INVESTMENT OUTLOOK FOR 2014 BY HSBC

Twice a year, I would attend the luncheon seminar hosted by HSBC at Makati Shangrila Hotel.  Although I have switched careers, I still find it enjoyable to attend this function.

This time around, we were served greens for starters and grouper garnished with beets and carrots for main dish.  Dessert was warm apple crumble with vanilla ice cream.

"A Good But Not a Vintage Year"

My take home notes for this affair are the following:

1. Consensus expects moderate pick up in GDP Growth.   Their biggest bet this year is the Eurozone, followed by US.  They aren't as optimistic for EM and Japan this year.

2.  There is divergence between US retail sales growth and imports from EM Asia.  Why?  Common answers would be that US is merely using old inventory, but the more likely culprit would be the cheap labor of their European neighbors.

3.  China growth rebounding based  on infrastructure growth, rising property prices and strong credit growth.

4.  Some country calls:  US         - Neutral
                                      Europe   - Overweight
                                      Japan      -  Underweight
                                      Asia ex-Japan   - Neutral

5.  For 2014, bet is on the developed world, with Europe outshining the US.  They expect Europe to outperform global equities and deliver double-digit returns.  Also, Europe's valuations are attractive compared to US.   ECB is in easing mode and there are no signs of overconfidence among investors.

6.  For developed market equities , AVOID  Japan, Europe Cement, Europe Food Retailers, and Europe Healthcare.    Why?  Japan PM Abe's 3rd policy "arrow" to revive economy will be difficult to implement.  Cement markets oversupplied (capacity utilization is just 70%) .  Retailers continue to expand despite the demand going flat.

7.  For developed market equities, GO FOR European banks, European real estate, global materials, disruptive technology (like Apple some years ago)

8.  For Asian Equities, they expect only single-digit percentage gains as their ROE is under pressure.  Having underperformed in 2013, Asia is likely to play catch up in 2014.    Bets for Asian Equities is KOREA AND TAIWAN.    They are the proxy for mainland economic growth.  As China's economy stabilizes, North Asia is to benefit the most.  AVOID India, Hong Kong and Asia Shipping.  Why?  India continues to wrestle with high inflation as its economy slows.  Hong Kong is vulnerable to any rise in US interest rates due to the HKD peg, especially the real estate sector.  Overcapacity of asia shipping  coupled with weaker demand.

9.  For EM/LATAM Equities, Go For Mining, LATAM Oil and Gas, Mexico.  AVOID Russia Oil Gas, South Africa and Brazil.   Russian tax system is getting so complex.  South African retailers face serious problems in managing credit risk.  Brazil is facing some tail risks.  Aside from the World Cup football event that benefitted some retailers, their education sector faces major challenges due to the peak in enrollments.

10.  For BONDS, AVOID India, Brazil and Turkey.  GO FOR Korea, Singapore, Europe and Philippines.

11.  For FX, GO FOR US$, CNY, KRW, TWD and NOK.  AVOID  INR , GOLD, GBP, AUD, IDR.

12.  Gold is unlikely to do well as US FED tapers Quantitative Easing.

Investment Outlook for 2013 by HSBC

Once again, I was invited by HSBC for their bi-annual presentation of investment outlook.  Lunch served was better than before.  They served forest treasure parmesan with pear salad and berry compote,  Cod fish fillet wrapped in parma ham with pumpkin risotto and warm bread pudding for dessert.

I always look forward to attending their luncheon because I enjoy listening to Arjuna Mahendran, head of Investment Strategy.  He speaks eloquently and concisely.  His every sentence is filled with insights into the market and strategies.   But this time around, they got Jose Rasco to give some of his analysis and outlook on the U.S. market.

The following list is not complete but they were the ones that I remembered from the presentation.  So I call them my take home points. This is something that is retained in my brain for the rest of the year and serves as a good guide book for me:

1.  Three axioms in investing this year:
      a)  Dont chase growth:  Emerging market consumers are fickle.  What drives the prices is not growth but liquidity from the quantitative easing of central banks last year.  Remember the lesson of Apple, which hit $700 but is now trading at $500 level.

     b)  Carry on with carry trades:  Western central banks will print more money.  So continue to borrow low cost money to invest.  
     
     c)  Invest in emerging market de-coupling through first world first rate companies.   BRICs will struggle to cope with inflation.  Instead, look at large emerging market companies with long history of stability.  These are the companies that will have minimal impact on economic shocks.

2.  Inflation:  China (and other BRICS) will continue to confront the inflation threat.

3.  Income growth:  Chinese wages are rising.   Southeast asia is blessed with crude oil, minerals and food crops.  Luxury goods will continue to feed the growing emerging markets income gap.  

4.  Debt is doing better than equity.   Look at the graph below.  The green line is the EM bond index, while the blue line is the MSCI world index.

      

    Midcap seems to be doing better than large caps.  The graph below is the comparison of S&P 500 and S&P midcap


5.  Infrastructure
     Urbanization in China causes them to focus on social infrastructure such as healthcare and pharmaceuticals, much like the U.S. many years ago.

6.  Quantitative easing in US will continue until inflation reaches 2.5% and unemployment hits 6% which will not happen in 2013.   US employment may be rising but not enough.  US economic activity is still below potential and labour market hardly recovered from the last recession.  Home sales have been steadily rising but most of it comes from foreign buyers.  Home inventories are going down though.

7.  Latin America corporate bond market is another viable investment vehicle.  Even if you cut their cash in half, these companies will continue to function well, thereby showing us how strong their balance sheets are.  In fact, 73% of their papers are investment grade, which makes Latin American debt market a very  good option to add to your portfolio.

8.  Fearless forecast on the Peso.  39.50 by end of 2013.   39 by end of 2014.