multi-asset abc global global research · 2014-02-12 · 6 multi-asset global 9 january 2014 abc...
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abcGlobal Research
Global growth will pick up modestly this
year but inflation is surprisingly low
We expect global equities to return 9% and fixed income returns of 4-5%
We think the dollar’s dominance will expand in scope, and that it will make gains against the euro and sterling
We expect global economic growth of 2.6% this year, a
moderate increase from 2% in 2013. Developed markets
could expand by 1.8% and emerging markets by 4.9%.
Disinflationary pressures in parts of the developed world
have raised the spectre of deflation. This leaves central
bankers with a troubling dilemma: should they consider
tightening monetary policy in response to better economic
data or keep policy loose to ward off the threat of deflation?
This is the backdrop to our key calls for the year. We think
the ten-year Treasury yield will fall to 2.1% because of the
persistence of low inflation, debt overhangs, and an
improving US fiscal position.
We see global equities rising by around 6%, and high single
digit returns overall, once dividends are included. Returns
will be driven by decent earnings growth, rather than
multiple expansion. We are overweight Europe, underweight
the US and Japan, and selective in emerging markets.
In FX, we think the dollar rally will continue and broaden, as
the Federal Reserve continues its exit strategy, and as
economic vulnerabilities in the Eurozone and the UK eat
into euro and sterling strength.
This report is a compilation of HSBC’s key views for 2014,
across asset classes. For fuller details, please see:
Global Economics Quarterly – Deflation: the hidden threat
Top ten risks for 2014
Currency Outlook: USD rally to spread its wings
Three total doves: Fixed Income Asset Allocation
Global Equity Insights Quarterly – Why you should
underweight the US and Japan
View HSBC Global Research at: http://www.research.hsbc.com
*Employed by a non-US affiliate of HSBC Securities (USA) Inc, and is not registered/qualified pursuant to FINRA regulations
Issuer of report: HSBC Bank plc
Disclaimer & Disclosures This report must be read with the disclosures and the analyst certifications in the Disclosure appendix, and with the Disclaimer, which forms part of it
Multi-asset Global
The 2014 HSBC View Our multi-asset summary
Click to watch video summary
9 January 2014
Stephen King Chief Economist HSBC Bank plc +44 20 7991 6700 [email protected]
Steven Major, CFA Global Head of Fixed Income Research HSBC Bank plc +44 20 7991 5980 [email protected]
Garry Evans* Global Head of Equity Strategy The Hongkong and Shanghai Banking Corporation Limited +852 2996 6916 [email protected]
Fredrik Nerbrand Global Head of Asset Allocation HSBC Bank plc +44 20 7991 6771 [email protected]
Pablo Goldberg Head, Global Emerging Markets Research HSBC Securities (USA) Inc. +1 212 525 8729 [email protected]
James Steel Chief Commodities Analyst HSBC Securities (USA) Inc. +1 212 525 6515 [email protected]
Nick Robins Head, Climate Change Centre HSBC Bank plc +44 20 7991 6778 [email protected]
HSBC FX Strategy
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Key HSBC 2014 forecasts
Source: HSBC
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Source: HSBC
Key events in 2014
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As growth accelerates...
…inflation sinks ever lower…
…paving the way for new economic
challenges
The big challenge for 2014
Heading into 2014, there is something strikingly
odd about the global economy. Inflation in many
parts of the world is surprisingly low. This is
particularly true of the developed world. In the US
and Europe, in particular, central banks are faced
with a troubling dilemma: even as activity has
picked up, disinflationary pressures appear to be
building. Should central bankers consider a
tightening of monetary policy in response to the
better real economy data or, instead, should they
keep policy loose in response to an increasing
threat of deflation?
We examine the possible reasons behind
unexpectedly low inflation. Sometimes,
disinflation or deflation can be a force for good,
reflecting a sudden surge in productivity that
lowers prices relative to wages or a sudden
increase in energy supply that drives down
headline inflation. Although there is a flavour of
the latter in recent US inflation numbers, thanks to
the impact of the shale revolution, we doubt these
factors fully explain why inflation globally is so
low: core inflation rates have, in many cases, also
surprised on the downside.
Instead, it looks as though low inflation is a
reflection of the waning powers of central banks
as they have resorted to unconventional monetary
stimulus measures. It is already abundantly
obvious that unconventional policies have had a
bigger impact on financial asset values than on the
real economy. We also examine another distorting
effect from unconventional policies channelled
through exchange rate movements. It increasingly
seems that, rather than removing deflationary
trends, monetary stimulus merely allows central
banks to export deflation to other parts of the
world. It’s a monetary version of currency wars.
The international dimension
Initial bouts of quantitative easing – whether from
the Bank of England, the Federal Reserve or,
more recently, the Bank of Japan – have been
associated with a sizeable exchange rate decline
which has lifted inflation temporarily in the “host”
country. Yet, for every exchange rate decline,
there has also, inevitably, been an exchange rate
rise. And for those who have experienced
“unwanted” exchange rate gains, inflation has
ended up lower than expected and, often, lower
than desired. The most obvious recent example
has been the eurozone experience in the second
half of 2013.
In normal circumstances, this wouldn’t be a
problem. But with domestic transmission
mechanisms not working as well as they might and
with growing protectionist policies limiting the
scope for trade multipliers to kick in, it’s
increasingly apparent that one country’s monetary
stimulus is another’s ball and chain. If
unconventional policies work primarily through the
exchange rate, they serve primarily to export, rather
than cure, disinflationary pressures. At the
international level, those pressures refuse to subside.
Economics
Stephen King Chief EconomistHSBC Bank plc+44 20 7991 [email protected]
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The policy response
It’s comforting to argue that, faced with
accelerating economic activity, low inflation
won’t be around for very long. Yet, for all the
welcome news on unemployment in both the US
and the UK, wage growth is surprisingly weak.
And there is a significant danger of confusing
cause with effect. In a standard economic cycle,
activity leads inflation. In a post-bubble
environment, where debts are high and
deleveraging is rife, the opposite applies:
excessively low inflation increases real debt
levels, makes deleveraging more difficult and,
eventually, suppresses demand and activity. Japan
provides the obvious – and sobering – example: a
modest recovery in the mid-1990s ultimately was
undermined through a combination of creeping
deflation and premature policy tightening.
This makes the transition from quantitative easing
through to forward guidance – as tapering takes
hold in the US – all the more difficult to manage.
Forward guidance works on the basis that central
banks can gaze into the future and offer a credible
promise about the future path for interest rates.
But if central banks are unable to decide whether
output leads inflation (in the standard cyclical
sense) or inflation leads output (in the structural
post-bubble sense), providing clear guidance on
future monetary policy may prove to be near
enough impossible, particularly if policymaking
committee members squabble publicly over the
appropriate monetary stance.
The forecasts
While the growth outlook improves, we are not
forecasting a return to pre-crisis rates of
expansion. Our most important innovation this
quarter is the introduction of our first published
estimates for 2015. We expect global growth to
accelerate to 2.8% by then, up from 2.0% in 2013
and 2.6% in 2014. The acceleration reflects a shift
from contraction in the eurozone in 2013 to
modest expansion alongside a more aggressive –
although unbalanced – pick-up in the UK. At
around 2.3% in 2014 and 2.5% in 2015, the pace
of US economic recovery remains disappointing
relative to past experience. The emerging markets
shrug off some of their 2013 funk, with a return to
growth of above 5% by 2015. Brazil, however,
remains notably weak.
We’re not forecasting a descent into outright
deflation. Instead, we’re highlighting the risk that
inflation remains too low or, worse, that it
continues to sink over the next two years. As
Japan’s 1990s experience clearly demonstrates, a
near-term cyclical pick-up is in no sense a
guarantee that the deflation genie has been put
back in its bottle. We suspect forward guidance
may increasingly have to focus on the dangers
associated with inflationary undershoots than on
growth overshoots in the coming months,
implying lower interest rates for longer,
particularly in the US and the eurozone.
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With spreads compressed and yields higher,
returns will come from the duration call
We expect 4-5% returns from all fixed
income, even with a small drop in yields, and
see the 10-year UST yield falling to 2.1%
Disinflation and debt overhangs are reasons
to believe the market focus on evidence of
economic recovery is misplaced
A good entry level for rates
We continue to see value in developed market
government bonds, especially US Treasuries, and
expect yields to fall from current levels. Overall, we
expect global rates markets to continue to move in a
synchronised fashion.
The key to returns in 2014 will be making the right
call on duration. Our call is that there is value in the
intermediate, or 5- to 10-year, segment of the US
Treasury curve, caused by market expectations that
rates will rise sooner than the Fed is indicating.
Overall, we believe that rates markets are pricing in
rate hikes earlier than is likely to be justified by
central bank actions. One reason for this is the
persistence of low inflation: central banks will be
reluctant to tighten monetary conditions with
inflation pressures low, and the market focus on
evidence of economic recovery as a catalyst for
tighter policy is misplaced, in our view.
Another support is central bank liquidity. With
zero-bound rates across the major developed
markets, the central bank-created liquidity is
effectively fungible across the regions. All eyes
will be on the BoJ ahead of the Japanese fiscal
year-end (31 March). The Japanese central bank is
actually behind on its commitments for this year;
against a commitment of JPY13trn, the BoJ has
only deployed JPY9trn so far, suggesting it may
step up buying, even as the Fed tapers its QE. This
is as important for the JGB market, as it keeps
yields contained, as it is for the overseas markets,
where Japanese flows could be headed.
Fed funds futures for December 2016 yield little
more than the Fed’s own forecast for that date
(1.75%), but it is beyond this two-year horizon
where US yields have risen the most. The 2- to10-
year Treasury curve has steepened 40bp in the last
two months alone. This ‘bowing-out’ of the curve
has quickly reached historically significant levels
and, most noticeably, has been moving in the
opposite direction to the Japanese equivalent (see
Figure 1). This makes it attractive to buy 7- to 10-
year maturities in the US, as we expect the curve to
start “bowing-in”.
A similar strategy could be applied to the UK gilt
curve, which steepened in anticipation of tighter
policy earlier than what the Bank of England has
indicated. German Bunds also offer better value than
in 2013, having underperformed amid a relatively
benign backdrop for the Eurozone periphery. With
Fixed Income
Steven Major, CFA Global Head of Fixed Income Research HSBC Bank plc+44 20 7991 [email protected]
Figure 1. US yield curve offers value in belly
Source: HSBC, Bloomberg Note: Uses swap rates (10 day MA)
-13
-40
-20
0
20
40
60
80
-20
0
20
40
60
80
100
120
04 05 06 07 08 09 10 11 12 13 14
2-10
-30y
r (bp
)
2-10
-30y
r (bp
)
US (LHS)
Japan (RHS) 87
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challenges ahead, such as from the ECB’s bank
stress tests and European elections, the Bund market
is set to benefit from any flight to quality.
US Treasury yields will fall
US 10-year spot yields are close to 3.0%, almost
double the level from the beginning of May 2013.
Our view is that yields will fall – we forecast a 10-
year Treasury yield of 2.1% by the third quarter -
given the continued disinflation pressure and
continuing constraint of the debt overhang.
The rise in yields and consensus expectations that
they will rise further, appears to be related to the
better-than-expected growth data and some
challenge to the credibility of the Fed’s forward
guidance. This would be fine if it could be shown
that bond yields were being driven by the economic
data. Yet, for the last five years, nominal yields have
sat well below the level of GDP. What happened in
the last two months of 2013 was very similar to the
period when yields last went to the top of the range,
through May to September. Term premium, the
residual risk for holding long-term bonds, was re-
priced to take account of the changing policy.
The Fed recognises that long-term rates are
composed of two main components; the path of
short-term interest rates and the term premium. It is
the latter that had previously been pulled lower by
unconventional monetary policies and majority
ownership of US Treasuries by the official sector.
Anticipation of reduced QE has contributed most to
the rise in yields, together with the Fed’s transition
from an emphasis on asset purchases to forward
guidance. The challenge is to promise a path of low
future short rates without the authority of asset
purchases to back the promise up.
One overlooked result of the gradual recovery has
been the improvement in the US fiscal position, even
though the total debt level remains high. Only a year
ago, consensus expectations were conditioned by
fears of a fiscal cliff and a budget deficit heading for
10% of GDP. Now, the federal deficit is heading
below 3%, with the first two months of the fiscal
year (starting in October) showing a 22% y-o-y
decline; driven by both better receipts and reduced
spending. This trend also supports lower yields. The
supply/demand balance improves by USD25-30bn a
month compared to last year. Considering demand
growth from investors, there is an effective tapering
by the Treasury that is larger than the Fed's tapering.
Credit – waiting for a better buying opportunity
Following a year when rates market volatility has
returned, investors in the spread markets will be
wary about chasing carry. We believe that the
major credit market indices offer insufficient
spread compensation and would prefer to wait for
better buying opportunities. This means an
underweight recommendation for investment
grade and neutral for high yield.
The return of rates market volatility is especially
relevant to credit investors now that such a high
contribution to return will come from the duration
call. Overall, 2013 was a poor year for fixed income,
but positive returns were possible in the high yield
credit and peripheral European sovereign sectors
(Figure 2). It is unlikely, given starting valuations,
that such a level of return will be possible in 2014
based on the spread component alone, so it will
largely come down to the call on the rates market.
Figure 2. 2013 saw modest fixed income returns
Source: HSBC, iBoxx, Markit, Thomson Reuters Datastream *Note: Return = coupon + price gain. Return uses absolute return
-8
-4
0
4
8
12
16
20
24
Retu
rn* (
%)
20132012
All equity(USD)
All equity(EUR)
ESP gov
(EUR)
HY(EUR)
HY (USD)
ITLgov
(EUR)
All gov
(EUR)
IG corp
(EUR)
DEM gov
(EUR)
All gov
(USD)
EM gov
(USD)
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Tapering means the bull market can no
longer continue purely on the back of
multiple expansion
But we see high single digit returns in 2014
driven by decent earnings growth
We favour Europe, but cut the US to UW
and stay UW Japan. At the sector level, we
are OW Materials, Financials and IT
Earnings to the fore
Over the past two years, global equity returns
have been driven almost entirely by multiple
expansion, with aggressive monetary policy
helping reduce tail risks and lower the equity risk
premium. With the Fed starting to reduce
accommodation this is unlikely to continue this
year. However, we do not foresee a new bear
market. Economic growth is picking up and
earnings are likely to meet analysts’ expectations.
We believe that stocks are unlikely to repeat
2013’s 20% return, but we forecast MSCI ACWI
to rise by 6% to end-2014.
The equity market initially shrugged off the start
of Fed tapering in December with the S&P 500
rising by 4% between the announcement and year-
end. However, after the immediate relief rally in
shares, we expect that tapering will represent a
headwind for equity markets over the course of
2014. The Fed’s move does represent a reduction
in monetary accommodation – and it is, after all,
the marginal change that drives markets. And,
once asset purchases draw to an end, the market’s
attention will shift to when the Fed will hike rates,
which on the Fed’s current projections looks like
being sometime in 2015.
The key implication for equities of the Fed’s policy
change is that we believe it means the equity bull
market can no longer continue purely on the back
of multiple expansion. In the past two years, the
MSCI All Country World Index has risen by 39%.
But this was almost entirely due to multiple
expansion, with the forward PE rising to 14.1x
from 10.8x over this time, while earnings growth
over the two years combined was only 3%.
This means that earnings growth needs to come
through if equities are to rise further. The good news
is that, in a more normal world and with a moderate
pick-up in the global cycle (HSBC’s economists
forecast global GDP growth of 2.6% this year and
2.8% next, after 2.0% in 2013), decent earnings
growth should be possible. Our top-down model
suggests that, after three years of downward
revisions, analysts’ forecasts for 2014 are about
right. The model indicates about 11% EPS growth
in the US (versus the consensus of 10%) and 14% in
Europe ex UK (same as the consensus).
So we don’t think monetary headwinds mean the
bull market is over. Valuations are only at mid-
cycle levels (although the US looks expensive
relative to the rest of the world), and measures of
investor sentiment suggest that the market is not
excessively optimistic (despite some pockets of
bubbliness, such as social media stocks). The
biggest tail-risk perhaps is deflation – but our
analysis suggests that the disinflationary
environment we are currently in is not enough to
trigger a derating.
Global equities
Garry Evans* Global Head of Equity StrategyThe Hongkong and Shanghai Banking Corporation Limited +852 2996 [email protected]
*Employed by a non-US affiliate of HSBC Securities (USA) Inc, and is not registered/ qualified pursuant to FINRA regulations
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Country and sector recommendations
With greater emphasis on earnings, a key theme in
our global portfolio is to favour the regions and
sectors that we believe have the most scope for
earnings to surprise on the upside.
We therefore remain overweight Europe where
earnings are significantly below trend levels, and
are likely to rebound strongly as economic growth
stabilises. But we cut the US to underweight (from
neutral) because earnings are already near record
highs and valuations are beginning to look
extremely stretched relative to the rest of the world.
The US is also moving into a less favourable
position in its monetary policy cycle relative to
Europe. Whilst the Fed has now begun to scale
back its extraordinary measures, there is scope for
the ECB to loosen policy further given the on-
going disinflationary pressure in the Eurozone.
Elsewhere, we remain underweight Japan. It is
now a big consensus overweight, but we see little
that would propel the market further. We believe
that the easy gains have been made, and we
question the potential for reform to have a
significant impact on the economy and corporate
performance from here.
We are selective on emerging markets. Last year
saw a wide dispersion in EM returns, and we
expect this will continue in 2014. We favour the
structurally strong EMs (Taiwan and Mexico)
and those we feel have made progress in tackling
their problems (Indonesia and Malaysia). We
lower China to underweight (from neutral), and
remain underweight India and South Africa.
At the global sector level we remain overweight
on Materials. The sector is likely to see earnings
improve from a very low base, and should also
benefit from a shift in focus towards shareholder
returns. We also remain overweight IT which
screens well across a number of valuation metrics
and continues to see strong upward revisions
to earnings.
And we upgrade Financials to overweight (from
neutral). The sector is likely to continue to
benefit from the on-going economic recovery and,
with earnings still well below trend, there is
significant scope for upside surprises. The sector
also continues to look inexpensive, trading below
long-term average valuations in all regions.
We remain underweight Industrials, where
valuations look stretched following strong
performance in 2013, and we are now
underweight both Consumer sectors, because
valuations are also stretched and earnings
momentum is beginning to slow.
Strategy in bullets
MSCI ACWI expected to rise 6% by end-
2014 (giving a return of 9% when adding the
dividend yield)
Remain overweight Europe
Lower the US to underweight, and remain
underweight on Japan
Selective on EM, with overweights on
Mexico and Taiwan, but underweights on
China, South Africa and India
Overweight IT, Materials and Financials
Remain underweight Consumer Staples and
Industrials, and lower Consumer
Discretionary to underweight from neutral
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The USD rally will continue in 2014 and
expand in scope
EUR and GBP to succumb to their economic
vulnerabilities
In emerging markets, we prefer INR over
the IDR, we like the MXN and would sell
the RUB
USD rally to spread its wings
The rally seen in the USD during much of 2013 is
set to continue this year and expand in scope.
There are two main reasons for our greater
bullishness:
1. The Fed’s exit will drive USD higher
The USD’s gains on the Fed’s exit strategy are
only just beginning, and will likely accelerate as
the market questions the gap between the likely
end of QE3 and the first Fed rate hike.
2. GBP and EUR will no longer be the
exception to this USD dominance.
The unbalanced nature of the UK recovery means
the already large trade deficit could become an
even greater concern for GBP. EUR resilience is
being built on specious arguments. We think the
currency will succumb to lacklustre growth, low
inflation and possible ECB policy easing.
Fed to drive the USD higher
The pace of further USD gains will depend on
how fast the Fed chooses to taper and whether the
market continues to believe there will be a big gap
between the end of QE3 and the first rate hike. On
both aspects, we think the balance of risks favour
USD strength.
Recent surveys suggest the Fed QE3 programme
will not be ended until the December FOMC
meeting. We believe the end could come sooner,
especially if the recent run of upside surprises on
US economic activity persists. The initial
USD10bn taper came earlier than the majority
expected, targeted both mortgage backed
securities and Treasuries, and was described as
modest by the Fed. There is scope for the pace to
be increased subject to the data.
The USD may also benefit should the market
begin to question the Fed’s message that there is
likely to be a substantial gap between the end of
QE3 and the start of a rate hike cycle. Surveys
suggest this gap currently stands at 10 months. It
may narrow. The UK provides a useful parallel
where the market has questioned central bank
forward guidance, and bought the currency as a
result. A similar process in the US is likely to
drive the USD stronger.
GBP: mind the trade gap
The UK’s unbalanced recovery points to
considerable GBP weakness later in 2014. For
now, GBP may be underpinned by the
acceleration in UK activity and the associated
hawkish shift in rate expectations. However, the
upswing is being driven largely by consumption
supported, not by rising real incomes, but by a
combination of dis-saving, renewed housing
leverage, and wealth effects from a government-
boosted housing market. With little hope for a
marked improvement in exports, this means that
rising import demand will widen the UK visible
trade deficit in goods from an already large 6.5%
of GDP in 2013 to potentially troubling levels.
FX
David Bloom Global Head of FX ResearchHSBC Bank plc+44 20 7991 [email protected]
Daragh Maher FX Strategist, G10HSBC Bank plc+44 20 7991 [email protected]
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At the same time, doubts are likely to emerge about
the sustainability of the UK recovery, which will
undermine the short-term inflows which have been
a crucial element of funding for the trade deficit.
GBP would face the double whammy of questions
over the trade deficit’s sustainability alongside
retreating interest rate hike expectations.
EUR: myth-busters
We are not convinced by a number of suggestions
offered for the EUR’s resilience to wider USD
strength. One idea is that EUR is gaining on the
basis of its improving current account balance.
Yet the US deficit has seen an even greater
correction in its imbalance. In addition, the swing
into surplus for the Eurozone reflects economic
weakness or collapsing domestic demand not
strength. The second suggestion is that the EUR is
being supported by portfolio flows, but the
Eurozone is not the only market to see buying of
local equity and bond markets. Furthermore,
portfolio flows are not the dominant aspect of the
Eurozone’s capital account.
Like the AUD in 2013, which seemed initially
immune to deterioration in many of its macro
drivers, we therefore expect the EUR to belatedly
weaken in response to its economic frailties. The
divergent paths of US and Eurozone monetary
policy and the relative pace of economic growth
point to a much lower EUR during 2014.
Emerging market opportunities
Long INR-IDR. Though both currencies are
plagued by current account deficits, the INR is
mainly suffering from a large trade deficit, while
the IDR is being hurt by a widening income
account deficit. The INR has recovered from the
summer sell off, helped by import restrictions and
schemes to attract capital inflows. The IDR still
suffers steady income outflows despite rate hikes
and an improved trade balance. While the RBI has
been trying to curb the INR’s volatility, BI has
allowed the IDR to adjust weaker. Valuation also
suggests that at current levels, the INR is still
more undervalued than the IDR. Selling IDR
against the INR rather than against the USD
removes the negative carry aspect.
Short USD-MXN: On a relative basis, the MXN
outperformed all other currencies in LatAm FX in
2013 thanks to the approval of important
structural reforms that are expected to raise the
country's potential growth in the coming years.
And yet, in absolute terms, current USD-MXN
levels do not reflect this structural shift, in our
view. We expect continued support for the MXN
against the USD in 2014, aided by an upgrade by
the rating agencies, increased FDI inflows, and a
rebound in cyclical domestic data. We target
USD-MXN at 12.60/USD in 2014 and find
current levels as attractive entry points. We would
also look to play MXN outperformance against
other currencies in the region, or against the EUR,
echoing our EUR-USD view.
Long USD-RUB: Interestingly, the RUB has
never been categorised in the “fragile” group of
currencies like the TRY and ZAR. The fact that
Russia has a current account surplus is certainly
the main explanation. Yet, the RUB weakened
significantly during the EM sell-off in H2 2013
and we believe that the adjustment is likely to
extend in 2014. A small current account surplus in
a context of persistent and structural capital
outflows will continue to weigh on the RUB,
particularly given very weak economic growth
and sticky inflation. The diminished involvement
of the Russian central bank in the FX market and
a likely further widening of the RUB trading band
should also contribute to a weaker currency.
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Four years into the recovery we find it hard
to get overly excited about risk assets as
secular headwinds persist.
Near-term risks tend to be cyclically
driven; hence, our risk appetite is heavily
dependent on economic momentum.
As long as the cyclical trend is positive we
retain an asset allocation that focuses on
relative laggards which leads us to take
EM risks
Big questions remain
In a world of near-zero policy rates and a
continuation of unconventional policy measures
that have now become, well, conventional, one
has to ask what the long-term implications are.
Does this drive risk appetite into bubble territory
or is the stimulus simply a replacement of private
sector deleveraging? Judging from the returns in
2013 and current positioning, we would argue that
we are on the path towards over-exuberance with
regards to perceived safe carry trades and large
cap (particularly US) equities.
Looking out over the economic and financial
landscape, we are to some degree torn between what
looks like a rather problematic secular story and
continued cyclical strength. But given that we are
now in our fourth year of recovery, and that the
business cycle tends to last between four and six
years, it is hard to get overly excited about risk. We
are not believers in the so called ‘Great Rotation’ in
which investors sell bonds outright to rotate into
equities. Rather, we believe the opposite is more
likely given global demographic trends. The
majority of assets belong to investors that are either
about to enter or in retirement, and these investors
are unlikely to move aggressively into risk due to
lower risk tolerance as they age. In addition, the
potential for more protectionist policies around the
world could also cap growth prospects. All of this
should keep fundamental appetite for bonds healthy
and overall risk appetite muted. But, questions still
stand regarding the impact of monetary policy.
Cyclical signals are still strong
In November, we introduced our new HSBC
Leading Indicators (HLIs) (see ‘The new HSBC
Leading Indicators: Ahead of the pack’, 11
November 2013). As a quick refresher, we publish
two indicators: a cycle (HLI-C) and a momentum
(HLI-M) indicator. The HLI-C is designed to
identify turning points in the global business cycle
and tends to lead the ISM manufacturing index by
about three months. The HLI-M indicator
provides an early signal of changes in the cycle;
for example, it would signal if we are slowing into
a cyclical peak.
HSBC Leading Indicators remain fairly strong
Source: HSBC
95
100
105
0%
25%
50%
75%
100%
01-Jan-08 01-Jan-10 01-Jan-12
HLI - Momentum (LHS) HLI - Cycle (RHS)
Asset Allocation
Fredrik Nerbrand Global Head of Asset AllocationHSBC Bank Plc+44 20 7991 [email protected]
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At the moment, the HLIs show that global
economic conditions remain fairly robust. The
HLI-M is currently at 64%. This indicator should
be read in a similar way to a PMI, with the 50%
line separating expansion and contraction; so its
current level suggests growth is holding up well.
Looking at relative-valuations, equities currently
appear to be cheaper than credit, as measured by our
bottom-up CDS/12m fwd dividend-yield model.
However, investors are still positioned fairly
conservatively. Moreover, our credit impulse
indicator appears to have reached a turning point on
a global basis, and we see that the drag from credit
appears to be waning in places like Spain and
Indonesia. The weak spots in terms of bank lending
are still China, Germany and Japan. The US is also
relatively weak but seems to have turned the corner.
So, all in all, our tactical risk appetite is still above
our strategic one. This is not to say that there is not
going to be any “Rock’n Roll” in 2014, but this
seems contingent on Black Swans rather than
cyclicality at this point.
But some event risks persist
2013 was a relatively calm year – at least compared
to the calamities of recent years. The question is
whether or not 2014 can repeat this feat. But,
shorter-term rotations can and will occur. These
rotations are likely to take place on the back of
oscillations in the economic cycle or because of
“known unknown” risks. In ‘Top 10 risks for 2014’,
10 December 2013, we highlighted ten such risks
for 2014.
These risks can be split into cyclical and non-
cyclical. For example, a China hard landing, EM
current-account crisis, or the Fed being forced to
increase QE are more cyclical in nature than for
example a failure to raise the US debt ceiling. That
is, a cyclical downturn would increase the
probability of these events occurring materially.
It is for this reason we track the HSBC Leading
Indicators (HLIs) as an early warning system of
these risks. For now though, the HLIs are not
flashing red so the cyclical risks do not appear on the
verge of materialising.
Asset allocation implications
Whilst we have a continued support from cyclical
data, the impetus for further improvements is
going to be more challenging. In this type of
environment we believe that buying relative
laggards is an appropriate strategy. That is, as
long as cyclical data holds up we believe these
laggards offer most upside given current
valuations. In particular, this leads us towards
emerging market related assets that suffered last
year and now present investors with relatively
attractive valuations. It is worth noting that the
risks for emerging markets have rotated from low
growth in developed countries to capital flow
reversals due to a recovery in developed
economies. However, this recovery should push
emerging market growth and risk appetite up.
Yet, asset allocation is about combining assets in
appropriate sizes. As highlighted by our
economists, the potential of deflationary threats
should keep bond yields capped. Therefore, we
believe a large weight in government bonds is
warranted. Overall, we focus this exposure on US
Treasuries but we also take a position in Italian
and Spanish bonds to pick up some additional
spread as long as the cyclical story prevails.
But, there are also areas that we prefer to avoid.
In particular, we believe investment credit spreads
are overly tight and offer very limited relative
value. Furthermore, inflation bonds and REITs
offer limited value given that our inflationary
outlook is mostly skewed to the downside.
Hence, our asset allocation is characterised by a
barbell approach: large equity and government
bond positions with limited allocation to credit.
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Following a slowdown in 2013, EM growth
should accelerate to 4.9% in 2014
Policy-makers are likely to be more reactive
than active, keeping rates mostly on hold and
undertaking few reforms ahead of elections
Market volatility should stay high, but
positive returns, while low, are likely
Baby steps on shaky ground
The risks faced by the emerging markets have
rotated. They used to be centred on a new leg
down in developed markets’ economic activity
and risk aversion shocks. Now, they are about a
contraction in global liquidity, a potential
slowdown in China, and a reflow of capital out of
EM and back to the developed markets.
The huge inflows of capital during the 2006-12
period left EM vulnerable to a reversal of
financial policy in the US. With the Bank of Japan
still in easing mode and the European Central
Bank potentially able to provide more stimuli,
global liquidity remains plentiful despite the start
of US tapering. Yet, currencies sold off and
economies decelerated in 2013 as external
imbalances started to correct. More adjustments
might be needed, but these should happen more
smoothly than last year, particularly in the
markets (See Emerging Markets Vulnerability, 18
December 2013).
As long as China’s growth stays around 7.5%,
EM growth could accelerate, but not very quickly.
Many key EM countries have large current
account deficits (Turkey, South Africa, Chile,
Colombia, Brazil, India, and Indonesia); and with
the markets more averse to financing countries
with imbalances, growth is somewhat capped.
EM to grow 4.9% in 2014
We see the emerging countries growing by 4.9%
in 2014. Asia should lead the pack, up north of
6%, although decelerating from 2013, dragged by
China. We expect Latin America to accelerate to
around 3% from 2.4% last year, boosted by a
strong acceleration in Mexico (4.1%), while
Brazil should expand at a below-trend 2.2%.
CEEMEA should also see some acceleration to
2.7% from 2.2%, pushed by growth in the CEE3
and the Middle East. We see Turkey decelerating
to 2.2%, following the recent market turbulence
stemming from a corruption investigation.
More reactive than active
With little slack in labour markets, wage pressures
remain latent. Keeping EM competitive would
require pressing ahead with structural reforms.
However, a busy election calendar and still-decent
growth is likely to keep policy-makers more in a
reactive than active mode, in our view.
Emerging markets
HSBC GDP growth and inflation forecasts ______ GDP _______ ____ Inflation _____ 2014F 2015F 2014F 2015F World 2.6 2.8 2.7 2.9 Developed 1.8 1.9 1.6 1.7 Emerging 4.9 5.2 5.7 6.1 China 7.4 7.7 2.7 3.1
India 5.0 6.2 7.2 7.8
Korea 3.2 3.4 2.6 3.0
Brazil 2.2 1.2 6.1 6.0
Mexico 4.1 3.8 4.0 3.5
Russia 2.0 2.0 5.8 4.8
Poland 3.0 3.3 1.8 2.2 Turkey 2.2 4.1 7.4 6.8
South Africa 2.6 3.1 5.7 5.5
Source: HSBC *Nominal GDP weights used for aggregates
Pablo Goldberg Global Head, EM ResearchHSBC Securities (USA) Inc.+1 212 525 8729 [email protected]
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Where possible, the easiest adjustment route is
currency depreciation, yet in countries where the
ability to float is more limited by high inflation
rates (Brazil, India, Indonesia, Turkey,
Argentina), interest rates will have to stay high
and growth might suffer.
Emerging Markets 2014 elections calendar
Month Day Presidential Elections
Legislative/ Parliamentary
Elections
Jan-14 14 Egypt Feb-14 02 El Salvador-1st Rd
Costa Rica Costa Rica Thailand
Mar-14 09 El Salvador-2ndRd Colombia 15 Slovakia 1st Rd 29 Slovakia 2nd Rd Apr-14 TBC Hungary
South Africa 05 Afghanistan 09 Indonesia 30 Iraq May-14 TBC Lebanon India 04 Panama Panama 11 Lithuania 1st Rd 25 Lithuania 2nd Rd
Colombia
Jul-14 09 Indonesia Aug-14 TBC Turkey Oct-14 05 Brazil
Bolivia Brazil Bolivia
26 Uruguay-1st Rd Uruguay Nov-14 TBC Romania
30 Uruguay-2nd Rd
Source: IFES Election Guide, The Atlantic, The National Democratic Institute
As the slack in global manufacturing remains and
with commodity prices well-behaved, there
should be no surprises on the inflation front in
emerging markets. Given this outlook, central
bankers might opt to keep domestic monetary
conditions loose, particularly if international
conditions are getting tighter. We expect most EM
central banks to stay on hold during 2014, with
some room for tightening in Asia if growth starts
to pick up more rapidly.
Market outlook With QE tapering scheduled to start, and with the
US Fed suggesting a very gradual adjustment to
its policy, emerging assets should perform better
than they did in 2013. The US change of
paradigm, from open-ended QE to tapering,
resulted in EM fixed income having its worst year
since 2008. EM equities posted their second post-
crisis yearly negative return.
Investors’ appetite for EM assets should return to
positive, following outflows in 2013, supported
by accelerating growth, still-strong fundamentals,
and cheaper relative valuations. Still, appetite
should stay subdued as the factors bringing money
into EM have receded significantly (See Capital
Inflows into EM, August 2013)
Inflows into emerging markets dedicated funds
EM Equities EM FI External debt Local debt USD bn % AUM USD bn % AUM USD bn % AUM USD bn % AUM
2009 84.2 19.1 8.3 8.3 3.2 6.9 2.6 5.0 2010 103.6 14.3 55.7 60.8 15.0 30.7 31.1 119.9 2011 -38.1 -4.2 17.1 10.0 0.7 0.8 14.8 22.2 2012 46.5 5.3 57.0 26.4 36.5 42.4 15.3 16.1 2013 -8.2 -0.7 -15.0 -4.1 -15.2 -8.5 -0.2 0.0
Source: EPFR
Market volatility should be lower than its peaks in
May, when QE tapering talk began, but should
stay above its post-crisis average. HSBC’s bullish
outlook on US Treasuries is a key variable
supporting our strong total return forecasts for EM
debt. We expect hard currency denominated
bonds to return between 4-7% this year, as
spreads could tighten further. Outperformance
will likely come from making the right call on
Turkey, Venezuela, Argentina, and Brazil.
We expect 6-8% returns from the local markets,
supported by the carry. We see little coming from
duration and EM FX could provide an extra 0.7%
to returns in USD. Yet we acknowledge that
currencies will likely remain the main factor
behind return volatility. We keep an eye on ZAR,
BRL, MXN, and TRY, in particular.
We expect EM equities to rise by about 7% during
2014, or return 10% once dividends are included.
EM trades at a discount on price-to-book to
developed markets. We favour the structurally
strong EMs (Taiwan and Mexico) and those we
feel have made progress in tackling their problems
(Indonesia and Malaysia). We are underweight
India, South Africa and China.
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We expect gold to recover modestly in the
second half; strong emerging market
demand for jewellery is supportive
We see silver as a steady metal, but not a
rising star, in 2014
Platinum and palladium should decouple
from gold, robust auto demand supportive
Gold
Gold’s bull run, which lasted more than a decade,
ended in 2013, as the investment demand that
fuelled the long-running rally sharply contracted.
We see scope for only a modest recovery in gold
prices, and have lowered our average gold price
forecasts, as shown in the table below. Volatility
is still likely to persist, however, and we estimate
a wide trading range of USD1,105/oz to
USD1,390/oz for 2014.
HSBC gold price forecast (USD/oz)
__2014e____ __2015e____ __2016e____ __Long term__ Old New Old New Old New Old New
1,435 1,292 1,395 1,310 1,345 1,500 1,350
Source: HSBC
Reduced demand for safe havens and expectations
of US monetary policy shifts triggered a rush out
of gold-exchange traded funds (ETFs) and greatly
reduced net long positions on the Comex (see
chart). In 2014, we expect US monetary policy –
especially as it influences the USD – to continue
to be key to gold prices. Tapering expectations
helped trigger a near-stampede out of gold in
2013. Further shifts in quantitative easing (QE)
tapering expectations could have a second-round
negative impact on gold prices. These declines
should be much more restrained than the plunge
in prices in the first half of 2013, however.
Much will depend on the pace and timing of the
Federal Reserve’s tapering and US economic
conditions. If, as HSBC economists expect, the
Fed continues to taper amid a solid economic
rebound, then the USD is likely to rally and
pressure gold. This is the most likely scenario and
the one on which we base our expectations for a
weaker gold price in the near term. If the Fed
shies away from further tapering then gold may
receive some modest support. Alternatively, if the
Fed opts for a slow, modest taper and the
economy fails to rebound we would expect gold
to be buoyed. Under a disaster scenario in which
the economy reacts badly to tapering we would
expect subsequent USD weakness to boost gold.
Gold holdings in exchange-traded funds
Source: HSBC, Bloomberg
Tapering, combined with a stronger USD, creates
a climate, in our view, for lower prices in 1H
2014. Without significant investor interest, gold’s
upside will be limited, particularly if the Fed
continues a tapering policy. That said, gold prices
will not be entirely determined by the USD
direction and Fed policy, and we expect tight
0
10
20
30
40
50
60
70
80
90
300
500
700
900
1,100
1,300
1,500
1,700
1,900
2,100
Apr-04 Apr-06 Apr-08 Apr-10 Apr-12
Gold in ETFs (RHS) Gold prices USD/oz (LHS)
moz
Precious metals
James Steel Chief Commodities AnalystHSBC Securities (USA) Inc+1 212 525 [email protected]
Howard Wen AnalystHSBC Securities (USA) Inc+1 212 525 [email protected]
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supply and strong physical demand to lead to a
modest rally later in the year.
We estimate that China absorbed the equivalent of
half of total gold mine production in 2013. Based
on low prices and strong income growth, we
believe emerging market demand in general and
Chinese demand in particular will remain strong
in 2014. There is also the possibility that high
tariffs and regulations aimed at curbing India’s
gold imports will be relaxed in 2014, boosting
consumption. Economic recovery in the mature
economies should also support jewellery demand.
Low prices will help keep supply tight. Producers
may be compelled to close and/or restructure
high-cost mines if prices drop below a range that
we estimate to be around USD1,100/oz to
USD1,200/oz, see Gold Outlook: Getting physical
(12 September 2013). Supplies may be further
tightened by a contraction in scrap supplies as
holders will be unlikely to hand in gold for
reprocessing at low prices. We expect the
combination of tight supplies and buoyant
physical demand to engineer a price recovery later
this year, as the market recovers from the negative
impact of Fed tapering.
Silver
We have raised our 2014 average price forecast
for silver slightly, as shown in the table below.
We expect a trading range for 2014 of
USD17.75/oz to USD22.75 for 2014.
HSBC silver price forecast (USD/oz)
__2014e____ __2015e____ __2016e____ __Long term__ Old New Old New Old New Old New
20.00 20.80 20.25 20.25 21.50 25.00 25.00
Source: HSBC
Our relatively neutral outlook for silver is based
on expectations of adequate but not ample mine
supply increases, mostly as a by-product from
polymetallic mines in Latin America. Industrial
demand, notably for electronics, which comprises
half of total silver consumption, is expected to be
robust based on industrial production forecasts
from HSBC macroeconomics.
PGMs
We have lowered our platinum price forecasts
across the board but have left palladium forecasts
unchanged, with the exception of our long-term
forecast (see table below). We expect a wide
trading range this year for platinum of
USD1,360/oz to USD1,725/oz and for palladium
of USD680/oz to USD900/oz.
HSBC PGMs price forecasts (USD/oz)
__2014e___ __2015e___ __2016e___ _Long term__ Old New Old New Old New Old New
Platinum 1,625 1,595 1,875 1,850 1,925 1,825 1,800 Palladium 825 825 900 900 925 950 900
Source: HSBC
With both the platinum and palladium markets
forecast to run steep production /consumption
deficits in 2014 Platinum Group Metals Outlook:
Decoupling from gold (22 November 2013), we
expect both metals to decouple from potentially
weak gold prices and trade higher than recent
levels. Prospects for limited mine output and
growing auto and other industrial demand in 2014
will provide support to the PGMs regardless of
gold direction, we believe. Platinum may be
supported more directly by labor tensions in South
Africa. Palladium is likely to benefit from waning
exports from Russian stockpiles.
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Impacts: we expect greater focus in 2014 on
the present danger of climate vulnerability,
impacts, and loss and damage
Carbon: we expect continued focus in the
USA and China on driving down
dependence on high carbon energy – most
notably coal
Finance: Green bonds will be a growing
source of finance
2014: the year of reconnect
We believe 2014 will mark the beginnings of a
new climate agenda. The traditional narrative was
driven by a view that climate risks are in the
future, that carbon has to be priced to be cut and
that low-carbon alternatives are high-risk and
speculative. We now see three themes converging
to give new impetus to the climate economy.
Impacts: the future is now
2013 ended with super typhoon Haiyan devastating
the Philippines just before the annual climate talks in
Warsaw. So the future is now and 2014 will focus on
the present danger of climate vulnerability, impacts,
loss & damage.
This could be among the 10 all-time hottest years.
Indeed, the UK Met Office’s central forecast for
global average temperatures in 2014 of 14.57°C
would make it the hottest year since records began
in 1880.
New detail on observed climate impacts, plus
guidance on the severity of climate risks to
humans, should be revealed in a report from the
Intergovernmental Panel on Climate Change due
in March. It will also highlight how countries can
ensure resilience through effective adaptation
plans. And importantly, it should provide more
evidence of a changing water cycle caused by
different rainfall patterns and glacier shrinkage,
reiterating our view that water availability and
quality is critical to future economic productivity
(see Natural Capital, November 2013).
Stronger evidence of links between warmer
temperatures and physical impacts will help
developing countries argue that the risk of climate
change is damaging their economies and should
strengthen their claims for compensation from
historically high emitters in the industrialised
world. This loss and damage agenda was
formalised at Warsaw last November and a two-
year work plan will be presented at the Lima
conference in December 2014. But we believe
that if industrialised countries’ emission pledges
are initially insufficient in the run up to Paris 2015
– which is highly likely – political pressure will
grow for compensation and, potentially, litigation.
The IPCC report will also assess regional
vulnerability to climate impacts, such as
heatwaves and floods. Although developing
countries are worst hit, many have not yet
embedded adaptation and resilience into their
economic strategies. Within the G-20, we believe
India, China, Indonesia, South Africa and Brazil
are most vulnerable.
Carbon: risks for high-carbon energy
To meet global climate goals, inefficient coal-
fired generation must be replaced with low-carbon
alternatives. The two ‘carbon elephants’ – China
and the US – account for more than 40% of global
carbon pollution but they established a US-China
Climate change
Nick Robins Head, Climate Change CentreHSBC Bank plc+44 20 7 991 [email protected]
Zoe Knight AnalystHSBC Bank plc+44 20 7991 [email protected]
Wai-Shin Chan, CFA AnalystThe Hongkong and Shanghai Banking Corporation +852 2822 [email protected]
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Climate-Change Working Group in April 2013
and friendly co-operation should strengthen in
2014. We believe a China-US bilateral agreement
could have a transformative impact on realising a
global deal at international talks in 2015.
In terms of public funding, attention will turn to
large G-20 industrialised countries that have not
yet made pledges on ending coal funding, notably
Germany and Japan. In financial markets, investor
scrutiny of capital expenditure plans for new coal
assets and new coal-fired capacity will intensify.
Bonds: realising the green bond potential
Low-carbon investment themes will strengthen in
2014. Wind should bounce back from its 2013
low with global wind installations growing by
23% in 2014 and 11% next year. We forecast
solar installations to grow 7% to 39GW in 2014
and 11% in 2015.
Bond markets have increasingly been used over
the past two years to raise capital for the low-
carbon transition – and we see this trend
intensifying in 2014. Within this, there is a fast-
growing segment of badged ‘green bonds’ with
funds ring-fenced for environmental purposes,
primarily low-carbon energy generation, but also
for energy-efficiency and environmental
investment. Total issuance of green bonds in 2013
was cUSD9bn from international financial
institutions, but also agencies and corporates; we
expect issuance to expand further in 2014, with a
broader focus beyond renewable energy.
Established green markets – such as organic
agriculture – are governed by independent
standards overseen by third-party verification and
labelling. There are currently no commonly
accepted definitions of ‘green bonds’ but we
expect a growing focus on market guidelines to
ensure transparency, enabling investors to allocate
capital with confidence.
Policy: the year of preparation
This has been billed as the year in which
governments complete their ‘homework’ ahead of
the culmination of climate negotiations at Paris in
2015. Although countries need not present their
pledges until early next year, we expect several to
do so at September’s UN climate-leaders’ summit.
The Lima climate conference (COP20) in
December will focus on drawing up guidelines for
the country pledges and compiling the draft
elements for the 2015 agreement. The IPCC will
follow its March report with reports on mitigation
and low-carbon strategies in April and a synthesis
volume will also be issued in October.
There are general elections in Brazil, India, South
Africa in 2014 plus mid-term congressional polls
in the US and elections for the European
Parliament (and the appointment of a new
Commission). These polls could postpone climate
ambition until 2015. The timing of the EU vote is
particularly time-sensitive: a draft proposal for the
EU’s climate and energy strategy for 2030 is
expected in January ahead of a decision in March
before the elections in May. It will be important
for the EU, as the historic leader in international
climate policy, to have its strategy agreed ahead
of the UN summit in September.
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Notes
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Notes
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Disclosure appendix Analyst Certification The following analyst(s), economist(s), and/or strategist(s) who is(are) primarily responsible for this report, certifies(y) that the opinion(s) on the subject security(ies) or issuer(s) and/or any other views or forecasts expressed herein accurately reflect their personal view(s) and that no part of their compensation was, is or will be directly or indirectly related to the specific recommendation(s) or views contained in this research report: Stephen King, Steven Major, Garry Evans, Fredrik Nerbrand, Pablo Goldberg, James Steel, Nick Robins, David Bloom and Daragh Maher
Important disclosures
Equities: Stock ratings and basis for financial analysis
HSBC believes that investors utilise various disciplines and investment horizons when making investment decisions, which depend largely on individual circumstances such as the investor's existing holdings, risk tolerance and other considerations. Given these differences, HSBC has two principal aims in its equity research: 1) to identify long-term investment opportunities based on particular themes or ideas that may affect the future earnings or cash flows of companies on a 12 month time horizon; and 2) from time to time to identify short-term investment opportunities that are derived from fundamental, quantitative, technical or event-driven techniques on a 0-3 month time horizon and which may differ from our long-term investment rating. HSBC has assigned ratings for its long-term investment opportunities as described below.
This report addresses only the long-term investment opportunities of the companies referred to in the report. As and when HSBC publishes a short-term trading idea the stocks to which these relate are identified on the website at www.hsbcnet.com/research. Details of these short-term investment opportunities can be found under the Reports section of this website.
HSBC believes an investor's decision to buy or sell a stock should depend on individual circumstances such as the investor's existing holdings and other considerations. Different securities firms use a variety of ratings terms as well as different rating systems to describe their recommendations. Investors should carefully read the definitions of the ratings used in each research report. In addition, because research reports contain more complete information concerning the analysts' views, investors should carefully read the entire research report and should not infer its contents from the rating. In any case, ratings should not be used or relied on in isolation as investment advice.
Rating definitions for long-term investment opportunities
Stock ratings HSBC assigns ratings to its stocks in this sector on the following basis:
For each stock we set a required rate of return calculated from the cost of equity for that stock’s domestic or, as appropriate, regional market established by our strategy team. The price target for a stock represents the value the analyst expects the stock to reach over our performance horizon. The performance horizon is 12 months. For a stock to be classified as Overweight, the potential return, which equals the percentage difference between the current share price and the target price, including the forecast dividend yield when indicated, must exceed the required return by at least 5 percentage points over the next 12 months (or 10 percentage points for a stock classified as Volatile*). For a stock to be classified as Underweight, the stock must be expected to underperform its required return by at least 5 percentage points over the next 12 months (or 10 percentage points for a stock classified as Volatile*). Stocks between these bands are classified as Neutral.
Our ratings are re-calibrated against these bands at the time of any 'material change' (initiation of coverage, change of volatility status or change in price target). Notwithstanding this, and although ratings are subject to ongoing management review, expected returns will be permitted to move outside the bands as a result of normal share price fluctuations without necessarily triggering a rating change.
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*A stock will be classified as volatile if its historical volatility has exceeded 40%, if the stock has been listed for less than 12 months (unless it is in an industry or sector where volatility is low) or if the analyst expects significant volatility. However, stocks which we do not consider volatile may in fact also behave in such a way. Historical volatility is defined as the past month's average of the daily 365-day moving average volatilities. In order to avoid misleadingly frequent changes in rating, however, volatility has to move 2.5 percentage points past the 40% benchmark in either direction for a stock's status to change.
Rating distribution for long-term investment opportunities
As of 08 January 2014, the distribution of all ratings published is as follows: Overweight (Buy) 45% (34% of these provided with Investment Banking Services)
Neutral (Hold) 37% (32% of these provided with Investment Banking Services)
Underweight (Sell) 18% (28% of these provided with Investment Banking Services)
HSBC and its affiliates will from time to time sell to and buy from customers the securities/instruments (including derivatives) of companies covered in HSBC Research on a principal or agency basis.
Analysts, economists, and strategists are paid in part by reference to the profitability of HSBC which includes investment banking revenues.
For disclosures in respect of any company mentioned in this report, please see the most recently published report on that company available at www.hsbcnet.com/research.
Additional disclosures 1 This report is dated as at 09 January 2014. 2 All market data included in this report are dated as at close 08 January 2014, unless otherwise indicated in the report. 3 HSBC has procedures in place to identify and manage any potential conflicts of interest that arise in connection with its
Research business. HSBC's analysts and its other staff who are involved in the preparation and dissemination of Research operate and have a management reporting line independent of HSBC's Investment Banking business. Information Barrier procedures are in place between the Investment Banking and Research businesses to ensure that any confidential and/or price sensitive information is handled in an appropriate manner.
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Disclaimer * Legal entities as at 8 August 2012 ‘UAE’ HSBC Bank Middle East Limited, Dubai; ‘HK’ The Hongkong and Shanghai Banking Corporation Limited, Hong Kong; ‘TW’ HSBC Securities (Taiwan) Corporation Limited; 'CA' HSBC Bank Canada, Toronto; HSBC Bank, Paris Branch; HSBC France; ‘DE’ HSBC Trinkaus & Burkhardt AG, Düsseldorf; 000 HSBC Bank (RR), Moscow; ‘IN’ HSBC Securities and Capital Markets (India) Private Limited, Mumbai; ‘JP’ HSBC Securities (Japan) Limited, Tokyo; ‘EG’ HSBC Securities Egypt SAE, Cairo; ‘CN’ HSBC Investment Bank Asia Limited, Beijing Representative Office; The Hongkong and Shanghai Banking Corporation Limited, Singapore Branch; The Hongkong and Shanghai Banking Corporation Limited, Seoul Securities Branch; The Hongkong and Shanghai Banking Corporation Limited, Seoul Branch; HSBC Securities (South Africa) (Pty) Ltd, Johannesburg; HSBC Bank plc, London, Madrid, Milan, Stockholm, Tel Aviv; ‘US’ HSBC Securities (USA) Inc, New York; HSBC Yatirim Menkul Degerler AS, Istanbul; HSBC México, SA, Institución de Banca Múltiple, Grupo Financiero HSBC; HSBC Bank Brasil SA – Banco Múltiplo; HSBC Bank Australia Limited; HSBC Bank Argentina SA; HSBC Saudi Arabia Limited; The Hongkong and Shanghai Banking Corporation Limited, New Zealand Branch incorporated in Hong Kong SAR
Issuer of report
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Telephone: +44 20 7991 8888
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