Bangkok--14 Jan--HSBC
***The eurozone crisis, US fiscal adjustment and the strength of China’s economywill likely continue to weigh on investor sentiment***
***Asian equities, particularly China and Korea are attractively priced***
***Favour cyclical over defensive sectors***
***Strong fundamentals continue to support Asian bond markets***
Based on its latest Investment Quarterly, HSBC Global Asset Management (HSBC) reveals that 2013 will be a year of “investing in a low yield world” where global GDP growth is likely to be constrained by three major macro issues - the on-going eurozone crisis, US fiscal adjustment and lower trend growth in China, despite a cyclical upturn. However, Asian corporates with stabilising earnings, are at very attractive valuations and among Asian markets, HSBC prefers China and Korea and favours cyclical stocks with a focus on the consumer discretionary sector. Asian bond markets are likely to continue performing in 2013 supported by strong fundamentals.
Philip Poole, Global Head of Macro & Investment Strategy at HSBC Global Asset Management said, “Global economic growth was constrained in 2012, and this will likely be the case in 2013. We expect interest rates in the key developed markets to stay ultra low for at least another two years and probably longer. In such a low yield environment core government bonds are not attractive but we see specific opportunities in the equity and higher yielding bond markets, especially in emerging markets, where growth is clearly stronger.”
Bill Maldonado, Chief Investment Officer, Asia Pacific and Strategy Chief Investment Officer, Equities at HSBC Global Asset Management said, “In 2013, we expect the recovery in Asia to continue, supported by structural reforms by governments to sustain economic growth. In Asia, valuations have collapsed, but profitability has not which suggests a fundamental opportunity for investors in equities especially China and Korea.”
HSBC’s views on different asset classes for 2013 are as follows:
Equity markets
Equity markets are trading at attractive levels versus history and indicate an interesting entry level for investors with a medium to long term horizon. The consumer discretionary sector is priced very attractively versus defensive stocks such as consumer staples, healthcare and telecommunications services, which appear expensive. HSBC also sees buying equities as a source of income. Equity dividend yields currently stand at attractive levels compared with government bonds, while in many cases company balance sheets are still supportive of paying increased dividends. This represents an attractive combination in the continuing low interest rate environment in 2013 and beyond.
In an Asian context, China and Korea are at cheap valuations and backed by accommodative monetary policy, corporate profitability and pro-active government initiatives which provide considerable support to the local economies.
HSBC believes that China’s potential growth is set to moderate over the next decade as the economy matures, while inflation is likely to be structurally higher. This said, HSBC also believes that China will achieve a ‘soft’ landing with GDP growth of 8-8.5% for the year 2013.
The Korean economy has showed resilience in a volatile global environment thanks to the following factors: 1. persistent current account surplus and large foreign currency reserves; 2. strengthened banking and corporate balance sheets since the Asian financial crisis; 3. diversified export products and markets and 4. overall predictable, effective and decisive policy making, with a sound fiscal position and low level of government debt giving policy flexibility. Despite these drivers, Korea still faces the challenge of an ageing population over the longer term and the possibility of a regime collapse or military escalation in North Korea is also an ongoing political risk.
For emerging markets, China, Russia, Malaysia, Thailand, Turkey and Poland look relatively cheap on a price-to-book basis relative to profitability and Brazil, Mexico and South Africa look relatively expensive on this basis. On a longer term basis, part of the return from emerging market investments will likely come from currency appreciation.
In terms of developed markets, Japan, the US, the UK, Italy, the Netherlands and Australia look cheap on a price-to-book basis.
In both emerging and developed markets, from a sector perspective, the cyclical sectors like industrials, energy and materials look to offer the best trade-off between valuation and profitability at this point, while defensive sectors like consumer staples and healthcare look relatively expensive.
Debt markets
HSBC holds a positive outlook for Asian local currency bonds as key indicators such as Asian bond spreads and debt issuance remain at healthy levels in the region and Asian currencies remain significantly undervalued versus the currencies of developed markets.
Given the strong performance in 2012, HSBC is more cautious on emerging market debt, but inflows into the asset class are supportive, and the yield pick up is still attractive in such a low yielding environment. On the currency front, emerging market currencies look undervalued versus developed market currencies, and the magnitude of the discount suggests increasing value in several countries.
Though corporate spreads have compressed, they still look attractive when compared with government bonds which currently offer very low yield. There are also specific opportunities in US and European high yield bonds, as there are signs showing that lending conditions in these markets have stabilised.
Currency markets
The euro could benefit in 2013 as the perceived risk of an EU break-up recedes and given that on-going quantitative easing from the US Federal Reserve is unsterilised. Over the longer term, exposure to emerging markets currencies could help capture carry and appreciation versus developed market currencies and support emerging equity and local currency bond returns.
Real estate
HSBC remains broadly positive on real estate as an asset class, which provides diversification in multi-asset portfolios because of its generally weak correlation with other assets. Property yields provide a healthy margin in this ultra-low yielding environment. This is likely to remain a supportive factor in an environment of continued low interest rates. Regular rent reviews in property leases also provide investors with some degree of protection against inflation. HSBC prefers listed over unlisted property, mainly on valuation grounds as many markets stand at a discount to underlying net asset values.
“In a low yield world, where volatility is likely to continue, investors need to stay focused in their search for returns. Credit and equity selection will be a key determinant of returns,” concluded Poole.
“Despite a strong bounce for most markets in 2012, we believe that equities, followed by emerging markets bonds especially in Asia, still offer compelling investment opportunities as part of a balanced portfolio. Investors should continue to focus on fundamentals, which is a key growth driver of Asian markets in 2013,” concluded Maldonado.