This commentary has been produced by HSBC Global Asset Management to provide a high level overview of the recent economic environment, and is for information purposes only. The views expressed were held at the time of preparation; are subject to change without notice and may not reflect the views expressed in other HSBC Group communications or strategies. This marketing communication does not constitute investment advice or a recommendation to any reader of this content to buy or sell investments nor should it be regarded as investment research. The content has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of its dissemination. You should be aware that the value of any investment can go down as well as up and investors may not get back the amount originally invested. Furthermore, any investments in emerging markets are by their nature higher risk and potentially more volatile than those inherent in established markets. Any performance information shown refers to the past and should not be seen as an indication of future returns. You should always consider seeking professional advice when thinking about undertaking any form of investment.
Investment Views - As of 01 March 2013
- Whilst global equity financial markets' performance was mixed in February, the markets were roughly flat overall despite a general improvement in global economic data since the start of the year. The looming US fiscal deadlines and an inconclusive Italian general election result have kept investors cautious, though indications from various leading central bankers suggesting that loose monetary policy is likely to remain should be a positive influence on investor sentiment.
- The US private sector continues its recovery, and with the housing market in particular continuing to improve, this may help offset various tax increases and government spending cuts. In Europe, recent data continues to expose a clear divergence between Germany and the rest of the eurozone. While the Irish promissory note deal in early February signalled the European Central Bank's (ECB) efforts to support member countries and help manage debt level efforts, the result of the Italian elections has served to heighten concerns about political instability.
- The Italian general elections held during 24 -25 February 2013, resulted in a 'hung parliament'. While Mr Bersani's centre-left coalition won outright in the Lower House, his party failed to gain a majority in the Senate, even in collaboration with Mr Monti's centrist group. The biggest winner by votes was Mr Grillo's anti-establishment 'Five Star Movement', which achieved close to 25% of the national vote. Coalition negotiations will take place over the coming weeks before the 15 March deadline. Any government formed may be unstable and a fresh round of elections in a few months time may be likely. However, last year's ECB commitment to do "whatever it takes" to preserve the euro and the announcement of the Outright Monetary Transactions (OMT) government bond buying programme for countries that apply for it, may help to reduce the degree of uncertainty.
- On 1 March, the 'sequestration' (automatic spending cuts) took effect in the US. The automatic spending cuts USD1.2 trillion of budget authority over the course of nine years (2013-21). Due to this deadline occurring half way into a fiscal year, the magnitude of budget authority cuts during 2013 is likely to 'only' be USD85 billion.
- The minutes of the US Federal Reserve's January meeting provided an element of uncertainty as they highlight discussion over the risks and costs associated with quantitative easing. This led to some speculation the US Federal Reserve may end the programme earlier than expected.
- Indeed, through February, there were several important speeches from the US Federal Reserve. US Federal Reserve Vice-Chair Janet Yellen suggested that the current loose monetary policy is justified. Meanwhile Federal Reserve Chairman Ben Bernanke's testimony at the Humphrey Hawkins Congressional meeting committed the US Federal Reserve to maintain monetary easing "until it observes a substantial improvement in the outlook for the labour market".
- In the UK, Moody's, the credit-rating agency, downgraded the UK's sovereign credit rating from 'AAA' to 'Aa1'. Moody's cited the "challenges that subdued medium-term growth prospects pose" and the decision came as a surprise ahead of the UK Budget on 20 March 2013. However, UK gilt yields fell subsequently, indicating that investors continue to treat the UK as a perceived 'safe haven'.
- China's economic data for January confirmed that the recovery, initiated in the fourth quarter of 2012, had gathered pace at the beginning of 2013. Exports rebounded sharply in January though the data may have been distorted by the Lunar New Year holidays. Lastly, data indicates that financing for businesses is becoming easier, and inflation remained stable at 2% in January.
- On 28 February, the Japanese Prime Minister Shinzo Abe nominated Haruhiko Kuroda – a long-time advocate of more aggressive anti-deflation policies – as the new Governor of the Bank of Japan. This nomination reinforced the credibility and the commitment of Japanese policymakers to fight deflation and was well received by the financial markets. January and February data suggested an economic recovery was underway during the first quarter of 2013.
- Investments in core government bonds are facing the prospect of negative real returns given the low interest rate environment.
- Corporate balance sheets and cash levels are healthy while central banks' maintain accommodative monetary policies, suggesting liquidity is also supportive of risk assets, with very low interest rates and the world's major central banks (the US Federal Reserve, the European Central Bank, and the Bank of Japan) committing to provide additional monetary policy easing if necessary.
- US economic data releases were mixed in February, though were generally better than expected,. The unemployment rate increased slightly to 7.9%, and core retail sales were weaker than anticipated. However, manufacturing sentiment, the University of Michigan consumer confidence survey and house prices all increased and mostly above expectations.
- Short-term concerns to US growth will likely persist as automatic spending cuts gradually take effect, and the impact of personal income tax increases filters through to the economy. It is likely the automatic spending cuts may impact growth by roughly 0.5% through 2013. At the same time, the Federal debt ceiling and the 'continuing resolution' budget arrangement remain unresolved and a material concern for investors through the first quarter of 2013. However, the US House of Representatives vote to delay the debt ceiling until 19 May 2013 has been a welcomed decision by investors in the short term.
- While the impact of quantitative easing (QE) has resulted in a weaker domestic currency, lower interest rates and generally higher asset prices, it has not by itself been enough to reignite economic growth in the UK.
- The latest UK economic data was mixed through February. The manufacturing PMI declined modestly and retail sales were weaker than expected. On the other hand, the UK services sentiment rose by more than expected and the labour market data improved.
- The Bank of England (BoE) announced in February no changes to its existing asset purchase program of GBP375 billion and also elected to maintain rates at 0.5%. Interestingly, in the BoE meeting minutes it emerged that members voted 6-3 to leave policy measures unchanged in a closer-than-expected vote, suggesting that if UK economic weakness continues, more QE could be on its way.
- Global GDP is arguably a more important driver of UK equities, especially large caps, rather than UK GDP because of their significant exposure to international demand. On top of this, UK corporate balance sheets generally remain healthy.
- Across Europe in February, positive data included the eurozone manufacturing PMI, German industrial orders and industrial production and an improvement in German business conditions. On the other hand, weaker data included French and German GDP and eurozone GDP for the fourth quarter of 2012, which contracted by 0.6% over the quarter.
- However, many structural and reform hurdles for Europe remain throughout 2013. These include record high unemployment, major fiscal tightening and austerity, and now the political and reform instability due to the Italian election 'hung parliament'.
- On 28 February, Japan's Prime Minister Shinzo Abe nominated Haruhiko Kuroda – a long-time advocate of more aggressive anti-deflation policies – as the new Governor of the Bank of Japan, a nomination well received by the financial markets. Mr Kuroda gained credibility on fighting deflation as he supported, 10 years ago, the introduction of a formal inflation target to anchor inflation expectations. He is likely to keep the open-ended nature of the asset purchase programme announced in January but may increase the scope and the size of the scheme. He replaces the incumbent governor, Masaaki Shirakawa, on 19 March. On the economic front, the draft budget for the fiscal year 2013-14, beginning in April, showed some spending cuts and slightly higher revenue, in an attempt to start reducing the fiscal deficit. However, the government has forecast an increase of its interest payment of JPY1.5 trillion, a surge unprecedented since 1945. The fiscal support provided to the economy since Abe's election and expectations of loose monetary policy have boosted economic sentiment among businesses and consumers which may lead to stronger economic momentum in the first quarter of 2013.
- Expected monetary policy for 2013, especially after the replacement of the current central bank Governor, effective on 19 March, has had a large impact on the Japanese yen. The Japanese currency lost almost 20% in value against the US dollar between mid-November 2012 and mid-February 2013.
Asia ex-Japan Equities
- The Asian economies continue to grow more strongly than the developed markets in 2013 as the emerging markets benefit from a process of catch-up in living standards in comparison to the developed markets.
- Data suggests that economic growth is likely to remain weak in the first quarter of 2013 in the region. However, signs of improvement have emerged, especially among Northeast Asian economies where exports and industrial production stabilised or increased moderately. Whilst Inflation in most economies (excluding India) is likely to rise in the second half of this year, it is not expected to be a major threat in the near term, allowing central banks to maintain accommodative monetary policy. In the second half of 2012, the central banks of Thailand, Korea and the Philippines lowered interest rates. Many governments have also adopted fiscal stimulus policies. However, since the beginning of the year, several central banks refrained from monetary easing policies, especially in South Korea.
- Recent economic and financial data in China are showing growing signs of recovery, and the PMIs indicate that growth is likely to at least stabilise in the near term. The government has maintained its guidance of prudent monetary policy and proactive fiscal policy 2013 even though broad-based property price increases in December and January raised concerns among policymakers.
- The Indian economy is facing risks of a persistently large current account and fiscal deficits as well as high levels of inflation. However, India's long-term demographics appears to remain positive. The reform announcements, including hikes in energy prices, liberalisation of foreign direct investment, the Cabinet Committee on Investment (CCI) and privatisation of state-owned companies have helped to shrug off the perception of a lack of policy progress and boosted investor sentiment in India. However, the government's ability to push forward fiscal consolidation remains uncertain ahead of the election in mid-2014. The Union Budget for the fiscal year 2013-14, announced at the end of February, showed the willingness of the government to bring the fiscal deficit down from around 5.2% of GDP in the current fiscal year to 4.8%. However, sentiment could rapidly improve if the government meets its deficit and funding targets over the year.
- Over the longer term, the challenge for most Asian regional economies is likely to be to shift to more domestically-driven sources of growth with less emphasis on net demand from the developed markets.
EMEA and LATAM Equities
- Generally, emerging markets positive demographics and relative lack of debt are positive growth factors relative to the developed world.
- Despite these longer-term positives, these markets still have risky, volatile characteristics.
- In Brazil, consumer confidence declined mom in February while the latest credit growth numbers moderated. Unemployment figures in January were a slightly higher-than-anticipated 5.4%.
- In Russia the central bank left all rates unchanged in February. The latest economic data releases from Russia have been varied; industrial production, retail sales, unemployment, and investment growth were moderately weak while wage growth was quite resilient.
- The US economy continued to grow in 2013 as the banking sector has largely recapitalised and recovered from the credit crisis. Meanwhile, the housing market has gained momentum and job growth is continuing, albeit at a modest pace. US growth may be held back because of the need to deal with the fiscal deficit and the income tax increase in particular, which could restrict consumer spending growth in the first half of 2013.
- Perceived 'safe haven' bond markets, principally the government bond yields of the US, UK, Germany and other developed countries outside of the eurozone, such as Canada and Switzerland, are expected to rise modestly in 2013 given ultra-low central bank rates and on-going risks such as various US fiscal deadlines which are due over the coming months (as discussed above).
Eurozone Government Bonds
- In the eurozone, perceived 'safe haven' government bond yields, namely German bunds and French bonds, fell especially towards the end of the month as the uncertain Italian election result increased demand for perceived 'safe havens' bonds in Europe. Italian and Spanish government bond yields were virtually unchanged over the month, until 25 February when the Italian election result became clearer. However, volatility in eurozone bond markets returned towards the end of the month. Periphery eurozone government bond yields increased sharply as a result of the uncertainty created by the Italian hung parliament.
- German government bund yields fell (and prices rose), from around 1.70% at the end of January to 1.35% at the end of February for 10-year bond yields. Although the weak economic environment in Europe supports lower government bond yields for perceived 'safe haven' countries such as Germany in particular, German government bond yields remain extremely low by historical standards.
UK Government Bonds
- In common with US Treasuries, German bunds and Japanese government bonds, UK gilts have benefited from perceived 'safe haven' status. This is despite a large fiscal deficit and weak economic growth, which reflects the fact that the UK is a true sovereign, having control over both its fiscal and monetary policy (i.e. it has the ability to set its own taxation and spending policies and print its own money). It is also a function of substantial government bond purchases by the Bank of England under its QE program which have probably helped keep government bond yields lower and prices higher than otherwise would have been the case.
- Indeed, despite the downgrade of UK government debt from 'AAA' to 'Aa1' by credit-rating agency Moody's on 22 February, UK gilts government bond yields fell towards the end of February as investors became more concerned after the outcome of the Italian elections.
- With the UK economic outlook remaining weak, there is a chance of further QE asset purchases. Incoming Governor of BoE, Mark Carney, may also favour other unconventional monetary policy when he takes over as Governor in July.
This website contains general information about HSBC Global Asset Management and its registered entities that operate in various countries throughout the world. No information on this website is an offer of an investment product or the recommendation to buy or sell a particular security or commodity, invest in any asset class, commodity or currency, or a recommendation to allocate assets in any manner. The information included herein is of a general nature and to inform the user of HSBC Global Asset Management’s general scope and thoughts on areas that HSBC Global Asset Management may deem of interest to visitors to this web site. Particular services and products available in one or more countries may be found by visiting the particular web site of the relevant asset management business of HSBC Group.
The contents of this document may not be reproduced or further distributed to any person or entity, whether in whole or in part, for any purpose. All non-authorised reproduction or use of this document will be the responsibility of the user and may lead to legal proceedings. The material contained in this document is for general information purposes only and does not constitute advice or a recommendation to buy or sell investments. Some of the statements contained in this document may be considered forward looking statements which provide current expectations or forecasts of future events. Such forward looking statements are not guarantees of future performance or events and involve risks and uncertainties. Actual results may differ materially from those described in such forward-looking statements as a result of various factors. The information, comments and recommendations involved here are not within the scope of investment consultancy. Investment consultancy services are only provided within the framework of the investment consultancy agreement as agreed between brokerage companies, portfolio management companies, banks not accepting deposits, and the customer. The conclusions arrived at here are based upon the preferred calculation method and/or the personal opinions of the individuals responsible for the comments and recommendations, so they may not be appropriate for your financial situation and risk and return preferences. Therefore, any investment decision made only on the basis of the information involved here may not lead to the optimum results. We do not undertake any obligation to update the forward-looking statements contained herein, or to update the reasons why actual results could differ from those projected in the forward-looking statements. This document has no contractual value and is not by any means intended as a solicitation, nor a recommendation for the purchase or sale of any financial instrument in any jurisdiction in which such an offer is not lawful. The views and opinions expressed herein are those of HSBC Global Asset Management at the time of preparation, and are subject to change at any time. These views may not necessarily indicate current portfolios' composition. Individual portfolios managed by HSBC Global Asset Management primarily reflect individual clients' objectives, risk preferences, time horizon, and market liquidity.
The value of investments and the income from them can go down as well as up and investors may not get back the amount originally invested, and income is not guaranteed. The price of equity securities may rise, or fall because of changes in the broad market or changes in a company’s financial condition, sometimes rapidly or unpredictably. The risks of investing in debt instruments include credit risk in which an investor could lose money if an issuer of a debt instrument fails to make timely payments of interest or principal or enters bankruptcy. Sovereign debt instruments are subject to the risk that the governmental entity may be unable or unwilling to repay the principal or interest on its sovereign debt. Investments in commodities may have greater volatility than investments in traditional securities, particularly if the instruments involve leverage. Real estate investments may be subject to risks including declines in the value of real estate and risks related to general and economic conditions. The frequency of payment of any income, if applicable, is not guaranteed, and may vary. Where applicable and where a prospectus exists, any investment should be based on the full details of such prospectus. Past performance contained in this document is not a reliable indicator of future performance whilst any forecasts, projections and simulations contained herein should not be relied upon as an indication of future results. Where overseas investments are held the rate of currency exchange may cause the value of such investments to go down as well as up, and any return therefrom may be affected. Investments in emerging markets are by their nature higher risk and potentially more volatile than those inherent in some established markets. Economies in Emerging Markets generally are heavily dependent upon international trade and, accordingly, have been and may continue to be affected adversely by trade barriers, exchange controls, managed adjustments in relative currency values and other protectionist measures imposed or negotiated by the countries with which they trade. These economies also have been and may continue to be affected adversely by economic conditions in the countries in which they trade. Investments in commodities may be subject to greater volatility than investments in traditional investment types. The performance of bonds, gilts and other fixed interest securities tends to be less volatile than those of shares of companies (equities). However there is a risk that both the relative yield and the capital value of these may be reduced if interest rates go up. Mutual fund investments are subject to market risks, read all scheme related documents carefully.
We accept no responsibility for the accuracy and/or completeness of any third party information obtained from sources we believe to be reliable but which have not been independently verified.
HSBC Global Asset Management is the brand name for the asset management business of HSBC Group and operates through the following entities: in the UK by HSBC Global Asset Management (UK) Limited, who are authorised and regulated by the Financial Services Authority; in Jersey by HSBC Global Asset Management (International) Limited which is regulated by the Jersey Financial Services Commission for Fund Services & Investment Business and is licensed by the Guernsey Financial Services Commission for Collective Investments & Investment Business. HSBC Global Asset Management (International) Limited is registered in Jersey under registration number 29656 with its registered office at HSBC House, Esplanade, St Helier, Jersey JE4. HSBC Bank plc acts as settlement agent to HSBC Global Asset Management (International) Limited. Approved for issue in the UK by HSBC Global Asset Management (UK) Limited; in France by HSBC Global Asset Management (France), a Portfolio Management Company authorised by the French regulatory authority AMF (no. GP99026); in Germany by HSBC Global Asset Management (Deutschland) which is regulated by BaFin; in Hong Kong by HSBC Global Asset Management (Hong Kong) Limited, which is regulated by the Securities and Futures Commission; in Canada by HSBC Global Asset Management (Canada) Limited which is registered in all provinces of Canada except Prince Edward Island and is also registered in the Northwest Territories; in Turkey by HSBC Portföy Yönetimi A.Ş, which is licensed to provide portfolio management and investment advisory services in Turkey by the Capital Markets Board of Turkey; in Malta by HSBC Global Asset Management (Malta) Limited, which is licensed to provide investment services in Malta by the Malta Financial Services Authority; in Saudi Arabia by HSBC Saudi Arabia Limited, authorized and regulated by the Capital Market Authority under the License No. 05008-37, Incorporated in Riyadh with limited liability under C.R. No. 1010221555. 7601 North Olaya Road (Al Murooj), P.O.Box 9084, Riyadh 11413, Kingdom of Saudi Arabia; in Bermuda by HSBC Global Asset Management (Bermuda) Limited, of 6 Front Street, Hamilton, Bermuda which is licensed to conduct investment business by the Bermuda Monetary Authority; in United States by HSBC Global Asset Management (USA) which is regulated by the Securities and Exchange Commission; in India by HSBC Asset Management (India) Pvt. Ltd. which is regulated by the Securities and Exchange Board of India; in Japan by HSBC Global Asset Management (Japan) K.K, a Financial Instruments Business Operator under registration number of Kanto Local Finance Bureau (FIBO) 308 and a member of the Investment Trusts Association, Japan and the Japan Investment Advisers Association; in Taiwan independently operated by HSBC Global Asset Management (Taiwan) Limited, which is authorised and regulated by Financial Supervisory Commission, and with its registered office at 24th Fl., 99, Sec. 2, Tunhwa S. Rd., Taipei, Tel: 886 2 2325 7888; in United Arab Emirates, Qatar, Bahrain, Jordan, Lebanon by HSBC Bank Middle East Limited which is regulated by Jersey Financial Services Commission. In Oman by HSBC Bank Oman S.A.O.G Regulated by Central Bank of Oman and Capital Market Authority, Oman and in Singapore by HSBC Global Asset Management (Singapore) Limited, which is regulated by the Monetary Authority of Singapore. HSBC Global Asset Management (Singapore) Limited, or its ultimate and intermediate holding companies, subsidiaries, affiliates, clients, directors and/or staff may, at anytime, have a position in the markets referred herein, and may buy or sell securities, currencies, or any other financial instruments in such markets. HSBC Global Asset Management (Singapore) Limited is an Exempt Financial Adviser and has been granted specific exemption under Regulation 36 of the Financial Advisers Regulation from complying with Sections 25 to 29, 32, 34 and 36 of the Financial Advisers Act).
Not FDIC Insured • May Lose Value • No Bank Guarantee
Copyright © HSBC Global Asset Management Limited 2013. All rights reserved. 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 Global Asset Management Limited