Global Investment Committee - HSBC Guyerzeller...

Monthly view February 2017 1

Global Investment Committee Monthly view February 2017

Click on the image to watch a video summary from Chief Market Strategist Willem Sels

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Current Deviation from our Standard

Strategic Asset Allocation (moderate

risk advisory model portfolio)

The Global Investment Committee Contributors Chief Market Strategist

Willem Sels

[email protected]

+44 (0) 207 860 5258

Regional Heads of Investment Strategy

Cheuk Wan Fan

[email protected]

+852 2899 8648

Belal Mohammed Khan

[email protected]

+41 (58) 705 5273

Jose Rasco

[email protected]

+1 (212) 525 3264

Jonathan Sparks

[email protected]

+44 (0) 207 860 3248

Disclaimer and disclosures

This report must be read with the

disclaimer (important notice section)

A selective ‘risk-on’ stance remains appropriate

Stock and bond markets moved sharply following the US Presidential election, but due to a lack of clarity, they have since settled into a range. Although uncertainty may remain for some time and lead to some volatility, we believe that on balance, the global economic data, US policy, and the direction of USD and oil prices should be positive for risk appetite in the medium term. Hence, we hold on to our selective ‘risk-on’ stance for now, attempting to strike the right balance between selecting opportunities and avoiding the sources of potential risk.

Our core views and changes this month:

A year of two halves:

• US fiscal stimulus and hopes of deregulation should boost US equity market sentiment in H1, but the need to compromise in the Congress is likely to cap the rally.

• We expect mild USD strength in the coming months, followed by mild weakness in H2.

• US Treasury yields to move in a range in H1, followed by lower yields in H2, supporting credit markets and gold prices.

We maintain selective ‘risk-on’ exposure through US high yield and

investment grade, EM hard currency debt, our positive view on US

domestic stocks, the energy and materials sector, new technology stocks

and selective EM stock markets.

Due to European election risks, we downgrade European peripheral

bonds to underweight. Similarly, we maintain Eurozone stocks at an

underweight, and prefer German stocks over peripheral markets.

In EM, we prefer domestically and reform-focused countries over export-led

markets. We remain constructive on Asia’s structural growth outlook and

overweight on India, Indonesia and China. To mitigate the risk of trade

protectionism, we are underweight on South Korea, Singapore and

Malaysia. We have turned more cautious on Turkey due to its high

vulnerability to the volatility of US yields and USD.

We continue to see gold and hedge funds as important diversifiers. We

believe gold can reach USD 1390/oz this year, while hedge funds tend to

show low correlation to bond markets, and should be able to benefit from

volatility and cross-market opportunities.

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Commodities

Private Equity

Real Estate

Hedge Funds

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mailto:[email protected]









Regional equity views Current deviation from our standard Strategic Asset Allocation (moderate risk advisory model portfolio)

Subject to change without notice

Currency forecasts

USD

Current Q1 17 Q2 17 Q4 17

EUR 1.07 1.01 1.05 1.10

GBP 1.25 1.18 1.15 1.10

CHF 1.00 1.07 1.03 0.98

JPY 113.6 120 125 115

AUD 0.75 0.69 0.67 0.70

CNY 6.88 7.05 7.10 7.20

HKD 7.76 7.80 7.80 7.80

EUR (Value of 1 EUR)

Current Q1 17 Q2 17 Q4 17

GBP 0.86 0.86 0.91 1.00

CHF 1.07 1.08 1.08 1.08

CNY 7.38 7.12 7.46 7.92

Source: HSBC Global Research as at 25

January 2017. Forecasts are

not a reliable indicator of future returns.

Markets have settled in a range…

Following the significant moves in equity markets after the US Presidential

election, equity markets around the world have settled in a range, looking for

direction. This is the result of a number of factors:

o Mixed political outlook in the US: Following the elections, markets first

focused on the potential for deregulation, tax cuts and higher spending.

But a renewed focus on trade restrictions, with the exit from the Trans-

Pacific Partnership Treaty already signed by Mr Trump, are causing

markets to have a more mixed view on policy. There is a risk that

restrictions to trade are easier to implement than agreements on tax cuts

or higher spending, and therefore come first.

o Oil prices drifting sideways: In recent weeks, oil prices have stalled.

Markets may now be waiting for hard figures about the degree of

compliance to the OPEC quota. In addition, reports on increased drilling

and the build-out of new pipelines in the US could raise expectations of oil

supply, and cap oil prices in the short term.

o Recent USD range trading: Following the US election, the ‘Trump

reflation trade’ and equity market strength had initially been linked to a

stronger USD. But President Trump’s reservation about a strong USD may

be a (short term) obstacle to much more USD strength and have an impact

on broader market sentiment.

o Political opacity. The lack of visibility of US policy, and the risk related to

the European elections could lead to some short term volatility. Relatively

low return expectations for equity market (with consensus forecasts in the

mid-single digits for the S&P 500) are leading to anaemic equity fund

flows.

… But we still expect constructive risk appetite in H1

In spite of the factors that are currently contributing to range trading, we

continue to believe in a year of two halves, with support for USD and

equity markets in H1, followed by more mixed stock markets in H2, lower

bond yields and higher gold prices.

We thus continue to be positioned with a selective ‘risk-on’ view, for the

following reasons:

1. The economic cycle is improving. Although global economic growth will

still be below the historical average (2.5% vs 2.8%), every little helps. US

growth should be boosted by higher private sector investment (mainly in

energy). With the exception of some data in Japan and the Eurozone

periphery, economic surprise indices, leading indicators, PMIs and

business sentiment are improving somewhat across the world. This

positive cyclical signal should be constructive for markets.

Economic data has been more positive than expected lately

Source: Surprise indices from Bloomberg, HSBC Private Bank as at 23 January 2017.

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EM Latam

EM EMEA

EM Asia

Pacific ex Japan

Japan

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Europe ex UK

North America

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2. US economic policies are more likely to be positive than negative.

The pendulum of the markets’ focus may swing from the (negative) trade

policies to the positives, including deregulation, tax cuts, infrastructure

investment and President Trump’s business focus.

o Overall, though, we believe that we can manage the potential

negative impact of trade policies through a domestic focus and a

focus on small and midcap stocks.

o We take advantage of opportunities created by the lower

regulation we expect to see in US financials, including market

expectations of a review of Dodd-Frank and a potential reduction

in inheritance tax. We also believe that cyclical improvement and

the prospect of two Fed rate hikes should offset the risk of a

flattening yield curve in H2.

o In healthcare, where we expect to see more regulation or a focus

on drug prices. Therefore, we are more selective.

3. The outlook for US interest rate hikes remains muted. We expect to

see just two rate hikes in 2017, and this is also what is priced into markets.

The slow pace of rate hikes should not be a major challenge for markets,

as it is largely offset by continued liquidity injections in Europe and Japan.

Moreover, it should avert large swings in USD, which should in turn avert

major challenges to EM flows.

o We maintain our view that 10-year US Treasury yields will move

towards 1.35% from the current 2.43%, with most of the move

occurring towards the end of the year. Slow rate hikes, still low

inflation, only mild upside to oil prices, global liquidity and

limitations to the ability of President Trump achieve his campaign

promises on spending, all indicate that the market is now too

negative on US Treasuries.

Has the market become too negative on 10-year US Treasuries? Speculative

positions are particularly short on the 10-year contracts, much less so on the other

contracts

Source: US Commodity Futures Trading Commission (CFTC), HSBC Private Bank as at 23 January 2017.

o In the context of lower yields, a continued search for yield,

somewhat higher oil prices and rating agencies’ expectations of

lower default rates, we continue to have a positive view on US

high yield. Importantly for investors, we think that high yield

should perform well, even if yields go up somewhat before they

come down: due to their relatively low duration and pro-cyclical

characteristics, HY is typically much less vulnerable to yield

volatility than investment grade,

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Diversification is prudent

Hedge funds can play two important roles, in our view.

o 2017 is likely to witness a fair amount of volatility, which hedge funds tend

to be well placed to exploit. Hedge funds should be able to take advantage

of changing interest rate and growth prospects, and cross-market

opportunities.

o For investors worried about higher rates, we note that hedge funds’ returns

have historically shown a low correlation with bond yields.

We also use gold as a diversifier, and believe gold prices are likely to continue

to appreciate from here, to reach a high of USD 1390 / oz in 2017. In H1, we

think that gold will mainly be driven by US policy uncertainty, and the busy

European election calendar. In H2, we believe that our view of a slightly weaker

USD, and lower US bond yields, should help support gold prices.

USD tends to be boosted by hopes of reflation but hurt by fears of trade

restrictions. Gold tends to move in the opposite direction of USD.

Source: Bloomberg, HSBC Private Bank as at 23 January 2017.

A selective ‘risk-on’ stance

Our views combine into a selective ‘risk-on’ advisory portfolio:

We only hold a neutral view on equities, but we are constructive on US and

Asian stocks, with a focus on US energy, financials, domestic and small/mid

cap stocks, together with structural growth themes in Asia. We are underweight

on European stocks ahead of the European elections.

Our constructive view on emerging market hard currency debt, selective EM

Local Currency debt, USD high yield and USD investment grade can be seen

as a ‘risk-on’ view, but our constructive view on US Treasuries compensates for

that (even though our Treasury view is rate related rather than risk related).

Finally, our view to diversify through gold and hedge funds is part of a prudent

stance and our long term strategy of diversification in multi-asset portfolios.

__________________________________________________

In our view, a selective ‘risk-on’ strategy remains appropriate in

the current economic and market environment. It should help

weather the volatility we foresee, due to the lack of political

visibility. It should also allow us to achieve income and returns

in those areas that we are most comfortable with.

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Gold USD index (RHS)


Equities

From these levels, our views on equities remain more hopeful than outright

optimistic. We see the potential cyclical improvement in economic growth

from the switch to fiscal policy expansion dubbed as the ‘Trump reflation

trade’. However we also see the monetary drag from higher interest rates,

the possible squeeze on the consumer from higher oil prices, and the

numerous political events, such as Brexit, that could derail the uplift in

economic activity.

The Trump Reflation Trade has boosted equity markets, especially in the

US. Our Global Research team believes that the economic lift will be modest

this year and the next, limiting the potential uplift from fiscal expansion. On

the tax side, the reduction in personal tax rates could offset the potential rise

in energy prices forecast this year. In the corporate sector, tax reductions

and lowering the repatriation tax could provide a huge influx of cash that

could be deployed in the form of corporate buybacks, increased dividend

payments, or a further expansion of M&A activity. This, combined with

increasing protectionist rhetoric from Washington, could boost valuations for

domestically focused small and mid-cap stocks.

While we see the potential challenge of higher rates, we are only looking for

50 basis points of hikes this year. Compared to the potential rise in inflation it

could leave companies with some room for margin expansion after all.

Markets have settled in a range, waiting for more clarity from the US President

Source: Bloomberg, HSBC Private Bank as at 23 January 2017.

The busy election calendar causes us to maintain a cautious view on

European stocks. We believe that the French elections (April and May) will

continue to be the main focus. While valuations are cheaper than in the US,

the valuation gap is not much more substantial than in the past, and we

believe that this is more than appropriate given the short term risks.

Investors with a high risk appetite or a long term view, however, could see

value in some stocks in the region.

As for the UK, we think that a weaker GBP, triggered by the uncertainty

surrounding the Brexit negotiations, could support export-led stocks.

However, the weaker economic data we expect to see may hurt

domestically-focused stocks, and portfolios without currency hedges are

likely to see weak total returns.

In emerging markets, we continue to focus on countries with a large

domestic market, to weather market headlines related to trade restrictions. In

addition, we favour countries with a strong structural reform programme,

which leads us to India, Indonesia and the New economy in China. We

maintain our positive view on Russian stocks given attractive valuations, the

higher oil price we expect to see (USD 60/bbl on average for 2017) and

hopes of a better US-Russia relationship. Within Latin America, we start to

see more value in Mexico, and expect Brazil to benefit from the rise in

commodity prices and interest rate cuts. Rate cuts and higher commodity

prices should help support growth and equity market performance, in our

view.

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S&P 500 Stoxx 600 Europe MSCI EM


Fixed income

Last month, we increased the duration of our Treasury view to medium-to-long, as we believed that yields had moved up too fast, and the curve steepened too quickly. Speculative positioning had grown excessively negative, and the yield pickup of the 10-year point relative to the 5 and 30-year points seemed too high. Since then, we have seen yields back down somewhat, and the curve has flattened. Economic activity and inflation data has been mixed and in line with expectations lately, giving less direction to bond markets. Oil prices have also struggled to advance further, on doubts over the compliance of OPEC members to the agreed cuts. As a result, the markets’ view on the probability and timing of rate hikes by the Fed has also been stable in recent weeks, with two rate hikes priced in by the end of the year – in line with our expectations. For the coming months, we expect the 10-year Treasury yield (currently at 2.45%) to settle in a 2.20-2.60% range, before declining later in the year. The market currently still gives the Trump administration the benefit of the doubt regarding its ability to ‘reflate’ the economy, resulting in slightly higher breakeven inflation expectations. However, we think that in coming months, obstacles to the implementation of President Trump’s plans will become clear, and with oil prices giving little direction, and with a strong USD, we think that inflation expectations should peak soon. We continue to favour credit in general but more particularly US over EU credits, as we believe that the search for yield should continue, especially if yields stabilise, and come down again later in the year. We hold a positive view on US high yield (HY) in particular, given the attractive pickup when compared to investment grade. The lower duration of US HY should also help flows, as some investors want to limit the sensitivity to a rising yield scenario. Finally, our positive view on oil prices (Brent to average USD 60/bbl this year), and the rating agencies’ view that default rates will fall further from here, should also support US HY. Within emerging markets, we continue to prefer hard currency over local currency bonds, in general. The total return of local currency bonds for foreign investors may be negatively impacted by EM currency weakness (USD strength) that we expect to see in the coming months. In addition, we have become less hopeful on the scope for rate cuts in EM, with some notable exceptions such as India, Indonesia and Russia, where we think that rate cuts should support valuations. Within the hard currency universe, we favour Brazil, Russia, India and Indonesia.

USD HY and EM hard currency debt provide a significant yield pickup

Source: OECD leading indicators, HSBC Private Bank, Bloomberg as at 24 January 2017. Past performance is not a reliable indicator of future performance.

We are less constructive on European government bonds than on US Treasuries. We believe that the relatively resilient UK data (so far) will lead the Bank of England to halt its quantitative easing (QE) programme, which should be negative for both sovereign gilts and GBP corporate bonds. In Europe, the already announced reduction of the QE pace may lead sovereign bond yields slightly higher, while market nervousness ahead of the busy European election calendar may lead to widening of peripheral spreads.

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10-year Treasury USD IG USD HY

EM Hard Currency EM Local Currency


Currencies and commodities

The dollar continues to be the main driver of FX market movements. We

believe in a year of two halves, with mild USD strength in the first couple of

months of 2017, to be followed by USD weakness in the second half.

Conversely, this should first lead to mild weakness for most other currencies,

with a potential recovery for JPY, EUR and EM currencies later in the year.

We believe that the market’s generally hopeful view on the Trump

administration’s ability to reflate the US economy through tax cuts and

increased spending, together with the possibility of repatriation of foreign

profits, will lead to USD support in the short term, in spite of Mr Trump’s

comments that too much USD strength is not desirable (source: Wall Street

Journal). Resilient US data and comments by the Fed that foreign risks may

have declined somewhat, may also support USD, even though the two

interest rate hikes this year that we expect to see are already priced in the

market. The upside for USD may thus be mild (an estimated 3-5% against

most currencies), but it should be relatively broad-based, in our view. The

mild downside we expect in the second half of the year is related to our view

on Treasury yields, which we expect to come down later in the year, and our

belief that not all the tax initiatives may easily pass through Congress, given

the already high debt load in the US.

We believe USD strength and resilient risk appetite will bring USD/JPY to 125

in the first half, with JPY recovering later to 115 at year end. For EUR, we

see most of the weakness materialising upfront, especially ahead of the

elections in the Netherlands, France, Italy and Germany. This may bring EUR

to a low of 1.01 in coming months, but allow EUR to recover to 1.10 if the

threat of Eurosceptic parties winning power is averted.

GBP is likely to continue on its weakening path, and we expect to see

GBP/USD trading at 1.10 by year end, and GBP/EUR to be at 1.00 (parity).

The movements of GBP are largely related to the market’s perception of the

direction of the Brexit negotiations, and we believe that ahead of the elections

in several European states, the tone will remain tough, which may negatively

affect market sentiment.

In our view, mild weakness for CNY may continue throughout the year, and

we forecast 7.20 USD/CNY for year end. The Chinese government does not

desire significant weakness, and with CNY managed against a broad

currency basket, CNY movements should reflect the mild currency

movements we expect to see elsewhere. We see continued pressure on

MXN, given the vulnerability to headlines related to the US / Mexico trade

links. Within Latin America, investment flows may be directed to Brazil

instead, helping BRL. We also believe that TRY remains vulnerable to

political headlines and low investor confidence in the short term.

Gold should continue to progress in our view. In the short term, the concern

over potential trade restrictions initiated by the new US administration, as well

as the European election uncertainties should lift gold prices. In H2, we

believe the weakening USD and lower bond yields should provide support.

USD may continue to strengthen in the initial months of the Trump

administration

Source: Bloomberg, HSBC Private Bank, Bloomberg as at 23 January 2017. Past performance is not a reliable indicator of future performance.

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Hedge funds

In 2016, hedge fund returns were technically driven and macro led causing a

period of underperformance in Q1. For the remainder of the year returns

normalised as managers generally de-risked prior to, and then successfully

navigated Brexit and the US Presidential elections.

Looking forward into 2017, we note that the evolving political and economic

environment will have different effects on economic areas, industries, and

businesses. There is likely to be more dispersion in equities and macro, in all

likelihood less interest rate related multiple expansion, potentially more growth,

and in the US reduced regulatory pressure and possibly a significant overhaul of

the corporate tax regime. The above should lead to a new and diverse opportunity

set for relative stock and currency selection, and trading across and along

different interest rate and credit curves. We believe that the opportunity set for

Hedge Funds on the whole has thus improved, and we upgrade macro as well as

distressed opportunities.

Given elevated valuation levels across asset classes, we continue to have a

favourable outlook regarding relative value strategies, particularly through a multi-

strategy construct, which remains our favourite strategy. After concerns about

position crowding earlier in 2016 pairwise correlations, particularly impacting non-

directional equity strategies, have fallen to more manageable levels.

The Trump Presidential election victory caused a sea-change in the opportunity

set for discretionary macro trading. Macro managers expect an increase in trading

opportunities across fixed income, currency and equity markets following Donald

Trump’s victory in the US election. In Europe, managers generally share the view

that the failure of the Italian referendum and uncertainty around upcoming

elections will keep the euro under pressure, giving rise to further trading

opportunities.

Negative Neutral/ Negative Neutral

Neutral/ Positive Positive

Credit long/short

Volatility arbitrage Equity Market neutral

Multi-strategy

Managed futures Equity long/short

Distressed Fixed income arbitrage

Event driven

Macro

As for event driven strategies, the backdrop of improving economic growth still

requires companies to continue to find ways of boosting earnings. Spreads are

attractive for most long duration or complex M&A deals and crowdedness across

event-oriented positions is currently lower than during some previous periods. We

favour multi-strategy event managers especially those who have a flexible

approach to managing net exposure and who have demonstrated a proven track

record in a variety of event driven disciplines.

Within distressed, redeployment of risk remains high and as a result many

managers have relatively high cash balances to more aggressively redeploy dry-

powder. Liquidity remains transitory and being able to act as a liquidity provider in

times of market stress remains a favourable long-term strategy, while

opportunities in stressed balance sheets continue to develop.

We remain somewhat less positive on credit long short strategies, however. The

2016 rally in credit has reduced the opportunity set, and the increasingly hawkish

tone from the Fed, and expected tapering from the ECB could lead to higher

volatility and lower trading liquidity.

9

What?

Change Rationale

Fixed Income

US Sovereign (nominal)

We think that the US 10-year treasury yield will decline to 1.35% towards the year end, from the current elevated levels. This is because of the high debt overhang in DM, demand for US treasuries in the wake of a stronger USD, aging demographics and higher political uncertainty in Europe due to Brexit and European elections. All these factors are likely to keep the demand for US 10-year treasuries high, pushing the yields lower. Hence, we upgrade our view on US sovereign (nominal) from neutral to neutral positive.

US High Yield (HY)

An uptick in oil prices following the OPEC’s agreement to cap oil production, and commodity prices in general, in line with president Trump’s proposed spending on infrastructure have improved the fundamentals for US HY companies and reduced their probability of default, while providing an attractive opportunity of yield pickup. Therefore, we upgrade our view on US HY debt from neutral with a positive bias to positive.

EUR Sovereign (nominal bonds)

Increased political risks, and a rise in inflation expectations given the increased CPI numbers in recent months may lead to a rise in nominal European sovereign yields. Therefore, we downgrade EUR Sovereign nominal bonds from neutral to neutral with a negative bias.

European Periphery bonds

Greater political risks and higher inflation expectations could lead to higher yields on the European periphery sovereign bonds. Accordingly, we downgrade them to neutral with a negative bias from neutral.

European HY bonds

We downgraded our view on European HY bonds given increased risks (political, economic and business risks) which may prove to be a headwind for European HY companies, and their valuations. Therefore, we change our view from neutral with a positive bias to neutral.

Argentina Corporate Hard Currency (HC)

Since their return on the global markets last year, Argentinian corporates have lower funding needs and better track record than the sovereign. It is a niche market but could represent good buying opportunities for risk seeking clients. Therefore, we upgrade our view from neutral with a negative bias to neutral.

Turkish Corporate HC debt Given political uncertainty and weak growth outlook, we think it is optimal to trim exposure to Turkish corporate HC debt, especially in the weakest financials. The constitutional referendum is negative for the country’s outlook, in our view. As a result, we downgrade of Turkish corporates hard currency from neutral to neutral with a negative bias.

Equities

Mexico We think that low equity valuations and a weak currency should help Mexican equities. Therefore, we upgrade our view from negative to neutral.

Turkey Turkey is a highly levered EM country. Its growth forecasts remain low and it is fundamentally hard to see a clear turning point. Also, a stronger dollar will put pressure on Turkey, in our view. Therefore, we downgrade Turkish equities from neutral to negative.

Currencies

CAD (12 months) Canadian dollar faces the uncertainty of future US trade policy, and the still lingering possibility of an interest rate cut by the Bank of Canada. Domestically the economy remains vulnerable. We expect 1.40 USD/ CAD by the end of the year. Therefore, we downgrade our short term view from neutral to neutral with a negative bias.

JPY (3 months) JPY has become the cleanest way to express a USD view, basically acting as a mirror image to USD sentiment. We expect this pattern to continue in 2017 which suggests USD-JPY rise to 125 by the end of Q2 on Trump-flation expectations before falling back to 115 by year-end as the USD euphoria fades. Given our cautious stance, we downgrade our short term view on JPY from neutral to neutral with a negative bias.

Emerging Market currencies (3 months)

We think that during this ‘Trump-flation’ period, in the first half of 2017, EM FX will inevitably come under pressure, and liquid EM currencies most exposed to capital outflows will likely underperform. Later in 2017, we expect USD to soften and EM FX to recover. Therefore, we downgrade our short term view from neutral to neutral with a negative bias.

BRL (12 months) Our colleagues in Global Research expect BRL to appreciate in the long run, given improving fundamentals and also in line with our view that USD would weaken in H2 2017 (flipside of which would be currency strength in most EM FX) reversing the bulk of their anticipated first half weakness. Accordingly, they have enhanced their year-end-forecast for BRL versus the current spot price. Therefore, we upgrade our view from neutral with a negative bias to neutral.

ZAR (12 months) Similar to BRL, we expect ZAR to reverse its recent weakness in H2 2017 on the back of expected USD weakness in H2. Therefore, we upgrade our view from neutral with a negative bias to neutral.

TRY (12 months)

Turkish economic growth slowed down sharply in H2 2016 and there is no reason to think that growth will be more robust in 2017, in our view. A wider current account deficit, weaker foreign appetite, uncertain monetary policy and political uncertainties all give cause for some caution. We thus downgrade TRY to neutral with a negative bias.

Guide to Symbols View upgraded =/+ Neutral view with a positive bias + Positive view = Neutral view View downgraded =/- Neutral view with a negative bias - Negative view

View changes this month

10

Asset class detail

Equities Foreign Exchange Commodities

Regions View 3m 6-12m 3m 6-12m

US + USD =/+ = Gold =/+ =/+

Europe ex UK - CAD =/- Oil =/+ =/+

UK = EUR =/- = Agricultural = =/+

Japan = GBP - - Industrial metals =/+ =/+

Dev. Pacific ex Japan = CHF =

Emerging Markets =/+ NOK =/+

Canada = SEK =

JPY =/- =

AUD = =

NZD =

SGD = =

Emerging Markets =/- =

Fixed Income**

Overall View Detail View Maturity Detail View Maturity

Sovereign =

USD

Sovereign =/+ Medium to Long JPY

Sovereign = Short to Medium

Corp. Inv. Grade = Sov. I-L = Medium Corp. IG = Short to Medium

High Yield =/+ Corp. IG =/+ Medium to Long AUD

Sovereign =/+ Medium

Emerging Markets =/+ High Yield* + Short to Medium Corp. IG =/+ Medium

EUR1

Sovereign =/- Medium NZD

Sovereign =/+ Medium

Periphery =/- Medium Corp. IG = Short to Medium

Sov. I-L = Medium CAD

Sovereign = Short to Medium

Corp. IG =/- Medium Corp. IG = Short to Medium

High Yield* = Short to Medium

GBP

Sovereign =/- Medium

EM

Sov. (local) = Medium

Sov. I-L = Medium Sov. (USD) =/+ Short to Medium

Corp. IG = Medium Corp. (local) = Medium

High Yield* =/- Short to Medium Corp. (USD) =/+ Short to Medium

* Note: in high yield, the neutral sign denotes a positive view on BB and B ratings. We avoid CCC names.

Emerging Markets

Equities View

Foreign Exchange View

Fixed Income (sov) Local

currency

Foreign currency

Sov Corp

China =/+ China =/- China = =

India + India = India =/+ =

South Korea - South Korea = South Korea = =

Philippines = Thailand = Brazil =/+ =/+ =/+

Taiwan = Indonesia = Argentina = =

Indonesia + Philippines = Mexico =/- =/- =

Hong Kong = Russia = Russia =/+ =/+ =/+

Singapore - Turkey =/- Hungary =/- =

Malaysia - Poland =/- Turkey =/- =/- =/-

Turkey - Hungary = South Africa =/- =/-

South Africa

UAE

Brazil

Mexico

Russia

=/-

=/+

=

=

=/+

Brazil

Mexico

South Africa

=

=/-

=

Dubai

GCC

Indonesia

= =

=/- =

=/+ =/+

N.B. Red indicates a change from last month. Please see the Guide to Symbols on page 8

** Overall views give the global fixed income perspective and the Detail provides a view within each currency. 1 EUR sovereign bond view is representative of German Bunds

3m = 3 months; 6-12m = 6-12 months; IG = investment grade; I-L = index-linked or inflation linked bonds

All data sources: Bloomberg, HSBC Private Bank as at 25 January 2017

11

Asset class performance as at 24 January 2017

Total Returns

Fixed Income Year to date 2016 2015 2014 2013 2012

US Treasuries 0.8% 1.1% 0.8% 6.0% -3.3% 2.2%

UK gilts -0.9% 10.1% 0.6% 13.8% -4.0% 2.6%

German Govt -0.5% 4.1% 0.3% 10.4% -2.3% 4.5%

Japan Govt -0.1% 3.3% 1.2% 4.5% 2.1% 1.8%

Global Tips 0.2% 10.2% -0.5% 9.7% -4.5% 7.5%

Global Corporate IG 0.6% 5.7% -0.2% 7.8% 0.1% 10.8%

Global High Yield 1.2% 15.9% -2.1% 2.5% 7.1% 18.8%

EM local currency 0.1% 2.9% 1.3% 8.5% -0.4% 4.1%

EM hard currency 2.1% 9.6% 1.8% 6.2% -8.3% 18.0%

Equity Year to date 2016 2015 2014 2013 2012

North America 1.5% 12.1% 0.8% 13.2% 31.0% 15.3%

Dev. Europe ex UK 0.4% 3.2% 9.1% 7.4% 24.2% 20.0%

UK 1.1% 19.2% -2.2% 0.5% 18.5% 10.2%

Japan -0.6% -0.4% 10.3% 9.8% 54.8% 21.8%

Dev. Pacific ex Japan 2.3% 8.5% -0.8% 5.8% 16.5% 22.6%

Australia 0.7% 12.2% 1.5% 5.8% 21.1% 20.8%

New Zealand 3.2% 17.1% 8.1% 13.9% 12.5% 23.3%

Hong Kong 5.2% 2.3% -0.6% 5.1% 11.1% 28.0%

Singapore 4.3% 3.3% -12.0% 8.1% 5.1% 23.5%

Emerging market 3.0% 10.1% -5.4% 5.6% 3.8% 17.4%

Brazil 6.7% 37.2% -12.5% -2.8% -3.0% 10.1%

Russia -2.5% 35.1% 22.9% -12.1% 7.5% 9.7%

India 2.7% 1.1% -1.6% 26.4% 8.6% 30.0%

China 4.6% 1.2% -7.7% 8.3% 4.0% 22.9%

South-Africa 2.9% 4.5% 0.3% 16.7% 16.3% 25.1%

Alternatives Year to date 2016 2015 2014 2013 2012

Real Estate -0.8% 9.6% 12.8% 40.5% -1.8% 21.0%

Hedge Funds 0.3% 0.7% -0.3% 3.4% 9.0% 4.8%

Gold 5.0% 9.0% -10.4% -1.8% -27.3% 5.6%

Wti Crude Oil -2.4% 44.8% -30.5% -45.8% 7.3% -7.1%

Private Equity NA 0.9% 5.1% 11.1% 20.8% 14.0%

Source: Datastream. Past performance is not a reliable indicator of future performance. (*) denotes a price return rather than a total return. Bank of America and JP Morgan bond indices, MSCI equity indices, FTSE EPRA NAREIT indices, US Private Equity Cambridge Associates and HFRI Funds of Funds Composite indices. Hedge fund index as at 31 January 2017; Private equity as at June 2016.


Glossary of terms

Absolute return – The nominal return

on an investment irrespective of

any given specific benchmark.

Alternative investments – Non-

traditional investments with low

correlations to traditional assets which are

typically used to improve portfolio

diversification.

Annualised return – The yearly increase

(or decrease) in the value of an

investment, including the effects of

compounding.

Annualised volatility – The estimated

spread of returns of an asset on an annual

basis. Volatility is usually used as a

measure of risk, as a highly volatile asset

may offer large negative as well as large

positive returns.

Asset allocation – The apportioning of

investment assets between different asset

classes such as equities, fixed income,

liquid assets (cash), real estate, etc.

Asset class – Assets are aggregated into

groups that share similar characteristics.

Asset classes include

‘Equity,’ ‘Fixed income,’ ‘Liquid assets,’

‘Real Estate’ and ‘Commodities’.

Benchmark – A single or a weighted

collection of indices used as a reference

or comparison of investment performance.

Credit risk – The risk of loss to your

investment arising from a counterparty

(e.g. a bond issuer or a bank) which does

not,

or cannot, make the required payments

as promised or agreed on in a contract.

Cumulative return – Actual (non-annualised) performance over a given period of time.

Derivatives – Instruments such as

futures, options and swaps that derive

their value from the movement in

the price of an underlying asset.

Diversification – The process of

spreading a portfolio’s holdings over a

range of securities and asset classes with

the aim of reducing volatility.

Duration – The weighted average

maturity of a bond’s cash flows or of any

series of linked cash flows.

Expected return – The weighted average

of a probability distribution of possible rates

of return.

Fund of funds – A fund whose purpose is

to invest in other funds. Applicable to all

asset classes.

Hedge – A transaction made with the intent

of reducing investment risk, for example

using options or forwards.

Hedge fund – An unregulated fund which is

allowed to use strategies that are

unavailable to the majority of unit and

investment trusts. Hedge funds can be

exempt from many of the rules and

regulations governing traditional funds.

Usually considered as an ‘Alternative’ asset

class.

High yield – Corporate bonds that are

rated below investment grade (defined as

BB and below).

Hold – Maintain a current level of investment in a particular asset class, market, sector, security, or investment vehicle.

Illiquid asset – An investment that

cannot be realised at short notice.

Inflation – Rising prices of individual

or a basket of goods and services.

Long duration – A fixed income security

that has a modified duration that is longer

than 7 years.

Long term – An investment time horizon of

five years or greater.

Market capitalisation – Refers to the total

value of a company or stock exchange.

Usually calculated by multiplying the

number of shares outstanding for a

company or a stock exchange by the value

of a single share.

Market risk – The risk that the value of

your investment can fall as well as rise by

taking exposure to a particular market.

Market risk cannot be diversified away from

by increasing holdings of similar securities.

Medium duration – A fixed income security

that has a modified duration between 3 and 7

years.

Medium term – An investment time horizon of

between three and five years.

Neutral – A portfolio position that is the

same as the benchmark would suggest.

Overweight – A portfolio position that is

higher than the benchmark would suggest.

Private equity – Securities of unlisted

companies which are generally illiquid and are

therefore held for longer periods of time than

more traditional securities.

Relative return – The return that

an asset achieves over a period of time

compared to a benchmark.

Short duration – A fixed income security that

has a modified duration between one and three

years.

Short term – An investment time horizon of

between one and three years, or a tactical view

of less than six months.

Strategic asset allocation – The proportional

mix of asset classes which should meet

an investor’s risk and return objectives over a

seven to ten year time horizon.

Tactical asset allocation – An active

management strategy that deviates from the

long-term strategic asset allocation in order to

take advantage of current market views.

Total return – A measure of the return over a

stated period that incorporates both the return

from price appreciation and investment income,

such as coupons and dividends.

Traditional investments – Equities, bonds,

and cash.

Underweight – A portfolio position that is

lower than the benchmark would suggest.

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Risk Disclosures Some of the products are only available to professional investors as defined under the Securities and Futures Ordinance in Hong Kong / accredited

investor(s) or other relevant person(s) as defined under the Securities and Futures Act in Singapore. Please contact your Relationship Manager for

more details.

Risks of investment in fixed income

There are several key issues that one should consider before making an investment into fixed income. The risk specific to this type of investment may

include, but are not limited to:

Credit risk

Investor is subject to the credit risk of the issuer. Investor is also subject to the credit risk of the government and/or the appointed trustee for debts that

are guaranteed by the government.

Risks associated with high yield fixed income instruments

High yield fixed income instruments are typically rated below investment grade or are unrated and as such are often subject to a higher risk of issuer

default. The net asset value of a high-yield bond fund may decline or be negatively affected if there is a default of any of the high yield bonds that it

invests in or if interest rates change. The special features and risks of high-yield bond funds may also include the following:

Capital growth risk - some high-yield bond funds may have fees and/ or dividends paid out of capital. As a result, the capital that the fund has

available for investment in the future and capital growth may be reduced; and Dividend distributions - some high-yield bond funds may not distribute dividends, but instead reinvest the dividends into the fund or alternatively,

the investment manager may have discretion on whether or not to make any distribution out of income and/ or capital of the fund. Also, a high

distribution yield does not imply a positive or high return on the total investment. Vulnerability to economic cycles - during economic downturns such instruments may typically fall more in value than investment grade bonds as

(i) investors become more risk averse and (ii) default risk rises.

Risks associated with subordinated debentures, perpetual debentures, and contingent convertible or bail-in debentures

Subordinated debentures - subordinated debentures will bear higher risks than holders of senior debentures of the issuer due to a lower priority of

claim in the event of the issuer’s liquidation. Perpetual debentures - perpetual debentures often are callable, do not have maturity dates and are subordinated. Investors may incur

reinvestment and subordination risks. Investors may lose all their invested principal in certain circumstances. Interest payments may be variable,

deferred or canceled. Investors may face uncertainties over when and how much they can receive such payments. Contingent convertible or bail-in debentures - Contingent convertible and bail-in debentures are hybrid debt-equity instruments that may be

written off or converted to common stock on the occurrence of a trigger event. Contingent convertible debentures refer to debentures that contain

a clause requiring them to be written off or converted to common stock on the occurrence of a trigger event. These debentures generally absorb

losses while the issuer remains a going concern (i.e. in advance of the point of non-viability). “Bail-in” generally refers to (a) contractual

mechanisms (i.e. contractual bail-in) under which debentures contain a clause requiring them to be written off or converted to common stock on

the occurrence of a trigger event, or (b) statutory mechanisms (i.e. statutory bail-in) whereby a national resolution authority writes down or

converts debentures under specified conditions to common stock. Bail-in debentures generally absorb losses at the point of non-viability. These

features can introduce notable risks to investors who may lose all their invested principal.

Changes in legislation and/or regulation

Changes in legislation and/or regulation could affect the performance, prices and mark-to-market valuation on the investment.

Nationalization risk

The uncertainty as to the coupons and principal will be paid on schedule and/or that the risk on the ranking of the bond seniority would be

compromised following nationalization.

Reinvestment risk

A decline in interest rate would affect investors as coupons received and any return of principal may be reinvested at a lower rate.

Changes in interest rate, volatility, credit spread, rating agencies actions, liquidity and market conditions may significantly affect the prices and mark-

to-market valuation.

Risk disclosure on Dim Sum Bonds

Although sovereign bonds may be guaranteed by the China Central Government, investors should note that unless otherwise specified, other renminbi

bonds will not be guaranteed by the China Central Government.

Renminbi bonds are settled in renminbi, changes in exchange rates may have an adverse effect on the value of that investment. You may not get back

the same amount of Hong Kong Dollars upon maturity of the bond.

There may not be active secondary market available even if a renminbi bond is listed. Therefore, you need to face a certain degree of liquidity risk.

Renminbi is subject to foreign exchange control. Renminbi is not freely convertible in Hong Kong. Should the China Central Government tighten the

control, the liquidity of renminbi or even renminbi bonds in Hong Kong will be affected and you may be exposed to higher liquidity risks. Investors

should be prepared that you may need to hold a renminbi bond until maturity.




Risk Disclosure on CoCo Bonds

This instrument is highly complex in nature. Do not invest in it unless you fully understand and are willing to assume the risks associated with it. If

you are in doubt about the risks involved in the product, you may clarify with the intermediary or seek independent professional advice.

Strong/prior experience in investing similar instruments and good understanding on the underlying mechanism of CoCo is required. In the worst case scenario, you may lose all of your invested principal in the event of (1) permanent principal write-down, (2) the equity value

drops to zero after auto-conversion and/or (3) default, insolvency and/or bankruptcy of the relevant issuer (as the case may be), coupon payment

is at the discretion of the issuer and subject to the approval of the regulator and can therefore be variable, deferred or cancelled. Each CoCo instrument is unique and can differ from the main outlines listed here as well as in sections 2 and 3 below. Specific country

requirements may apply. Please read the risk factors and consider all the terms and conditions governing the relevant investment(s) including

without limitation the Prospectus for each CoCo you invest in. Extremely limited liquidity can occur under adverse market conditions as evidenced from what had happened on almost all of the banks’

subordinated debt instruments in the last financial crisis in 2008. This CoCo is a perpetual debenture. It may be callable, not have a maturity date and subordinated. You may incur reinvestment and

subordination risks, on top of the worst case scenario risks listed above.

Risk disclosure on Emerging Markets

Investment in emerging markets may involve certain, additional risks which may not be typically associated with investing in more established

economies and/or securities markets. Such risks include (a) the risk of nationalization or expropriation of assets; (b) economic and political uncertainty;

(c) less liquidity in so far of securities markets; (d) fluctuations in currency exchange rate; (c) higher rates of inflation; (f) less oversight by a regulator of

local securities market; (g) longer settlement periods in so far as securities transactions and (h) less stringent laws in so far the duties of company

officers and protection of Investors.

Risk disclosure on FX Margin

The price fluctuation of FX could be substantial under certain market conditions and/or occurrence of certain events, news or developments and this

could pose significant risk to the Customer. Leveraged FX trading carry a high degree of risk and the Customer may suffer losses exceeding their

initial margin funds. Market conditions may make it impossible to square/close-out FX contracts/options. Customers could face substantial margin

calls and therefore liquidity problems if the relevant price of the currency goes against them.

Currency risk – where product relates to other currencies

When an investment is denominated in a currency other than your local or reporting currency, changes in exchange rates may have a negative effect

on your investment.

Chinese Yuan (“CNY”) risks

There is a liquidity risk associated with CNY products, especially if such investments do not have an active secondary market and their prices have

large bid/offer spreads.

CNY is currently not freely convertible and conversion of CNY through banks in Hong Kong and Singapore is subject to certain restrictions. CNY

products are denominated and settled in CNY deliverable in Hong Kong and Singapore, which represents a market which is different from that of CNY

deliverable in Mainland China.

There is a possibility of not receiving the full amount in CNY upon settlement, if the Bank is not able to obtain sufficient amount of CNY in a timely

manner due to the exchange controls and restrictions applicable to the currency.

Illiquid markets/products

In the case of investments for which there is no recognised market, it may be difficult for investors to sell their investments or to obtain reliable

information about their value or the extent of the risk to which they are exposed.

©Copyright HSBC Private Bank (UK) Limited 2015 ©Copyright HSBC Private Bank (Monaco) SA 2015

ALL RIGHTS RESERVED

GPB/013/01/2017


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