of 14 /14
IN THIS ISSUE 1 Highlights 2 Short-term Investment Outlook 4 Macro Assessment 6 Equity Mark ets 9 Fixed Income 11 Other Investments 12 Currency 13 Sukuk Highlights During January, renewed investor risk-appetite saw equities perorm strongly overall, although degrees o perormance varied among regions. In developed markets, the eurozone was the standout perormer as news-ow over sovereign debt concerns was appeased by successul debt auctions in Italy, Portugal and Spain. Eurozone investor sentiment was urther aided by pledges o assistance rom the European Central Bank, Japan and China. Looking ahead however, sovereignty debt concerns will remain until governments reach a clear and permanent solution. On the macroeconomic ront, the US benefted rom rising investor confdence as consumer spending, manuacturing fgures and existing home sales soared, supporting positive economic growth. Overall, the health o the US economy appears to have improved rom previous subdued levels and investor expectations have risen as a result. Within developed countries, however, high unemployment levels persist amid weak labour markets. In emerging markets, economic data remains strong and governments continue to tighten monetary policy. In China or instance, the economy grew aster-than- expected in the ourth quarter, with gross domestic product up 9.8% rom the year-earlier, and up 10.3% or all o 2010. Meanwhile, consumer ination hit 4.6% year-on-year in December. Consequently, the People’s Bank o China ordered lenders to increase their reserve requirement in an attempt to dry up liquidity to get ination under control. Alongside China, central banks in Brazil and India ollowed suit. January Market Recap During January, global equity markets, as measured by the MSCI World index, rose by 2.2% as the global economic recovery gained momentum and sovereign debt concerns in the eurozone were appeased by successul debt auctions in peripheral countries. In contrast to preceding months, global equity returns were particularly robust within developed markets, which outpaced their emerging market counterparts. Over the month, emerging markets suered a correction as the MSCI Emerging Markets index ell by 2.1% engul ed by ination concerns and possible interest hikes. Similar to developed markets, the variation in returns rom individual countries in emerging markets was signifcant. Russian stocks were an exception as they bucked the trend by rising during January. Elsewhere among the BRIC countries, Chinese Brazilian and Indian equities posted hety losses, with the latter alling by over 10%. In Egypt, stocks spiralled downwards amid the growing political unrest though this had limited impact on the wider emerging market index. While growth within emerging countries remains robust, the rate o growth is decelerating. Rising ination and the possibility o urther interest hikes remain at the crux o the nervousness among emerging markets. February 201 1 Global Investment Perspective Outlook & Strategy While the global economic recovery is making progress, conditions remain challenging and growth uncertainties persist. Thereore, our central scenario remains unchanged. Overall, we anticipate positive, albeit moderate, sub-trend economic growth in developed economies in 2011. Furthermore, we also expect ongoing strength in emerging economies. Our main concern here is the prospect o urther monetary tightening, which would impact global growth prospects, given that emerging economies have been an important engine behind the global economic recovery to date. In the developed world, the key risks on the economic horizon remain fscal tightening and weak consumption. The prospects or labour markets and consumption remain unclear , despite some signs o stabilisation. Unemployment rates are stil l elevated and consumers are s till endeavouring to unwind debt positions, particularly in the US and the UK. At an asset class level, we started a modest overweight position in both developed and emerging market equities relative to cash and government bonds. The market remains ushed with liquidity, given not only capital injections by central banks but the high levels o cash on corporate balance sheets. This is positive or equities as it gives companies the exibility to invest, expand and drive earnings growth, or raise dividend payment to increase shareholder returns. Equities are supported by the positive collective backdrop o improving economic data particularly in the US, reasonable earnings growth orecasts or 2011 and undemanding stock valuations, not least relative to cash and government debt. At the sector level, while valuations remain attractive or healthcare and telecommunications stocks on an absolute basis, the valuation gap relative to other sectors is less compelling. Thereore, we no longer have a relative preerence or these two sectors. Within the context o developed market equities, we maintain a preerence or Japanese equities where we maintain a tactical short-term overweight position as valuations and equity undamentals remain sound. Presently, this scenario remains unchanged irrespective o the recent credit rating downgrade o Japanese sovereign debt by Standard & Poor’s. Within the emerging mar kets, we continue to avour Russia on the basis o attractive stock valuations on both a relative and absolute basis, and signs o improving economic conditions. In fxed income, with ination under control in the developed world with the exception o the UK, we believe central banks are likely to keep interest rates low, which is broadly supportive o fxed income markets. Within the fxed income universe, our preerence continues to ocus on developed market corporate bonds, particularly high yield which we believe oer value on a total-return basis.

GIP FEB2011

Embed Size (px)

Text of GIP FEB2011

  • 8/7/2019 GIP FEB2011

    1/14

    IN THIS ISSUE

    1 Highlights

    2 Short-term Investment

    Outlook

    4 Macro Assessment

    6 Equity Markets

    9 Fixed Income

    11 Other Investments

    12 Currency

    13 Sukuk

    HighlightsDuring January, renewed investor risk-appetite sawequities perorm strongly overall, although degreeso perormance varied among regions. In developedmarkets, the eurozone was the standout perormeras news-ow over sovereign debt concerns wasappeased by successul debt auctions in Italy, Portugaland Spain. Eurozone investor sentiment was urtheraided by pledges o assistance rom the EuropeanCentral Bank, Japan and China. Looking aheadhowever, sovereignty debt concerns will remain untilgovernments reach a clear and permanent solution.

    On the macroeconomic ront, the US benefted romrising investor confdence as consumer spending,manuacturing fgures and existing home salessoared, supporting positive economic growth. Overall,

    the health o the US economy appears to haveimproved rom previous subdued levels and investorexpectations have risen as a result. Within developedcountries, however, high unemployment levels persistamid weak labour markets.

    In emerging markets, economic data remains strongand governments continue to tighten monetary policy.In China or instance, the economy grew aster-than-expected in the ourth quarter, with gross domesticproduct up 9.8% rom the year-earlier, and up 10.3%or all o 2010. Meanwhile, consumer ination hit4.6% year-on-year in December. Consequently, thePeoples Bank o China ordered lenders to increasetheir reserve requirement in an attempt to dry up

    liquidity to get ination under control. Alongside China,central banks in Brazil and India ollowed suit.

    January Market RecapDuring January, global equity markets, as measuredby the MSCI World index, rose by 2.2% as the globaleconomic recovery gained momentum and sovereigndebt concerns in the eurozone were appeased bysuccessul debt auctions in peripheral countries.

    In contrast to preceding months, global equityreturns were particularly robust within developedmarkets, which outpaced their emerging marketcounterparts. Over the month, emerging marketssuered a correction as the MSCI Emerging Marketsindex ell by 2.1% enguled by ination concerns andpossible interest hikes. Similar to developed markets,

    the variation in returns rom individual countries inemerging markets was signifcant. Russian stockswere an exception as they bucked the trend by risingduring January. Elsewhere among the BRIC countries,Chinese Brazilian and Indian equities posted hetylosses, with the latter alling by over 10%. In Egypt,stocks spiralled downwards amid the growing politicalunrest though this had limited impact on the wideremerging market index.

    While growth within emerging countries remainsrobust, the rate o growth is decelerating. Risingination and the possibility o urther interest hikesremain at the crux o the nervousness amongemerging markets.

    February 2011

    Global Investment Perspective

    Outlook & StrategyWhile the global economic recovery is making progress, conditions remain challenging and growthuncertainties persist. Thereore, our central scenario remains unchanged. Overall, we anticipate positive,albeit moderate, sub-trend economic growth in developed economies in 2011. Furthermore, we alsoexpect ongoing strength in emerging economies. Our main concern here is the prospect o urthermonetary tightening, which would impact global growth prospects, given that emerging economieshave been an important engine behind the global economic recovery to date.

    In the developed world, the key risks on the economic horizon remain fscal tightening and weakconsumption. The prospects or labour markets and consumption remain unclear, despite some signs ostabilisation. Unemployment rates are stil l elevated and consumers are still endeavouring to unwind debtpositions, particularly in the US and the UK.

    At an asset class level, we started a modest overweight position in both developed and emerging marketequities relative to cash and government bonds. The market remains ushed with liquidity, given not onlycapital injections by central banks but the high levels o cash on corporate balance sheets. This is positiveor equities as it gives companies the exibility to invest, expand and drive earnings growth, or raisedividend payment to increase shareholder returns. Equities are supported by the positive collectivebackdrop o improving economic data particularly in the US, reasonable earnings growth orecasts or2011 and undemanding stock valuations, not least relative to cash and government debt.

    At the sector level, while valuations remain attractive or healthcare and telecommunications stocks on anabsolute basis, the valuation gap relative to other sectors is less compelling. Thereore, we no longer havea relative preerence or these two sectors.

    Within the context o developed market equities, we maintain a preerence or Japanese equities wherewe maintain a tactical short-term overweight position as valuations and equity undamentals remain sound.Presently, this scenario remains unchanged irrespective o the recent credit rating downgrade o Japanesesovereign debt by Standard & Poors. Within the emerging markets, we continue to avour Russia onthe basis o attractive stock valuations on both a relative and absolute basis, and signs o improvingeconomic conditions.

    In fxed income, with ination under control in the developed world with the exception o the UK,we believe central banks are likely to keep interest rates low, which is broadly supportive o fxed incomemarkets. Within the fxed income universe, our preerence continues to ocus on developed marketcorporate bonds, particularly high yield which we believe oer value on a total-return basis.

  • 8/7/2019 GIP FEB2011

    2/14

    2

    ASSET CLASS CURRENTVIEW REASONING

    EQUITY

    Global Developed

    Market EquityNeutral

    Equity valuations relative to cash and especially government debt remain

    attractive, plus liquidity remains supportive. There continue to be risks to the

    economic recovery, but our core scenario is or positive, but sub-trend growth.

    US Equity Neutral Whilst unemployment remains elevated at 9.6%, Fed policy has remained

    accommodative and recent economic news-ow has been encouraging.

    Europe Equity

    (including the UK)Neutral

    Economic conditions remain mixed. UK growth has slowed, austerity

    measures are in the process o being rolled out in parts o Europe and the

    economic health o peripheral eurozone countries remains uncertain. That said,

    interest rates and ination remain generally low (the UK being an outlier), the

    Bank o England has agged the possibility o a urther round o quantitative

    easing, and recent corporate earnings news in Europe has been encouraging.

    Japan Equity Positive

    We have a tactical, short-term preerence or Japanese equities as they lagged

    other developed equity markets or much o 2010 and, having recently started

    to outperorm, are likely to have positive price momentum. There are also early

    signs that ows are becoming more supportive. Japanese stock valuations

    look attractive relative to history both in absolute terms and relative to other

    developed markets.

    Asia ex-Japan

    EquityNeutral

    From a macroeconomic perspective, the outlook remains generally positive

    with strength in both the manuacturing and consumer sectors. However,

    rom a valuation perspective, market prices have largely reected the positive

    news-ow.

    Hong Kong and

    China Equity

    Neutral

    (3-6 months)

    Positive

    (6-12 months)

    We turned rom positive to neutral on a 3-6 months view. Though stocks

    are not at expensive levels, we are increasingly concerned about monetary

    tightening measures to curb ination.

    Global Emerging

    MarketsNeutral

    Emerging countries are likely to continue to lead the recovery due to robust

    domestic consumption and strong intra-regional trade. That said, like developed

    markets, emerging market equities are exposed to volatility stemming rom

    the question marks around the sustainability o the global economic recovery.

    Latin America

    EquityNeutral

    The economic perormance o Latin American countries remains strong and

    earnings growth estimates or 2011 look reasonable. Having said that, the

    good news seems to be well reected in market prices and relative valuation

    measures show no strong signals. We, thereore, retain our neutral stance.

    Middle East Equity Neutral

    Economic data rom the region has been highly encouraging and 2010-2011

    orecasts are positive. In addition, valuations remain reasonable. Key risks include a

    slowdown in global demand or oil and the potential deterioration o budget defcits

    among some o the countries in the region.

    Eastern Europe

    EquityNeutral

    Manuacturing data has varied within the dierent countries. Weak labour

    markets, high levels o government debt and ongoing concerns about eurozone

    debts are weighing on the outlook or the broader region. However, at a

    country level, we avour Russian equities. Valuations or Russian equities are

    attractive in both absolute and relative terms.

    FIXED INCOME

    US Government

    BondsNegative

    Excess capacity in developed markets and the renewed commitment o key

    central banks to remain accommodative are generally supportive or low yields.

    However, despite the recent rise in yields, the market is still oering little value

    relative to history and, downside risks remain. Within fxed income, we preer to

    own corporate debt, where we see greater total return opportunities.

    EURO Government

    BondsNegative

    We have a negative stance on eurozone government bonds relative to cash. This

    is due to uncertainties regarding the economic health o eurozone peripheral

    countries. In addition, valuations o these bonds do not look particularly attractive;

    they oer very limited protection against negative surprises.

    Short-term InvestmentOutlook (6-12 months)

  • 8/7/2019 GIP FEB2011

    3/14

    3

    Summary

    Overall, we have implemented a moderate overweight position in global equities relative to both government bonds and

    cash. Within equities, we have closed out our preerence or healthcare, telecommunications and consumer staples stocks as

    the valuation gap relative to other sectors has converged making these sectors less attractive on a relative basis. Within the

    context o developed markets equity, we remain positive on Japan on a short-term perspective partly due to attractive stock

    valuations and positive price momentum and ows. Within emerging markets equity, our avoured market is still Russia.

    In fxed income, we have a negative view on government bonds relative to cash, although less so than last month. However,we have a positive stance on corporate debt both investment grade and high yield. Positives or corporate bonds include

    attractive valuations and avourable issuer undamentals. Our central economic scenario is or slow but positive growth in the

    major developed markets, a backdrop which is typically positive or credit markets.

    With regard to the our major developed market currencies, it is likely that heightened volatility will continue. Valuation

    measures are not currently providing strong signals and we thereore, have a neutral stance on currency positions.

    FIXED INCOME

    Asian GovernmentBonds

    Neutral With the recent rise in US treasury yields and tight spreads in AsiaGovernment USD bonds, we maintain our neutral recommendation.

    Investment Grade

    CorporatePositive

    Strong corporate earnings results, the view that major central banks will keep

    interest rates low and strong demand or yield have boosted investment grade

    corporate bonds. With momentum likely to remain positive, we continue to be

    positive on the asset class.

    High Yield Bonds Positive

    High yield bonds continue to look attractive on a total return basis. We have

    retained our positive view on the asset class given better-than-expected

    corporate results, declining deault rates and growing expectations that interest

    rates could remain anchored at their current low levels due to growing global

    economic growth uncertainties.

    Sovereign US

    dollar denominated

    Emerging Markets

    Debt

    Negative

    Sovereign US dollar-denominated emerging market debt continues to look less

    attractive on valuation grounds than developed market corporate debt, and high

    yield in particular.

    Global Developed

    Ination-linked

    Bonds

    Negative The sell-o in nominal bonds makes the global ination-linked bond market

    more expensive and the nominals less expensive.

    OTHER

    INVESTMENTS

    Oil

    Between

    the rangeo US$70 to

    US$90 per

    barrel

    We expect the oil price to uctuate in the US$70-US$90 range, as improved

    demand is balanced out by a orecast rise in OPEC production. Fluctuation in

    risk-appetite is likely to contribute to oil price volatility.

    Gold

    Neutral

    Betweenthe range o

    US$1,250 to

    US$1,400 per

    troy ounce

    We are neutral on gold now as opposed to having been somewhat negative

    in previous months. Moves by the US Federal Reserve to add urther liquidityto markets, combined with ongoing macroeconomic uncertainty, remain

    supportive actors or this precious metal. Against this backdrop, we expect

    gold will trade in a between a range o US$1,250 to US$1,400 per troy ounce

    in the near-term.

    Commercial

    Real Estate

    (unlisted markets)

    Neutral

    High unemployment, alling occupancy rates and declining rental values

    in the US and Europe warrant a cautious/ negative outlook or these two

    markets in general. Our short-term outlook or the UK has deteriorated, with

    weaker rental and capital growth projections, although we are not expecting

    a signifcant price correction as yields remain above our view o long run air

    value. The outlook or Asia Pacifc is improving, although there is wide regional

    divergence.

    CURRENCYEUR, GBP, JPY

    and USDNeutral

    Valuation indicators are not sending any clear signals at present. We see both

    event-driven and sentiment-driven risks contributing to ongoing volatility. We thus

    continue to have a neutral view on currency exposures.

    Short-term Investment

    Outlook (6-12 months)

  • 8/7/2019 GIP FEB2011

    4/14

    4

    US

    The economic recovery made good progress in the US, despite

    some disappointment in labour data.

    GDPgrowthwasparticularlyencouraginginthefourthquarter,

    coming in at an annualised rate o 3.2% year-on-year, as personal

    consumption grew by 4.4% year-on-year. Manuacturing activity

    remained a key as well, with industrial production accelerating to

    0.8% month-on-month in December.

    Nevertheless,labourmarketconditionsshowedlacklustre

    improvements as non-arm payrolls rose by less-than-

    anticipated 36,000 in January. The unemployment rate

    declined to 9% but jobless claims still gave mixed signals

    throughout the month.

    Theconcernwasreinforcedlaterinthemonth,asadvance

    retail sales growth unexpectedly slowed, rom 0.8% m-o-m

    in November to 0.6% month-on-month in December and the

    University o Michigan Confdence indicator dropped to 72.7.

    Turningtoination,theallitemsConsumerPriceInation

    index climbed by 1.5% year-on-year in December, abovethe consensus estimate, driven by a sharp increase in

    commodity prices.

    Europe ex-UK

    While there continued to be signs o an economic recovery or

    the eurozone region as a whole, some country level data is still

    a concern.

    Industrialactivitywassolid,withtheeurozonePMIindex

    coming in above both the consensus and November reading.

    Industrial production growth was encouraging as well.

    Nevertheless,thesituationintheservicessector(andretail

    in particular) remained difcult. Retail sales disappointed in

    November, dropping by 0.8% month-on-month, reecting

    the impact o ongoing high unemployment on household

    consumption.

    TheEurozoneunemploymentratewasunchangedin

    November, at 10.1%, while household consumption grew

    less-than-expected by the consensus in the third quarter, at

    0.1% quarter-on-quarter.

    Furthermore,thesharpcontrastbetweenthesolid

    perormance o the larger economies o France and Germany,

    with the peripheral eurozone countries persisted.

    Fiscalissuesremainedthemainareaofconcern,with

    Portugal the latest subject o speculation.

    The economic recovery is gaining momentum. Global manuacturing activity was robust and emerging

    economies continued to impress. However, there are still key risks to watch on the horizon.

    UK

    While manuacturing activity was positive, the economic news-

    ow disappointed in January.

    TheUKPMIroseto58.3inDecember,wellabovethemarket

    expectation, while industrial production was also encouraging,

    growing by 3.3% month-on-month.

    However,GDPcontractedby0.5%quarter-on-quarterinthe

    ourth quarter. While the adverse weather conditions during

    the traditionally busy estive season played an important

    role in the all in economic activity, fscal tightening and low

    consumer spending were other key actors. Indeed, retail

    sales were down 0.3% in December.

    Furthermore,unemploymentstayedhigh,at7.9%in

    December, overshadowing the mild improvement in jobless

    claims. Mortgage approvals remained low in November,

    which is indicative o a wider trend o consumer trepidation.

    Turningtoination,year-on-yearConsumerPriceInation

    rates increased sharply in December to 2.9% and 3.7% or

    the core and all-items indices respectively.

    OfadditionalconcernwasthattheDecemberjumpinination

    excludes the eect o the VAT increase which came into

    eect on 1 January 2011.

    Macro Assessment

  • 8/7/2019 GIP FEB2011

    5/14

    5

    Japan

    Economic data was mixed in January, although exports

    growth improved.

    Japansexport-orientedsectorscontinuedtoshowsome

    strength, helped by Chinas growth and a stronger recovery

    in the US. Industrial production rose by 3.1% month-on-

    month in December, and exports posted a 13% year-on-year

    increase in the same month.

    Nevertheless,therecontinuestobeweaknessindomestic

    demand and labour markets. Consumer confdence declined

    in December, while nationwide retail sales ell ater declining

    0.5% year-on-year a month earlier. Meanwhile, overall

    household spending declined in December.

    Ofadditionalimportance,therewasrenewedconcern

    surrounding the level o government debt in Japan.

    Despitethenationsgovernmentpledgetoturnitsannual

    budget defcit into a surplus by 2020, S&P downgraded the

    long term sovereign debt rating o Japan, rom AA to AA-,

    highlighting its concern over the nations growing debt burden

    and the difculties it may ace to restore its fscal balance.

    JapanscoreConsumerPriceInationrateremainedin

    negative territory, at -0.7% year-on-year. Such rates continue

    to underscore the weakness in Japanese consumer activity

    and to show that the ongoing deationary conditions are little

    changed. On the positive side, this will allow the Bank o

    Japan to retain its accommodative stance.

    Macro Assessment

    Emerging Markets

    Economic activity continued to impress, although combined

    with ongoing high ination levels, this could lead to urther

    monetary tightening.

    Indicatorsofindustrial/manufacturingactivityshowedrobust

    reading across the emerging market region. For instance,

    Chinas GDP growth beat the consensus orecast, coming

    in at 9.8% or the ourth quarter, which was well above the

    reading or the third quarter.

    Turningtoconsumeractivity,year-on-yearretailsaleswere

    strong, beating the consensus estimates in Brazil, China,

    South Korea and India.

    Thegoodreadingswerenotlimitedtothemajoreconomies,

    but improvement was also noticeable in wider EM region.

    This was particularly true in Latin America, where the

    Economic Activity Index rose above the consensus

    expectations in Argentina and Chile.

    ThesituationinCentralandEasternEuropehasshown

    encouraging signs o improvement, largely driven by the

    robust expansion in Germany (the regions major economic

    partner). There were ongoing positive readings in Russia, as

    well as in the rest o the region.

    Turningtoination,Chinaremainedthecentreofattention,

    with ination coming in at 4.6% in December. China raised

    its Reserve Requirement Ratio to the highest level on record.

    Inationary pressures generally intensifed in emerging

    markets. Food ination continued to be a major driver o

    price movements.

  • 8/7/2019 GIP FEB2011

    6/14

    6

    Global Developed Markets

    Liquidityisexpectedtoremainapositivefactorforequity

    markets in general given central bank stimulus and

    quantitative easing in the US.

    Despitemodestlyhigherlevelsofinationindeveloped

    nations, central banks are likely to maintain accommodative

    monetary policies in 2011.

    Valuationsinallmajorequitymarketsareatundemanding

    levels, and macroeconomic data is improving.

    Therefore,astheimprovingbackdropforequitiesisbecoming

    more evident, we have moved to a modest overweight

    position in equities against cash and government bonds.

    US

    TheUSmacroeconomicpictureimproved,althoughrisk

    persists. Overall we reiterate our central scenario o positive

    growth in 2011 and 2012 or the US.

    UScompaniescontinuedtoperformgenerallywell,whilethe

    earnings growth estimate or 2011 stood at 14.9% in January,

    a level in line with the broader developed markets and with

    our assessment o the US economic picture.

    Furthermore,astheFedmaintaineditsaccommodative

    monetary stance and is perusing its second round oquantitative easing, liquidity is likely to remain a positive actor

    or US (and other) equities.

    Europe

    AlthoughfourthquarterGDPgrowthintheUKwasnegative,

    overall, economic activity has improved in both the UK and the

    Eurozone. We continue to expect moderate growth in 2011.

    Fromavaluationperspective,EurozoneandUKequitiesare

    trading at reasonably undemanding levels, with their 12-month

    orward price to earnings ratios at 10.8x and 10.5x respectively.

    Inaddition,despitemodestlyhigherlevelsofination,centralbanks are likely to maintain accommodative monetary policies

    in 2011.

    Japan

    TheeconomicoutlookforJapanremainspositive,despite

    signs o consolidating ater the strong third quarter GDP

    fgures. Overall, the economic backdrop remains encouraging

    and in line with our central scenario or positive economic

    growth in 2011.

    TheearningsgrowthprospectofJapanesecompaniesfor

    2011 stayed reasonably solid, at 12.6%. Furthermore, the

    negative impact o the strong JPY on exports has been

    diminishing, suggesting a brighter horizon or Japanese

    exporters, while the improvement in labour markets could

    lead to a rebound in domestic consumption.

    Fromavaluationperspective,Japaneseequitiesweretrading

    at a 12-month orward price earnings ratio o 14.0 at the end

    o January. This compares to 13.6 a month earlier, which

    remains an attractive level relative to history.

    Againstthisbackdropandtheongoingsupportivehigh

    liquidity environment or equities in general, we have

    increased our allocation to Japanese equities versus cash

    and government bonds, as we did in other equity markets,

    and retained our preerence or Japanese stocks against the

    broader developed equity universe.

    Global-Emerging Markets

    Therecentcorrectioninemergingmarketequitiesonan

    absolute basis and relative to developed equity markets is, in

    our opinion, just that and we do not expect this to continue

    or a prolonged period. I the ination picture deteriorates

    triggering urther aggressive tightening, this view may change

    but in such a scenario, the probability is that all equities and

    other risk assets would be vulnerable as global growth could

    be threatened.

    WecontinuetolikeRussianequitiescomparedtoother

    emerging markets. Macroeconomic data has been

    encouraging, the rouble is strengthening and the valuations

    remain extremely attractive.

    TheunrestinEgyptclearlyhasamajorimpactonthecountry

    and is important to the wider investment world because o

    the regions oil supplies. Political change looks highly likely but

    it is hard to make any meaningul comment on the medium

    term investment impact while events are still unolding.

    Equity Markets

  • 8/7/2019 GIP FEB2011

    7/14

    7

    Equity Markets

    Hong Kong and China

    Chinasstrong4Q2010GDPgrowthof9.8%andrising

    ination risks have increased the pressure or the government

    to tighten policies more orceully through both monetary and

    administrative tools.

    Thoughstocksarenotatexpensivelevels,weareincreasingly

    concerned with the monetary tightening polices to curb

    ination.

    Marketscouldstayrangeboundwithdifcultytoachievea

    meaningul upside.

    Intheneartermwearealsoseeingfundowsfromemerging

    markets moving back to developed markets. We turnedneutral or the China and Hong Kong equity markets.

    Butona6-12monthsview,weremainpositiveastightening

    ears are expected to recede.

    Asia ex-Japan

    Fromamacroeconomicperspective,Asia-exJapan

    continued to show solid perormance and is expected to stay

    strong or the remainder o the year. However, the potential

    or monetary tightening in key countries could moderate the

    pace o improvement.

    Fromavaluationperspective,Asiaex-Japanequitieswere

    trading at a 12 month orward price earnings ratio o 12.7x

    at the end o January, which was marginally higher than a

    month earlier.

    Earningsgrowthforecastsfor2011continuetolook

    attractive, at 13.8%, which is, in our view, in line with the

    current economic conditions.

    Attheequityassetclasslevelthough,weretainourneutral

    stance or Asia ex-Japan markets relative to other equity

    markets, as specifc risk surrounding monetary policies

    remain and valuation levels show no strong signals.

  • 8/7/2019 GIP FEB2011

    8/14

    8

    Equity Markets

    Latin America

    TheeconomicperformanceofLatinAmericancountries

    remains strong and earnings growth estimates or 2011 look

    more reasonable.

    Havingsaidthat,thegoodnewsseemstobewellreected

    in market prices and relative valuation measures show no

    strong signals.

    Ongoingglobalowsfromthedevelopedtotheemerging

    world, uelled by continued low interest rates in the developed

    world, continue to present a problem to emerging economies.

    Brazil,thelargestmarketinLatinAmerica,hasalreadyraised

    the tax on certain investments by oreigners rom 2% to 6%in an eort to stem currency appreciation.

    Middle East

    TherehavebeenmacroeconomicimprovementsintheMiddle

    EastandNorthAfrica(MENA)region.Qatarhascutits

    interest rates while Dubai has stated it does not require the

    support o its central bank anymore.

    GrossDomesticProductgrowthexpectationsarepositive

    or both 2010 and 2011, although there are downside risks.

    Valuations remain undemanding but given the risks to

    economic growth and the narrowing valuation discount to

    emerging markets, we remain neutral on MENA versus other

    equity markets.

    TheunrestinEgyptclearlyhasamajorimpactonthecountry

    itsel and is important to the wider investment world because

    o the regions oil supplies.

    PoliticalchangeinEgyptlookshighlylikelybutitishard

    to make any meaningul comment on the medium term

    investment impact while events are still unolding.

    Eastern Europe

    WemaintainourpreferenceforRussianequitieswithinthe

    wider emerging markets universe, as we continue to think

    valuations are attractive on a relative basis.

    InEasternEurope,ConsumerPriceInationindicesincreased

    across the major countries. However, given the outlook or

    domestic demand in this part o the emerging markets world,

    the risk o policy changes remains lower than in Asia and

    Latin America.

  • 8/7/2019 GIP FEB2011

    9/14

    9

    US Government Bonds

    Overall,thegenerallyimprovingmacroeconomicenvironment

    continues to support our modestly cautious view on US

    treasuries relative to other asset classes.

    TheFederalOpenMarketsCommitteetooknoteofthebetter

    news on economic activity in recent weeks, but avoided

    sending any signal that it was yet reconsidering the existing

    quantitative easing plan or purchases o treasury securities

    through to June. The Committee also continued to highlight

    that overall conditions are likely to warrant exceptionally low

    levels or the ederal unds rate or an extended period.

    Fromavaluationperspective,althoughinationarypressures

    and ination expectations remain muted, current yields are

    not particularly attractive relative to history.

    However,yieldshaverisensomewhatinrecentmonths

    making valuation levels less stretched. We thereore have a

    neutral view on US treasuries relative to cash.

    Withinxedincomemarkets,ourpreferenceremainsfor

    corporate bonds, both investment grade and particularly

    high yield.

    Eurozone Government Bonds

    Theoverridingmoodinthenancialmarketsisstillvolatile

    and uncertainties regarding the economic health o eurozone

    peripheral countries remain, more particularly surrounding the

    risk o some orm o sovereign deault.

    Althoughthebondmarketsofperipheraleurozonenationsare

    priced to compensate or some risk, the fnal solution to the

    debt difculties is not clear making it hard to evaluate whether

    the pricing is sufciently attractive.

    Therefore,againstthisbackdrop,wemaintainasomewhat

    cautious outlook or eurozone government bonds against

    cash although the recent increase in yields has mitigated this

    caution to some extent. Overall, within fxed income, our

    preerence remains or corporate rather than sovereign debt.

    Asian Government Bonds

    RecentheadlineshaveshiftedthefocusawayfromEurope

    to Japan and Egypt. Japan sovereign rating was downgraded

    by S&P, citing its weak fscal position with high debt levels.

    Meanwhile, political unrest in Egypt continued to weigh down

    markets. These developments had some spill-over eects on

    Asian credit resulting in wider spreads overall.

    FormosteconomiesinAsia,inationnumbershavebeen

    higher-than-expected largely driven by the increase in ood

    and commodity prices. The ination indicators are generally

    expected to remain high over the next ew months.

    WeremainneutralonAsiaGovernmentUSDbondswiththe

    recent rise in US treasury yields.

    Investment Grade Corporate Bonds

    Therewereencouragingsignsofimprovementineconomic

    activity in January, particularly in the US, and a backdrop o

    moderate economic growth is broadly positive or corporate

    bonds as it should beneft company balance sheets.

    Thisissupportedbytheexpectationsforearnings

    growth in 2011, at 14.9% or the US and 15.3% or the

    developed countries.

    However,giventheongoingpressureongovernmentbond

    yields, current spread levels, albeit attractive in relation to the

    very low ofcial interest rates in developed countries, do not

    provide much cushion should government bond yield rise.

    Thereforeagainstthisbackdrop,wehaveretaineda

    preerence or investment grade corporate bonds relative to

    government bonds, but continue to avour high yield bonds

    within developed corporate bonds, as their extra yield oers

    more protection should government bond yields rise.

    Fixed Income

  • 8/7/2019 GIP FEB2011

    10/14

    10

    Global Ination-Linked Bonds

    Indevelopedeconomies,inationisexpectedtoberelatively

    contained in the near-term, as high unemployment and tighter

    fscal policies are likely to weigh on growth.

    Thesell-offinnominalbondsmakestheglobalination-linked

    bond market more expensive and the nominals less expensive.

    Whileweretainanunderweightstanceonination-linkedbonds,

    our view has turned less negative as the relative valuations

    versus conventional government bonds have improved.

    Fixed Income

    High Yield Bonds

    Thegeneralthemeincreditsofarin2011hasbeenthestrong

    perormance in high yield corporate bond issues, relative to

    investment grade issues.

    Ourtacticalpreferenceforhighyieldcorporatedebthas

    thereore continued to prove rewarding.

    Theunderpinningofthehighyieldbondmarketremainsvery

    supportive, with declining deault rates, abundant liquidity

    conditions, attractive valuations and notable improvements

    in corporate balance sheets. Corporate earnings also remain

    reasonably strong with ourth quarter results largely beating

    expectations in terms o both earnings per share and revenues.

    Overall,weretainourpositiveviewoncorporatebonds.

    Within this, we continue to have a preerence or high

    yield corporate bonds over investment grade, as valuations

    appear more attractive and the asset class is somewhat less

    correlated to a rising yield environment which remains a risk in

    developed market government bonds.

    Sovereign US dollar-denominated Emerging Markets Debt

    Aspolicymakersindevelopedeconomiesarelikelyto

    maintain accommodative monetary conditions throughout

    2011, the higher yields oered by emerging market debt

    should remain appealing.

    However,withinationrisingorstayinghigh,whileeconomic

    activity continues to grow at a ast pace in many emerging

    economies, the likelihood or central banks to raise interest

    rates urther is high.

    Furthermore,giventhateconomicreadinghavebeenbeating

    the consensus estimates in several cases, it is possible that

    rates will need to rise urther than currently expected (i price

    pressures do not recede).

    Overall,ourinvestmentoutlookforthisassetclasshasnot

    changed. We continue to preer developed market corporate

    debt to US dollar-denominated emerging market sovereign debt.

  • 8/7/2019 GIP FEB2011

    11/14

    11

    Other Investments

    Oil

    TheoilpriceincreasedslightlyfromUS$91.4perbarrelatthe

    end o December to US$92.2 per barrel at the end o January.

    Early in the month, the price declined beore moving sharply

    upwards at the end o the month as political tensions in Egypt

    escalated.

    GlobalcrudeoildemandcontinuedtostrengtheninDecember

    while supply ell as non-member o the Organisation o

    Petroleum Exporting Countries (OPEC) output was reduced

    as a leakage o an Alaskan pipeline disrupted supply.

    TheInternationalEnergyAgencyrevisedupits2011forecasts

    or global oil demand, reecting stronger than expected

    economic growth and cold northern hemisphere weather.

    OPECcrudeproductionisprojectedtoriseslightlythrough

    2011 to accommodate increasing oil consumption.

    However,commercialoilinventoriesheldintheOrganisation

    or Economic Co-operation and Development remain high and

    are likely to contain signifcant price momentum.

    Balancingononehand,theexpectedpick-upindemandand

    on the other, the degree o spare capacity, we maintain our

    orecast price range o US$70-90.

    Gold

    ActionsbytheUSFederalReservearelikelytocontinueto

    provide liquidity and potentially weaken the US dollar urther,

    both o which are likely to drive commodity prices, including

    gold, higher.

    Inaddition,ongoinguncertaintysurroundingthesustainability

    o the economic recovery remains, adding to the

    attractiveness o holding the metal.

    However,somefactorsremainunsupportive,likethethreatof

    higher interest rates outside the US, as has been the case in

    some developing economies.

    Commercial Real Estate

    TheUKremainsourpreferredmarketoverthemedium-to-

    long-term due to the yield level which, although lower than

    last summer, sufciently prices in the weak occupier market.

    However, we expect a dip in perormance in the short-term.

    AsiaPacichasthestrongestrentalgrowthprospects,

    particularly in the short-term, although recent strong capital

    value growth has reduced yields to an unattractive level, with

    the potential or a correction in values over the medium-to-

    long-term.

    IntheUS,despiteweakoccupiermarkets,pricingforprime

    assets in top-tier markets, such as New York and Washington

    D.C., has increased rapidly, and cap rates are back to pre-

    crisis levels. This has reduced their relative attractiveness.

    However, there are signifcant regional dierences, and

    pricing or other segments o the market remains subdued.

    Selected opportunities may appear as demand broadens rom

    its current narrow ocus.

    Intheeurozone,capitalvaluesgenerallyremainexpensive

    on a relative basis, and other regions potentially oer better

    value. However, there are signifcant country level and local

    variations within the region, and we expect stock specifc

    opportunities to emerge.

  • 8/7/2019 GIP FEB2011

    12/14

    12

    Alongwithmostcommentators,wedonotbelievethe

    resolution to the peripheral European countries fscal

    difculties has been achieved. The end game is difcult to

    predict and is likely to drag out over quite some time probably

    with bouts o nervousness or the EUR ollowed by relie

    rallies as seen recently.

    OurviewofthelikelypathofofcialUKinterestratesis

    now dierent to the market. We believe the frst rise in

    rates will be later than the market expects and possibly not

    even until 2012 because o the underlying ragility o the UK

    economy coupled with signifcant urther fscal tightening in

    the pipeline.

    Wecontinuetorecommendneutralpositionsforthemajorcurrencies as we do not have a high conviction on their

    direction over the orecasting time horizon.

    Currency

  • 8/7/2019 GIP FEB2011

    13/14

    Sovereign

    Malaysia

    A Malaysian government agency will sell RM10 billion

    (US$3.3 billion) o sukuk to fnance the construction o police

    quarters and acilities. Pembinaan BLT Sdn Bhd, which develops

    acilities or the police, will issue the sukuk. Pembinaan BLT Sdn

    Bhd, a construction company owned by Malaysias Ministry o

    Finance, started marketing RM1 billion ($327 million) o sukuk.

    The sukuk, which will be the frst under a 25-year, 10 billion

    ringgit Islamic Medium Term Note program, are being oered

    in six maturities. Proceeds rom sukuk sales will be used to

    build police acilities and to pay debt obligation.

    Bahrain

    The Central Bank o Bahrain (CBB) announced that the

    monthly issue o the short-term Sukuk Al-Ijara has been

    oversubscribed by 450%. Subscriptions worth BD45 million

    were received or the BD10 million issue, which carries a

    maturity o 182 days. The expected return on the issue, which

    begins on 20 January 2011 and matures on 21 July 2011, is

    0.92%. The Sukuk Al-Ijara are issued by the CBB on behal o

    the Government o the Kingdom o Bahrain.

    Kazakhstan

    Kazakhstan is set to pass legislation that would allow Kazakh

    corporations to sell sukuks. The legislation is expected to bepassed within the next two months.

    Indonesia

    Indonesias fnance ministry plans to sell 2.25 trillion rupiah

    ($248.62 million) o sukuk in February to the state-managed

    Islamic Haj Fund via a private placement. The und is managed

    by the religious ministry, and the sukuk is not tradable on the

    secondary market.

    Corporate

    UAE

    Emaar Properties, the United Arab Emirates biggest developer

    by market value, may sell a 5.5 year benchmark size dollar-

    denominated sukuk.

    Saudi Arabia

    Saudi Arabias civil aviation authority is eyeing sale o sukuk, in

    several tranches to fnance a modernisation o the kingdoms

    airports. The frst tranche o the sukuk would be worth 4.5

    billion riyals ($1.20 billion).

    Malaysia

    Malaysias Sapuracrest Petroleum secured a RM750

    million (US$244 million) Islamic fnancing acility to und its

    expansion. Maybank Investment signed an agreement with

    Sapuracrest unit or the acility that include Malaysian ringgit

    and US dollar denominated tranches. The deal, which employs

    the Ijarah and Murabahah concepts, attracted strong demand

    with a total o six participating fnanciers.

    Pengurusan Aset Air, or Water Asset Management Company

    (WAMCO) is a wholly owned company under the Minister o

    Finance, has sold RM2.7 billion o sukuk in January. It sold

    RM1.2 billion in three-year paper at 3.64%, RM1 billion o

    5-year paper at 3.92% and RM500 million in 10-year paper at

    4.43%. The issuance was part o a RM20 billion government

    guaranteed Islamic und-raising programme.

    Sukuk Index

    TheHSBC/DIFXUSDollarSukukIndex(SKBI)isdesigned

    as a replicable benchmark tracking the return o an emerging

    Sukuk portolio. It consists o USD/ GBP/ JPY/ EUR-denominated fxed/ oating rate vanilla Sukuk. The SKBI

    average yield stands at 4.882 as at end o January 2011

    compared to 4.736 as at end o December 2010.

    Sukuk

    30/01/10

    0

    1

    2

    3

    4

    5

    6

    7

    8

    9

    28/02/10

    30/03/10

    30/04/10

    30/05/10

    30/06/10

    30/07/10

    30/08/10

    30/09/10

    30/10/10

    30/11/10

    30/12/10

    30/01/11

    SKBI Average Yield

    4.882

    Source: Bloomberg as o end o January 2011

  • 8/7/2019 GIP FEB2011

    14/14

    Disclaimer: The inormation in this Global Investment Perspective newsletter

    (GIP newsletter) has been obtained rom reports (relevant reports) issued

    by HSBC Investments (HIS). Whilst every care has been taken in preparing

    and issuing this GIP newsletter, HSBC, HIS and the HSBC Group make no

    guarantee, representation or warranty and accepts no responsibility or liability

    as to its accuracy or completeness. Some o the inormation in this document

    is derived rom third party sources as specifed at the relevant places where

    such inormation is set out. HIS believes such inormation to be reliable but

    it has not independently verifed. All opinions and estimates constitute HIS

    judgement as o the date(s) o the relevant reports issued by HIS and are

    subject to change without notice.

    The inormation contained in this GIP newsletter is not directed at and is not

    intended or the residents o the United States, Canada or Australia.

    The inormation contained in this document has not been reviewed in the light

    o your personal fnancial circumstances. HSBC, HIS and the HSBC Group

    are not providing any fnancial or investment advice. The inormation is not

    and should not be construed as an oer or solicitation, or recommendation,

    to acquire or dispose o any investment and should not be considered

    as investment advice. Any person considering an investment should

    seek independent advice on the suitability or otherwise o the particular

    investment. Investment involves risk, value o investment may move up or

    down, and may become valueless. Past perormance fgures shown are not

    indicative o uture perormance. The relevant product oering documents

    should be read or urther details.

    In the event o a conict between the English version o this newsletter and

    that translated into Chinese, the English version shall prevail.

    Every mention o HSBC in this disclaimer reers to HSBC Bank Malaysia

    Berhad (Company No. 127776-V) and HSBC Amanah Malaysia Berhad

    (CompanyNo.807705-X)together.

    Publisher o the entire publication:

    HSBC Bank Malaysia Berhad

    (Company No. 127776-V)

    Publisher o the Sukuk section o the publication:

    HSBC Amanah Malaysia Berhad

    (Company No. 807705-X)

    Copyright. HSBC Bank Malaysia Berhad

    (Company No. 127776-V) 2010 and

    HSBC Amanah Malaysia Berhad

    (CompanyNo.807705-X)2010.

    All rights reserved.

    Printer

    Percetakan Lai Sdn. Bhd.

    No. 1, Persiaran 2/118C,

    Kawasan Perindustrian Desa Tun Razak,

    56000 Cheras, Wilayah Persekutuan Kuala Lumpur.

    Click hsbcpremier.com.my/hsbcamanah.com.my

    Call 1 300 88 9393