Investment strategy update Fundamentals remain solid despite strong volatility

Transcription

1 For intermediaries only. Not for further distribution. 07 February 2018 Investment strategy update Fundamentals remain solid despite strong volatility Key takeaways Global market volatility picked up strongly over the past few days, following a large decline in US Treasuries over January. We believe a relative quick adjustment in the equity market is a positive sign given the sharp rally in early 2018 after a stellar performance in The equity market remains underpinned by solid fundamentals Economic data releases continue to show a global economy in very good shape. The Q4 earnings season in developed markets has also been a lot stronger than expected. Overall, we think there is still a strong case for global equities relative to competing asset classes For the moment, our asset allocation view has not changed and we retain a pro-risk positioning in multi-asset portfolios. We are overweight global equities (with a preference for EM equities particularly Asia) and EM debt in local currency while underweight DM government bonds, global investment grade and high yield credit What happened? Global market volatility picked up strongly over the past few days. The MSCI All Country World Index (ACWI) and US S&P 500 were down 3.0% and 4.1%, respectively, on Monday (5 February). The sharp correction was triggered by rising US government bond yields (the 10-year Treasury yield broke the critical 2.80% level last Friday, its highest since January 2014) primarily driven by expectations of stronger cyclical inflationary pressures in In particular, data released on Friday showed US average hourly earnings in January rose by 2.9% yoy, a 9-year high. Rising concerns over building inflationary pressures have also fed into expectations of a more rapid pace of monetary policy normalisation by major global central banks As mentioned before, inflation scare could be one of the key risks for 2018, as investors had been expecting a mild inflation for a prolonged period of time. As the market narrative moves, to price in greater cyclical inflation, periodic bouts of volatility should be expected. Meanwhile, the equity market correction needs to be put into context. Both the MSCI ACWI and S&P 500 are now roughly back to where they were at the end of 2017, before January s sharp rally. Furthermore, the last major corrections in the S&P 500 (August 2015 and January 2016) were both over 10% compared to around 8% so far (as of 6 February 2018) and saw subsequent recoveries Economic and corporate fundamentals remain solid Both DM and EM economic fundamentals remain solid. Economic data releases continue to show a global economy in very good shape, with growth balanced across sectors and regions, and negligible recession risks. The Q4 earnings season in developed markets has also been a lot stronger than expected. Overall, we think there is still a strong case for global equities relative to competing asset classes For the moment, our asset allocation view has not changed and we retain a pro-risk positioning in multi-asset portfolios. We are overweight global equities (with a preference for EM equities particularly Asia) and EM debt in local currency while underweight DM government bonds, global investment grade and high yield credit For US Treasuries, the recent rise in yields has increased prospective returns, although we have not yet reached levels consistent with a more constructive view. We remain underweight in this asset class for the time being, however 10-year yields comfortably above 3% could shift our thinking This commentary provides a high level overview of the recent economic environment, and is for information purposes only. It is a marketing communication and 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. It 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. The performance figures displayed in the document relate to the past and past performance should not be seen as an indication of future returns. Any forecast, projection or target where provided is indicative only and is not guaranteed in any way. HSBC Global Asset Management 1 accepts no liability for any failure to meet such forecast, projection or target. Non contractual document.

2 Investment strategy update Asia ex Japan equities: Strong fundamentals remain intact We remain positive on Asian equities and will take this pullback as an opportunity to add to stocks we like at more attractive valuations The relatively strong fundamentals in Asia remain. A strong recovery in earnings has underpinned the stellar market performance, and we remain positive on the earnings outlook Valuations remain reasonable in Asia. Asia trades at a 40% discount to the US market Chinese equities: Supported by earnings growth and potential re-rating On the back of the still robust macro factors, fair valuation and positive fund flow backdrop, we will buy on dips and continue to favour sectors that benefit from the consumption upgrade story including healthcare and consumer staples Earnings growth and valuation re-rating will continue to support the market in Markets expect another 20% (ex-banks) earnings growth this year After 2017 s rally, valuation of offshore Chinese equities is still undemanding at 13x PE, compared to its 10- year average of 12x PE. Stripping out ADR, the valuation is even more reasonable at 11x PE. Sectors such as banks and property are still trading at very low valuation Southbound buying has been a source of fund flows into the HK stock market since 2017 and we believe this trend has not changed. Southbound net buying even hit a new record high of HK$10.5bn in early February, signaling strong demand from Chinese investors during market dips Global equities: A disciplined approach during times of market volatility Our global equity portfolios have shown some defensiveness amid the sell-off. We have a disciplined investment approach that we believe will deliver attractive returns over time. We maintain our approach and strategy, especially during times of market volatility Whether this is a buying opportunity or not remains to be seen we do not know if the two days of weakness will extend further, or whether investors will step in. We are always looking for buying opportunities of individual securities that we like Asian credit: Resilience to continue amidst demand and better fundamentals Resilient growth in the Asian region and solid credit fundamental should continue to provide support for Asian credit. Stable demand from Asian local investors and structurally shorter duration compared with bonds from other regions can also help buffer against US treasury volatility The strategy of our portfolios remain largely. Our strategy maintains an underweight stance in duration. However, we are managing our duration exposure tactically as we expect the US Treasury yields to remain in a range. We keep our defensive stance and stick to our carry strategy, as we favour shorter-dated names with attractive carry and selected long-dated IG names from resilient sectors for their attractive yield curve Meanwhile, amid broad dollar weakness, we also hold Asia local currency bonds (such as CNH, INR, IDR and MYR bonds) given currency outlook and diversification and attractive yields offered by these bonds Global credit: A more defensive stance with a focus on quality to ride out market volatility From a portfolio perspective, given tight valuations in 2017 and into 2018 we have had a more defensive stance in our portfolios, being selective in the bonds we hold and focusing on stable to improving credits which we believe are better positioned to ride out the market volatility we are likely to see at these asset prices. Positioning has not changed materially due to the current volatility. We have taken advantage of the recent weakness to add to positions in bonds that we like at more attractive valuation and will continue to assess opportunities as they present themselves The magnitude of the market movement in credit has been relatively muted when compared to Global Equity markets. From January 31 through February 5, spreads were for Investment grade at 91 bps while HY spreads widened out from 317 to 332 bps. Outflows from the asset class have not been substantial and the market has been trading in an orderly fashion throughout While we expect that volatility may persist, the underlying credit fundamentals of the market remain intact, 2 underpinned by solid growth and continued positive economic data

3 Investment strategy update Multi asset: diversified portfolios help mitigate the impact from equity correction In China, RMB bonds were rather impacted much less compared to others. Therefore, the asset class acted as a diversification tool for the portfolio o With the strong equity performance in 2017 together with the positive start in 2018, it is fair to have a reasonable correction. We believe the correction is not driven by any fundamental change. o Earnings growth remain strong and together with the global economy recovery, the prospects for investing in Chinese equities remain o We will closely monitor the portfolio and make allocation changes depending on market situation should we find necessary In Europe, we decreased the equity exposure by 5% on February 2nd to lock-in some profits, but we are still positive on this asset class in the medium/long term. The recent equity markets sell off could give us the opportunity to re-increase our equity positioning later on 3

4 Asia ex Japan Equities Current positioning / preferred investment themes Consumption upgrades in China Wealth effect creates demand for higher quality goods and services Structural opportunities in Indian financials - rapid growth in the use of financial products, and benefitting from a non-performing loan cycle that has peaked Demographic power in Indonesia R&D push in healthcare Investment strategy Asia Pacific ex Japan High Dividend Regional banks benefit from stronger global growth and a rising interest rate environment; attractive dividend Exposure to natural resources - benefit from favourable prices on the back of supply side reforms and synchronized global growth Consumption upgrades in China Wealth effect creates demand for higher quality goods and services Chinese internet - reliable earnings profile Korean tech bargain hunt - leading hardware names trading at deep discounts to global peers Regional telecoms - attractive source of dividends and provide defensive profile in volatile markets Chinese Equities Sectors that enjoy the consumption upgrade story including healthcare and consumer staple Global Equities We have disciplined investment approach that we believe will deliver attractive returns over time. We maintain our approach and strategy, especially during times of market volatility The sector positioning is driven by stock selection Asian Bond Bank subordinate bonds relatively defensive nature and attractive yields Hong Kong property names stable recurring income India strong government support Exposure to Asian local currency bonds, particularly selective INR, IDR and CNH bonds for currency gains and attractive yields Asian High Income Bond India and Indonesia in particular India oil & gas and cyclical sector names, high quality INR denominated bonds, Indonesian corporate names and IDR denominated Indonesia sovereign bonds Selected China bank leasing names attractive carry UW names where we find valuations unattractive Asian High Yield Bond India and Indonesia particularly corporate names from commodity related names Exposure to Asian local currency bonds, particularly selective INR, IDR and CNH bonds for currency gains and attractive yields UW names where we find valuations unattractive Asia Focused Income The strategy benefits from a diversified portfolio, mitigated the impact from equity correction - Exposure to equity markets consistent with the portfolio s risk profile, alongside corporate and emerging markets bonds in various currencies and at various credit ratings Tactically overweight in Japanese equities and European equities - attractive risk premium vs local bonds Slight exposure in Indian bonds - attractive yield 4 Non contractual document

5 Global High Income / Global High Yield Current positioning / preferred investment themes Given tight valuations in 2017 and into 2018 we have had a more defensive stance in our portfolios, being selective in the bonds we hold and focusing on stable to improving credits which we believe are better positioned to ride out the market volatility we are likely to see at these asset prices We have taken advantage of the recent weakness to add to positions in bonds that we like at more attractive valuation and will continue to assess opportunities as they present themselves From a duration perspective we remain underweight vs our benchmarks in anticipation of further increasing yields Investment strategy No material changes China Multi Asset 1% OW in Chinese equities - we still have a positive view on the asset class. We believe the attractive risk premium and corporates earning growth will continue to benefit investors We hold around 40% of RMB denominated bonds. In the Asian bond markets, RMB bonds were rather less impacted compared with others. Therefore, the asset class acted as a diversification tool for the portfolio. Despite the market volatility, the RMB bond yields remain quite stable with little fluctuation We will closely monitor the portfolio and make allocation changes depending on market situation should we find necessary Euro Multi Asset Given the strong equity recent performance, we decreased the equity exposure by 5% on 2 February to lock-in some profits and increased the exposure to government bonds. But we remain positive on this asset class in the medium/long term. The recent equity markets sell off could give us the opportunity to re-increase our equity positioning later on Still favour the riskier asset classes such as equities and, to a lesser extent, high-yield bonds. They have attractive return prospects adjusted for risk and are expected to benefit the most from the ECB s accommodative policy Remain cautious on credit No material changes; decreased equity exposure on 2 February to lock-in profit; still favour the riskier asset classes Important information This document is prepared for general information purposes only and does not have any regard to the specific investment objectives, financial situation and the particular needs of any specific person who may receive it. Any views and opinions expressed are subject to change without notice. This document does not constitute an offering document and should not be construed as a recommendation, an offer to sell or the solicitation of an offer to purchase or subscribe to any investment. Investors may wish to seek appropriate professional advice where necessary. Investment involves risk. Past performance of any fund or the manager, and any economic and market trends or forecasts are not necessarily indicative of the future or likely performance of the fund or the manager. Unit values and income therefrom may fall as well as rise and the investor may not get back the original sum invested. Changes in rates of currency exchange may affect significantly the value of the investment. HSBC Global Asset Management (Singapore) Limited ( AMSG ) has based this document on information obtained from sources it reasonably believes to be reliable. However, AMSG does not warrant, guarantee or represent, expressly or by implication, the accuracy, validity or completeness of such information. HSBC Global Asset Management (Singapore) Limited 21 Collyer Quay #06-01 HSBC Building Singapore Telephone: (65) Facsimile: (65) Website: Company Registration No R 5 Non contractual document