Great Expectations - Markets Ahead of Reality? - Investment Outlook Second Quarter 2021 - Great Expectations - Markets ...

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Great Expectations - Markets Ahead of Reality? - Investment Outlook Second Quarter 2021 - Great Expectations - Markets ...
Great Expectations –
Markets Ahead of Reality?
Investment Outlook
Second Quarter 2021
Great Expectations - Markets Ahead of Reality? - Investment Outlook Second Quarter 2021 - Great Expectations - Markets ...
Contributors
                                                                 Global Chief Investment Officer
                                                                 Willem Sels
                                                                 willem.sels@hsbcpb.com
                                                                 +44 (0)207 860 5258

                 Global Investment Strategist,
                 Managing Editor                                 Head of Asset Allocation
                 Neha Sahni                                      Stanko Milojevic
                 neha.sahni@hsbcpb.com                           stanko.milojevic@hsbcpb.com
                 +44 (0)20 7024 1341                             +44 (0)20 7024 6577

    Regional Chief Investment Officers

                 Belal Mohammed Khan                             Cheuk Wan Fan
                 belal.mohammed.khan@hsbcpb.com                  cheuk.wan.fan@hsbcpb.com
                 +41 (0)58 705 5273                              +852 2899 8648

                 Jose Rasco                                      Jonathan Sparks
                 jose.a.rasco@us.hsbc.com                        jonathan.sparks@hsbcpb.com
                 +1 (1)212 525 3264                              +44 (0)20 7860 3248

                 Patrick Ho                                      James Cheo
                 patrick.w.w.ho@hsbcpb.com                       james.cheo@hsbcpb.com
                 +852 2899 8691                                  +65 6658 3885

                 CIO of Wealth Management and
                 Global Head of Research and Insights            Global Head of Equities
                 Xian Chan                                       Kevin Lyne Smith
                 Xian.chan@hsbc.com                              kevin.lyne-smith@hsbc.com
                 +44 (0)20 7991 9198                             +44 (0)207 860 6597

                 Global Head of Fixed Income                     Senior Fixed Income Credit Specialist
                 Laurent Lacroix                                 Elena Kolchina
                 laurent.lacroix@hsbcpb.com                      elena.kolchina@hsbcpb.com
                 +44 (0)207 024 0613                             +44 0207 860 3058

                 Global FX Coordinator                           Head of Sustainable Product Offering
                 Nicoletta Trovisi                               Sophie Haas
                 nicolettatrovisi@hsbc.com                       sophie.l.haas@hsbcpb.com
                 +44 207 005 8569                                +44 (0) 207 024 0283

                 Global Market Analyst, Real Estate Investment   Global Head of Hedge Funds
                 Guy Sheppard                                    Richard Berger
                 guy.r.sheppard@hsbc.com                         richard.berger@hsbc.com
                 +44 (0)207 024 0522                              +44 (0) 203 359 6139

                                                                 Senior Product Specialist |
                                                                 Private Market Investments
                                                                 Jorge Huitron
                                                                 jorge.emilio.huitron@hsbc.com
                                                                 +44 (0) 203 359 7040

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Great Expectations - Markets Ahead of Reality? - Investment Outlook Second Quarter 2021 - Great Expectations - Markets ...
Contents
Letter to clients                                       05
Portfolio Strategy                                      06
Updating our Strategic Asset Allocation
for the recovery and beyond                             10
Top Trends for 2021
1. Recharging Asia’s Growth                             14
2. Recovering in a Low Yield World                      18
3. Digital transformation                               20
4. Investing for a Sustainable Future                   22
Equities24
Fixed income                                            26
Currencies and commodities                              30
Hedge funds                                             32
Private markets                                         34
Real estate                                             36
Disclaimers38

                                         Investment Outlook Second Quarter 2021   3
Great Expectations - Markets Ahead of Reality? - Investment Outlook Second Quarter 2021 - Great Expectations - Markets ...
Click below to watch our video                Click below to watch our video
    Portfolio strategy – comparing market views   Three high conviction themes for
    with our own convictions                      Q2 and beyond

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Great Expectations - Markets Ahead of Reality? - Investment Outlook Second Quarter 2021 - Great Expectations - Markets ...
Welcome
Dear client
When we published our 2021 investment              So, our ‘volatile but still low’ bond yield      after lockdowns end. The digital revolution
outlook, we titled it ‘Recovering and              outlook stands. If inflation rises in Q2         as well as the sustainability revolution are
Rebuilding’ as we looked ahead to an               but then falls back, and central banks’          structural in nature, and form the basis of
improving economy, steady progress in the          policy normalisation is only very slow, the      two of our main trends for 2021. We are
fight against the pandemic, and improving          recent upward move in Treasury yields is         only at the very start of the sustainability
earnings. We took a bullish view on equity         exaggerated, and inflation expectations          revolution, and investors should not be shy
markets and were forecasting volatile but          (breakevens) should fall back. The more          to price in impressive earnings growth.
still low bond yields, and a stable interest       important component to watch are real            For investors who are worried about the
rate policy in G10 countries.                      yields, which have risen but for now             valuations of some of the relatively rare
                                                   remain very low. Central banks will try to       ‘pure play’ sustainability firms, we point
Markets have been looking ahead as well.           keep them low, because when they last            out that many traditional companies have
The equity rally and outperformance of             shot up sharply during the 2013 Taper            growing sustainable activities. It makes
cyclical stocks suggest that they are willing      Tantrum, equities, credit, gold and other        sense to look for some of those companies,
to price in future earnings growth already         assets dropped. They do not want financial       and integrate sustainability not just in the
now. That could feel odd to some people            conditions to tighten, until the economy is      satellites but also in the core portfolio.
whose country is still in lockdown mode,           on a much better footing.
or to owners of a business that remains                                                             In tech and sustainability, we look for
closed. But we think the market is right           We thus position for improving growth            opportunities around the world. Asia has
to be positive. Mortality and infections           and earnings, for a short term pickup in         a strong and growing tech sector, and
have dramatically fallen in countries where        inflation and bond market volatility, but also   China has put sustainability at the heart
vaccinations are well progressed, and              for return to lower and more stable bond         of its five-year plan, as part of its ‘quality
a pickup in consumption thus seems a               yields later in the year. We think the best      growth’ strategy. The improvement in
question of when rather than if. Till then,        way to do this is to invest for the positive     global manufacturing is helping Asian
fiscal policy will provide a partial safety net.   6-12 month market outlook, but to manage         markets as well, and local consumption
                                                   the potential for short term volatility. We      is picking up. Together, these factors are
So far, so good. But markets worry that            therefore maintain an overweight in global       recharging Asia’s growth, and we see
this cyclical recovery and fiscal stimulus         equities and cyclical sector exposure. Given     many opportunities in the region’s stock
will lead to inflation. In the short term, they    low cash rates, we also maintain a solid         and credit markets.
are right. Improved demand may lead to             weight of carry assets (investment grade,
bottlenecks and price increases in some            high yield, and emerging markets bonds)          In our investment outlook brochure and
areas where supply is slow to pick up. Oil         and have added to dividend stocks. We            videos, we discuss these views and
prices have also risen compared to last            manage rate-driven volatility by diversifying    opportunities in more detail. In spite of the
year, which should boost inflation until the       and managing duration in bond portfolios,        run-up in equity valuations and increased
end of Q2. But we think markets are wrong          and by maintaining overweights to                rate volatility, the best strategy is to remain
to price in higher inflation for the longer        financials and materials in equity portfolios.   invested in well diversified portfolios, as we
term. Labour markets have become even              In Q2, USD may remain volatile, gold             anticipate a healthy balance of improved
more global and competitive, with many             may be directionless but still an important      earnings and still low rates for the rest of
of us working online through Zoom or               diversifier, and hedge funds should have a       the year.
Teams. Technology also continues to act            strong opportunity set.
as a deflationary force. So, central banks
do not feel threatened by the short term           Rate volatility has led some investors away
rise in inflation, and they intend to keep         from growth stocks into value stocks, but
policy rates unchanged. Tapering of bond           our low rate view should provide them
purchases should be very slow and well             with some comfort. We have broadened
telegraphed, probably starting with the Fed        sector exposure into other sectors as the        Willem Sels,
in December.                                       economic recovery broadens, but fleeing          Global Chief Investment Officer
                                                   from tech is not rational. Tech earnings are
                                                   solid and should continue to be so even          23th of March 2021

                                                                                                       Investment Outlook Second Quarter 2021        5
Great Expectations - Markets Ahead of Reality? - Investment Outlook Second Quarter 2021 - Great Expectations - Markets ...
Portfolio Strategy
Markets naturally anticipate, but in                 look forward, to the economic reopening,            to spend on things like entertainment
the following pages, we examine how                  and we thus think the market is right to be         and travel, and many shops were
markets currently see the world, and                 optimistic.                                         closed. Consumers also increased their
whether they are right to do so, or are                                                                  precautionary savings as they felt more
going too far in their anticipation.                 In fact, the move in US equity markets is           uncertain about the future. These savings,
                                                     in line with the greater optimism we see            renewed optimism and the end of the
Topic 1: A broad-based                               in business surveys, both in its timing and
                                                     its amplitude. The Q4 earnings season has
                                                                                                         lockdowns, as vaccines get rolled out,
                                                                                                         should lead to a significant jump
economic recovery                                    delivered a solid set of positive surprises,        in consumption.
                                                     and some more positive guidance about
The sharp equity market rally from the
                                                     the future.                                         It is clear that there is still a lot of
March 2020 lows is due to many factors,
                                                                                                         uncertainty about the speed of the vaccine
but it is clear that it wouldn’t have
                                                     Our economists also foresee a relatively            roll-out. But the recent fiscal support
happened if markets are not confident
                                                     sharp and broad-based pickup in                     packages in the US, UK, China and other
about the economic recovery. A look at
                                                     economic activity. Government spending              countries illustrate that governments
sector performance also illustrates this
                                                     and construction activity are ongoing.              are there to provide a safety net, helping
confidence: cyclicals have outperformed
                                                     Global manufacturing is accelerating, with          households and SMEs to bridge the
defensives.
                                                     higher orders and low inventories painting          time between now and the economic
                                                     an optimistic picture in many countries.            reopening. In our view, this should allow
This may seem odd to some readers,
                                                     What will really move the dial in months            markets to continue to look forward, to the
especially to many clients who are
                                                     ahead, however, is consumer spending.               better times ahead.
business owners and still face challenging
                                                     Lockdowns limited the consumers’ ability
conditions currently. But markets tend to

    What it means for our                                From a style factor perspective, many          It is also customary to look for high
                                                         clients typically focus on large cap           quality stocks, to ride out economic
    investment strategy                                  stocks, either by choice or because            and market cycles. Our confidence in
    We agree with the market’s bullish                   they are most present in benchmark             the economic recovery has caused us
    assessment of the economic cycle. It                 indices. We have added some selective          to close our satellite investment theme
    supports our overweight position on                  exposure to small and midcap stocks,           related to quality. In an improving
    global equities and on cyclical sectors,             because such stocks are often strong           economy, we think the way to look at
    including for example industrials,                   beneficiaries of a recovery in the local       quality and resilience is more structural,
    materials and financials.                            economy.                                       i.e. we try to pick the stocks that are well
                                                                                                        positioned for the future – notably for the
    Our country picks also reflect our                                                                  digital and sustainability revolutions.
    cyclical preferences. China’s economy
    should grow at an impressive 8.5% rate               The outperformance of cyclical sectors illustrates the market’s cyclical
    this year, with a focus on quality growth.           optimism
    We like the Chinese digital consumption,
    technology hardware, high-end                                 150      Cyclical / Defensives performance ratio
    manufacturing, electric vehicles, and                         140                US                             Europe
    materials sectors, which should benefit                       130
                                                 rebased to 100

    from the government’s policy priorities.                      120
    Strong semiconductor and tech activity
                                                                  110
    should benefit South Korea, while rising
    Asian and global growth is a positive for                     100
    Singapore. We also have an overweight                         90
    position in the US and the UK, where                          80
    the vaccine roll-out is well advanced                         70
    compared to the EU. Elections in                              Mar-17           Mar-18           Mar-19                Mar-20               Mar-21
    France and Germany could be a risk to
    investment sentiment later this year.            Source: Bloomberg, HSBC Private Banking as at 23 March 2021. Past performance is not a reliable
                                                     indicator of future performance.

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Great Expectations - Markets Ahead of Reality? - Investment Outlook Second Quarter 2021 - Great Expectations - Markets ...
Topic 2: Market fears of                        year, and it so happens that oil collapsed          the bond markets’ forward rates). We
                                                last year. These base effects, however,             continue to believe that inflation is kept
higher inflation                                should be temporary, allowing CPI to                structurally low by many factors. Global
Markets’ positive view on the cycle also        peak around April or May, and then come             labour markets, low unionisation rates
naturally puts some upward pressure on          down again.                                         and the growth of the gig economy are
bond yields. In part, this is because bullish                                                       probably the main drivers. The pandemic
                                                There is also some growing evidence                 has caused even bigger parts of the
equity markets imply less safe haven
                                                of supply bottlenecks in manufacturing,             economy to move online, and as we work
demand for Treasuries. But the move is
                                                as inventories are low and companies                through Zoom or Teams, it is clear that
principally driven by fears that stronger
                                                restart. Consumers may also rush to the             many jobs can increasingly be done from
activity and higher fiscal spending will lead
                                                shops and try to board the same plane               anywhere in the world. This creates more
to higher inflation.
                                                to Mykonos or Phuket, leading to higher             competition in the labour market and
On this point, we only partially agree with     prices. But again, the effect should be             should keep wage inflation low. Without
markets: we think inflation will rise, but      temporary. There is still a lot of spare            higher wage inflation, we do not think CPI
only mildly and temporarily. Contrary to        capacity in the economy, and many                   inflation can drift up for long.
markets’ fears, we think inflation remains      companies do not have the pricing power
structurally low.                               to charge through higher input costs to             Much of the generous fiscal spending
                                                their customers. So again, we think this            in many countries should not lead to
The short term upside we foresee for CPI        effect will be temporary.                           inflation, as the support for households
is due to the oil prices, which have risen                                                          and SMEs often simply offsets a fall
on better demand, and a remarkably              So it is odd to us that the market has              in their income. From a longer term
high compliance to production quota             not only pushed up its assessment of                perspective, more fiscal spending now
by OPEC+ producers. Inflation always            near-term inflation, but also that of inflation     means higher debt, and therefore less
compares today’s prices with those of last      5-10 years from now (we can see this in             spending (or higher taxes) later.

 What it means for our                          clients, and cash rates are unlikely to           The US dollar is likely to remain volatile,
                                                rise any time soon. Central banks will            as a result of the volatile US bond yields.
 investment strategy                            try to avoid any excessive bond market            The low US rate environment, and
 We position for short term volatility in       volatility, which should comfort bond             positive outlook for risk assets may lead
 inflation and bond markets, but a return       investors. Our search for yield thus              to some further weakness of USD, but
 to lower inflation and bond yields later       continues in investment grade, high yield         we think the downside potential is now
 this year.                                     and emerging market hard and local                much more limited, following the fall we
                                                currency bonds.                                   have already seen.
 We manage this short term volatility by
 diversifying bond portfolios, keeping          We think the market is pricing in
 bond duration in check, and by                 excessive long term inflation, which
 incorporating some positions – such as         leads us to be underweight in TIPs
 financials stocks – that can benefit from      (Treasury inflation linked securities).
 higher rates.                                  Oil and supply side bottlenecks may lead to short term inflation

 Bank stocks also have another benefit,         100              Manufacturing price PMI index                  WTI Crude Oil (USD/bbl)
 i.e. that dividends are now on the rise,
 after being cut sharply last year. The          80
 improving economy leads to higher
 lending volumes and should reduce loan          60
 losses, and several regulators are easing
 the restrictions on dividend pay outs and       40

 share buybacks
                                                 20

 This is welcome, as we remain in a                0
 structurally low yield world. Even after          Jan-16 Jul-16 Jan-17 Jul-17 Jan-18 Jul-18 Jan-19 Jul-19 Jan-20 Jul-20 Jan-21
 the recent move in Treasury yields, they
 remain unattractive for most of our             Source: Bloomberg, HSBC Private Banking as at 23 March 2021. Past performance is not a reliable
                                                 indicator of future performance.

                                                                                                      Investment Outlook Second Quarter 2021       7
Great Expectations - Markets Ahead of Reality? - Investment Outlook Second Quarter 2021 - Great Expectations - Markets ...
Topic 3: Market concerns                       recent earnings season did deliver a high                We now expect the Fed to start tapering
                                               number of positive surprises. Global                     in December, but gradually, and with very
about high valuations                          business surveys also suggest earnings                   clear guidance. The market should be less
Price / earnings ratios are high relative to   optimism for the future, and we note that                surprised by this in 2013, and the move
history, and this is causing some investor     the equity market performance is in line                 in real yields should be less pronounced.
concern. It has led to temporary episodes      with the ISM performance.                                As a result, we foresee only a mild drop
of profit taking over the past 12 months.                                                               in Price / Earnings ratios, which, given the
                                               Of course, valuations are also supported                 strong earnings growth, is still compatible
And as valuations are typically highest in
                                               by very generous global central bank                     with high single digit equity market
technology and other growth stocks, it has
                                               liquidity, and by the low rate environment.              performance till year end. Needless to say,
also led investors to rotate out of growth
                                               When we compare US P/E ratios to the US                  we closely watch the real yield.
stocks into value stocks.
                                               BBB-rated bond yield, we do not find that
But how high are valuations really?            the equity market is overvalued. That said,              Lastly, some heavily shorted stocks have
Mathematically, price / earnings (P/E)         bond markets could pose a risk to equity                 seen very sharp erratic moves when retail
ratios can be high when earnings are           market valuations, if yields rise further, or            investors started to buy them, with the
low. So, trailing P/Es (which look at the      equity investors start to demand a higher                upward momentum driving more inflows
earnings of the past year) will be boosted     risk premium over bonds as a result of                   and causing the price to spiral (first up,
by last year’s earnings recession. Even        macro-economic and policy uncertainty.                   then down). For now, this affects a small
forward P/Es (which look at the estimated                                                               part of the market, but if it spreads and
                                               More than inflation, it is tapering of                   causes equity markets to become more
earnings of the next 12 months) may be
                                               bond purchases that could be the most                    erratic, investors would start to price in
pushed up if analysts’ earnings estimates
                                               significant risk to equity valuations. In                higher risk premia.
are lower than those markets are trying to
                                               2013, markets were surprised by the Fed’s
price in. So, much will depend on whether
                                               tapering, and this led to rising real yields,
companies deliver on earnings, and the
                                               and a correction in equity markets.

    What it means for our                              value, because some cheap companies             Equity market valuation concerns
                                                       may be value traps, if their business           may well continue to lead to some
    investment strategy                                model is not adapted to the digital and         temporary corrections, which investors
    We see no obvious mispricing of equity             sustainability revolutions.                     will be able to exploit through volatility
    markets as long as real yields do not                                                              strategies. Given our core views of
                                                       We are also wary of chasing                     structurally low yields, strong global
    spike further, global liquidity remains
                                                       momentum for the sake of it. While              liquidity and an ongoing recovery,
    ample and the global recovery remains
                                                       sharp flow-driven upside can be                 we would see such corrections as
    in place. As a result, we maintain our
                                                       tempting, it will be followed by sharp          medium-term buying opportunities.
    equity market overweight.
                                                       falls if the price becomes divorced from
    However, since mid-2020, we have put               company fundamentals.
    more emphasis on relative valuations.
    We have broadened our sector exposure
    as tech is indeed highly valued relative   Equity market valuations are high relative to history
    to other sectors. This rotation is made
    easier by the fact that the fundamental                           35               US                       Emerging markets
    outlook of other sectors has improved.
                                                                      30
                                               Price/Earnings ratio

    Within sectors, there is a large                                  25
    dispersion in valuations between stocks.
                                                                      20
    Stock pickers, active fund managers
    and hedge funds are able to capitalise                            15
    on this.
                                                                      10

    The broadening of our sector exposure                              5
    also means that we see opportunities                                   Jan-11   Jan-13    Jan-15           Jan-17          Jan-19           Jan-21
    in both growth and value styles. We            Source: Bloomberg, HSBC Private Banking as at 23 March 2021. Past performance is not a reliable
    do not have an outright overweight on          indicator of future performance.

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Great Expectations - Markets Ahead of Reality? - Investment Outlook Second Quarter 2021 - Great Expectations - Markets ...
Topic 4:                                           together with technology. This led to                     Comparing valuations of tech companies
                                                   correction in early March in both areas,                  with those during the dotcom period
Tech and Sustainability;                           when the spike in bond yields caused                      does not really make sense, in our view,
Sustainability and Tech                            growth stocks to suffer.                                  as most of the big tech firms make huge
                                                                                                             profits now. And those that benefited from
We like to draw some parallels between             As we have stated, though, we think bond                  the pandemic are not immediately going
technology and sustainability.                     yields may remain volatile, but should                    to see a sharp fall in profits: many of the
                                                   eventually stabilise and come back down.                  changes to the economy and the way we
For a start, both the digital revolution and       So while there is the potential for volatility            live are probably permanent, so the digital
sustainability are two of our top trends           in growth stocks, we think there are plenty               economy will continue to grow its share of
for investors.                                     of opportunities for investors with a 6-12                GDP in coming years.
                                                   month (or longer) view. We thus see the
Secondly, technological advances often             March correction as a buying opportunity.                 For companies active in areas related to
enable us to move to a more sustainable                                                                      sustainability, we think the revolution has
world. For example, the increased mileage          The valuation of growth stocks is even                    only just started. To get an idea of the
potential in batteries makes electric              more dependent on the short and long                      sheer size of investment and change that
vehicles more attractive, and the falling          term earnings outlook than for other                      is needed, one just needs to look at the
cost of solar and wind power makes it              stocks, as investors’ assumptions vary                    US CO2 emissions since 1800, and how
economic to switch to green energy. It is          wildly for many of those companies. On                    we need to make a complete U-turn. So,
interesting to note as well that some of           future earnings, we would be careful                      companies that tap into this investment
the largest tech companies are now the             not to be too conservative, as the digital                and demand should see plenty of scope
biggest corporate buyers of clean energy.          revolution and sustainability revolutions                 to grow their earnings, now and in the
                                                   provide very significant earnings                         long term.
The market is putting some of the green            growth potential.
stocks in the ‘growth stocks’ camp,

   What it means for our                            energy; and some industrial companies                   done in the core portfolio, the total
                                                    have growing green hydrogen activities.                 exposure to the sustainability theme
   investment strategy                                                                                      will quickly add up, and it may be a
                                                    By differentiating between ‘traditional’                good complement to exposure in the
   Valuation concerns often focus on the
                                                    companies on the basis of these                         thematic satellite.
   large cap US stocks in technology,
                                                    activities, investors can build up more
   and on the pure play firms in areas of
                                                    exposure to sustainability. If this is
   sustainability.

   In technology, we diversify beyond the
                                                       The tech sell-off spilled over in sustainability, but we think this is temporary
   large US names, by looking for smaller
   stocks, opportunities in Asia, and                                400                Nasdaq                             Clean energy
   tech-related companies in other sectors
   (health technology, automation, 5G).                              350

                                                                     300
   As for sustainability, the number of
   large quoted companies that are pure                              250
                                                    rebased to 100

   plays, is limited, and hence, fund-driven
   flows into such stocks naturally drives                           200
   up their price. Although future earnings
   potential may warrant that high stock                             150
   price, we think investors can diversify
                                                                     100
   into companies that are not pure
   plays, but have growing activities in                              50
   the sustainability area. Traditional car
   companies have different levels of                                  0
   activity in electric vehicles; some utilities                      Jan-15   Jan-16      Jan-17         Jan-18        Jan-19        Jan-20        Jan-21
   are more advanced than others in green                 Source: Bloomberg, HSBC Private Banking as at 23 March 2021. Past performance is not a reliable
                                                          indicator of future performance.

                                                                                                                 Investment Outlook Second Quarter 2021      9
Great Expectations - Markets Ahead of Reality? - Investment Outlook Second Quarter 2021 - Great Expectations - Markets ...
Updating our Strategic Asset
Allocation for the recovery
and beyond
     Since our last SAA update in April         Opportunities for counter-consensus                   We have reduced our previous
     2020, valuations have risen sharply        asset allocation tilts have thus                      sizeable position in high yield
     across risk assets, thus implying          moderated, and our SAA composition                    credit, adjusting to a barbell strategy
     lower potential for total returns in the   moves closer to the market consensus.                 between equities and high quality
     years ahead.                               We prefer equities over fixed income                  bonds. To broaden our opportunity
                                                and continue to prefer emerging over                  set, we further diversify our portfolios
                                                developed markets.                                    by adding corporate emerging market
                                                                                                      debt, inflation linkers, and securitised
                                                                                                      investment grade bonds to our SAA.

Our last SAA update took place in April         reassurance needed to begin to re-balance                More recently, government bond yields
2020, in response to extraordinary market       their portfolios. As the year went on, the               jumped and global stock markets
reaction to the global COVID-19 pandemic.       long-term outlook continued to brighten                  extended their rally on the back of
At that time, extreme market volatility and     from a very grim starting point, further                 enduring improvements in the outlook for
a sell-off in credit markets led to a violent   supporting risk assets.                                  the post-COVID economy.
widening of credit spreads. Relative to our
assessment of the outlook for defaults          Credit spreads widened substantially in Q1 2020 but quickly narrowed over the
and downgrades, elevated credit spreads         course of the year
presented a substantial carry opportunity,      bps
motivating a move towards high yield            2500
and investment grade credit in our SAA.                              AAA              AA             A           BBB              BB            B
Importantly, re-balancing to new strategic
weights also meant reducing the allocation      2000
from assets that had appreciated
sharply, such as government bonds, and
increasing our allocation to assets that had
                                                1500
sold off, such as equities.

Over the subsequent ten months, risk
assets staged an extraordinary and an           1000
almost uninterrupted march higher, driven
by a transition from a pervasive fear of the
unknown towards a constructive outlook           500
for the future. While the consequences of
the pandemic and lockdowns across the
globe were very hard to predict and price,         0
                                                    2005                           2010                           2015                           2020
the extraordinary policy response that
promptly took place gave investors the
                                                Source: HSBC Private Banking, Refinitiv Datastream, March 2021. Past performance is not a reliable
                                                indicator of future performance, 23 March 2021.

10
Lower and flatter Capital Market Line
   Following the accelerated run-up in                                   yields. This is currently keeping the
   valuations since April 2020, expected                                 left-hand side of the capital market line
   returns across global markets are now                                 somewhat anchored. Secondly, expected
   inevitably lower than they were. This is                              returns are now notably less dispersed
   particularly pronounced for asset classes                             around the CML than they were back
   that are higher on the risk spectrum,                                 in April 2020. And lastly, the ongoing
   resulting in a flatter Capital Market Line                            tightening of credit spreads has led to
   (CML), as we show below.                                              diminishing opportunity in high yield
                                                                         credit, on a risk-adjusted basis – relative
   At the lower end of the risk spectrum, we                             to a more traditional combination of
   are observing a gradual re-emergence of                               government bonds and equities.
   the inflation risk premium in US Treasury

   Expected returns are lower, Capital Market Line is flatter, and expected returns
   are closer to fair levels

           10%                                                 April 2020                                  PE
                  9%                                                                      EME
                                                                 EMD_L
                  8%
                  7%
Expected Return

                                                                           DME
                  6%                      PD
                                                       HYD
                                                        EMD_H                      RE
                  5%

                  4%
                                              HF                            Com
                  3%                    SIG IG

                  2%
                                             Infl
                  1%       Cash
                                   Gov
                  0%
                    0%                  5%             10%          15%             20%           25%           30%
                                                                  Volatility

             10%                                               January 2021
                    9%

                    8%
                    7%
  Expected Return

                                                                                                      PE

                    6%                                           EMD_L                    EME

                    5%
                                                                            Com

                    4%                                                     DME
                                                                                   RE
                                                       EMD_C
                    3%                            HF   HYD
                    2%            SIG        PD         EMD_H

                                             Infl
                    1%     Cash
                                  Gov
                                             IG
                    0%
                      0%                5%             10%           15%            20%           25%           30%
                                                                   Volatility

    Source: HSBC Asset Management, HSBC Private Banking, Refinitiv Datastream, 23 March 2021.

                                                                                                    Investment Outlook Second Quarter 2021   11
Changes to our SAA
Taken together, these changes in our               With fewer opportunities to deviate              we are also adding securitised investment
long term market outlook imply less                substantially from consensus, and given          grade bonds as a part of the defensive
pronounced mispricing opportunities                the low yield and spread environment, we         bond allocation. Both of these asset
between asset classes, and therefore               are further diversifying our portfolios to       classes have different exposure to interest
motivate a reduction of some of our                capture previously untapped sources of           rate risk compared to nominal government
existing counter-consensus positions.              returns. Due to continued improvements           bonds, and as such allow us to have a
Most notably, our annual re-optimisation           in liquidity and size of the emerging            better diversified defensive building block
results in an unwinding of high allocations        market corporate debt universe, we are           in the world of low interest rates.
to high yield credit, relative to equities and     now confident in a strategic case for
defensive fixed income bonds. In other             this asset class. We expect emerging             In our table below, we show how we
words, our SAA is now adjusting from               market corporate debt to deliver better          think about asset allocation, which is
a “bullet” to “barbell” positioning, with          risk adjusted returns compared to hard           not a simple one-dimensional list, but is
an overarching tilt towards equities. We           currency debt issued by emerging                 formulated along four sources of risk. We
continue to have high allocations                  market governments.                              also show that alternative assets such as
to emerging market equities and debt                                                                hedge funds and private markets should
relative to consensus, though the size of          We are also adding inflation linked bonds        not be considered as asset classes, but
these position is now also lower than in           to the mix, after allocating to this asset       as a different way to liquid equity and
previous years.                                    class on a tactical, off-benchmark basis         bond markets to gain exposure to our
                                                   over the last several years. Where relevant,     four risk factors.

USD Medium Risk SAA

 Equity related                        Rates related                       Credit related                     Diversifyers

 Developed Markets (27%)               Global Government Bonds (8%)        Global IG Credit (10%)             Cash (2%)

                                                                                                              Commodity (5%)

                                                                           Global High Yield (6%)

                                                                                                              Other HFs (5%)

                                                                           EMD Hard Currency (3%)

 Emerging Markets (5%)                 EMD Local Currency (4%)             EM Corporates (3%)

 Equity HFs (5%)                                                           Credit HFs (5%)
                                                                                                              Real Estate (3%)

 Private Equity (5%)                   Inflation-linked (1%)               Private Debt (3%)

     Private Markets             Hedge Funds              Liquid Markets

Source: HSBC Private Banking, 23 March 2021.

12
Investment Outlook Second Quarter 2021   13
Top trends for 2021
1: Recharging Asia’s Growth
We remain positive on Asia’s structural                bode well for Asia’s technology sector                re-entry opportunity into structural
growth trajectory and see many                         earnings outlook, as indicated by the 50%             winners and Asian recovery leaders.
thematic investment opportunities,                     spike in DRAM prices since mid-January.               Within Asian equities, we stay overweight
including our themes Riding on                                                                               China and Singapore given their positive
China’s Five-Year Plan, Asia’s Supply                  To reflect the impact of vaccine                      recovery outlook and attractive risk-reward
Chain Revamp, New Asian Consumer                       breakthroughs and stronger global                     profile.
and Asian Credit Opportunities. The                    recovery, we have raised our 2021 GDP
themes benefit from structural factors                 growth forecasts to 3.8% (from 3.2%) for
                                                       Japan, 3.4% (from 2.7%) for South Korea
                                                                                                             Riding on China’s
such as a clear Chinese 5-year plan, a
strong regional position in technology,                and 5.0% (from 3.5%) for Taiwan. We also              Five-Year Plan
growing consumer wealth, as well as                    raised our GDP growth forecast for India to
                                                                                                             China’s National People’s Congress (NPC)
the global cyclical recovery.                          11% from 9.0% for the 2021 fiscal year to
                                                                                                             confirmed a gradual policy normalisation
                                                       reflect stronger industrial activity. Overall
                                                                                                             without major change to the supportive
As we enter Q2, Asian economic recovery                we have upgraded our 2021 GDP forecast
                                                                                                             fiscal and monetary policy stance. The
is broadening and gathering pace. In                   for Asia ex-Japan to 7.6% from 7.5%,
                                                                                                             Government Work Report 2021 has
February, the Asian electronics PMI                    and expect almost all Asian economies
                                                                                                             reaffirmed the top policy priority on
surged to a cycle high, close to previous              to recover to their pre-pandemic output
                                                                                                             sustaining the recovery with a strong
semiconductor super-cycle levels in                    levels by the end of 2021 except Japan,
                                                                                                             focus on job creation, quality growth and
2018. Robust domestic demand and                       Thailand and the Philippines.
                                                                                                             the 14th Five-Year Plan (FYP, 2021-2025).
stronger-than-expected global demand
                                                                                                             With the post-pandemic recovery being
boosted Asian exports, particularly                    The better-than-expected Q4 2020 Asian
                                                                                                             the number one policy goal, we believe the
for the technology-driven North Asian                  reporting season supports our expectation
                                                                                                             PBoC is in no hurry to tighten monetary
economies. Mainland China, Japan, South                of a robust and broad-based earnings
                                                                                                             policy and we do not expect any policy
Korea and Taiwan stand out as geared                   recovery in 2021. Consensus estimates
                                                                                                             rate hike this year. The “Dual Circulation
beneficiaries of the digital transformation            of 28% 2021e EPS growth projected for
                                                                                                             Strategy” under the 14th FYP has
accelerated by COVID-19. The global                    Asia ex-Japan support the Top Trend of
                                                                                                             made a further policy pivot to domestic
shortage in semiconductors and fast                    Recharging Asia’s Growth. We consider
                                                                                                             consumption, technological innovation
growing demand for consumer electronics                the recent tactical pullback triggered by
                                                                                                             and the green revolution.
                                                       rising global bond yields as an attractive
              Most Asian economies will recover to pre-pandemic levels by the end of 2021
Most Asian economies  will recover to pre-pandemic levels by the end of 2021
14

                                                                                                                                                            12
12
      2022

10
                                                                                                                                      9          9
                                                                                  8         8          8         8          8
 8
      2021                                                   7         7

 6
                                                   5
                  4          4         4
 4
      2020
        2
 2

 0
     Mainland  Sri       Taiwan Vietnam        New Australia South             Hong        India Indonesia       Singapore       Thailand
      China   Lanka                           Zealand        Korea             Kong                       Malaysia         Japan          Philippines
                                                                   Quarters to pre-pandemic level activity
Source: HSBC Global Research, HSBC Private Banking as of 23 March 2021. Note: the graph represents the number of quarters the economy will likely need to
recover fully from the recession caused by the pandemic’,

14
Supportive policy measures and key              and wind power operators, renewable                  find plenty of investment opportunities in
development targets unveiled in the             energy equipment providers, grid and                 the remodelling of Asia’s supply chains
14th FYP underpin attractive investment         transmission, energy storage, new energy             in the course of the recovery from the
opportunities from the digital consumption      vehicle manufacturers, batteries producers           pandemic disruptions. Asia’s technology
boom, China’s innovation-driven growth          and electric vehicles supply chains.                 supply chain is pivotal to the world,
model, its industrial upgrade plan and                                                               given it is the largest production base
low carbon transition. The government           Asia’s Supply Chain                                  of semiconductors with 80% of global
set a quota of RMB3.65trn in issuance of                                                             installed wafer capacity located in the
special local government bonds, which           Revamp                                               region. Asia’s exports have stayed very
will be deployed to fund infrastructure         Recovering from COVID-19 disruptions,                resilient throughout the global pandemic,
projects and address the debt loads of          Asian manufacturers are actively                     as industry leaders in the region have
local government financing vehicles. We         upgrading their supply chains and                    gained market share from global
expect the infrastructure growth will be        optimising production models in response             competitors which suffered from the
led by digital infrastructure investment and    to the changing dynamics in geopolitics,             fallout of supply chain disruptions.
development of smart city clusters. The         trade policies and production costs. We
policy pivot to private consumption and
the digital economy should bode well for
the growth outlook of the ecommerce,                                                                                           -
                                                China’s transformation towards a consumption-led economy under the 14th FYP
discretionary and service consumption
in China. Riding on the emergence of             60
Chinese middle class consumers in the
                                                                            Industry            Services
next five years, we position in quality
growth leaders in the internet and
                                                 55
consumer discretionary sectors with
strong brands and robust
business models.
                                                 50
The new five-year plan delivered policy
stimulus measures including tax incentives
for R&D, increased public spending on            45
basic research, and measures to widen the
funding channels for startups. These policy
initiatives should support China’s pursuit of
self-sufficiency, upgrading and localisation     40
of core technologies. Key investment
opportunities include local industry
leaders in the high-tech hardware and            35
components, robotics and automation,
smart manufacturing, artificial intelligence,
digital supply chain, data centres, cloud
                                                 30
computing, 5G technologies, the Internet
of Things and biotechnology. The 14th FYP
guidelines on the low carbon transition are
consistent with the targets of achieving         25
carbon emissions peak by 2030 and
carbon neutrality by 2060. To achieve
decarbonisation of the Chinese economy,
                                                 20
there will be massive investments in new
                                                   1980                    1990                   2000                    2010                    2020
capacities in renewable energy and new
energy vehicles in the next five years.         Source: CEIC, HSBC Global Research forecasts, HSBC Private Banking as of 24 March 2021. Past
We see promising opportunities in solar         performance is not a reliable indicator of future performance.

                                                                                                         Investment Outlook Second Quarter 2021     15
We expect the upgrading of Asia’s               Notably, RCEP is expected to reinvigorate                                             to further relocation of manufacturing
technology supply chain to speed                ASEAN’s supply chains and attract new                                                 capacity from China to Southeast Asia to
up after the pandemic due to strong             foreign direct investment from North                                                  mitigate tariff risks.
demand growth of semiconductors                 Asia. Thailand has announced policies
driven by increased consumption of              to establish the country as an electric
                                                                                                                                      New Asian Consumer
work-from-home products. In the process         vehicles production hub in the next five
of Asia’s supply chain revamp, North            years. Malaysia has built up 4.3 gigawatts                                            An important engine recharging
Asia should see closer ties in advanced         of solar-cell-module manufacturing                                                    Asia’s growth is the rebound in private
manufacturing while Southeast Asia              capacity, making it the third-largest                                                 consumption. We are looking for a robust
is expected to attract new investment           maker outside of China. ASEAN will also                                               7.8% rebound, in real terms, in Asian
in both labour-intensive industries and         benefit from China’s strong position in                                               private consumption this year after the
mid-to-high-end manufacturing capacity.         artificial intelligence, cloud computing,                                             -3.7% decline in 2020 caused by the
                                                drones and other technologies, which the                                              pandemic disruption. As of mid-March,
The Regional Comprehensive Economic             bloc needs to upgrade the viability and                                               all Asian economies that we track except
Partnership (RCEP), which will enter into       competitiveness of its existing value chain                                           Taiwan and Vietnam have started mass
force in July 2021, is poised to reshape        and supply chains. At the same time, the                                              vaccination programmes. Japan, Hong
the supply chains in Asia. According            Biden administration’s ongoing review                                                 Kong, Singapore, Malaysia and South
to a study of the Peterson Institute for        of the US supply chains and lingering                                                 Korea have already secured enough doses
International Economics, China, Japan           US-China trade issues may also lead                                                   to vaccinate at least 50% of their
and South Korea are expected to see
the biggest increases in exports by 2030
                                                80% of global installed wafer capacity is located in Asia
under RCEP, especially for exports across
each other’s markets. The bulk of the gains
are expected to be realized in advanced                                                                120
manufacturing such as electronics,
machinery and auto vehicles given the
                                                                                                              US     Europe   China      Taiwan
complementary patterns of their supply
                                                                                                              S. Korea    Japan   Singapore
chains. Furthermore, we expect that the
new EU-China Comprehensive Agreement                                                                   100
on Investment (CAI), which was signed
                                                2019-2030 Installed Global Wafer Capacity Projection

in January, will help China move further
up in the value chain in advanced
manufacturing industries. The EU-China
                                                                                                        80
CAI will likely deepen China’s integration
with the advanced manufacturing supply
chains of Japan and South Korea.

Under the RCEP framework, we anticipate                                                                 60
accelerating economic integration within
Asia and rising intra-regional trade flows,
offering a catalyst for further supply
chain integration between North Asia
and ASEAN. This structural trend will                                                                   40
promote optimisation of supply chains
across the region, as Asian manufacturers
are expected to take advantage of lower
production costs in other RCEP member
                                                                                                        20
countries to achieve diversification of their
regional production bases. We expect
more Asian manufacturers in the high-cost
locations to relocate their production
capacities in textiles, apparel and toys                                                                 0
manufacturing to lower-cost countries in                                                                     2019                 2025                   2030
Southeast Asia under RCEP.                      Source: Semiconductor Industry Association, HSBC Private Banking as of 24 March 2021

16
populations, according to the Duke              We remain bullish on companies                  through near-term volatility in inflation
University Health Innovation Center. Asian      exposed to digital consumption in China         numbers and bond yields. We do not
vaccination rates are steadily                  and Asia. China’s favourable policies to        expect any policy rate hike in Asia in 2021,
rising while infection rates are far below      stimulate consumer spending and rural           given average headline inflation in Asia
other advanced economies, paving                consumption under the 14th FYP will             is around 110bp below the mid-point of
the way for normalisation of consumer           bring attractive opportunities in the digital   the respective central banks’ inflation
activities and tourism, especially              economy and consumer discretionary              targets. Should US bond yields continue to
intra-regional travel in Asia.                  sectors. We favour digital consumer             overshoot, Asian central banks would take
                                                facing companies in the ecommerce,              policy action to try to prevent any undue
Against the backdrop of global vaccine          digital payment, online education, mobile       rise in domestic funding costs which could
deployment, we see compelling recovery          gaming, online entertainment and food           threaten the cyclical recovery.
opportunities in Asia’s consumption             delivery sectors. Despite gradual easing
and service sectors in H2 2021. Industry        of COVID-19 headwinds as a result of            We favour Asian corporate bonds due
leaders in the retail, travel and hospitality   vaccine implementation, we believe the          to their strong credit fundamentals and
industries should stage a sharp earnings        structural trend of digital transformation      substantial yield pickup over developed
turnaround from the deep profit                 will continue to proliferate across Asia, as    market credit with similar credit metrics.
recession in 2020. China has launched its       consumer preferences have fundamentally         The Chinese government’s recent
“vaccination passport” which stores the         shifted in favour of online transactions        clampdown on over-leveraging in the
vaccination data for the person, and can        during the pandemic. The public health          real estate sector has added volatility in
facilitate the reopening of international       crisis has also spurred consumer demand         the credit market and pushed interbank
travel between China and other countries.       for wellness, sportswear, healthcare            market interest rates higher. But we see
Singapore and Australia are negotiating         services and personal hygiene products.         market fears of China policy tightening
for a “travel bubble” agreement to allow        We prefer big cap consumer companies            risks as overdone, as the China NPC has
their residents to travel between both          with strong brand franchise and                 reaffirmed the policy priority to support
countries without the need for quarantine       competitive market positions.                   growth recovery. Within the Asian credit
as early as this July. In Q1, Singapore                                                         market, we are overweight hard currency
established a one-way travel corridor with
lower-risk countries and reciprocal “green
                                                Asian Credit Opportunities                      and local currency credit in China and hard
                                                                                                currency bonds in Indonesia.
lanes” with higher-risk countries to allow      Despite the short-term volatility in US
essential business and official travel to       Treasury yields, we retain our high
resume. All these positive developments         conviction theme of Asian Credit
are supportive of a strong rebound in           Opportunities due to attractive risk-return
private consumption and services in Asia        trade-off of the Asian bond market. We
later this year.                                expect Asian central banks will look

                                                                                                   Investment Outlook Second Quarter 2021   17
2: Recovering in a low yield world
While our top trends are generally
structural in nature, ‘Recovering in a
                                             the domestic economy, with money for
                                             low earners, small businesses and local
                                                                                            Still a low yield world
low yield world’ is a hybrid. Structural     authorities. Unsurprisingly, our Reopening     We have often discussed our view that
forces should keep yields low relative       America theme has been popular, and it         bond yields are low because of structural
to history, but the theme also caters to     continues to capitalise on this recovery,      reasons, including global ageing, the Asian
cyclical forces, which are causing some      taking a pro-cyclical stance, with a focus     savings surplus and our view that higher
rate volatility, upside to earnings and      on industrials, materials, and financials.     government debt leads to structurally
to dividends. As the cyclical recovery       Small and mid-cap stocks are often highly      lower growth. Inflation has been on a
unfolds, we have tweaked some of             exposed to the local economy, and we           long term downward trend too, due to
the themes, but the combination              therefore believe it makes sense to add        technology (e.g. price comparison sites
of improving growth and still low            some of those to portfolios which are          and automation), globalisation and the
yields continues to support a risk-on        often naturally focused on large caps.         fall in unionisation rates. Some have
environment.                                                                                argued that globalisation is declining as
                                             The global recovery is not only benefiting     supply chains are reorganised, with more
The cyclical recovery                        financials in the US, but also elsewhere in
                                             the world. We are overweight financials
                                                                                            re-onshoring to avoid disruptions due
                                                                                            to pandemics or trade tensions. But we
Since we wrote our 2021 outlook, the         for their cyclical exposure, but also          would argue that this is more than offset
economic data have become increasingly       because we believe that many will start to     by further globalisation of the labour
positive, causing economist across Wall      pay dividends or buy back shares again.        market: with even more economic
Street to gradually upgrade their growth     These activities were cut sharply in 2020,     activity moving online, workers can
forecasts. Ours have done the same,          because of a fall in profits or requests       increasingly do their job from anywhere
with upgrades in the US, UK, and other       by regulators, who wanted them to              in the world, causing increased global
countries leading to an upgrade of 2021      protect their capital buffers. Our Resilient   competition in the labour market, and
world GDP growth estimates from 4.4%         Income theme rightly was very selective        keeping wages low.
then to 5.6% now. Global manufacturing       on dividend stocks in 2020 and focused
has continued to improve, and near           on dividend preservation, while it is now      But while yields should remain low, we
record high PMI readings suggest that        oriented towards dividend growth. Banks        have been positioning for more short
business leaders are optimistic about the    are not the only sector where dividends        term volatility. That volatility comes from
future. Orders are high, and inventories     can be lifted, but the prospects there are     temporary oil price base effects and bottle
will need to be replenished from very        good, because of lower than expected           necks when the economy reopens. The
low levels. Looking ahead, consumption,      loan losses, and the recent steepening of      markets are trying to assess how much
which accounts for more than half of         yield curves, which should boost profits.      the vaccination programmes and US fiscal
GDP in most countries, may contribute        While yields are still low because of          stimulus will boost growth and inflation.
the most to the improvement of activity      structural reasons, even their recent mild     As there is much uncertainty around these
in coming months. This is because            increase is already very significant for       points, market sentiment and bond yields
during the lockdown, many consumers          banks’ profits.                                may continue to swing up and down
saved more than usual, and they are                                                         depending on the incoming data and Fed
eager to spend more as life gets back                                                       governors’ speeches. In our bond portfolio
to normal. In many countries such as                                                        strategy, we try to temper volatility
the US, unemployment is falling. And                                                        through diversification, and we manage
fiscal support – most recently in the form                                                  rate and cyclical risks respectively by
of president Biden’s $1.9trn spending                                                       adopting moderate duration and selective
package – is providing strong support for                                                   credit risk.

18
On the aggregate, however, we believe           The pandemic has led to a further acceleration of the debt build-up, which
that central banks will manage to avoid         should be deflationary in the long term
excessive bond market volatility. With
structurally low yields, the search for                160
                                                                           China      Euro area         United Kingdom               United States
yield thus continues, and investor interest
                                                       140
remains buoyant in Emerging Markets,
where allocation remains light, especially             120
in local currencies, despite robust inflows
from November to February. While                       100
                                                % of GDP

EM bonds will continue to face US rate
                                                           80
volatility in the short-term, we believe they
remain one of the main beneficiaries of                    60
the global search for yield as they continue
                                                           40
to offer attractive carry opportunities
relative to other bond markets. We are                     20
selective in our allocation and generally
prefer hard-currency bonds from China,                      0
                                                                2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020 2022 2024
Indonesia and Brazil, mostly issued
by corporate with improving credit
                                                Source: IMF World Economic Outlook, HSBC Private Banking as at 11 March 20211. Forecasts post 2020 are
fundamentals. As for local-currency debt,       subject to change, 23 March 2021.
we continue to favour defensive markets
such as China, but also higher-beta
countries such as Russia, Brazil and
                                                Dividend futures reflect the market’s expectations that dividends are on the rise
Mexico, where local rates still exhibit
                                                around the world
positive real buffers and currencies are
prone to appreciation.                                                     S&P 500 2021 dividend future

We also continue to find the yield pickup                                  Eurostoxx 2021 dividend future (RHS)
                                                70                                                                                                  140
in Developed Markets Financials Credit                                                                                                              130
                                                65
attractive across the subordinated part of      60                                                                                                  120
the capital structure, in the US and Europe.                                                                                                        110
                                                55
Following the tightening of Senior and          50
                                                                                                                                                    100
Tier II spreads, we have become relatively                                                                                                          90
                                                45
more constructive on Tier I securities,                                                                                                             80
                                                40                                                                                                  70
taking comfort from rising capital ratios,      35                                                                                                  60
which are at historically high levels. We       30                                                                                                  50
remain selective when going down the            25                                                                                                  40
capital structure however, and generally         Dec-16           Jun-17     Dec-17   Jun-18   Dec-18    Jun-19     Dec-19     Jun-20     Dec-20
continue to focus on higher credit quality
banks. In the Eurozone periphery, we
                                                Source: Bloomberg, HSBC Private Banking as at 11 March 20211. Past performance is not a reliable indicator
focus on the largest banks in each nation       of future performance, 23 March 2021.
and avoid second tier issuers.

                                                                                                           Investment Outlook Second Quarter 2021       19
3: Digital Transformation
Some transformations are dramatic             booking services that screen patient           remains fiction, the science is delivering
metamorphoses, like the caterpillar           information; telemedicine that avoids          increasing automation to many aspects of
becoming a butterfly, while others            initial face-to-face meetings; greater use     our daily lives.
are subtle, such as the chameleon             of screening and testing to provide rapid
changing its skin colour. And so it           diagnosis; e-prescriptions and online          Let’s look at several examples where
is with the transformations we are            dispensary services. Essentially, a GP         automation has become an integral part of
witnessing the introduction of new            surgery becomes the hub from where             the product and/or service.
digital technologies.                         digital healthcare services are coordinated
                                              within the community.                          Automobiles are in the midst of the
                                                                                             biggest disruption since the launch of the
Healthcare Innovation,                        At the other end of the technological scale,   first cars as electric motors replace the
more than a                                   other developments have had dramatic           internal combustion engine and vehicles
metamorphosis!                                impact, but are less visible as they affect    are more electrical rather than mechanical
                                              very small segments of the population.         products with electricity rather than
Healthcare is an essential service and        For example, inherited genetic diseases,       petrol being the primary source of power.
the pandemic has made it a hot topic          many of which affect a tiny fraction           Automation has already been trickling
both politically and personally. However,     of the population, but often lead to a         into vehicles for several decades, initially
for something so important the service        significant shortening in life expectancy      with things like automatic transmission,
has been in many ways like Robert Louis       and/or debilitating symptoms with few          cruise control and navigation systems,
Stevenson’s Dr Jekyll and Mr Hyde. The        if any treatment options. This is about        but more recently with self-parking and
service has been quick to adopt cutting       to change for some conditions with the         braking and lane control. The introduction
edge medicines, diagnostics, devices and      introduction of CRISPR (clustered regularly    of electric vehicles facilitates further levels
machines (more Dr Jekyll), but has been       interspaced short palindromic repeats)         of automation effectively making vehicles
less embracing of other technologies that     gene editing tool that is able to identify,    more autonomous. Vehicles diagnostic
are transforming other sectors (more Mr       delete and where required add genetic          systems can already determine the need
Hyde). The pandemic has been a catalyst       sequences in faulty DNA within the             for a service or malfunctions and some
for change and in 2021 we are starting        patient’s cells. The technology has been       are capable of contacting the garage
to see signs that healthcare services are     used to successfully treat patients with       where the work can be scheduled and a
realising things cannot continue as they      thalassaemia and patients with sickle cell     replacement car reserved, with an SMS
were. They are embracing changes              anaemia - a condition effecting tens of        informing the owner. Fully autonomous
that will be essential in many countries      millions of people. The same technology        self-driving vehicles are probably still
as costs rise and populations age.            has promise as a treatment for conditions      at least a decade away, but they are
We will shine a light on two very different   such as haemophilia, cystic fibrosis,          tantalisingly close to that dream
areas at either end of the innovation         muscular dystrophy and select hereditary       being realised.
technology spectrum.                          eye diseases.
                                                                                             The financial sector has seen significant
General practitioners or GPs are most                                                        disruption albeit less dramatic. In the
patients’ main first point of contact with
                                              Automation, more science                       insurance sector, it started slowly when
healthcare services and part of this          and less fiction                               new entrants only sold insurance policies
service is on the cusp of transformation.                                                    directly to consumers over the telephone
                                              For the generation of children who
The way GPs provide primary healthcare                                                       thereby lowering costs for consumers
                                              grew up in the 1950s and 1960s whose
has seen little change since Robert                                                          and the insurers. The internet shifted
                                              imaginations were fed on a diet of science
Louis Stevenson’s time a century ago,                                                        applications and claims online with
                                              fiction films, TV series and comics,
often involving face-to-face contact and                                                     comparison websites identifying the best
                                              automation was imminent and would
multiple steps over several weeks or even                                                    deal. In the latest iteration, insurers have
                                              impact almost every aspect of our lives
months. The pandemic and the risks of                                                        further automated the process, including
                                              and potentially adults would no longer be
face-to-face meetings have opened up                                                         the use of AI software to assess policy
                                              required to work as robots took over their
an opportunity for GPs to adopt several                                                      applications to assess risk and generate
                                              tasks. Fast forward to 2021, and while
innovative technologies including online                                                     bespoke competitive risk adjusted pricing;
                                              things such as colonising distant plants

20
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