Global Investment Perspective

8/2/2019 Global Investment Perspective

http://slidepdf.com/reader/full/global-investment-perspective 1/12

Highlights

• 2011provedanextremelyvolatileyear,

largelyduetoongoinguncertainty

surroundingtheeurozonesovereigndebt

situation.

• Growthhasslowedthroughouttheyear,

withtheInternationalMonetaryFund(IMF)

cuttingits2011GrossDomesticProduct

(GDP)economicgrowthforecastforWestern

economiesfrom2.5%to1.6%.

• Developedeconomies–withtheUSa

major exception–areengagedinausterity

measures,whiletheemergingworldis

lookingtodampenitsmuchstrongergrowth

tostaveoffanythreatofination.

• Anyimprovementnextyearrestslargelyon

theeurozonendinganappropriatesolution

toitsproblems.

• Againstthisbackground,manyinvestorshave

edtowhattheysawassafehavens,forcing

goldpricestorecordhighsandgovernment

bondyieldstogenerationallows.

• Short-termismisrifeinsuchvolatilemarkets,

creatingopportunitiesinsomeassetclasses

forinvestorswhocantakealonger-termview.

• Equitiescurrentlylooktoofferthebestvalue,

withmanycorporatesinsolidnancialshape

afterapplyingtheirownausteritymeasures

amidthecreditcrunch.Strongbalancesheets

areallowingongoingdividendgrowth.

• Sharevaluationsremainlow,reecting

themutedeconomicoutlookinthe

West.Thisignorestwokeyfactors:

thatmanyWesterncompanieshave

growingEasternearningsexposure,and

thatemergingmarketequitieshavethe

potentialtobenetfromtheemerging

markets’strongermacrooutlook.

• CoreWesterngovernmentbonds

representpoorvalue,withshort-term

safehaveninvestingforcingyields

down.Insomeinstancesthisassetclass

currentlyofferstheprospectofnegative

realreturns(returnsafteradjustingfor

ination).

• Acombinationofmorepersistentlonger-

terminationandtheindustrialization

ofemergingmarketsfavorsphysical

assetslikerealestateandcommodities.

Apositivesupplyanddemandpictureis

alsosupportiveforthelatter.

• Goldhasprovenpopularasasafehaven,

butwithnoyield,thepreciousmetalis

challengingtovalueandislikelytosuffer

wheninvestorswanttomoveintomore

risk-orientedassetsagain.

Marketslookedintotheabyssonceagainin2011Havingstartedtheyearrobustlyenough,theoutlookdeterioratedsharplyastheyearprogressed,

withinvestorsfacingtheprospectofrecession(andsomewouldarguedepression)andeven

questioningthefutureofthenancialsystem.Faultlineswereevidentearlyon,withcivilunrest

intheMiddleEastspreadingtoLibyaandresultinginoilpricesrisingtoatwo-and-a-half-yearhigh.

Japanthensufferedahugeearthquake,tsunamiandnuclearincidentinMarch,causingsupplychain

issuesformuchoftheyear.

Therealtestforinvestornervescameoverthesummer.FearscenteredonEurope,withmanynations

sufferingfromhighsovereigndebttoGDPlevels,budgetdecitsandlowgrowth.Whilethisfocused

onperipheralEuropeuntiltheautumn,signsofcontagionspreadtolargernationssuchasItalyand

Spainasbondyieldsrosethrough7%and6%,respectively.Thisinturnputpressureonthebanking

INTHISISSUE

1 Highlights

1 Market Review

3 Outlook for 2012

4 The shift to short-

termism

5 The case for equities

7 Commodities and

global real estate

8 The case against

government bonds

9 Our outlook for the

asset classes

December 2

Outlookfor2012Lookingpasttheabyss



2

sector,asignicantholderofsovereigndebt,andconcernsresurfaced

thatmanyinEuropewouldneedtorecapitalizeoracceleratedeleveraging

(loweringdebtlevels).Furthermore,asbankfundingcostsrose,their

abilitytonancethemselveswasrestricted,preventingthemfrom

supplyingcredittotherealeconomy.Anotherchallengefacedbymarkets

wasoneofslowingeconomicgrowth.Globalgrowthhadbeenrecovering

steadilysincetheendoftherecessioncausedbythe2008nancialcrisis

(albeitratherunevenly,withmutedgrowthindevelopedregionsandmuchstrongerguresinemergingmarkets).

Movingthrough2011,however,thisgrowthstartedtofallrapidly.In

January,theIMFforecast2011GDPgrowthinadvancedeconomies

of2.5%andthenrevisedthisdownto1.6%bySeptember.Emerging

economiescontinuedtobenetfromstructuralgrowthdrivers,butthey

werenotcompletelyimmunefromtheslowdowninthedevelopedworld

andhadtoraiseinterestratesintheirbattleagainstination.Asaresult,

theIMFcutits2011growthforecastfrom6.5%to6.4%.Allinall,the

combinationofslowingeconomicgrowthandfearsthattheeuroandeven

theEuropeanUnionmayceasetoexistintheircurrentformssawinvestors

eeriskierinvestmentcategoriessuchasequitiesandcommodities.They

lookedforsolaceintraditionallydefensiveareassuchas‘safehaven’

governmentbondsandgold.Unusuallyhighlevelsofvolatilityinthevalue

ofdifferenttypesofinvestmentswasevidentformuchoftheyear.



Centraltoanyoutlookfor2012isthatEuropeanauthoritiesdelivera

comprehensivesolutiontotheongoingeurozonesovereigndebtcrisis.

Ofcialshavebeenapplyingaband-aidapproachtotheirproblems:

ratherthantacklingthingsearly,politicianshaveonlyactedwhen

facedwithseveremarketpressure,andonlythendeliveringjust

enoughtostemthetide.Thisonlyservedtohighlightthefundamental

inadequaciesoftheeurozone’sstructures.Suchatoolittle,toolate

approachisrarelyananswertomarketproblems–investorsinvariably

moveontothenextproblem,andoften,whatstartedasasmallissue

quicklyescalatesintosomethingfarmoreserious.Thesituationin

Europeoverthesummerservesasanexample.Almostfromdayone,

investorsdeemedthepackagetobailoutGreeceasinadequate.

Theyquicklymovedontosystematicallyattackthefarmoreimportant

SpanishandItaliangovernmentbondmarkets,forcingyieldsupto

unprecedentedlevels,(asshownintherstchartbelow).

Globaleconomicgrowthislikelytoremainunderpressure,asshowninthesecondchart.Thisispartlyduetomanydevelopedeconomiesinstigating

austeritypackagesandemergingmarketssteppingonthebrakestoslow

agrowinginationthreat,butEuropeisclearlycompoundingtheproblem.

DespitemanyEuropeancompaniesbeinginrelativelyrobustnancial

positions,theyhavesimplystoppedinvesting,preferringtowaituntil

condenceincreasesbeforespendingtheircash.

Inthefaceofsuchuncertainty,howcaninvestorspositionaportfolioand

evencontinuetoholdmoreriskyassetclasses?Perhapsthebestanswert

thisisencapsulatedbyWarrenBuffett,whosaid,“befearfulwhenothers

aregreedyandgreedywhenothersarefearful.”

The cost of government borrowing increased significantly for Italy and Spain

Source: Reuters from 30 September 2010 to 29 November 2011

0%

1%

2%

3%

4%

5%

6%

7%

8%

Sep-10 Oct-10 Dec-10 Jan-11 Mar-11 May-11 Jun-11 Aug-11 Oct-11 Nov-11

Italy Spain Germany

The growth outlook for developed markets has deteriorated

Source: International Monetary Fund (IMF), as at September 2011

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

January 2011 forecas t Current forecast January 2011 forecas t Current forecas t

20122011

% g

r o w t h

1 0 - y e a r g o v e r n m e n t b o n d y i e l d

Outlook for 2012



4

0

1

2

3

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5

6

7

8

1945 1952 1959 1966 1973 1980 1987 1994 2001 2008

US institutional investors have become more focused on the short term

Source: Based on Morningstar and NYSE data, Goldman Sachs Research estimates, f rom 1945 to 2008

H o l d

i n g

p e r i o d s

i n

y e a r s

Underlyingthesewords,however,issomethingfarmorefundamental.

Inshort,marketshavegonefrombeingdominatedbyinvestorswith

longer-terminvestmenthorizonstobeingdrivenbyshort-termism.Toa

largedegreethisisunderstandable.Whenvolatilityishigh,asitisnow,

investorsquicklyturnfromtargetingwealthgenerationtofocusingon

preservingit.Theprospectofseeinghard-earnedcapitalfallsharply

invalueissimplytoomuchformanyinvestorstobear.Theywould

ratheravoidriskierareasandinvestinmoreconservativeassetclasses,

evenifthelatterappearexpensiveinthelongterm.Compoundingthis

shifttoshort-terminvestingaresomedeeper,structuraltrendswithin

worldstockmarkets.Historically,pensionfundswereclassiclong-term

investors.Theyhadlong-termliabilitiesandneededtoinvestinassets

thatcouldgrowtomeetthese–importantly,short-termvolatilitywas

notamajorconcernandseenasapriceworthpayingforcapitalgrowth.

Morerecently,however,therehasbeenashiftinbehavior,with

manyfundsnownolongertargetingfutureliabilitiesbutratherfocusingon

contributions.Theneedforholdingriskassetclasseshasfallen,withbonds

doingthejobregardlessofwhetherornottheygeneratevalueinthelong

term.Weseethisasafundamentalweaknessinhowindividualsfundtheir

retirement.Further,regulationissuchthatmanyfundshavebeenrequired

toselldowntheirriskierassetclassesandswitchintobonds.Theriseof

hedgefundsandhigh-frequencyinvestorshasexacerbatedthisproblemby

accentuatingvolatilityfurther.

Herethoughistheopportunityforinvestorspreparedandabletoinvest

forthelongerterm;short-termismcreatessomeexceptionalinvestment

opportunities.

The shift to short-termism



Ifyoucanlookthroughtheshort-termfog,equitiesoffersomeexcellent

opportunitiesforbuildingwealthinthelongertermaspartofabalanced

portfolio.Companies,incontrasttogovernmentsandtheconsumer,

havebeenmanagingthemselvesextremelyprudently.Whilethelatter

werebuildingdebttounsustainablelevels,companieswerepaying

downborrowingandbuildingcashbalances.Equitydividendyields

currentlystandatattractivelevelscomparedwithgovernmentbonds,

whilecompanybalancesheetsareenablingthemtogrowdividends–a

veryattractivecombinationinalowinterestrateenvironment.

0%

1%

2%

3%

4%

5%

6%

7%

1999 2001 2003 2005 2007 2009 2011

USA World

Equity dividend yields are currently at attractive levels

Source: UBS from 31 December 1999 to 30 November 2011

Equity valuations look attractive

Source: HSBC as at 30 September 2011

0

5

10

15

20

25

30

J a n - 9 1

J a n - 9 2

J a n - 9 3

J a n - 9 4

J a n - 9 5

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J a n - 9 8

J a n - 9 9

J a n - 0 0

J a n - 0 1

J a n - 0 2

J a n - 0 3

J a n - 0 4

J a n - 0 5

J a n - 0 6

J a n - 0 7

J a n - 0 8

J a n - 0 9

J a n - 1 0

J a n - 1 1

MSCI All-Country World Index

W o r l d e q u i t y P / E r a t i o

G l o b a l a n d U S

e q u i t y y i e l d

The case for equities

Valuationsarealsoextremelylowbypaststandards.Tosome

degree,thisisjustiedwithgrowthindevelopedeconomieslikelytobesomewhatlowerthanitwashistorically.Butfocusingonlower

growthratesindevelopedeconomiesignorestwokeyfeatures.First,

companiesindevelopedmarketsareincreasinglyglobalintheiroutlook.

Theyarenotjustaplayontheeconomicgrowthofthecountryoftheirdomicile,butinsteadcanbenetfromhigherglobalgrowth.



6

Second,emergingmarketequitiesthemselvesofferinvestorsthe

opportunitytobenetfromthepositivestructuralgrowthtrends

exhibitedbydevelopingeconomies.Thatsaid,performanceofmany

emergingmarketsin2011showstheyarenotself-sufcientyet,with

ahighrelianceonexportstothedevelopedworld.Astheycontinueto

grow,however,therewillinevitablybegreaterspendingondomestic

infrastructure(asthechartbelowshows)andanincreasinglywealthy

populationwilllooktoconsumemore.Thiswillreducethedependence

onexports,andwithit,makeemergingmarketeconomiesandpossibly

stockmarketsincreasinglyguardiansoftheirowndestinies.

The case for equities (cont’d)

Emerging markets’ future infrastructure requirements are high

Source: Booz Allen Hamilton, Global Infrastructure Partners, World Energy Outlook, OECD, Boeing, Drewry Shipping Consultants, US Dept. of Transportation as at 2007

U S D

T r i l l i o n

Middle East

Africa

North America

Latin America

Europe

Asia0

5

10

15

20

25

Water Power Road and rail Air/seaports



7

Acombinationofinationprovingincreasinglypersistentandthe

industrializationofemergingmarketsfavorsphysicalassets.Areas

ofthemarketsuchascommoditiesandrealestateseetheirvalues

risewithinationandalsobenetfromgrowingdemandasemerging

marketsurbanize.Althoughmanycommoditieshaveseenpricedeclines

in2011,reectingtheglobalslowdownineconomicgrowth,theyshould

benetlongertermfromtheseeminglyunstoppablepressuresofrising

demandfrominfrastructureprojectsandlimitedsupplyinmanycases.

Pricesinthelongtermareseeingsignicantupwardpressure.Global

realestateyieldsalsooftengiveinvestorsadecentupliftovermany

governmentbonds(asshowninthechartbelow),whichisanattractive

featureformanyinvestorsinalowinterestrateenvironment.

Theoneexceptiontothisisgold,asillustratedbelow.Tomany,this

representstheultimatesafehaveninvestment–itisaphysicalasset

and,muchtotheuneaseofmanyacentralbanker,youcannotprintany

moreofit.Tosomeextent,wesympathizewiththisview,withgold

typicallyenhancingportfolioreturnsatthesametimeasreducingrisks.

Itdoes,however,haveonemajorproblem:withnointrinsicreturn,

youjustcannotassignafundamentalvaluetoit.Inallprobability,as

aninvestment,itrepresentstheipsideofthecointoinvestinginrisk

assets–thatis,themorepeopleavoidriskassets,themoretheywill

looktobuygoldwiththeircapital.Whenriskyassetsturn,however,you

reallydonotwanttobethelastpersonholdinggold.

Real estate yields look attractive compared with government bonds

Source: Datastream from 29 December 2006 to 06 December 2011

Y i e l d

Gold is seen as a relative safe haven

Source: Reuters from 03 January 2005 to 30 November 2011

G o l d

p r i c e

U S D p

e r o

u n c e

0%

1%

2%

3%

4%

5%6%

7%

8%

9%

10%

Dec-06 Apr-07 Aug-07 Dec-07 Apr-08 Aug-08 Dec-08 Apr-09 Aug-09 Dec-09 Apr-10 Aug-10 Dec-10 Apr-11 Aug-11 Dec-11

Developed world listed real estate yield 10-year treasury yield

0

250

500

750

1,000

1,2501,500

1,750

2,000

Jan-05 Sep-05 May-06 Jan-07 Oct-07 Jun-08 Feb-09 Nov-09 Jul-10 Mar-11 Nov-11

Commodities and

global real estate



Themirrorimageofthisvalueinequitiesistheovervaluationwithin

manygovernmentbondmarkets,withyieldsinmanycasesnot

sufcientenoughtocoverination.Governmentbondshavenotonly

beenoneofthemainbeneciariesoftheshifttoshort-termismbut

alsothelong-termdowntrendinglobalinationandinterestrates.

Again,muchofthishasbeendrivenbyemergingmarkets,whichhave

increasinglybecomethemanufacturingengineoftheglobaleconomy.

Thisphenomenonhashadtworelatedimpacts,withbothdrivingdown

bondyields.First,byexportingcheaperconsumergoodsintoWestern

economies,inationrateshavebeenhelddown.Second,theseexports

havecreatedsignicantcurrentaccountsurpluseswithindeveloping

markets,whichhaveinmanycasesbeenrecycledintoWestern

governmentbonds,furtherpushingdownyields(asthechartbelow

illustrates).

Whileinationarypressureslookmutedintheneartermasausterity

packagesintheWestkickin,weseethestructuraldowntrendin

inationcomingtoanend.

Wagesinmanyemergingmarketsarenowrisingrapidlyasthese

economiesgrowricherandtheirworkersdemandhigherwages.

Also,astheglobaleconomyrebalancesoverthelongterm,theows

intoWesterngovernmentbondsofrecentyearsareunlikelytobe

repeated.Hencebondshavebeenthebeneciaryofanalmostperfect

storm–along-termdownwardshiftinyields,asthechartbelowshows,

acceleratedbyinvestorspursuingsafetyintheshortterm.However,

surelyjustasthebondevangelists’callsforstructurallyloweryields

becomemorevocal,investorswithalong-termoutlookshouldbe

avoidingthiscategorygiventheprospectofnegativereallong-term

returns.

The case against government

bonds

Wearekeennottounderplaytherisksofinvestinginglobalstockmarketsatpresent.However,theshort-termdirectionisinthehandsofpoliticians.

IntheWest,politiciansaregrapplingwithexcessdebt,globaleconomicimbalancesand,perhapsmostimportantly,howtosolvetheeurozonedebtcrisis

inthefaceofinadequategovernance.Conversely,inAsia,centralbankersarewalkingatightropeofreducinginationwithoutkillingoffgrowthcompletely.

Historically,theChineseauthoritiesinparticularhavebeensuccessfulinachievingthisbuttherisksremain.Thismakestheshorttermuncertain,but

forthosewiththeluxuryofbeingabletotakelong-terminvestmentdecisions,thisincreasinglyshort-termworldiscreatingsomerareopportunitiesto

generatewealth.Thestartpointmaybeuncertainbuteventualupsideispotentiallysignicant.

Conclusion

Government bond yields have fallen dramatically

Source: Reuters from 02 January 1992 to 03 October 2011

1%

2%3%

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Jan-92 Jun-94 Dec-96 May-99 Nov-01 May-04 Oct-06 Apr-09 Oct-1

1 0 - y e a r b o n d y

i e l d

UK Germany France US



Our outlook for the asset classes

TheoutlookfortheUSeconomyremainstough,particularlyasunemploymentisstubbornlyhigh,atabout9%,andconsumerspendingakeydriverofgrowth.However,theUSdoesappeartobeseeingstrongergrowththanotherdevelopedeconomies.Thismayprovidesomesupport

to2012corporateearnings,atleastcomparedwithotherdevelopedmarkets,especiallyifeconomicstimulusmeasuresareextendedinto2012.

Althoughvaluationsaresomewhathigherthanforotherdevelopedmarkets,witha2012forecastprice/earningsratioof10.9times,weconsider

thisafairpremiumgiventhestrongereconomicmomentum.PoliticaldeadlockhasbeenasevereimpedimenttotheUSdealingwithitsbudgetary

problems,withthecountrystandingaloneamongmajoreconomiesinnotenactingscalausterity.2012seespresidentialandcongressional

electionsandwewouldhopethataftertheprimarystagesofthecontest,whicharelikelytoseecandidatesappealtotheirnarrowpartybases,

theyseekcommongroundandrealisticwaysofresolvingthelong-termbudgetpressures.

US EQUITIES

POSITIVE

Despitevolatilitystemmingfromtheeurozonedebtcrisis,CanadianequitiesmanagedtonishNovemberlargelyunchanged.Animprovingpicture

intheUS–Canada’skeytradingpartner–helpedshoreupCanadianequities.China’sdecisiontoloosenmonetarypolicyalsobodeswellfor

demandforkeycommoditiesproducedinCanada.CommoditypricescameunderpressureinNovemberandearlyDecember,butthelong-termdemandpictureisstillpromising.Canadiancompaniesalsocontinuetomaintainsolidbalancesheetsandaredeliveringdecentearnings.Thewider

equitymarketoffersanaveragedividendofcloseto3%andaprice/earningsratioofabout11.5timesexpected2012earnings.Thissuggeststhat

Canadianequitiesaretradingatadiscountrelativetorecenthistory,giventhatthe25-yearaverageratioisapproximately15times.

CANADIAN EQUITIES

POSITIVE

ProspectsforcontinentalEuroperemaindominatedbytheeurozonedebtcrisis.Europeanequitiestradeonalowmultipleof8.8timesforward

earnings,implyingtheassetclassofferssignicantvalueshouldasolutionbefound.Abreak-upoftheeurozone,whichisnotourcentralscenario,

wouldhaveseverenegativeimplicationsfortheEuropeaneconomyandequitieswouldlikelyseesignicantdownsideinthisevent.Whilethe

outlookfortheUKeconomyremainssubduedanddependentondevelopmentsintheeurozone,wehaveamorepositiveviewonUKequities.

Theybenetfromsignicantexposuretointernationaleconomies.Valuationsareattractivewithaforwardearningsratioofabout8.6times

(comparedtoa10-yearaverageofabout14times)andadividendyieldofabout3.6%.

EUROPEAN EQUITIES

POSITIVE

Japaneseequitiesfrequentlytradedinadisconnectedmannerfromothermarketsin2011.Likeotherequitymarkets,valuationsremainattractive,

particularlyifJapanesecompaniescanboosttheirlevelsofreturnonequity,althoughthisislikelytobealonger-termdevelopment.For2012,

Japaneseequitiesarelikelytobeaffectedbytheslowdowninglobalgrowth,whilewewouldalsoexpectappreciationtodampencorporate

performance.

JAPANESE EQUITIES

POSITIVE

Powerfullonger-termphenomenasuchasindustrializationandurbanization,aswellasmorerobustscalpositions,underpinourpositiveviewonemergingmarketequities.Wecontinuetoseestrongergrowthfromemergingeconomiescomparedwithdevelopedeconomiesin2012,albeitat

slowerratesthanpreviously.Emergingmarketequitieshaveunderperformeddevelopedmarketequitiesin2011.Thereissomeriskthatfurther

downwardrevisionsinglobalgrowthcouldleadtothemcontinuingtotradeashigher-riskplaysratherthanreectingthesuperiorstructuralfeatures

oftheireconomies.However,valuationsareattractive,withaggregateemergingmarketequitiestradingatabout9timesnextyear’searnings,against

a10-yearaverageofabout11times.EasternEuropeanequitiesareexposedtotheriskofacreditcrunchasdeleveragingbankswithdrawcreditfrom

theregion.WithinEasternEurope,wefavorRussianequities,wherevaluationsremainlowatabout4.9timesearnings(againsta10-yearaverageof

about8times).Thecountryisaplayonoilandotherhardcommoditieswherewehavepositiveviews.Theoutlookfortheoilpricerepresentsthe

keyriskfortheassetclass,andamorepronouncedeconomicslowdown,whichwilllikelyleadtoamaterialfallintheoilprice,wouldbeparticularly

negativeforRussianequities.Thisisnotourcentralscenario.Politicalrisksalsoremain,particularlyinapresidentialelectionyear.

EMERGING MARKET EQUITIES

POSITIVE



10


LatinAmericanequitiesarealsoextremelyattractivelyvaluedonaP/Eratioof9times2012forwardearnings,comparedwithave-yearaverageof11.4times.SlowingworldwidedemandandfallingcommoditypriceshaveraisedfearsforLatinAmerica,however,despitethis,commoditysupplies

remaintightoveralland,sofar,thelikelihoodofacrashsimilartothatof2008/2009seemslow.Shouldtherebeaprolongeddownturn,theregion’s

economieshavemanytoolsattheirdisposaltocounterthis–forexample,thereisampleroomtocutratesifnecessary(Brazilhasalreadystarted

thismeasure).Onamacroeconomiclevel,manyLatinAmericancountriesareinbettershapethantheirdevelopedmarketpeers,supportedbyhigher

levelsofconsumercondenceandsolidscalaccounts.

EMERGING MARKET EQUITIES (CONTINUED)

POSITIVE

TheslowdowninglobaleconomicactivityhashadanimpactonAsiaex-Japan,givenitsrelativelyhighlevelsofexportstodevelopedcountries.

However,westillviewtheeconomicbackdropfavorably,withitseconomiesofferingstrongergrowththanthedevelopedworld.Inationisshowing

signsofmoderatingandwecouldseelooseningmonetarypoliciesin2012,whichwewouldregardaspositivefortheregion’seconomiesandequity

markets.WithinAsiaex-Japan,wefavorChineseequitieswherevaluationsarelowinourview,withthemarkettradingonabout8.2times2012

earnings,signicantlybelowthemarket’s10-yearaverageofabout12.5times.Therearerisksinthattherapidrisesinresidentialrealestatepricescouldreverseandbecomedestabilizingtopartsoftheeconomy,butoverall,weforecastasoftratherthanahardlandingfortheeconomyandforecast

2012economicgrowthofaround8%.

ASIA EX-JAPAN EQUITIES

POSITIVE

USgovernmentbondyieldsremainextremelylowdespiteinvestorslosingcondenceintheroleofpoliticalinstitutionstotacklefundamental

budgetaryproblems.TheUSCongressionalBudgetSuperCommitteefailedtoreachabipartisandecitreductionagreementafterthreemonthsof

intensenegotiations,despiteasimilarpoliticaldeadlockoverthesummerleadingtotheUScreditratingbeingdowngradedbyonenotchbyStandard

&Poor’s.Morepositivelyfortreasuries,theFederalReservedecidedtolengthentheaveragematurityofitstreasuryholdingsbysellingUS$400

billionofshort-datedsecuritiesandpurchasinglonger-termbonds.TheyalsocommittedtokeepFedfundrateslowforalongerperiodoftime.

NotwithstandingFederalReserveactionsthatarecurrentlysupportingprices,weremaincautiouslynegativeonUStreasuriesasanassetclass.We

believethepositivesurpriseseenineconomicdatacancontinueandshouldtheeurozonereachagreementonalastingsolutiontoitssovereigndebt

crisis,thesafehavenpremiumembeddedinUStreasurypricesmaystarttoevaporate.Thiswouldforceyieldstorisetolevelsmorereectiveofthecurrenteconomicandscalbackdrop.

US GOVERNMENT BONDS (TREASURIES)

NEGATIVE

Canadaretaineditsstatusasasafehaveninthewakeoftheongoingeurozonedebtcrisis.ThebroaderCanadianbondmarketdelivereda0.84%

gaininNovember.GovernmentofCanadabondswere0.92%higher.Asexpected,onDecember6,theBankofCanadamaintaineditsovernightrate

at1%.Wedon’tseetheBankraisingratesuntillate2012orbeyond.Onbalance,recenteconomicindicatorsinCanadasuggestthatgrowthinthe

secondhalfofthisyearwasslightlystrongerthantheBankprojectedinOctober.Inationisalsoseendecliningfromitscurrentlevelofabout3%to

2%overthenext12months.WealsoforecastGDPgrowthof1.9%in2012.Againstthisbackdrop,westillprefercorporatebonds,despiterecent

underperformance,becausetheycontinuetoofferbettervaluesthangovernmentbonds.Companybalancesheetsarestrong,anddemandforyield

frominvestorsismaintaininghealthyinterestinnewcorporatedebtissuance.

CANADIAN BONDS

NEGATIVE




ConcernsoverthedifcultiesfacingGreeceandothertroubledEuropeannations,aswellasslowingeconomicmomentum,ledtocorporatebonds

underperforminggovernmentbondsin2011.Financialissueswereweakerthannon-nancial,largelydictatedbytheextentoftheirexposureto

peripheralEurope.Debtwithlesspriorityforrepaymentwithinthecapitalstructure–suchasTier1instruments–sufferedmost.Corporatebonds

issuedbyothernon-nancialsectorsalsosufferedduetocontagioneffectsandanincreasedexpectationthatcompanieswillfarelesswellifthe

economicbackdropdeteriorates.Thepoorperformanceofcorporatebondsin2011hasseenyielddifferentialsoverthesafestsovereignissuers

risetorelativelyattractivelevels,particularlyiffearsofadouble-diprecessionareoverdone.Thereforetheassetclasslooksattractiveonaforward

lookingbasis.

CORPORATE BONDS

POSITIVE

Emergingmarketdebtmarketshaveseenatransformationoverrecentyears,withcountriesshowingsignicantlyimprovedscalpositionsand

tradebalancesaswellasrobusteconomicgrowth.Valuationsremainreasonableandweseeemergingmarketsovereignbondsoutperformingthe

‘safehaven’developedeconomybondmarkets,thelatterofwhichofferverylowyieldstoinvestorsinourview.

SOVEREIGN EMERGING MARKET BONDS

NEUTRAL

Wearebroadlypositiveonglobalrealestateasanassetclass.Itoffersanattractiveyieldupliftovergovernmentbonds,whichshouldpersistas

centralbanksmaintainaccommodativemonetarypolicies.AsiaPacichasthestrongestfundamentals,althoughrentalgrowthmaymoderate

shouldtheglobaleconomyslow.HighlevelsofUSunemploymentandthetoughoutlookfortheEuropeaneconomyarelikelytoprovidea

challengingenvironmentforrentalgrowth.

GLOBAL REAL ESTATE

POSITIVE

Lowinterestrates,andtheprospectsforfurthercentralbankinterventionbygovernmentsindevelopedeconomies,havebeensupportiveforgold.

Weremainalerttotherisksthatabubblecouldbeformingintheassetclass.Thesharpsell-offinSeptember2011indicatesgoldisnotnecessarily

defensiveandcouldseesignicantdownsideintheeventthattheworld’simbalancesarecorrectedandtheuncertaintylifted.Thisriskandthedifculty

invaluinggoldmakesuswaryofholdingsignicantpositionsoverthelongerterm.However,asitcanprovidesomethingofahedgetoextreme

negativeevents,wecontinuetoadvocatemodestholdingsindiversiedportfolioswhiletheoutlookfortheglobaleconomyremainssouncertain.

GOLD

NEUTRAL

Webelievehardandsoftcommoditiesoffertheprospectsforattractivelonger-termreturns,givencontinueddemandgrowthfromemerging

markets.Thisisgrowingfromalowbase,andsupplyremainsrestrictedduetoadeclineinminingcapitalexpenditurefollowingthe2008nancial

crisis.Manycommoditymarketshaveseendeclinesin2011,aseconomicactivityhasslowed.However,asemergingeconomiesarethekey

driversofdemandgrowthandwedonotforecastaglobalrecession,webelievethepricedeclinesseenin2011arecorrectionsratherthantheend

ofpositivelonger-termtrends.

COMMODITIES

POSITIVE

Manycurrencymarketshavebeendrivenbysimilarfactorsasequitiesandbonds,suchastheSwissFranc,forexample,whichhasseensignicant

appreciation.WewouldseearesolutionoftheeurozonesovereigndebtcrisisaspositivefortheEuroandnegativefortheSwissFranc,andpossibly

theUSDollarandYen,shouldsucharesolutionbeaccompaniedbyawiderincreaseinriskappetite.Longerterm,weseetheemergingmarket

currenciesaswellplacedtoappreciate,reectingtheirlong-termstructuraladvantages,althoughpolicyactionsmayslowdowntheprocess.

CURRENCIES

POSITIVE



Unless stated otherwise, all data and charts are sourced from Datastream, Bloomberg, Barclays Capital, Citigroup World Government

Bond indices and HSBC Global Asset Management. All returns are total monthly returns expressed in local currencies.

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investment(s) should be made in connection with your independent tax advisor.

Investing entails risks, including possible loss of principal. Investors should be aware that performance returns are affected by market fluctuations

and note that the use of derivatives and investments involving a currency other than their own involves special risks. Investments in commodities and

currencies may involve substantial risk as the prices can fluctuate significantly. International investing involves a greater degree of risk and increasedvolatility that is heightened when investing in emerging or frontiers markets. Foreign securities can be subject to greater risks than U.S. investments,

including currency fluctuations, less liquid trading markets, greater price volatility, political and economic instability, less publicly available information,

and changes in tax or currency laws or monetary policy. Emerging markets are often characterized by even less economic diversity and political stabilit

than more developed international markets, and individual securities may demonstrate greater price volatility and a lack of liquidity. Investors should

consider their investment objectives, whether or not they can assume these risks and should undertake their own appropriate professional advice.

Past performance does not guarantee future results.

The MSCI All Country World Index is a free float-adjusted market capitalization weighted index that is designed to measure the equity market

performance of developed and emerging markets. The MSCI ACWI consists of 45 country indices comprising 24 developed and 21 emerging market

country indices. The developed market country indices included are: Australia, Austria, Belgium, Canada, Denmark, Finland, France, Germany, Greece,

Hong Kong, Ireland, Israel, Italy, Japan, Netherlands, New Zealand, Norway, Portugal, Singapore, Spain, Sweden, Switzerland, the United Kingdom and

the United States. The emerging market country indices included are: Brazil, Chile, China, Colombia, Czech Republic, Egypt, Hungary, India, Indonesia,

Korea, Malaysia, Mexico, Morocco, Peru, Philippines, Poland, Russia, South Africa, Taiwan, Thailand, and Turkey.

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Outlook for 2012 is a joint publication of HSBC Global Asset Management (USA) Inc. and HSBC Global Asset Management (Canada) Limited (collective

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