At present, most markets globally stand relatively stronger in comparison to the low expectations people had due to recession fears at the advent of this year, according to Xavier Baraton of HSBC Asset Management.
"Clearly, recession is yet to materialise and hence, markets look healthy," Baraton, global chief investing officer at HSBC Asset Management Pvt., told BQ Prime.
However, the "optics is potentially misleading" because about two thirds of the rise in U.S. markets can be attributed to stocks from the Artificial Intelligence pocket, he said. This trend is "disconnected from the fundamentals of the market", Baraton said.
Parallelly, the services sector has borne the brunt of inflation, and as a consequence of that the Federal Reserve may declare another rate hike in July, he said.
We could see further deterioration of the U.S. economy in the second half of this year.Xavier Baraton, Global CIO, HSBC Asset Management
Three factors that could be potential challenges:
Robustness of the job market in the U.S. and Europe could converge with the pressures of the services sector.
Benefits of excess savings for the U.S. household, especially in the post-Covid era might get exhausted by the fourth quarter.
Further chances of balance-sheet contraction by the Federal Reserve and the European Central Bank could affect risk assets.
As a result of these factors, valuations could stretch. Therefore, Baraton suggests investors move away from developed market equities.
The bond market is a good alternative, Baraton said.
Investors should diversify and focus on "idiosyncratic stories" in emerging markets as the U.S. dollar could weaken in the coming quarter, he said.
The Fed will maintain a hawkish bias, which will definitely compress the U.S. economy, according to him.
Weakening trend in U.S. dollar could benefit emerging markets.Xavier Barton, Global CIO, HSBC Asset Management
Where Does India Stand?
India's structural opportunity is underappreciated.Xavier Baraton, Global CIO, HSBC Asset Management
The opportunity that India provides for structural allocation over the long term is still underappreciated because of the impression of cyclical volatility, Baraton said.
India is unavoidable as it is accelerating at a "non-debt inflated mechanism", Baraton said.
A PE ratio of 20 times is not particularly expensive for the country, he said.
In the next 10 years, he foresees India becoming the strongest emerging market and also surpassing China.
According to data backed by HSBC Asset Management's research, India accounts for 15% of global GDP growth, with China at 30%, and the U.S. at 14%.
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