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Investing in the world’s growth engine
Bill MaldonadoCIO Asia Pacific
February 2018
This presentation is intended for Professional Clients as defined by MIFID only
and should not be distributed to or relied upon by Non professional clients.
Non contractual document
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22
This document provides a high level overview of the recent economic environment. It is for marketing purposes
and does not constitute investment research, investment advice nor a recommendation to any reader of this
content to buy or sell investments. It 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.
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3 Non contractual document
Overview
Source: HSBC Global Asset Management as of December 2017
Year of the equities
The combination of an improved economic environment and stronger corporate fundamentals has allowed investors to shrug off
disruptive market events and geopolitical risks to a large extent and enabled equities to outperform strongly
Valuations have been supported by uber-gradual policy normalisation, waning geopolitical risks, and the advent of a ‘Goldilocks’
environment of good growth, low inflation and low rates
But undoubtedly, earnings growth has been the main driver of equity markets in 2017
2018 will continue to offer many opportunities in equities, as a number of themes, predominantly that of continued synchronised
global growth, play out
Asia is particularly geared to benefit, not just from recovering commodity prices, global capex upcycle and strong international
trade flows, but also from the pickup in local economies
We also find Asia ex-Japan equities particularly attractive as valuations remain reasonable on a relative basis and with return on
equity (ROE) picking up after a multi-year decline
The views expressed were held at the time of preparation and are subject to change without notice. For illustrative purposes only
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-15
-10
-5
0
5
10
15
20
25
30
35
40
45
50Income Price Appreciation Alternative Betas FX Traditional Betas USD Total Return
%, 2017 USD Total Returns
Market anatomyDecomposing 2017 returns
Source: HSBC Global Asset Management, Bloomberg, Datastream as of December 2017
Investment involves risks. Past performance is not indicative of future performance
In 2017, equities were the biggest beneficiaries of the Goldilocks environment – a combination of
good growth, low inflation, strong corporate profits, and a weak dollar
Cash Government Bonds Corporate Bonds EM Bonds Equities Alternatives
The views expressed were held at the time of preparation and are subject to change without notice. For illustrative purposes only
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Rational exuberanceDecomposing equity returns
Source: HSBC Global Asset Management, Bloomberg, Datastream as of January 2018
Returns shown in USD terms from 31/12/2012-31/12/2017 annualised. (H) denotes currency hedged returns
For equities, the earnings growth has been the biggest contributor to total returns in 2017
Over the five year period, multiple expansion has been the main driver of returns while currency has been a drag
Global Equity Return Decomposition 2013-2017
-15
-10
-5
0
5
10
15
20
25
30
35
2013 2014 2015 2016 2017 5y (annualised)
%
FX Dividend Yield Multiple Expansion Earnings Growth USD Total Return
Investment involves risks. Past performance is not indicative of future performanceThe views expressed were held at the time of preparation and are subject to change without notice. For illustrative purposes only
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ROEs recovering in most major markets
Source: Credit Suisse, as of December 2017.
Developed markets ROE Asia ex Japan ROE
Europe ROE US ROE
7%
8%
9%
10%
11%
12%
13%
Dec-09 Dec-10 Dec-11 Dec-12 Dec-13 Dec-14 Dec-15 Dec-16 Dec-17
MSCI Europe ROE
6%
7%
8%
9%
10%
11%
12%
13%
14%
Dec-09 Dec-10 Dec-11 Dec-12 Dec-13 Dec-14 Dec-15 Dec-16 Dec-17
MSCI World ROE
9%
10%
11%
12%
13%
14%
15%
Dec-09 Dec-10 Dec-11 Dec-12 Dec-13 Dec-14 Dec-15 Dec-16 Dec-17
Asia ex-JP - ROE
7%
9%
11%
13%
15%
17%
Dec-09 Dec-10 Dec-11 Dec-12 Dec-13 Dec-14 Dec-15 Dec-16 Dec-17
MSCI USA ROE
13.6% now
11.0% now
9.6% now
11.4% now
Investment involves risks. Past performance is not indicative of future performanceThe views expressed were held at the time of preparation and are subject to change without notice. For illustrative purposes only
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Emerging Markets equitiesMarket outlook
Source: HSBC Global Asset Management as of January 2018
The outlook for emerging markets equities remains attractive
Growth
– Strong economic growth and rising corporate earnings across emerging markets
Inflation
– Inflationary expectations are stable and comparable to developed markets levels
Interest rates
– Still scope for easing in emerging markets as developed markets prepare for tightening cycle
Valuations
– Attractive valuations versus developed markets and historic trading range
Investor positioning
– Asset class remains under owned
Investment involves risks. Past performance is not indicative of future performanceThe views expressed were held at the time of preparation and are subject to change without notice. For illustrative purposes only
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EM equities: Valuations are attractive relative to profitability
Any forecast, projection or target contained in this presentation is for information purposes only and is not guaranteed in any way. HSBC accepts no liability for any failure to meet such forecasts, projections or targets. For illustrative purpose only
EM valuations are near historic lows and seem close to the bottom of a trading range
EMs offer a higher return on equity than developed markets for a much lower price-to-book value
Profitability and Valuation
(EMs, Jan 2000-Sep 2017) Profitability and Valuation – EM vs DM
Trailing estimates, Emerging Markets: MSCI Emerging Markets USD and Developed Markets: MSCI World USD
Source: HSBC Global Asset Management, Bloomberg, DataStream as at 31 December 2017. For illustrative purposes only
12m Forward estimates, Emerging markets: MSCI Emerging Markets; Developed markets: MSCI World
Source: HSBC Global Asset Management, Bloomberg, as of 31 December 2017. For illustrative purposes only
Price-to-Book (x)
Return on Equity (%)
2017
1,0
1,5
2,0
2,5
3,0
5 10 15 20
Pri
ce
-to
-Bo
ok (
x)
Return on Equity (%)
Emerging Markets
Developed Markets
1,0
1,5
2,0
2,5
3,0
10 11 12 13
Pri
ce
-to
-Bo
ok (
x)
Return on Equity (%)
2008
2016
2000
Investment involves risks. Past performance is not indicative of future performanceThe views expressed were held at the time of preparation and are subject to change without notice. For illustrative purposes only
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EM equities: Strong earnings upgrades across the board
Over the past year, EM corporates have delivered higher levels of profits and higher RoEs
Profit growth set to continue, supported by improvements in EM fundamentals and rising earnings
Forecast valuations
(MSCI Emerging Markets index) EPS growth (%) 3M chg. in est. (%)
2016 2017 2018 2017 2018
Consumer Discretionary -1.2 10.6 25.1 -3.2 -0.8
Consumer Staples 0.1 12.5 13.3 -1.4 -1.0
Energy -7.9 27.3 8.5 3.5 2.1
Financials 1.3 12.1 9.9 1.1 1.3
Health Care 6.2 7.5 26.6 -1.2 -1.0
Industrials -3.2 37.6 5.9 4.2 -0.1
Information Technology 12.7 51.9 18.2 1.7 5.6
Materials 312.7 20.0 8.1 2.9 4.6
Real Estate 11.6 21.2 18.2 4.7 3.7
Telecoms -10.1 17.3 8.4 -0.4 -0.8
Utilities -6.0 -14.0 16.1 -6.0 -2.6
Emerging Markets 8.1 22.5 13.2 1.2 2.2
Source: IBES, Morgan Stanley Research as of January 2018.
For illustrative purposes only. Any forecast, projection or target where provided is indicative only and is not guaranteed in any way.
HSBC Global Asset Management accepts no liability for any failure to meet such forecast, projection or target.
Investment involves risks. Past performance is not indicative of future performanceThe views expressed were held at the time of preparation and are subject to change without notice. For illustrative purposes only
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Emerging Markets equitiesRisks to market outlook
The views expressed above were held at the time of preparation and are subject to change without notice
Geopolitics, eg escalation of North Korean conflict, potential deterioration in Sino-US (trade) relations
US dollar strength and sharply rising US interest rates
Sharp commodity price moves
Domestic politics – Turkey, South Africa, Brazil, Korea
Government interference in company profits (eg. unexpected new taxes, levies, etc.)
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Spotlight on Asia
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Strong gains YTD 2017…..
Source: Bloomberg, HSBC Global Asset Management, data as of 31 December 2017. Total return in USD terms.
In 2017, Asia ex Japan equities posted its best performance since 2009, beating gains in key DM and EM peers (in USD terms)
Asia ex Japan equities rallied in 2017
Total return (%)
41,7%
-60%
-40%
-20%
0%
20%
40%
60%
80%
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
YT
D 2
01
72017
Investment involves risks. Past performance is not indicative of future performanceThe views expressed were held at the time of preparation and are subject to change without notice. For illustrative purposes only
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….despite a noisy macro backdrop
Source: Bloomberg, HSBC Global Asset Management, as of December 2017. Total return in USD with dividend reinvested.
31/12/2016=100
80
90
100
110
120
130
140
150
1/16 2/16 3/16 4/16 5/16 6/16 7/16 8/16 9/16 10/16 11/16 12/16 1/17 2/17 3/17 4/17 5/17 6/17 7/17 8/17 9/17 10/17 11/17
MSCI World MSCI Asia ex Japan
Chinese stock market rout
Worries over weaker global
growth and tighter US monetary
policy
‘Brexit’ vote
US presidential election
India de-monetisation
OPEC meeting
US rate hike
US rate hike
Article 50 triggered
French election
Korea presidential election
UK General Election
US rate hike
North Korea tensions
German
election+38%
+21%
Investment involves risks. Past performance is not indicative of future performanceThe views expressed were held at the time of preparation and are subject to change without notice. For illustrative purposes only
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Earnings are a higher return contributor for Asia ex Japan
Source: CLSA, as of December 2017.
Return drivers – PE vs EPS (as % of total returns)
Contribution to annualised US$ total return (as a % of total return)
2
69
(10)
37
(13)
66
(11)
103
70
14
78
46
73
27
56
(13)
2817
42 3339
25
56
41
(10)(15) (18)
(32)
(60)
(30)
0
30
60
90
120
150
L20Y L5Y L20Y L5Y L20Y L5Y L20Y L5Y
USA USA AsiaxJ AsiaxJ World World Europe Europe
PE contrib EPS contrib Dividend contrib Currency contrib
EPS contribution higher than PE for Asia
over the last 5 years
PE driven returns in US
over the last five years
Investment involves risks. Past performance is not indicative of future performanceThe views expressed were held at the time of preparation and are subject to change without notice. For illustrative purposes only
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Another year of positive earnings growth expected in 2018
Source: Factset, IBES, MSCI, Bloomberg, IMF, consensus data as of December 2017. Any forecast, projection or target where provided is indicative only and is not guaranteed in any way. HSBC accepts no liability for any failure to meet such forecasts,
projections or targets.
GDP forecast EPS growth forecast Fwd PE PB RoE
2017 2018 2017 2018 2018 2017 2017
Australia 2.3% 2.8% 12.0% 5.0% 15.9 2.0 11.9%
China 6.8% 6.5% 21.5% 15.6% 13.3 1.9 13.5%
Hong Kong 3.7% 2.9% 5.8% 7.6% 14.8 1.2 8.0%
India 6.3% 6.7% 11.4% 18.4% 18.1 3.0 14.8%
Indonesia 5.1% 5.3% 14.9% 14.0% 16.1 2.9 16.9%
Korea 3.2% 3.0% 53.1% 11.8% 8.6 1.2 12.5%
Malaysia 5.8% 5.3% (25.6%) 5.6% 15.8 1.5 8.9%
Philippines 6.6% 6.6% 2.7% 12.3% 18.6 2.5 12.6%
Singapore 3.3% 2.8% 6.6% 9.8% 14.3 1.3 8.6%
Taiwan 2.6% 2.5% 10.1% 10.9% 13.4 1.9 12.9%
Thailand 3.8% 3.7% 7.6% 7.7% 15.2 2.1 13.3%
Asia Pacific ex Japan 4.8% 4.9% 20.5% 11.1% 13.3 1.7 12.0%
Asia ex Japan 6.0% 5.9% 22.2% 12.2% 12.8 1.7 12.1%
USA 2.3% 2.6% 9.7% 11.4% 18.6 3.3 16.2%
Europe (USD) 2.3% 2.1% 13.9% 12.7% 14.7 1.9 11.7%
Emerging Markets 4.6% 4.9% 23.0% 13.5% 12.3 1.7 12.8%
AC World 3.6% 3.7% 14.3% 11.3% 16.1 2.3 13.2%
Investment involves risks. Past performance is not indicative of future performanceThe views expressed were held at the time of preparation and are subject to change without notice. For illustrative purposes only
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Asia margins are moving higher
Source: Credit Suisse, as of December 2017. Any forecast, projection or target contained in this presentation is for information purposes and is not guaranteed in any way. HSBC accepts no liability for any failure to meet such forecasts, projections or targets
Asia Pacific ex Japan EBIT margin Asia Pacific ex Japan sales growth
8%
9%
10%
11%
12%
13%
14%
15%
16%
1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017E
Asia Pac ex-JP - EBIT margin
(15%)
(10%)
(5%)
0%
5%
10%
15%
20%
25%
30%
35%
1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017E
Asia Pac ex-JP - Sales growth
average: 12%
High of 14.8% in 2004
2017E: 11.5%
2018E: 12.0%
9.1% in 2014
average: 11.6%
2017E: 9.2%
2018E: 8.4%
Investment involves risks. Past performance is not indicative of future performanceThe views expressed were held at the time of preparation and are subject to change without notice. For illustrative purposes only
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Asia ex Japan equity valuations not stretched
Source: Credit Suisse, MSCI data as of December 2017
With a trailing P/B of 1.75x, Asia is trading near its long term average valuation (1.77x)
Stripping out the IT sector, valuation for Asia ex Japan falls to 1.43x vs long term average of 1.61x
Asia ex Japan equities non-IT sectors trading below long-term average
Trailing PB
0,5
1,0
1,5
2,0
2,5
3,0
De
c-9
5
De
c-9
6
De
c-9
7
De
c-9
8
De
c-9
9
De
c-0
0
De
c-0
1
De
c-0
2
De
c-0
3
De
c-0
4
De
c-0
5
De
c-0
6
De
c-0
7
De
c-0
8
De
c-0
9
De
c-1
0
De
c-1
1
De
c-1
2
De
c-1
3
De
c-1
4
De
c-1
5
De
c-1
6
De
c-1
7
MSCI AC Asia ex-JP average MSCI AC Asia ex-JP ex IT average
MSCI Asia ex-Japan: 1.75x
Average: 1.77x
MSCI Asia ex-Japan ex IT: 1.43x
Average: 1.61x
Investment involves risks. Past performance is not indicative of future performanceThe views expressed were held at the time of preparation and are subject to change without notice. For illustrative purposes only
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Compelling valuations when compared with rest of the world
Source: Credit Suisse, MSCI data as of December 2017
Asia ex Japan continues to trade at an attractive discount versus global equities and the US market in particular
Asia Pacific ex Japan EBIT margin Asia Pacific ex Japan sales growth
Trailing PB relative to US
(70%)
(60%)
(50%)
(40%)
(30%)
(20%)
(10%)
0%
10%
20%
May-01 May-04 May-07 May-10 May-13 May-16
Asia Pac ex-JP - PB rel less ROE rel to World
(90%)
(80%)
(70%)
(60%)
(50%)
(40%)
(30%)
(20%)
(10%)
0%
De
c-9
7
De
c-9
8
De
c-9
9
De
c-0
0
De
c-0
1
De
c-0
2
De
c-0
3
De
c-0
4
De
c-0
5
De
c-0
6
De
c-0
7
De
c-0
8
De
c-0
9
De
c-1
0
De
c-1
1
De
c-1
2
De
c-1
3
De
c-1
4
De
c-1
5
De
c-1
6
De
c-1
7
MSCI AC Asia ex-JP - Trailing PB rel to US average
Current discount: 47.1%
Average discount: 38.9%
(26.8%)
Investment involves risks. Past performance is not indicative of future performanceThe views expressed were held at the time of preparation and are subject to change without notice. For illustrative purposes only
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Key themes
Note: For illustrative purposes only, and should not be construed as a recommendation to buy or sell any investment
Source: HSBC Global Asset Management
Theme Strategy
Consumption
Consumption continues to grow driven by rising incomes and aspirations
Focus on market leaders with strong brands across food, personal care, protection, travel, auto, mobile data providers, e-commerce, smartphones and
electrical equipment. This cuts across sectors such as telecoms, technology, consumer staples, consumer discretionary and financials
Valuations have become increasingly attractive due to rotation to cyclicals, creating attractive entry points
Technology
Asia is the fastest growing market for smart devices
We invest in companies that continue to benefit from changes in technology and shifts in consumer preferences
Our holdings include some of the global leaders in the software service, gaming, social media, semiconductor and display space
Non-banking financials
We prefer insurance companies to banks, particularly in China, as non-performing loans at banks have yet to peak, potentially weighing on earnings growth
prospects
We are also constructive on diversified financials such as stock exchanges that have very strong competitive positioning
Korea
Market leading Korean technology companies continue to benefit from the global technology cycle – the outlook for memory and display remains strong
Korean companies continue to increase their dividend payouts and/or buybacks in response to investor demands for more proactive capital management
and group restructuring. Korea remains one of the cheapest markets in Asia with scope for a re-rating in valuations
Indonesia
Indonesia is one of our preferred telecom markets given strong growth in data consumption and an improved outlook for data monetization
We like Indonesia for its rising middle class and consumption growth
Unlike other Asian markets, Indonesia has not yet enjoyed a comparable re-rating for its stronger earnings outlook
Branded plays
We have taken positions in a range of global brands, most of which have production in Asia – and are sold to the world
These companies typically have strong cash flows and growing franchises
Brands held include products in: auto, consumer electronics, DIY hardware, household electrics, cosmetics and luggage
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Conclusion
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21 Non contractual document
The pecking order of asset classesEquities stand out in term of implied market odds
Note:
1. Global Fixed Income assets are shown hedged to USD. Local EM debt, Equity and Alternative assets are shown unhedged
Source: HSBC Global Asset Management, Global Investment Strategy. Any forecast, projection or target provided is indicative only and is not guaranteed in any way. HSBC Global Asset Management accepts no liability for any failure to meet such forecast
projection or target
Data as at end-November 2017
US TIPSGlobal ILBs
US Tsy
UK GiltsGermany Bunds
Japan JGBs
Global Gov
Local EMD
Asia Local Bonds
EUR HY
EM Sovs USDGlobal Credit Global HY
ACWI Equity
DM Equity
EM Equity
US EquityUK Equity
Eurozone Equity (H)
Asia ex Japan Equity
Japan Equity (H)
Commodities
Private Equity
US HY
US MBSGlobal ABS
Canada Equity
Asia IG CorporateSukuk Bonds
GCC EquityGlobal REITs
US Direct Real EstateAsia HY Corporate
China EquityHong Kong EquityFrontier Market Equity
(3)
(2)
(1)
0
1
2
3
4
5
6
7
8
9
10
0 2 4 6 8 10 12 14 16 18 20 22 24 26 28 30 32 34
Expected Volatility (%)
Exp
ecte
d R
isk P
rem
ia(%
, N
om
inal, U
SD
)
Current Pecking Order of Asset Classes
Sharpe Ratio = 0.25
Sharpe Ratio = 0.10
Investment involves risks. Past performance is not indicative of future performanceThe views expressed were held at the time of preparation and are subject to change without notice. For illustrative purposes only
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22
Key risks
For more detailed information on the risks associated with this fund, investors should refer to the prospectus of this fund.
The value of investments and any income from them can go down as well as up and investors may not get back the amount
originally invested.
Exchange rate risk: Investing in assets denominated in a currency other than that of the investor’s own currency perspective exposes the
value of the investment to exchange rate fluctuations
Emerging market risk: Emerging economies typically exhibit higher levels of investment risk. Markets are not always well regulated or
efficient and investments can be affected by reduced liquidity
Derivative risk: The value of derivative contracts is dependent upon the performance of an underlying asset. A small movement in the value
of the underlying can cause a large movement in the value of the derivative. Unlike exchange traded derivatives, over-the-counter (OTC)
derivatives have credit risk associated with the counterparty or institution facilitating the trade
Operational risk: The main risks are related to systems and process failures. Investment processes are overseen by independent risk
functions which are subject to independent audit and supervised by regulators
Concentration risk: Funds with a narrow or concentrated investment strategy may experience higher risk and return fluctuations and lower
liquidity than funds with a broader portfolio.
Non contractual document
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23Non contractual document
Important information
This document is distributed in France, Italy, Spain and Sweden by HSBC Global Asset Management (France), in Switzerland by HSBC Global Asset Management (Switzerland) Ltd 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. Consequently, HSBC
Global Asset Management (France) will not be held responsible for any investment or disinvestment decision taken on the basis of the commentary and/or analysis in this document.
All data are from HSBC Global Asset Management (France) unless otherwise specified.
Any third party information has been obtained from sources we believe to be reliable, but which we have not independently verified."
The material contained herein is for information only and does not constitute legal, tax or investment advice or a recommendation to any reader of this material to buy or sell investments. You must not, therefore, rely on the content of this
document when making any investment decisions.
This document is not intended for distribution to or use by any person or entity in any jurisdiction or country where such distribution or use would be contrary to law or regulation. This document is not and should not be construed as an offer to sell
or the solicitation of an offer to purchase or subscribe to any investment.
Any views expressed were held at the time of preparation, reflected our understanding of the regulatory environment; and are subject to change without notice.
The value of investments and any income from them can go down as well as up and investors may not get back the amount originally invested.
Important information for Luxembourg investors: HSBC entities in Luxembourg are regulated and authorised by the Commission de Surveillance du Secteur Financier (CSSF).
Important information for Swiss investors : Important information for Swiss investors: 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. This document may be distributed in Switzerland only to qualified investors according to Art. 10 para 3, 3bis and 3ter of the Federal Collective Investment Schemes Act (CISA).
HSBC Global Asset Management is the brand name for the asset management business of HSBC Group. The above document has been produced by HSBC Global Asset Management (France) and has been approved for distribution/issue by the
following entities :
HSBC Global Asset Management (France)
HSBC Global Asset Management (France) - 421 345 489 RCS Nanterre. Portfolio management company authorised by the French regulatory authority AMF (no. GP99026) with capital of 8.050.320 euros.
Offices: HSBC Global Asset Management (France) - Immeuble Coeur Défense - 110, esplanade du Général Charles de Gaulle - 92400 Courbevoie - La Défense 4 – France.
(Website: www.assetmanagement.hsbc.com/fr).
HSBC Global Asset Management (Switzerland) Limited
Gartenstrasse 26, P.O. Box, CH-8002 Zurich. Paying agent: HSBC Private Bank (Suisse) S.A., Quai des Bergues 9-17, P. O. Box 2888, CH-1211 Geneva 1(Website: www.assetmanagement.hsbc.com/ch)
Copyright © 2018. HSBC Global Asset Management (France). All rights reserved.
Non contractual document updated in January 2018 - AMFR_Ext_86_2018
http://www.assetmanagement.hsbc.com/fr
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