HSBC GIF Managed Solutions - Asia
Quarterly market review Most global stock markets continued to make progress during 2Q 2014, such that the MSCI World Index has now risen for four consecutive quarters. Although long term expected returns still favour equities over bonds the extent, scale and consistency of the moves higher in equity prices suggests some complacency is entering the markets. Within Asia the first half of the year has seen quite a wide divergence of performances with strong performances from India (17.6%), Indonesia (16.6%), the Philippines (16.6%) and Taiwan (11.5%) contrasting with modest returns for Hong Kong (2.6%) and Singapore (1.7%) and outright declines for Malaysia (-0.4%), South Korea (-1.06%) and China (-2.6%). Core government bond yields ended lower in 2Q 2014 leading to positive returns across most bond asset classes. Asian bonds have performed well during the first half of 2014 with the J.P. Morgan Asia Credit Indices (JACI) Investment Grade and Non-Investment Grade Indexes both returning 5.8%, while the HSBC Asian Local Bond Overall index returned 5%, with Asian currencies generally showing gains against the dollar over the period. In currency markets there was notable strength in the Australian and New Zealand dollars (+5.3% and +6.3% versus the US dollar year to date) while the Chinese renminbi was one of the few Asian currencies to weaken this year, by 2.4% versus the US dollar. The global economic background in June continued to be supportive of markets with modest growth coupled with low inflation allowing interest rates to remain at historic low levels. In a major policy shift the European Central Bank (ECB) cut interest rates, leaving the deposit facility rate, the rate which banks earn on deposits at the central bank, at a negative rate. They also loosened policy in a number of other ways, illustrating their determination to stimulate growth in the region and bring the inflation rate up towards the 2% target. Across Asia economic data was mixed in June and New Zealand once again raised rates while they were left unchanged in Australia, India, South Korea, Indonesia, The Philippines and Taiwan. Since beginning to raise interest rates in March the New Zealand stock market has underperformed global and Asian markets. Overview of historic performance 31/07/2012 MTD (Net) 1 MTD (Gross) QTD (Net) 1 QTD (Gross) Since Inception 2 (Net) 1 Since Inception 2 (Gross) HGIF Managed Solutions - Asia 0.55 0.68 4.29 4.70 17.17 21.12 Note: MTD= Month-To-Date; QTD= Quarter-To-Date 1 Performance Net of Total Expense Ratio (TER). 2 The since inception return is calculated from 25 May 2012 to 30 Jun 2014. Source: HSBC Global Asset Management as at June 2014. Data shown is for illustrative purposes only and does not constitute any investment recommendation. Past performance is not indicative of future returns. 2
Quarterly performance Fund performance was strong in Q2 2014 as Asian assets continued to produce good returns. The benign market conditions provided support for both equities and bonds. In particular, Asian equities performed strongly delivering a significant contribution to the portfolio. Although the US Federal Reserve (Fed s) quantitative easing program has been reduced, inflation remains subdued and low interest rates are expected to stay in place for some time. Portfolio positioning and activity We still favour equities over bonds in the long term as we expect this asset class will generate better total returns over a long time horizon. However, the strong gains for equities in recent years suggests some complacency is entering the market. For bonds, we like corporate bonds over government bonds as the extra yield available on corporate bonds will more than compensate for any default experience. We are cautious about the current low level of government bond yields and high level of equities and have accumulated some cash to take advantage of any opportunities that may arise. Core government bond yields moved down further in 2Q 2014, for example, the yield on the 10-year US Treasury bond fell from 2.7% to 2.5%. The lower yields provided support for Asian investment grade bonds which contributed positively to the overall portfolio. Asian high dividend equity was the best performing asset class in 2Q 2014 with our exposure in India equities contributing significantly. Improvement in India s external balances boosted confidence in their ability to finance current account deficits while inflation has become more stable. Both of these factors were supportive of Indian equities. yield bonds offer better opportunities and value than government bonds in particular, and high yield bonds in Asia are attractive compared to those elsewhere in the world. The level of yield on high yield bonds provides a cushion to potential interest rate rises in the US. Global emerging markets local bonds also produced positive returns over the quarter, though they underperformed Asian bonds and equities. Market conditions were generally supportive for risky assets and the yield differential between emerging markets and developed markets may lead to appreciation in emerging market currencies over time. With bond yields low, equity markets high and interest rates set to rise at some point, this does not feel like the right time to be too aggressive in terms of asset allocation. There are also signs of complacency among investors with volatility low, equity funds once again popular with retail investors and sales of collateralized loan obligations a risky product that pools loans and slices them into securities of varying risk and return running at levels not seen since 2007. However this does not mean that investors should take an overly defensive stance either. A market environment where risk and leverage is being accumulated can persist for a long time, and those who try to anticipate a market decline can find themselves either on the sidelines earning no return for an extended period or, worse, forced back into markets even closer to the highs. We maintain equity holdings based on long term value and diversification, and will add further if a major setback in prices takes place. However we have accumulated some cash in portfolios in the belief that bond yields are too low for the economic background and there will be better opportunities to buy in the months ahead. We maintained high yield holdings to enhance the overall return of the portfolio and for diversification purposes. We believe that high 3
Current asset allocation Weightings (%) Asian Investment Grade Bond 39.01 Asian High Dividend 23.25 Asian High Yield Bond 20.66 GEM Local Debt 8.26 Asian Local Currency Bond 2.05 Cash, US/HK/SG Government Bonds* 6.78 Total 100.0 * The cash position includes strategic holding and cash in the underlying asset allocation sleeves pending investment when attractive investment opportunities arise. Source: HSBC Global Asset Management as at June 2014. Data shown is for illustrative purposes only and does not constitute any investment recommendation. Past performance is not indicative of future returns. 4
Appendix: Overview of investment process The Asia Fund aims to seek income and moderate capital growth We look for investments with attractive risk adjusted income and capital growth by investing flexibly in a diversified portfolio of asset classes, primarily based in the Asia ex-japan region The investment process can be described as follows: Yield assessment Asset allocation Portfolio construction Risk monitoring Assess yields available in the different asset classes Make allocations between different asset classes with a min exposure of 70% in Asian (ex Japan) income oriented assets Build portfolio through underlying asset classes managed by HSBC investment specialists Review portfolio regularly to monitor asset class and overall portfolio risk Source: HSBC Global Asset Management as at June 2014. Data shown is for illustrative purposes only and does not constitute any investment recommendation. Past performance is not indicative of future returns. Risk Disclosure The value of investments can go down as well as up and investors in the funds may not get back the amount originally invested. Changes to currency exchange rates may also cause fluctuations in the value of the funds. The funds invest a proportion of their assets in emerging markets which are, by their nature, higher risk and potentially more volatile than those inherent in some established markets. The proportion of the investment in these markets varies by fund. For a full list of risks, please refer to the Prospectus. 5
Disclaimer This document is prepared for general information purposes only and the opinions expressed are subject to change without notice. The opinions expressed herein should not be considered to be a recommendation by HSBC Global Asset Management (Singapore) Limited to any reader of this material to buy or sell securities, commodities, currencies or other investments referred to herein. It is published for information 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 this document. This document does not constitute an offering document. Investors should not invest in the Fund solely based on the information provided in this document and should read the offering document of the Fund for details. Investors may wish to seek advice from a financial adviser before purchasing units in the fund. In the event that the investor chooses not to seek advice from a financial adviser, he should consider whether the fund in question is suitable for him. Investment involves risk. The past performance of any fund and the manager and any economic and market trends/forecasts are not necessarily indicative of the future or likely performance of the fund. The value of investments and units may go down as well as up, and the investor may not get back the original sum invested. Investors and potential investors should read the Singapore prospectus (including the risk warnings) which is available at HSBC Global Asset Management (Singapore) Limited or its authorised distributors, before investing. Changes in rates of currency exchange may affect significantly the value of the investment. HSBC Holdings plc, its subsidiaries and other associated companies which are its subsidiaries, and including without limitation Global Asset Management (Singapore) Limited (collectively, the HSBC Group ), affiliates and clients of the HSBC Group, and directors and/or staff of any of the foregoing may, at any time, have a position in the markets referred to herein, and may buy or sell securities, currencies, or any other financial instruments in such markets. HSBC Global Asset Management (Singapore) Limited has based this document on information obtained from sources it believes to be reliable but which it has not independently verified. Care has been taken to ensure the accuracy and completeness of this presentation but HSBC Global Asset Management (Singapore) Limited and HSBC Group accept no responsibility or liability for any errors or omissions contained therein. HSBC Global Asset Management (Singapore) Limited 21 Collyer Quay #06-01 HSBC Building Singapore 049320 Telephone: (65) 6658 2900 Facsimile: (65) 6225 4324 Website: www.assetmanagement.hsbc.com/sg Company Registration No. 198602036R 6