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Why global uncertainty may fail to derail innovation-driven growth

Why global uncertainty may fail to derail innovation-driven growth

by Willem Sels, Global Chief Investment Officer, HSBC Global Private Banking and Wealth

  • The global economy is weakening a bit, though resilient enough to weather tariffs and complex international relations, thanks to innovation boosting productivity and investment
  • This means we can maintain a risk-on approach, overweighting equities in the US, China, UAE, Japan, India and Singapore
  • Tariffs lead us to reiterate our North American Re-industrialisation theme; be selective in the consumer sector, mindful that consumer preference could shift toward local brands; underweight materials, and overweight gold to manage tail risks

Context is everything. Trade tariffs and geopolitical tensions dominate the headlines, but one key fact is often overlooked: the global economy remains resilient.

Over the past 18 months, economists have progressively upgraded their growth forecasts for the U.S. Meanwhile, China has shifted toward a more business-friendly and supportive central government stance towards the private sector. This policy shift is expected to drive increased capital investment, boost employment, and strengthen consumer confidence.

Economists scorn trade tariffs because they raise risks of stagflation. However, the general rule that trade tariffs will hurt growth while stoking inflation may not apply where trade diversion is possible. 

For example, for importers, tariffs on commodity imports from country X can lead them to switch to importing from country Y with no tariffs instead. Meanwhile, country X can find another export destination without import tariffs.

Additional aspects may limit tariff impacts even further. For one, tariffs mostly target trading in goods but not services—a relief to service-exporting economies. The US could also get a boost from increased investment as foreign companies seek to invest and produce more in the country to avoid tariffs. 

Europe and China, meanwhile, are both busy building new trade networks and markets to keep exports going. 

Tariffs are also likely up for negotiation. To the extent that they do apply, some of the revenue they raise in the US may be used to finance tax cuts, which could be positive for corporate earnings or the economy overall. 

Global uncertainties of course go beyond just tariffs. It is clear that the new US administration is less supportive of a multi-lateral approach in its international relations, preferring bilateral negotiations. 

We believe governments around the world will react by focusing on three areas: boosting defence in its traditional form as well as in cybersecurity; refocusing on resources such as electricity (AI is rapidly accelerating demand) and rare earth metals (critical inputs for technology production processes); and developing strategic policies to foster innovation and maintain competitiveness in key industries.

The main takeaway is that investors should set their risk appetite based on the global cycle and structural trends. Only after that, should they consider making adjustments to adapt to tariffs in portfolio positionings. While policy uncertainty is currently very high, equity volatility has risen much less. We believe this is not only because of a resilient economy but also because some news headlines turn out to be just ‘noise’. 

To recap, the economy is healthy, and we do not believe tariffs and geopolitical uncertainty will lead to stagflation. As AI and innovation are currently accelerating and governments around the world are taking initiatives to make their economies more competitive, investment and productivity growth will continue to support economic activity and earnings growth.

Therefore, we continue to adopt a pro-risk stance, with a solid overweight in US stocks, but an increased search for opportunities in other markets too. 

China’s more business-friendly environment and rapid technological innovation, as illustrated by DeepSeek, are key positives for Chinese stocks, which we upgraded to overweight in February. 

We are also positive on the Japanese, Indian and Singaporean stock markets, illustrating the opportunity for regional diversification. We remain neutral on the UK and underweight in the Eurozone as news flow and growth levels may remain more challenging in the coming months.

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