1For Professional Clients and Institutional Investors only
To 2017 and beyondInvestment Outlook
Bill Maldonado, Global CIO, Equities1 December 2016
Global EquityYear end review & 2017 outlook
2For Professional Clients and Institutional Investors only
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
Source: HSBC Global Asset Management, as of 11 November 2016US 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.
Total returns, USD (%)
3For Professional Clients and Institutional Investors only
Emerging market equities outperformed
Source: Bloomberg, HSBC Global Asset Management, as of November 2016Emerging market equities – MSCI Emerging Markets Index, Developed Market Equities – MSCI World Index
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
85
90
95
100
105
110
115
120
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
MSCI Emerging Markets Index vs. MSCI World Index in 2016
4For Professional Clients and Institutional Investors only
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
5For Professional Clients and Institutional Investors only
Global Equities in 2017The equity premium is still attractive
Source: HSBC Global Asset Management, as of October 2016
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
(1.6%)(1.0%)
0.6%0.9%
2.7%2.7%
4.2%6.9%
5.9%
5.1%
9.0%8.8%
5.5%
(5%) 0% 5% 10% 15%
Japan JGBsGerman Bunds
UK GiltsUS Government Bonds
US Corporate CreditEUR High Yield
US High YieldLocal EM Debt
Global listed real estate equities
Developed Markets equities
Asia ex Japan equitiesEmerging Markets equities
Global equities
Expected 10-year nominal returns(annualised, USD unhedged, %)
6For Professional Clients and Institutional Investors only
Equity market premia good vs. cash/bonds
Market-implied risk premia in dollar (hedged) terms, as at end October 2016
Source: HSBC Global Asset Management as of October 2016Implied 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
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%
7For Professional Clients and Institutional Investors only
Equities remain attractive despite recent rally
For illustrative purposes only
8For Professional Clients and Institutional Investors only
Key themes for 2017
9For Professional Clients and Institutional Investors only
Beneficiaries of reflationary and pro-growth policies
S&P 500 earnings expected to continue to grow
Source: Datastream, UBS as of November 2016. For illustrative purposes only.
.
MSCI Emerging Markets universe earnings revisions have bottomed
Rebased
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
10For Professional Clients and Institutional Investors only
“Trumponomics” and US equities
US corporate profit momentum has slowed
Source: HSBC Global Asset Management, DataStream as at 30 September 2016. For illustrative purposes only..
MSCI US - Return on Equity (RoE)
0
2
4
6
8
10
12
14
16
18
20
2005 2007 2009 2011 2013 2015
ROE, %
MSCI US
MSCI US (Sector-Neutral)
MSCI US (ex Oil & Gas)200
250
300
350
400
450
500
0
500
1,000
1,500
2,000
2,500
2005 2007 2009 2011 2013 2015
USD, bnUSD bn
US Corporate Profits - Total, LHSUS Corporate Profits - Domestic, LHSUS Corporate Profits - Rest of the World, RHS
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
11For Professional Clients and Institutional Investors only
Emerging market vs. developed market equities
EM equities have lagged DM peers in the last decade
Source: HSBC Global Asset Management, DataStream as at 30 September 2016. For illustrative purposes. Any performance information shown refers to the past and should not be seen as an indication of future returns..
-20%
-10%
0%
10%
20%
30%
Dec
-04
Dec
-05
Dec
-06
Dec
-07
Dec
-08
Dec
-09
Dec
-10
Dec
-11
Dec
-12
Dec
-13
Dec
-14
Dec
-15
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
12For Professional Clients and Institutional Investors only
The case for emerging market equities
Source: HSBC Global Asset Management, DataStream as at 30 September 2016. For illustrative purposes only..
Contribution to global GDP growth
-2%
0%
2%
4%
6%
1981
1986
1991
1996
2001
2006
2011
2016
Emerging markets Developed markets
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
13For Professional Clients and Institutional Investors only
The case for emerging market equities II
Valuations: Price-Book
Source: HSBC Global Asset Management, DataStream as at 30 September 2016. For illustrative purposes only.Emerging market equities – MSCI Emerging Markets Index, Developed Market Equities – MSCI World Index
.
0.0
1.0
2.0
3.0
4.0
Dec
-99
Dec
-01
Dec
-03
Dec
-05
Dec
-07
Dec
-09
Dec
-11
Dec
-13
Dec
-15
Emerging Markets Developed Markets
0%
5%
10%
15%
20%
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
Return on Equity (RoE)
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
14For Professional Clients and Institutional Investors only
Asia ex Japan equities favoured amongst EMs
80
85
90
95
100
105
110
115
1/16 2/16 3/16 4/16 5/16 6/16 7/16 8/16 9/16 10/16
31/12/2015 = 100
Asia ex Japan China US Europe
Asia ex Japan equities have outperformed DM in 2016
Brexit vote
Source: Bloomberg, MSCI, HSBC Global Asset Management, as of October 2016. Investment involves risks. Past performance is not indicative of future performance.
Asia ex Japan Cyclicals PB less Defensive PB
-1.0
-0.8
-0.6
-0.4
-0.2
0.0
0.2
12/03 12/05 12/07 12/09 12/11 12/13 12/15
Asia ex-JP Trailing PB - Cyclicals less Defensives
-0.74 Dec 2008
-0.36x now
-0.82x
Historic average: -0.36x
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
15For Professional Clients and Institutional Investors only
Asia ex Japan equity earnings outlook improving
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 2016
(7)
(6)
(5)
(4)
(3)
(2)
(1)
0
Jan 16 Feb 16 Mar 16 Apr 16 May 16 Jun 16 Jul 16
L3M earnings revision (16F, %)
MSCI Asia ex Japan earnings revisions have bottomed MSCI Asia ex Japan1 earnings misses declining
43
48
52
55
48 50
53
60
49
43
40
45
50
55
60
65
1Q'1
4
2Q'1
4
3Q'1
4
4Q'1
4
1Q'1
5
2Q'1
5
3Q'1
5
4Q'1
5
1Q'1
6
2Q'1
6*
% of earnings misses in Asia ex-JP
(%)
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
16For Professional Clients and Institutional Investors only
Asia ex Japan equity RoEs starting to bottom
Source: MSCI, IBES, HSBC Global Asset Management as of October 2016
MSCI Asia ex Japan RoEs starting to bottom
0%
2%
4%
6%
8%
10%
12%
14%
16%
18%
12/95 12/98 12/01 12/04 12/07 12/10 12/13
Asia ex-JP - ROE
10.0% now
13.8% Dec 10
low 11.5% in 2009
low 1.7% in 1998
10.2% 6 months ago
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.
17For Professional Clients and Institutional Investors only
Outlook: 2017 and beyond
18For Professional Clients and Institutional Investors only
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
19For Professional Clients and Institutional Investors only
Impact of unexpected events diluted in long term
0
50
100
150
200
250
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
S&P 500 Total return index MSCI ACWI (USD) Total Return Index
US election
OPEC meeting
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
London bombings
North Korea’s 1st nuclear test
Saddam Hussein is executed
Multiple suicide bombings in northern Iraq
Thailand rocked by bombs
The U.S. sub-prime housing
crisis
Icelandic and Russian Financial
Crisis
Global Financial Crisis
Israel invaded Gaza
The U.S. withdrew from Iraq
Lehman Brothers collapsed
Oil price swings between US$145 –
US$32 p.b.
North Korea fired missiles
Haiti earthquake
European sovereign debt
crisis
Japan’s nuclear disaster
1st Libyan civil war
Gold skyrocketed to ~US$1,900 per ounce
Arab Spring Uprising
Israel and Gaza conflict is reignited
Kenyan shopping mall
attack
North Korea’s 3rd nuclear test
Spain accepted EUR100 bn bailout
deal
The U.S. reached a crisis point nearly
defaulting on public debt
DJI dropped 634 pts. in 1 day
The Hang Seng Index dropped
2,100 pts in 1 day
Rise of ISIS in the Middle East and
on the world stage
2nd Libyan civil war
US stocks sink as oil
price hits $40
Charlie Hebdoattack Paris
RussianFinancial Crisis
Russia made incursions into
Ukraine
DJI dropped 9% between 21 –
24 Aug
Greek banks shut for 6
days
Bond yields turned negative as central banks rolled out asset-
purchase programs
Chinese stock market slump
Deutsche announces to cut 9,000 jobs in 2015 - 2018
Investors retreat from commodities on concerns over China’s
Growth. Glencore
plunged 31% in Oct.
“Brexit”
2016
Source: Bloomberg, HSBC Global Asset Management as of November 2016
20For Professional Clients and Institutional Investors only
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
21For Professional Clients and Institutional Investors only
Important Information
For Professional Clients and intermediaries within countries set out below; and for Institutional Investors and Financial Advisors in Canada and the US. This document should not be distributed to or relied upon by Retail clients/investors.
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. All non-authorised reproduction or use of this document will be the responsibility of the user and may lead to legal proceedings. The material contained in this document is for general information purposes only and does not constitute advice or a recommendation to buy or sell investments. Some of the statements contained in this document may be considered forward looking statements which provide current expectations or forecasts of future events. Such forward looking statements are not guarantees of future performance or events and involve risks and uncertainties. Actual results may differ materially from those described in such forward-looking statements as a result of various factors. We do not undertake any obligation to update the forward-looking statements contained herein, or to update the reasons why actual results could differ from those projected in the forward-looking statements. 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 views and opinions expressed herein are those of HSBC Global Asset Management Global Investment Strategy Unit at the time of preparation, and are subject to change at any time. These views may not necessarily indicate current portfolios' composition. Individual portfolios managed by HSBC Global Asset Management primarily reflect individual clients' objectives, risk preferences, time horizon, and market liquidity.The value of investments and the income from them can go down as well as up and investors may not get back the amount originallyinvested. Past performance contained in this document is not a reliable indicator of future performance whilst any forecasts, projections and simulations contained herein should not be relied upon as an indication of future results. Where overseas investments are held the rate of currency exchange may cause the value of such investments to go down as well as up. Investments in emerging markets are by their nature higher risk and potentially more volatile than those inherentinsome established markets. Economies in Emerging Markets generally are heavily dependent upon international trade and, accordingly, have been and may continue to be affected adversely by trade barriers, exchange controls, managed adjustments in relative currency values and other protectionist measures imposed or negotiated by the countries with which they trade. These economies also have been and may continue to be affected adversely by economic conditions in the countries in which they trade. Mutual fund investments are subject to market risks, read all scheme related documents carefully.We accept no responsibility for the accuracy and/or completeness of any third party information obtained from sources we believeto be reliable but which have not been independently verified.HSBC Global Asset Management is a group of companies in many countries and territories throughout the world that are engaged in investment advisory and fund management activities, which are ultimately owned by HSBC Holdings Plc. HSBC Global Asset Management is the brand name for the asset management business of HSBC Group. The above communication is distributed by the following entities: in the UK by HSBC Global Asset Management (UK) Limited, who are authorisedand regulated by the Financial Conduct Authority; in France by HSBC Global Asset Management (France), a Portfolio Management Company authorisedby the French regulatory authority AMF (no. GP99026);
22For Professional Clients and Institutional Investors only
Important Information (continued)
in Germany by HSBC Global Asset Management (Deutschland) GmbH which is regulated by BaFin; in Switzerland by HSBC Global Asset Management (Switzerland) Ltd whose activities are regulated in Switzerland and which activities are, where applicable, duly authorisedby the Swiss Financial Market Supervisory Authority. Intended exclusively towards qualified investors in the meaning of Art. 10 para 3, 3bis and 3ter of the Federal Collective Investment Schemes Act (CISA); in Hong Kong by HSBC Global Asset Management (Hong Kong) Limited, which is regulated by the Securities and Futures Commission; in Canada by HSBC Global Asset Management (Canada) Limited which is registered in all provinces of Canada except Prince Edward Island; in Bermuda by HSBCGlobal Asset Management (Bermuda) Limited, of 6 Front Street, Hamilton, Bermuda which is licensed to conduct investment business by the Bermuda MonetaryAuthority; in India by HSBC Asset Management (India) PvtLtd. which is regulated by the Securities and Exchange Board of India; in the United Arab Emirates, Qatar, Bahrain, Kuwait & Lebanon by HSBC Bank Middle East Limited which are regulated by relevant local Central Banks for the purpose of this promotion and lead regulated by the Dubai Financial Services Authority; in Oman by HSBC Bank Oman S.A.O.G regulated by Central Bank of Oman and Capital Market Authority of Oman;inTaiwan by HSBC Global Asset Management (Taiwan) Limited which is regulated by the Financial Supervisory Commission R.O.C. (Taiwan); in the US by HSBC Global Asset Management (USA) Inc. is an investment advisor registered with the US Securities and Exchange Commission;
INVESTMENT PRODUCTS:
Are not a deposit or other obligation of the bank or any of its affiliates; Not FDIC insured or insured by any federal government agency of the United States; Not guaranteed by the bank or any of its affiliates; and Are subject to investment risk, including possible loss of principal invested.
and in Singapore by HSBC Global Asset Management (Singapore) Limited, which is regulated by the Monetary Authority of Singapore.HSBC Global Asset Management (Singapore) Limited, or its ultimate and intermediate holding companies, subsidiaries, affiliates, clients, directorsand/or staff may, at anytime, have a position in the markets referred herein, and may buy or sell securities, currencies, or any other financial instruments in such markets. HSBC Global Asset Management (Singapore) Limited is a Capital Market Services License Holder for Fund Management. HSBC Global Asset Management (Singapore) Limited is also an Exempt Financial Adviser and has been granted specific exemption under Regulation 36 of the Financial Advisers Regulation from complying with Sections 25 to 29, 32, 34 and 36 of the Financial Advisers Act, Chapter 110 of Singapore.Copyright © HSBC Global Asset Management Limited 2016. All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, on any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the prior written permission of HSBC Global Asset Management Limited. Approved for use with professional clients under FP16-2110 until 28/11/2017
