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This commentary has been produced by HSBC Global Asset Management to provide a high level overview of the recent economic and financial market environment, and is for information purposes only.
The views expressed were held at the time of preparation; are subject to change without notice and may not reflect the views expressed in other HSBC Group communications or strategies. This marketing
communication does not constitute investment advice or a recommendation to any reader of this content to buy or sell investments nor should it be regarded as investment research. The content has not been
prepared in accordance with legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of its dissemination. You should be aware
that the value of any investment can go down as well as up and investors may not get back the amount originally invested. Furthermore, any investments in emerging markets are by their nature higher risk and
potentially more volatile than those inherent in established markets. Any performance information shown refers to the past and should not be seen as an indication of future returns. You should always consider
seeking professional advice when thinking about undertaking any form of investment.
Investment Monthly
April 2017
Overview
Risk asset rally leaves a thin margin of safety
• We remain neutral global equities and corporate bonds,
and underweight developed market (DM) government
bonds. We also continue to be overweight local currency
emerging market (EM) government bonds
• Global equities edged higher for another month in March,
supported by a continuation of upbeat economic data
releases, and despite continued US policy uncertainty
• As expected, the March US Federal Open Market
Committee (FOMC) meeting saw a 25bps hike in the federal
funds rate, with a further two rate hikes in 2017 signalled
• In the eurozone, amid strong activity data and diminished
risks of deflation, the European Central Bank (ECB) struck a
more hawkish tone at its March meeting
• China’s National People’s Congress (NPC) highlighted
“stability” as 2017’s key objective, as the government
strikes a balance between growth and structural reforms
For DM government bonds, prospective returns still justify an
underweight position. The prevailing macro environment
remains bond unfriendly. However, with the possibility of
adverse economic or political outcomes, the current pricing of
US Treasuries implies a strong diversification case for holding
them in a balanced portfolio. For EM, we remain overweight
local currency government debt given valuations that are still
attractive.
• EM equities have seen a strong rebound year-to-date,
suggesting investors are reacting to positive macro data
and may be less concerned over a “hard-Trump” policy
agenda
Equities
Government Bonds
Global
Neutral
—
Developed Underweight
Market
(DM)
—
Global
investment
grade (IG)
Neutral
—
EM Asian
fixed
income
Underweight
—
US
Underweight
—
US
Underweight
—
USD IG
Neutral
—
Asia
ex-Japan
equities
Overweight
—
UK
Underweight
—
UK
Underweight
—
EUR and
GBP IG
Neutral
—
China
Overweight
—
Eurozone
Overweight
—
Eurozone
Underweight
—
Global
high-yield
Neutral
—
India
Overweight
—
Japan
Overweight
—
Japan
Underweight
—
Gold
Neutral
—
Hong Kong Neutral
—
Emerging Overweight
Markets
(EM)
—
EM (local
currency)
Overweight
—
Other
commodities
Neutral
—
Singapore
Neutral
—
Real estate
Neutral
—
South
Korea
Overweight
—
Taiwan
Neutral
—
Icons:
View
Asset Class
Movement
—
View on this asset class has been upgraded
— No change
View
Asian Asset
View
Neutral
View
Corporate Bonds & Other
Asset
Class
CEE &
Latam
View
Asset
Movement Class
Risk assets have witnessed an impressive rally over recent
months, with global equities hitting fresh record highs,
high-yield (HY) credit spreads substantially compressing, and
EM assets outperforming. This may be attributed to a
combination of robust global economic activity, still loose
monetary policy, and fiscal policy no longer acting as a drag
in a number of economies. Consequently, the pricing of risk
assets implies that the market now has a limited ability to
absorb bad news – political risks remain high and there is
scope for US fiscal stimulus to disappoint. In this context, we
remain neutral global equities, though we adopt a negative
bias on our neutral global HY stance. We also acknowledge
that an extended period of market strength (“irrational
exuberance”) is a key risk of a more cautious stance.
View
Asset
Movement Class
View
View
Movement
View on this asset class has been downgraded
3
Markets continue to price an improved macro
outlook
Global equities register another positive month in
March; eurozone bonds decline
Eurozone data remains very positive, reflected in a
more bullish ECB outlook
March saw Global equities edge higher for a fifth straight month,
supported by a continuation of upbeat economic data releases,
and a slightly more dovish March FOMC meeting than expected.
The MSCI AC World index rose 0.8%. Within DM, US equity
indices were little changed, weighed on by uncertainty over the
US policy outlook (as the Trump administration failed to pass
the American Health Care Act through Congress), as well as
lower oil prices due to renewed supply glut concerns. US policy
concerns also helped push the US dollar lower against most major
currencies, with a stronger Japanese yen contributing to weakness
in Japanese indices (the Nikkei edged 1.1% lower over the month).
European stocks, however, outperformed, with the Euro Stoxx 50
rising 5.5%, supported by receding political risk concerns following
a market-friendly outcome in the Dutch elections. Within EM, the
MSCI India and China saw another month of solid gains, whilst
the MSCI Brazil fell (-2.6%). Finally, 10-year US Treasuries were
little changed, although eurozone equivalents declined (yields
rose) amid a slightly more hawkish March ECB meeting, offsetting
weaker than expected inflation prints (all data above as at close of
31 March in local currency, price return, month-to-date terms).
Eurozone economic activity data continues to perform well, with
the preliminary March composite PMI rising to a fresh six-year
high (+1.7 pts to 56.7), beating expectations of a slight decline. On
a historical basis, PMIs over Q1 are consistent with a firming of
GDP growth during the quarter, following 0.4% qoq in Q4 2016.
Improved activity data goes some way in explaining the more
bullish outlook presented at the ECB’s March meeting, which
pointed to “less pronounced” risks to the growth outlook, even if
they “remain tilted to the downside”. ECB President Draghi also
stated that “risks of deflation have largely disappeared”. Overall,
with strong activity data and diminished risks of deflation, the
arguments for a further taper of the Asset Purchase Programme
(APP) in 2018 are strong, especially given concerns of technical
buying limits and market distortions. Nevertheless, Draghi
continues to emphasise there are “no signs yet of a convincing
upward trend in underlying inflation”. Consequently, ultra-low
rates are likely to persist.
US activity remains strong amid greater policy
uncertainty
As expected, the US Federal Reserve’s March FOMC meeting
saw the federal funds rate increase by 25bp to 0.75% - 1.00%,
the third rate hike since December 2015. The median estimate of
the Fed’s “dot plot” continued to point to two further 2017 rate
hikes, with the projected final destination for US rates remaining
little changed at 3%. Further monetary policy tightening this year
is consistent with an economy that continues to perform very
strongly. February’s nonfarm payrolls release showed 235,000
jobs created, with wage growth continuing to trend higher.
Meanwhile, consumer sentiment surveys at multi-year highs
signal potential upside to spending going forward. Nevertheless,
policy deadlock is a key risk to the outlook, especially in light of
the American Health Care Act’s failure to pass through congress.
Positively, however, US legislators’ focus now turns towards tax
reform and fiscal stimulus.
4
Chinese authorities highlight “stability” as key
objective for 2017; Japanese data improves, but
inflation remains weak
In China this month, the National People’s Congress (NPC)
highlighted “stability” as the key objective for 2017, as the
government strikes a balance between economic growth and
structural reforms/financial stability. Proactive fiscal policy was
reiterated, as well as a prudential and neutral monetary policy.
However, a subtle monetary tightening bias at late is reflected
in higher (and potentially more volatile) interbank rates, stricter
credit extension to the property market, and tighter regulations
on financing by shadow banks given a policy focus on financial
de-leveraging and containing risks. Japanese economic data has
recently improved, with personal consumption and external trade
gathering pace over the first months of 2017. However, inflation
remains weak despite the surge in energy prices over the past
12 months. Nevertheless, at its March policy meeting, the Bank
of Japan reiterated its confidence that inflation will gradually
converge towards its 2% target.
Emerging market assets have benefited from
easing concerns over a hard-Trump trade agenda
and upbeat global data
For emerging markets (EM), there has been an impressive
rebound in equities year-to-date, suggesting that investors have
become less concerned over a “hard-Trump” policy agenda.
Investors are also responding to generally better news on the
global economic cycle. Although aggregate EM equity valuations
no longer look anomalously cheap, risk premia are still attractive in
selective markets such as Korea, Russia, Poland and Turkey. Many
EMs also benefit from undervalued currencies poised for mediumterm appreciation. EM local-currency debt has not rallied as
strongly as equities year-to-date, and prospective returns continue
to look attractive against competing asset classes.
In terms of economic developments, Brazilian data releases
improved in March, with retail sales, industrial production, PMIs
and consumer confidence all rising. Positive GDP growth is
expected to return in Q2-2017, whilst a slowdown in inflationary
pressures could see the Central Bank of Brazil cut policy rates
further in Q2. Less positively, Mexico’s data releases in March
showed anaemic activity, with inflationary pressures likely to
maintain a hawkish bias by the Bank of Mexico. In India, the ruling
BJP’s strong performance in state assembly elections should
facilitate the implementation of economic reforms, with the goods
and services tax (GST) on course for a 1 July rollout. Recent data
also indicates a less adverse than expected economic impact of
demonetisation.
Risk asset rally implies a more targeted and
cautious use of risk budgets
The macro environment remains supportive for equities, but
recent price action has significantly reduced the prospective
reward for bearing equity risk in an environment of high
uncertainty. Equity risk premia are especially low in the US, UK
and Canada. Overall we remain neutral, with a relative preference
for Japan and Europe which offer higher implied risk premia. For
credits, recent spread compression makes us more cautious on
global high-yield credit, despite an improvement in underlying
fundamentals. Amid a thinner margin-of-safety, we adopt a
negative bias on our neutral stance. We remain underweight in
DM government bonds, given that prospective returns still look
low relative to competing asset classes. The prevailing macro
environment also remains bond-unfriendly (e.g. stronger global
activity, the prospect of fiscal easing). However, we still think there
is a strong diversification case for owning Treasuries in a multiasset portfolio as insurance against a deteriorating global growth
picture.
5
Market Data
Close
MTD
Change
(% )
3M
Change
(% )
1-year
Change
(% )
YTD
Change
(% )
52-week
High
52-week
Low
Fwd
P/E
(X)
449
1.0
6.4
12.7
6.4
453
379
16.6
20,663
-0.7
4.6
16.8
4.6
21,169
17,063
17.2
US S&P 500 Index
2,363
0.0
5.5
14.7
5.5
2,401
1,992
18.3
US NASDAQ Composite Index
5,912
1.5
9.8
21.4
9.8
5,928
4,574
22.6
15,548
1.0
1.7
15.2
1.7
15,943
13,217
16.9
426
3.6
6.5
6.5
6.5
429
354
15.0
3,501
5.5
6.4
16.5
6.4
3,508
2,678
15.0
Equity Indices
World
MSCI AC World Index (USD)
North America
US Dow Jones Industrial Average
Canada S&P/TSX Composite Index
Europe
MSCI AC Europe (USD)
Euro STOXX 50 Index
UK FTSE 100 Index
7,323
0.8
2.5
18.6
2.5
7,447
5,789
14.8
12,313
4.0
7.2
23.6
7.2
12,376
9,214
14.1
France CAC-40 Index
5,123
5.4
5.4
16.8
5.4
5,133
3,956
15.1
Spain IBEX 35 Index
10,463
9.5
11.9
19.9
11.9
10,463
7,580
14.8
Germany DAX Index*
Asia Pacific
MSCI AC Asia Pacific ex Japan (USD)
Japan Nikkei-225 Stock Average
Australian Stock Exchange 200
Hong Kong Hang Seng Index
Shanghai Stock Exchange Composite Index
Hang Seng China Enterprises Index
Taiwan TAIEX Index
Korea KOSPI Index
479
2.8
12.3
14.9
12.3
484
394
13.8
18,909
-1.1
-1.1
12.8
-1.1
19,668
14,864
18.0
5,865
2.7
3.5
15.4
3.5
5,902
4,894
16.3
24,112
1.6
9.6
16.1
9.6
24,657
19,595
12.1
3,223
-0.6
3.8
7.3
3.8
3,301
2,781
13.7
10,274
-0.2
9.4
14.1
9.4
10,698
8,176
8.3
9,812
0.6
6.0
12.2
6.0
9,977
8,000
13.7
2,160
3.3
6.6
8.2
6.6
2,182
1,893
9.9
29,621
3.1
11.2
16.9
11.2
29,859
24,523
17.4
Indonesia Jakarta Stock Price Index
5,568
3.4
5.1
14.9
5.1
5,617
4,691
16.1
Malaysia Kuala Lumpur Composite Index
1,740
2.7
6.0
1.3
6.0
1,760
1,612
16.5
Philippines Stock Exchange PSE Index
7,312
1.4
6.9
0.7
6.9
8,118
6,499
17.8
Singapore FTSE Straits Times Index
3,175
2.5
10.2
11.8
10.2
3,188
2,703
14.8
Thailand SET Index
1,575
1.0
2.1
11.9
2.1
1,601
1,343
15.5
India SENSEX 30 Index
Latam
Argentina Merval Index
20,265
6.0
19.8
56.0
19.8
20,323
11,776
8.4
Brazil Bovespa Index*
64,984
-2.5
7.9
29.8
7.9
69,488
47,874
12.1
4,783
9.7
15.2
21.5
15.2
4,877
3,847
17.8
Chile IPSA Index
Colombia COLCAP Index
Mexico Index
1,366
3.0
1.0
2.2
1.0
1,419
1,271
12.4
48,542
3.6
6.4
5.8
6.4
49,524
43,902
18.3
EEMEA
Russia MICEX Index
1,996
-2.0
-10.6
6.7
-10.6
2,294
1,834
6.1
South Africa JSE Index
52,056
1.8
2.8
-0.4
2.8
54,704
48,936
15.3
Turkey ISE 100 Index*
88,947
1.7
13.8
6.8
13.8
91,497
70,426
8.8
*Indices expressed as total returns. All others are price returns.
7
3-month
Change
(%)
YTD
Change
(%)
1-year
Change
(%)
3-year
Change
(%)
5-year
Change
(%)
Global equities
6.9
6.9
15.0
16.0
49.5
US equities
6.1
6.1
16.7
31.3
80.1
Equity Indices - Total Return
Europe equities
Asia Pacific ex Japan equities
7.2
7.2
9.8
-5.0
28.4
12.8
12.8
18.2
11.1
26.2
Japan equities
4.5
4.5
14.4
19.2
39.1
Latam equities
12.1
12.1
23.3
-11.5
-27.0
Emerging Markets equities
11.4
11.4
17.2
3.6
4.1
All total returns quoted in USD terms. Data sourced from MSCI AC World Total Return Index, MSCI USA Total Return Index, MSCI AC Europe Total
Return Index, MSCI AC Asia Pacific ex Japan Total Return Index, MSCI Japan Total Return Index, MSCI Latam Total Return Index and MSCI Emerging
Markets Total Return Index.
Close
MTD
Change
(% )
3-month
Change
(% )
1-year
Change
(% )
YTD
Change
(% )
502
0.0
0.4
1.1
0.4
Bond Indices - Total Return
BarCap GlobalAgg (Hedged in USD)
JPM EMBI Global
768
0.3
3.9
8.8
3.9
2,760
-0.2
1.2
3.3
1.2
BarCap Euro Corporate Index (EUR)
242
-0.4
0.3
2.5
0.3
BarCap Global High Yield (USD)
445
0.0
3.0
15.1
3.0
BarCap US Corporate Index (USD)
Markit iBoxx Asia ex-Japan Bond Index (USD)
190
0.3
2.3
4.1
2.3
Markit iBoxx Asia ex-Japan High-Yield Bond Index (USD)
244
0.4
3.7
12.5
3.7
Total return includes income from dividends and interest as well as appreciation or depreciation in the price of an asset over the given period.
Bonds
Close
End of
Last mth.
3-months
Ago
1-year
Ago
Year End
2016
0.75
0.60
0.50
0.20
0.50
US Treasury yields (%)
3-Month
2-Year
1.25
1.26
1.19
0.72
1.19
5-Year
1.92
1.93
1.93
1.20
1.93
10-Year
2.39
2.39
2.44
1.77
2.44
30-Year
3.01
3.00
3.07
2.61
3.07
Developed market 10-year bond yields (%)
8
Japan
0.07
0.05
0.04
-0.04
0.04
UK
1.14
1.15
1.24
1.41
1.24
Germany
0.33
0.21
0.20
0.15
0.20
France
0.97
0.89
0.68
0.49
0.68
Italy
2.31
2.08
1.81
1.22
1.81
Spain
1.65
1.64
1.38
1.43
1.38
Currencies (vs USD)
Latest
End of
Last mth.
3-months
Ago
1-year
Ago
Year End
2016
52-week
High
52-week
Low
Developed markets
EUR/USD
1.07
1.06
1.05
1.14
1.05
1.16
1.03
GBP/USD
1.26
1.24
1.23
1.44
1.23
1.50
1.18
CHF/USD
1.00
0.99
0.98
1.04
0.98
1.06
0.97
CAD
1.33
1.33
1.34
1.30
1.34
1.36
1.25
JPY
111.4
112.8
117.0
112.6
117.0
118.7
99.0
AUD
1.31
1.31
1.39
1.31
1.39
1.40
1.28
NZD
1.43
1.39
1.44
1.45
1.44
1.50
1.34
Asia
HKD
7.77
7.76
7.76
7.76
7.76
7.77
7.75
CNY
6.89
6.87
6.95
6.45
6.95
6.96
6.46
INR
64.85
66.69
67.92
66.25
67.92
68.86
64.76
MYR
4.43
4.44
4.49
3.90
4.49
4.50
3.84
KRW
1,118
1,130
1,206
1,143
1,206
1,212
1,090
TWD
30.35
30.68
32.33
32.21
32.33
32.82
30.15
3.12
3.11
3.26
3.59
3.26
3.72
3.04
Latam
BRL
COP
2,874
2,926
3,002
3,002
3,002
3,208
2,817
MXN
18.72
20.11
20.73
17.28
20.73
22.04
17.05
EEMEA
RUB
56.24
58.38
61.54
66.90
61.54
69.49
55.86
ZAR
13.41
13.13
13.74
14.77
13.74
15.98
12.31
TRY
3.64
3.65
3.52
2.82
3.52
3.94
2.79
Latest
MTD
Change
(% )
3-month
Change
(% )
1-year
Change
(% )
YTD
Change
(% )
52-week
High
52-week
Low
Commodities
1,249
0.1
8.4
1.3
8.4
1,375
1,121
Brent Oil
Gold
52.8
-5.0
-7.0
33.4
-7.0
58
37
WTI Crude Oil
50.6
-6.3
-5.8
32.0
-5.8
55
35
R/J CRB Futures Index
186
-2.5
-3.4
9.0
-3.4
196
165
5,838
-2.3
5.5
20.4
5.5
6,204
4,484
LME Copper
Sources: Bloomberg, HSBC Global Asset Management. Data as at close of business 28 February 2017. Past performance is not an indication of
future returns.
9
Long-term Asset class positioning (>12 months)
Views are based on regional HSBC Global Asset Management Asset Allocation meetings held throughout March 2017, HSBC
Global Asset Management’s long-term expected return forecasts which were generated as at 28 February 2017, our portfolio
optimisation process and actual portfolio positions.
Asset class
View
Movement
Rationale
Equities
Global
Neutral
—
Positive factors: Global economic growth momentum remains solid, driving global equity markets to deliver
positive returns over the long term. Overall, support from accommodative monetary policy and an increased
willingness for looser fiscal policy will, in the medium and longer term, likely outweigh any headwinds from
more modest Chinese growth, US interest-rate increases and political uncertainty in many regions.
Risks to consider: The recent compression of implied equity premia limits the ability of the market to absorb
bad news. Episodic volatility may be triggered by concerns surrounding Chinese growth, uncertainty around US
economic policy, and/or a potentially more rapid than expected Fed tightening cycle, coupled with political risks.
A notable and persistent deterioration of the global economic outlook could also dampen our view.
US
Underweight
—
Rationale of underweight views: Relatively high current valuations lead to an implied risk premium that is
lower than in other developed markets. The policy outlook under the Trump administration remains highly
uncertain.
Positive factors to consider: Corporate tax reform, looser regulation and fiscal stimulus under the Trump
administration present an upside risk to earnings.
UK
Underweight
—
Rationale of underweight views: The prospective reward to bearing equity risk in the UK is relatively low.
Although the macroeconomic backdrop remains resilient following last June’s Brexit vote, the economy faces
a number of challenges, including negotiating Brexit. Overall, the risks appear excessive given the skinny risk
premium.
Positive factors: The UK economy has been far more resilient following June’s Brexit vote than originally
anticipated. Meanwhile, any further sterling weakness may support UK equities going forward given their
relatively high dependence on foreign earnings.
Eurozone
Overweight
—
Rationale of overweight views: We favour eurozone equities due to their higher implied risk premia and
scope for better earnings news given the region’s earlier point in the activity cycle. Furthermore, the monetary
backdrop remains supportive, with ultra-low interest rates likely to persist until the end of the decade.
Risks to consider: Rising euroscepticism raises concerns over the European Union’s future, potentially
weighing on growth prospects. Slower UK GDP growth may also hit eurozone exports to a significant trading
partner. Meanwhile, ECB monetary policy may be less accommodative than expected. Finally, further political
uncertainty lies ahead in the form of the French, German and (likely) Italian elections in 2017.
Japan
Overweight
—
Rationale of overweight views: Relative valuations and risk premia are attractive, in our view, whilst the Bank of
Japan’s (BoJ) extremely loose monetary policy and the government’s recent fiscal stimulus package may boost
earnings. Large corporate cash reserves mean Japanese firms have scope to boost dividends or engage in stock
repurchases. Earnings momentum is showing signs of picking up.
Risks to consider: Domestic economic fundamentals are relatively sluggish, with an absence of momentum in
personal consumption, despite tight labour market conditions.
Emerging
Markets (EM)
Overweight
—
Rationale of overweight views: We believe EM equities remain attractive for western-based investors (USD,
GBP or EUR based) given our expectation of longer-term currency appreciation. However, we continue to be
selective, focusing on countries with strong underlying macro fundamentals, and which could be shielded from
protectionist trade policies.
Risks to consider: Aggregate EM equity valuations no longer look anomalously cheap. There could be some
near-term volatility as worries persist around the uncertain path for future Fed tightening, the potential for
increased trade protectionism, economic transition in China, and the robustness of the global economy as a
whole. Geopolitical uncertainty also poses risks.
CEE & Latam
Neutral
—
Positive factors: Longer term, we anticipate positive growth differentials with developed markets to be
maintained, whilst Brazil’s status as a relatively closed economy offers some insulation from a potential increase
in global protectionism. Other countries, such as Poland, have low levels of US dollar-denominated debt.
Risks to consider: Geopolitical tensions are also high and unpredictable, whilst domestic political and
macroeconomic fundamentals remain poor in many countries, such as Brazil.
Government bonds
Developed
Markets (DM)
Underweight
—
Rationale of underweight views: Despite the recent government bond selloff, prospective returns still look low
relative to competing asset classes. In a bond-unfriendly environment (stronger global activity, the prospect of
fiscal easing, and rising headline inflation in many economies), global bond yields could move higher still.
Positive factors to consider: Government bonds still provide diversification benefits and reduce volatility
within multi-asset portfolios. Meanwhile, “secular stagnation” forces are powerful (ageing populations, low
productivity and investment), and the global pool of safety assets is limited. Therefore, the “normalisation” of
bond yields could take several years.
US
Underweight
—
Rationale of underweight views: The US labour market is at (or close to) full employment so underlying
inflationary pressures are likely to build, especially if fiscal stimulus materialises. In addition, prospective returns
for US Treasuries still look low relative to competing asset classes and we maintain a structural underweight.
Positive factors to consider: We think there is a strong diversification case for owning Treasuries as insurance
in case of a worsening global growth picture. Investors seem to be pricing a significant level of US stimulus and
the maintenance of positive macro momentum.
UK
Underweight
—
Rationale of underweight views: Prospective UK gilt returns remain very low. Although there is still a high
likelihood the UK economy will slow in the coming quarters, the compression of yields is likely to be partially
offset by higher inflation following the fall in sterling. The Bank of England is also close to the end of its current
bond buying programme.
Positive factors to consider: Amid downside risks to growth, UK monetary policy is likely to stay highly
accommodative for a longer period.
11
Asset class
View
Movement
Rationale
Government bonds
Eurozone
Underweight
—
Rationale of underweight views: Similarly, core European bonds are overvalued, in our view. A key risk is the
likelihood of further tapering of the ECB APP after December 2017.
Positive factors to consider: The APP may provide near-term support. Meanwhile, core inflationary pressures
and long-term inflation expectations in the region remain subdued, which should keep accommodative monetary
policy in place for an extended period of time.
Japan
Underweight
—
Rationale of underweight views: Japanese government bonds are overvalued, in our view, whilst the BoJ’s
commitment to peg 10-year yields close to zero could be re-evaluated. Given the high level of JGB purchases
already made, other asset class purchases may be explored.
Positive factors to consider: The “Yield Curve Control” framework should limit volatility and reduce the risk of
higher yields in the near-term. Meanwhile, BoJ Governor Kuroda has indicated that cutting policy rates could
play a central role in future policy decisions.
Emerging
Markets (EM)
Overweight
—
Rationale of overweight views: The yield available on EM local currency sovereign bonds makes them attractive
relative to DM government debt, in our view. Furthermore, our estimate of the sustainable return on EM
currencies reinforces our choice to hold this position unhedged.
Risks to consider: Spreads in the EM debt universe are at risk of widening as US policy tightens.
Corporate bonds
Global
investment
grade (IG)
Neutral
—
Positive factors: The prevailing macro environment remains supportive for credits. Macro momentum is
improving and implied recession probabilities are near zero – the default outlook appears benign.
Risks to consider: Valuations do not appear anomalously cheap, and we retain a neutral positioning, particularly
given the risk of tighter than expected US monetary policy.
-USD
investment
grade
Neutral
—
Positive factors: US investment grade debt looks more attractive relative to European credit. Carefully-selected
US credit may outperform.
Risks to consider: Lower relative valuations for USD-denominated credit is offset in the nearer term by the risk of
a more aggressive pace of Fed tightening. The US credit cycle is more mature than that in Europe which remains
nascent.
-EUR and
GBP
investment
grade
Neutral
—
Positive factors: The ECB and BoE’s corporate bond-buying programmes remain supportive. Meanwhile, in the
eurozone, the latest survey data suggests a gradual improvement in credit conditions, and default rates remain
low. Valuations are still around neutral levels.
Risks to consider: European and UK credits are vulnerable to a winding down of ECB and BoE corporate bond
buying programmes. Stripping out currency effects, GBP-denominated credit for UK-focused names could
deteriorate if the UK economy slows.
Global highyield
Neutral
—
Positive factors: Corporate fundamentals are improving following a pick-up in the global activity cycle. Defaults
remain comparatively low and are likely to be contained to commodity-related sectors.
Risks to consider: Further credit spread compression leaves a thin margin of safety. We are neutral with a
negative bias.
Gold
Neutral
—
Positive factors: Fed hikes are likely to remain gradual, limiting the opportunity-cost of holding the non-yield
generating asset. Rising inflationary pressures could boost inflation, hedging demand, whilst high political risks/
uncertainty could also support the yellow metal.
Risks to consider: A stronger-than-expected Fed hiking cycle may push the USD higher.
Other
commodities
Neutral
—
Positive factors: With oil demand growth remaining robust there is scope for the market to continue to rebalance,
particularly following OPEC’s November output cut deal.
Risks to consider: Oil markets could remain oversupplied if demand growth slows, US production remains
resilient, and OPEC cuts aren’t extended. Industrial metals remain exposed to the pace of China’s economic
rebalancing and global growth.
Real estate
Neutral
—
Positive factors: Over the last six months, real-estate equity performance has lagged general equities, largely on
the expectation of higher US interest rates. We believe the market has focused too heavily on real-estate equities
as a ‘bond proxy’. Based on our estimates of future dividend growth, we believe global real-estate equities are
priced to deliver attractive long-run returns relative to developed-market government bonds.
Risks to consider: Rising interest rates could continue to impact listed real estate negatively in the short term.
The UK's decision to leave the EU has reduced rental growth prospects, especially in central London, and
increased uncertainty around future occupier demand.
EM Asian
Fixed Income
Underweight
—
Rationale of underweight views: From a near-term perspective, this asset class is sensitive to US monetary
policy. Whilst a more gradual interest rate hike cycle in the US is positive for the asset class, Asian bond spreads
look tighter (167bp for the EMBI Global Asia as at 31 March) than in other regions of the EM space (436bp for the
EMBI Global Latin America for example), which reduces their relative attractiveness in the near to medium term.
Positive factors to consider: From a long-term perspective, return signals are still positive, backed by relatively
sound economic fundamentals, stable inflation and credit quality.
Asia ex
Japan Equity
Overweight
—
Rationale of overweight views: Higher nominal growth supports earnings prospects, amid a better global
growth/trade outlook, resilient Chinese activity, and gradualism in global central bank policy action. Return on
equity is bottoming out. Sound domestic dynamics, structural reforms, and shareholder-friendly policies are a
positive for some markets.
Risks to consider: US president Trump introduces the risk of protectionist policies. Another key risk is a more
aggressive Fed hiking cycle and rising US/global yields, putting pressure on Asian FX and compounding capital
outflows. Other risks include global/regional political events; commodity-price volatility; and renewed concerns
about China’s growth and financial risks.
Other
Asian assets
12
Asset class
View
Movement
Rationale
Asian assets
- China
Overweight
—
Rationale of overweight views: Corporate earnings, profits and margins have improved with return on equity
bottoming, supported by relatively stable economic growth and a recovery in commodity-related sectors amid
supply discipline. Many companies had cut capex, increased cash-flow and de-leveraged their balance sheets.
Dividend policy is in focus given recent official statements on the need to improve shareholder returns at SOEs.
Policy focus on financial deleveraging and containing risks (e.g. shadow banking, asset bubbles) is positive for
medium-term financial stability.
Risks to consider: Money market/liquidity tightening may cap equity gains, if higher borrowing cost hits earnings.
The economy’s heavy reliance on policy stimulus and on (debt-financed) property and infrastructure investment
is not sustainable. Policymakers face the dilemma between curbing the risk of asset bubbles whilst supporting a
stable development of the property sector. Other risks include an ongoing cyclical recovery being short-lived; a
setback in supply-side reform; defaults and bank NPLs; and external uncertainties (US trade policy, Fed and global
growth outlook, etc.).
- India
Overweight
—
Rationale of overweight views: The BJP’s strong performance in the state assembly elections is expected to
facilitate implementation of economic reforms. The goods and services tax (GST) is on course for 1 July rollout.
Increased banking system liquidity post demonetisation aiding monetary transmission via lower domestic rates,
the government’s focus on infrastructure and affordable housing, and the 7th Pay Commission boost help revive
growth and earnings. Structural tailwinds add to a cyclical recovery. Indian markets are relatively shielded from a
shift toward protectionism.
Risks to consider: Weak loan growth and worsening NPA situation, particularly for public sector banks, and
sluggish private capex remain key concerns. Other risks include faster pace of monetary policy normalisation by
the Fed/DM central banks; the impact on Indian exporters, especially IT and business process outsourcing services,
from US immigration, tax and trade policies; and pressures on inflation from oil prices and/or potential El Nino.
The GST could cause some initial disruptions, despite its long-term economic benefits. Valuations are elevated
relative to their history.
- Hong Kong
Neutral
—
Positive factors: The outlook for the Hong Kong economy has improved with the recent upturn in trade, signs of
improving inbound tourism and recovering retail sales, resilient home prices aiding local consumer sentiment,
and the budget which envisages moderate fiscal stimulus. The Macau gaming sector has seen robust revenue
growth. Integration with China, including the “One Belt One Road” initiative, could help raise productivity of Hong
Kong’s service economy in the longer term.
Risks to consider: Hong Kong economy and markets are vulnerable to the risk of rising US/global protectionism,
tightening of monetary conditions (due to higher US interest rates and/or capital outflows), China’s financial and
macro-rebalancing risks, and global demand uncertainties. The property sector faces the risks of looming US rate
hikes and increasing supply this year, although capital inflows have pushed interbank rates lower recently and
private home prices stayed elevated.
- Singapore
Neutral
—
Positive factors: Earnings and return on equity are bottoming out with a turnaround in Singapore’s economy,
amid a revival in global trade, recovery in commodity prices, a pickup in loan/M2 growth, continued public
investment growth and modest fiscal stimulus. The slight easing of property curbs signalled that the tightening
cycle is over. Sentiment towards SGD has improved. The government is pump priming the new digital age push.
Healthy balance sheets support dividend plays.
Risks to consider: Singapore faces the risk of rising US interest rates and US/global protectionism. Its asset
markets are also sensitive to the USD trend/outlook. Banks are grappling with asset quality issues, particularly
with their exposure to the oil & gas sector. The country’s transition from a labour-driven growth model to a
productivity-driven one remains challenging, while structural headwinds, including the loss of manufacturing
export competitiveness, cap growth upside.
- South Korea
Overweight
—
Rationale of overweight views: Tech sector earnings growth has been driven by strong memory prices and
upcoming global brands’ smartphone model launches. Improved cost control also helps earnings of other cyclical
sectors. Concerns about domestic political instability have eased with the presidential election planned on 9 May.
Streamlining the ownership structure of chaebols to improve corporate governance and strengthen minority
shareholders’ rights will be a positive catalyst.
Risks to consider: US (trade) protectionist policies, tensions with China following the deployment of US missile
technology in Korea, and North Korea remain key concerns. Domestic consumption growth may remain weak
amid a softer labour market due to the impact of restructuring in several industrial sectors, the anti-graft law, and
tightening of mortgage lending standard. Construction investment is likely to slow down. Currency is a wild card
for exporter earnings.
- Taiwan
Neutral
—
Positive factors: A cyclical (export) recovery and improving earnings prospects support the market. We are
positive on the outlook for selective tech sub-sectors, such as the supply-chain of new smartphone product
launches this year and sectors benefiting from the trend for the industrial Internet of Things (IoT). Recovering
commodity prices help related sectors. A special infrastructure budget has been approved. Taiwan market is net
cash and has a relatively high dividend yield.
Risks to consider: US trade and tax policies cast significant uncertainty, due to Taiwan’s openness to trade, large
direct and indirect exports to the US, and equity market exposure to exporter sectors. Taiwan’s tech sector is
facing challenges from slower global tech demand growth and tougher competition from China in the supply
chain. Deterioration in cross-strait relationship is a concern. TWD strength is a headwind for exporter earnings,
although much of manufacturing is China-based.
13
Definitions:
Icons:
View on this asset class has been upgraded
— No change
View on this asset class has been downgraded
Underweight, overweight and neutral classifications are the high-level asset allocations tilts applied in diversified, typically multi-asset
portfolios, which reflect a combination of our long-term valuation signals, our shorter-term cyclical views and actual positioning in
portfolios. The views are expressed with reference to global portfolios. However, individual portfolio positions may vary according to
mandate, benchmark, risk profile and the availability and riskiness of individual asset classes in different regions.
• ‘Overweight’ implies that, within the context of a well-diversified typically multi-asset portfolio, and relative to relevant internal or
external benchmarks, HSBC Global Asset Management has (or would have) a positive tilt towards the asset class.
• ‘Underweight’ implies that, within the context of a well-diversified typically multi-asset portfolio, and relative to relevant internal
or external benchmarks, HSBC Global Asset Management has (or would have) a negative tilt towards the asset class.
• ‘Neutral’ implies that, within the context of a well-diversified typically multi-asset portfolio, and relative to relevant internal or
external benchmarks HSBC Global Asset Management has (or would have) neither a particularly negative or positive tilt towards
the asset class
For global investment-grade corporate bonds, the underweight, overweight and neutral categories for the asset class at the aggregate
level are also based on high-level asset allocation considerations applied in diversified, typically multi-asset portfolios. However,
USD investment-grade corporate bonds and EUR and GBP investment-grade corporate bonds are determined relative to the global
investment-grade corporate bond universe.
For Asia ex Japan equities, the underweight, overweight and neutral categories for the region at the aggregate level are also based on
high-level asset allocation considerations applied in diversified, typically multi-asset portfolios. However, individual country views are
determined relative to the Asia ex Japan equities universe as at 31 March 2017.
Similarly, for EM government bonds, the underweight, overweight and neutral categories for the asset class at the aggregate level
are also based on high-level asset allocation considerations applied in diversified, typically multi-asset portfolios. However, EM Asian
Fixed income views are determined relative to the EM government bonds (hard currency) universe as at 31 March 2017.
14
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