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HSBC Asset Management predicts a recession in the US and Europe by 2024
Red flags in the global economy
HSBC Asset Management has released its mid-year outlook, predicting a recession in western economies that would cause difficulties for the markets. Joseph Little, the Global Chief Strategist at the company, believes that the economy is pointing towards high recession risks, and Europe's macro trajectory is aligned with the US, further validating these recession warnings. Though some areas of the economy have remained resilient until now, Little believes the coming recession will be more like the early '90s recession, predicting a 1-2% drawdown in GDP. Despite inflation being seemingly sticky, the company still expects the US Federal Reserve to cut interest rates before the end of 2023, with the European Central Bank and the Bank of England following suit next year.
The challenges ahead
HSBC expects that the recession in Western economies will cause a choppy outlook for the markets due to the rapid tightening of financial conditions and market values that don't seem to match a pessimistic world view. HSBC's Little emphasized the importance of inflation not remaining significantly above the target, as it is in many major economies, to enable the central bankers to cut rates. He also believes that the coming recession scenario wouldn't be enough to purge all inflation pressures, and developed economies would face a regime of slightly higher inflation and interest rates over time.
Cautiously optimistic investment approach
HSBC Asset Management encourages investors to take a cautious and more selective investment approach in credit and developed market stocks, stating that the interest rate exposure looks attractive, particularly the Treasury curve, the front end, and the mid-part of the curve. The company advises investors to see some potential in European bonds and focus on higher quality credits in investment grade over speculative investment grade credits. HSBC remains overweight on Chinese stocks as they come out from several years of stringent Covid-19 lockdown measures, and the company expects comparatively low inflation to make further monetary policy easing a possibility in China, with GDP growth surpassing the government's 5% target this year.
Investment opportunities in China and India
HSBC Asset Management stated the diversification of Chinese equities shouldn't be underestimated, as value is outperforming growth in China and Asia, opposite to developed stock markets. China's domestic household savings should keep supporting domestic demand, and government fiscal efforts are expected to create jobs. The company also notes the robust services sector and resurgent consumer spending in India, expecting it to be the main macro growth story in 2023, making a strong investment case for the country.
In conclusion, HSBC Asset Management's prediction of a recession in the US and Europe by 2024 sheds light on the economic challenges that new businesses may face in the coming years. While the exact severity of the recession remains to be seen, the potential for a drawdown in GDP and higher inflation and interest rates could certainly pose difficulties for new businesses trying to establish themselves. However, there may still be investment opportunities for these businesses to consider, particularly in certain areas of the market that show potential for growth, such as Chinese and Indian equities. As HSBC Asset Management advises, taking a cautious and more selective investment approach may be key in navigating the choppy outlook for the markets that the recession is expected to cause. Ultimately, new businesses will need to stay informed on economic trends and take calculated risks in order to adapt and thrive in the midst of potentially uncertain times.