Investment Outlook First Quarter 2019 - HSBC Private Bank · Investment Outlook First Quarter 2019 9 High conviction investment themes Around a well-diversified core portfolio, we

Finding the right balanceInvestment Outlook First Quarter 2019

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3Investment Outlook First Quarter 2019

Contributors

Regional Chief Market Strategists

Belal Mohammed Khan [email protected] +41 (0)58 705 5273

Cheuk Wan Fan [email protected] +852 2899 8648

Jose Rasco [email protected] +1 (1)212 525 3264

Jonathan Sparks [email protected] +44 (0)20 7860 3248

Nicoletta Trovisi [email protected] +44 207 005 8569

Global FX Coordinator

Global Market Analyst, Real Estate Investment

Guy Sheppard [email protected] +44 (0)207 024 0522

William Benjamin [email protected] +44 (0)207 024 1546

Head of Alternative Investment Funds

Global Head of Fixed Income

Laurent Lacroix [email protected] +44 (0)207 024 0613

Kevin Lyne Smith [email protected] +44 (0)207 860 6597

Global Head of Equities

Global Chief Market Strategist

Willem Sels [email protected] +44 (0)207 860 5258

Quantitative Strategist

Stanko Milojevic [email protected] +44 (0)20 7024 6577

Neha Sahni [email protected] +44 (0)20 7024 1341

Global Investment Strategist, Managing Editor

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Contents

Letter to clients 07

Our views in a nutshell 08

Portfolio Strategy 10

Numbers that count 14

Box 1: In Hindsight 15

Investment themes 17 – EM charting a new course 17 – Industrial Revolution 4.0 21 – A sustainable world 22 – An extended late cycle 24

Equities 26

Box 2: Is high corporate leverage 28 becoming an issue?

Fixed Income 30

Currencies and commodities 34

Hedge funds 37

Private markets 37

Real estate 38

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WelcomeMessage from our Global Chief Market Strategist 12 December 2018

Dear client,

As we head into a new year, many of us have the good intention of striking the right balance in our lives. And so it should be too, we think, with our view on markets.

2018 was a tough year for many investors, with higher volatility, more dispersion between markets, and a constant stream of political headlines complicating market analysis. Following a ten-year long and almost uninterrupted equity bull market, the difficult market circumstances of the past 12 months came as a shock to many.

But there is a danger that investors now become too pessimistic. We no longer have the benefit of a synchronised global economic growth, as seen in 2017, but the slowdown we are seeing should be mild. Global GDP growth should still be at a respectable 2.6%, and earnings growth at circa 10%. The US still has good momentum behind it, and China’s domestic economy is more resilient than people think. Hence, we think that markets’ concern about a US or global recession is overdone.

Much has been thrown at markets in 2018, but the lower expectations, lower pricing, and lower positioning should help equity markets form a bottom in the coming months and recover later on. The higher USD interest rates that triggered the initial stages of the sell-off are now largely in the price, and US Treasuries

should trade in a range. Pessimists cannot have it both ways: a weaker economy is unlikely to be compatible with much higher Treasury yields. Equity market pricing has already adjusted sharply, with a big drop in price / earnings valuations, and credit spreads have widened, especially in emerging markets, but recently also for USD developed market bonds. Investor positioning has adjusted, and almost all signs of exuberance that existed in 2017 have now disappeared. Oil prices too may have fallen too far and they should find a floor soon.

With so much ‘in the price’, it seems that large shocks such as a recession, a European sovereign crisis or Fed policy mistake would be required to lead to a further large adjustment of equity markets, and we do not believe these will materialise. A large geo-political shock could of course do serious damage to markets, but this is hard to predict and we find it counter-productive to invest on the basis of wild guesses.

Clearly, the global slowdown makes it inappropriate to be overly bullish, and we balance the moderate weakening of the cyclical outlook against the significant improvement in equity, bond and credit valuations. We are overweight on equities, but also on gold, and we recently added to higher quality USD investment grade exposure and selective EM hard currency debt. Within equities,

we hold overweight positions in defensive sectors such as healthcare and utilities, but also in technology, which we think should recover and benefit from long term support. In EM equities, we find very attractive valuations for investors with a long term perspective. But most naturally worry about short term volatility, and we therefore focus on areas of likely resilience amid the challenges posed by the US-China trade tariffs. We like areas that benefit from rising Chinese household wealth or from fiscal stimulus, and India’s urbanisation or connectivity.

At this late stage of the global cycle, rising return dispersion and market volatility call for a focus on active management, risk diversification and balanced risk taking. Alternative investments can offer uncorrelated returns, help weather volatility and take advantage of the mispricing of specific securities the recent correction has created.

As we head into 2019, we would like to wish all of our clients a happy and prosperous new year!

Willem Sels, Global Chief Market Strategist

Our views in a nutshell

DM Government bondsNegative on German Bunds and Japanese government bonds.

EquitiesPositive on US, China, India and Singapore.

Negative on Italy, Spain, South Africa, Russia, Taiwan and Turkey.

CreditPositive on Brazilian, Mexican, GCC, Indonesian and South Korean Hard Currency bonds; Chinese Local Currency bonds. US IG and US HY.

Negative on Eurozone IG and HY; Ukrainian and Turkish debt.

AlternativesPositive on Gold and Oil

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Our investment strategy for the core of investors’ portfolios currently reflects the following convictions:

® Equity markets have re-priced, to account for higher US rates. To fall much further, the US would need to go into recession, which would be a big surprise.

® Value has been created in a number of asset classes, and we take advantage of this by putting some more money to work in our advisory model portfolio. We have added to some lower and higher risk assets, to maintain a good balance.

® We maintain most of our relative preferences. We prefer stocks in the US and EM over those in Europe; US credit over EUR or GBP credit; and EM hard currency debt over EM local currency debt.

® The US dollar should continue to appreciate, even if gains should be less than in 2018. FX volatility may remain elevated, and investors should assess the benefits of hedging some positions.

Core

SatellitesESG

A sustainable world

Industrial Revolution 4.0

EM charting a new courseAn extendedlate cycle


High conviction investment themes

Around a well-diversified core portfolio, we typically add a number of investment themes, which can serve a number of purposes. Long term structural themes can help lower the cyclicality of the portfolio, and three of our four themes fall into this category. The Fourth Industrial Revolution (IR 4.0), EM charting a new course and A sustainable world all tap into long term trends, which should continue to be supported even if the economic cycle were to slow down. The exception is our Extended late cycle theme, which is more cyclical, but allows us to skew the portfolio in case the investor is particularly sensitive to a particular aspect of the current cycle.

High conviction themes can also help add to portfolio returns, if we manage to pick areas with superior earnings growth. Some of our themes are in areas where significant disruption is taking place. However, active stock or bond picking may be necessary to pick the winners and avoid the losers. We believe it is important to size the investment in themes appropriately: if it is too small, it is unlikely to move the dial, but if it is too large, it could misalign the risk profile of the portfolio. As a general rule, we think the weight of the core portfolio should remain well above 50%.

Our previous quarterly investment outlook publication, entitled ‘What’s the right price of money’ described the correction in global stock and bond markets as a process of re-pricing. This process naturally flowed from higher US interest rates and the end of Quantitative Easing (QE) in the US. The good news is that this process should now largely have run its course. Indeed, global equity valuations have fallen by 17% this year, twice the typical annual de-rating in a Fed tightening cycle.

But markets have clearly started to price another risk, i.e. the fear of a sharp economic slowdown, largely driven by the uncertainty around the economic effects of the US- China trade tariff dispute. Indeed, the 17% correction in valuations already exceeds the typical 15% move outside of a recession, but when the US enters recession, the typical correction is 31%. To correct much further, we believe we would need to be in a recession scenario, and we do not think this will be the case.

Taking a balanced view of fundamentals

1. US economic outlook

Current views on the US economy fall in three camps, which we represent in our table. Some believe the US economy – and its labour market - may be overheating, leading to strong growth in coming months, but with the risk of sharp Fed tightening, which would be followed by a sharp slow-down. This is a typical Boom-Bust scenario. At the other extreme, some believe tariffs and higher rates will lead to a sharp downturn in coming months.

We believe it is important to strike the right balance, and that the truth is in the middle: economic growth has peaked, but remains healthy, with GDP growth forecast at 2.5% in 2019. We are in the late stage of the US cycle, but this stage will probably be extended. Three rules of thumb suggest a recession is unlikely until 2020. First, after the widely followed ISM manufacturing survey peaks, it has historically taken 15 months before the US entered into a recession. So even if the August reading proves to be the high point, the economy still has some time to run on this measure. Second, it has also taken 15 months from the moment of yield curve inversion till the start of a recession. We recently saw a minor inversion of part of the yield curve, but no full inversion yet. Lastly, rising rates could theoretically trigger a recession, but at the start of the past 6 recessions, the Fed’s real rate stood above 2%, while currently, it is only marginally above zero.

Slower but continued economic growth should allow earnings to continue to grow too. The speed of earnings growth has likely peaked, after the one-off boost from the 2018 tax reforms, but they are still likely to continue to grow at a healthy 10% clip.

The Fed should continue on its gradual tightening path, with slightly lower growth and inflation to drop from 2.5% to 2.1% in 2019. Wage inflation is rising, but there is some slack in the labour market, as many people only have part-time jobs and automation may cause workers to shift to other, more productive jobs. Oil prices should rise from their recent lows, but remain well off their peak, thus contributing less to inflation than they did in 2018.

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Portfolio StrategyLooking for the right balance

Core case: late cycle

End-of-cycle

Boom-bust

FX: strong USDBonds: FRN, Inflation-linked bonds, short duration stanceEquities: US OW, EM UW, US cyclicals, momentum and value

FX: USD rally to fadeBonds: focus on 3-5 year in US, add defensive EM HCEquities: US OW, start to diversify globally, focus on quality/value, neutral cyclical stance

FX: USD strengthBonds: long duration, selective focus on domestic EM exposureEquities: underweight global equities, defensive stocks, domestic EM, low vol/dividend strategies

Source: HSBC Private Banking as at 11 December 2018


2. Chinese economic outlook

A prudent investor may want to assume that there will be no immediate end to the US-China trade disputes, even though both countries want to avoid further escalation. To mitigate trade war risks, multinational corporations will likely divert some of their production to factories in other countries to escape tariffs. The adjustment of global supply chains weighs on foreign direct investment into China and adds uncertainty to Asian exporters who are part of China’s supply chains.

The external headwinds have prompted the Chinese government to step up fiscal and monetary stimulus to boost domestic demand. We expect China to reduce VAT and corporate income taxes, and cut banks’ reserve requirement ratio by another 2% in 2019. Balancing the impact of higher tariffs versus policy stimulus, GDP growth should not fall much, and is expected to remain around 6.6%. This is largely because of the highly domestic nature of the Chinese economy, with domestic demand contributing more than 90% of China’s GDP growth. Measures to increase liquidity support for the private sector are key, as private enterprises contribute 70% of economic output of the country. The government’s commitment to continued SOE reform is important to support market confidence, and we also believe that the government favours relative stability of RMB. As USD strength eases in 2019, we expect USD/RMB to trade around 7.10 by end-2019.

3. European economic outlook

Europe’s economy and earnings will probably slowdown more materially than in the US, and investing is largely a matter of relative attractiveness. In a few countries, GDP growth dipped marginally below zero in Q3. Markets also worry about uncertainties related to Italy and

the European elections. As for the UK, an underweight on UK stocks and a negative GBP view worked well in recent quarters, but we recently moved back to a neutral view on both, as we do not have clarity about the outcome of the Brexit process, and two-way risks exist. Portfolio strategy

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Source: Datastream, HSBC Private Banking as at 11 December 2018. Past performance is not a reliable indicator of future performance.

Valuations have corrected sharply, while earnings expectations have not declined much

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Weighing fundamentals against valuations The strong USD and higher US rates have led to a global re-pricing of assets. As our chart on page 13 highlights, most equity markets are currently trading near the lowest price /earnings (P/E) valuation ratios in 5 years. China and India are some of the exceptions, but this is because they rallied so strongly in recent years. Even for these two markets, the recent fall in valuations has been sharp. As we discussed, the fall in global P/E ratios makes equities attractive, because we view a recession as unlikely.

So what about bonds? Yields on US Treasuries and USD investment grade are at or near the highest levels in 5 years. US high yield has been much more resilient, because of relatively low duration and low default rates, but it is clear the trade-off between value and risk has shifted away from HY in favour of better rated credits. EM hard currency debt has become more attractively valued. We therefore now hold an overweight position in EM HC debt.

On the EM local currency front, while LC bonds have been more resilient, investors there have been hit by a sharp correction in EM currencies. Due to the much lower yields, we consider EUR bonds much less attractively valued than USD bonds, even though much of this can be explained by the difference in cash rates.

In our view, Treasury yields will trade in a range in coming months, and this should limit the scope for further re-pricing of bond and equity markets. The gradual Fed tightening we foresee is already largely priced in and speculators’ positions are already very bearish. While higher Treasury yields were one of the early causes of the equity market correction, Treasuries have started to get a safe haven bid amid equity volatility in recent weeks. In turn, if yields no longer rise, USD may see less upward pressure, and two of the early causes of the equity market correction should dissipate. However, cash and floating rate notes can be helpful for investors who believe the Fed may hike more than we expect, if inflation is boosted by additional trade tariffs.

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USD bond markets have sold off as a result of the US Treasury move


Investment implications

With this balanced outlook of slower but healthy growth, and the relative differences between the three economic blocks, what are the market implications? When we balance valuations against relative risks, where are the best opportunities?

® Global equities merit an overweight position. As we discussed, equity valuations suggest a likely recession, but we do not believe this is a serious risk in 2019. Earnings growth should slow down from 15% in 2018 to 10% in 2019, but this is a respectable level, and multiples have corrected sharply.

® From a regional perspective, we hold overweight positions in the US and EM Asia, and are underweight in Europe ex-UK. The US benefits from strong earnings growth and investors should still benefit from some USD upside adding to returns. Although its valuations are not as attractive as in Europe or Asia, the differential is not as big as it was in the summer. Europe is generally seen as being attractively valued, and many institutional investors

are overweight, but political risks remain, and some EUR weakness

may subtract from returns. In Asia, we have adapted our high conviction themes to reflect short term uncertainty and potential for volatility, focusing on financials and quality consumer stocks (instead of consumer cyclicals and technology hardware) and structural growth themes related to reform and technological upgradation. Cyclical stocks may be vulnerable until economic data create more confidence. But when markets find support, global equity funds will need to add to EM Asia positions, as the extent of their underweight position in EM Asia looks too extreme.

® Low valuations in many asset classes have caused us to put some more money to work in our advisory model portfolio. Since the summer months, we had been overweight on cash to weather some of the volatility, but with much of the re-pricing behind us, we have now put that cash to work. We have added a range of assets, including higher and lower risk assets, as we wanted to strike the right balance, and avoid materially increasing our overall

risk exposure. We have added to gold, US investment grade bonds, EM hard currency debt, US equities and Asian equities.

® To further limit overall portfolio risk, our sector allocation has become slightly more defensive with overweight positions in utilities and healthcare. We have increasingly moved to quality growth stocks with strong balance sheets and sustained earnings growth, recognising the concern about the economic cycle in the short term. We couple this with structural growth trends, especially those related to the Fourth Industrial Revolution (IR 4.0) that should support IT, and any company that effectively uses technology to its benefit.

® For USD, the path of least resistance remains one of moderate strength, helped by better growth and higher interest rates compared to Europe or Japan, and the safe haven qualities of US equities and Treasuries compared to other markets. But with the Fed rate hikes largely priced in, the surprises in central bank policy could come from outside the US, which should allow for selective exceptions to the broad USD trend. Moreover, as investors are still uncertain about the global economic outlook, and the scope for political surprises around the world remains, we may be in a Risk on / Risk off (RoRo) world, where periods of strong risk appetite and weak risk appetite quickly succeed each other. FX volatility should thus be elevated, and investors may want to assess whether hedging part of their portfolio is appropriate.

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Many equity markets are trading close to the lowest level in 5 years

Numbers that count127 million peopleThe number of tourists expected to visit China each year, by 2030. This would make China the most popular tourist destination, just ahead of France (126 million) and the US (116 million). (Source: The World Economic Forum).

30% China’s share of patents granted around the world has jumped from almost nil to 30% in the past 10 years. Japan is #2, with 23%, and the US #3, with 19%. (Source: Financial Times, IP5 offices).

70% of global GDP growthEM economies are likely to account for 50% of the world’s GDP by 2030, but they will create about 70% of the world’s GDP growth. China will be the world’s largest economy, at USD 26 trillion, exceeding the USD 25.2 trillion of the US. (source: HSBC Global Research).

12.3 Gigawatts The Indian state of Karnataka has 12.3 gigawatts of renewable energy capacity, the most of all 29 Indian states, and considerably more than Denmark (7.8 GW) and the Netherlands (7.7GW). The bulk comes from solar power, but hydro and biomass complete the mix. (Source: IRENA, IEEFA).

Less than 1South Korea’s fertility rate is set to hit a record low of 0.96, leading to a rapidly shrinking population, as stability requires a rate just above 2. Declining populations push several Asian countries to increase automation and move into higher value added activities. As populations age, wealth management stands to benefit.

24 FTAsChina has negotiated 24 free trade agreements so far, and 16 are signed and implemented already. The EU is in the process of finalising trade pacts with Japan, Singapore, Vietnam, Mexico, Mercosur, Chile, Australia and New Zealand. The market’s focus is on US trade tariffs, but elsewhere, trade flourishes.

10xAir pollution in the EU is causing ten times more premature deaths than traffic accidents, according to the EU Court of Auditors.

90%Researchers in South Korea found that micro plastics are present in 90% of the sea salt we consume. The Environmental Science and Technology journal reports that the average adult ingests about 2000 micro plastics per year through fish or water consumption.

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In hindsight…The principal objective of any outlook piece is to look forward, but it is also important to assess the quality of the calls we made in 2018.

Our 2018 investment outlook expressed a preference for the US and Asia over Europe. Our US overweight was a good call: US equities significantly outperformed other markets, benefiting from the strong US economic cycle and tax cuts. Our overweight in technology benefited us for most of the year, and we avoided some of the internet platform volatility by focusing on structural themes related to the Fourth Industrial Revolution instead. In FX, our view that USD would continue to rise was an out of consensus call, but proved to be correct.

Avoiding the stock markets of the ‘middle’ of the world - including continental Europe, the UK and emerging markets such as Turkey and South Africa – also worked well, as they were hit by comparatively weaker growth, Brexit uncertainty and a variety of political risks. We moved back to neutral on UK equities and GBP in September 2018, and we await the outcome of Brexit negotiations to see if this proves to be a good decision.

But our overweight on Asia mostly proved to be a bad decision. Economic growth held up relatively well, but we underestimated investors’ bad reaction to US-China trade tensions. We became much more selective, and reduced our overweight to Asian equities, while cutting our EM debt exposure to neutral. We also focused on areas and themes with structural support, to reduce short term volatility. But while we maintain our view that the medium to long term outlook for Asian markets remains promising, a convincing rebound has still not materialised. In addition, weak EM currency performance added to

foreign investors’ losses in EM equity markets.

Part of the issue was that the positive cyclical factors that supported our bullish US equity and USD views, also led the US Treasury to sell off. We expected 10-year Treasury yields to rise from 2.4% to 2.8%, and then range trade thereafter, but yields overshot this target, trading closer to 3.0-3.2%. EM bonds were hit hard, but US high yield, as we expected, was much more resilient. Rising Fed rates strongly supported our Floating Rate Notes high conviction theme.

As we expected, it was a volatile year, with much less equity market upside than in 2017. In our advisory model portfolio, we reduced the overall risk in most asset classes, and raised some cash to better weather the volatility. While many commentators believed gold would benefit from global uncertainty, we never really warmed to it until Q4 2018, as the headwinds of rising US rates and a strong USD proved to be significant obstacles for its performance. This proved to be good decision and worked in our favour. However, in December 2018 we decided to upgrade our view on gold to mildly overweight as Treasury yields topped out. Moreover, in volatile markets such as now, gold is a good hedge against any future tail risks.

Overall, our performance is close to benchmark at this point of time, as our good calls in developed markets have largely been offset by the bad calls in EM Asia. Many active fund managers and hedge fund managers have found it hard to add value in 2018. Whether we end up in positive or negative territory versus our benchmark thus depends on the final weeks of the year, and whether markets focus on the value in global markets, or on the risks.

Box 1

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Peaking US rates and slowing USD strength are expected to remove a major headwind for emerging market (EM) and Asian assets in 2019. To mitigate trade uncertainty, China is stepping up fiscal and monetary stimulus to boost domestic demand. We also expect to see a recovery in oil prices, which should be another factor providing support to EM assets. After a significant re-pricing of EM assets in 2018, valuations look compelling versus historical average. Within EM, EM Asia looks the most attractive region due to its strong domestic growth drivers, structural reform progress, low valuations and rising ROE. The extent of foreign investors’ underweight in EM Asian equities looks too extreme at a two standard deviations below historical average. We identify three compelling investment themes to capture tactical and structural opportunities in Asia.

Asian Quality GrowthWe favour quality growth stocks in Asia due to their fundamental resilience and sustained earnings growth. We select Asian quality growth stocks with high profit margins, strong free cash flow generation, low gearing, robust balance sheet strength and outstanding brand franchise. Firms with these characteristics should be able to react to economic challenges and external headwinds. We combine quality with growth as market expectations have turned over-pessimistic on the cycle, and we forecast 6% GDP growth and 10% earnings growth for Asia ex-Japan in 2019.

Quality stocks have historically performed well in the early phase of a cyclical downturn. Since 2000, our EM quality stocks universe has outperformed the benchmark by 6.6% per annum. Taking into account lingering trade uncertainty and the late stage of the cycle, we favour the quality stocks in the domestically oriented consumer and financial sectors in Asia while staying cautious on the cyclicals such as technology hardware and consumer discretionary. We also identify quality growth stocks among Asia’s structural reform winners and technological innovators. With fading headwinds from higher US rates, Asian high dividend stocks including selective Singapore REITs with sustainable cash flows and dividends offer attractive opportunities, in our view.

Rising Asian Wealth Changing demographics, longer lifespans, and rising wealth create attractive opportunities in equities and credit, in our view. We estimate demand for pension assets in Asia to expand by at least 5% annually until 2050, with most growth coming in the next decade. We are bullish on insurance companies, wealth managers and selective brokers which are well positioned to capture rising wealth management needs in Asia.

According to the BCG Global Wealth Report 2017, Asia ex-Japan’s USD62 trillion private wealth should deliver the highest growth rate of all regions and grow by 9.9% compound annual growth

EM charting a new course


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rate (CAGR) in 2016-2021, driven by higher personal savings and new wealth creation. The study suggests that private wealth in Asia Pacific, including Japan, should surpass North America in 2019. We expect the strong private wealth growth in Asia to drive robust consumer demand for healthcare, consumption, entertainment and travel services. In particular, the rise of China’s empty nesters (families that have their only child leaving home) who are aged 40-64 with personal income exceeding USD50,000 per annum will offer strong growth driver for healthcare spending and discretionary consumption. China’s empty nesters account for almost one-fifth of urban Chinese households, according the consultancy Global Demographics.

In the ASEAN markets, healthcare spending is still low, at circa 5% of GDP, versus 10% in Japan and 17% in the US, based on World Bank statistics. Healthcare spending in the ASEAN Six (Malaysia, Singapore, the Philippines, Indonesia, Thailand and Vietnam) is expected to grow by a CAGR of 7% from USD420bn in 2017 to USD740bn in 2025 (Source: Solidiance Analysis). More generally, rising income and urbanisation should drive consumption growth in ASEAN countries. In India, the young demographics and rising urbanisation should boost spending on housing, healthcare and communications. India’s supermarkets and modern convenience

stores account for less than 3% of the total food and grocery market, making the expansion of the modern retail sector one of India’s most compelling growth stories for the next decade.

Riding China’s Policy TailwindsTo counter the effect of slowing global growth and US-China trade tariffs, China is expected to stimulate domestic demand through VAT reduction, corporate income tax cuts, export rebates and increased spending on infrastructure. Domestic demand has contributed over 90% of China GDP growth over the past three years. In such a domestic economy, fiscal stimulus can have a big multiplier effect on growth, as there are fewer leakages.

Positioning for China’s fiscal stimulus and structural reforms, we favour Chinese equities in the banking, infrastructure, construction and building materials sectors and bonds issued by quality State Owned Enterprises (SOEs). Corporates have already been promised a reduction in their social security burden, and we also expect China to cut VAT by 0.9-1.6% of GDP, bringing tax savings of up to RMB1.3trn. With the tax cuts, China’s budget deficit could increase to around 4% of GDP in 2019, up from an estimated 2.8% in 2018 but we do not think this will materially affect the market’s perception of the government’s credit quality.

After the broad based tightening in shadow banking activities in the past years, we expect more credit to be extended to the private sector. The central bank has said they will encourage more bank lending to the private sector, especially the small to medium sized enterprises that suffered the most from the tighter non-bank credit channels. After contraction in y-o-y terms in most of the 2018, infrastructure investment should rebound modestly in 2019, ranging from traditional infrastructure such as railways and environmental protection to newer needs including hospitals and tourism. Beijing has granted approval for local government bond financing to fund the increase in infrastructure spending.

Accelerated SOE reforms and continued supply-side reform should benefit select SOEs. We expect breakthroughs in corporate governance and mixed ownership reforms, to progress towards a level playing field, or “Competitive Neutrality” of the state sector versus the private sector. Increasingly, rules on the management of SOEs will encourage the separation of enterprises from government in decision making. SOE reform may also reduce the size of non-financial SOEs’ assets, which at RMB183.5trn much exceed all other SOEs in the world combined. We expect structural reforms to bode well for quality blue-chip SOE stocks and investment grade credit issued by leading SOEs.

In the Chinese bond market, we like the Chinese Local Currency debt as it would benefit from inclusion in the international bond index and also from any further monetary policy easing, which should be a tailwind for the LC debt in China. In Chinese Hard Currency debt, we adopt a more selective approach and prefer selective SOEs benefitting from the reform process.

Private wealth in Asia Pacific is expected surpass North America in 2019

Source: BCG Global wealth report 2017; HSBC Private Banking as at 11 December 2018

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2020


The technology sector has had a difficult time in recent months. The outrage over Facebook’s use of personal data is leading to increased US regulation at state and federal level, and will probably temper the platforms’ rapid growth rates. US-China trade tariffs are forcing companies to re-consider their supply chains, and while the disruptions may be temporary, share prices have been hard hit. Higher US interest rates have caused investors to turn away from growth stocks. And because many investors were overweight on IT, position adjustment has been rapid and significant. Lastly, the decision of equity index provider MSCI to reclassify some IT companies has hit pricing, as they are moved into a new sector with telecom companies, which typically have lower valuation multiples.

One wonders what else could go wrong. It seems to us that a lot has already been thrown at technology, and the valuation adjustment has been significant. From a medium to long term perspective, the sector should see good support, as the factors that form the foundations of the Fourth Industrial Revolution are here to stay. Smart graduates flock to the knowledge economy, and find it obvious that this is the most promising area for their careers. And 5G, rapidly increasing mobile data and AI provide huge opportunity for innovation.

The stringent rules that protect European consumers’ data may be a headache for many firms there, and US firms are seeing an increased burden as well, but Chinese firms may have a competitive

edge due to their easy access to massive data. The Fourth Industrial Revolution (IR 4.0) continues unabated in Asia, in spite of the trade tariffs. In an effort to get to an agreement with the US, China may well tweak its government policy and local practices in certain areas, but China’s objective to become a modern nation and a leader in innovation will not change. Recently, some Chinese companies in the sector announced good results, proving that many companies can rely on the big domestic market and the Asian region should flourish. Online advertising revenues continue to grow at an impressive pace, and the Singles’ Day online sales again beat last year’s staggering record.

For us, volatility in IT is not a game changer, as IR 4.0 is much broader than social media or the IT sector. In fact, to avoid the volatility of the past few months, we have steered away from the social media platforms. Instead, we focus on technology as an enabler of change, increased productivity and innovation. In fact, we find some of the most attractive opportunities within sectors outside of IT.

Health tech is supported by a number of long term trends. Global ageing raises healthcare needs around the world, while rising wealth boosts demand for better care in Asia, and high government debt piles create the need to cut costs in Europe’s national health services. Tech is the enabler of many innovations, with AI often at the centre. AI is better at detecting skin cancer and as good at analysing eye scans as most doctors are,

and it can help speed through new drug trials much faster than before. Health tech has not been immune to tech volatility, but its link to the defensive health sector has helped dampen volatility somewhat, and its long term promise is great, in our view.

Fin tech is also supported by long term factors, including very low productivity growth in the financial sector, high costs and the challenges of heavy regulation. While fin tech companies are unlikely to replace financial firms altogether, they can help them cut costs, automate paper work and address regulatory requirements.

Automation and robotics also help address some long term challenges. Alibaba’s co-founder Jack Ma comforted us that humans will always be smarter and wiser than machines and will never be replaced. But declining work populations and rapid wage growth in Asia require companies to rapidly become more productive, and automation is often one of the answers. Interest rate hikes are unlikely to be a real challenge to automation, as the productivity gains outweigh the rising interest rate costs of such an investment. But the uncertainty around global growth and the worries about US-China trade tariffs have weighed on investment spending activity in recent months. As a result, we have put this theme on hold for now, until there is more clarity around the tariffs, and CEOs are more confident to invest again. Given the strong structural support for this theme however, we expect to re-launch it again in the course of 2019.

Industrial Revolution 4.0

22

For those who fret about trade frictions dividing the world, one thing is clear: our air and water continue to flow across continents, and the health of our planet thus is a global problem.

It is highly visible and bound to remain high on the agenda for decades. The terrible hurricanes, flooding and wildfires this year have kept the environment in front of everyone’s mind. Global warming may not be the immediate trigger for the devastation, but many scientists believe that it increases the frequency and the intensity of such calamities.

We have been aware of global warming for some time, but in recent months, the poor state of our rivers, lakes and oceans has rapidly gained attention. Images of fish and birds swallowing plastics have shocked consumers. Slowly but surely, they have started to scrutinise the packaging of the products they buy, and governments are increasingly legislating to reduce waste.

For many companies, therefore, there are rapidly growing economic incentives to become friendlier to the environment. Companies are increasingly highlighting their environmental credentials in

advertising, hoping to attract new clients. And they are scrutinising their start-to-end production process to be more energy efficient and less wasteful. Above all, they will want to avoid significant miss-steps, because in the internet age, an environmental mistake can rapidly hurt business. The ‘hashtag risk’, as it has become known, can motivate companies to become good global citizens.

As such factors influence sales and profits, they impact companies’ share price, and the level of yields where they can borrow. Most equity analysts and rating agencies now consistently incorporate ESG (Environmental, Social, Governance) factors in their analysis, penalising companies that score poorly. Investors also differentiate, with many institutional investors incorporating the UN principles in their policies. Younger investors and millennials are particularly interested in being responsible investors, and demographic trends thus also support this investment trend.

There are thus many reasons to expect our ‘sustainable world’ theme to see good traction, and remain with us for some time. The problem is unlikely to go away any

A sustainable world


time soon, the impact on earnings is real, and investors will continue to care, with their heart as well as their wallet. With the support coming from all of these angles, this investment theme is very unlikely to be a fad.

Many investors take an ESG approach, picking stocks of companies that score well on these factors, or avoiding those that don’t. A wide range of investment funds and ETFs now incorporate this methodology, and allow investors to buy any asset class or stock market in an ESG-responsible way.

Our thematic approach is an alternative or a complement, and targets activities or sectors which benefit from the trends we have described, and can combine investors’ desire to do good, with the potential for attractive investment returns.

® Our Clean living investment theme focuses on opportunities in companies involved in rectifying environmental damage like climate change, water and air pollution and also those involved in recycling materials like plastics, aluminium etc.

® Sustainable bonds include green bonds (issued by companies involved in green projects), social bonds (using proceeds to finance projects benefitting disadvantaged populations, essential services, affordable housing etc.) and the UN Sustainable Development bonds.

® But sustainable growth isn’t all about the environment. Our gender diversity theme is based on the idea that diverse teams perform better than homogeneous ones. They allow companies to be closer to their clients, they approach problems from more different angles and thus avoid making mistakes, and they can come up with more original ideas. In the end, research has shown that this often benefits the share price.

24

The themes under this umbrella are picked because we believe they are particularly well adapted to the current stage of the economic cycle. They therefore have a shorter investment horizon than the themes under our three other umbrellas, which are long term and structural in nature.

In summary, the main drivers for investors at the current stage are as follows. We believe the US economy is slowing and in the late stage of its expansion, but growth should still remain positive throughout 2019, and probably well into 2020. This stage is coupled with some inflation pressure and US rate hikes, although we think both will be gradual and mild. As a result of the weaker cyclical outlook, investors’ return expectations are likely to remain subdued, causing them to adopt a more selective approach. But the fall in valuations in 2018 also creates an incentive to stay invested. But as markets wonder how much growth will slow down, how far rates will rise, and what will be the next political headline, volatility and dispersion should remain elevated. Finally, in Europe, valuations are lower than in the US, but the slowdown there is also more pronounced, creating very selective attractive opportunities.

We list some investment opportunities below. As they are linked to the current stage of the cycle, we think they can be part of the core portfolio, but for investors who want to increase exposure to these opportunities, they can also be added as satellites. Given the shorter term horizon, these themes may require liquid implementation solutions, in case the cycle takes a turn for the better or for the worse.

® Active versus passive: Throughout the document, we indicate areas where an active and selective approach may be more appropriate than index tracking strategies. Where technological disruption creates winners and losers, a good active manager will hope to outperform their benchmark. In credit, we adopt a selective buy and hold strategy to avoid defaults and limit the mark to market impact of spread widening. And in European equities in particular, where we have an underweight position, we select special opportunities related to M&A activity, privatisation and activist shareholder activity or financial sector consolidation.

An extended Late cycle


® European defensives: Outside of the special opportunities, we adopt a defensive approach in Europe, given weakening economic outlook and the political headline risks.

® In the US, we like defensive sectors such as healthcare and utilities, but we also remain structurally constructive on US technology stocks. Technology remains one of our favourite US sectors in spite of recent turbulence and increased regulation. US tech companies are flush with cash from tax reform and a decade of expanding growth. We believe they will use that cash to develop new digital content in-house or through acquisitions. Consumer demand for personal computers, cellular phones, tablets, smart devices, or wearable devices is very strong.

® US buybacks and quality stocks. Amid global trade tensions and a gradual slowdown in economic data, we look for areas of resilience. The 2017 tax repatriation break provided a fair amount of incremental cash for US companies, which many are using to embark on buyback programs to return cash to shareholders and boost share prices. Companies with high quality sustainable earnings should be another area of resilience, in our view.

® US credit: In bonds, we have migrated from US HY as our main overweight to a more diversified exposure which now includes both US HY and IG bonds, and also EM HC debt. We also see opportunities in bonds of global energy companies, as their cash flows are solid and should further be boosted by higher oil prices in 2019, in our view.

® USD Floating Rate Exposure: FRNs should continue to perform well in coming months, as the Fed should hike interest rates in March and June 2019. Thereafter, the attraction of this theme is likely to fade. Still, investors who are worried about the risk of upside surprises to inflation – i.e. the boom / bust scenario described in our portfolio strategy chapter – could use this this theme to hedge against such a risk.

® Finally, in the UK, we continue to manage GBP uncertainty until there is more clarity about the future trade relationship between the UK and the EU, and a deal has been approved by all parties.

Equities

26

As we enter the New Year, we try to gauge the changes, risks and opportunities that lie in its offing. Global economic growth is set to slow down modestly in the developed world, while emerging market economies should show little change versus 2018. US CEOs and managers seem to agree with our view that equity investors have become too negative on growth (see first graph on page 27). Earnings growth should stay solid in the US and solid cash flows should keep US equities well bid as corporate buyback programs remain in place.

That said, outperformance of equities will come with some volatility. The risk is that higher inflation and higher interest rates raise the cost of capital at a time when economic growth is slowing. Hence, we adopt a selective approach, looking for quality stocks or themes with structural support, and defensive sectors such as healthcare and utilities, which have traditionally provided stability of earnings. In this more competitive and selective world, active stock selection is quite valuable to separate quality companies from the rest of the pack.

US is attractiveRegionally, our focus remains on US equity markets. Even with US economic growth forecast to slow to a 2.5% in 2019 from around 3.0% in 2018, growth is still above potential, with a strong business sentiment in manufacturing, and healthy consumer confidence. Much will depend on corporate earnings growth, which should fall from above 20% in 2018 to around 10% in 2019. Of course, 2018 numbers were boosted by the tax cuts,

10% is still a very respectable number, especially as valuation multiples have dropped significantly. But investors will increasingly be looking for quality earnings, a more balanced exposure to cyclicality, and a focus on sectors with structural support, such as technology.

In spite of low unemployment, inflation remains in check, and the normalisation of Fed policy is happening at a very moderate pace. Therefore, interest rate sensitive sectors such as utilities should fare well, while also benefiting from their defensive character. Technology recently got hit by rate fears, among other factors, but we think this particular concern is exaggerated. Tech benefits from structural changes in consumer and business behaviour. The technological revolution has just begun and should continue to benefit both the technology sector and the productivity of new businesses in other sectors.

The 2018 tax reform did not only boost earnings, but also allowed companies to repatriate profits. The benefit for US stocks is still being felt, providing US companies with plenty of cash to drive accretive corporate programs in M&A and stock buybacks. In 2019, we anticipate that stock buyback programs and M&A should remain quite strong, further boosting demand for US equities.

The government is spending cash too, increase spending, and offsetting some investors’ concern about the economic impact of increased trade frictions. One potential area of growth could be infrastructure, where there is rare political agreement from both sides of the aisle on the need for expansive programs.

The Big Shift into EM?Emerging markets economic growth should remain stable and inflation is expected to pick up only marginally. In 2018, US dollar strength was a problem for EM markets, (see second graph on page 27), but we expect this headwind to ease. For investors able to look through the short term volatility we may still see, EM valuations are quite compelling. Just as in developed markets, we like active investment management and a strategy focused on quality, even with more compelling valuations.

Irrespective of short term volatility, fundamentals in EM Asia are still quite positive. Many countries have improved fiscal and monetary policies, and the build-up in leverage in recent years is much below the levels seen in previous decades. Second, investments in infrastructure and education should make growth more sustainable.

There are two long-term trends that should support equity markets in EM Asia. The Fourth Industrial Revolution is also underway in Asia, rapidly lifting large segments of society into the modern economy. 3D printing, big data, predictive analytics and a host of other technologies should continue to drive growth in the new digital EM Asia as these technologies diffuse throughout those economies. Secondly, the increased wealth in the region, combined with the digital economy, are changing the behaviour and spending power of the EM Asian consumers. Expanding digital and social media, combined with more interactive technologies and a more consumer oriented society are changing the very nature of EM Asian consumers.


EuropeEuropean economic growth slowed markedly in 2018 and is forecast to slow further in 2019. With PMIs relatively close to the neutral 50 level, and analysts downgrading earnings more than in other regions, the cyclical outlook is not supportive, and we are underweight on Europe ex-UK in our advisory portfolios. Global trade issues will be important for sentiment, and any suggestion of increased tariffs with the US would be a negative. Several regional problems remain, such as Brexit, continued austerity, and headline risk around the European elections. The mild further decline in the euro could help bolster profits on exported goods, but foreign investors are likely to be hit with a currency loss on their stock positions.

Equity charts 1

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Source: Bloomberg, HSBC Private Banking as at 11 December 2018. Past performance is not a reliable indicator of future performance.

Source: Bloomberg, HSBC Private Banking as at 11 December 2018. Past performance is not a reliable indicator of future performance.

Business sentiment suggests the US economy is doing better than what equity markets fear

If USD stabilises against EM currencies, this should help EM equity markets to stabilise and recover as well

28

Recent headlines have put the high level of US corporate debt back on the agenda. At least two very well-known companies recently cut their dividends, as rating agencies had indicated that their ratings could fall if they did not reduce their debt loads. Some commentators have expressed concern about the low level of investor protection in ‘covenant-lite’ loans. And with interest costs rising, investors intuitively wonder whether US debt loads have become less sustainable. Are they right to do so?

The high debt problem is not new. In absolute dollar terms, and as a share of GDP, total US corporate debt stands at a record high. But net of cash, and relative to profits or cash flow, the picture is less dramatic, because many companies have grown their cash balances, and most have seen solid earnings growth in recent years. Leverage is high, but below the record levels observed in 2000-2003, and it has been roughly constant since 2016 for most corporates. And, due to low interest costs, the ability of companies to cover their interest payments has even improved a bit in recent years – albeit from quite low levels. Lastly, the quality of covenants in leveraged loans is low, but according to Moody’s, it has not deteriorated further since 2016. Any weakening of covenants has been concentrated with higher quality issuers, which should have a low default rate probability, and can be screened out by a knowledgeable active manager. Moreover, the protection that really matters to investors is their claim on the

underlying collateral, where covenants have not materially changed.

But of course, any market-wide ratios and averages hide a lot of the important nuances. Within the S&P500, there are 47 companies with an interest coverage ratio of less than 5 times, well below the long term average of 7.4 times. Leverage is often a particular challenge for companies that have been involved in M&A activities, and some have used debt to finance share buybacks and dividend payouts. This is particularly the case in some defensive sectors or those with predictable cash flows, such as utilities, telecom and energy, where leverage has increased the most in recent years. By comparison, leverage in technology has dropped in recent years.

The danger, of course, is that the bad apples with the high leverage may well create enough headlines to set a negative tone for the market, pushing credit spreads wider. The IMF has warned that if a few large BBB corporates are downgraded, the much smaller HY market could have difficulty absorbing them, leading to a spike in spreads. The widening for the aggregate market should, however, be capped somewhat by our view that the corporate default rate will remain low. The peak in default rates tends to lag the peak of the economic cycle by 32 months, and defaults should remain relatively rare as we only foresee a mild slowdown in US economic growth. Moreover, the Fed should only hike twice in 2019, and many high yield companies

Is high US corporate leverage becoming an issue?

Box 2


have extended their maturities, thereby reducing their refinancing risk. Finally, the Fed’s bank lending survey indicates that banks also seem to be willing to continue keep up lending volumes and maintain easy lending conditions, at least for now.

Investment implications ® For bond investors, a selective and

active approach is clearly needed to determine a company’s risk of rating downgrades and spread widening. Analysts need to forecast future earnings growth, investment plans, M&A activity and dividend policies to assess whether rising debt costs are a substantial issue and to determine potential changes in leverage.

® For equity investors, rising interest rates can weigh on profits, although the market-wide impact should be manageable, given the slow nature of Fed hikes. Still, some highly levered companies that have paid out high dividends in recent years may need to cut them, to placate bond investors or rating agencies. As a result, when looking for high dividend stocks, we believe it is important to consider whether that dividend is sustainable.

® Our view that spreads could widen, but the default rate should remain low, leads us to adopt a selective buy-and-hold approach in USD credit, to try to separate the two risks. If one can take a view on the default risk of a bond and can hold

on to the position till maturity, even if spreads widen in the meantime, this will help the attractiveness of USD credit.

® In any case, investors who buy exposure to the entire investment grade (IG) market should realise that the composition has changed, with BBB now accounting for almost 50% of IG, against 21% in 1988. While some of this is due to changes in rating methodology, some large fallen angels, and the creation of corporate hybrids, it is clear that investment grade has become riskier than it once was, and more vulnerable to changes in global risk appetite.

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US corporate leverage is high, but it has been relatively stable for the past three years

30

2018 was a volatile year for bond investors, as geopolitical uncertainties and tightening financial conditions pulled down market performance. Investors’ sentiment turned negative in February when US Treasury yields surged on higher inflation data, prompting the Federal Reserve (Fed) to adopt a more hawkish stance. Their forward guidance moved higher over the year supported by strong US and global economic growth. This led to sharply higher short-dated yields, and the move was exacerbated by the end of Quantitative Easing (QE). The resulting tightening in financial conditions sent shockwaves across financial markets, impacting most debt instruments denominated in USD. Within Emerging Markets (EM), those countries with the largest external funding dependence, government and current account deficits, bore most of the pain. The move began in Argentina, which had to plea for an IMF loan, and then spread to Turkey, South Africa and Russia. Plummeting currencies forced local central banks to raise interest rates, hurting local stock market performance. Overall, market sentiment deeply deteriorated and equity and spread volatility surged to levels not seen in years.

At the other end of the spectrum, Developed Market (DM) High Yield remained quite resilient amid this challenging environment, at least until October. Their overall shorter duration (making them less exposed to movements in rates), solid corporate

fundamentals in the US, easing monetary policies in the EU and supporting technical factors in the UK, helped HY to stay in positive return territory for most of 2018, although the fall in oil prices later in the year may hurt performance. A heavy political calendar and trade tensions between the US and China had their toll on investor confidence too.

To navigate these difficult markets, we adopted a more defensive and selective stance towards EM debt in 2018. We focused on lower beta countries like Gulf Cooperation Council (GCC) and South Korea and started to move up the credit quality in corporate credits in the US and Asia, mostly in China.

Where does it leave us ahead of 2019?We start 2019 with the same selective investment approach we took in 2018, based on our view of valuations, risks and investment flows. The carry offered by DM credit markets is larger than a year ago, but has to be balanced with the mature state of the credit cycle, which has been in place for almost 10 years. EM risk premia generally offer some compensation against continued geopolitical threats. Technicals remain fragile as fund outflows have been high in 2018 compared to history, but there are some tentative signs of stability and even improvement. In a nutshell, we maintain an overall underweight bond allocation

Fixed IncomeIntroducing a Buy & Hold strategy on short-dated corporate bonds in US dollars


in our Tactical Asset Allocation (TAA), but the composition of this asset class remains tilted in favour of US corporate bonds (US HY and IG bonds) and EM external debt. Going into 2019, we believe that the Fed’s tightening path and the evolution of US-China trade tensions remain key risk factors and will continue to shape investor sentiment in the coming months, especially for EM debt.

While the Fed may stick to its forward guidance, they recently acknowledged the downward risk to global growth and the tightening of US dollar financial conditions. We keep our benign forecast on Fed fund rates and expect the central bank to increase interest rates by 0.25% in March and again in June 2019, taking the terminal Fed fund rate to 3.0%. Notably, this remains below the Fed’s median dot plot, the economists’ consensus, and the historical peak level of interest rates. Moreover, Fed Chairman Powell commented in late November 2018 that rates are already close to neutral, which makes us believe that rate risks are clearly titled towards the downside. We expect rates to peak in mid-2019 and believe the Fed will start easing in 2H 2020, as it reacts to a slowdown in economic growth and an anaemic inflation. This dovish cyclical scenario fits very well with our structural long-term view that US Treasury yields should remain low for longer.

When the two largest economies in the world enter into a war of trade and tariffs, it is clear that the impact on economic growth, global trade and financial markets can be substantial. However, China is well equipped to withstand the effects of the US tariffs currently in place, mostly because it has a strong domestic consumption, a healthy private sector and government support in the form of infrastructure investments and corporate tax cuts. Consequently, we believe US tariffs should not materially derail Chinese economic growth in 2019, and the country should continue to drive the global economic expansion.

There has been negative media coverage related to excessive balance sheet leverage in the US, covenant-light practices in bonds issued by US and Asian corporates, and the sheer size of the BBB-bond segment in US Investment Grade. While there is some truth behind these elements, we believe that the end of the credit cycle is not imminent. The US continues to enjoy a solid economic growth in a low inflation environment while the leverage in corporate balance sheets remains high, it is stable and slightly off the cyclical peak seen in 2016. Still, years of zero-interest rate policy and Quantitative Easing programmes had dramatically decreased the volatility in the corporate credit market. With both having ended, a resurgence of volatility and re-pricing of credit spreads is normal (for more details, see Box 2).

Our investment strategy needs to factor in both the above-mentioned risks and the improved valuations. In order to navigate through these periods of corporate credit spread volatility, we have adopted a Buy & Hold investment strategy on short-dated bonds denominated in USD. Our selection of 2-to-4-year USD bonds ranges from US to EM corporate credits with sound fundamentals and attractive valuations. We also decided to move up the rating scale towards lower IG ratings and selective BB-rated High Yield (HY) securities. This reasoning is supported further by a very flat yield curve in the US and we feel that the duration risk is currently not fully compensated by the yield differential. At this juncture, we favour short-dated credits over duration despite our constructive stance on US Treasuries.

In terms of geographical allocation, we maintain our neutral stance on the overall EM debt but with a selective approach. We continuously review this stance as we believe the current carry and mean-reverting return factors could justify an upgrade of the overall EM debt complex in the near future. However, in December 2018, we upgraded our view on EM Hard Currency (HC) debt to mildly overweight, whilst leaving our EM LC debt view at neutral. A less hawkish Fed rhetoric and some reduction in US-China trade tensions should provide support to EM HC debt, in our view. We like HC bonds from some low beta countries like the GCC and South Korea. We also like

32


Brazilian and Mexican HC bonds, for their high carry and relatively better political outlook for Brazil. We remain neutral on Russian external and local debt given the sanctions’ risk and are mildly underweight on Turkish HC debt. We think that recent steps taken by the Turkish government are in the right direction, but it may take some time before economic stability is restored in full.

In Asian HC debt, our preference lies with China, where we focus on selective State Owned Enterprises (SOEs) and some higher rated quality names, and also South Korea. Following an improvement in valuations and enhanced stability in key macroeconomic indicators recently, we

also upgraded our view on Indonesian HC bonds. In local-currency bonds, we are constructive on China only, where interest rates could continue to decline due to possible monetary policy easing.

In DM, we continue to favour US credits overall relative to US Treasuries but also relative to European bond markets in general. As indicated earlier, we recently decided to move up the rating scale and focus on the short-end of the yield curve, selecting corporate credits with sound fundamentals and attractive valuations. Investors who worry about inflation surprises and more rapid rate hikes, however, may find floating rate notes (FRNs) attractive.

Within European sovereigns, we remain prudent on Italy relative to other peripheral countries. Populist fiscal measures, controversial budget negotiations with Brussels and the reduction of the ECB’s asset purchase programme support a more cautious view on Italy relative to Spain and Portugal. We also confirm our bearish view on European credits (ex UK) despite the impressive credit spread widening in the HY market and valuations more in-line with fundamentals. In the UK, we remain neutral across the board, as both upside and downside risks remain regarding the UK-EU Brexit approval process.

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34

USD strengthened in 2018 against both developed and emerging market (EM) currencies. In 2019, this trend should continue, but at a slower pace and with more volatility. Our expectation is for more limited USD upside because the two Fed rate hikes we expect in H1 are already largely priced in. We foresee a resurgence of the Risk on- Risk off (RORO) phenomenon in light of the gradual turn of the economic cycle, market speculation about when the Fed will end its interest rate hikes, and a continuation of political uncertainty. In periods of higher volatility (risk-off), investors’ preference for safe heaven currencies like USD, JPY, and CHF should go up, while in risk-on scenarios, demand for EM FX and commodity currencies (mainly AUD) should rise.

EUR should see some mild weakness against USD, given the weakness in Eurozone economic data, and the continued divergence of monetary policy between the two blocks. Eurozone’s GDP and business optimism have dropped and are weaker than in the US. Currency markets will be watching political developments, including European Parliamentary elections scheduled for May 2019, where a gain for Eurosceptic parties could lead to some EUR weakness. A leadership change at the European Central Bank (in October 2019) will also be of interest. As much of the political news is taking place in H2, we think EUR may range trade in Q1, but weaken thereafter. If economic data were to deteriorate more sharply than we expect around the world, there is some concern about the ability

of the ECB to respond with some form of monetary policy stimulus, in contrast with the Fed. In this risk scenario, USD strength would be more pronounced.

GBP has been volatile and at the time of writing, uncertainty remains about the final outcome of the Brexit negotiations. The two extremes in our view are GBP/USD 1.45 (in case of a very soft Brexit or remain scenario) and GBP/USD 1.10 (in case of a hard Brexit). When clarity finally comes, GBP should be significantly impacted, after which the market focus would be gradually shifted again from politics to economic fundamentals. Our core view, based on the plan agreed by the UK and the EU, is for relative stability of GDP growth and hence of GBP, but that forecast could change if the deal is not approved.

Following the slide of EM currencies in 2018, we expect a more mixed and less negative picture in 2019. Therefore we hold a neutral view on the overall EM currency suite. Our selective stance and relative views on individual EM currencies are based on their respective fundamentals.

The Chinese Renminbi (CNY) of course remains an important reference currency, and weakened due to US-China trade policy, and the markets’ concern over slowing Chinese growth. While further escalation seems to have been avoided, tariffs will probably persist through 2019, and it may take time for investors to grow comfortable that Chinese economic

data will be resilient. CNY may therefore see some mild weakness in Q1, before recovering later in the year. The weakness we foresee is limited due to fiscal and monetary policy support, further capital account liberalisation and the increased inclusion of both Chinese equities and bonds in benchmark indices.

ZAR, TRY and INR are all likely to weaken due to domestic challenges. South African economic data have deteriorated, with year-on-year GDP growth at just 0.4% in Q3 2018, and general elections due around May 2019 likely to increase political uncertainty. TRY bounced off its lows recently due to some improvements in its relationship with the US, but this may fade as its fundamental economic story remains very challenging, with CPI above 20%, and high interest rates limiting growth. For INR, several local issues are likely to weigh on the currency, from news reports about a rift between the central bank and the government, to the deterioration in the current account, and general elections in Q2 2019.

In Mexico, political risk has come back, after the new president cancelled the Mexico city airport project and put a limit on bank fees. Investors now fear market unfriendly political interventions, causing us to adopt a mildly bearish view on MXN. BRL should be more stable, as a result of its attractive carry. Although political uncertainties exist, the new president has promised to revive the economy and undertake reforms.

Currencies and commodities

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Commodities: Our outlook for both oil and gold is constructive. USD strength and higher interest rates were major obstacles for commodities, especially for gold. But with rate hikes now largely in the price, and USD less pronounced going forward, these headwinds should gradually fade. For oil, the sharp sell-off seen in late 2018 has flushed many speculative investor long positions, and has likely created attractive prices to buy oil for importers. It has also put breakeven prices back into focus, and they are above the current oil price level for some producers (see graph). Therefore, there are growing expectations that producers will be pressured to better manage or reduce supply. We recently added gold in our advisory model portfolio, due to attractive valuation, the flatter USD outlook and our desire to hedge global tail risks. At current prices, we expect to start to see growing physical demand, especially from EM consumers, if the EM economic and FX outlook stabilises.

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Source: IMF, HSBC Private Banking as at 11 December 2018

Oil prices and FX movements are important drivers of EM markets.

Breakeven oil prices can give an indication of where an equilibrium for oil prices could be.

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Hedge fundsIn 2018, hedge fund strategies delivered on their objective of providing absolute returns coupled with downside protection. Returns for the year were moderate, with some segments significantly outperforming others, most notably strategies that benefit from the volatility we saw across markets.

Going into 2019, we expect continued interest-rate divergence, trade tensions, Brexit-related uncertainty and large currency moves to generate volatility. We therefore continue to like macro strategies positioned to benefit from this uncertainty, and we remain constructive on multi-strategy, particularly those with a more relative value bias and equity market-neutral strategies.

Within credit, we are finding continued opportunities as interest rates increase at differing speeds across the globe and,

in the event of economic conditions deteriorating, we remain prepared to increase allocations to stressed and distressed credit strategies.

We are less constructive on equity long/short and event-driven strategies, as we move further into the late stages of this economic cycle.

Our base case expectation is that hedge fund strategies continue to positively differentiate themselves from long-only strategies. A key risk to this would be if we entered into a period of reduced volatility, during which many of the current (and upcoming) uncertainties either failed to materialise, or were quickly and successfully resolved. Although such a scenario would be positive for long-only strategies, it would be less so for hedge fund strategies.

Private marketsThe growth of private markets is probably one of the most significant investment trends of the last 20 years. As regulation and activist investor demands have made it less appealing to run a public company, the private model has become capable of funding firms to a much larger size, meaning that young, fast-growing companies now tend to remain private, offering investors a wealth of opportunities.

Historically, private markets have thus been one of the best-performing investment strategies, and available data shows that so far, 2018 is no exception, with exit trades at high valuations. We think valuation levels will continue to be

a key driver in 2019, supporting high exit activity, in conjunction with more selective investment decisions.

In this more fully priced environment, we prefer areas where we have very high conviction over the long term. In terms of sectors, we favour technology / software and infrastructure, both of which tend to be resilient through economic downturns. Geographically, we prefer Asia, where valuations remain cheap, coupled with high growth rates and strong performance. We also think it is crucial to diversify, and to be able to rely on a specialist team which can identify and capture liquidity premia across a range of geographies and sectors.


Real estate

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The occupiers’ marketDriven by the race to capture future growth associated with emerging technologies such as autonomous vehicles, artificial intelligence and quantum computing, technology companies continue to be the main driver of office occupier demand across regions. Elsewhere, co-working operators such as WeWork and IWG are growing rapidly as firms and freelancers change how they lease space. In the near term, two elements are likely to differentiate how markets perform. Firstly, cities with significant development pipelines (New York, Washington DC, London City, Barcelona) are likely to suffer from higher vacancies as landlords focus on occupancy rather than growing rents. Secondly, the low unemployment rate in some markets (US, Japan, UK, and Germany) are starting to limit the ability of firms to make new hires, expand their footprint and put upward pressure on rents.

Although cyclical tailwinds of rising employment and rising wages are supporting retail sales in many markets, retail property continues to struggle with secular headwinds as consumers continue to change how they shop from physical shops to buying online. The squeeze on margins from losing sales to online rivals such as Amazon, coupled with the cost of making significant investment in developing an online presence, have contributed to retailers closing non-productive stores and, in some cases,

going into administration. Whilst the trend is for store rationalisation, some retailers are expanding. Of particular note has been the rise of online retailers taking physical space to increase brand awareness and compliment their online presence (click and collect and returns). This points to the longevity of physical retail, though secondary schemes with lower footfall are expected to remain under pressure.

As retailers seek to optimise their omni-channel retail platforms, they are streamlining their supply chains to serve a combination of types of retail fulfilment (in store, online, click and collect). Home delivery is a costly exercise, particularly for those traditional retailers looking to expand their online platform. The need to make home delivery cost effective is driving significant investment throughout the supply chain, but perhaps most importantly in new strategically located logistics facilities capable of speeding up the home delivery process. This process is expected to continue as online sales (as a percentage of total retail sales) continue to grow, especially in countries which are currently lagging.

Investment marketIn the 12 months to Q3 2018, investment volumes dipped by 5%, although by historic standards the amount invested in real estate remains elevated. This dip likely reflects a levelling off of investor activity as

with yields at record low levels in many of the largest markets, investors are having to be particularly selective in order to achieve return objectives.

In the UK there has been a particular decline in the number of deals as Brexit uncertainty is deterring many investors; although volumes remain buoyed by international demand for trophy assets. Elsewhere, in the US, rising interest rates are starting to weigh on investment activity as the cost of debt increases and the rise in Treasury yields has made real estate investment comparatively less attractive.

Given the shifting balance in consumption between spending in shops and online, investor behaviour has shifted accordingly to capture the upside for logistics rents vis-à-vis retail property. Elsewhere, investors are targeting alternative sectors such as student accommodation, build-to-rent and healthcare in the search for diversified income and higher yields.

Key risksKey risks we see include higher interest rates, trade disputes, and some risk of over-supply in certain markets. Interestingly, Brexit presents both risks and opportunities depending on geographies, with increased occupier demand growth that is already benefiting some continental European markets.


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Disclaimer

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

» 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 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.

Important notice The following is subject to local requirements (if any) This is a marketing communication issued by HSBC Private Bank (UK) Limited on behalf of HSBC Private Banking. This document does not constitute independent investment research under the European Markets in Financial Instruments Directive, or other relevant law or regulation, and is not subject to any prohibition on dealing ahead of its distribution. HSBC Private Banking is the principal private banking business of the HSBC Group. Private Banking may be carried out internationally by different HSBC legal entities according to local regulatory requirements. Different companies within HSBC Private Banking or the HSBC Group may provide the services listed


in this document. Some services are not available in certain locations. This document is provided to you for your information purposes and as general market commentary only and should not be relied upon as investment advice. This document is not offering securities and is not a prospectus. The information contained within this document is intended for general circulation to HSBC Private Clients and it has not been reviewed in light of your personal circumstances (including your specific investment objectives, financial situation or particular needs) and should not be relied upon in substitution for the exercise of independent judgement. If you have concerns about any investment or are uncertain about the suitability of an investment decision, you should contact your Relationship Manager or seek such financial, legal or tax advice from your professional advisers as appropriate. Market data in this document are sourced from Bloomberg unless otherwise stated. While this information has been prepared in good faith including information from sources believed to be reliable, no representation or warranty, expressed or implied, is or will be made by HSBC Private Bank (UK) Limited or any part of the HSBC Group or by any of their respective officers, employees or agents as to or in relation to the accuracy or completeness of this document.

The information stated, forward- looking statements, views and opinions expressed and estimates given constitute HSBC Private Banking’s best judgement at the time of publication, are solely expressed as general commentary and do not constitute investment advice or guarantee of returns and do not necessarily reflect the opinions and views of other market participants and are subject to change without notice. It is important to note that the capital value of, and income from, any investment may go down as well as up and you may not get back the full amount invested. We can give no assurance that the expectations reflected in those forward-looking statements will prove to be correct or come to fruition. Actual results may differ materially from the forecasts/estimates. Past performance is not a reliable indicator of future performance. When an investment is denominated in a currency other than your local or reporting currency, changes in exchange rates may have an adverse effect on the value of that investment. There is no guarantee of positive trading performance.

Investors in Hedge Funds and Private Equity should bear in mind that these products can be highly speculative and may not be suitable for all clients. Investors should ensure they understand the features of the products and fund strategies and the risks involved before deciding whether or not to invest in such products. Such investments are generally intended for experienced and financially sophisticated investors who are willing to bear the risks associated with such investments, which can include: loss of all or a substantial portion of the investment, increased risk of loss due to leveraging, short-selling, or other speculative investment practices; lack of liquidity in that there may be no secondary market for the fund and none expected to develop; volatility of returns; prohibitions and/or material restrictions on transferring interests in the

fund; absence of information regarding valuations and pricing; delays in tax reporting; – key man and adviser risk; limited or no transparency to underlying investments; limited or no regulatory oversight and less regulation and higher fees than mutual funds. Investments in commodities may involve substantial risk, as the price of the commodity may fluctuate significantly. Some HSBC Offices listed may act only as representatives of HSBC Private Banking, and are therefore not permitted to sell products and services, or offer advice to customers. They serve as points of contact only. Further details are available on request.

In the United Kingdom, this document has been approved for distribution by HSBC Private Bank (UK) Limited whose office is located at 8 Cork Street, London W1S 3LJ. Private customers should be aware that the rules and regulations made under the Financial Services and Markets Act 2000 for the protection of investors, including the protection of the Financial Services Compensation Scheme, do not apply to investment business undertaken with the non-UK offices of the HSBC Group. This publication is a Financial Promotion for the purposes of Section 21 of the Financial Services & Markets Act 2000 and has been approved for distribution in the United Kingdom (UK) in accordance with the Financial Promotion Rules by HSBC Private Bank (UK) Limited who are authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority.

In Guernsey, this material is distributed by HSBC Private Banking (C.I.) a division of HSBC Bank plc, Guernsey Branch which is licensed by the Guernsey Financial Services Commission for Banking, Insurance and Investment Business. HSBC Bank plc is registered in England and Wales, number 14259.

Registered office 8 Canada Square, London, E14 5HQ. HSBC Bank plc is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority (UK FCA reference number: 114216).

HSBC Private Bank (Suisse) S.A., DIFC Branch is regulated by the Dubai Financial Services Authority (DFSA) and FINMA. This document is directed at Professional Clients only as defined by the DFSA and should not be acted upon by any other person. HSBC Private Bank (Suisse) S.A. – DIFC BRANCH P.O. Box 506553 Dubai, United Arab Emirates.

In Singapore, the document is distributed by the Singapore Branch of The Hongkong and Shanghai Banking Corporation Limited. In Hong Kong, HSBC Private Banking is a division of Hongkong and Shanghai Banking Corporation Limited and this document has been distributed by the The Hongkong and Shanghai Banking Corporation Limited in the conduct of its Hong Kong regulated business. THE CONTENTS OF THIS DOCUMENT HAVE NOT BEEN REVIEWED OR ENDORSED BY ANY REGULATORY AUTHORITY IN HONG KONG OR SINGAPORE. The recipient(s) should qualify as professional investor(s) as defined under the Securities and Futures Ordinance in Hong Kong or accredited investor(s) or other relevant person(s)

as defined under the Securities and Futures Act in Singapore. Please contact a representative of The Hongkong and Shanghai Banking Corporation Limited or the Singapore Branch of The Hongkong and Shanghai Banking Corporation Limited respectively in respect of any matters arising from, or in connection with this report.

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 in Section 275 or 305 of the Securities and Futures Act in Singapore. Please contact your Relationship Manager for more details.

This document is provided to you for information purposes only. It is not intended to be a personalised communication from the Bank to you and the specific investment objectives, personal situation and particular needs of any specific persons were not taken into consideration in the writing of this document. As such, this document does not constitute and should not be construed as legal, tax or investment advice or a solicitation and/or recommendation of any kind from the Bank to you, nor as an offer or invitation from the Bank to you to subscribe to, purchase, redeem or sell any financial instruments, or to enter into any transaction with respect to such instruments. The content of this document may not be suitable for your financial situation, investment experience and investment objectives, and the Bank does not make any representation with respect to the suitability or appropriateness to you of any financial instrument or investment strategy presented in this document.

You should contact your Relationship Manager if you wish to enter into a transaction for an investment product. You should not make any investment decision based solely on the content of any document.

Where we make any solicitation and/or recommendation in Hong Kong to you for a Financial Product (as defined in HSBC’s Standard Terms and Conditions) where this is permitted by cross border rules depending on your place of domicile or incorporation, we will take reasonable steps to ensure the suitability of the solicitation and/or recommendation. In all other cases, you are responsible for assessing and satisfying yourself that any investment or other dealing to be entered into is in your best interest and is suitable for you.

In all cases, we recommend that you make investment decisions only after having carefully reviewed the relevant investment product and offering documentation, HSBC’s Standard Terms and Conditions, the “Risk Disclosure Statement” detailed in the Account Opening Booklet, and all notices, risk warnings and disclaimers contained in or accompanying such documents and having understood and accepted the nature, risks of and the terms and conditions governing the relevant transaction and any associated margin requirements. In addition to reliance on a solicitation and/or recommendation made in Hong Kong by HSBC (if any), you should exercise your own judgment in deciding whether or not a particular product is appropriate for you, taking into

42

account your own circumstances (including, without limitation, the possible tax consequences, legal requirements and any foreign exchange restrictions or exchange control requirements which you may encounter under the laws of the countries of your citizenship, residence or domicile and which may be relevant to the subscription, holding or disposal of any investment) and, where appropriate, you should consider taking professional advice including as to your legal, tax or accounting position. Please note that this information is neither intended to aid in decision making for legal or other consulting questions, nor should it be the basis of any such decision. If you require further information on any product or product class or the definition of Financial Products, please contact your Relationship Manager.

HSBC Private Banking is the marketing name for the principal private banking business of the HSBC Group. HSBC Bank Bermuda Limited is a member of the HSBC Group. In Bermuda, HSBC Bank Bermuda Limited, whose offices are located at Compass Point, 9 Bermudiana Road, Hamilton HM11, is licensed to conduct Investment business by the Bermuda Monetary Authority.

In Luxembourg, HSBC Private Banking (Luxembourg) SA is located at 16, boulevard d’Avranches PO BOX 733, L-2017 Luxembourg and is regulated by the Commission de Surveillance du Secteur Financier. In Monaco this document is distributed by HSBC Private Banking (Monaco) SA, a Société Anonyme Monégasque (Monaco Limited Company) incorporated under Monaco laws, with authorised capital of EUR 151.001.000, registered on the Monaco Register of Trade and Industry under number 97 S 03269, and whose registered office is located at 17 Avenue d’Ostende, MC 98000 Monaco, regulated by the Banque de France and the Commission de Contrôle des Activités Financières (CCAF). In Israel HSBC Bank plc is licensed as a foreign bank and as a marketer of financial assets, regulated by the Israel Securities Authority. Not all the investment products / financial assets that are mentioned in this document are approved for sale in Israel.

For further information please refer to your RM. In Mexico, HSBC Private Banking offers banking services through HSBC México S.A., Institución de Banca Múltiple, Grupo Financiero HSBC, properly authorised and regulated by National and Banking Commision and Central Bank.

For clients receiving this from the US This document was prepared by HSBC Private Bank (UK) Limited for use by members of the HSBC Global Private Banking business. In the United States, HSBC Private Bank offers banking services through HSBC Bank USA, N.A. – Member FDIC and HSBC Private Bank International, and provides securities and brokerage services through HSBC Securities (USA) Inc., member NYSE/FINRA/SIPC, and an affiliate of HSBC Bank USA, N.A. Foreign securities carry special risks, such as exposure to currency fluctuations, less developed or less efficient trading markets, political instability, a lack of company information, differing auditing and legal standards, volatility and, potentially, less liquidity. Investment products are: Not a deposit or other

obligation of the bank or any affiliates; Not FDIC insured or insured by any federal government agency of the United States; Not guaranteed by the bank or any of its affiliates; and are subject to investment risk, including possible loss of principal invested. Foreign securities carry special risks, such as exposure to currency fluctuations, less developed or less efficient trading markets, political instability, a lack of company information, differing auditing and legal standards, volatility and, potentially, less liquidity.

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; (e) 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.

A complete list of private banking entities is available on our website, www.hsbcprivatebank.com.

No part of this publication may be reproduced, stored in a retrieval system, or transmitted, on any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without the prior written permission of HSBC Private Bank (UK) Limited.

Australia If you are receiving this document in Australia, the products and services are provided by The Hongkong and Shanghai Banking Corporation Limited (ABN 65 117 925 970, AFSL 301737) for “wholesale” customers (as defined in the Corporations Act 2001). Any information provided is general in nature only and does not take into account your personal needs and objectives nor whether any investment is appropriate. The Hongkong and Shanghai Banking Corporation Limited is not a registered tax agent. It does not purport to, nor does it, give or provide any taxation advice or services whatsoever. You should not rely on the information provided in the documents for ascertaining your tax liabilities, obligations or entitlements and should consult with a registered tax agent to determine your personal tax obligations.

Where your location of residence differs from that of the HSBC subsidiary where your account is held, please refer to the Disclaimer at http://www.hsbcprivatebank.com/en/utilities/cross-border-disclosure for disclosure of cross-border considerations regarding your location of residence.

©Copyright HSBC Private Bank (UK) Limited 2018

ALL RIGHTS RESERVED GPB/337/12/2018


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