The world financial system is out of step; 2024 shall be a “yr of contraction”.

Hong Kong Ferris Wheel and the Hong Kong and Shanghai Bank, HSBC Building, Victoria Harbour, Hong Kong, China.

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According to HSBC Asset Management, the US will enter a downturn in the fourth quarter, followed by a “year of decline and a European recession in 2024.”

In its half-year outlook, the British banking giant’s asset manager said recession warnings were “flashing red” for many economies, while fiscal and monetary policy were at odds with stock and bond markets.

Joseph Little, chief global strategist at HSBC Asset Management, said that while some parts of the economy have remained resilient so far, the risk balance “points to a high risk of recession” as Europe lags behind the US, but macroeconomic developments in general “adjusted”. may be. “

“We’re already in a mild earnings recession and corporate defaults are also mounting,” Little said in the report, available to CNBC.

“The bright spot is that we expect high inflation to ease relatively quickly. That will give policymakers an opportunity to lower interest rates.”

Despite the dovish tone from central bankers and the apparent ongoing inflation, particularly at the core level, HSBC Asset Management expects the US Federal Reserve to cut rates before the end of 2023, followed by the European Central Bank and Bank of England suit next Year.

At its June meeting, the Fed paused its tightening cycle and left its target range for interest rates at 5% to 5.25%, but signaled that two more rate hikes could be expected this year. According to CME Group’s FedWatch tool, market prices expect policy rates to be a quarter of a point higher in December this year.

HSBC’s Little acknowledged central bankers will not be able to cut rates if inflation stays well above target – as is the case in many major economies – and said it was therefore important that the recession “does not come too soon” and will lead to disinflation.

“The coming recession scenario will be more like the recession of the early 1990s, with our central scenario being a 1-2% contraction in GDP,” Little added.

HSBC expects the recession in western economies to create a “difficult, unsettled outlook for markets” for two reasons.

“First, we are dealing with the rapid tightening of financing conditions, which has led to a downturn in the credit cycle. Second, markets don’t seem to be pricing in a particularly pessimistic view of the world,” Little said.

“We believe the news coming in over the next six months could be difficult for a market pricing in a ‘soft landing’.”

There was little to suggest that this recession will not be enough to ‘drive’ all inflationary pressures out of the system and that developed economies therefore face a regime ‘with some time higher inflation and higher interest rates’.

“For this reason, we take a cautious overall view of risk and cyclicality in portfolios. Interest rate risk is attractive – particularly the Treasury curve – the front end and middle part of the curve,” Little said, adding that the company “sees some of that.” “Value” in European bonds as well.

“We are selective in credit, focusing on higher-quality, investment-grade credit versus speculative investment-grade credit. We are cautious on developed market equities.”

Support for China and India

As China emerges from several years of strict Covid-19 lockdown measures, HSBC believes strong savings from domestic households should continue to support domestic demand, while problems in the housing sector have bottomed and government budget efforts should create jobs.

Little also suggested that comparatively low inflation – consumer prices rose by 0.1% a month in May to a two-year low a month as the economy struggles to get back on track – means further easing is on the cards of monetary policy is possible and GDP growth “should slightly exceed”. “The government’s modest 5 percent target for this year.

For this reason, HSBC remains overweight Chinese stocks and Little said the “diversification of Chinese stocks should not be underestimated”.

“For example, in China and Asia, value is outperforming growth. It’s the opposite of developed stock markets,” he added.

Little pointed out that India is the “top macroeconomic growth story in 2023” alongside China, as the economy has rebounded strongly from the pandemic thanks to rebounding consumer spending and a resilient service sector.

“In India, recent upside growth surprises and downside inflation surprises are leading to a kind of ‘Goldilocks’ economic mix,” Little said.

“Improved corporate and bank balance sheets have also been encouraged by government subsidies. At the same time, the structural, long-term investment story for India remains intact.”

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