2024 Predicted to be a “Year of Contraction” as Global Economies Fall Out of Sync

According to HSBC Asset Management, the U.S. is expected to enter a downturn in the fourth quarter, followed by a “year of contraction and a European recession in 2024.”

In their mid-year outlook, HSBC’s asset manager stated that recession warnings are “flashing red” for many economies, while fiscal and monetary policies are out of sync with stock and bond markets.

Global Chief Strategist Joseph Little emphasized the high recession risk and stated that although some parts of the economy have remained resilient, Europe is lagging behind the U.S. in terms of recovery.

Little added, “We are already in a mild profit recession, and corporate defaults have started to creep up too.”

Despite the hawkish tone of central bankers and the persistent inflation, HSBC Asset Management predicts that the U.S. Federal Reserve will cut interest rates before the end of 2023, followed by the European Central Bank and the Bank of England.

The Federal Reserve paused its monetary tightening cycle at its June meeting, but signaled the possibility of two further rate hikes this year. Market pricing indicates a quarter percentage point increase in the Fed funds rates by December.

HSBC’s Little acknowledged the challenge central bankers face in cutting rates if inflation remains significantly above target. He emphasized the importance of the recession not occurring too early and causing disinflation.

HSBC expects the recession in Western economies to result in a difficult and choppy outlook for markets. Little highlighted the rapid tightening of financial conditions and the optimistic view of the world reflected in market pricing.

Little suggested that this recession will not be sufficient to eliminate all inflation pressures, leading to somewhat higher inflation and interest rates over time in developed economies.

HSBC takes a cautious view on risk and cyclicality in portfolios, with appealing interest rate exposure and some value in European bonds.

Little highlighted the outperformance of value over growth in China and Asia, emphasizing the importance of diversification in Chinese equities.

HSBC remains overweight on Chinese stocks and sees the diversification of Chinese equities as a significant opportunity.

Little pointed out that India is the main macro growth story in 2023, with a strong recovery from the pandemic and favorable economic conditions.

Improved corporate and bank balance sheets, government subsidies, and a promising investment outlook contribute to HSBC’s positive stance on India.