Stock markets aren’t really out of line in any direction, to hear one strategist tell it.
“We haven’t got a big qualm with the market at this point in time. I don’t see really significant, anomalous valuations in the market, and that takes me to this idea of staying invested, being diversified, but not being too tactically adventurous,” said Joseph Little, global chief strategist at HSBC Global Asset Management.
Little added the Nasdaq Composite isn’t as stretched as it was during the dot-com bubble. HSBC is overweight global stocks, particularly for Northern Asian emerging markets that are leveraged to China’s recovery.
Little isn’t a proponent of the argument, however, to switch now into cyclical stocks from the defensive companies that have outperformed. “I think you need to have a bit more confidence in a macro momentum story, of upgrades to investor expectations about growth. I’m not sure I have that confidence at the moment,” he said.
The global economy, he said, is entering a slower phase after the rapid recovery since the initial lockdowns. The economy will be operating somewhere between 5% to 10% below its pre-pandemic level for the next six to 12 months. He called the situation, with rangebound markets, “a coupon-clipping environment.”
HSBC is recommending using alternatives to government bonds, such as inflation-linked securities or gold GCZ20, 2.02%, for the safer parts of a portfolio. The downturn in U.S. stocks in September was tricky, because the traditional hedges, and even some of the more unusual ones like bitcoin, haven’t really delivered, he said.
“This learned response of relying on govvies as the ultimate hedging instrument for equity portfolios is perhaps not right,” Little said. A “protective put strategy — being long the equity market and having put protection — has been outperforming a 60/40 portfolio during the course of this year — even when volatility VIX, -2.73% is very high, and put protection is expensive,” he said. A 60/40 portfolio is one 60% invested in stocks and 40% invested in safer securities like government bonds. Read more on the debate over 60/40 portfolios.
Investors may want to consider more exotic parts of the fixed income space, such as high-yield Asian corporate debt, or Chinese government bonds, he said.
“I don’t think there’s a silver bullet around what can be the diversifier of choice for multiasset investors,” Little said. But with monetary policy “on steroids,” as he said, “these classic risk-free asset classes are behaving a little bit differently in practice.”
This article originally appeared on MarketWatch.
