HSBC global strategy believes China and India will perform better than Western nations in the short-term.
Western economies will face a recession while China and India will keep growing, is the overall outlook predicted by HSBC global strategist Joseph Little.
In particular, Little said the United States will fall into recession this year, with the European Union following suit in 2024.
He also believed that a recession would not be enough to solve inflation once and for all, therefore interest rates might stay high for the years to come.
"The coming recession scenario will be more like the early 1990s recession, with our central scenario being a 1-2% drawdown in GDP," Little added.
The American Federal Reserve paused rate hikes in June, leaving interest rates at 5-5.25%. The decision came one day after May inflationary data showed a better scenario than expected. US inflation dropped down to 4% year-on-year.
Nevertheless, Fed Chairman Jerome Powell signalled two more hikes were coming in 2023. Despite Powell’s statement, HSBC believes rate cuts might be coming this year as well.
Completely different scenario in the European Union, where inflation remains high at 6.1% year-on-year and the European Central Bank has no intention of stopping rate hikes. "We think the incoming news flow over the next six months could be tough to digest for a market that’s pricing a ‘soft landing’," Little said.
Europe also faces another winter of uncertain energy prices, as the Ukraine-Russia war appears to have no end in sight.
India and China on the up-side
On the other hand, Joseph Little appears very optimistic in regards to China and India.
He believes that China’s expected 5% GDP growth is far too low compared to the dragon’s actual performance. Low inflation and flexible monetary policy make China quite appealing to markets. Indeed, HSBC itself remains heavy on Chinese stocks.
Little appears unbothered by China’s abysmal exports as he believes Beijing is focusing on internal demand. A necessary measure, Little believes, following years of harsh Covid-19 restrictions.
Finally, India will be the "main macro growth story in 2023," Little said. India too was heavily hit by the Covid-19 pandemic though it’s giving strong signs of recovery.
Furthermore, India and China are benefiting from the Russian invasion of Ukraine and the subsequent market closure between Moscow and the West.
Russian oil started flowing east. India and China are able to buy Russian energy sources at a bargain, given they’re the only doors left open for Moscow.
In conclusion, investors should focus on the East for the months and years to come, at least until recession is only a distant memory.
