Meike Bliebenicht, senior product specialist, multi-asset, HSBC Global Asset Management
We have a moderate pro-risk bias in our multi-asset portfolios, and at broad asset class level we prefer equities over bonds. The macro economic backdrop has been improving substantially over the past 12 months and global economic growth momentum remains solid, feeding through to corporate earnings. For example, eurozone PMI rose to 56.8 in April, with manufacturing expanding at its fastest pace in six years. But headwinds exist from more modest Chinese growth, tighter US monetary policy and political uncertainty in many regions. Given that global equity markets have already performed well, current valuations seem less appealing than in previous years and may have less of a buffer to absorb disappointing news.
We believe prospective returns for global government bonds appear low, relative to competing asset classes. But in a multi-asset context, government bonds always have a particular role to play in portfolios with lower-risk profiles. The macroenvironment remains more supportive for investment-grade corporate bonds, and momentum is improving with implied recession probabilities appearing to be low. Corporate fundamentals are also improving for global high-yield bonds following a pick-up in the activity cycle. Defaults remain comparatively low, and we think they are likely to be contained to certain sectors. However, compressed high-yield spreads leave a thin margin of safety, which is why we have recently reduced our overweight in the space.
US Federal Reserve rate hikes are likely to remain gradual, limiting the opportunity cost of holding non-yielding assets such as gold. Rising inflation could boost hedging demand for the precious metal, while high political risks/uncertainty could also be supportive. Oil demand growth remains robust, providing scope for the market to continue to rebalance, particularly following Opec’s November output cut deal. Of course, markets could remain oversupplied if US production remains resilient. Our view is that commodity futures, in aggregate, offer poor prospective returns and we currently do not include exposure to commodities in our multi-asset portfolios.
Real estate equities are, in our view, priced to deliver reasonably attractive long-term returns compared with developed-market government bonds. In the long run, rents are positively related to economic growth and may also offer a partial inflation hedge. However, we believe that the market has focused too heavily on real estate equities as a bond proxy, and rising rates could have a negative impact in the short term.
We currently do not have exposure to hedge funds or private equity in our multi-asset portfolios as we do not believe they provide the necessary diversification benefits to justify the higher cost of accessing the asset classes and their reduced liquidity. But infrastructure investments remain a valuable source of diversification for clients who require income from their portfolio, and we retain an allocation to this asset class within our multi-asset income portfolios.