this document provides a high level overview of the recent … · 2018. 2. 1. · 2 this document...

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

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.

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


-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


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


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%


MSCI World ROE

9%

10%

11%

12%

13%

14%

15%


Asia ex-JP - ROE

7%

9%

11%

13%

15%

17%


MSCI USA ROE

13.6% now

11.0% now

9.6% now

11.4% now



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



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)


Emerging Markets

Developed Markets

1,0

1,5

2,0

2,5

3,0

10 11 12 13

Pri

ce

-to

-Bo

ok (

x)


2008

2016

2000



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.



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.)

Spotlight on Asia


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



….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%



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



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%



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%



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



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%)



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

Conclusion


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


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

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)

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Offices: HSBC Global Asset Management (France) - Immeuble Coeur Défense - 110, esplanade du Général Charles de Gaulle - 92400 Courbevoie - La Défense 4 – France.

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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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