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1
Global Investment Perspective
In the developed world, the key risks on the economic horizon remain fiscal tightening and weak consumption.
The prospects for labour markets and consumption remain unclear, despite some signs of stabilisation.
Unemployment rates are still elevated and consumers are still endeavouring to unwind debt positions,
particularly in the US and the UK.
At an asset class level, we have a neutral view on equities relative to cash on the basis that earnings forecasts
for 2011 are reasonable, stock valuations look undemanding, not least relative to cash and government debt,
and central banks continue to provide liquidity support. In early November, the US Federal Reserve announced
plans to buy US$600 billion worth of government bonds by mid-2011. Collectively, these factors create a
supportive backdrop for equities in general although balanced by the negative impact of the slow-down in
global growth.
At the sector level, while valuations remain attractive for healthcare and telecommunications stocks on an
absolute basis, the valuation gap relative to other sectors is less compelling. Therefore, we no longer have a
relative preference for these two sectors.
Within the context of developed markets equity, we have a preference for Japanese equities where we
maintain a tactical short-term overweight position. The Japanese equity market lagged other developed
equity markets for much of 2010 and, having recently started to outperform, is likely to have positive price
momentum. There are also early signs that flows are becoming more supportive. Japanese stock valuations
look attractive relative to history both in absolute terms and relative to other developed markets.
Overall, we remain neutral on emerging markets equities. Within this universe, we continue to favour Russia as
we view stock valuations as attractive on a relative and absolute basis.
In fixed income, with inflation under control in the developed world with the exception of the UK, we believe
central banks are likely to keep interest rates low, which is broadly supportive for fixed income markets.
Within the fixed income universe, our preference continues to focus on developed market corporate bonds,
particularly non investment grade (‘high yield’) which we believe offer value on a total-return basis. Conversely,
US treasury and eurozone sovereign bond valuations do not appear particularly attractive despite the recent
rise in yields, nor do they offer much protection in the event that inflation begins to surprise on the upside. From
a valuation perspective, emerging market debt remains less attractive than high yield and other corporate debt.
Therefore, we have a negative stance on US dollar-denominated emerging market sovereign debt relative to
developed market corporate debt. Furthermore, we also have a slightly negative view on global developed
inflation-linked bonds, largely because inflation in the developed world is currently muted. High unemployment
and the compression in salaries, as well as ongoing risks to a sustainable recovery, are still weighing on
consumer demand, thus helping to keep prices under control.
2
Short-term Investment
Outlook (6 - 12 months)
CURRENT
ASSET CLASS REASONING
VIEW
• Equity valuations relative to cash and especially government debt remain
Global Developed Market
Neutral attractive, plus liquidity remains supportive. There continue to be risks to the
Equity
economic recovery, but our core scenario is for positive, but sub-trend growth.
• Whilst unemployment remains elevated at 9.6%, Fed policy has remained
US Equity Neutral
accommodative and recent economic news-flow has been encouraging.
• Economic conditions remain mixed. UK growth has slowed, austerity
measures are in the process of being rolled out in parts of Europe and the
economic health of peripheral eurozone countries remains uncertain. That
Europe Equity
Neutral said, interest rates and inflation remain generally low (the UK being an
(including the UK)
outlier), the Bank of England has flagged the possibility of a further round of
quantitative easing, and recent corporate earnings news in Europe has been
encouraging.
• We have a tactical, short-term preference for Japanese equities as they lagged
other developed equity markets for much of 2010 and, having recently started to
Japan Equity Positive outperform, are likely to have positive price momentum. There are also early signs
that flows are becoming more supportive. Japanese stock valuations look attractive
relative to history both in absolute terms and relative to other developed markets.
• From a macroeconomic perspective, the outlook remains generally positive with
strength in both the manufacturing and consumer sectors. However, from a
EQUITY Asia ex-Japan Equity Neutral
valuation perspective, market prices have largely reflected the positive news-
flow.
• Emerging countries are likely to continue to lead the recovery due to robust
domestic consumption and strong intra-regional trade. That said, like developed
Global Emerging Markets Neutral
markets, emerging market equities are exposed to volatility stemming from the
question marks around the sustainability of the global economic recovery.
• The economic performance of Latin American countries remains strong and
earnings growth estimates for 2011 look reasonable. Having said that, the
Latin America Equity Neutral
good news seems to be well reflected in market prices and relative valuation
measures show no strong signals. We, therefore, retain our neutral stance.
• Economic data from the region has been highly encouraging and 2010-2011
forecasts are positive. In addition, valuations remain reasonable. Key risks include
Middle East Equity Neutral
a slowdown in global demand for oil and the potential deterioration of budget
deficits among some of the countries in the region.
• Manufacturing data has varied within the different countries. Weak labour
markets, high levels of government debt and ongoing concerns about eurozone
Eastern Europe Equity Neutral debts are weighing on the outlook for the broader region. However, at a
country level, we favour Russian equities. Valuations for Russian equities are
attractive in both absolute and relative terms.
3
Short-term Investment
Outlook (6 - 12 months)
4
Short-term Investment
Outlook (6 - 12 months)
Summary
5
Long-term Investment
Outlook (3 - 5 years)
• Comparatively low level of yield and issues around public debt are likely
Developed Market Government Bonds Negative
to keep average returns relatively subdued.
6
Macro Assessment
While the economic news-flow was generally encouraging, the risks from sovereign debt issues in developed economies
and monetary tightening in emerging economies remain present.
7
Macro Assessment
Japan
Economic releases were generally mixed, but the broad picture remained
positive overall.
Emerging Markets
8
Macro Assessment
9
Equity Markets
Global Developed Markets concerns over the debt situation and risks of contagion are
ongoing.
• We have a neutral view on equity markets relative to cash.
• From a valuation perspective, eurozone and UK equities are
• This view is underpinned by a moderation in 2011 earnings trading at reasonably undemanding levels, with their 12-month
growth expectations. The more moderate forecasts mean that forward price / earnings ratios at 10.6x and 10.4x respectively.
the risk of negative surprises is not as elevated as before.
• In addition, as the European Central Bank and the Bank of England
• Another reason for our neutral view is attractive relative are likely to leave their interest rates unchanged for some time,
valuations especially versus government debt. Furthermore, we expect ongoing liquidity to be supportive.
commitments by central banks to inject more liquidity into
• Overall, we maintain a neutral position in equities versus cash in
markets if needed to support growth have improved the outlook
recognition of the balance of the various factors aforementioned
for equities somewhat.
and the risks.
• At the sector level, we have closed out our preference for
healthcare, telecommunications and consumer staples stocks
Japan
as the valuation gap relative to other sectors has converged
making these sectors less attractive on a relative basis.
• The Japanese economic recovery is expected to slow and the
government is trying various ways to spur inflation and employment
US to foster a more sustainable growth path. The corporate tax reduction
proposal has been passed by the cabinet and is awaiting approval
• The US macroeconomic picture was encouraging in December,
from parliament. This contributes to our positive outlook on Japanese
supporting our central scenario of positive growth in 2011.
equities.
• US company earnings growth estimates for 2011 rose
• 2011 estimated earnings growth for Japanese stocks is still reasonably
marginally in December to 13.7%. That said, the weakness in
healthy (12.8% as at end December). While the ongoing strength of the
consumption and employment still warrants some caution.
yen might be cited as a negative factor, companies’ export earnings
• From a valuation perspective, US equities are trading at a 12 have shown remarkable resilience to a stronger currency.
month forward price / earnings ratio of 13.3x. This is higher
• In terms of valuations, Japanese equities appear inexpensive, as both
than the level seen in November but still in attractive territory
trailing and forward price / earnings ratios are still below their historic
compared to history. Furthermore, with the Fed keeping rates
peaks.
low and continuing its quantitative easing programme, liquidity is
likely to remain a positive factor for US (and other) equities. • Based on attractive valuations and expected positive price momentum,
we have taken a tactical short-term overweight position in Japanese
• Therefore, balancing the ongoing risks to economic growth, the
equities against other developed equity markets.
moderately attractive valuations and the favourable levels of
liquidity, we retain our neutral positioning in US equities versus
cash. Global Emerging Markets
10
Equity Markets
• Relative valuations within emerging markets equities have shifted tax on certain investments by foreigners from 2% to 6% in an
slightly. Valuations for Emerging Asia have improved, with the 12 effort to stem currency appreciation.
month price/ earnings ratio easing to 12.0x and now standing
only marginally higher than Latin America (11.6x). Middle East
• Our emerging market equities view continues to be neutral • Gross Domestic Product growth expectations are positive
overall (versus cash) as the long-term backdrop to the asset for both 2010 and 2011, although there are downside risks.
class remains favourable, but is balanced by the risks of slowing Valuations remain undemanding but given the risks to economic
economic growth in both the emerging and developed regions in growth and the narrowing valuation discount to emerging
markets, we remain neutral on MENA versus other equity
2011.
markets.
Asia ex-Japan
Eastern Europe
• GDP growth across the region remained solid, but the potential
• We maintain our preference for Russian equities within the wider
for monetary tightening in key countries could moderate the
emerging markets universe, as we continue to think valuations
pace of improvement. Overall, we expect economic growth
are attractive on a relative basis.
to stay strong in 2011, a positive factor for the region’s equity
markets. • In Eastern Europe, CPI indices increased across the major
countries. However, given the outlook for domestic demand
• From a valuation perspective, Asia ex-Japan equities remain
in this part of the emerging markets world, the risk of policy
attractive, at a price / earnings ratio of 12.8. Earning growths
changes remains lower than in Asia and Latin America.
expectations for 2011 are also a positive factor particularly as
they are relatively undemanding compared to previous years.
• However, the momentum of economic growth will likely be
slower this year which, coupled with and higher interest rates in
2011, reduces the upside potential for Asian equities.
• While we are positive in the Asia ex-Japan region on reasonable
valuation and ample liquidity, we are cautious as to the level of
tightening central banks in Asia might put forth, thus we maintain
a neutral stance on the region.
Latin America
11
Fixed Income
US dollar Government Bonds is in line with our central scenario of economic growth and is
typically positive for corporate bonds.
• The recent movements in US government yields continue
• In addition, corporate earnings remain supportive. 2011 earnings
to support our modestly cautious view on this segment of
growth expectations are a solid 14.7% at the end of December,
the fixed income asset class, amid a generally improving
a level that continues to reflect the current and expected
macroeconomic environment.
economic conditions.
• The latest quantitative easing programme is supportive of
• That said, while we expect credit spreads for investment grade
treasury prices, but as the recovery shows some progress,
bonds to continue their general tightening trend given their strong
the time for the start of normalisation in monetary policy is
fundamentals, this might not be enough to compensate for
approaching.
potential future increases in government bond yields.
• From a valuation perspective, although inflationary pressures
• Against this backdrop, we have retained a preference for
and inflation expectations remain muted, current yields are not
investment grade corporate bonds relative to government
particularly historically attractive. However, yields have risen
bonds.
somewhat in recent months and, therefore, valuation levels are
less stretched.
High Yield
• We continue to be a little cautious of US treasuries relative to
cash but less so than last month as yields have already risen • Among riskier asset classes, our tactical preference for high
in recent weeks. Within fixed-income assets, our preference yield corporate debt has continued to prove rewarding. Although
remains for corporate bonds, both investment and non- yield spreads against government bonds are tighter than earlier in
investment grade. 2010, valuations remain attractive.
13
Other Investments
Currency
• The debt situation of the peripheral European economies does combination of interest rate rises and other measures such as
not look to be fully resolved and further periods of funding capital controls) in 2011 with the potential for at least short-
difficulties, probably requiring intervention from the various term market reaction, the better growth rates in the emerging
authorities, can be expected. Although our central view is not for regions are likely to underpin their currencies in the long-term.
a break-up of the euro, either partial or full, further euro volatility
is likely. • Our currency views have not changed this month. We do
not have high conviction in any tactical currency views and,
• Although we can expect emerging countries to implement therefore, have a neutral view.
further policy responses to try to limit inflows (probably a
14
Managing risk exposure using diversification
Example of diversification strategies in the model portfolio (*)
Example: Portfolio I Example: Portfolio II Example: Portfolio III Example: Portfolio IV Example: Portfolio V
Lower Higher
risk risk
Liquidity Global Aggregate Bonds Property US Equity Asia Pac. ex Japan Equity
Global High Yield Bonds Commodity Europe Equity Emerging Markets Equity
Emerging Markets Debt Private Equity Japan Equity Russia
Hedge Fund
Absolute Return
Source: HSBC Global Asset Management, November 29th 2010. Past performance does not guarantee future results. (*) For illustration purpose only. The present document and the information
provided do not constitute a proposal or advice for the acquisition or sale of investment products. HSBC Bank Plc does not provide investments advice with the present document, does not accept
any obligation and will not accept any responsibility for any consequences from any investment decision based on the present document.
15
Disclaimer
The views expressed are those of HSBC Global Asset Management and do not constitute investment advice. No liability is accepted to recipients acting
independently on its contents. Past performance should not be seen as an indication of future returns. The value of investments and any income from them can
go down as well as up.
The present document and the information provided do not constitute a proposal or advice for the acquisition or sale of investment products. HSBC Bank Plc
does not provide investments advice with the present document, does not accept any obligation and will not accept any responsibility for any consequences
from any investment decision based on the present document.
Any forecast, projection or target where provided is indicative only and is not guaranteed in any way. HSBC Global Asset Management accepts no liability for
any failure to meet such forecast, projection or target.