Six Positive Surprises From HSBC Take Focus Off Black Swans

  • HSBC says investors are very preoccupied by downside risks
  • The biggest shock of 2017 may turn out to be good news

Canaccord's Dwyer Takes a Neutral Market Outlook

Market analysts have been unusually emphatic about forecasting risks in 2017, as they tout a menagerie that extends from bulls to bears as well as swans of various hues.

This gloomy focus means that this year it’s positive developments that would offer the real shock to investment portfolios, according to strategists at HSBC, rather than the fulfillment of various dire scenarios that are, by now, widely predicted.

“The consensus outlook has switched from an optimism bias, to one with greater focus on downside risks,” the strategists led by Fredrik Nerbrand write in a note to clients. Arguing that many of these concerns are well-known, they make the case that “the biggest surprises may be skewed to the upside.”

Here are HSBC Bank Plc’s six positive developments that could take place over the course of this year, as well as their implications for different asset classes.

1. A revival in U.S. productivity

The fiscal stimulus Donald Trump has promised could help revive U.S. productivity from the less-than 1 percent annual growth at which it’s been averaging over the last five years. If enacted within the president-elect’s first few months, tax reform and an uptick in investments could juice the nation’s productivity going into 2018.

  • Implications: Good for equities, credit, the dollar; "mildly" bad for bonds

2. European populists lose convincingly

Voters will choose new leaders in the Netherlands, France and Germany over the next 12 months, and there’s a possibility of snap elections in Italy and Greece. The polls in France and Germany, at least, suggest established parties will triumph in the euro area’s biggest economies, HSBC says. It says a loss in momentum for populists could translate into the relaxation of fiscal austerity.

  • Implications: Bullish for European equities, the euro and high-beta European credit; "meaningfully" bearish for bunds

3. A recovery in global trade volumes

Robust outcomes from the four major trade accords that are currently being negotiated would lift the "fairly low" prospects of a rebound in international commerce. If President-elect Donald Trump seeks to amend rather than withdraw from the Trans-Pacific Partnership, and Brexit negotiations turn out "amicable," 2017 might end up arresting the slump.

  • Implications: Positive for G10 commodities and most emerging-market currencies, European and Asian equities, commodity- and energy-related credit; "mildly" negative for bonds

4. A painless Brexit

Although the odds are in favor of a "disruptive" negotiation process, HSBC says there’s another scenario that involves a "smooth and painless" transition. European negotiators could err on the side of pragmatism and allow a lengthy transition period, while the U.K. might be able to negotiate a relatively favorable deal on trade.

  • Implications: Positive for the pound, the U.K.’s domestically-focused equities, European cyclicals, sterling-denominated investment-grade credit; 10-year nominal gilt yields to remain "contained"

5. Dollar liquidity conditions improve

The current U.S.-dollar shortage has increased hedging costs for Japanese and European investors, and non-U.S. banks are suffering constraints on dollar funding. HSBC foresees a possibility that central banks acknowledge the negative impact of the shortages and preemptively move to address the issue.

  • Implications: Positive for emerging-market equities, banks, supportive for the front-end of the U.S. yield curve, high-yield credits, could lead to a stronger yen

6. China speeds up reforms of its state-owned enterprises

The year-long push to restructure China’s debt-ridden state-owned enterprises got renewed impetus last month after the SOE administrator vowed to push forward with reforms. The pace of these reforms may exceed market expectations this year, as policy makers aim to see results ahead of the major party conference that is likely to be scheduled for November.

  • Implications: Positive for Chinese equities, less downward pressure on yuan and other Asian currencies, Australia and New Zealand’s dollars would stabilize
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