Investment Monthly – November 2018

Investment Monthly ? November 2018 Global equity markets sell off

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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.

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Summary

Investment Monthly November 2018

Macro Outlook

Global growth has moderated in 2018. However, our Nowcast (which tracks global and countries' economic growth using a "big data" approach) remains above 3%. Recession risk still looks low

There is divergence between above-trend growth in the US, moderation in developed economies, and a clear loss of momentum in emerging economies

Global monetary policy and inflation divergence persists. The US is leading the way on inflation and the Fed continues to tighten policy. European and Japanese inflation is subdued, although wage growth is picking up

The outlook for emerging markets (EM) remains challenging amid Fed tightening, higher oil prices and unresolved trade tensions. However, China policy easing and the recent stabilisation of EM asset prices are positives

Central Banks

US Federal Reserve (Fed) policy guidance remains for one more rate hike in 2018 ? essentially in line with market expectations ? with policy no longer described as being "accommodative" as rates approach "neutral" (estimated to be 3%)

The European Central Bank (ECB) remains on track to terminate net bond buying by year-end. There are signs of wage pressures, although we do not expect the first interest rate hike until late-2019 at the earliest

The Bank of England kept monetary policy on hold in September. The prospect for further "gradual and limited" rate hikes is pinned to Brexit developments and wage growth

With Japan's inflation well below the central bank's 2% target, monetary policy is expected to remain expansionary, with further tweaks in yield targets possible

Key Views

A recent key development has been higher long-term Treasury yields, following a pick up in short-term yields earlier this year

This has been sparked by strong US economic data, and Fed comments implying that the US rate hiking cycle could be extended for longer

We are getting closer to the point where our preference for US equities over US Treasuries is being challenged, but we are not quite there yet

Corporate fundamentals are still good. Current valuations suggest global equities remain the best way to benefit from reasonable growth trends

We think EM risk is being well rewarded by the market, especially local currency government bonds. Investor concerns about EMs have recently eased

Key Risks

China slowdown

DM political event risk

Growth recession

Bond market shock (inflation risk and Fed policy error)

Global growth resynchronisation

Trade tensions

Source: HSBC Global Asset Management, Global Investment Strategy, October 2018

Please refer to Basis of Views and Definitions section for additional information

Source: HSBC Global Asset Management. Subject to change

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All numbers rounded to one decimal place.

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Investment Views

Investment Monthly November 2018

Within Asia ex. Japan equities, we move South Korea from overweight to neutral

Current valuations suggest that the best way for us to "back growth" remains through global equities

Global equities ? Offer attractive rewards and we believe they are still the best way to access global growth. We prefer Eurozone and Japanese equities, which offer a greater margin of safety (e.g. against weaker growth/higher bond yields)

Government bonds ? We are underweight DM government bonds, although we find relatively attractive prospective risk-adjusted returns for shorter-dated US Treasuries. Local-currency EM government bonds have high prospective returns

Corporate bonds ? In our view, shorter-dated US investment grade, and USD denominated EM bonds look increasingly attractive. US high-yield prospective returns have also improved, although we still prefer exposure to equities

Equities Asset Class Global

US UK Eurozone Japan Emerging Markets (EM) CEE & Latam

View View move

Overweight ?

Neutral ?

Government bonds

Asset Class

Developed Market (DM) US

Neutral ? UK

Overweight ? Eurozone

Overweight Neutral Neutral

? Japan ? EM (local currency) ?

View move: ? No change Upgraded over the last month Downgraded over the last month

Source: HSBC Global Asset Management. Subject to change. Please refer to Basis of Views and Definitions section for additional information

Corporate bonds & Alternatives

View

View move

Asset Class

View View move

Underweight ? Global investment

grade (IG)

Neutral ?

Underweight ? USD IG

Neutral ?

Underweight ? EUR & GBP IG

Underweight ?

Underweight ? Asia IG

Neutral ?

Underweight Overweight

? Global high-yield ? US high-yield

Europe high-yield

Asia high-yield

Neutral ?

Neutral ? Underweight ?

Neutral ?

EM agg bond (USD)

Neutral ?

Gold

Neutral ?

Other commodities

Neutral ?

Real estate

Neutral ?

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Asian assets Asset Class EM Asian fixed income

View View move

Underweight ?

Asia ex-Japan equities China India Hong Kong Singapore South Korea Taiwan

Overweight ? Overweight ? Overweight ?

Neutral ? Overweight ?

Neutral Neutral ?

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Asset Class Performance at a glance

Investment Monthly November 2018

Global equities fell in October, weighed down by concerns around the implication of rising US Treasury yields on broader financial conditions and global growth

Government bonds ? US Treasury yields rose (prices declined) on the back of strong US economic data, rising wage growth and as market expectations of interest rates aligned closer to the Fed

Commodities ? US dollar strength, rising US inventories and dampened risk appetite weighed on crude oil prices, which fell over the month. Gold prices rose

Past performance is not an indication of future performance

%

Equitie s

40

37.3

Corporate bonds

Government bonds

Com modities and real estate

30 24.0

20

10

0

-10

-4.0 -7.5

-20 Global equities

13.5

15.0

10.4

8.9

7.3

9.3

5.8 5.3

2.0

-8.7

-15.7 GEM equities

-2.4 -1.8

-1.6 -4.2

-3.3 -0.9

-2.2 -5.6

Global HY corp bonds Global IG corp bonds Global government Global EM local

bonds

currency government

bonds

-6.8 Gold

-5.8

-4.8 -4.0

Other commodities

Real estate

2017

2018 YTD

MTD (as of 31 Oct. 2018)

Note: Asset class performance is represented by different indices.

Global Equities: MSCI ACWI Net Total Return USD Index. GEM Equities: MSCI Emerging Market Net Total Return USD Index. Corporate Bonds: Bloomberg Barclays Global HY Total Return Index value unhedged. Bloomberg Barclays Global IG Total Return Index unhedged. Government bonds: Bloomberg Barclays Global Aggregate Treasuries Total Return Index. JP Morgan EMBI Global Total Return local currency. Commodities and real estate: Gold Spot $/OZ/ Other commodities: S&P GSCI Total Return CME. Real Estate: FTSE EPRA/NAREIT Global Index TR USD.

Source: Bloomberg, all data above as of close of 31 October 2018 in USD, total return, month-to-date terms

Source: HSBC Global Asset Management. Subject to change

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Please refer to Basis of Views and Definitions section for additional information

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Base case views and implications

Investment Monthly November 2018

US

Europe

Monthly macroeconomic update

Base case view and implications

US economic momentum remains solid, with business and household confidence still optimistic despite continuing trade tensions with China

Steady employment and income growth should continue to support robust domestic demand in the coming months

A split congress is expected as a result of the midterm elections on 6 November, which should have a limited impact on the economy and financial markets

The Fed is likely to continue raising rates, which could undermine growth in the coming quarters as the recent fiscal stimulus wears off and US-China tensions potentially escalate

We continue to favour US equities over US Treasuries based on current valuations, but we are close to the point where this view is challenged

UK: The economy continues to grow at a moderate pace and has so far been resilient to Brexit uncertainty. Low unemployment is starting to feed into wage pressures, and the Bank of England continues to signal further tightening ahead

Eurozone: Latest activity indicators have softened, although this partly reflects temporary factors affecting the German auto industry

UK: Based on current valuations, we believe UK gilts are overvalued, whilst UK equities are also relatively unattractive Eurozone: Monetary policy is expected to remain relatively loose, although the end of QE is a risk for eurozone bonds. We have a strong preference for the bloc's equities

China: Growth momentum remains broadly stable, although US-China trade tensions and slower credit growth are weighing on the outlook

India: Recent macro data indicates a moderation in economic activity in H2 fiscal year 2019, amid tighter financial conditions, higher oil prices and fiscal constraints

Japan: Growth remains relatively weak, although low unemployment and a pickup in wage growth are buoying domestic demand and investment. Protectionism and next year's consumption tax hike are key risks to the outlook

China: We believe equity markets will find support from continued policy easing and favourable valuations

India: The positive case for equities is supported by reforms, higher infrastructure spending, and improving governance

Japan: The Bank of Japan is likely to keep policy ultra-loose as inflation remains well below target. We think Japan's equities are attractively valued, especially compared to government bonds

Brazil: Growth should accelerate in 2019, following a crippling truckers' strike earlier this year. The recent election of Jair Bolsonaro as President may boost business confidence, especially if market-friendly reforms are enacted

Russia: The economy is being supported by higher oil prices, but a planned VAT rate hike in 2019 is likely to weigh on activity

MENA: Higher oil prices should support a growth recovery, also helped by the impact of modest reforms and stabilisation efforts undertaken in some countries

EM economic momentum remains negative, weighed down by Fed tightening, trade tensions and higher oil prices

We prefer to fulfil our EM equity exposure in Asia where economic and earnings growth has been relatively robust

We have a strong preference for local currency EM government bonds, which offer very high risk adjusted returns

Asia

Other EM

Source: HSBC Global Asset Management. Subject to change.

Please refer to Basis of Views and Definitions section for additional information

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