Investors will need to be 'a lot more tactical, a lot more active' in Goldilocks market: Strategist

HSBC Chief Multi-Asset Strategist Max Kettner discusses how the Fed's strategy to raise interest rates has impacted consumer confidence and breaks down how the potential continuation of the strategy of quantitative tightening could impact investor portfolios.

Video transcript

- Staying with the Fed, HSBC's economists expect another rate hike at the June meeting followed by a lengthy pause well into next summer. And a fresh note, the cross asset team says equities have generally performed pretty well post the final rise. Let's bring in Max Kettner, HSBC's Chief Multi-Asset Strategist. So Max, good to see you.

So that suggests that whether they raise in June or the last one was the last one, if history is any guide, that suggests stocks could do pretty well here?

MAX KETTNER: Yeah, exactly. And good morning to you as well. So I think it doesn't really matter, I think, for our outlook whether this was now really the last one or whether we'll see another 25 basis point rate hike in June, I don't think that's going to move the needle an awful lot too much.

I think what's going to be much more important what you said in the previous section about that probability of the rate cuts in the second half, right, until December. So I think that's going to be much more important. If we really go into the second half, and if we realize we've got about three rate cuts by the Federal Reserve priced into futures markets right now.

If that doesn't happen, and markets and investors really start to realize in the second half of the year, look, that's not going to happen. Things are a bit too strong, and the hopes for those rate cuts are a bit overdone, I think then we could get a bit of trouble for equities and for risk assets in general. But that's quite a few months away, right? We're talking maybe in three, four, perhaps possibly only in five months.

Until then, I think we can ride this Goldilocks wave, right? You just mentioned the note that we wrote where generally what we found is that post the last Fed rate hike, we're actually seeing pretty decent gains across all the asset classes, whether that's in equities or whether it's in treasuries or whether that's in corporate credit.

- So looking at the year to date performance though on the S&P 500, I mean it still seems like we're hovering around what has been the tops of this year. So does that mean we're set for more volatility in the mid-term in this kind of larger try and pick when you can get in, pick when you can get out type of trade year, at least in this near term scenario that you're describing?

MAX KETTNER: Yeah, I would fully subscribe to that view. And I would actually also extended it, and would say that's probably something that we've got to get used to over the next, not only in the near term, the next couple of weeks or months, but really perhaps over the next year or year and a half. Because bear in mind what we have right now is sort of a slow grind lower in growth, right?

In US growth, things are a little bit better than people really expected six months ago. So it's not really this big switch lower in terms of global growth momentum. But it's not particularly great either, right? On the other hand, we see inflation heading in the right direction. But a lot of that has now driven by base effects.

And that's going to at least, not reverse, but not going to be as supportive in the second half for US headline inflation, in particular. And that's going to be basically the US headline inflation can re-accelerate a little bit towards the end of the year as well. So that's going to be bad as well.

So I think equity markets are going to stay torn between these push and pull factors, right? Of bearish factors, oh, you mentioned jobless claims much worse than expected. You get a few other data points, however. Look at the earnings season in Europe, in the US, much better than expected. And on the inflation side as well, for now we're heading in the right direction.

Later this year, we might be re-accelerating a little bit. So were going to be really, really pulled and pushed in those ranges. And, I think, it's really, really important to get the timing right. Because I do believe that perhaps in six or 12 months time, we could find ourselves really talking about the same things, right? The same sort of index levels really.

So a buy and hold strategy will not work. We're going to have to be a lot more tactical and a lot more active in the next coming months.

- That sounds like it's a lot more challenging, Max. One of the other areas that I was noticing in your note that tended to perform well in past cycles was investment grade credit. That was sort of the other one that stood out to me. And is that an area, also, that you guys are looking at right now? Do you think it will be as volatile as the equity market?

MAX KETTNER: No, I think, I mean, in general, you've seen investment grade credit really, really perform quite well after the last Fed rate hike. However, in reality, that is mostly a function of the drop in government bond yields, right? So what you typically see is that government bond yields, both on the short end of the yield curve and the long end of the yield curve, they're starting to go down after the last rate hike. And that really helps investment grade credit.

That's mostly a function of that, not really of the credit markets per se. So what we're really looking at right now, given these pull and push factors, and given that we're still thinking that it's pretty rangebound for now, particularly in yields, would much rather go actually up the risk curve, right? So be overweight in high yield credit, in emerging market debt, in emerging market local currency debt, right?

So really picking up a bit more sort of the higher carry and higher beta carry asset classes.

- Max, it's always great to get some time with you and get your perspective. Max Kettner, HSBC's Chief Multi-Asset Strategist. Thank you.