Global Equity Year end review & 2017 outlook

Transcription

1 To 2017 and beyond Investment Outlook Global Equity Year end review & 2017 outlook Bill Maldonado, Global CIO, Equities 1 December

2 2016: A good year for equities despite shocks 2016 has been a positive year for equities despite occasional episodic volatility triggered by a number of factors including China worries, global growth concerns, Brexit and the US Presidential election Equities in general rallied amidst the global search for returns in a low interest rate and low inflation world. Remaining invested paid off Total returns, USD (%) Source: HSBC Global Asset Management, as of 11 November 2016 US 10Y Bloomberg/EFFAS Bond indices U, US30Y Bloomberg/EFFAS Bond indices U, Global Agg Global AggTR HedUSG, Global IG BAML Global Corporate Index, Global HY BAML Global HY, Local EM debt J.P. Morgan EMBI Global Total, DM Equities MSCI Daily TR Gross World USD, US Equities MSCI Daily TR Gross USA USD, DM (ex US) Equities (H shares) MSCI Daily TR Gross China USD, Asia ex Japan Equities MSCI Daily TR Gross AC Asia Ex, EM Equities MSCI Daily TR Gross EM USD. 2

3 Emerging market equities outperformed Emerging market equities outperformed developed market equities in 2016 YTD This was logical given the relative valuations and prospects of emerging markets versus the developed markets although the absolute difference was relatively small MSCI Emerging Markets Index vs. MSCI World Index in Jan-16 Feb-16 Mar-16 Apr-16 May-16 Jun-16 Jul-16 Aug-16 Sep-16 Oct-16 Nov-16 Emerging Market Equities Developed Market Equities Source: Bloomberg, HSBC Global Asset Management, as of November 2016 Emerging market equities MSCI Emerging Markets Index, Developed Market Equities MSCI World Index 3

4 2017 will likely be similar to 2016 Remain in state of fragile equilibrium with sub-par growth and benign inflation coupled with an accommodative monetary stance Improving momentum in cyclical data Global liquidity conditions will remain supportive End of fiscal austerity on the horizon and increased prospects for reflation Risk of high, episodic, volatility in financial markets Exploiting tactical opportunities remains key to success in this low return world 4

5 Global Equities in 2017 The equity premium is still attractive The equity vs. bonds decision seems clear to us A reflationary environment favours global equities relative to other asset classes In the absence of a recession and sharply deteriorating corporate fundamentals or sharply rising rates, harvesting the equity premium makes sense Cyclical data looks good and recession probability models suggest a low chance of an imminent recession Recent US macro profits data illustrates relatively stable corporate fundamentals Expected 10-year nominal returns (annualised, USD unhedged, %) Global equities Emerging Markets equities Asia ex Japan equities Developed Markets equities Global listed real estate equities Local EM Debt US High Yield EUR High Yield US Corporate Credit US Government Bonds UK Gilts German Bunds Japan JGBs (1.0%) (1.6%) 0.9% 0.6% 5.5% 5.1% 5.9% 4.2% 6.9% 2.7% 2.7% 8.8% 9.0% (5%) 0% 5% 10% 15% Source: HSBC Global Asset Management, as of October

6 Equity market premia good vs. cash/bonds Market-implied risk premia in dollar (hedged) terms, as at end October 2016 Equity Market Implied Risk Premia (End-October 2016) Implied Premium v Cash Implied Premium v Bonds AC World 3.4% 4.5% Developed Markets 3.4% 4.5% Emerging Markets 3.4% 4.4% United States 3.1% 4.2% Canada 2.6% 3.7% United Kingdom 2.9% 4.0% Europe ex UK 4.0% 5.0% Germany 4.9% 5.9% France 4.3% 5.4% Switzerland 3.4% 4.5% Japan 5.2% 6.3% HK 3.8% 4.9% Singapore 4.2% 5.3% Australia 3.4% 4.5% Asia Pac ex Japan 4.1% 5.2% Asia ex Japan 4.2% 5.3% China (USD) 5.5% 6.6% South Korea 4.9% 6.0% Taiwan 3.1% 4.2% India 2.5% 3.5% Indonesia 0.7% 1.7% Brazil -2.3% -1.2% Mexico 1.1% 2.1% South Africa 1.3% 2.4% Russia 4.8% 5.9% Turkey 4.0% 5.1% Source: HSBC Global Asset Management as of October 2016 Implied risk premia are expected asset class excess returns in USD hedged terms (for foreign asset classes) based on current market pricing relative to our USD cash rate assumptions 6

7 Equities remain attractive despite recent rally For illustrative purposes only 7

8 Key themes for

9 Beneficiaries of reflationary and pro-growth policies The near-term growth outlook for the US has improved with the turn up in PMIs and the expected fiscal policy proposals of President-elect Trump which will likely boost GDP growth in 2017 Emerging market cyclical indicators have been improving. Equity earnings expected to pick up further as better macro data supports the corporate environment S&P 500 earnings expected to continue to grow MSCI Emerging Markets universe earnings revisions have bottomed Rebased Source: Datastream, UBS as of November For illustrative purposes only.. 9

10 Trumponomics and US equities Profit momentum has slowed with a stronger US dollar, energy price weakness and higher wages However, following the presidential election, there are increased expectations of favourable tax reforms, increased fiscal spending and reduction in regulations, which are seen supporting revenue growth and higher margins US corporate profit momentum has slowed MSCI US - Return on Equity (RoE) USD bn 2,500 2,000 1,500 1, US Corporate Profits - Total, LHS US Corporate Profits - Domestic, LHS US Corporate Profits - Rest of the World, RHS USD, bn ROE, % MSCI US MSCI US (Sector-Neutral) MSCI US (ex Oil & Gas) Source: HSBC Global Asset Management, DataStream as at 30 September For illustrative purposes only.. 10

11 Emerging market vs. developed market equities EM equities have been a major laggard over the last decade, as disappointing earnings growth, multiple contraction and depreciating currencies have all weighed on total returns EM equities have lagged DM peers in the last decade 30% 20% 10% 0% -10% -20% Dec-04 Dec-05 Dec-06 Dec-07 Dec-08 Dec-09 Dec-10 Dec-11 Dec-12 Dec-13 Dec-14 Dec-15 Source: HSBC Global Asset Management, DataStream as at 30 September For illustrative purposes. Any performance information shown refers to the past and should not be seen as an indication of future returns.. 11

12 The case for emerging market equities Emerging markets now contribute about a third of global GDP and half of global GDP growth In the short to medium term, we expect economic fundamentals to be supportive for EM equities Continued, rapid, industrialisation will boost growth while potential moves up the value chain could improve corporate earnings in some economies Contribution to global GDP growth 6% 4% 2% 0% -2% Emerging markets Developed markets Source: HSBC Global Asset Management, DataStream as at 30 September For illustrative purposes only.. 12

13 The case for emerging market equities II Today, (i) equity valuations look reasonable, (ii) EM currencies look undervalued, (iii) profitability and cyclical indicators are improving Emerging market equities expected returns appear attractive versus bonds and cash Valuations: Price-Book Return on Equity (RoE) % 15% % 1.0 5% 0.0 Dec-99 Dec-01 Dec-03 Dec-05 Dec-07 Dec-09 Dec-11 Dec-13 Dec-15 0% Jan-95 Jan-97 Jan-99 Jan-01 Jan-03 Jan-05 Jan-07 Jan-09 Jan-11 Jan-13 Jan-15 Emerging Markets Developed Markets Emerging Markets Developed Markets Source: HSBC Global Asset Management, DataStream as at 30 September For illustrative purposes only. Emerging market equities MSCI Emerging Markets Index, Developed Market Equities MSCI World Index. 13

14 Asia ex Japan equities favoured amongst EMs MSCI Asia ex Japan has rallied strongly since Brexit, led by cyclical sectors including materials, energy and financials Asian equities likely to remain in favour, supported by improving earnings outlook and compelling valuations Asia ex Japan equities have outperformed DM in /12/2015 = 100 Brexit vote 80 1/16 2/16 3/16 4/16 5/16 6/16 7/16 8/16 9/16 10/16 Asia ex Japan China US Europe Asia ex Japan Cyclicals PB less Defensive PB Historic average: -0.36x Dec x /03 12/05 12/07 12/09 12/11 12/13 12/15 Asia ex-jp Trailing PB - Cyclicals less Defensives -0.36x now Source: Bloomberg, MSCI, HSBC Global Asset Management, as of October Investment involves risks. Past performance is not indicative of future performance. 14

15 Asia ex Japan equity earnings outlook improving Earnings revisions appear to have bottomed, percentage of companies missing their earnings estimates has trended down recently Rising consumption, stable commodity prices and supportive monetary policy (rate cuts) are all tailwinds for earnings in Asia MSCI Asia ex Japan earnings revisions have bottomed MSCI Asia ex Japan 1 earnings misses declining 0 L3M earnings revision (16F, %) 65 (%) (1) (2) (3) (4) (5) (6) (7) Jan 16 Feb 16 Mar 16 Apr 16 May 16 Jun 16 Jul Q'14 2Q'14 3Q'14 4Q'14 1Q'15 2Q'15 3Q'15 4Q'15 1Q'16 2Q'16* % of earnings misses in Asia ex-jp 1 Based on broader universe with market cap more than USD1 billion. * With 68% results announced. Source: CLSA, HSBC Global Asset Management, data as of September

16 Asia ex Japan equity RoEs starting to bottom The rate of decline in RoE for MSCI Asia ex Japan has slowed to just 0.2% over the past six months, half the 0.4% decline in MSCI World RoE over this period and one quarter of the 0.8% decline in MSCI US RoE. MSCI Asia ex Japan RoEs starting to bottom 18% 16% 14% 12% 10% 8% 6% 4% low 11.5% in % Dec % 6 months ago 10.0% now 2% 0% low 1.7% in /95 12/98 12/01 12/04 12/07 12/10 12/13 Asia ex-jp - ROE Source: MSCI, IBES, HSBC Global Asset Management as of October

17 Outlook: 2017 and beyond 17

18 2017: Another year of uncertainties Potential impact of populism & de-globalisation Tightening of monetary policy in the US French & German elections Leadership changes in China Brexit developments & Hard Brexit concerns Revival of US debt-ceiling worries Policy missteps by central banks Higher economic and asset market volatility 18

19 Impact of unexpected events diluted in long term Unexpected events occur all the time, but their impact may not last long Hurricane Katrina hit the Gulf Coast of the U.S., almost destroying New Orleans The U.S. subprime housing crisis Thailand rocked by bombs Oil price swings between US$145 US$32 p.b. Lehman Brothers collapsed The U.S. withdrew from Iraq The U.S. reached a crisis point nearly defaulting on public debt DJI dropped 634 pts. in 1 day Spain accepted EUR100 bn bailout deal Rise of ISIS in the Middle East and on the world stage 2nd Libyan civil war The Hang Seng Index dropped 2,100 pts in 1 day US stocks sink as oil price hits $ London bombings Saddam Hussein is executed North Korea s 1st nuclear test Multiple suicide bombings in northern Iraq Icelandic and Russian Financial Crisis Global Financial Crisis Israel invaded Gaza North Korea fired missiles Haiti earthquake European sovereign debt crisis Gold skyrocketed to ~US$1,900 per ounce Japan s nuclear disaster 1st Libyan civil war Arab Spring Uprising Israel and Gaza conflict is reignited Kenyan shopping mall attack North Korea s 3rd nuclear test Russia made incursions into Ukraine Charlie Hebdo attack Paris Russian Financial Crisis DJI dropped 9% between Aug Greek banks shut for 6 days Bond yields turned negative as central banks rolled out assetpurchase programs Chinese stock market slump Deutsche announces to cut 9,000 jobs in Investors retreat from commodities on concerns over China s Growth. Glencore plunged 31% in Oct Brexit OPEC meeting US election 2016 S&P 500 Total return index MSCI ACWI (USD) Total Return Index Source: Bloomberg, HSBC Global Asset Management as of November

20 Looking ahead 2017 and beyond Going into 2017, global economy remains in a state of fragile equilibrium with a low growth/inflation mix Combination of reflationary policies, corporate fundamentals and compelling valuations form a supportive backdrop for equities in the year ahead Equity premiums look attractive in a low return world, especially when compared with government bonds Emerging market equities, particularly in Asia, continue to stand out in terms of growth prospects, positive earnings revisions and valuations 2017 will see an overhang from many of the risks that materialised in the previous year and new ones including de-globalisation and potential policy missteps On a longer time perspective, geopolitical events play much less important role than fundamentals and economic and market development 20

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