Global Equities New approaches for investing in global equities

Transcription

1 Global Equities New approaches for investing in global equities February 2017 This publication is intended for Professional Clients only and should not be distributed to or relied upon by Retail Clients. The information contained in this publication is not intended as investment advice or recommendation. Non contractual document.

2 Contents Introduction 3 Alpha-Beta divide 4 Global equity building blocks 5 Multi-Factor investing: core allocation 6 Active management opportunity 7 Active portfolio construction options 9 Lower volatility 10 Dividend / Income 11 Smaller companies 12 Real estate 13 Thematic 14 2

3 Oct-95 Oct-99 Oct-03 Oct-07 Oct-11 Oct-15 Introduction Our market outlook suggests that investors may currently be thinking about increasing their equity exposure. Our Global Investment Strategy team assesses the long-term expected returns of asset classes within our multi-asset allocation models, to feed into our investment strategy. These estimates are based on dividend yield, earnings per share growth, and market re-pricing. Our analysis suggests that equities currently look more attractive than developed market government bonds and cash (Figure 1). In addition, global equities deliver an attractive yield spread versus US 10-Year Treasuries (Figure 2). As investors have progressively been shifting their equity allocations from domestic equities towards both global equities and multi-asset solutions, we have seen a renewed interest in global equity strategies. Global equity investing requires flexible strategies that investors can tailor to their investment objectives. This paper reviews recent developments in global equity investment approaches and offers a brief description of the key asset allocation building blocks available to investors. Figure 1 Expected 10-year nominal returns (annualised, USD unhedged, %) Global Developed markets US Canada Emerging markets Asia ex Japan Global listed real estate Local EM Debt US High Yield EUR High Yield US Corporate Credit US Government Bonds Canada 10yr Bond UK Gilts German Bund Japan JGB 4.2% 3.4% 3.5% 2.3% 1.2% 1.9% 0.0% 0.0% 5.7% 5.2% 5.3% 4.5% 5.9% 9.2% 9.4% 8.2% (5%) 0% 5% 10% 15% Source: HSBC Global Asset Management as at 31 December For illustrative purposes only and does not constitute any investment recommendation in the above mentioned asset classes. Any forecast, projection or targets where provided is indicative only and is not guaranteed in any way Figure 2 Yield spread (Global equity earnings yield versus US 10-Year Treasury yield) MSCI ACWI US 10-Year Treasuries Source: HSBC Global Asset Management, Bloomberg, as of 31 December The level of yields is not guaranteed and may rise or fall in the future. For illustrative purposes only. Any performance information shown refers to the past and should not be seen as an indication of future returns. HSBC Global Asset Management, November

4 Alpha-Beta divide The objective for equity asset allocation fulfilment is to gain exposure to equity beta with cost-effective, efficient implementation. If one believes equity markets are efficient, capweighting is the optimal approach. The Efficient Market Hypothesis suggested investors should hold the market portfolio for equity exposure. Cap-weighted indices became a proxy for the market portfolio and low-cost passive indexation became a reference for equity beta. Equity markets, however, have exhibited excess volatility, which can result in the mispricing of risk. If equity markets are inefficient, then active solutions and alternative weighting schemes (smart beta strategies) have the potential to add value. Figure 3 Alpha-Beta divide Source: HSBC Global Asset Management For illustrative purposes. The Alpha-Beta divide The Alpha-Beta divide has evolved further towards explicitly selecting and controlling factor exposure (Figure 3). Taking a factor perspective: Cap-weighted indices contain implicit factor exposures The performance of traditional active strategies could be explained as a combination of factor exposure and alpha Given that different factors outperform in different regimes, there is a need to take explicit control of these factors. Alternative weighting schemes Cap-weighted indices contain implicit factor exposures and carry concentration risk, given that index weights are linked to security prices. Alternative weighting strategies are costeffective ways of gaining exposure to factors, creating index weights without linkage to security prices, yielding more stable index weights. Different weighting approaches exist: Factor weighting Fundamental weighting Equal-weighting A systematic rebalancing mechanism to bring index weights back to their target index weights can capture pricing errors arising from excess volatility, with the potential to add value over traditional equity beta. Please note that the products implementing the strategies described above may not be authorised/registered for sale in your country. Source: HSBC Global Asset Management December

5 Global equity building blocks Equity fulfilment options Smart Beta / Alternative Weighting Schemes Passive Cap-Weighted Indexation Single Factor Multi-Factor Fundamental weighting Lower Volatility Active Fundamental Stock Selection New approaches to investing Investors looking to access global equity beta or alpha-seeking strategies within global markets now have a number of compelling investment options to consider, spanning the risk spectrum, for strategic asset allocation. By highlighting the specific investment objective, the respective investment processes may be tailored to capture the essence of the investment opportunity. Subsequent pages highlight and discuss select new developments in global equity investing. Passive cap-weighted indexation Low cost, efficient indexation solutions capture equity beta across reference cap-weighted indices Single Factor/ Multi Factor Our strategy ensures the selected factors are designed to carry purified target premia with most reliable data sources, minimal unintended risk and least duplication among themselves. Multi Factor strategy is a bespoke solution to construct diversified portfolio that are exposed to a multiple factors. It mitigates the cyclicality of individual factors as well as the need for factor timing. Our Multi-Factor Equity process can be applied to a wide range of markets and is capable of incorporating client specific guidelines such as tracking error, country and sector risk exposure or ESG requirements (e.g. low carbons) Fundamental weighting Alternative weighting schemes, or Smart Beta, seek to deliver excess returns over market capitalisation-weighted indexation, by taking advantage of excess volatility in markets. Fundamentally-weighted strategies may be well-positioned as a fulfilment option for a core equity allocation. Lower volatility Volatility comes with investing in equities. A lower volatility strategy aims to deliver better risk-adjusted returns and aims to help investors accommodate this volatility. Active Fundamental Stock Selection Typical stock selection strategies aim to identify significant mispricing within the market. We also see increasing integration of Environment, Social, Goveranace (ESG analysis into active investment decisions as well as a consideration of carbon exposure and carbon intensity. A number of portfolio construction options exist, including Core Dividend/income Small cap Real estate Thematic Please note that the products implementing the strategies described above may not be authorised/registered for sale in your country. 1 Current topics in global equity investing HSBC Global Asset Management, November

6 Nov-13 Feb-14 May-14 Aug-14 Nov-14 Feb-15 May-15 Aug-15 Nov-15 Feb-16 May-16 Aug-16 Smart Beta: Global Multi-Factor / core allocation We believe that it is possible to outperform capitalisation-weighted indices. However, the concepts, economic models and tools used to describe how markets work were designed for efficient, rational markets. In our view this dependence on efficient market theories is a serious brake on designing and implementing effective investment strategies. This makes it critical that we apply rigorous thought to the implementation of any investment process. A number of concepts drawn from the academic literature form the cornerstone of our investment process. HSBC s investment approach/philosophy to factor investing is based on the observation that stocks, with certain characteristics, have been shown to outperform the broader market on a risk adjusted basis (Figure 3). This work leverages the broad academic literature during the last forty years and highlights the persistence of certain equity risk premia. Our strategy aims to profit from these inefficiencies by adopting a robust quantitative approach based on financial and economic theory. The key elements of our factor investment process are quantitative stock selection, robust portfolio construction and consistent implementation with integrated risk management. Figure 3 Factor risk premia HSBC Global Multi-Factor Equity HSBC Global Multi Factor Equity, established in 2004 in segregated portfolios for institutional clients, is a multi-factor equity strategy which aims to deliver consistent outperformance against a market capitalisation weighted index with targeted tracking error. The strategy is designed to provide investors with exposure to multiple factor premiums, such as value, quality, low risk, size and momentum. (Figures 3), and the solution has exhibited exposures consistent with its design parameters (Figure 4).. One of the keys in delivering consistent outperformance is to maintain a suitably diversified set of small active weights against the specified index. Figure 4 Factor exposures over time 100% 80% 60% 40% 20% 0% Value Quality Size Low risk Momentum Source: HSBC Global Asset Management, Bloomberg, Thompson Reuters, Worldscope. September Source: HSBC Global Asset Management. For illustrative purposes. 6

7 Jun-01 Jun-03 Jun-05 Jun-07 Jun-09 Jun-11 Jun-13 Jun-15 Smart Beta: Fundamental weighting A fundamentally-weighted strategy can provide investors with broad equity exposure with the potential for outperformance. As an example, the HSBC Economic Scale Index (ESI) strategy weights companies based on their economic footprint, that is, their contribution to the global economy, as measured by Gross National Product (GNP), or Value Added. Figure 5 Performance of fundamentally-weighted strategies HSBC ESI World MSCI World FTSE RAFI Developed 1000 Weighting companies in proportion to their economic footprint, rather than price, helps to avoid the performance drag associated with systematically overweighting overpriced shares and underweighting under-priced shares (Figure 5) Rebalancing Rebalancing can also be a key driver of performance in Smart Beta strategies. To demonstrate the value of rebalancing, portfolio returns can be decomposed into the sensitivity to the styles/factors identified by Fama and French. The alpha not attributed to these styles/factors can be associated with rebalancing. Rebalancing can make a significant contribution to the excess performance, with relatively little exposure or sensitivity to small cap and value factors (Figure 6). This potential for excess return from rebalancing increases with the volatility or noise of the underlying market. Figure 6 Value of rebalancing HSBC ESI World MSCI World FTSE RAFI Developed 1000 Return p.a. Excess Return p.a. Volatility p.a. Sharpe Ratio 7.19% 1.49% 16.4% % 15.4% % 1.15% 16.9% 0.31 Source: Euromoney Indices, Bloomberg, Datastream, MSCI Barra. Simulated data calculated by the Euromoney Index Team based on weekly total returns in USD for the period 30 June 2006 to 31 December Based on performance back tests that assume no trading costs or fees. HSBC Economic Scale Index data prior to 15 June 2012 is back tested (simulated) data calculated by the independent calculation agent, Euromoney. Data subsequent to the Index launch date has been calculated daily by Euromoney. Past performance and back tested (simulated) data are not a reliable indication of future returns. Back tested performance results have many inherent limitations and were achieved with the benefit of hindsight by means of a retrospective application of the HSBC Economic Scale Index rules based methodology to determine the appropriate weightings. The results do not represent the results of actual trading using client assets and as such do not include any dealing costs that may be incurred by funds tracking an Index. No representation is being made that the Index will or is likely to achieve results similar to those shown. In fact, there are frequently sharp differences between back tested performance results and actual results subsequently achieved. Value of Rebalancing Overall excess return Potential rebalancing Alpha' Market beta Smallcap beta Index data prior to 15 June 2012 is back-tested (simulated) data calculated by the independent calculation agent, Euromoney Indices. Data subsequent to the Index launch date has been calculated daily by Euromoney Indices. Past performance and back-tested (simulated) data are not a reliable indication of future returns. Back-tested performance results have many inherent limitations and were achieved with the benefit of hindsight by means of a retrospective application of the HSBC Economic Scale Index rules-based methodology to determine the appropriate weightings. The results do not represent the results of actual trading using client assets and as such do not include any dealing costs that may be incurred by funds tracking an index. No representation is being made that the Index will or is likely to achieve results similar to those shown. In fact, there are frequently sharp differences between back tested performance results and actual results subsequently achieved. Source: Datastream, data (using weekly total returns in GBP with gross dividends re-invested) from 11 July 2001 to 30 September Value beta Tracking error HSBC ESI Emerging Markets 3.57% 3.45% % HSBC ESI Worldwide 1.81% 1.21% % HSBC ESI World 1.41% 0.91% % 7

8 Investment attractiveness Price-to-Book (x) Smart Beta: Lower Volatility Lower volatility strategies aim to deliver improved risk-adjusted returns relative to the reference cap-weighted benchmark. Lower volatility strategies typically offer a smoother performance pattern and lower drawdowns. This can lend investors confidence in funding obligations and provide the capacity to stay invested with less likelihood of triggering a de-risking decision. From an asset allocation perspective, lower volatility aims to soften the impact of equity on overall portfolio risk and can allow or balance a tactical allocation to more aggressive, higher volatility strategies. At the end of June 2016, the MSCI ACWI Minimum Volatility Index appeared expensive relative to the profitability delivered, given the construction of the index does not consider stock valuation and low volatility stocks appear expensive (Figure 7), but premium valuation corrected dramatically in the second half of The index is also skewed towards defensive sectors (i.e. consumer staples, health care, telecommunications and utilities), about twenty percentage points overweight compared to the standard index. Investors may be better served in considering a lower volatility approach that considers valuation, illustrated in Figure 8. Such an approach would look first a set of attractive investment opportunities. Minimum variance optimisation would then be applied to lower portfolio volatility by combining low volatility names with higher volatility diversifiers. This methodology creates a portfolio of attractive investments and lower volatility, helping to avoid crowded trades, sector overconcentration and potentially interest rate sensitivity. Figure 7 Profitability-Valuation of MSCI ACWI Minimum Volatility index (Return on Equity, Price-to-Book) Dec Return on Equity (%) Quarterly data, Sep 2012 Dec 2016 Source: HSBC Global Asset Management, Bloomberg as of 31 December For illustrative purposes. Any performance information shown refers to the past and should not be seen as an indication of future returns. More attractive Less attractive % 0% 20% 25% 15% 50% 10% 75% 0% 100% Lower Jun 2016 Figure 8 Portfolio construction focus on investment attractiveness Holdings Stock volatility (%) Universe Higher Dots represent individual stocks within the MSCI ACWI universe. Representative overview of the investment process, which may differ by product, client mandate or market conditions. Source: HSBC Global Asset Management For illustrative purposes. Any performance information shown refers to the past and should not be seen as an indication of future returns. Please note that the products implementing the strategies described above may not be authorised/registered for sale in your country. Source: HSBC Global Asset Management December

9 Active management opportunity Active managers aim to invest in a broadly diversified set of high conviction opportunities. We see a clear opportunity for active managers to add value in stock selection. Figure 9 Stock selection opportunity Global World The global equity universe offers active managers access to a greater number of potential investments, and the opportunity to select the best investment ideas (Figure 9). Geographic boundaries can pose artificial constraints around investment decision-making and implementation. A global perspective prioritises company fundamentals over domicile. For example, Samsonite, a luggage manufacturer and retailer, is listed in Hong Kong, as is Prada, the Italian luxury goods company. Pacific Rubiales, an oil exploration and production company, is listed in Canada yet its operations are primarily in Colombia. The breadth of investment opportunities across sectors, countries and themes allows managers to reflect relative preferences. Stocks Countries Sectors Source: HSBC Global Asset Management,, MSCI as at 30 December For illustrative purposes. Figure 10 Dispersion in global equity returns (Individual stock one-year return, %) Return dispersion confirms active opportunity Fundamentally, the complex interrelationships and changes within the global economy and the competitive dynamics of industries can lead to differing views over the future outlook of individual companies. This controversy can lead to security mispricing and a potential investment opportunity that can be confirmed by fundamental research. Ex-post, the dispersion of one-year returns confirms that stock selection has the potential to add value (Figure 10) Source: HSBC Global Asset Management, Bloomberg as of 31 December Data shown is gross and the effects of commission, fees and other charges will reduce the overall return. For illustrative purposes. Any performance information shown refers to the past and should not be seen as an indication of future returns. 9

10 EBIT/Enterprise value Price-to-Book (x) Market structure supports stock selection The global universe facilitates relative choice; the universe contains businesses operating within a breadth of sectors and sub-sectors and across a number of countries. This matrix provides a framework from which preferences can be expressed. This does not exclude the possibility that the best investment ideas could come from the confines of a single region or country, but it follows logically that investors would be better placed if offered a larger choice set, provided they have the framework, process, tools and resources to evaluate the larger universe. Today, we see dispersion in the relationship between Profitability and Valuation (Figures 11 and 12), indicating a potential investment opportunity that could be confirmed through proprietary fundamental research.. Inherent evolution of portfolio exposures Figure 11 Dispersion in Profitability-Valuation (Return on Equity and Price-to-Book) Return on Equity (%) Source: HSBC Global Asset Management as of 31 December For illustrative purposes. Any performance information shown refers to the past and should not be seen as an indication of future returns. Figure 12 Dispersion in Profitability-Valuation (Return on Invested Capital and EBIT Yield) Importantly, global equity portfolio sector and regional exposures can evolve over time as investment opportunity and conviction change. The active manager can use stock selection to drive strategic and tactical allocation, versus using a top-down perspective. For example, if consumer staples or German equities become overvalued, an active strategy could decrease portfolio weight in those areas in favour of other more attractive areas of the market. 30% 20% 10% 0% Return on Invested Capital (%) Source: HSBC Global Asset Management as of 31 December For illustrative purposes. Any performance information shown refers to the past and should not be seen as an indication of future returns. 10

11 Active portfolio construction options Figure 13 Active portfolio construction options Lower Volatility Core Income Smaller Companies Real Estate Thematic Investors have typically based their active investments around Core strategies that aim to outperform the reference cap-weighted benchmark. Investors now have the option to access strategies that are constructed to meet specific investor objectives (Figure 13). How these objectives are delivered should be an important consideration for investors. Lower volatility strategies aim to deliver improved risk-adjusted returns relative to the reference cap-weighted benchmark. Investors may consider such strategies as Smart Beta or a type of active stock selection. Dividend / Income: strategies aim to outperform the reference cap-weighted benchmark with a higher yield than the reference benchmark. Smaller Companies strategies aim to outperform the reference small cap benchmark. Real estate equities offer liquid and relatively efficient access to global property. Thematic strategies aim to invest in secular, global trends, where change drives growth potential. Please note that the products implementing the strategies described above may not be authorised/registered for sale in your country. Source: HSBC Global Asset Management December

12 Active risk exposure Price-to-Book (x) Return potential (Portfolio average stock rank) Dividend / Income Dividend / Income: strategies aim to outperform the reference cap-weighted benchmark with a higher yield than the reference benchmark. In a low interest rate environment, investors may seek new avenues beyond fixed income to fulfil their income requirements. Regular investment income can help meet recurring expenses. Income generation can provide a steady cash flow stream for the investor as opposed to producing income from capital alone. Currently, the MSCI ACWI High Dividend Index appears expensive relative to the profitability delivered, given the construction of the index does not consider stock valuation (Figure 14). We believe investors should focus first on investment attractiveness, not dividend yield. Our analysis suggests there is a trade-off between portfolio return potential and portfolio yield, which is an important consideration for investors focused on total return (Figure 15). In addition, risk exposures could increase higher yielding names have similar factor exposures. (Figure 16). Portfolio managers can then utilise portfolio construction tools to construct income portfolios that balance total return, dividend yield and risk factor exposures (Figure 17). Figure 14 Profitability-Valuation of MSCI ACWI High Dividend index (Return on Equity, Price-to-Book) Dec 2016 Figure 15 Relationship between portfolio return potential and dividend yield Similar Higher. Portfolio yield relative to market yield Higher Return on Equity (%) Quarterly data, Sep 2012 Dec 2016 Source: HSBC Global Asset Management, Bloomberg as of 31 December For illustrative purposes. Any performance information shown refers to the past and should not be seen as an indication of future returns. Lower Source: HSBC Global Asset Management, - Dec Figure 16 Relationship between portfolio risk exposure and dividend yield Figure 17 Dividend / Income portfolio construction Higher Dividend yield * Return potential Risk exposures Lower Similar Portfolio yield relative to market yield Source: HSBC Global Asset Management Dec For illustrative purposes. Higher 12 Source: HSBC Global Asset Management as of 31 December For illustrative purposes. Representative overview of the investment process, which may differ by product, client mandate or market conditions.

13 Annualised return (%) Annualised return (%) Annualised return (%) Smaller Companies Smaller Companies strategies aim to outperform the reference small cap benchmark. We believe stock selection has the potential to improve returns over passive small cap exposure, particularly where regional fundamental insight is evident. Such strategies can be considered as standalone tactical allocation or as part of a regional fulfilment alongside traditional large cap strategies. Figures 18, 19 and 20 show how respective Small-Mid Cap or Small Cap indices have performed versus their large cap counterparts over ten years. While volatility has generally been higher, excess return has meant that Smaller Company strategies have generally delivered higher Sharpe Ratios. Figure 18: Europe (10 years to 30 Dec 2016) Europe Volatility (%) Source: HSBC Global Asset Management, MSCI as at 30 December USD returns gross of fee. Data shown is gross and the effects of commission, fees and other charges will reduce the overall return. For illustrative purposes only. Any performance information shown refers to the past and should not be seen as an indication of future returns. Figure 19: European Union (10 years to 30 Dec 2016) Europe SMID EMU EMU Small Volatility (%) Source: HSBC Global Asset Management, MSCI as at 30 December EUR returns gross of fee. Data shown is gross and the effects of commission, fees and other charges will reduce the overall return. For illustrative purposes only. Any performance information shown refers to the past and should not be seen as an indication of future returns. Figure 20: Asia ex Japan (10 years to 30 Dec 2016) 5 4 Asia ex Japan Asia ex Japan Small Volatility (%) Source: HSBC Global Asset Management, MSCI as at 30 December USD returns, gross index, gross of fee. Data shown is gross and the effects of commission, fees and other charges will reduce the overall return. For illustrative purposes only. Any performance information shown refers to the past and should not be seen as an indication of future returns. 13

14 Dec-01 Dec-03 Dec-05 Dec-07 Dec-09 Dec-11 Dec-13 Dec-15 Correlation Real Estate Real estate equities offer liquid and relatively efficient access to global property, including companies operating in clusters such as office, industrial, residential, shopping centres, health care, self storage and data storage. Over long-term holding periods, listed real estate equities may be more strongly correlated with direct property and weakly correlated to overall equities, so they can be a diversifying build block for asset allocation and multi-asset fulfilment (Figure 21). Recently, Real Estate has been classified as an eleventh sector in the Global Industry Classification Standard (GICS) categorisation, upgrading the universe from a sub-sector within the Financials sector. Figure 21 Real estate diversification potential UK property equities versus UK direct property UK property equities versus UK equities Real estate equities, as represented by the FTSE EPRA/NAREIT Developed index, offer the prospect of income growth and capital appreciation over the long term (Figure 22) and historically have offered a yield that has been higher than general equities (Figure 23). Real Estate strategies aim to access the long term performance characteristics of incomeproducing real estate through listed equities. About 60% of the universe by market capitalisation is comprised of companies with higher liquidity, a larger proportion of recurring income and relatively low leverage (Figure 24) Figure 22 Annualised return difference (FTSE EPRA/NAREIT Developed less MSCI ACWI) 25% 20% 15% 10% 5% 0% (5%) (10%) (15%) 0.0 Holding period (months) Source: FTSE EPRA/NAREIT, IPD, HSBC Global Asset Management. FTSE All Share, GPR UK TR Index (Dec November 2016). Any performance information shown refers to the past and should not be seen as an indication of future returns. Figure 23 Dividend yield difference (%, FTSE EPRA/NAREIT Developed less MSCI ACWI) 5 Three-year Five-year Source: HSBC Global Asset Management, Bloomberg as at 31 December USD returns gross of fee. Data shown is gross and the effects of commission, fees and other charges will reduce the overall return. Any performance information shown refers to the past and should not be seen as an indication of future returns. Figure 24 Income-generating properties (% of universe by market capitalization) 100% Mar-05 Mar-07 Mar-09 Mar-11 Mar-13 Mar-15 Source: HSBC Global Asset Management, Bloomberg as at 31 December USD returns gross of fee. Data shown is gross and the effects of commission, fees and other charges will reduce the overall return. Any performance information shown refers to the past and should not be seen as an indication of future returns. The level of yields is not guaranteed and may rise or fall in the future % 60% 40% 20% 0% Other Liquidity and scale: top 40% by market cap Recurring income: EBITDA margin >50% on 1-year or 3- year basis Leverage: Debt-to-enterprise value <50% Source: HSBC Global Asset Management, Bloomberg as at 31 December USD returns gross of fee. Data shown is gross and the effects of commission, fees and other charges will reduce the overall return. Any performance information shown refers to the past and should not be seen as an indication of future returns.

15 Thematic Thematic strategies aim to invest in secular, global trends, where change drives growth potential. As an example, climate change is a theme that has significant investment implications. The global commitment to managing global temperature increase may bring an industrial transition to a low carbon economy (Figure 25) that could impact companies across all sectors, creating opportunities and risks as well as winners and losers (Figure 26). Companies that consider this transition within their corporate strategy should be better placed to maintain or enhance their competitive position, with the potential to deliver sustained or improving profitability in the future. The decision of United States and China to formally ratify the Paris climate change agreement underscores strong institutional support for this transition. Over 70 countries have ratified the agreement, accounting for over 55% of emissions. The agreement enters into force in early November This transition to a low carbon economy could entail new technologies and services, and it could also lead to new regulations on carbon emissions (Figure 27). Since carbon exposure may have the potential to determine winners and losers within industries, investors are also increasingly concerned with a company s carbon emissions (CO2 equivalents) and carbon intensity (emissions per unit of revenue), given the opportunities and risks posed by this transition. As asset managers sign the Montreal Carbon Pledge, committing to report investment portfolio carbon exposure, carbon could begin to influence investment attractiveness. Figure 25 Transition to a low carbon economy Source: FTSE Russell, FTSE LCE Project, December For illustrative purposes only. Any forecast, projection or target where provided is indicative only and is not guaranteed in any way. Figure 26 Opportunities and risks Opportunities Risks Figure 27 Number of national laws and regulations related to CO 2 emissions Consumer demand Technology innovation Government policy Changes in demand Government policy Litigation risk Physical risk Source: HSBC Global Asset Management Source: London School of Economics, Goldman Sachs Investment Research, 30 November

16 Important Information This document is distributed by HSBC Global Asset Management (France) and is only intended for professional investors as defined by MiFID. The information contained herein is subject to change without notice. All non-authorised reproduction or use of this commentary and analysis will be the responsibility of the user and will be likely to lead to legal proceedings. This document has no contractual value and is not by any means intended as a solicitation, nor a recommendation for the purchase or sale of any financial instrument in any jurisdiction in which such an offer is not lawful. The commentary and analysis presented in this document reflect the opinion of HSBC Global Asset Management on the markets, according to the information available to date. They do not constitute any kind of commitment from HSBC Global Asset Management (France). 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The above document has been produced by HSBC Global Asset Management (France) and has been approved for distribution/issue by the following entity: HSBC Global Asset Management (France) RCS Nanterre. Portfolio management company authorised by the French regulatory authority AMF (no. GP99026) with capital of euros. Postal address: Paris cedex 08, France. Offices: Immeuble Coeur Défense Tour A, 110, esplanade du Général de Gaulle Courbevoie - La Défense 4 (Website: HSBC Global Asset Management (Switzerland) Limited Gartenstrasse 26, P.O. Box, CH-8002 Zurich, Switzerland (Website: Copyright HSBC Global Asset Management (France). All rights reserved. Non contractual document, updated in February 2017 / AMFR_Ext_XX_