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Retail investors should ‘be realistic about what is achievable’ right now, strategist says

HSBC Asset Management Global Chief Strategist Joseph Little joins Yahoo Finance Live to discuss global rate hikes, bond yields, growth trends, market uncertainty, volatility, and diversifying investments.

Video Transcript

- Welcome back, everyone. While the Fed remains focused on fighting inflation, that steady drumbeat now has investors looking and trading ahead to the Fed's hiking cycle into 2023 as the year draws to a close here. Here with a look at how to price the market in September, we've got Joseph Little, HSBC Asset Management Global Chief Strategist. Joe, great to have you here with us this morning. First of all--

JOSEPH LITTLE: Morning.

- Just break down the pivot in at least the portfolio plays that we're seeing right now after the Fed pivot narrative dampened significantly at the end of last week.

JOSEPH LITTLE: Yeah, like that's a really key important question for people in the market, for investors looking at their portfolios at the start of the new month. As you said rightly before the segment, the big news from Jackson Hole is this very clear signal from Mr. Powell, which has been reinforced by some of the other Fed governors already, but they're not ready to pivot, and that's not something that the market should really be factoring in. That's not something that we should be factoring in as investors, at least going out into the first part of 2023.

That's had some quite profound implications for investment markets as they've traded during August. We've seen bond yields once again moving significantly higher. Particularly at the short end, US interest rates moving higher. If we look at the long end of the US curve, we've also had real inflation adjusted interest rates moving higher, and of course, the 10 year note yield moving higher in yield terms as well.

And interestingly, that's not just been contained to developments in the US. The UK and Europe have actually been even more volatile as interest rate markets. Short term interest rates in the UK and Europe up more than 100 basis points at more than one percentage points during the month in August. So some big moves, and that has some really important implications for how we think about portfolio strategy over the next six to 12 months or so. Certainly to the end of the year and the early part of 2023.

- So Joe, help us build wealth. What are three strategies retail investors should be doing today to make money in this crazy market in September?

JOSEPH LITTLE: Well, I think the first thing is to be realistic about what is achievable in investment markets at this point in time. Look, it's a very difficult situation, lots of uncertainty about the macroeconomic picture. We've got a situation where liquidity is coming out of the market because of these rate hikes and this signal that we're going to continue to see rate hikes not just in the US, but in other parts of the world as well. So be realistic about the kinds of returns that you're expecting at this juncture.

And staying-- maybe as a second idea-- staying with some search and focus on diversifying those investment exposures as well. Don't put all your eggs, as it were, in the one basket. The question really is how to find that kind of diversification at a point in time where stocks are wobbling and bond yields are moving higher, so bond markets are weakening as well in price terms.

And one interesting area is to look to parts of the Asian markets as something that is rather uncorrelated rather de-correlated with what we're seeing in Western investment markets. So for example, the correlation between Chinese stocks and global stocks today is zero. They're uncorrelated. It's a very different economic and policy cycle that we see in China at present.

If we're looking over the course of August, just August alone, it's been a tough phase for stocks, but parts of Southeast Asia, India have really performed still pretty well. So there's some resiliency maybe in some of the growth and catch up stories and parts of South Asia. So there's some things to do within the Asia region that we can focus on as well. Those are probably some of the key lessons that we would have at the top of the mind going into September and looking to Q4.

- Let me just push back on one of those things, because you mentioned within Asia, for China specifically, that they may be in a different cycle, however they're in a different cycle because they're also trying to spur spending and spur growth at the same time that they still have a zero COVID policy, and that's going to prompt some of the many shutdowns, as you may have them, that could continue to impact supply chain, could continue to impact that spending ability from the consumer or for even stores to be open. So with that in mind, which of those counterbalancing acts actually wins out?

JOSEPH LITTLE: Well, you're quite right, and look, it's not straightforward. It's a tricky environment at the moment for economists, and it's tricky for investors as well. The big challenges that we have in the Chinese economy are very much connected to that zero COVID policy and the shutdowns that might be creating domestically. It's a drag on economic performance, isn't it, as a consequence of that. And then the other area of concern is the property sector and then spillovers emanating from the fragility and the weakness that we've seen in the property sector.

But what really fascinates and interests me is despite the tricky outlook, we have seen some policy easing measures come through. We can, I think, anticipate some improvement in growth trends going through toward the end of the year, but the fascinating aspect beyond all of that is how uncorrelated the Chinese equity market and other Asian asset classes are compared to what we see in the West. You can see elements of this in the credit markets and in the stock markets in China, or you can look at some of the Japanese asset classes given the behavior of the yen. There is some idiosyncrasy there. It's very different to what we see in the West.

To put it in some context, one of the big reasons for this is not just the differences in terms of the growth and policy situation, but the inflation pictures in a very, very different situation as well. In the US, we're looking at inflation peaking and maybe moving towards 5% or 6% maybe by the end of the year with some following wins and some better news flow coming through. In the UK where I'm sat, we're looking down the barrel of 15% to 20% inflation potentially according to some commentators.

But the situation in Japan and China is very different. Inflation rates are below 3%, and the point that I'd sort of emphasize is that it just means that those parts of the world are quite diversified. They're quite de-correlated. Not just geographically de-correlated, but cyclically de-correlated to what we see elsewhere in investments. We're not trying to claim that they're necessarily straightforward investment plays, but they do offer investors who want to diversify and are looking for different parts of the world, different asset classes to combine in their portfolio, they do offer investors some opportunity to find low correlated liquid asset classes in investment markets today.

- Some real good words of wisdom. Joseph Little, HSBC Asset Management Global Chief Strategist, good to see you. We'll talk to you soon.