HSBC: Investor Confidence Plunged As Europe’s Debt Crisis Escalated

According to its latest Investment Quarterly Report, HSBC Global Asset Management believes that going forward investors need to be selective when it comes to their investments in readiness for hopefully an eventual return to some market stability in 2012.

Investor confidence plunged in 2011 as Europe’s debt crisis escalated and U.S. politicians squabbled over deficit proposals. Currently the eurozone is teetering on the brink of recession and it may take several years to fix its problems. The U.S. is looking in better shape but gross government debt is rising and tensions are expected to remain high in the run-up to the presidential and congressional elections. Growth in Asia is likely to slow too, primarily because this region cannot entirely decouple itself from the rest of the world, the report authored by Philip Poole, Global Head of Macro & Investment Strategy, HSBC Global Asset Management, said.

But the report points out that slower-growth, does not equal zero growth. HSBC forecasts 8.6% and 7.5% GDP expansion for China and India respectively this year, figures well into positive territory – and growth most Western economies would be delighted to come close to. The report also argues that some profitable Asian companies are now undervalued, and as such their shares have potential to rise over the medium to long term.

Poole added: “We currently favour the so-called cyclical sectors in emerging markets, namely industrials, materials, financials and energy as central banks in countries including China, Brazil, Indonesia and Thailand have cut interest rates (or reserve ratios) to stimulate growth as concern about inflation recedes. And many such countries still have scope to ease further and to fund development projects with bond sales, while in many Western countries rates are already near zero and public debt is significant.”

HSBC Global Asset Management expects growth in emerging markets will increasingly be driven by domestic consumption and by urbanisation, meaning companies providing goods and services aligned to these trends are likely to benefit and that not only will these be companies selling directly to the end consumer or government, but those further back in the supply chain, such as raw commodities producers.

 While the report focuses on Western and Emerging economies, the MENA landscape poses several opportunities but also calls for caution.  Daniel Rudd, Head of MENA Wholesale, HSBC Global Asset Management, said.  “It’s true local investors have not only been keeping an eye on the European debt crisis, but have also been sitting on the sidelines awaiting the outcome of the Arab Spring”.

 “There are several positive developments for the region.  Firstly average growth is running around 3.5% which would be the envy of most Western economies and secondly, it’s clear the region needs signals of change within the financial markets. The UAE and Qatar are committed to eventually being included in the MSCI benchmark. Overlay this with recent developments within Saudi Arabia, the largest Arab economy, progression is showing through the consideration of change to foreign ownership listed shares within Saudi market, which could be a true indication of encouragement for the region”.

 In the bond markets, the flight to safety in 2011 saw investors leave corporate credit in favour of government risk and this has left the bonds of some profitable companies undervalued. Learning from the recent credit crunch, many companies in Asia and beyond have stockpiled cash, building their balance sheets as a preemptive defensive measure. Should the eurozone crisis escalate and continental European banks curb lending again, these companies will be far better equipped to fund themselves from internal resources than they were in the dark days after 2008 notes the report.