HSBC Q1 23 Outlook

Investment
Outlook
Q1 2023
Looking for the

Silver Lining
Global Private Banking

Global Private Banking Investment Outlook Report
Contributors Global Chief Investment Officer

Willem Sels
willem.sels@hsbcpb.com
+44 (0)207 860 5258
Director, Global Market Strategist

Head of Asset Allocation and Managing Editor
Stanko Milojevic Neha Sahni
stanko.milojevic@hsbcpb.com neha.sahni@hsbcpb.com
+44 (0)207 024 6577 +44 (0)207 024 1341
Regional Chief Investment Officers
Chief Investment Officer, Asia Chief Investment Officer, North Asia

Cheuk Wan Fan Patrick Ho
cheuk.wan.fan@hsbcpb.com patrick.w.w.ho@hsbcpb.com
+852 2899 8648 +852 2899 8691
Chief Investment Officer, Southeast Asia Chief Investment Officer, China

James Cheo Desmond Kuang
james.cheo@hsbcpb.com Desmond.kuang@hsbc.com.cn
+65 6658 3885 +86 21 38881020
Chief Investment Officer,

EMEA and Switzerland Chief Investment Officer, UK & CI
Georgios Leontaris Jonathan Sparks
georgios.leontaris@hsbcpb.com jonathan.sparks@hsbcpb.com
+41 (0)58 705 5746 +44 (0)20 7860 3248
Chief Investment Officer, Americas

Jose Rasco
Global Head of Fixed Income Global Head of Equities

Laurent Lacroix Kevin Lyne Smith
laurent.lacroix@hsbcpb.com kevin.lyne-smith@hsbc.com
+44 (0)207 024 0613 +44 (0)207 860 6597
FX & Commodities Product

Specialist Senior Fixed Income Credit Specialist
Rodolphe Bohn Elena Kolchina
rodolphe.bohn@hsbcpb.com elena.kolchina@hsbcpb.com
+44 (0)203 359 1177 +44 (0)207 860 3058
Director, Global Equities

Global Market Analyst, Bryan O’Carroll
Real Estate Investment bryan.ocarroll@hsbcpb.com
Guy Sheppard +44 (0)203 268 4220
guy.r.sheppard@hsbc.com
+44 (0)207 024 0522
Senior Product Specialist,

Private Market Investments Head of European Hedge Fund Research
Jorge Huitron Alex Grievson
jorge.emilio.huitron@hsbc.com Alex.grievson@hsbc.com
+44 (0)203 359 7040 +44 (0)203 359 7065
2
Contents
Letter to Clients 05
Our Portfolio Strategy 06
Are Diversified Portfolios Still a
Better Option than Cash? 12
Top Four Trends and High Conviction Themes14
1. Remaking Asia’s Future 14
2. O
pportunities Amid High Rates
and Slowing Growth 18
3. Digital Transformation 20
4. Investing for a Sustainable Future 22
Equities24
Fixed Income 28
Currencies and Commodities 32
Hedge Funds 34
Private Markets 36
Real Estate 38
Disclaimers40
3
4
Welcome
Dear client
As we look into 2023, the headwinds with the yield level of short-to-medium hedge funds and a core allocation to
from slowing growth and higher rates dated and highly rated bonds, which we private assets and real estate. And finally,
that have been plaguing investors will overweight. Adjusted for their relative we position in structural trends, noting
remain key market drivers. But while risk levels, bonds have sold off more that many companies that are well
the cyclical outlook remains a major than equities this year, making them placed for such trends now often trade at
challenge, we are starting to see a silver look cheap. We also like bonds for cheap valuations.
lining on the rate front. diversification purposes, because their One case in point is sustainability. Some
Let’s look at the bad news first. Global correlation with equities typically drops governments have allowed more oil and
economic momentum continues to in times of slowing economic growth. gas drilling to secure energy supplies,
slow, with the Eurozone and UK in We further diversify portfolios through but this does not put into question the
recession, US growth well below normal, our overweight in hedge funds, which long term investment case for climate
and China’s 2023 recovery likely to be benefit from high volatility, the diverging mitigation and adaptation solutions.
shallow. This cyclical headwind largely fundamentals of different countries, and In fact, the same governments have
determines how we feel about stocks. the rising income hedge funds receive on also invested in renewable energy
We expect consensus earnings growth to their cash balances. and nuclear, while households and
slow further, so we are underweight on While our confidence in short-to-medium businesses have invested in solar and
global equities, with a defensive sector dated bonds, our upgrade of Chinese increased insulation, and are making
bias and a focus on quality stocks with stocks and downgrade of USD are signs production processes more efficient to
strong market positions. Geographically, that we see a silver lining, we will keep save on high energy bills. So the short-
the relative resilience of the US leads monitoring important milestones that term cost incentive is adding to the long-
us to prefer US stocks over European could make us add more risk. When term sustainability driver, compressing
stocks. In Asia, we have upgraded the peak in core inflation and Fed rates the green premium and advancing new
Chinese stocks because policy is eventually confirmed, we may well green solutions and technologies.
measures are easing COVID and increase our rate exposure through At the end of a difficult year, investors
housing related risks. Asia’s reopening is increased duration and add back to our face an important balancing act. On
supportive of economic activity but the tech exposure. Good news on the rate the one hand, there is great uncertainty
tech cycle is slow. front may help stocks too, but before we around geopolitics and the timing of
On the rate front, markets have tried see a sustained equity rally, the cyclical the turn in the rate, inflation and growth
several times to anticipate peak rates, outlook first needs to stabilise. That will cycles. On the other hand, almost all
but so far fallen back each time. The have to wait, as rate hikes have a lagged assets have repriced since the start of
lower-than-expected US inflation print effect on economic growth. But once the 2022. The good news is that even quality
for October, however, signals that we are cycle is more stable, we could get more assets are now much cheaper and
getting closer to peak rates, even if we’re positive on stocks and lower rated credit. investors can build resilient portfolios
not quite there yet. Commodity price Stronger global risk appetite would with respectable expected returns, and
inflation, transportation costs and supply eventually also lead us to take a bearish wait for better fundamentals to take
chain issues are all easing. Rents are view on USD. riskier positions.
still rising but should plateau in coming Those are potential reasons for future
months, as they tend to follow house optimism, but for now, we remain
prices, which have been falling. cautious and see four priorities for
As the Fed approaches peak rates, investors. First, we rebalance portfolios
USD’s impressive bull run should come towards high rated bonds. Secondly, we
to a halt. We therefore adopt a neutral build recession resistant portfolios by
view on the greenback. And with bond focusing on quality stocks and partial
Willem Sels,
markets already pricing a 5% Fed funds inflation hedges. Third, we enhance the
Global Chief Investment Officer
rate for Q1 2023, we feel comfortable diversification from bonds by adding
23 November 2022
5
Our Portfolio Strategy

The global economic slowdown will keep rates high for longer, which should
Fixed income: overweight
remain a key headwind for stocks continue to slow growth, with a lag.
for some time and we are mildly Housing markets are already seeing the
Focus on high quality borrowers
underweight in global equities. An effect of higher rates, with prices, sales
Keep overall duration below
overweight in high-rated bonds and construction activity levels down
benchmark
can provide diversification, and in developed markets (DM). Consumers
bond yields already price in a lot of have seen their mortgage payments rise
tightening. As the growth cycle lags Equities: mildly underweight (sometimes double or triple) and the
the rate cycle, we much rather take cost of petrol, food, clothing and utility
Prefer US over Eurozone and UK
rate risk than cyclical risk. We are bills shoot up. For the vast majority,
also overweight in hedge funds to Prefer EM Asia and Latin America over wages have not kept up with inflation,
diversify and mitigate uncertainties. EM Europe forcing them to reduce spending
We look for the silver lining and Maintain a defensive sector tilt, with a on discretionary items in particular.
explore what could eventually focus on quality and income Governments have come to the rescue,
make us more bullish. And we but as their cost of borrowing has shot
continue to highlight structural Alternatives: overweight up, their ability to act is limited: the most
opportunities at attractive dramatic recent illustration was the UK,
valuations, related to sustainability, Overweight in hedge funds where the government was forced by
technology and in Asia. Keep core allocations to private markets to abandon spending plans
markets and real estate and raise taxes instead (ending many
1. The way we see the world economists’ belief in Modern Monetary
The global economic slowdown will Theory in the process).
remain a major driver for markets. The downside tail risks for housing markets
Slower economic growth should
Eurozone and the UK are going through and ease COVID-related bottle necks,
gradually lead inflation to come down,
a recession, and although the US is more but economic activity is unlikely to
and the October US CPI figure triggered
resilient, growth is below normal there accelerate sharply.
hopes in this direction. The good news
too, and we may see one or two negative While low rates in the past decade were is that oil, natural gas and transportation
quarters of US growth in 2023. China’s designed to boost growth and avoid costs are down already, and the shortage
growth rate could bottom as supportive deflation, the interplay between rates, of semiconductors is easing. This
monetary policy should start to pay some growth and inflation now works the other is contributing to lower goods price
benefits. Recent policy measures reduce way around. Sticky inflation is bound to
6
inflation, which we think will continue to difficult. In addition, the lag with which question the sustainability revolution.
ease, and may surprise to the downside. all the rates hikes we’ve seen around We don’t think this is the case:
On the other hand, though, there are the world will affect inflation and households and companies have reacted
plenty of sticky inflation items, related growth, is highly uncertain, creating to the war by installing more solar
to rents (which lag house prices) and the risk of policy error (too little or too panels, insulating their houses better and
services, propped up by a still strong much tightening). Political topics are trying to reduce energy consumption,
labour market. So while inflation should key too: China’s COVID policy is closely while governments have also invested in
come down in 2023, it is unlikely to get watched by markets, the outlook of the renewable energy and nuclear. COP27
anywhere near the typical 2% central Russia-Ukraine war is unpredictable and COP15 have illustrated that climate
bank targets. That means that central but has big implications, and the policy change and biodiversity are impacting
banks are not yet done with their rate gridlock in the US congress could lead each other, and addressing the cause
hikes, and many will want to keep their to challenges around the debt ceiling. of either also tends to help address the
rates in restrictive territory to ensure We’re also seeing a rise in insolvencies other challenge. Much more needs to
the inflation dragon is really slain. of some smaller and weaker corporates be done urgently, and the effort needs
In the case of the US Federal Reserve, as a result of higher rates, higher input to be sustained, if we want a chance
we think rates will go to 5% in Q1 and and labour costs though not a credit to hit the 1.5C target. We think the
then stay around that level through crisis (due to the careful management of structural support for sustainability
2023 and 2024. leverage by households and corporates themes is enhanced by the short term
In summary, we expect a fundamental in recent years). Finally, the hawkish tone need to save on costly energy, fertilisers,
market backdrop of slowing global of the ECB, coupled with the new Italian packaging, transport etc. Among other
growth, while rates continue to rise for government, may test investors’ nerves structural trends, we think the much
now, and plateau later (China is a notable in the Eurozone’s periphery. debated de-globalisation and US-China
exception, as its growth is slow but Amid this uncertainty, luckily, there strategic competition leads to supply
finding a bottom, and Chinese rates are are some structural trends that remain chain diversification, re-onshoring and
relatively stable). in place and give investors some long nearshoring, benefiting Mexico, our
term direction. Some commentators Total Security and ASEAN Tigers
But a big issue for investors is that
are wondering whether the Russia- themes. We discuss the long term
there are huge uncertainties around
Ukraine war, which has caused some trends more in our chapter on High
this outlook. The many components
governments to drill for more oil and Conviction (HiCo) Themes.
entering into CPI create a confusing
picture and make accurate forecasts gas to secure energy supplies, puts into
7
2. Our current positioning How does our world view affect our investment priorities?
Our portfolio strategy adapts to Four key priorities for investors Related focus areas
the serious cyclical challenges
Rebalancing positions towards bonds Overweight on IG bonds in DM and EM,
but recognises the run-up in bond
ahead of peaking interest rates with 2-5 year maturities
yields to date. We’re much happier
to take some interest rate risk than HiCo themes in Short-to-Medium Dated
cyclical risk, and are therefore mildly Quality credit, and DM financials
underweight in equities, focusing
Building recession resistant portfolios Quality stocks and bonds
on quality, income and a defensive
sector positioning. In bonds, we think Focus on income, partial inflation
short-to-medium maturities are the hedges and HiCo themes on American
place to be, as they incorporate almost Resilience, Asia’s Reopening Winners
all of the rate hikes we expect to and Durable Dividends
see, while extending duration would
Risk diversification to mitigate market Diversification through our hedge funds
increase volatility without giving
volatility and geopolitical uncertainty overweight and core allocation
investors much more yield (as yield
to alternatives
curves are flat or inverted). Clearly, the
economic downturn also directs us Positioning in structural growth trends Energy Transition and Independence,
to high credit ratings, and we favour supported by tailwinds ASEAN Tigers, Asia’s Green
investment grade borrowers in DM Transformation
and EM. Rising rates hurt both equities Financing Biodiversity Action
and bonds in 2022, but with many
Total Security and Smart Mobility
rate hikes priced in, and the focus of
market focus increasingly turning to
the economic cycle, we think bonds As our table shows, we believe there are ® Thirdly, amid all the uncertainty and
and equities will become less correlated, four priorities for investors. the risk scenarios we have discussed,
with high quality bonds becoming a ® First, we rebalance portfolios towards we emphasize diversification. The
bonds, focusing on investment grade low rate environment of the past
better diversifier than they were in 2022.
in developed and emerging markets. decade was sometimes referred
We add further diversification through
Our related High Conviction themes to as TINA (There Is No Alternative
our hedge funds (HF) overweight, and
are in Short-to Medium Dated Quality to equities), and until recently, our
believe HF continue to benefit from capital market assumptions used to
Credit, DM Financial bonds at the top
a great opportunity set amid high consider cash and high rated bonds
end of the capital structure, and Asian
volatility, rotation between sectors and the least attractive assets from a
Quality Credit.
markets, and geographical differences in risk/return perspective. The rise in
® Secondly, we try to make portfolios
monetary policy and growth momentum. yields has corrected that, and the
more resistant to recession risk (which
We also note that many hedge fund new environment is now sometimes
is in part triggered by sticky inflation),
strategies that use futures and OTC referred to as TARA (There Are
by focusing on quality stocks and
derivatives, complemented with cash Reasonable Alternatives to equities;
bonds, companies providing dividend
related instruments, see their return including bonds, some cash, and
income or those whose revenues are
alternative assets). So we diversify
potential lifted by higher cash rates. boosted by inflation (energy, staples,
with high rated bonds and hedge
infrastructure). Our HiCo themes
funds, and believe other alternatives
of American Resilience, Durable
such as private assets and real estate
Dividends and Hedging Against
are key parts of well-diversified
Inflation can help achieve this.
portfolios too. By using spikes in
8
volatility to generate income trend. Asia’s short term dynamics the number of themes under the
or partial downside protection, have been held back by the delayed ‘Digital Transformation’ umbrella,
investors can take positions with recovery in China, but Beijing’s as rising rates hurt growth stocks,
limited directional risk. recent pivot towards optimisation of and some companies in this area
® Lastly, our HiCo themes tap into COVID policy and property easing are hit by semiconductor shortages,
structural trends, which can measures are giving us some more waning demand for consumer
sometimes be crowded out by the confidence. We have moved our electronics and lower ad revenues.
noise coming from the rate and focus towards Southeast Asia, We retain our themes related to
growth debate, but which remain and towards the beneficiaries of Smart Mobility and Total Security as
in place. We continue to hit the supply chain reorientation and they have the strongest short term
green button with themes under our the reopening post-COVID. We support in our view.
‘Investing for a Sustainable Future’ have consciously been reducing
9
Historically, equities and bonds become less correlated when the economic
cycle slows.
US economic momentum
65 Correlation between bonds and equities (RHS) 0.6
0.4
60
0.2
0
55
ISM index
-0.2
50 -0.4
-0.6
45
-0.8
40 -1
2002 2004 2006 2008 2010 2012 2014 2016 2018 2020 2022
Source: Bloomberg, HSBC Global Private Banking as at 22 November 2022. Past performance is not a reliable
indicator of future performance.
The fall in valuations has pushed up bond yields and equities’ earnings yield,
but the move in bonds is more significant.
14
Fed funds 5-y r US Treasury US Investment Grade
12 US equities Global equities

Bond yield and earnings yield (%)
10
0
2002 2004 2006 2008 2010 2012 2014 2016 2018 2020 2022
indicator of future performance. Note: equities’ earnings yield is the inverse of the Price / Earnings ratio.
10
3. What could make us more could happen in Q1 or early Q2, and growth or a small earnings recession,
constructive? would create a more constructive bond and earnings momentum stabilises,
We’ve outlined our core views and the environment and allow us to increase this could be the signal for markets that
uncertainties around that view, which our duration exposure. FX markets enough pessimism is priced in. This
were mainly focused on the downside would be affected too: we moved USD would be a key milestone allowing us
risks. But what could make us more to a neutral view after the lower-than- to add back to equities and take a less
positive? We’re currently still facing the expected October CPI figure, which defensive sector stance. Local factors
worst possible combination of slowing will make it harder for markets to keep matter too: while recent policy measures
growth, high inflation and rising rates. forecasting ever higher rates, and have made us more positive on China,
But almost all assets have become much should halt the widening in interest rate we would want to see an easing of the
cheaper than they were in early 2022, differentials between USD and other energy crisis and the Russia-Ukraine
and if markets become more confident currencies. In equities, more stable – or war before upgrading Europe. In the
that some of the fundamentals are even lower – bond yields would mean UK, increased trust in government
stabilising, and risks are appropriately more support for growth stocks, and policies helps, but it is hard to see a
priced, markets could bottom and even this could lead us to add back more high sharp and sustained market rebound
recover later in 2023. conviction themes under the ‘Digital amid a prolonged recession. In stage 3,
Transformation’ trend. We note though improved risk appetite would reduce the
Our table shows a possible path towards
that we would still continue to stick to safe haven appeal of USD, leading to
a more constructive environment. We
quality stocks and bonds until the cycle more support for cyclical currencies and
think we’re more likely to see better rate
starts to bottom. those with a more attractive yield.
sentiment before we see better news
on the growth front. Markets will try to From a cyclical perspective, we foresee For now, we maintain our cautious
assess when the Fed can be confident a possible bottoming of global economic portfolio composition, but we think
that inflation is well on its way down, data around Q2 or Q3, but little upward it is useful to continue to watch key
because that will allow it to slow hikes economic momentum from there. On milestones as we are hopeful that some
and eventually pause. It’s impossible the earnings side, we think consensus markets will see a rebound sometime in
to know for sure, but this milestone forecasts need to come down further, 2023, and investors need to be nimble.
but once analysts forecast zero earnings
How could our views change when rates peak or growth bottoms?
Current position
® Underweight equities – building recession resistant portfolios

® Overweight bonds but with a focus on short-to-medium maturities and
quality borrowers
® We moved USD to neutral
Milestone 1: What could we change after rates have peaked?
® Extend duration of bond holdings

® Less challenging environment for tech and other growth stocks
® Stick to quality stocks and bonds
Milestone 2: What could we change when economic growth and

earnings stabilise?
® Add to equity exposure and become less defensive

® Selectively add to credit risk
® Geographical preferences depend on improvement in key local challenges
® USD to decline
11
Are Diversified
Portfolios Still a
Better Option
than Cash?
Perhaps disheartened by the 2022 First, whilst cash rates have indeed Remaining invested and diversified
market sell-off and enticed by increased, so have risk premia across across the asset class is a useful
rising interest rates, some investors global markets. Second, regardless of investment principle that helps instil
wonder whether making substantial whether the Fed gets inflation under discipline and avoid pitfalls of market
allocations to cash is becoming a control, history shows that most timing. Evidence shows that embracing
viable strategy. We recognise that asset classes should outperform cash market volatility is a rewarding strategy
cash is now less unattractive in both scenarios, which strengthens for investor with a long-term horizon.
than it used to be, and we have the case for diversification. Finally, Due to the absence of prolonged,
tactically upgraded it to neutral. following a historical repricing deep selloffs in the 15 years following
But our strategic allocation to cash episode, we believe that fixed income the Global Financial Crisis (GFC), this
remains low, and we see three is now offering positive excess principle may have felt particularly easy
reasons to remain diversified across returns over cash rates, and this to follow. In addition, cash rates were
asset classes. is reflected in our strategic asset effectively zero over most of the period.
allocation for 2023. With nothing to be gained from holding
cash and plenty to be lost to inflation,
While cash rates have moved up, long term return expectations for bonds in astute investors embraced market risk by
particular have moved up much more sharply. investing in a mix of bonds, stocks, and
2023 2022 alternatives, whilst limiting their cash
8% Equity allocations during this period.
Expected long-term returns from date shown
Risky FI
7% But 2022 has been painful for both stock
6% and bond investors. Following a rapid
Defensive FI adjustment of the Fed’s monetary policy
5%
stance, cash rates are now sitting at
4% 4%, levels not seen since 2007. Perhaps
Cash disheartened by the recent sell-off and
3%
enticed by higher interest rates, some
2% investors wonder whether cash has
become a more attractive proposition
1%
than it used to be. We sympathise
0% with this view, mainly on the basis that
0% 2% 4% 6% 8% 10% 12% 14% 16% 18%
the regime of financial repression is
Expected volatility probably behind us, and we may again
Source: HSBC Global Asset Management, HSBC Private Banking, 22 November 2022. Defensive FI: Government see a regime where cash returns begin
Bonds, Corporate Credit, Securitised Credit and Inflation-linked Bonds. Risky FI: High Yield and Emerging Market
Debt. Equities: Developed and Emerging equities. All expected returns are shown in USD.
to outpace inflation again (in the US,
12
we think inflation could fall below the USD, 0.81% in the Eurozone, 1.70% in of potential asset class performance
Fed policy rate in H2 2023). With that in the UK and 3.09% in China. At the same in the forthcoming period outside of
mind, we have recently upgraded our time, our estimate of the expected equity our core scenario, we have to venture
view on cash to neutral. risk premium has increased from 4.12% away from the post-GFC experience of
But one needs to compare the outlook to 4.91% over the last twelve months. As near-zero interest rates and base our
for cash against all other asset classes seen in chart below, fixed income risk scenarios on periods with high cash
as viable alternatives when allocating premia are particularly elevated relative rates: the 1970s, when cash rates were
assets. In spite of their recent increase, to history, and our long term return high and inflation kept escalating, and
the market consensus is that cash forecasts have moved up considerably, the 1980s, when cash rates were equally
rates are not going to remain at these especially for defensive fixed income. elevated, but inflation was brought
levels for a long period of time. Our Whilst we agree cash is no longer under control. Evaluating both scenarios
expectation is that the Fed will cut rates unattractive, we must emphasize that can give us some insight on what we
from 2025, and that the cash rate will positive real returns on cash are far from may reasonably expect, regardless of
average 2.58% over the next 10 years in guaranteed. To get some idea whether the Fed gets inflation under
control in coming years.
The first inference to be made from
Scenario 1: High cash rates and spiralling inflation (1970s) these scenarios is that most asset
classes tend to outperform cash
35%
even when cash rates are elevated,
30% reinforcing the case for remaining
invested in a diversified portfolio.
25%
Equities are particularly sensitive to
Anualised return
20% inflation dynamics – they may struggle

to do better than cash if inflation
15% remains problematic (1970s), but
they should deliver superior returns if
10%
monetary policymakers regain control
5% (1980s). Broad commodities remain
a relevant hedge against particularly
0%
severe inflationary episodes. And
Commodities Property CPI Treasuries Coroporate Cash Stock
Bonds Market perhaps most interestingly, fixed income
outperforms cash in both reflationary
and disinflationary scenarios.
In our Strategic Asset Allocation update
Scenario 2: High cash rate and declining inflation (1980s) for 2023, we are marginally increasing
our allocation to fixed income. We are
25%
putting a particular emphasis on inflation
linked bonds, as their real yields have
20% returned to levels not seen in more than
a decade. Tactically, we increased our
Anualised return
15% cash allocation to neutral this year. But

at its neutral weight, cash still represents
the smallest percentage allocation in
10%
our diversified multi-asset portfolio,
and we continue to advocate broad
5%
diversification across the investable
asset classes as a time-tested strategy
0% for the long run.
Stock Treasuries Corporate Commodities Cash Property CPI
Market Bonds
Source: HSBC Private Banking, Bloomberg, Yale University, Dartmouth college, 22 November 2022 . Returns
are shown in USD between 31 Dec 1969 and 31 Dec 1989.
13
Remaking Asia’s
Future
Against a challenging macro control measures and stop excessive
backdrop of global downturn, Asian Our four high conviction themes local containment restrictions marked
economies continue to stand out as an important milestone in the gradual
a relative safe haven with resilient 1. Asia’s Reopening Winners relaxation of the Zero COVID policy. We
domestic fundamentals to weather expect China will likely announce more
2. ASEAN Tigers
the recession risks. We believe meaningful reopening measures after
Asian economies can maintain their 3. Asia’s Green Transformation the State Council leadership reshuffle
relative outperformance against the 4. Asian Quality Credit at the National People’s Congress in
global peers with silver linings of March 2023 when booster vaccinations
accelerating economic reopening Our new High Conviction Theme of are ramped up more broadly across the
and more growth supportive policy Asia’s Reopening Winners focuses on nation in the coming months.
initiatives. China’s recent pivot beneficiaries of the widening reopening
We expect North Asian economies,
towards gradual relaxation of trend across the region. The 20 new
including Mainland China, Hong Kong,
the Zero COVID policy and more measures announced by China’s
Taiwan, South Korea and Japan, should
comprehensive policy support for National Health Commission to cut
feel the largest positive impact of
the property sector are notable quarantine time, optimise pandemic
reopening in 2023 given their border
drivers to support its gradual
Asia has the largest potential upside in reopening
growth recovery in 2023. We
expect GDP growth in Asia ex- 100%
Japan to accelerate to 4.5% in 2023
January – July 2022 as % of 2019 levels*
from 3.9% in 2022, which is still 24% 26%

80% 35%
respectable compared with many 40% 43%
International tourist arrivals,
developed economies which should

see close to zero growth in 2023. 60%
We believe a recovery in China’s 86%
consumption and investment amid

its gradual reopening would boost 40%
the overall growth outlook for the
region, given China is the single 20%
largest trading partner of 16 major
Asian economies.
0%
Our Top Trend of Remaking Asia’s Middle East Europe Americas Africa World Asia Pacific
Future looks for the most attractive
% recovered % not yet recovered
structural and tactical opportunities in
the region. Source: UNWTO, HSBC Global Private Banking, 22 November 2022.
14
reopening and relaxation of COVID trend to continue. Asia’s travel and integrated region through the Regional
restrictions have lagged behind the rest tourism sectors are forecast to grow Comprehensive Economic Partnership,
of the world. Southeast Asia should at an annualised rate of 8.5% over the which is the world’s largest free trade
continue to benefit from the strong coming decade, double the pace of 4% bloc. We believe ASEAN economies can
momentum of overseas travellers’ inflow growth for the regional economy. Riding also benefit from the reconfiguration
and tourism boom. In Thailand, tourist on the reopening tailwinds, we favour and regionalisation of Asia’s supply
arrivals have climbed to only half of pre- quality industry leaders in the travel, chains. And selected ASEAN markets,
COVID levels. We expect the reopening- airlines, hospitality, food and beverages, such as Indonesia, can gain from
driven recovery to continue in Southeast Macau gaming and mass consumption high commodity prices, proving to be
Asia and tourism stands to benefit from sectors in Asia. defensive to the inflation shock.
the boom. The ASEAN economies are showing ASEAN stock markets have recorded
According to World Travel & Tourism silver linings of resilience with a strong one of the strongest earnings growth in
Council estimates, Asia Pacific is consumer spending outlook amid 2022, outperforming global and regional
expected to revert to pre-pandemic continued economic reopening. We peers, and we expect this trend to
levels in terms of contribution of travel launch a new theme on ASEAN Tigers, continue going into 2023. Indonesia and
and tourism to GDP in 2023. The capturing growth opportunities in Thailand have some of the most solid
recovery of tourism in Asia was still consumption companies, infrastructure, economic momentum within Southeast
half way through 2021, according to ASEAN banks and Singaporean REITs. Asia, thanks to strong consumer
UNWTO, and we expect this recovery ASEAN is now a more economically demand. Valuations remain attractive
ASEAN has played an increasingly important role in the global trade

ASEAN’s global share of exports, %
8.0%
7.0%
6.0%
5.0%
4.0%
3.0%
1990 1995 2000 2005 2010 2015 2020
Source: UNCTAD Stat, HSBC Global Private Banking, 22 November 2022.
15
relative to history and other regional innovation of new energy vehicles benefit from the net zero transition.
markets. Over the past decade, technologies in the region. We We expect China’s annual solar
ASEAN economies have undergone favour renewable energy equipment installed capacity to reach 115GW
a healthy reset as they have makers of solar, wind and green by 2023 and increase at a 15%
deleveraged and continued to invest hydrogen, smart grid manufacturers CAGR to 150GW in 2025.
in infrastructure. As a result, ASEAN and leaders in the Electric Vehicles In India, investments of around
companies have developed resilient (EV) supply chains. The World USD300bn will be needed to
fundamental strengths and stronger Bank estimates China needs to complete the 500GW of renewable
balance sheets to withstand invest up to USD17trn for energy energy capacity target by 2030.
headwinds from the strong dollar transition, green infrastructure and Southeast Asian countries are also
and high US rates. technologies to meet its carbon rushing to issue green bonds to
Among the structural growth neutrality goals by 2060. China is finance eco-friendly projects. In
opportunities, our High growing into a global powerhouse ASEAN and East Asia, the amount
Conviction Theme of Asia’s Green in EV, and one out of three new of sustainable bonds outstanding
Transformation stays focused on cars sold in China is now electric. accounted for about 18% of world’s
opportunities from the energy Pure EV plays, some conventional total, trailing only Europe as the
transition and independence, green Original Equipment Manufacturers second-largest market, according to
infrastructure development and (OEMs) and battery companies can Asian Development Bank.
China should witness the strongest solar demand growth in the world
over the next few years.
160 China Americas Europe

150
140 135
120 115
100 98
80
54
60 55 41 44
53 37 53
48 46 49
44 42
40 35 39
30 26 28
21
17 17 19 20
20 13
7 8 10
0-
2016 2017 2018 2019 2020 2021 2022e 2023e 2024e 2025e
Source: SolarPower Europe, BNEF, HSBC estimates, HSBC Global Research, HSBC Global Private Banking,
22 November 2022.
16
Positioning for moderating inflation and bonds and Indonesian hard currency
peaking of the US interest rate cycle, bonds. With Hong Kong’s accelerating
we remain bullish on the theme on reopening to the outside world, we
Asian Quality Credit, especially amid favour investment grade bonds in the
the substantial yield pick-up across retail and property space. We continue
the Asian credit markets in 2022. to see attractive carry opportunities in
However, this theme stays focused Indonesia’s quasi-sovereign investment
on high quality corporate bonds in grade bonds, thanks to the country’s
Asia, including high grade Hong Kong improving fiscal position in a strong
corporate bonds, Chinese TMT commodity cycle. We prefer short-to-
medium duration Asian investment
grade bonds which are expected to see
lower price volatility relative to longer-
dated credit amid rate volatility.
Asian IG credit spreads are attractive versus US IG bonds
250 Asian IG Spread US IG Spread
200
Credit spreads in basis points
150
100
50
0
03/01/2022 03/03/2022 03/05/2022 03/07/2022 03/09/2022 03/11/2022
Source: Bloomberg, HSBC Global Private Banking, 22 November 2022. Past performance is not a reliable
17
Opportunities Amid
High Rates
and Slowing Growth
The set of themes under our second American Resilience: The US economy staples, as consumers trade down to
trend balance the attraction of is growing at below-normal speed, lower cost goods, but keep spending.
improved valuations in equities but it still remains more resilient than Durable Dividends: Dividends can
and bonds against the current other economies. Key to this is the fact substantially add to total returns,
deterioration of the cyclical that it is an energy exporter, so we see especially when the potential for
momentum and the high level of opportunities in oil and gas. Many US sustained upside in equity markets is
uncertainty. They also act as a households managed to save during the limited. Of course, as the cycle slows,
counter-weight to many of our pandemic and unemployment remains it is important to select companies that
other themes, which typically have very low. So while we have been shifting have sufficiently strong cash flows to
a growth-style bias and follow out of discretionary consumer goods and pay out constant or growing dividends.
longer-term trends. We recognise services, we see support for consumer But dividend expectations have been
there is some overlap between the
themes we discuss below, but by
Consumers have seen their mortgage payments and inflation jump, and this
combining some of the ideas, all
is weighing heavily on their confidence.
focused on quality and/or cyclical
defensiveness, investors can find Inflation Mortgage rate Consumer confidence (RHS)
tangible ways to help compose a 10 120
defensive portfolio with reasonable
return potential. 8
100
6
Our six high conviction themes 80
4
60
%
1. American Resilience
2
2. Durable Dividends
40
3. Recession Survivors 0
4. Hedging Against Inflation 20
-2
5. S
hort-to-Medium Dated
Quality Credit -4 0
6. D
M Financials – Moving Up the 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020 2022
Capital Structure Source: Bloomberg, HSBC Global Private Banking as at 22 November 2022
18
recovering, in part because banks Hedging Against Inflation: In Short-to-Medium Dated Quality
(typically among the high dividend financial markets, no inflation Credit: our large overweight of
payers) are getting a lift from rising hedge is perfect, but we find three short-to-medium dated and high-
rates. From a style perspective, avenues attractive. Firstly, the energy rated bonds in our core portfolio is
dividend stocks tend to be value sector should continue to generate also reflected in our high conviction
oriented, which can help balance substantial cash flows, even after themes. We continue to focus on
portfolios that are heavy on growth the fall of energy prices. And in investment grade, because we think
stocks. They also tend to have a the event that prices were to spike high yield spreads are somewhat
quality bias and often qualify as ‘low again and cause CPI to rebound, the too tight and sensitive to the growth
volatility’ stocks, which should help sector would outperform. Second, slowdown. And we prefer short-to-
as we expect market volatility to we like consumer staples stocks medium maturities as credit yield
remain higher than usual. with strong market positions as food curves are very flat and hence, it
Recession Survivors: The UK is and goods inflation is often passed does not pay to try to get a higher
in recession and we expect the on to the consumer, lifting revenues yield by extending duration. Investors
Eurozone to enter a recession soon. for those companies. And lastly, we who worry that policy rates could go
So we are underweight on the region look at infrastructure, as many of even higher than what is currently
in our equity portfolios and look them benefit from a link (often set priced in can add floating rate notes.
for companies that can weather a by the regulator) between their input DM Financials – Moving up
recession. Such companies will have costs and the prices they charge, the Capital Structure: Banks
a quality bias, i.e. strong market which protects their profits. We have strengthened their capital
positions and resilient earnings, as have removed real estate from this and liquidity ratios in response to
well as manageable leverage. In high conviction theme, as higher stringent regulatory requirements
addition, the companies we look borrowing costs may continue to under the Basel III accord. That said,
for tend to be in defensive sectors, weigh on real estate values, but Tier 1 capital can be sensitive to
such as energy, consumer staples real estate continues to be a key the local economy and sovereign
and healthcare. component in a well-diversified spreads, especially in Europe, where
core portfolio. the economy is weakening. In that
context, we are moving up the
capital structure, to Tier 2 and Senior
unsecured bonds. We find yields
attractive in this area, compared to
both sovereign and non-financial
bond yields.
19
Digital
Transformation
Amid slowing global growth, Smart Mobility 1) The integration of smart technologies
trade tensions and high inflation, Rarely do several separate strands of into the infrastructure and the
governments, corporates and technology converge in the ways we modes of transport that facilitate the
consumers have shifted priorities are seeing in the transportation sector movement of people and goods.
in an attempt to limit the impact of and these technologies will transform 2) The beneficiaries of limiting the use of
those disruptive forces by focusing many aspects of the way people travel fossil fuels in transportation.
on things like alternative sources both locally and over long distances. Let’s look at a practical example of
of energy and supply chains’ Smart mobility has multiple benefits as it each to illustrate how this is already
reconfiguration. Where does this increases access; provides alternatives; happening in the real world.
leave the global wave of digital improves the experience and expands
transformation? Over the last two decades, leisure and
options. Our investment theme focuses
business travel has been transformed
on two key areas:
at almost every step by automation and
Our two high conviction themes digitisation. A new wave of innovations
is being unleashed as 5G networks and
1. Smart Mobility
Global CO2 emissions from transport by sub-sector in the Net Zero Scenario,
2. Total Security 2000-2021
Road Rail Shipping Aviation Pipeline Transportation
We think it actually provides 9

renewed impetus to digitisation. 8
The diversification, shortening and
automation of supply chains that 7
Gigatonnes of CO2
companies are seeking often involves 6

much more digitisation. And the
5
efficiency drives to tackle inflation often
lead to manually intensive processes 4
being substituted for digital alternatives. 3
Digital technologies are transforming
society both by substituting existing 2
technologies or processes or devices, 1

and also by opening up new avenues of
0
doing things.
2000 2003 2006 2009 2012 2015 2018 2021
Source: International Energy Agency, HSBC Global Private Banking as at 22 November 2022
20
low-earth orbit satellites are connecting vehicles powered by petrol or beneficiaries in this broad topic in our
existing infrastructure users, devices diesel engines from 2030 or 2035 Total Security investment theme.
and transportation. Fully integrated which will accelerate the adoption of The digital transformation has many
transportation systems are becoming electric vehicles. benefits, but it also leads to a new
a reality. Anybody with a smart phone The opportunity for investors lies security threat, namely, cybercrime.
can purchase a ticket on an airline, train with the associated new technologies Governments and companies are
or bus for many of the world’s transport replacing those reliant on fossil fuels. investing heavily to protect digital
networks before they even arrive in the Based on currently available technology, infrastructure, software and confidential
country. Smart technologies allow you lithium batteries offer the best alternative data in an attempt to deter physical and
to see passenger loading when selecting source of power for everything from digital attacks. The technology industry
a seat; choose less busy routes or times gadgets and sensors to vehicles. is responding to these multiple threats
when driving; be informed of delays or Commercial vehicles and trains could by developing software that detects
congestion in real time; view locations benefit from the advancements in spyware and computer viruses,
using streaming. Simple enhancements hydrogen fuel cell technology although unlocks ransomware and creates
give the traveller more choices and allow its adoption is still some way behind firewalls to block hacking. A service
them to be in greater control of their lithium batteries. industry has evolved to provide advice
own destiny, literally! to potential targets.
Therefore, travel is set to become a
Let’s look at the second aspect of our more pleasant and environmentally In recent years, wider security risks to
Smart Mobility theme, the beneficiaries friendly experience. physical assets and their supply lines
of the transition away from use of fossil have reappeared with many goods
Total Security
fuels to power transportation. According including food, water and energy.
to the IEA, in 2021 transportation To many people, the world today seems
Governments and companies are trying
accounted for 37% of global CO2 a less safe place than at the turn of
to mitigate the effects by increasing
emissions from end use sectors, the century which is strange given all
inventories, diversifying sources and
equivalent to 7.7 gigatons of carbon. The the advances in commerce, science,
supply chains, investing in alternative
Paris Agreement, the COP26 and the technology, communication and life
energy and developing more local
IPCC climate study give an even greater expectancy until recently. There is
capabilities.
sense of urgency to the adoption of increased awareness of vulnerabilities
at national, corporate, and personal As the world’s population continues
zero-emission technologies. Electricity,
level and increased demand for security. to expand and resources become ever
hydrogen, biofuels and ammonia are
Governments are not solely responsible more constrained this will drive growth
potential zero-emission or green fuels
for security, as popular culture frames in demand for security product and
that should help reduce emissions.
it “everybody has skin in the game’. We services, although sentiment and growth
Governments in several countries have
examine potential developments and may ebb and flow with perceived risks
mandated a ban on the sale of new
and threats.
21
Investing for a
Sustainable Future
The 27th Conference of the Parties Projected annual investment in energy storage
of the United Nations Framework
Convention on Climate Change 70 APAC EMEA Americas Rest of World
(or COP 27 for short) had a raised
60
urgency compared to other years
and the acceptance and activity on
50
sustainability issues is markedly
higher than it has ever been. There 40
USD bn
is a broad spectrum of crises facing

life on earth, the majority of which 30
are a result of human activity
and it is now widely accepted 20
that we need to move quickly to
10
limit the impact of our historic
mistakes. The good news is that
0
we have everything we need to 2018 2020 2022 2024 2026 2028 2030 2032 2034 2036 2038 2040
get to where we need to be in 2019 2021 2023 2025 2027 2029 2031 2033 2035 2037 2039
terms of sustainability: we have
Source: Bloomberg Finance L.P. HSBC Global Private Banking, 22 November 2022.
the understanding, the technology,
the capital and increasingly the
desire. As a result, for investors, the Annual Renewable Energy Capacity Pipeline
opportunity set is getting deeper
450
and broader every day and we
400
have identified 4 themes within the
sustainability trend that we believe 350
represent excellent opportunities 300
going forward.
250
USD bn
200
Our four high conviction themes
150
100
1. Energy Transition and Independence
50
2. Financing Biodiversity Action
0
3. Sourcing Income in a
2004 2006 2008 2010 2012 2014 2016 2018 2020 Q3
Sustainable Way 2022
2005 2007 2009 2011 2013 2015 2017 2019 2021
4. The Rise of S in ESG
Source: Bloomberg New Energy Finance (BNEF), HSBC Global Research, HSBC Global Private Banking as at
22 November 2022
22
Energy Transition and Independence Financing Biodiversity Action can deliver attractive dividends but also
The energy transition from high carbon Biodiversity is rapidly moving up the do so in a sustainable way. This way
fossil fuels to a lower carbon mix of agenda and seeing many initiatives to try investors can get the benefits of
fossil fuels and renewables has been and reverse some of the damage that we an attractive investment approach
well underway for many years with have caused to our natural environment. aligned to the current investment
solar, wind and other renewable sources The recent win by Luiz Inácio Lula da environment while also supporting a
such as hydro gaining a bigger share Silva in the Brazilian presidential race is sustainable future.
of the energy mix. Still, the transition a good example. This win was at least
The Rise of S in ESG
is in a relatively early stage with plenty to some extent a result of his stance
of opportunities left. Grids, cables on the protection of the Amazon which The social impact of a company’s role
and substations for example need to was in marked contrast to his opponent in the broader society is becoming an
be updated to accommodate these and incumbent, Jair Bolsonaro. It was ever more important consideration for
renewable energy formats and the a clear message from the people of investors. The pandemic was a key
growing trend for residential renewable Brazil, echoed by those concerned trigger that brought the social side of
energy generation also needs support with sustainability around the world corporate behaviours (good and bad) to
and a framework to operate effectively that preservation and regeneration of the forefront of the headlines. Workers
within. Likewise, battery technology our planet’s biodiversity are now a top who had been considered disposable
and its wider infrastructure needs to priority. At the local level we are seeing were reclassified as essential and as
be considered alongside these new a growing appetite for rewilding, refilling a result their bargaining power has
considerations. The cost of clear areas of land with the natural gained ground. Inflation has now added
storage is falling and global energy wild flora, native grasses, trees and to employee motivations and created
storage installations are expected to flowers which we have learned carries a further drive within worker bodies
grow exponentially from 33GWh in benefits to our natural ecosystem far for better pay and conditions. Train
2020 to 1055GWh in 2030 according beyond what is immediately apparent. strikes have been ongoing in the UK
to Bloomberg. The biodiversity of our planet has been for example, as the unions there look
greatly reduced in the last 150 years for a larger portion of profits to go to
The War in Ukraine has added
and we are only now realising the roles the workers. In the US, calls for higher
momentum to the energy transition
that many plants and animals play in minimum wage levels and resulting
trend and highlighted the dangers and
protecting our environment and keeping unionisation discussions have been
cost of being overly reliant on others for
it in balance. Policy and social demand dampened by some major retailers
domestic energy supplies. Europe, and
is now building behind this theme, raising their pay and benefits beyond
Germany in particular, have suffered
boosting the potential of businesses the level legally required but this may
from rapidly rising energy prices
active in this area. not last. What this means for investors
and threats of blackouts. This gave
is that some companies will be better
governments globally a new reason to
Sourcing Income in a positioned than others to navigate the
support and accelerate their sustainable
Sustainable Way mounting pressures from these issues.
energy plans as a sustainable future is
With markets undergoing a significant Companies that perform well in areas
also a domestically generated future.
de-rating in 2022, investors are looking such as diversity and inclusion, and
Germany for example, saw demand for
for more stable investments that have strive to achieve equality as well as
residential solar panels surge following
an income component to their returns. equity, will have the draw of talent, in
the onset of the conflict with sales in
Through our theme of Sourcing Income turn resulting in better relations with
the first 6 months of 2022 equivalent
in a Sustainable Way, we have identified regulatory bodies and clients, and in a
to the total number for 2021. Overall,
companies which have a stable stronger bottom line.
the trend of renewable energy expansion
is ongoing. foundation at the business level and
23
Equities
Global equities struggled in 2022 Asia’s growth should gradually pickup, also like the energy sector, as supply
as markets repriced stocks for in part because of recent policy constraints should keep inventories
issues like COVID, the impact of the announcements in China that reduce tail tight and prices high; renewable energy
Russia-Ukraine war, high inflation, risk and signal an increased focus on generation benefits from people’s desire
global tightening of monetary balancing COVID control with growth. to save on costly oil and gas, as well as
policy, tighter corporate margins, Meanwhile, Europe and the UK seem the continued structural trend.
and slower earnings growth. As we destined to be in recession. In the US, In terms of style, we focus on quality
enter 2023, we do so with some the healthy balance sheets put together companies with resilient earnings.
trepidation. The repricing we’ve in 2021 could prevent the economy from Companies that maintain high levels of
seen makes valuations now look toppling over into outright recession but cash should be able to maintain dividend
attractive, but until earnings growth slower growth seems inevitable. We policies, providing attractive total return
is downgraded sufficiently to reflect maintain a defensive sector positioning, opportunities for income investors. And
the new reality, the risk premium starting with an overweight in consumer with bond yields still remaining high
is unlikely to compress much, and staples as rising food prices may keep and volatile, we maintain our balance
volatility should remain in place. margins wider than anticipated. We between value and growth stocks.
Overweight Daily bond yield moves have been much larger than usual, providing hedge
funds with many opportunities.
Markets: US, Mexico, Brazil,
Switzerland, Mainland China, USA Europe ex-UK UK EM Asia
Indonesia, Thailand and Hong Kong 200
Sectors: Consumer Staples and 180

rebased to 100 five years ago
Energy (including renewables)

160
Underweight
140
Markets: UK, Germany, Spain, Italy,
South Africa, Turkey, South Korea 120
and Taiwan
100
Sectors: Industrials and Consumer
Discretionary 80
Global style bias 60

Nov-17 Nov-18 Nov-19 Nov-20 Nov-21 Nov-22
Quality and Income
Source: Bloomberg, HSBC Global Private Banking as at 22 November 2022. Past performance is not a
reliable indicator of future performance.
24
Europe on the brink hard by the Chinese zero tolerance economic performance, further
In Europe, recession seems all but a policy against the COVID pandemic. earnings downgrades seem probable
certainty as food and energy prices Because of the cyclical challenges, and we think we will need to wait
remain stubbornly high and the war we’re even more defensive in for an easing of the energy crisis
continues to create fiscal drag in Europe than in other regions, with before the valuation gap with the
the region. Equities in Europe are an overweight in healthcare and US can compress. The UK market
also being weighed down by weak an underweight in financials. As in continues to do better than the state
domestic demand. Global trade other regions, tight supplies and of the local economy would suggest,
flows, which have often helped lift good profitability has allowed us to thanks to the presence of many
European equity markets, are set to also keep our overweight position global companies, but the deep cost
slow further in the face of this global on the European energy companies. of living crisis and fiscal tightening
slowdown. Europe has been hit Valuations look compelling but should nevertheless weigh on
given the outlook for the region’s performance in our view.
A split congress has historically been relatively constructive for US

stocks, under a Democratic president.
Democrat Republican
20
15
10
5
%
-5
-10
Supportive Mildly Supportive Mixed Mildly Hostile Hostile
Congress Congress Congress Congress Congress
Source: HSBC Global Asset Management, HSBC Global Private Banking as at 22 November 2022.
Past performance is not a reliable indicator of future performance.
25
Mildly overweight on EM Asia Maintaining our overweight in position. Therefore, while the higher
Asian equity markets have seen quite the Americas inflation and rate structure will take a
a disparity in terms of performance. Slower economic growth and bite out of growth and demand in the
Some Southeast Asian markets have contracting margins should weigh on US, we feel that both the corporate
outperformed as border reopening US earnings growth in 2023. Equity and consumer sectors remain liquid
has boosted consumption and investors also continue to struggle enough to survive the downturn.
shifting supply chains have lifted with the Fed’s historically aggressive Nevertheless, the weakening cycle
production. In addition, food and tightening of monetary policy and means that we maintain a defensive
energy producers in the region have still very high inflation. High rates are posture with overweight positions
benefited from the same global particularly painful for technology, in consumer staples, energy and
trends we have seen in other regions. which is a large sector in the US. utilities.
Also, domestic demand has been Still, US equities remain our main In Latin America, equity markets
more resilient and intraregional overweight globally as we believe have fared better than their other EM
trade has kept markets buoyed the US may avert outright recession. counterparts. Central banks in the
and economies have reopened. Many US companies refinanced their region tightened monetary policy
Taiwan and South Korea however balance sheets and extended the earlier than others, and are now
have been hit by the fading global duration of their bonds when rates more advanced, giving some like
demand for semiconductors and the were still low in 2021. This implies Brazil the possibility to start cutting
global competition in technology. It they do not have to refinance in the rates in Q2 2023. As China’s COVID
is in China that we have made the near term, and should be good for measures are adjusted, providing
big change, upgrading the market their cash levels and profitability. further stimulus for the domestic
to a mild overweight after weak US stocks rallied going into the economy, Latin America, especially
performance. Although we do midterm elections and a split Brazil and Chile, could benefit
not see a big pickup in economic congress has traditionally been substantially from the improvement
growth, we believe the downside good for US stocks. in trade flows. And in Mexico, the
risk related to housing and COVID near shoring theme is providing
Many US consumers refinanced their
has been reduced by Beijing’s a boost. As American companies
mortgages too in 2021, and many of
recent policy pivot towards growth move supply chain management
them have long maturities and fixed
recovery. The market now expects closer to US borders, the economy
rates, which should now help cap
more initiatives in coming months. has already begun to see an
their debt service costs for some
Reduced risk coupled with improvement due to this long-
time. This, combined with faster
attractive valuations have made the term theme.
wage growth, has put consumer
market more attractive, warranting
balance sheets in a fairly healthy
the upgrade.
China’s valuations are particularly cheap compared to other markets, and reduced downside
economic risk leads us to upgrade Chinese equities to mildly overweight.
24 US Europe ex-UK
12-month forward price / earnings ratio
22 China Emerging Markets
20
18
16
14
12
10
8
26
Two milestones ahead – before we would see more for improved total returns. We take a
While we remain cautious on global sustained and widespread support balanced
equities for now, we could take more for stocks. view between growth and value.
positive steps when two milestones In the meantime, we focus on quality While we pay close attention to
are reached. Further evidence companies that produce solid cash sector bets, this remains a stock-
of rates peaking would benefit flows and maintain low levels of pickers’ market, and close attention
rate-sensitive stocks, including net debt. We also continue to look should be paid to resilience of
technology. But we would need for income, either through dividend underlying business models.
to reach the second milestone – a payouts or stock re-purchase
stabilisation of growth and earnings programs to enhance the potential
Higher rates have hurt growth stocks, while high dividend stocks have done well.
Amid the slowdown, the recent pickup in cyclicals looks odd to us.
120
Cyclicals / Defensives ratio Value / Growth ratio
Dividend stocks / MSCI world ratio
110
rebased to 100 five years ago
100
90
80
70
60
50
27
Fixed Income
Rate volatility remains elevated on Rate volatility has been detrimental to bond returns
the back of hawkish central banks’
rhetoric and high inflation prints, YTD 3M
which have been detrimental to 0%
bond market returns. The silver
lining is that bond valuations price -5%
in most of the rate hikes we foresee
and have gained in attractiveness -10%
relative to other asset classes, such
as equities. As a consequence, we
-15%
hold an overweight in fixed income,
but we remain cautious and focus
-20%
on quality corporate credit, mostly
-7.3% -7.8% -8.1% -5.0% -4.0% -6.3% -7.2% -4.9%
in investment grade (EM and DM)
and at the “short-to-medium” part -25% -15.2% -14.0% -19.2% -12.9% -13.4% -19.8% -21.3% -17.3%
of the yield curve. The flat or even US US US IG US HY EURO HY EM Corp EM Sov EM Sov LC
Treasury Treasury HC HC USD
inverted yield curve shapes do not Linkers Unhedged
adequately compensate for taking
additional duration exposure in our
Source: HSBC Global Private Banking, JP Morgan, BOFAML indices as at 22 November 2022.
opinion. We expect DM sovereign Past performance is not a reliable indicator of the future performance
bond yields to remain volatile in
the short-term but to decline over
2023 as inflation and economic
growth head south and corporate
credit spreads continue to widen,
especially for lower-rated issuers. US Treasury valuations have improved relative to equities
0%
Overweight
UST Index Yield - S&P 500 Earning Yield
-1%
Government bonds: UK Gilts
-2%
Credit and EM: US, European and
UK IG; Australian and New Zealand -3%
corporate bonds; GCC and Mexican
Yields
Hard Currency bonds; Brazilian -4%

HC corporate bonds; Mexican and
-5%
Brazilian Local Currency bonds
-6%
Underweight
-7%
Government bonds: German
and Japanese government bonds, -8%
European Periphery debt Nov-07 Nov-09 Nov-11 Nov-13 Nov-15 Nov-17 Nov-19 Nov-21
Credit and EM: Argentinian, Turkish Source: HSBC Global Private Banking, Bloomberg as at 22 November 2022. Past performance is not a
and Ukrainian Hard Currency bonds; reliable indicator of the future performance
Turkish and Indian Local Currency

bonds, Russian debt in Hard and
Local currency
28
Developed Markets: overweight

with a focus on carry opportunities
at the short-to-medium end of the
corporate credit curve
Following the repricing for tighter
monetary policies and the high level
of DM real rates, which are almost
back to pre-2008 levels, we believe it
is right to hold a mild overweight for
bonds and a modest underweight in
equities. But the uncertainty around
the global economy and central banks’
inflation fight “at all costs”, force us
to be cautious in our bond allocation,
especially when considering that the
Federal Reserve has already hiked
interest rates to a restrictive territory.
Consequently, we reduced our long-held
underweight position in DM government
bonds, which represent the safest part
of our bond allocation and serve as a
diversifier to risk assets (i.e. their returns
function generally counter-cyclically).
Another supportive argument is the
differential between US Treasuries and
the S&P 500 earnings yield, which is
at its tightest since 2007, making bond
valuations more attractive on a relative
basis. Finally, with a 5% Fed funds peak
rate now priced in by markets, we also
believe that a peak in DM bond yields
rates is not too far away.
Some DM rates may have even seen

their peak already: this might be the case
in the UK, where the BoE met market
expectations with an outsized 75bp
hike to 3% in November, but struck a
distinctly dovish tone. This supports our
view that the end of tightening cycle
is very close and Gilt yields may have
29
peaked in October, following the mini- At the sector level, we mostly weak China property sector. As of the
budget announcement. We therefore concentrate on Energy and Financial end of October, EM sovereign bonds
upgraded our view on Gilts to a mild companies, with a preference for the had a negative return of 23.8% and EM
overweight in November, while keeping top-end of their capital structure (refer to corporate bonds delivered a negative
a full overweight on quality credit, short- our Theme on DM Financials: Moving Up return of 19.8%. EM local bonds were
dated IG bonds in GBP. They offer the the Capital Structure). In other sectors, more resilient, declining by 9.5% on
widest credit spreads on average across we focus on companies with strong average, but including FX weakness,
DM IG markets. balance sheets, declining leverage and they provided quite similar negative
Overall, our global bonds overweight increasing cash flow generation and return of 19.3% in USD terms.
consists of an overweight in global IG healthy bond maturity profiles. A flight to quality also led to significant
(i.e. USD, EUR, GBP), neutral Global HY outflows from EM funds this year, which
Emerging Markets: focus on short-
and a small underweight in sovereign added pressure to EM bond prices
to-medium dated quality credit
debt. We continue to focus on carry as fund managers had to liquidate
opportunities at the short-end of the Emerging market bonds in hard positions in illiquid markets in order to
corporate credit curves (2-5-year currencies (HC) performed poorly this satisfy redemptions. All in all, EM credit
maturities), focusing on Global IG and year, suffering from challenging global underperformed US High Yield bonds,
high BB-rated companies, where the economic environment and rising rates which delivered a negative return of
carry trade is the most attractive in our coupled with idiosyncratic stories such 12.2% as of the end of October.
view when compared to relative risks. as the Russia-Ukraine war and the
EM corporate fundamentals are at the strongest level in over 10 years
Net leverage IG companies
4 EM IG US IG Euro IG
3.5
2.5
1.5
0.5
0
2008 2010 2012 2014 2016 2018 2020 2022
2009 2011 2013 2015 2017 2019 2021
Source: HSBC Global Private Banking as at 22 November 2022; JP Morgan estimates as of Q2 2022
30
At the same time, emerging market remains limited at just 1.2% and is focusing on cash-rich companies with
economies are now much more resilient similar to DM markets where the default low refinancing risks and stress the
to global challenges and EM corporate rate is 1.5% for US HY and 0.3% for importance of diversification.
fundamentals are at the strongest European HY. Within EM, the default rate On a regional basis we prefer Brazil,
level in over 10 years. As of the end of is unsurprisingly the highest in Mexico and the GCC which have
Q2 2022, the average net leverage of EM Europe at 21.7% and Asia at 12.8% demonstrated more economic resilience
Global EM was 1.3x (see graph). US IG while Middle East & Africa remains at in the current global environment. We
companies had an average net leverage 0.0% and Latin America is at a fairly recently upgraded Brazil from neutral
of 2.5x and European IG at 3.3x. Despite contained 2.2%. to a mild overweight stance based on
macro headwinds, EM companies’ While macro risks remain elevated in the an improved macroeconomic backdrop
credit metrics should remain stable this near term and volatility in risky assets and reduced political uncertainty as the
year as most companies continued might continue, we find that short-to- presidential elections are behind us. We
to see revenue and EBITDA growth medium dated quality EM credit offers remain neutral on EM LC markets as
and were able to pass on rising costs value due to solid credit quality and global risks remain elevated, pressuring
to customers. improved valuations. On average, EM EM countries’ fiscal and current
The EM corporate default rate, excluding corporate bonds provide a yield of 8.7% accounts. The only two local markets
the troubled areas of Chinese property, and have an investment grade rating where we are mildly overweight are
Russian and Ukrainian issuers, also of BBB. However, we remain selective Brazil and Mexico.
EM corporate fundamentals are at the strongest level in over 10 years
Net leverage HY companies
EM HY US H Y Euro HY
0
2008 2010 2012 2014 2016 2018 2020 2022
2009 2011 2013 2015 2017 2019 2021
Source: HSBC Global Private Banking as at 22 November 2022; JP Morgan estimates as of Q2 2022
31
Currencies and
Commodities
USD strength has been a key As a result, we recently downgraded
Bullish
dynamic of financial markets since USD to neutral; upgraded EUR and
the start of 2021, but the outlook GBP to a neutral view; and JPY JPY, SGD, BRL
is changing. The dollar benefited and SGD to a bullish view. In the
from the leadership of the Fed in commodities space, we remain Neutral
setting the pace of monetary policy neutral on Gold, Silver and Oil as
USD, EUR, GBP, CHF, AUD, NZD, CAD,
tightening and an attractive rate we see muted momentum.
EM FX (including RMB), Gold, Silver
pickup compared to many other G10 USD strength has been a very consistent
and Oil
currencies. But as we get closer story over the past two years and
to peak rate levels, we think those investors who have stuck with it have Bearish
rate differentials are unlikely to benefited from strong currency gains,
widen further, and the gap may even with the USD index trading at 20 year KRW
narrow with some countries. As a highs in early November. While there
result, the main tailwind for USD is were three main tailwinds (widening The October US CPI figure, which finally
fading fast. USD will still get some interest rate differentials, weakening showed a decline in core inflation,
support however from weakening global economic growth, weak risk is giving markets hope that we are
global economic growth, relative appetite), at least one of them (rate approaching peak rates, and as a
economic resilience in the US and differentials) is quickly falling away. result, there is reduced upside risk to
mixed-to-weak risk appetite.
32
the 5% peak rate level that markets around macroeconomic forecasts will for now. We keep our prudent stance on
currently price in. We think it is too early continue to generate some FX volatility, KRW, however. KRW could continue to
to become negative on USD however, which investors can exploit, while others suffer from the weak technology cycle.
as the Fed still needs to implement may look at hedging unwanted USD We see further upside risks for SGD, due
additional 100bps of rate hikes and the exposure to lock in and protect gains to strong economic fundamentals and
US economy is still relatively resilient made so far. the Monetary Authority of Singapore’s
amid a struggling global economy. While EUR and GBP will probably move tightening policy. Outside of Asia, we
Moreover, until risk appetite improves sideways, we believe JPY will manage to are constructive on BRL. The country
and equities see a more sustainable recover and we move to a bullish view. shows robust economic drivers, and the
bounce, the safe haven characteristics Of course, the pronounced weakness currency offers one of the largest real
of USD also provide it with some to date is one factor, in addition to the rates among EM. In addition, political
downside support. likelihood of further intervention. The uncertainties largely reduced since
The mirror image of our USD downgrade yen is also helped by a strong reduction elections have passed.
is an upgrade of EUR and GBP to a in investors’ bearish positioning and Despite the recent bounce in commodity
neutral view. Both currencies are cheap some volatility in global risk appetite, prices, we do not expect Gold and Silver
following the sharp USD rally. But both and this should help compensate for the to outperform in the coming months.
are also facing recessions, limiting continued yield disadvantage. USD’s recent strength has weighed
the potential for upside. Of course, The cyclical character of AUD means that on both metals, while higher rates and
commodity prices play a key role here. it will likely struggle to capitalise on the real bond yields create a competitive
European nations are commodity fading USD momentum. AUD also faces disadvantage for gold compared
importers, and the recent rise in oil and domestic risks given the rapid tightening to cash and bonds. Oil prices have
gas prices has forced the European and cycle compared to other major central decreased since the beginning of June
UK central banks to tighten policy in the banks. CHF could be supported by and although we do not expect them
midst of an unprecedented cost of living relatively robust local economic drivers to decrease further, we do not expect a
crisis. Central banks are therefore left but the yield differential with the US will strong rebound either. Global supply has
in a dilemma as the room for tightening continue to limit CHF’s upward potential. picked up given the increase in Russia’s
further narrows: the BoE recently production, but demand is softer than
In EM Asia, low Chinese inflation
became more dovish due to weak before. The market seems adequately
translates into an attractive real yield,
growth prospects, while the ECB remains supplied for now, so we believe
which supported RMB. We see upside
somewhat more hawkish and still does prices will trade sideways in the
risks if China’s economy rebounds in
not forecast a recession. The uncertainty coming months.
2023, but hold a neutral view on RMB
USD momentum is stalling
120
115
110
105
100
USD index
95
90
85
80
75
70
Jan-90 Jan-94 Jan-98 Jan-02 Jan-06 Jan-10 Jan-14 Jan-18 Jan-22
33
Hedge Funds
We maintain our positive outlook USD strength remains a key trend with profits, and the outsized price action this
for hedge funds because market the Fed further ahead in its hiking cycle year continues to be beneficial. This is
conditions, which we forecast to than the rest of the world. Tactical shorts particularly true for managers who have
persist well into the first half of in equity markets are popular exposures shorter lookback windows and are more
2023, are supportive for a number of as stocks come under pressure from reactive. For other approaches, market
strategies. In addition, higher cash both higher rates and recession fears. neutral systematic in particular, we note
rates provide a tailwind for certain In contrast we maintain our neutral that the current environment of elevated
strategies such as managed futures negative outlook for EM focused macro dispersion at a sector and single stock
and equity market neutral. We have managers due to geopolitical and level along with heightened volatility
the strongest positive conviction economic headwinds. Idiosyncratic provide a ripe opportunity as we
on developed market discretionary opportunities do however exist in certain continue to see outsized contributions
macro, systematic market neutral markets. But these bright spots are from idiosyncratic stock selection.
and multi-PM strategies all of which nonetheless challenged by the negative We continue to maintain an outright
have made money during 2022. sentiment, elevated volatility and low positive outlook on multi-strategy and
The environment remains supportive levels of liquidity making trading difficult. multi-PM managers. Many multi-PM
for developed market focused macro We remain neutral on Managed Futures managers have continued to deliver
managers. Divergences in the timing, strategies, neutral positive for Market strong returns in this unpredictable and
speed and magnitude of monetary Neutral Systematic and neutral negative whipsaw market, which continues to
tightening and potential recession across for Equity Long-Bias Systematic. For validate our high conviction in the space.
G10 economies should offer fertile managed futures while trend followers Risk management at multi-PM shops is
opportunities in both directional and are not necessarily long volatility, they notoriously sophisticated and involved,
relative-value fixed income trades. In FX, need ‘something to happen’ to make and its varied sources of uncorrelated
Daily bond yield moves were much larger than usual, providing hedge funds
with many opportunities
0.5
0.4
Daily moves in 10-year Treasury yields (%)
0.3
0.2
0.1
-0.1
-0.2
-0.3
-0.4
-0.5
2002 2004 2006 2008 2010 2012 2014 2016 2018 2020 2022
34
return streams have worked well and and become a natural replacement for and geographies. In addition, there
helped create resilience in this uncertain longer-biased equity exposure, with remains are remains a robust level of
market. In our view, the ability to attract increased alpha. Turning to Asia, while activist campaigns increasingly focused
and retain talent continues to be one the earnings picture remains weak, around “sell the company” demands,
of the most important differentiating significant de-risking over the past strategy/operational improvement and
factors of a successful multi-PM fund. 9 months has meant that valuations corporate governance.
We maintain our neutral outlook on are below fair value with a number of Within credit our view for Structured
Equity long/short across US, Europe, fundamentally strong companies Credit remains neutral/positive, and
Technology, and neutral positive outlook trading cheaply. our outlook for both Credit Distressed
for Asia Equity long/short. Against the We maintain our neutral rating on and Credit Long/short remains neutral.
backdrop of rising rates, many equity Event Driven strategies and favour However, considerable improvements in
long/short managers continue to run managers who have broad expertise spread, carry and dispersion continue to
with reduced risk as they expect markets across sub-strategies and the ability get our attention as we believe the next
to remain volatile in the near term. Many to opportunistically allocate across all credit cycle may be nearing. Structured
have also reduced their index hedges, asset classes. As a result of the rapid Credit appears to be the most attractive
switching to more single name equity tightening of monetary policy, we could currently as loss adjusted yields have
shorts as dispersion is expected to be be on the cusp of the next credit cycle, improved into the high single/low
higher in this environment. In summary, although credit issues should remain double digits.
whilst there may be more asymmetry to substantially less than in 2008. Still, this
the downside for equity markets during should represent a fertile opportunity set
1H 2023, this is an environment where for managers that can redeploy capital
equity long short managers can perform dynamically across the capital structure
Volatility has picked up across markets, but particularly in bonds
Equity volatility FX volatility Bond volatility index (RHS)

90 300
80
250
70
60 200
50
150
%
40
30 100
20
50
10
0 0
2002 2004 2006 2008 2010 2012 2014 2016 2018 2020 2022
35
Private Markets
Amid sharp declines in public As the macroeconomic picture worsens, have seen strong levels of fundraising
markets, Private Equity (PE) most PE firms have been forced to in Q3 compared to last year. Despite
valuations have dropped and re-examine and write down the value the headwinds in the broader market,
continue to soften, but less than of their investments on the back of investor appetite for PE remains strong.
public markets. Fundraising and lower public valuations, higher costs We have seen an increase in value of
exits have dropped too, but activity of capital, and a deteriorating growth $166.1bn in Q3 compared with the same
levels should still remain in line outlook. That said, in many cases, period last year of $157.9bn. However,
with historical averages. Despite the valuation compression has been we are witnessing a lower number of
the challenging environment, we muted, partly explained by the lower PE fund closings (3,347 vs 1,6242) as
believe PE provides opportunities to correlation between public market equity Limited Partners (LPs) are focusing on
take advantage of targets, especially valuations and private market valuations. re-ups, resulting in a thinning of the
in sectors where public valuations Manager performance continues to vary herd and leading to more “mega-funds”.
have suffered the steepest declines considerably and the gap between Looking ahead, we think many LPs
(such as technology and healthcare). top and bottom quartile funds is have already hit their allocation targets
And we believe there are attractive increasingly apparent. for the year and Q4 figures will be
deals in the secondary market to While fundraising activity continued more subdued.
acquire high quality exposures at to decline, it remains in line with In the secondary market, overall
discounted levels. historical quarterly averages and we transaction volumes in H1 2022
36
increased by 18% compared to H1 rather than being forced sellers in an lengthen. GPs are not under pressure to
2021, reaching $57bn of assets traded. unattractive market environment, thus deploy capital and competition around
In our opinion, this reflects the appeal slowing the flow of exits year to date. deals has been a bit lower than it has
of the secondary market as a source of When looking at Buyouts, IPOs as an been for a couple of years. Despite
liquidity for private equity asset owners exit path suffered the most notable the headwinds in the broader market,
and managers in uncertain market decline. Last year, IPOs accounted for pockets of activity remain. Investor
conditions. This presents a compelling roughly 25% of exits, compared to 17% appetite for IT deals remains robust
opportunity for secondary buyers this year in value terms, and only 5% by given the long-term trends in increased
to acquire high quality exposures at deal number, as investors shy away from digitalisation and tech innovation that
attractive pricing levels, especially in IPOs amid market volatility and issuers will drive attractive long-term growth
sectors that have suffered the from the low valuations. Still, exit values opportunities in the sector. Many
steepest declines (such as technology should roughly be aligned with pre- investors view the shift in valuations
and healthcare). pandemic levels. as a buying opportunity for assets that
In terms of exits, we are seeing General were previously perceived as being too
Deployment has been slower so far this
Partners (GPs) biding their time for expensive, and we expect PE firms to
year as GPs are more disciplined and
the right exit opportunities and PE find attractive take-private targets.
cautious given the macro environment
firms holding on to their investments and we expect due diligence timelines to
Buyout capital backed exits by type

Restructuring Sale to IPO Private
Management Placement
Merger Sale to GP Trade Sale Exits Value (RHS)

3500 1000
900
3000
800
2500
number of deals
700
USD billions
2000 600
500
1500 400
1000 300
200
500
100
0 0
2012 2014 2016 2018 2020 2022
YTD
2013 2015 2017 2019 2021
Source: Preqin, HSBC Global Private Banking as at 22 November 2022.
37
Real Estate
Higher interest rates have pushed and current owners. As a result, supply at a time of falling demand,
up property yields, causing values activity declined 21% YoY in Q3 in the adding further to downward pressure
to decline and opening up a US, 37% in Europe and 38% in Asia on values although ‘fire sales’ can
widening gap in price expectations (source: Real Capital Analytics). usually be avoided by managers
between potential buyers and The sharpest corrections have been deferring redemptions. Withdrawals
sellers. We anticipate further recorded in sectors that used to be are also a function of falls in bond
capital value declines. Property the most sought after, where property and equity values in portfolios, which
fundamentals yields were the lowest and which still have rendered investors over-exposed
are generally still healthy, though have the strongest long-term outlook to property and trigger a need for
a weakening economy indicates for rental growth and occupancy. portfolio rebalancing.
rental growth should slow in the This is most apparent for the logistics Occupier market fundamentals are
coming quarters. and residential sectors as strong generally still in reasonable health but
Rising rates have triggered a competition between investors for slowing economic growth weighs on
widespread increase of property the best assets often implied record leasing demand across all property
yields, hitting capital values. low yields and the use of leverage. types. Expansion plans and or costs
According to Green Street Advisers, Although values have now fallen can be reduced, putting downward
values have fallen by 10-15% in the US sharply for the lowest yielding sectors, pressure on rents and values. Unlike
and Europe in Q3 2022. Despite the this mainly reflects a paring back of previous downturns, however,
rise in property yields, the spread with gains rather than a change of fortunes. development activity does not
bond yields remains historically low, Just as investor demand has been pose a major risk as the profitability
pointing further potential declines in curtailed, some open-ended property of developing has been sharply
property values. Falling values have funds are dealing with a wave of curtailed by high costs of materials,
opened up a widening gap in price redemption requests. To raise cash, labour and debt.
expectations between potential buyers they may need to sell assets, adding
38
The office sector has been most in city centres are struggling with slow because people usually cut
impacted by the pandemic due to lower footfall from tourism (which discretionary spending (such as eating
the permanent shift towards hybrid remains well below pre-pandemic out and holidays) before missing
working. Geographically, this shift has levels) and the reduced frequency their monthly rent payments. In
been greater in the US and Europe of white collar workers going into addition, higher interest rates have
than in Asia-Pacific where a stronger the office. reduced the affordability of buying
cultural attachment to the office and E-commerce spending (as a share of flats and houses, further sustaining
higher density cities support office all retail sales) has fallen back into line demand from renters. Whilst there
working. Whilst occupiers may have with its pre-pandemic trend in many may be some signs, specifically in the
reduced their overall need for office economies. Still, logistics leasing US, of multifamily rents stabilising,
space, there has been a notable shift remains above trend as, in addition demographic tailwinds continue to
towards leasing better quality space to demand related to e-commerce support other parts of the residential
that supports corporate sustainability spending, businesses invest in sector such as single-family and
targets. Offices in secondary improving supply chain resilience after senior housing.
locations needing substantial several years of disruption caused Direct property valuations rely on
capital expenditure due to by the pandemic and geopolitical evidence of market transactions and,
environmental regulations are upheaval. Market rents are typically as a result, will take time to adjust
considered most at risk. above in-place rents currently paid by to the current environment of higher
Retail property fundamentals have tenants indicating substantial income interest rates, slowing economies and
been recovering from the big COVID- growth for landlords even if market weaker investor demand. By contrast,
pandemic hit. However, the cost of rental growth slows. publicly-listed real estate equities are
living crisis hurts retail spending. Residential property is amongst the marked to market and adjust quickly.
Moreover, many prime retail locations more defensive sectors as economies
39
Disclaimer
Risks to our View invested principal in certain circumstances. Interest Should the China Central Government tighten the
payments may be variable, deferred or canceled. control, the liquidity of renminbi or even renminbi
The key risk factors include adverse regulatory Investors may face uncertainties over when and bonds in Hong Kong will be affected and you may
changes, health concerns, spectrum cost and how much they can receive such payments. be exposed to higher liquidity risks. Investors
allocation issues excess capital expenditure by
should be prepared that you may need to hold a
telecom operators, trade tensions, evolvement of • Contingent convertible or bail-in debentures renminbi bond until maturity.
5G standards, uncertainties in pricing and demand - Contingent convertible and bail-in debentures
for new products and services in 5G and related are hybrid debt-equity instruments that may be Risk disclosure on Emerging Markets
offerings. written off or converted to common stock on
the occurrence of a trigger event. Contingent Investment in emerging markets may involve
Risk Disclosures convertible debentures refer to debentures that certain, additional risks which may not be typically
contain a clause requiring them to be written off or associated with investing in more established
Risks of investment in fixed income
converted to common stock on the occurrence of economies and/or securities markets. Such risks
There are several key issues that one should a trigger event. These debentures generally absorb include (a) the risk of nationalization or expropriation
consider before making an investment into fixed losses while the issuer remains a going concern (i.e. of assets; (b) economic and political uncertainty;
income. The risk specific to this type of investment in advance of the point of non-viability). “Bail-in” (c) less liquidity in so far of securities markets; (d)
may include, but are not limited to: generally refers to (a) contractual mechanisms fluctuations in currency exchange rate; (c) higher
(i.e. contractual bail-in) under which debentures rates of inflation; (f) less oversight by a regulator
Credit risk of local securities market; (g) longer settlement
contain a clause requiring them to be written off
or converted to common stock on the occurrence periods in so far as securities transactions and (h)
Investor is subject to the credit risk of the issuer.
of a trigger event, or (b) statutory mechanisms (i.e. less stringent laws in so far the duties of company
Investor is also subject to the credit risk of the
statutory bail-in) whereby a national resolution officers and protection of Investors.
government and/or the appointed trustee for debts
that are guaranteed by the government. authority writes down or converts debentures Risk disclosure on FX Margin
under specified conditions to common stock.
Risks associated with high yield fixed income Bail-in debentures generally absorb losses at the The price fluctuation of FX could be substantial
instruments point of non-viability. These features can introduce under certain market conditions and/or occurrence
notable risks to investors who may lose all their of certain events, news or developments and
High yield fixed income instruments are typically
invested principal. this could pose significant risk to the Customer.
rated below investment grade or are unrated and
Leveraged FX trading carry a high degree of risk
as such are often subject to a higher risk of issuer Changes in legislation and/or regulation and the Customer may suffer losses exceeding their
default. The net asset value of a high-yield bond
Changes in legislation and/or regulation could initial margin funds. Market conditions may make
fund may decline or be negatively affected if there
affect the performance, prices and mark-to-market it impossible to square/close-out FX contracts/
is a default of any of the high yield bonds that it
valuation on the investment. options. Customers could face substantial margin
invests in or if interest rates change. The special
calls and therefore liquidity problems if the relevant
features and risks of high-yield bond funds may also
Nationalization risk price of the currency goes against them.
include the following:
The uncertainty as to the coupons and principal Currency risk – where product relates to other
• Capital growth risk - some high-yield bond funds
will be paid on schedule and/or that the risk currencies
may have fees and/ or dividends paid out of capital.
on the ranking of the bond seniority would be
As a result, the capital that the fund has available When an investment is denominated in a currency
compromised following nationalization.
for investment in the future and capital growth may other than your local or reporting currency, changes
be reduced; and Reinvestment risk in exchange rates may have a negative effect on
your investment.
• Dividend distributions - some high-yield bond A decline in interest rate would affect investors as
funds may not distribute dividends, but instead coupons received and any return of principal may Chinese Yuan (“CNY”) risks
reinvest the dividends into the fund or alternatively, be reinvested at a lower rate.
the investment manager may have discretion on There is a liquidity risk associated with CNY
whether or not to make any distribution out of Changes in interest rate, volatility, credit spread, products, especially if such investments do not
income and/ or capital of the fund. Also, a high rating agencies actions, liquidity and market have an active secondary market and their prices
distribution yield does not imply a positive or high conditions may significantly affect the prices and have large bid/offer spreads.
return on the total investment. mark-to-market valuation.
CNY is currently not freely convertible and
• Vulnerability to economic cycles - during Risk disclosure on Dim Sum Bonds conversion of CNY through banks in Hong Kong
economic downturns such instruments may and Singapore is subject to certain restrictions.
Although sovereign bonds may be guaranteed by CNY products are denominated and settled in CNY
typically fall more in value than investment grade the China Central Government, investors should
bonds as (i) investors become more risk averse and deliverable in Hong Kong and Singapore, which
note that unless otherwise specified, other renminbi represents a market which is different from that of
(ii) default risk rises. bonds will not be guaranteed by the China Central CNY deliverable in Mainland China.
Risks associated with subordinated debentures, Government.
perpetual debentures, and contingent convertible There is a possibility of not receiving the full amount
Renminbi bonds are settled in renminbi, changes in in CNY upon settlement, if the Bank is not able to
or bail-in debentures exchange rates may have an adverse effect on the obtain sufficient amount of CNY in a timely manner
• Subordinated debentures - subordinated value of that investment. You may not get back the due to the exchange controls and restrictions
debentures will bear higher risks than holders of same amount of Hong Kong Dollars upon maturity applicable to the currency.
senior debentures of the issuer due to a lower of the bond.
priority of claim in the event of the issuer’s Illiquid markets/products
There may not be active secondary market available
liquidation. even if a renminbi bond is listed. Therefore, you In the case of investments for which there is no
• Perpetual debentures - perpetual debentures need to face a certain degree of liquidity risk. recognised market, it may be difficult for investors
often are callable, do not have maturity dates and to sell their investments or to obtain reliable
Renminbi is subject to foreign exchange control. information about their value or the extent of the
are subordinated. Investors may incur reinvestment Renminbi is not freely convertible in Hong Kong.
and subordination risks. Investors may lose all their risk to which they are exposed.
40
Disclosure concerning sustainable investments Important notice not necessarily reflect the views and opinions of
other market participants and are subject to change
“Sustainable investments” include investment The following may be subject to local requirements. without notice. Actual results may differ materially
approaches or instruments which consider
This is a marketing communication issued by from the forecasts/estimates. When an investment
environmental, social, governance and/or other
HSBC Private Banking. This document does not is denominated in a currency other than your
sustainability factors (collectively, “sustainability”)
constitute independent investment research under local or reporting currency, changes in exchange
to varying degrees. Certain instruments we include
the European Markets in Financial Instruments rates may have an adverse effect on the value of
within this category may be in the process of
Directive (‘MiFID’), or other relevant law or that investment. There is no guarantee of positive
changing to deliver sustainability outcomes.
regulation, and is not subject to any prohibition trading performance.
There is no guarantee that sustainable investments on dealing ahead of its distribution. HSBC Private Foreign securities carry particular risks, such as
will produce returns similar to those which don’t Banking is the principal private banking business exposure to currency fluctuations, less developed
consider these factors. Sustainable investments of the HSBC Group. Private Banking may be or less efficient trading markets, political instability,
may diverge from traditional market benchmarks. carried out internationally by different HSBC legal a lack of company information, differing auditing
entities according to local regulatory requirements. and legal standards, volatility and, potentially, less
In addition, there is no standard definition of, or Different companies within HSBC Private Banking
measurement criteria for sustainable investments, liquidity.
or the HSBC Group may provide the services listed
or the impact of sustainable investments in this document. Some services are not available in Investment in emerging markets may involve
(“sustainability impact”). Sustainable investment certain locations. Members of the HSBC Group may certain additional risks, which may not be typically
and sustainability impact measurement criteria are trade in products mentioned in this publication. associated with investing in more established
(a) highly subjective and (b) may vary significantly
economies and/or securities markets. Such risks
across and within sectors. This document is provided to you for your include (a) the risk of nationalization or expropriation
information purposes only and should not be of assets; (b) economic and political uncertainty;
HSBC may rely on measurement criteria devised relied upon as investment advice. The information
and/or reported by third party providers or issuers. (c) less liquidity in so far of securities markets; (d)
contained within this document is intended for fluctuations in currency exchange rate; (e) higher
HSBC does not always conduct its own specific general circulation to HSBC Private Banking
due diligence in relation to measurement criteria. rates of inflation; (f) less oversight by a regulator
clients and it has not been prepared in light of of local securities market; (g) longer settlement
There is no guarantee: (a) that the nature of the your personal circumstances (including your
sustainability impact or measurement criteria of periods in so far as securities transactions and (h)
specific investment objectives, financial situation less stringent laws in so far the duties of company
an investment will be aligned with any particular or particular needs) and does not constitute a
investor’s sustainability goals; or (b) that the stated officers and protection of Investors.
personal recommendation, nor should it be relied
level or target level of sustainability impact will be upon as a substitute for the exercise of independent You should contact your Relationship Manager
achieved. judgement. This document does not constitute and if you wish to enter into a transaction for an
Sustainable investing is an evolving area and new should not be construed as legal, tax or investment investment product. You should not make any
regulations may come into effect which may affect advice or a solicitation and/or recommendation investment decision based solely on the content of
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41
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42
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HSBC Q1 23 Outlook

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Investment

Looking for the

Global Private Banking

Contributors Global Chief Investment Officer

Director, Global Market Strategist

Regional Chief Investment Officers

Chief Investment Officer, Asia Chief Investment Officer, North Asia

Chief Investment Officer, Southeast Asia Chief Investment Officer, China

Chief Investment Officer,

Chief Investment Officer, Americas

Global Head of Fixed Income Global Head of Equities

FX & Commodities Product

Director, Global Equities

Senior Product Specialist,

4. Investing for a Sustainable Future 22

Our Portfolio Strategy

12 US equities Global equities

® Underweight equities – building recession resistant portfolios

Milestone 1: What could we change after rates have peaked?

® Extend duration of bond holdings

Milestone 2: What could we change when economic growth and

® Add to equity exposure and become less defensive

20% inflation dynamics – they may struggle

15% cash allocation to neutral this year. But

from 3.9% in 2022, which is still 24% 26%

developed economies which should

consumption and investment amid

ASEAN has played an increasingly important role in the global trade

Source: UNCTAD Stat, HSBC Global Private Banking, 22 November 2022.

160 China Americas Europe

Asian IG credit spreads are attractive versus US IG bonds

250 Asian IG Spread US IG Spread

We think it actually provides 9

companies are seeking often involves 6

technologies or processes or devices, 1

is a broad spectrum of crises facing

Sectors: Consumer Staples and 180

Energy (including renewables)

Global style bias 60

A split congress has historically been relatively constructive for US

22 China Emerging Markets

Hard Currency bonds; Brazilian -4%

Turkish and Indian Local Currency

Developed Markets: overweight

Some DM rates may have even seen

EM corporate fundamentals are at the strongest level in over 10 years

Net leverage IG companies

EM corporate fundamentals are at the strongest level in over 10 years

Net leverage HY companies

USD momentum is stalling

Volatility has picked up across markets, but particularly in bonds

Equity volatility FX volatility Bond volatility index (RHS)

Buyout capital backed exits by type

Merger Sale to GP Trade Sale Exits Value (RHS)

Source: Preqin, HSBC Global Private Banking as at 22 November 2022.

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4. Investing for a Sustainable Future 22