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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 Important Information for Customers: WARNING: THE CONTENTS OF THIS DOCUMENT HAVE NOT BEEN REVIEWED BY ANY REGULATORY AUTHORITY IN HONG KONG OR ANY OTHER JURISDICTION. YOU ARE ADVISED TO EXERCISE CAUTION IN RELATION TO THE INVESTMENT AND THIS DOCUMENT. IF YOU ARE IN DOUBT ABOUT ANY OF THE CONTENTS OF THIS DOCUMENT, YOU SHOULD OBTAIN INDEPENDENT PROFESSIONAL ADVICE. This document has been issued by The Hongkong and Shanghai Banking Corporation Limited (the “Bank”) in the conduct of its regulated business in Hong Kong and may be distributed in other jurisdictions where its distribution is lawful. It is not intended for anyone other than the recipient. The contents of this document may not be reproduced or further distributed to any person or entity, whether in whole or in part, for any purpose. 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