Foreword

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This commentary has been produced by HSBC Global Asset Management to provide a high level overview of the recent economic and financial market environment, and is for information purposes only. The views expressed were held at the time of preparation; are subject to change without notice and may not reflect the views expressed in other HSBC Group communications or strategies. This marketing communication 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. The content 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. You should be aware that the value of any investment can go down as well as up and investors may not get back the amount originally invested. Furthermore, any investments in emerging markets are by their nature higher risk and potentially more volatile than those inherent in established markets. Any performance information shown refers to the past and should not be seen as an indication of future returns. You should always consider seeking professional advice when thinking about undertaking any form of investment.

Key takeaways

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  • We continue to favour risk assets such as global equities, emerging market (EM) and corporate bonds relative to developed market (DM) government bonds
  • Global equities edged higher in January, supported by a host of upbeat global economic activity data, and continued expectations of looser global fiscal policy
  • Recent positive US data remains consistent with the Fed’s expectation of three rate hikes in 2017, although a Trump-led fiscal stimulus could result in a faster tightening path
  • European Central Bank (ECB) forward guidance remains dovish, with ECB president Draghi stating “there are no signs yet of a convincing upward trend in underlying inflation”
  • China’s GDP grew 6.7 per cent in 2016, meeting the government’s 6.5-7.0 per cent target, supported by resilient consumption on the back of fiscal stimulus and strong credit growth
  • For emerging market assets, risks of a stronger US dollar, increased global trade protectionism and rising geopolitical uncertainty justifies a more selective approach

A shift from “deflation dominance” to “reflation revival”

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Recent global economic activity data continues to improve, particularly in the US and Eurozone. This positive growth momentum has been accompanied by an increase in headline inflation across a number of major economies. This has, so far, been predominantly driven by oil price base effects and currency movements. Going forward, however, positive growth dynamics – aided by still historically loose G7 monetary policy – should further erode output gaps, placing upward pressure on underlying inflation.

The recent selloff in DM government bonds reflects this shift from “deflation dominance” to “reflation revival”. Although this has improved prospective returns, the economic environment remains bond unfriendly, particularly given the scope and growing appetite for fiscal stimulus (led by the US and Japan). Assuming resilient global growth, we anticipate a further gradual shift upward in DM government bond yields, and maintain our underweight position. We also continue to prefer an overweight exposure to a diversified basket of risk assets (including global equities and local currency EM debt), within the context of a well-diversified multi-asset portfolio, from a strategic and long-term perspective. However, the recent compression of global risk premia justifies a more cautious use of risk budgets.


Equities

Asset Class View View Movement
Global Overweight -
US Underweight -
UK Neutral -
Eurozone Overweight -
Japan Overweight -
Emerging Markets (EM) Overweight -
Asia ex Japan Overweight -
CEE & Latam Neutral -


Government bonds

Asset Class View View Movement
Global Underweight -
US Underweight -
UK Underweight -
Eurozone Underweight -
Japan Underweight -
Emerging Markets Overweight -


Corporate bonds & other

Asset Class View View Movement
Global investment grade (IG) Neutral -
USD investment grade Neutral -
EUR and GBP investment grade Neutral -
Global high-yield Neutral -
Gold Neutral -
Other commodities Neutral -
Real estate Neutral -

Long term asset class positioning (>12 months)

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Asset class View Movement Rationale
Equities
Global Overweight Rationale of overweight views:We continue to expect a better long-term reward for holding global equities rather than developed market cash or government bonds. The global economic recovery appears to be gathering pace, driving global equity markets to deliver positive returns over the long term. Overall, support from incredibly accommodative monetary policy and an increased willingness for looser fiscal policy will, in the medium and longer term, likely outweigh any headwinds from more modest Chinese growth, US interest-rate increases and political uncertainty in many regions.
Risks to consider: The implied premium in global equities has recently compressed at a time when uncertainty is elevated. Episodic volatility may be triggered by concerns surrounding Chinese growth, uncertainty around US economic policy under a Trump administration (with the possible introduction of protectionist trade measures), a potentially more rapid than expected Fed tightening cycle, coupled with rising political risks (especially in Europe). A notable and persistent deterioration of the global economic outlook could also dampen our view.
US Underweight Rationale of underweight views: Relatively high current valuations lead to an implied risk premium that is lower than in other developed markets. The policy outlook under a Trump administration remains highly uncertain. If a “Hard Trump” outcome arises, with potentially longer-term adverse impacts on the US economy, we would require a higher reward for bearing US equity risk. Meanwhile, a stronger US dollar and rising wage inflation may extend the recent deteriorating trend in corporate profits. An elevated corporate profit share also suggests little capacity for upside in earnings growth. Finally, rising inflation without an associated pickup in economic growth would imply a less constructive Fed hiking cycle than one driven by both inflation and growth.
Positive factors to consider: Corporate tax reform, looser regulation and fiscal stimulus under a Trump administration present an upside risk to earnings. A durable US economic recovery and a growth-focused central bank remain supportive for US equities.
UK Neutral Positive factors: The UK economy has been far more resilient following June’s Brexit vote than originally anticipated. Meanwhile, any further sterling weakness may support UK equities going forward given their relatively high dependence on foreign earnings.
Risks to consider: The UK equity premium has recently narrowed. Given political uncertainties surrounding Brexit and the cloudy economic outlook, we doubt investors are being compensated enough for the risks.
Eurozone Overweight Rationale of overweight views:We favour Eurozone equities due to their higher implied risk premia and scope for better earnings news given the region’s earlier point in the activity cycle. Furthermore, the monetary backdrop remains supportive, with the ECB’s Asset Purchase programme (APP) likely to be extended beyond the current December 2017 deadline.
Risks to consider: The UK ‘Brexit’ vote raises concerns over the European Union’s future, which may dent regional confidence, hitting growth prospects. Slower UK GDP growth may also hit Eurozone exports to a significant trading partner. Meanwhile, if inflation rises faster than expected, or the ECB raises concerns over the APP’s distortive effects, monetary easing may be less accommodative than expected. The region also remains vulnerable to external headwinds, particularly anaemic global trade growth and softness in key emerging market trading partners. Finally, further political uncertainty lies ahead in the form of the Dutch, French, German and (likely) Italian elections in 2017.
Japan Overweight Rationale of overweight views: Relative valuations and risk premia are attractive, in our view, whilst the Bank of Japan’s (BoJ) extremely loose monetary policy and the government’s recent fiscal stimulus package may boost earnings. The BoJ’s “Yield Curve Control” framework guarantees the equity risk premium, may alleviate some of the impact of negative interest rates on financial sector profits, and could provide a strong incentive for the Ministry of Finance to ease fiscal policy further. This framework could also allow further cuts into negative territory, helping to maintain yield differentials vis-à-vis other major economies, which may weigh on the yen, boosting the value of overseas earnings. Furthermore, given the limited scope for further JGB buying and a comparatively small corporate credit market, a proactive BoJ may increase its equity holdings to ease policy if required. Finally, large corporate cash reserves mean Japanese firms have scope to boost dividends or engage in stock repurchases.
Risks to consider: Earnings momentum has slowed recently amid external headwinds and sluggish domestic fundamentals. Despite the Bank of Japan’s adoption of Negative Interest Rate Policy (NIRP) in late January 2016, the outlook for the yen remains uncertain – a key risk for export-sensitive Japanese stocks. Finally, BoJ equity purchases raise concerns related to the bank becoming a major shareholder in the Japanese stock market.
Emerging Markets
(EM)
Overweight Rationale of overweight views: EM equities remain attractive for western-based investors (USD, GBP or EUR based) given our expectation of longer-term currency appreciation. However, we continue to be selective, especially as sovereign bond returns remain high. We would also focus on countries with strong underlying macro fundamentals, and which could be shielded from protectionist trade policies. Asia is our preferred region, as the prospective returns look higher, sustained by a continued supportive economic environment.
Risks to consider: There could be some near-term volatility as worries persist around the uncertain path for future Fed tightening, the potential for increased trade protectionism, the rate of economic transition in China, and the robustness of the global economy as a whole.
Asia ex Japan Overweight Rationale of overweight views:A combination of higher nominal growth/modest reflation, lower real interest rates, and a recovery in margins should support an improvement in Asia ex Japan corporate earnings, profitability and asset turnover. This benefits return on equity, which has showed signs of bottoming. Valuation looks reasonable based on our long-term expected return signals. Domestic demand resilience, structural reforms and shareholder friendly policies are positive for some markets.
Risks to consider: US president Trump introduces the risk of protectionist trade and tax policies. Another key risk is a more aggressive Fed hiking cycle and rising US/global yields, which would put pressure on currencies in the region and compound capital outflows, exposing many highly-leveraged economies to tighter liquidity and higher borrowing costs. Other risks include fragile global growth; renewed concerns about the Chinese economy (including debt levels) and policy agenda; commodity price volatility; and regional political/geopolitical events.
CEE & Latam Neutral Positive factors:Longer term, we anticipate positive growth differentials with Developed Markets to be maintained, whilst Brazil’s status as a relatively closed economy offers some insulation from a potential increase in global trade protectionism. Other countries, such as Poland, have low levels of US dollar-denominated debt.
Risks to consider:Shorter term, these markets are vulnerable to concerns about reduced global liquidity, whilst lower commodity prices may remain a severe impediment for commodity-dependent producers. Geopolitical tensions are also high and unpredictable, whilst domestic political and macroeconomic fundamentals remain poor in many countries, such as Brazil. Meanwhile, Mexico is particularly vulnerable to a “Hard-Trump” trade policy.
Government bonds
Global Underweight Rationale of underweight views:Following the recent government bond selloff, prospective returns have increased as a result, although still look low relative to competing asset classes. In a bond unfriendly environment (stronger global activity, the prospect of fiscal easing, and rising headline inflation in many economies), global bond yields could move higher still.
Positive factors to consider:Government bonds still provide diversification benefits and reduce volatility within multi-asset portfolios. Meanwhile, “secular stagnation” forces are powerful (ageing populations, low productivity and investment), and the global pool of safety assets is limited. Therefore, the “normalisation” of bond yields could last several years. Finally, Treasury Inflation Protected Securities (TIPS) still look attractive relative to nominal DM bonds, but the case has diminished following rising breakeven inflation rates.
US Underweight Rationale of underweight views: The US labour market is at (or close to) full employment and underlying inflation is rising. Meanwhile, the prospect of US fiscal stimulus should also boost inflationary pressures and increase treasury issuance. Despite recent price action, prospective returns for US Treasuries still look low relative to competing asset classes and we maintain a structural underweight.
Positive factors to consider: If US growth disappoints or the recent rise in inflation stalls, US Treasuries may begin to look attractive at current valuations, especially if monetary policy becomes more accommodative. Government bonds continue to offer a diversification element, important in a volatile environment.
UK Underweight Rationale of underweight views: Prospective UK gilt returns remain very low. Although there is still a high likelihood the UK economy will slow in the coming quarters, the compression of yields is likely to be partially offset by higher inflation following the fall in sterling. Growth may also be more resilient than expected.
Positive factors to consider: Amid downside risks to growth, UK monetary policy is likely to stay highly accommodative for a longer period.
Eurozone Underweight Rationale of underweight views: Similarly, core European bonds are overvalued in our view. A key risk is that the ECB tapers its QE programme further after December 2017.
Positive factors to consider: The extension of the ECB’s Asset Purchase Programme (APP) until December 2017 may provide further near-term support to this asset class. Meanwhile, core inflationary pressures and long-term inflation expectations in the region remain subdued, which should keep ultra-accommodative monetary policy in place for an extended period of time.
Japan Underweight Rationale of underweight views: In our view, Japanese government bonds are overvalued, with yields up to ten-year maturities close to negative territory. The current QE programme is supportive, but the commitment to keep 10-year yields at their current level could be reviewed, and given the high level of JGB purchases already made, the BoJ may have to explore other asset class purchases to ease policy.
Positive factors to consider: The Bank of Japan’s new policy framework of “Yield Curve Control” will limit volatility and reduce the risk of higher yields in the near term. Meanwhile, BoJ Governor Kuroda has indicated that cutting policy rates could play a central role in future policy decisions.
Emerging markets Overweight Rationale of overweight views: The yield available on EM sovereign bonds makes them attractive relative to DM government debt, in our view. Furthermore, our estimate of the sustainable return on EM currencies reinforces our choice to hold this position unhedged.
Risks to consider: Spreads in the EM debt universe are at risk of widening as US policy tightens. The required risk premium has also increased following the election of Trump. Bonds from EM economies with significant external financing needs are particularly vulnerable, whilst those dependent on trade are at risk from rising protectionism.
Corporate bonds
Global investment grade (IG) Neutral Positive factors: Corporate balance sheets remain in good shape and default rates are low. Furthermore, although credit spreads have narrowed significantly since early 2016, expected returns continue to look attractive on a relative basis versus what is available to multi-asset investors in other asset classes.
Risks to consider: Valuations do not appear anomalously cheap, and we retain a neutral positioning, particularly given the risk of tighter than expected US monetary policy.
- USD investment grade Neutral Positive factors: US investment grade debt looks more attractive relative to European credits. The US may outperform given conservative selection.
Risks to consider: Lower relative valuations for USD-denominated credit is offset in the nearer term by the risk of a more aggressive pace of Fed tightening. The US credit cycle is more mature than that in Europe which remains nascent.
- EUR and GBP investment grade Neutral Positive factors: Euro and sterling-denominated investment-grade corporate bonds should find continued support from the ECB and BoE’s corporate bond-buying programmes. Meanwhile, in the Eurozone, the latest survey data suggests a gradual improvement in credit conditions, and default rates remain low. Valuations are still around neutral levels.
Risks to consider: European and UK credits are vulnerable to a tapering of ECB and BoE corporate bond buying programmes. Stripping out currency effects, GBP-denominated credit for UK-focused names could deteriorate if the UK economy slows.
Global
high-yield
Neutral
Positive factors: Defaults remain comparatively low and are likely to be contained to commodity-related sectors. We think selective parts of the credit universe remain relatively attractive, such as US short-duration high-yield.
Risks to consider: Default rates are expected to peak in early 2017, and could spread beyond the commodity sector. This highlights the importance of being selective, with a focus on quality names. As with IG, high-yield credit could be volatile amid tighter US monetary policy.
Other
Gold Neutral Positive factors: Fed hikes are likely to remain gradual, limiting the opportunity cost of holding the non-yield generating asset. Rising inflationary pressures could boost inflation hedging demand.
Risks to consider: A stronger-than-expected Fed hiking cycle may push the USD higher.
Other commodities Neutral Positive factors: With oil demand growth remaining robust there is scope for the market to continue to rebalance, particularly following OPEC’s November output cut deal.
Risks to consider: Oil markets could remain oversupplied if demand growth slows, US production remains resilient, and OPEC cuts fail to be successfully implemented. Industrial metals remain exposed to the pace of China’s economic rebalancing and global growth.
Real estate Neutral Positive factors: Partly due to fears of rising interest rates, real estate equity prices have fallen in recent months. As a result, real estate equity dividend yields have increased and stand at a premium of around 130 basis points above general equities. Our outlook for future rents has remained broadly unchanged, however, and we continue to believe that global real estate equities offer reasonably attractive long-run prospective returns relative to core developed-market government bonds.
Risks to consider: The prospect of rising interest rates could continue to impact listed real estate negatively in the short term. The UK's decision to leave the EU has reduced rental growth prospects, especially in central London, and increased uncertainty around future occupier demand.

Basis of Views and Definitions of ‘Long term Asset class positioning’ table

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Views are based on regional HSBC Global Asset Management Asset Allocation meetings held throughout January 2017, HSBC Global Asset Management’s long-term expected return forecasts which were generated as at 31 December 2017, our portfolio optimisation process and actual portfolio positions.

Icons:
 View on this asset class has been upgraded
 No change
 View on this asset class has been downgraded

Underweight, overweight and neutral classifications are the high-level asset allocations tilts applied in diversified, typically multi-asset portfolios, which reflect a combination of our long-term valuation signals, our shorter-term cyclical views and actual positioning in portfolios. The views are expressed with reference to global portfolios. However, individual portfolio positions may vary according to mandate, benchmark, risk profile and the availability and riskiness of individual asset classes in different regions.

Overweight” implies that, within the context of a well-diversified typically multi-asset portfolio, and relative to relevant internal or external benchmarks, HSBC Global Asset Management has (or would have) a positive tilt towards the asset class.

Underweight” implies that, within the context of a well-diversified typically multi-asset portfolio, and relative to relevant internal or external benchmarks, HSBC Global Asset Management has (or would) have a negative tilt towards the asset class.

Neutral” implies that, within the context of a well-diversified typically multi-asset portfolio, and relative to relevant internal or external benchmarks HSBC Global Asset Management has (or would have) neither a particularly negative or positive tilt towards the asset class
For global investment-grade corporate bonds, the underweight, overweight and neutral categories for the asset class at the aggregate level are also based on high-level asset allocation considerations applied in diversified, typically multi-asset portfolios. However, USD investment-grade corporate bonds and EUR and GBP investment-grade corporate bonds are determined relative to the global investment-grade corporate bond universe.

A revival of inflationary forces

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Upbeat data and US policy expectations boost global equities; European government bonds fall amid higher inflation

January saw a host of upbeat global economic activity data lift Global equities higher, whilst continued expectations of Trump-led fiscal stimulus and deregulation also supported sentiment. The MSCI AC World index finished 1.5 per cent higher over the month, whilst the S&P 500 rose 1.8 per cent (in local currency terms). However, in Japan, a stronger yen against a broadly weaker US dollar weighed on the export-sensitive Nikkei (-0.4 per cent). Meanwhile, following a strong December, European stocks underperformed, with the Euro Stoxx 50 declining 1.8 per cent, dragged lower by utilities and consumer staples. Energy shares also declined amid slightly lower oil prices as investors continue to assess the likelihood of pledged OPEC production cuts. Elsewhere, emerging market equities significantly outperformed (the MSCI EM index rose 4.0 per cent), supported by US dollar weakness. Brazilian stocks performed particularly well, aided by an unexpectedly large cut in domestic interest rates. Finally, US Treasuries were little changed over the month, but European equivalents fell amid higher inflation expectations and ahead of a number of political risk events this year (all data above as of close of 31 January in local currency, price return, month-to-date terms).

Our Nowcast indicates continued US activity acceleration as PMIs and consumer sentiment remain elevated

In the US, recent data releases continue to paint a picture of broad economic strength. December’s better-than-expected ISM non-manufacturing PMI (57.2) was complemented by a two-year high in the ISM Manufacturing PMI (54.7). Meanwhile, the NFIB small business optimism index (105.8) rose to the highest level since December 2004. And although the Conference Board measure of consumer confidence edged marginally away from its December 15-year high, it remains consistent with robust consumer spending. Overall, US activity remains encouraging, with our US Nowcast measure of underlying activity rising in January to its highest level since July 2014. This remains consistent with the Fed’s expectation of three rate hikes in 2017. However, given the robustness of activity amid potential Trump-led fiscal stimulus, there is a material risk of a faster-than-expected Fed tightening path.

Eurozone economic activity remains upbeat; ECB strikes a dovish chord at its January meeting

Recent data in the Eurozone suggests that economic activity remains resilient, with the first estimate of Q4 GDP growth accelerating to 0.5 per cent qoq, 0.1ppts higher than Q3’s upwardly revised figure. Meanwhile, the increase in the manufacturing PMI has been pronounced, with Markit citing recent euro weakness as having boosted industrial orders. Generally speaking, confidence in the region remains very strong, with a tightening labour market providing the key underpinning of activity growth. Looking ahead, further gains in employment should also offset the headwind of gradually higher headline inflation – CPI inflation accelerated to an almost 4-year high of 1.8 per cent yoy in the flash January estimate. For now, these inflationary pressures are predominantly being driven by oil price effects, with ECB president Draghi striking a dovish chord at the January ECB policy meeting, arguing that “there are no signs yet of a convincing upward trend in underlying inflation”. Importantly, this implies monetary policy should remain highly accommodative in the short-to-medium term, further supporting future activity growth.

Chinese growth in 2016 meets government target; Bank of Japan upgrades growth forecasts

China’s GDP grew 6.7 per cent in 2016, meeting the government’s 6.5-7.0 per cent target, supported by resilient consumption on the back of fiscal stimulus and strong credit growth, as well as a recovery in output prices. Recent moves by the People’s Bank of China (PBoC) such as raising the Medium-term Lending Facility rate by 10bps, reinforce a focus on financial deleveraging amid other macro-prudential measures, whilst maintaining broadly stable funding conditions. In Japan, the Bank of Japan (BoJ) maintained its ultra-loose policy at its January meeting, as the bank cited risks to both economic activity and prices as skewed to the downside, despite recent signs of a cyclical economic upturn. The BoJ implicitly acknowledged that stronger global growth and a weaker yen are likely to be the primary engines of growth for Japan, whilst subdued domestic demand dampens the inflation outlook.

EM assets are still attractively priced, although post-Trump, selection is crucial

Emerging market assets have recently recovered some of their losses following Trump’s election victory, but investors remain concerned about the ‘Trump effect’ of a potentially stronger US dollar, increased global trade protectionism and rising geopolitical uncertainty. Some of these concerns of course have been self-inflicted, for example in Turkey (post-coup) and India (demonetisation efforts). In this environment, a selective approach is key, and we prefer to focus on markets with a high carry, relatively shielded from a shift towards protectionism (e.g. Brazil, India and Indonesia) and have currencies poised for medium-term appreciation (Taiwan, Brazil, Poland). Those economies with low dollar-denominated debt levels (China, Poland, Indonesia) are also attractive.

In terms of recent economic developments, Brazilian data has continued to surprise to the upside, albeit remaining in contractionary territory in yoy terms (e.g. retail sales and monthly GDP estimates). Nevertheless, this improvement combined with a greater than expected decline in inflation saw the Central Bank of Brazil cut 75bps to 13.00 per cent at its January meeting. Meanwhile, amid increased political uncertainty, Mexico’s January’s data releases showed a continued weakening of growth momentum. However, continued peso volatility and related inflationary pressures will likely maintain a hawkish bias at the Bank of Mexico. India’s Fiscal Year 2018 Union Budget highlights the government’s commitment to gradual fiscal consolidation as it increases spending on rural areas and infrastructure; offers tax and credit relief to the poor, farmers and small companies; and promotes affordable housing.

The recent compression of global risk premia implies a more selective and cautious use of risk budgets

For DM government bonds, although the recent selloff has improved prospective returns, they still look low relative to competing asset classes. Furthermore, the economic environment remains bond unfriendly amid robust global growth dynamics, rising headline inflation rates and the prospect of fiscal stimulus in a number of major global economies. Assuming global growth remains resilient, we anticipate DM government bond yields to climb higher still, and therefore retain our underweight position in this asset class. We also continue to prefer an overweight exposure to a diversified basket of risk assets, including equities (in particular Europe, Japan and selective parts of EM with resilient fundamentals) and local currency EM debt, within the context of a well-diversified multi-asset portfolio, from a strategic and long-term perspective. The key challenge, however, is that global risk premia have compressed at a time of elevated (mainly political) uncertainty, justifying a more selective and cautious use of risk budgets.

Global Strategic Asset Allocations

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Global Strategic Asset Allocations (as at 31 December 2016)

Global equities rose in December, with upbeat macro data boosting risk appetite among investors at the global level. The implied premium in global equities has compressed further relative to global bonds, but harvesting this premium continues to makes sense assuming no imminent recession. We prefer to remain focused on Rest-of-World equities, particularly Japan and Europe where cyclical activity is encouraging and policy remains supportive.

In the credit space, we continue to advocate a neutral stance for both investment grade and high-yield bonds as valuations remain in “fair value” territory. Generally speaking, we prefer exposure to short duration credits to take advantage of the credit risk factor whilst minimising duration risk. US investment grade credit also continues to look more attractive relative to European credits, where the duration premium remains negative.

Finally, US 10-year Treasuries declined (yields rose) during the month, driven by the Fed’s hawkish tilt at its December meeting. This move means we are no longer being penalised for taking duration risk in the US. However, given the current bond unfriendly environment (stronger global activity, the prospect of fiscal easing, and rising headline inflation), a positive reward is required. Overall, prospective returns still look low relative to competing asset classes and we maintain a structural underweight in development market government bonds.

Within the allocations of our global multi-asset model portfolios, we continue to remain underweight DM government bonds, but this is only significantly visible within the model portfolio for Risk Profile 2, where the lower volatility target prevents too high an allocation to global equities.

Risk Profile 2 – Global Multi-Asset Model Portfolio

Asset Class Current Model Portfolio Reference SAA Portfolio Tilt (December 2016) Portfolio Tilt Change
Global Equities 22.0% 21.0% 1.0% 0.0%
Global Government Bonds 12.5% 17.0% -4.5% 0.0%
DM Government Bonds 6.0% 12.0% -6.0% 0.0%
EM Government Bonds 6.5% 5.0% 1.5% 0.0%
Global Corporate Bonds 58.0% 56.0% 2.0% 0.0%
Global Investment Grade 42.5% 41.0% 1.5% 0.0%
Global High Yield 11.5% 10.0% 1.5% 0.0%
EM Debt (Hard Currency) 4.0% 5.0% -1.0% 0.0%
Global Real Estate 5.0% 5.0% 0.0% 0.0%
Cash 2.5% 1.0% 1.5% 0.0%
Total 100.0% 100.0% 0.0% 0.0%
Target Volatility 5 - 8%

Risk Profile 3 – Global Multi-Asset Model Portfolio

Asset Class Current Model Portfolio Reference SAA Portfolio Tilt (December 2016) Portfolio Tilt Change
Global Equities 48.0% 47.0% 1.0% 0.0%
Global Government Bonds 9.5% 10.0% -0.5% 0.0%
DM Government Bonds 3.0% 5.0% -2.0% 0.0%
EM Government Bonds 6.5% 5.0% 1.5% 0.0%
Global Corporate Bonds 36.0% 37.0% -1.0% 0.0%
Global Investment Grade 20.5% 22.0% -1.5% 0.0%
Global High Yield 11.5% 10.0% 1.5% 0.0%
EM Debt (Hard Currency) 4.0% 5.0% -1.0% 0.0%
Global Real Estate 5.0% 5.0% 0.0% 0.0%
Cash 1.5% 1.0% 0.5% 0.0%
Total 100.0% 100.0% 0.0% 0.0%
Target Volatility 8-11%

Source: HSBC Global Asset Management.
Past performance is not an indication of future returns.


Risk Profile 4 – Global Multi-Asset Model Portfolio

Asset Class Current Model Portfolio Reference SAA Portfolio Tilt (December 2016) Portfolio Tilt Change
Global Equities 71.5% 70.5% 1.0% 0.0%
Global Government Bonds 6.5% 5.0% 1.5% 0.0%
DM Government Bonds 0.0% 0.0% 0.0% 0.0%
EM Government Bonds 6.5% 5.0% 1.5% 0.0%
Global Corporate Bonds 16.0% 18.5% -2.5% 0.0%
Global Investment Grade 1.0% 3.5% -2.5% 0.0%
Global High Yield 11.0% 10.0% 1.0% 0.0%
EM Debt (Hard Currency) 4.0% 5.0% -1.0% 0.0%
Global Real Estate 5.0% 5.0% 0.0% 0.0%
Cash 1.0% 1.0% 0.0% 0.0%
Total 100.0% 100.0% 0.0% 0.0%
Target Volatility 11-14%

The above ‘Current Portfolio’ is based on regional HSBC Global Asset Management Asset Allocation meetings held throughout January 2017. The ‘SAA Portfolio’ is the result of HSBC Global Asset Management’s portfolio optimisation process. These model portfolios are expressed in USD.

Key Terms

  • Strategic Asset Allocation Portfolio: Within AMG’s multi-asset investment process, the ‘SAA’ refers to the ‘Strategic Asset Allocations’, which are generated through optimising long-term estimates of both expected return and covariance. These form the portfolios’ reference allocation for each risk level.
  • Current Portfolio: The ‘Current Portfolio’ represents the portfolio’s current target exposure. This reflects any active positions currently held in the portfolio (i.e. ‘over/under weight’ positions relative to the SAA).     
  • Portfolio Tilt: The difference between the ‘Current Portfolio’ and ‘SAA Portfolio’ allocations. Positive values reflect overweight exposure i.e. where a positive outlook on a particular asset class is currently held. Conversely, negative values reflect underweight positions i.e. where the team currently maintain a more cautious outlook.
  • Portfolio Tilt Change: The change in Portfolio Tilts from the previous Multi-Asset Strategy meeting. 

Risk Profiles

Each of the three portfolios outlined above match different customer risk profiles, as defined by their target long-term volatility bands:

  • Risk Profile 2 has a long-term target volatility of 5-8 per cent. This portfolio typically has a substantial allocation to fixed income investments and some allocations to growth-oriented investments such as equities
  • Risk Profile 3 has a long-term target volatility of 8-11 per cent. This portfolio typically has allocations to both fixed income investments and growth-oriented investments such as equities.
  • Risk Profile 4 has a long-term target volatility of 11-14 per cent. This portfolio typically has a high allocation to growth-oriented investments with higher risk levels.

Note:
The ‘Strategic Asset Allocations’ detailed above may sometimes appear to differ from the ‘Long-term Asset Class positioning’ table on pages 2 and 3 primarily due to portfolio constraints which include achieving portfolio volatility within the target long-term volatility bands and minimum and maximum asset class weights.

The above ‘Current Portfolio’ allocations are based on HSBC Global Asset Management’s current outlook and portfolio positioning. These positions are revisited on a monthly basis. The allocations are for illustrative purposes and are designed to be broadly representative of our current multi-asset positioning. Actual portfolio positioning may differ by product or client mandate due to manager discretion, local requirements, portfolio constraints and other additional factors.

The ‘Current Portfolio’ allocations do not consider the investment objectives, risk tolerance or financial circumstances of any particular client. They should not be relied upon as investment advice, research, or a recommendation by HSBC Global Asset Management. Asset allocation and diversification may not protect against market risk, loss of principal or volatility of returns.

The reference index for ‘Equities’ is the MSCI All Country World Index (ACWI), which includes both developed and emerging market equities. The reference index for ‘Real Estate’ is the FTSE EPRA/NAREIT Developed Index, which is designed to track the performance of listed real estate companies and Real Estate Investment Trusts (REITs).

Market Data

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  Close MTD
Change
(%)
3M
Change
(%)
1-year
Change
(%)
YTD
Change
(%)
52-week
High
52-week
Low
Fwd
P/E
(X)
Equity Indices
World
MSCI AC World Index (USD) 433 2.7 5.4 15.5 2.7 438 351 16.1
North America
US Dow Jones Industrial Average 19,864 0.5 9.5 20.6 0.5 20,126 15,503 16.6
US S&P 500 Index 2,279 1.8 7.2 17.5 1.8 2,301 1,810 17.6
US NASDAQ Composite Index 5,615 4.3 8.2 21.7 4.3 5,670 4,210 21.2
Canada S&P/TSX Composite Index 15,386 0.6 4.0 20.0 0.6 15,674 11,986 16.8
Europe
MSCI AC Europe (USD) 408 2.0 5.0 6.3 2.0 415 354 14.4
Euro STOXX 50 Index 3,231 -1.8 5.7 6.1 -1.8 3,342 2,673 14.0
UK FTSE 100 Index 7,099 -0.6 2.1 16.7 -0.6 7,354 5,500 14.5
Germany DAX Index* 11,535 0.5 8.2 17.7 0.5 11,893 8,699 13.6
France CAC-40 Index 4,749 -2.3 5.3 7.5 2.3 4,930 3,892 14.3
Spain IBEX 35 Index 9,315 -0.4 1.9 5.7 -0.4 9,624 7,580 13.7
Asia Pacific
MSCI AC Asia Pacific ex Japan (USD) 451 5.8 1.8 19.1 5.8 459 362 13.4
Japan Nikkei-225 Stock Average 19,041 -0.4 9.3 8.7 -0.4 19,615 14,864 19.0
Australian Stock Exchange 200 5,621 -0.8 5.7 12.3 -0.8 5,828 4,707 15.9
Hong Kong Hang Seng Index 23,361 6.2 1.9 18.7 6.2 24,364 18,279 11.7
Shanghai Stock Exchange Composite Index 3,159 1.8 1.9 15.4 1.8 3,301 2,638 13.4
Hang Seng China Enterprises Index 9,804 4.4 2.6 19.0 4.4 10,210 7,499 7.9
Taiwan TAIEX Index 9,448 2.1 1.7 16.0 2.1 9,468 7,800 13.6
Korea KOSPI Index 2,068 2.0 3.0 8.1 2.0 2,091 1,818 9.7
India SENSEX 30 Index 27,656 3.9 -1.0 11.2 3.9 29,077 22,495 19.1
Indonesia Jakarta Stock Price Index 5,294 0.0 -2.4 14.7 0.0 5,492 4,545 14.8
Malaysia Kuala Lumpur Composite Index 1,672 1.8 -0.1 0.2 1.8 1,729 1,612 15.8
Philippines Stock Exchange PSE Index 7,230 5.7 -2.4 8.1 5.7 8,118 6,499 17.3
Singapore FTSE Straits Times Index 3,047 5.8 8.3 15.9 5.8 3,073 2,528 14.2
Thailand SET Index 1,577 2.2 5.5 21.2 2.2 1,601 1,271 14.6
Latam
Argentina Merval Index 19,063 12.7 8.2 68.6 12.7 19,721 10,856 15.2
Brazil Bovespa Index* 64,671 7.4 -0.4 60.1 7.4 66,594 38,596 12.8
Chile IPSA Index 4,200 1.2 -2.1 13.3 1.2 4,326 3,573 14.8
Colombia COLCAP Index 1,357 0.4 -0.6 15.5 0.4 1,419 1,163 12.1
Mexico Index 47,001 3.0 -2.1 7.7 3.0 48,956 41,757 17.1
EEMEA
Russia MICEX Index 2,217 -0.7 11.4 24.2 -0.7 2,294 1,688 6.8
South Africa JSE Index 52,788 4.2 4.3 7.4 4.2 54,704 47,275 14.9
Turkey ISE 100 Index* 86,296 10.4 9.9 17.4 10.4 86,931 69,436 8.8

*Indices expressed as total returns. All others are price returns.

Equity Indices - Total Return 3-month
Change
(%)
YTD
Change
(%)
1-year
Change
(%)
3-year
Change
(%)
5-year
Change
(%)
Global equities 5.8 2.7 17.9 17.4 51.9
US equities 7.6 2.0 19.6 32.9 86.4
Europe equities 5.3 2.1 9.5 -4.1 29.1
Asia Pacific ex Japan equities 2.3 5.8 22.5 10.9 20.7
Japan equities 2.2 3.7 15.7 16.1 47.0
Latam equities -3.0 7.6 47.8 --5.8 -28.7
Emerging Markets equities 0.8 5.5 25.4 4.4 0.9

All total returns quoted in USD terms.
Data sourced from MSCI AC World Total Return Index, MSCI USA Total Return Index, MSCI AC Europe Total Return Index, MSCI AC Asia Pacific ex Japan Total Return Index, MSCI Japan Total Return Index, MSCI Latam Total Return Index and MSCI Emerging Markets Total Return Index.



Bond indices - Total Return Close MTD
Change
(%)
3-month
Change
(%)
1-year
Change
(%)
YTD
Change
(%)
BarCap GlobalAgg (Hedged in USD) 498 -0.4 -1.7 2.1 -0.4
JPM EMBI Global 750 1.4 -1.4 12.0 1.4
BarCap US Corporate Index (USD) 2,735 0.3 -1.7 6.1 0.3
BarCap Euro Corporate Index (Eur) 240 -0.6 -1.0 3.5 -0.6
BarCap Global High Yield (USD) 439 1.5 2.2 18.8 1.5
Markit iBoxx Asia ex-Japan  Bond Index (USD) 188 0.8 -1.3 5.2 0.8
Markit iBoxx Asia ex-Japan High-Yield Bond Index (USD) 239 1.5 0.9 15.5 1.5

Total return includes income from dividends and interest as well as appreciation or depreciation in the price of an asset over the given period

Bonds Close End of Last mth. 3-months
Ago
1-year
Ago
Year End
2015
US Treasury yields (%)
3-Month 0.51 0.50 0.30 0.31 0.50
2-Year 1.20 1.19 0.84 0.77 1.19
5-Year 1.91 1.93 1.31 1.33 1.93
10-Year 2.45 2.44 1.83 1.92 2.44
30-Year 3.06 3.07 2.58 2.74 3.07
Developed market 10-year bond yields (%)
Japan 0.08 0.04 -0.05 0.10 0.04
UK 1.42 1.24 1.24 1.56 1.24
Germany 0.43 0.20 0.16 0.32 0.20
France 1.03 0.68 0.46 0.64 0.68
Italy 2.25 1.81 1.66 1.41 1.81
Spain 1.59 1.38 1.20 1.51 1.38

Currencies (vs USD) Latest End of last mth. 3-months-
Ago
1-year
Ago
Year
End
2015
52-week
High
52-week
Low
Developed markets
EUR/USD 1.08 1.05 1.10 1.08 1.05 1.16 1.03
GBP/USD 1.26 1.23 1.22 1.42 1.23 1.50 1.18
CHF/USD 1.01 0.98 1.01 0.98 0.98 1.06 0.97
CAD 1.30 1.34 1.34 1.40 1.34 1.41 1.25
JPY 112.8 117.0 104.8 121.1 117.0 120.0 99.0
AUD 1.32 1.39 1.31 1.41 1.39 1.43 1.28
NZD 1.37 1.44 1.40 1.54 1.44 1.54 1.34
Asia
HKD 7.76 7.76 7.76 7.79 7.76 7.80 7.75
CNY 6.88 6.95 6.78 6.58 6.95 6.96 6.45
INR 67.87 67.92 66.78 67.79 67.92 68.86 66.07
MYR 4.43 4.49 4.19 4.15 4.49 4.50 3.84
KRW 1,161 1,206 1,144 1,199 1,206 1,245 1,090
TWD 31.39 32.33 31.56 33.33 32.33 33.67 31.01
Latam
BRL 3.15 3.26 3.19 4.00 3.26 4.08 3.10
COP 2,923 3,002 3,007 3,285 3,002 3,453 2,817
MXN 20.83 20.73 18.86 18.11 20.73 22.04 17.05
EEMEA
RUB 60.19 61.54 63.39 75.55 61.54 80.63 58.96
ZAR 13.48 13.74 13.47 15.89 13.74 16.44 13.17
TRY 3.77 3.52 3.09 2.95 3.52 3.94 2.79

Commodities Latest MTD
Change
(%)
3-month
Change
(%)
1-year
Change
(%)
YTD
Change
(% )
52-week
High
52-week
Low
Gold 1,211 5.1 -5.2 8.3 5.1 1,375 1,115
Brent Oil 55.7 -2.0 15.3 60.3 -2.0 58 30
WTI Crude Oil 52.8 -1.7 12.7 57.1 -1.7 55 26
R/J CRB Futures Index 192 -0.2 3.1 15.2 -0.2 196 155
LME Copper 5,991 8.2 23.4 31.4 8.2 6,046 4,430


Sources: Bloomberg, HSBC Global Asset Management. Data as at close of business 31 December 2016.
Past performance is not an indication of future returns.

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