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Market strategist details 'the critical issue' to understand about risk from new COVID-19 variant

In this article:
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Joseph Little, HSBC Global Asset Management's chief strategist, gives insights onto what new regulations stemming from the emerging South African COVID-19 variant may hold for markets and travel sectors.

Video Transcript

- Talk about what this means for the market, at least, for today. We have Joseph Little, he is a Global Chief strategist at HSBC Asset Management. And Joe, it's great to see you. You're looking at the Dow futures off just over 2% S&P, and NASDAQ futures also taking a significant hit. Is this an overreaction in your view or does it make sense?

JOSEPH LITTLE: So I think like you've said already on the show, the critical issue that the market is trying to digest is around the extent to which this new version is going to be more transmissible, the extent to which it's going to escape the vaccines. I mean, it's too soon to say, really. We don't quite know how it's precisely going to play out. The risk, really, is around how new COVID restrictions might impact the growth outlook and the scenario for growth.

And also like we've seen in Europe, how the reimposition of COVID restrictions can create some social unrest. So, many uncertainties, too soon to say. The one thing we know for sure is that the pandemic is not over. But I think we're going to have to monitor the news around the COVID policy, the health policies. And also, if it does get worse, what are policymakers going to do about it? They're going to be the key questions to monitor to get the sense around how much of an overreaction we're seeing at the moment.

- So let me get your point of view of the markets right now as a strategist. I'm just wondering, do you see this as a buying opportunity? If so, what do you buy or do you get a little bit more cautious at this point?

JOSEPH LITTLE: Right, so the challenge for investors at the moment is that there's many uncertainties about the outlook. We've got these challenges potentially around growth coming back with COVID and also the softness that we've seen on consumer confidence, a little bit of a slowdown in Asia as well. But, you know, last week, the week before, we were talking about inflation as the challenge. So many uncertainties to the economic outlook.

My baseline scenario, my core scenario is that we're still in the mid-cycle expansion. We're still in the expansion economy, growth and profits are past their peak, but they're still doing pretty good, thank you very much. And in that environment, you've got to favor stocks over bonds. But I think the important message is just to be very realistic at this point in the story. We've had a great year in investment markets, in equity markets. US equities are still up way more than 20% on the main indexes.

And it just means that at this point in time, like you mentioned at the top of the show amid all of the uncertainty, amid richer valuations, it's right just to not take too much risk at this point. Not an environment for making really big bets. Stay constructive, prefer stocks over bonds, but maybe be a bit more defensive in how we allocate to stocks at this point.

- So Joe, taking a look at some of the airlines today, you're looking at American, Delta, United, all off just around 7% or more. Is it too early to bet on some of these names? And not only airlines, I'm talking about travel stocks more broadly speaking, names like Expedia, names like some of the cruise lines. Is it too early to jump into this sector because the developments that we could get, like, today?

JOSEPH LITTLE: Probably too soon to say. Certainly, the cyclicals, the cyclical parts of the market, the value parts of the market are the other places that are getting hit. Like you mentioned, the small caps and the COVID sensitive parts of the economy, they're the logical places where the market will focus its attention first.

We think that, you know, if that baseline scenario that I describe, the expansion economy, if that scenario is what's delivered, and we do get 4% to 5% growth in 2022 for the main economies, then clearly there is a catch up trade. And many parts of the cyclical parts of the equity market can do well. That would take you to markets like Europe and Asia in regional equities and sectors, like you say, value sectors in the US.

I think the challenge, though, is that there are many uncertainties at this point in time. And there's not going to be a really big growth surprise out there to just drive value and cyclical parts of the market forward. So I'd advocate more of a barbell approach to thinking about equity positioning at this point in time. Take some exposures in the defensive parts of the market, take some exposures in the value parts of the market, prefer stocks to bonds. But just be aware that we've had a really good run. Valuations are a lot richer. And given all the uncertainties, that creates a tricky environment for investors over the next 12 to 15 months.

- All right, so we got one more before we go here. I've got to get your thinking on the Fed. Jerome Powell wakes up, Dow futures down 800 points, what is he thinking?

JOSEPH LITTLE: Yeah, so the policy side of the piece is a really interesting one at this point in time. I think at the moment, the Fed are going to be data dependent and watching the data like the rest of us. But there could be a scenario that comes into play now, where we're looking at even more gradual scenario for policy normalization from the Fed, from other Western European Central banks, from Asian central banks as well.

Policy normalization already looked like it was going to be pretty gradual, right. But the developments that we see, the growth worries that we're seeing come back into the markets consciousness in the last 24 hours could mean that monetary policy needs to be a little bit more dovish even than that, particularly, in a situation, where, you know, we've had a lot of fiscal support, a lot of fiscal stimulus, debt to GDP ratios are that much higher, the burden of responsibility may fall a bit more on central banks to support financial conditions, to support the economic system if these concerns do begin to really build.

So I think it reinforces the idea that we're going to see a really gradual phase of policy normalization. And when the hiking cycle starts, it's going to be the most dovish hiking cycle we've seen

- Joseph Little, always great to speak with you, Global Chief strategist at HSBC Asset Management.