global equity outlook...4-0,5 0,0 0,5 1,0 1,5 2,0 2,5 3,0 3,5 4,0 0 11 1 12 2 13 3 14 4 15 5 16 6 17...

15 February 2018

Global Equity Product Specialist team

Opportunities and risks

Global equity outlook

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. The information contained in this publication is

not intended as investment advice or recommendation. For illustrative purpose only, this document is a

global view of the recent evolution of the economic conditions. This is a marketing support which does

not constitute neither an investment advice or a recommendation to buy or sell investment. This

commentary is not the result of investment research. 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.

Non contractual document

2

Remain overweight global equities

• Positive environment for earnings growth

• Earnings growth could continue, based on operating leverage, capital expenditure, and corporate

activity

• Unlikely to see much more multiple expansion

Investors should not be complacent

• Market rally and inflows creates technical risk; with markets “on edge”, data points or events could

cause selling that continues around the globe

• Higher-than expected inflation the most pressing risk

• As time passes, however, economies move closer to late cycle and markets move closer to some

notion of “fair value”. Investors might begin to consider what actions they might take as that point

approaches

Equity outlookSummary

Investment involves risks. Past performance is not indicative of future performanceSource : HSBC Global Asset Management. As at February 2018. For illustrative purposes only. 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 will not be held responsible for any investment

or disinvestment decision taken on the basis of the commentary and/or analysis in this document. 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.

2018 YTD

4

-0,5

0,0

0,5

1,0

1,5

2,0

2,5

3,0

3,5

4,0

déc.-

10

juin

-11

déc.-

11

juin

-12

déc.-

12

juin

-13

déc.-

13

juin

-14

déc.-

14

juin

-15

déc.-

15

juin

-16

déc.-

16

juin

-17

déc.-

17

CPI CPI ex food and energy Average Hourly Wages

2018 YTDInflation prints

Source: HSBC Global Asset Management, Bloomberg as at 14 February 2018.

CPI and Average Hourly Wages

(% yoy change)• The Federal Reserve had expected cyclical

inflation pressure throughout the year

• The Average Hourly Wage print at 2.9% early

February was higher than expected

• This caused the market to sell off

• The CPI 2.1% print was higher than expected,

coupled with disappointing retail numbers

• Before the release, S&P futures were ahead by

0.5% but then reversed to show a 1.5% drop;

the market closed over 1% higher

Investment involves risks. Past performance is not indicative of future performanceSource : HSBC Global Asset Management. For illustrative purposes only. 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 will not be held responsible for any investment or disinvestment

decision taken on the basis of the commentary and/or analysis in this document. 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.

5

0

5

10

15

20

25

30

35

40

2 500

2 600

2 700

2 800

2 900

3 000

29-d

éc.

05-j

an

v.

12-j

an

v.

19-j

an

v.

26-j

an

v.

02-f

évr.

09-f

évr.

S&P 500 VIX (RHS)

2018 YTDMarket movements


S&P 500 and VIX

2,0

2,1

2,2

2,3

2,4

2,5

2,6

2,7

2,8

2,9

3,0

85

95

29-d

éc.

05-j

an

v.

12-j

an

v.

19-j

an

v.

26-j

an

v.

02-f

évr.

09-f

évr.

DXY 10yr yield (RHS)

DXY and US 10year Treasury yields

Wage

print

CPI

print

Wage

print

CPI

print





6

2018 YTDInterest rate expectations


Implied US interest rate probabilities

(1 February)


(15 February)

• Slightly higher expectations for higher interest rates





7

2018 YTDUS leading Asia trading

Source: HSBC Global Asset Management, Bloomberg as at 14 February 2018..

S&P 500 and MSCI AC Asia ex Japan • Asia ex Japan market moves have followed US

trading, as might be expected

-5%

-4%

-3%

-2%

-1%

0%

1%

2%

3%

MSCI AC Asia ex Japan S&P 500

Wage

print

CPI

print





8

Possible reasons for equity market weakness

• Long bull run with investors looking to take profit

• Strong equity flows leading to overbought market

• Rising expectations for four Fed rate hikes versus three

• Spike in volatility leads Managed Volatility funds to reduce market exposure to maintain target

volatility levels

2018 YTDSummary

Source: HSBC Global Asset Management, as at February 2018.




liability for any failure to meet such forecast, projection or target. c

Earnings outlook

10

Positive outlook for earnings

• Expected returns favoured versus government bonds and cash

− Attractive earnings yield spread over US Treasuries

• Macro support

− Economic acceleration

− PMIs over 50 and rising

− Accommodative monetary policy

• Earnings delivery

− Rising earnings revisions

− Economic growth translating into corporate earnings growth

− Breadth of earnings growth across sectors

Equity outlookEarnings outlook – summary

Source: HSBC Global Asset Management, as at 31 January 2018.





11

• Equities preferred to bonds and cash

• Within equities, preferences include

− Global Emerging Markets

− Asia ex Japan

− Japan

− Euroland

Equity outlookExpected returns

Equity

Forecast 10-year nominal returns

(annualised, USD unhedged)

0% 2% 4% 6% 8% 10%

Global bonds

US Corporate Credit

EUR High YieldUS High Yield

Local EM Debt

Global listed real estateAsia ex Japan

Emerging marketsJapan

UKEurolandCanada

USDeveloped markets

Global

Source: HSBC Global Asset Management as at 31 December 2017.





12

• Global equities offer an attractive risk premium

over the risk-free rate

• The spread has been declining as markets

rise

-4

-2

0

2

4

6

8

10

12

199

7

199

9

200

1

200

3

200

5

200

7

200

9

201

1

201

3

201

5

201

7

MSCI ACWI Earnings Yield US 10 Year Treasury Yield

Spread

Equity outlookYield spread

Source: HSBC Global Asset Management, Bloomberg as at 31 January 2018..

Yield spread

(MSCI ACWI Earnings Yield and US 10-year Treasury Yield)





13

Equity outlookComposite leading indicator

• The global economy continues to accelerate

• Consistent with our Nowcasting output

Composite lead indicator

(Industrial confidence, Consumer confidence, Capacity utilization, Unemployment, Producer Prices, Credit

spreads, Earnings revision ratio)

Source: BofA Merrill Lynch Global Quantitative Strategy, MSCI, IBES as of 17 January 2018





14

• PMIs are expansionary

46

48

50

52

54

56

201

5

201

6

201

7

201

8

Manufacturing Services

Equity outlookPMIs

Source: HSBC Global Asset Management, Bloomberg as at 31 January 2018.

JP Morgan Global PMIs

(World Composite)





15

Equity outlookMonetary policy

• Monetary policy remains accommodative

Source: Bloomberg, HSBC Global Asset Management, as of December 2017.





16

Equity outlookEarnings revisions

• Economic growth is translating into higher earnings expectations

across regions and most sectors

Earnings revision ratio

Source: BofA Merrill Lynch Global Quantitative Strategy, MSCI, IBES, as of 29 January 2018





17

-50

-40

-30

-20

-10

0

10

20

30

40

janv.-

07

janv.-

08

janv.-

09

janv.-

10

janv.-

11

janv.-

12

janv.-

13

janv.-

14

janv.-

15

janv.-

16

janv.-

17

janv.-

18

Ye

ar-

on

-ye

ar

EP

S g

row

th

Equity outlookEarnings growth


Global equity earnings growth

(MSCI ACWI)

• Higher earnings have the potential to support

high or higher valuations





18

• Most sectors are accelerating

• Materials and energy growth slowing

-60

-40

-20

0

20

40

60

80

201

2

201

3

201

4

201

5

201

6

201

7

Ye

ar-

on

-ye

ar

Ea

rnin

gs P

er

Sh

are

gro

wth

(%

)

Consumer Discretionary Industrials

Materials Energy

Financials Real Estate

Technology Consumer Staples

Health Care Telecom

Utilities

Equity outlookEarnings breadth

Source: HSBC Global Asset Management, Bloomberg as of 31 January 2018.

Global sector earnings growth

(MSCI ACWI, %)





19

Europe

• Weighted earnings are now tracking 4.7%

ahead of consensus and the median stock has

beaten by 2.7%

• 14% more companies have beaten on sales

than missed

• The median stock is seeing EPS growth of 9%

US

(339/500 companies)

• 4Q EPS has come in more than 3% above

analysts' expectations

• Both EPS and sales growth are their highest

in over six years

• Both official earnings guidance and the tone

on earnings calls are very positive

• Consensus 2018 EPS now incorporates 80%

of the tax reform benefit

Equity outlookFourth quarter 2017 earnings

Source: US: Bank of America Merrill Lynch, 12 February 2018; Europe: Morgan Stanley 12 February 2018.





Why equity markets could move higher

21

• Operating leverage

• Capital expenditure

• Cash flow Mergers & acquisitions

Equity outlookWhy equity markets could move higher – summary





22

• Positive operating leverage

• Operating margins have improved but have not reached pre-crisis highs

5

10

15

200

1

200

3

200

5

200

7

200

9

201

1

201

3

201

5

201

7

Op

era

tin

g m

arg

in %

Equity outlookOperating leverage


Operating margin

(%)

0,7

0,8

0,9

1,0

1,1

1,2

1,3

200

8

200

9

201

0

201

1

201

2

201

3

201

4

201

5

201

6

201

7

Degre

e o

f o

pe

ratin

g leve

rage

Degree of operating leverage

(12-month change)





23

• Capacity utilisation moving higher

• Capital expenditure could respond

Equity outlookOperating leverage


Capacity utilisation

(%)

-30

-25

-20

-15

200

7

200

8

200

9

201

0

201

1

201

2

201

3

201

4

201

5

201

6

201

7

Cap

ita

l e

xp

en

ditu

re

Capital expenditure

60

70

80

90

199

7

199

9

200

1

200

3

200

5

200

7

200

9

201

1

201

3

201

5

201

7

Cap

acity u

tilis

atio

n

US European Union





24

• Higher free cash flow could be used for

acquisitions, investment, or shareholder

returns

• Bolstered by US company repatriation of

overseas cash

• Acquisitions could result in higher levels of

profitability after synergies

5

10

15

20

25

30

200

7

200

9

201

1

201

3

201

5

201

7

Fre

e c

ash

flo

w p

er

sh

are

Equity outlookFree cash flow


Free cash flow





Risks we are monitoring

26

Market Fundamentals Macro Geopolitical

• Volatility

• Valuation

• Flows

• Positioning

• Sentiment

• Earnings breadth –

China

• Interest rates

• Inflation

• Recession probability

• US Dollar

• Oil price

• Election calendar

• Trade protectionism

• North Korea

• Middle East

• Russia

Equity outlookRisks we are monitoring – summary

• Lower volatility and higher valuations may bring stronger negative reaction to fundamental

disappointments

• Strong equity flows create technical risk

• Jittery markets could correct on small news / events with circular selling region by region

Source: HSBC Global Asset Management, as at 31 January 2018.





Risks we are monitoring: Market

28

• Volatility has reached pre-crisis lows

• Global equities are reaching new highs

• Markets may react sharply to specific data

releases or small events

0

5

10

15

20

25

30

35

40

0

50

100

150

200

250

300

350

400

450

500

550

199

5

199

7

199

9

200

1

200

3

200

5

200

7

200

9

201

1

2013

201

5

26

0 D

ay V

ola

tilit

y

MS

CI A

CW

I

MSCI ACWI 260 Day Volatility

Equity outlookVolatility


Equity market volatility

(MSCI ACWI)





29

• P/E ratio of 16.6 is above the long-term

average of 15.3

• Need for earnings growth to be delivered

10

15

20

25

200

1

200

3

200

5

200

7

200

9

201

1

201

3

201

5

201

7

Price

/ E

arn

ings r

atio

(x)

Equity outlookValuation


Price / Earnings ratio

(x)





30

• US CAPE is above the long-term average

• Similar picture using eight-year or twelve-year

earnings period


0

5

10

15

20

25

30

35

40

45

50

188

1,0

1

189

1,0

1

190

1,0

1

191

1,0

1

192

1,0

1

193

1,0

1

194

1,0

1

195

1,0

1

196

1,0

1

197

1,0

1

198

1,0

1

199

1,0

1

200

1,0

1

201

1,0

1

Cyclic

ally

-ad

juste

d P

rice

/Ea

rnin

gs r

atio


Source: Robert Schiller, www.econ.yale.edu as at 31 January 2018.

US Cyclically adjusted Price/Earnings ratio

(x)





http://www.econ.yale.edu/

31

• Valuations are reasonable relative to

profitability



Source: HSBC Global Asset Management, Bloomberg as at 31 December 2017.

Equity market valuation

(MSCI ACWI)

1,0

1,2

1,4

1,6

1,8

2,0

2,2

2,4

2,6

2,8

2 4 6 8 10 12 14 16

Price

-to

-Bo

ok (

x)

Return on Equity (%)

December 2017





Risks we are monitoring: Fundamentals

33

• Most sectors are accelerating

• Materials and energy growth is positive but

could be slowing

• Some concern that stimulus-led sectors may

slow once stimulus is removed

-60

-40

-20

0

20

40

60

80

100

120

201

2

201

3

201

4

201

5

201

6

201

7

Ye

ar-

on

-ye

ar

Ea

rnin

gs P

er

Sh

are

gro

wth

(%

)

Consumer Discretionary Industrials

Materials Energy

Financials Real Estate

Technology Consumer Staples

Health Care Telecom

Utilities

Equity outlookEarnings breadth – China

Source: HSBC Global Asset Management, Bloomberg as of 31 January 2018.

China sector earnings growth

(MSCI China, %)





Risks we are monitoring: Macro

35

Equity outlookFederal Reserve “Dot Plot”

• Market has priced in three rate hikes in 2018

• New Fed Chair Jerome Powell

Implied Fed Funds Target Rate

Source: HSBC Global Asset Management, Bloomberg, as of 31 January 2018.





36

• University of Michigan data shows as slight

uptick

0

1

2

3

4

201

2

201

3

201

4

201

5

201

6

201

7

Pe

rcen

t

Next year Next 5-10 years

Equity outlookInflation expectations (University of Michigan)


University of Michigan expected change in prices

(Percent)





37

• New York Federal Reserve inflation gauge

has moved higher recently

0

1

2

3

4

201

2

201

3

201

4

201

5

201

6

201

7

Pe

rcen

t

Full Data Price Only

Equity outlookInflation expectations (New York Fed)


New York Fed Underlying Inflation Gauge

(Percent)





38

• Inflation expectations have moved slightly

higher recently

0

1

2

3

4

201

2

201

3

201

4

201

5

201

6

201

7

Pe

rcen

t

US Breakeven 10 year

Equity outlookInflation expectations (Market instruments)


Inflation expectations

(Percent)





39

• A 2.9% print caused some market participants

to feel the Federal Reserve would add another

rate rise this year

• The Federal Reserve had expected cyclical

inflation pressure throughout the year

0

1

2

3

4

200

7

200

8

200

9

201

0

201

1

201

2

201

3

201

4

201

5

201

6

201

7

Pe

rcen

t

Equity outlookWage growth


Average Hourly Earnings

(Percent, year-on-year)





40

Equity outlookInterest rate cut probability

• Low probability of an interest rate cut in the next year


Source: HSBC Global Asset Management, Bloomberg, as of 1 February 2018.





41

• Low probability of recession in the next year

0

5

10

15

20

25

201

2

201

3

201

4

201

5

201

6

201

7

Pe

rcen

t

Equity outlookUS recession probability


US recession probability forecast

(Next one year)





42

• Well-signalled pace of Federal Reserve

interest rate normalisation

• Dollar weakness attributed to growth

differentials

• ECB may end tapering Sep-Oct 2018

• Treasury Secretary Steven Mnuchin*:

“A weaker dollar is good for us as it relates to

trade and opportunities. Longer term, the

strength of the dollar is a reflection of the

strength of the US economy and that it is, and

will continue to be, the primary reserve

currency”

• Some support from overseas USD repatriation

given Trump’s tax plan

50

60

70

80

90

100

110

120

130

199

7

199

9

200

1

200

3

200

5

200

7

200

9

201

1

201

3

201

5

201

7

DX

Y I

nd

ex

Equity outlookUS Dollar

Source: HSBC Global Asset Management, Bloomberg as at 31 January 2018. *Financial Times 24 January 2018.

US Dollar

(DXY Index)





43

• OPEC has been coordinated

• Strong demand supporting prices – is this the

last oil cycle?

0

20

40

60

80

100

120

140

160

199

7

199

9

200

1

200

3

200

5

200

7

200

9

201

1

201

3

201

5

201

7

Bre

nt C

rud

e (

$/b

bl)

Equity outlookOil price


Brent Crude

($/barrel)





44

Country Date Office

• Italy • 4 March • President

• Chamber (all)

• Senate (all)

• Russia • 18 March – first round

• 1 April – second round

• President

• Mexico • 1 July • President

• Chamber (all)

• Senate (all)

• Brazil • 7 October – first round

• 28 October – second round

• President

• Vice President

• National Congress

• State Governors

• US • 6 November • Senate (33-34)

• Congress (all)

• State Governors (34)

Equity outlookElection calendar

Source: HSBC Global Asset Management, Wikipedia, as at 31 January 2018.

For illustrative purposes only

45

NAFTA Trans-Pacific Partnership Paris Climate Agreement

• The North American Free Trade

Agreement is an agreement signed by

Canada, Mexico, and the United

States, creating a trilateral trade bloc in

North America.

• Trade agreement between Australia,

Brunei, Canada, Chile, Japan,

Malaysia, Mexico, New Zealand, Peru,

Singapore and Vietnam

• Negotiations have started on a new

trade agreement called

Comprehensive and Progressive

Agreement for Trans-Pacific

Partnership.

• An agreement within the United

Nations Framework Convention on

Climate Change (UNFCCC) dealing

with greenhouse gas emissions

mitigation, adaptation and finance

starting in the year 2020.

• The agreement came into force on

January 1, 1994.

• Signed on 4 February 2016; has not

entered into force.

• Adopted by consensus on 12

December 2015

• Ongoing negotiations • The United States withdrew from it

afterwards

• Under the agreement, the earliest

effective date of withdrawal for the U.S.

is November 2020, shortly before the

end of President Trump's first term

Equity outlookGlobal trade

Source: HSBC Global Asset Management, Wikipedia, as at 31 January 2018.

For illustrative purposes only





46

Equity outlookUS trade tariffs

Source: US Trade Representative, USA Today, 24 January 2019

For illustrative purposes only.

Risks we are monitoring: Geopolitical

48

Area/country/region Outlook

• North Korea • Difficult to predict

• Syria • Difficult to predict

• Jerusalem • Difficult to predict

• Iran • Difficult to predict

• Qatar • Difficult to predict

• Yemen • Difficult to predict

• Russia / Crimea • We believe sanctions are priced in

• Afghanistan • Difficult to predict

Equity outlookGeopolitical risk

Source: HSBC Global Asset Management as at 31 January 2018.





49

This presentation 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 an investment advice 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 (France) on the markets, according to the information available to date. They do not constitute any kind of commitment from HSBC Global Asset Management (France). 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 from HSBC

Global Asset Management unless otherwise specified. Any third party information has been obtained from sources we believe to be reliable, but which we have not independently verified.

Source: MSCI. The MSCI information may only be used for your internal use, may not be reproduced or redisseminated in any form and may not be used as a basis for or a component of any financial

instruments or products or indices. None of the MSCI information is intended to constitute investment advice or a recommendation to make (or refrain from making) any kind of investment decision and

may not be relied on as such. Historical data and analysis should not be taken as an indication or guarantee of any future performance analysis, forecast or prediction. The MSCI information is provided on

an “as is” basis and the user of this information assumes the entire risk of any use made of this information. MSCI, each of its affiliates and each other person involved in or related to compiling, computing

or creating any MSCI information (collectively, the “MSCI Parties”) expressly disclaims all warranties (including, without limitation, any warranties of originality, accuracy, completeness, timeliness, non-

infringement, merchantability and fitness for a particular purpose) with respect to this information. Without limiting any of the foregoing, in no event shall any MSCI Party have any liability for any direct,

indirect, special, incidental, punitive, consequential (including, without limitation, lost profits) or any other damages (www.mscibarra.com).

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: 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

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17, P.O Box 2888, CH-1211 Genève 1.

HSBC Global Asset Management is the brand name for the asset management business of HSBC Group. The above document has been approved for distribution/issue by the following entities:

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Copyright © 2018. HSBC Global Asset Management (France). All rights reserved Copyright © 2017. Non contractual document updated in February 2018. AMFR_EXT_128_2018

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