The UK-based institution’s asset management business sees a strong investment case for Asian bonds in its mid-year outlook. 

HSBC, in line with widespread practice across the investment industry, is taking another look at markets and assets headed into the second half of the year.

In its mid-year investment outlook released Tuesday, it indicated that its asset management business believes that markets and global growth will continue to remain resilient although «heightening uncertainties» and divergence in growth and policies worldwide warrant more defensive investment plays.

Gradual Shift

«For the first half of 2024, robust labor markets and increasingly favorable fiscal policies have helped the global economy to withstand restrictive interest rates. Economic power was gradually shifting towards Asia and emerging markets with strong growth prospects. European economies, on the other hand, continued to face challenges including the re-accelerated inflation,» HSBC indicated.

In Asia, HSBC sees continued «robust» economic momentum in India next year while growth in China continues to stabilize from a cyclical perspective.

Subdued Demand

China remains on track to achieve 5 percent GDP growth, particularly as the mainland government has budgeted moderate fiscal expansion this year, which could help the People’s Bank of China implement further policies and regulations that stimulate the economy and «counter subdued domestic demand».

«Under the current environment, we believe putting cash to work in portfolios with a defensive growth strategy is justified by shifting selective exposures to fixed income, risk assets, and private markets,» HSBC asset management global chief strategist Joseph Little indicated.

Attractive Option

Asian credit has produced «excellent» returns in 2024 with investment grade and high-yield Asian dollar bonds outperforming US and European counterparts.

The UK-based institution believes the outperformance will continue given the combination of relatively high yields, the trend towards cyclical stability in China, and potential Federal Reserve rate cuts, along with a weaker dollar, soon.

Strong Recommendation

«We believe that investors should seriously consider Asian fixed income as both a potential source of good returns and a strong diversifier for global portfolios in the coming quarters. Despite recent challenges in the Asian high-yield credit market, including the impact of the China property market downturn, there has been a notable improvement in performance this year,» said Alfred Mui, head of Asia fixed income investment at HSBC.

Equity Forecasts

When it comes to equity markets, HSBC believes momentum in the US remains strong although there is «clear evidence» valuations are «exuberant». Given this, the stock market in Asia also presents a strong opportunity for investment.

«We expect investing in Asia can provide higher yields and diverse opportunities in today's market,» indicated Caroline Yu Maurer, head of China and specialized Asia strategies at HSBC.

Solid Growth Potential

Overall, the bank believes Asia and the emerging markets offer solid potential in the longer run, something that also reduces the risk of an adverse growth outcome in the second half.

«HSBC AM believes that the world is becoming more complex with various risks to navigate. This environment leads us to take a “defensive growth” approach in our allocation strategy today,» the bank stated in the media release announcing the midyear outlook.