04 May 2017

Fed set to unwind its balance sheet

Fed expects to begin winding down balance sheet later in
Key takeaways 2017

The global economy continues to be in the midst of a

We remain neutral global equities and corporate bonds, and
underweight developed market (DM) government bonds. We
also continue to be overweight local currency emerging
market (EM) government bonds
Global equities rose for a sixth straight month in April, with
significant gains occurring after Emmanuel Macron obtained
the largest share of the vote in the first round of the French
presidential elections
The latest Federal Open Market Committee (FOMC) minutes
stated that reducing the size of the Federal Reserves
balance sheet would likely be appropriate later this year
At its April meeting, European Central Bank (ECB) President
Draghi noted that the recovery was increasingly solid and
that risks to the economic outlook had further diminished
Chinese data in March remained upbeat, with Q1 GDP
expanding 6.9% yoy, boosted by improving exports and
strong activity in the property sector
EM assets continue to benefit from diminishing concerns
over Trump policy, with the market also responding to
generally positive global economic news
synchronised cyclical growth upswing, whilst underlying
inflation remains weak in most DM economies. This should
allow global monetary policy to remain expansionary,
supporting growth prospects. The strong performance of
global equities year to date reflects this backdrop. Given the
current risk premia on offer, with valuations in line with
historical averages, we remain neutral global equities.
However, we also acknowledge the market is not priced to be
able to absorb negative shocks which could be triggered by
political uncertainty, or a deterioration in cyclical conditions. In
the US, there are questions over the likelihood of significant
fiscal stimulus. Premature tightening of monetary policy is also
a risk, especially as the Federal Reserve has recently
signalled it will begin normalising its balance sheet later in
2017. Alongside a likely further reduction in ECB asset
purchases in 2018, this signals we are past peak money.
German, UK and Japanese government bond valuations
remain extreme, and we maintain our underweight positioning.
However, the pricing of US Treasuries continues to imply a
strong diversification case for holding them as insurance
against a worsening global growth picture, should this happen.
For EM, we remain overweight local currency government
debt given that most countries offer high prospective returns.

Equities Government bonds Corporate bonds & other Asian assets

View View View View

Asset Class View Asset Class View Asset Class View Asset Class View
Movement Movement Movement Movement

Global Neutral Developed Underweight Global Neutral EM Asian Underweight

Market (DM) investment fixed income
grade (IG)

US Underweight US Underweight USD IG Neutral Asia ex-Japan Overweight

equities

UK Underweight UK Underweight EUR and Neutral China Overweight

GBP IG

Eurozone Overweight Eurozone Underweight Global Neutral India Overweight

high-yield

Japan Overweight Japan Underweight Gold Neutral Hong Kong Neutral

Emerging Overweight EM (local Overweight Other Neutral Singapore Neutral

Markets currency) commodities
(EM)

CEE & Neutral Real estate Neutral South Korea Overweight

Latam

Taiwan Neutral

This commentary has been produced by HSBC Global Asset Management to provide a high level overview of the recent economic
and financial market environment, and is for information purposes only. The views expressed were held at the time of preparation;
are subject to change without notice and may not reflect the views expressed in other HSBC Group communications or strategies.
This marketing communication does not constitute investment advice or a recommendation to any reader of this content to buy or
sell investments nor should it be regarded as investment research. The content has not been prepared in accordance with legal
requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead
of its dissemination. You should be aware that the value of any investment can go down as well as up and investors may not get
back the amount originally invested. Furthermore, any investments in emerging markets are by their nature higher risk and
potentially more volatile than those inherent in established markets. Any performance information shown refers to the past and
should not be seen as an indication of future returns. You should always consider seeking professional advice when thinking about
undertaking any form of investment.
Long-term asset class positioning (>12 months)
Basis of Views and Definitions of Long term Asset class positioning table
Views are based on regional HSBC Global Asset Management Asset Allocation meetings held throughout April 2017, HSBC Global Asset
Managements long-term expected return forecasts which were generated as at 31 March 2017, our portfolio optimisation process and actual
portfolio positions.

Icons: View on this asset class has been upgraded No change View on this asset class has been downgraded

Underweight, overweight and neutral classifications are the high-level asset allocations tilts applied in diversified, typically multi-asset portfolios,
which reflect a combination of our long-term valuation signals, our shorter-term cyclical views and actual positioning in portfolios. The views are
expressed with reference to global portfolios. However, individual portfolio positions may vary according to mandate, benchmark, risk profile and
the availability and riskiness of individual asset classes in different regions.
Overweight implies that, within the context of a well-diversified typically multi-asset portfolio, and relative to relevant internal or external
benchmarks, HSBC Global Asset Management has (or would have) a positive tilt towards the asset class.
Underweight implies that, within the context of a well-diversified typically multi-asset portfolio, and relative to relevant internal or external
benchmarks, HSBC Global Asset Management has (or would) have a negative tilt towards the asset class.
Neutral implies that, within the context of a well-diversified typically multi-asset portfolio, and relative to relevant internal or external benchmarks
HSBC Global Asset Management has (or would have) neither a particularly negative or positive tilt towards the asset class
For global investment-grade corporate bonds, the underweight, overweight and neutral categories for the asset class at the aggregate level are
also based on high-level asset allocation considerations applied in diversified, typically multi-asset portfolios. However, USD investment-grade
corporate bonds and EUR and GBP investment-grade corporate bonds are determined relative to the global investment-grade corporate bond
universe.
For Asia ex Japan equities, the underweight, overweight and neutral categories for the region at the aggregate level are also based on high-level
asset allocation considerations applied in diversified, typically multi-asset portfolios. However, individual country views are determined relative to
the Asia ex Japan equities universe as of 28 April 2017.
Similarly, for EM government bonds, the underweight, overweight and neutral categories for the asset class at the aggregate level are also based
on high-level asset allocation considerations applied in diversified, typically multi-asset portfolios. However, EM Asian Fixed income views are
determined relative to the EM government bonds (hard currency) universe as of 28 April 2017.

Equities

Asset class View Movement Rationale

Global Neutral Positive factors: Global economic growth momentum remains solid, driving global equity markets
to deliver positive returns over the long term. Overall, support from accommodative monetary policy
and an increased willingness for looser fiscal policy will, in the medium and longer term, likely
outweigh any headwinds from more modest Chinese growth, tighter US monetary policy, and
political uncertainty in many regions.
Risks to consider: The recent compression of implied equity premia limits the ability of the market
to absorb bad news. Episodic volatility may be triggered by concerns surrounding Chinese growth,
uncertainty around US economic policy, and/or a potentially more rapid than expected Fed
tightening cycle, coupled with political risks. A notable and persistent deterioration of the global
economic outlook could also dampen our view.

US Underweight Rationale of underweight views: Relatively high current valuations lead to an implied risk premium
that is lower than in other developed markets. The policy outlook under the Trump administration
remains highly uncertain.
Positive factors to consider: Corporate tax reform, looser regulation and fiscal stimulus under the
Trump administration present an upside risk to earnings.

UK Underweight Rationale of underweight views: The prospective reward to bearing equity risk in the UK is
relatively low, in our view. The UK economy could slow amid inflationary pressures.
Positive factors: The UK economy may continue to be resilient, whilst further sterling weakness
would likely prove supportive given a relative dependence on foreign earnings.

Eurozone Overweight Rationale of overweight views: We favour eurozone equities due to their higher implied risk
premia and scope for better earnings news given the regions earlier point in the activity cycle.
Furthermore, the monetary backdrop remains supportive, with ultra-low interest rates likely to persist
until the end of the decade.
Risks to consider: According to recent polls, the upcoming Italian elections should see the
eurosceptic 5-star movement perform well. Also, the outcome of Brexit negotiations is highly
uncertain. We think Brexit-related trade disruptions and/or slower UK GDP growth will likely hit
eurozone exports. ECB monetary policy may also be less accommodative than expected.

04/05/2017 Investment Monthly 2


Japan Overweight Rationale of overweight views: Relative valuations and risk premia are attractive, in our view,
whilst the Bank of Japans (BoJ) extremely loose monetary policy and the governments recent fiscal
stimulus package may boost earnings. Large corporate cash reserves provide Japanese firms with
the scope to boost dividends or engage in stock repurchases. Earnings momentum is showing signs
of picking up.
Risks to consider: Domestic economic fundamentals are relatively sluggish, with an absence of
momentum in personal consumption, despite tight labour market conditions.

Emerging Overweight Rationale of overweight views: We believe EM equities remain attractive for western-based
Markets (EM) investors (USD, GBP or EUR based) given our expectation of longer-term currency appreciation.
However, we continue to be selective, focusing on countries with strong underlying macro
fundamentals, and positive price momentum.
Risks to consider: Aggregate EM equity valuations no longer look anomalously cheap. There could
be some near-term volatility as worries persist around the uncertain path for future Fed tightening,
the potential for increased trade protectionism, economic transition in China, and the robustness of
the global economy as a whole. Geopolitical uncertainty also poses risks.

CEE & Latam Neutral Positive factors: We anticipate positive growth differentials with developed markets to be
maintained, whilst Brazils status as a relatively closed economy offers some insulation from a
potential increase in global protectionism. Other countries, such as Poland, have low levels of US
dollar-denominated debt, and along with Russia offer attractive risk premia.
Risks to consider: Geopolitical tensions are also high and unpredictable, whilst domestic political
and macroeconomic fundamentals remain poor in many countries, such as Brazil.

Government bonds

Asset Class View Movement Rationale

Developed Underweight Rationale of underweight views: Prospective returns still look low relative to competing asset
Markets (DM) classes. In a bond-unfriendly environment (stronger global activity, the prospect of fiscal easing),
global bond yields could move higher still.
Positive factors to consider: Government bonds still provide diversification benefits and reduce
volatility within multi-asset portfolios. Meanwhile, secular stagnation forces are powerful (ageing
populations, low productivity and investment), and the global pool of safety assets is limited.
Therefore, the normalisation of bond yields could take several years.

US Underweight Rationale of underweight views: The US labour market is at (or close to) full employment so we
believe underlying inflationary pressures are likely to build, especially if fiscal stimulus materialises.
In addition, prospective returns still look low relative to competing asset classes.
Positive factors to consider: We think there is a strong diversification case for owning Treasuries
as insurance in case of a worsening global growth picture or the re-emergence of deflationary
pressures. Investors also seem to be pricing a significant level of US stimulus.

UK Underweight Rationale of underweight views: Prospective UK gilt returns remain very low. Although the UK
economy could slow, any support in this respect may be offset by inflationary pressures.
Positive factors to consider: Amid downside risks to growth, UK monetary policy is likely to stay
highly accommodative for a longer period.

Eurozone Underweight Rationale of underweight views: Similarly, core European bonds are overvalued, in our view. A
key risk is the likelihood of further tapering of the ECB APP after December 2017.
Positive factors to consider: The APP may provide near-term support. Meanwhile, core
inflationary pressures and long-term inflation expectations in the region remain subdued, which
should keep accommodative monetary policy in place for an extended period of time.

Japan Underweight Rationale of underweight views: Japanese government bonds are overvalued, in our view, whilst
the BoJs commitment to peg 10-year yields close to zero could be re-evaluated.
Positive factors to consider: We believe the Yield Curve Control framework should limit volatility
and reduce the risk of higher yields in the near-term. Meanwhile, BoJ Governor Kuroda has
indicated that cutting policy rates could play a central role in future policy decisions.

Emerging Overweight Rationale of overweight views: The yield available on EM sovereign bonds makes them attractive
markets (EM) relative to DM government debt, in our view. Furthermore, our estimate of the sustainable return on
EM currencies reinforces our choice to hold this position unhedged.
Risks to consider: Spreads in the EM debt universe are at risk of widening as US policy tightens.

04/05/2017 Investment Monthly 3

Corporate bonds

Asset Class View Movement Rationale

Global Neutral Positive factors: The prevailing macro environment remains supportive for credits. Macro
investment momentum is improving and implied recession probabilities are near zero the default outlook
grade (IG) appears benign to us.
Risks to consider: Valuations do not appear anomalously cheap, and we retain a neutral
positioning, particularly given the risk of tighter than expected US monetary policy.

USD Neutral Positive factors: We think US investment grade debt looks attractive relative to European credit.
investment Carefully-selected US credit may outperform.
grade Risks to consider: Lower relative valuations for USD-denominated credit is offset in the nearer
term by the risk of a more aggressive pace of Fed tightening. The US credit cycle is more mature
than that in Europe which remains nascent.

Positive factors: The ECBs corporate bond-buying programme remains supportive. Meanwhile, in

EUR and Neutral
GBP the eurozone, the latest survey data suggests a gradual improvement in credit conditions, and
investment default rates remain low. Valuations are still around neutral levels.
grade Risks to consider: UK credits are vulnerable given that the BoE corporate bond buying programme
is nearing completion amid downside risks to the UK economic outlook.

Global high- Neutral Positive factors: Corporate fundamentals are improving following a pick-up in the global activity
yield cycle. Defaults remain comparatively low and we think they are likely to be contained to commodity-
related sectors.
Risks to consider: Further credit spread compression leaves a thin margin of safety. We are
neutral with a negative bias.

Other

Asset View Movement Rationale

Class

Gold Neutral Positive factors: We believe Fed hikes are likely to remain historically gradual, limiting the
opportunity-cost of holding the non-yield generating asset. Rising inflationary pressures could boost
hedging demand, whilst high political risks/uncertainty could also be supportive.
Risks to consider: A stronger than expected Fed hiking cycle may push the USD higher.

Other Neutral Positive factors: With oil demand growth remaining robust there is scope for the market to continue
commodities to rebalance, particularly following OPECs November output cut deal.
Risks to consider: Oil markets could remain oversupplied, especially if US production remains
resilient and/or OPEC cuts arent extended. Industrial metals remain exposed to the pace of Chinas
economic rebalancing and global growth.

Real estate Neutral Positive factors: Based on our dividend growth assumptions and current yields, which offer a
premium of around 1.3 percentage points above the dividend yield from wider equities, we believe
real estate equities are priced to deliver reasonably attractive long-run returns compared to
developed-marked government bonds. In the long run, rents are positively related to wider economic
growth and offer a partial inflation hedge.
Risks to consider: Over the last six months or so, real estate equity performance has lagged
general equities, largely on the expectation of higher US interest rates. We believe the market has
focused too heavily on real estate equities as a bond proxy but rising rates could continue to have a
negative impact in the short term. The UK's decision to leave the EU has reduced rental growth
prospects, especially in central London, and increased uncertainty around future occupier demand.

Asian assets

Asset Class View Movement Rationale

EM Asian Fixed Underweight Rationale of underweight views: From a near-term perspective, this asset class is sensitive to US
Income monetary policy. Whilst a gradual interest rate hike cycle in the US is positive for the asset class,
Asian bond spreads look tighter (171bp for the EMBI Global Asia as at 28 April) than in other
regions of the EM space (419bp for the EMBI Global Latin America for example), which reduces
their relative attractiveness in the near to medium term.
Positive factors to consider: From a long-term perspective, return signals are still positive, backed
by relatively sound economic fundamentals, stable inflation and credit quality.

Asia ex-Japan Overweight Rationale of overweight views: Higher nominal growth supports earnings prospects, amid a better
Equities global growth/trade outlook, resilient Chinese activity, and gradualism in global central bank policy
action. Return on equity is bottoming out. Sound domestic dynamics, structural reforms, and
shareholder-friendly policies are a positive for some markets.
Risks to consider: US president Trump introduces the risk of protectionist policies. Another key risk
is a more aggressive Fed hiking cycle and rising US/global yields, putting pressure on Asian FX and
compounding capital outflows. Other risks include global/regional political events; commodity-price
volatility; and renewed concerns about Chinas growth and financial risks.

04/05/2017 Investment Monthly 4


China Overweight Rationale of overweight views: Solid economic activity, a recovery in commodity sectors/prices
amid capacity cuts and supply discipline, and an infrastructure push support improving earnings,
profits, margins and free cash flow. Supply-side reform and SOE reform an increase in dividend
payouts to raise shareholder return and mixed-ownership reform to improve operational efficiency
and profitability are potential catalysts. MSCI's A-share inclusion would be a long-term positive.
Policy focus on financial deleveraging and risk control is positive for medium-term financial stability.
Risks to consider: Tightening of financial/macro-prudential regulations and financial deleveraging
create near-term risks to liquidity and broad credit growth. The economys heavy reliance on policy
stimulus and on (debt-fuelled) property and infrastructure investment is unsustainable. Policymakers
face the dilemma between curbing the risk of asset bubbles and supporting a stable property sector.
Other risks include a renewed cyclical slowdown; a setback in supply-side reform; and global policy/
growth uncertainties, though the Trump-Xi summit has helped ease near-term China-US tension.

India Overweight Rationale of overweight views: The BJPs strong performance in the state assembly elections
should help facilitate implementation of key economic reforms, such as the Goods and Service Tax
(GST). Credible reforms and structural tailwinds add to a cyclical recovery as remonetisation gathers
pace (we prefer cyclicals). Lower domestic rates amid increased banking system liquidity, the policy
focus on infrastructure and affordable housing, and the 7th Pay Commission boost help revive
growth and earnings. India is relatively less vulnerable to any potential rise in global protectionism.
Risks to consider: The year-to-date rally has compressed Indian equities risk premium and led to
elevated valuations relative to their history. Weak loan growth and worsening non-performing asset
situation, particularly for public sector banks, and sluggish private capex remain key concerns. Farm
loan waivers risk creating moral hazard and having negative fiscal implication. Other risks include
faster pace of Fed/DM monetary policy normalisation; US protectionist policies; and upside risks to
inflation. The GST could cause some initial disruptions, despite its long-term economic benefits.

Hong Kong Neutral Positive factors: Hong Kong equities have been underpinned by a cyclical recovery with the upturn
in trade, improving inbound tourism, and solid domestic demand amid a resilient labour market, a
strong property market, and moderate fiscal stimulus envisaged in the budget. The Macau gaming
sector has seen robust revenue growth. Integration with China, including the One Belt One Road
initiative, could help raise productivity of Hong Kongs service economy in the longer term.
Risks to consider: Hong Kong economy and markets face the risk of US/global protectionism,
tightening of monetary conditions due to higher US interest rates and/or capital outflows (although
HKD inter-bank rates have been falling recently and divergent from the USD rate trend on reduced
concerns over HKD outflows), Chinas financial risks, and global demand uncertainties. Fed policy
normalisation, increasing supply, and policy risks remain concerns for the property sector outlook.

Singapore Neutral Positive factors: Earnings and return on equity are bottoming out with a turnaround in Singapores
economy, amid a revival in global trade and manufacturing (tech cycle), a pickup in loan/M2 growth,
continued public investment growth and modest fiscal stimulus. The slight easing of property curbs
and an improving macro outlook should help sales momentum. The government is pump priming the
new digital age push. Healthy balance sheets support dividend plays.
Risks to consider: Singapore faces the risk of rising US interest rates and US/global protectionism.
Its asset markets are also sensitive to the USD trend/outlook. Banks asset quality remains in focus,
given the continued adjustment in the oil & gas sector. The countrys transition from a labour-driven
growth model to a productivity-driven one remains challenging. Structural shifts point to continued
headwinds for domestic demand and labour market slack (and an absence of wage pressures).

South Korea Overweight Rationale of overweight views: Strong earnings momentum has been driven by tech, materials
and energy, reflecting a robust export cycle and a recovery in prices for key materials. Chaebol
reform to improve corporate governance (via group restructuring and balance sheet optimisation,
e.g. higher dividend payouts) and strengthen minority shareholders rights will likely be one focus for
the new government and long-term catalyst for Korean equities. (Redistributive) fiscal policy should
support consumption, which has showed signs of bottoming recently along with better sentiment.
Risks to consider: Tensions with China following the deployment of US missile technology in
Korea, North Korea, and US protectionist policies remain key concerns. Domestic consumption
growth may remain tepid in the near term amid the potential impact of restructuring in several
industrial sectors, the anti-graft law, and macro-prudential policy tightening of household credit/
mortgages. Construction investment is likely to slow. Currency is a wild card for exporter earnings.

Taiwan Neutral Positive factors: A cyclical recovery supports earnings prospects. New infrastructure spending
coupled with signs of an export recovery spilling over to domestic demand and supply discipline in
China helps some commodity/cyclical sectors. We are positive on the outlook for selective tech sub-
sectors, such as the supply-chain of new smartphone launches this year and sectors benefiting from
the trend for the industrial Internet of Things. The Taiwan market has a relatively high dividend yield.
Risks to consider: TWD strength is a headwind for (tech) exporter earnings and margins, although
much of manufacturing is China-based. US trade and tax policies cast uncertainty, due to Taiwans
openness to trade, large (direct/indirect) exports to the US, and equity market exposure to exporter
sectors. Taiwans tech sector is facing challenges from slower global demand growth and tougher
competition from China in the supply chain. Deterioration in cross-strait relationship is a concern.

04/05/2017 Investment Monthly 5

Fed set to unwind its balance sheet
Global equities rose again in April; oil prices retreated on US output concerns; Treasuries gained
Global equities rose for a sixth straight month in April, with significant gains occurring after Emmanuel Macron obtained the largest
share of the vote in the first round of the French presidential elections. The MSCI AC World index finished 1.1% higher over the
month. In the US, the S&P 500 gained 0.9%, with support also coming from a positive Q1 earnings season that saw technology
shares outperform. The MSCI EM rose more sharply (+2.2%), although Chinas Shanghai composite index declined (-2.1%),
weighed by concerns about a possible tightening of credit conditions. Meanwhile, oil prices retreated amid concerns of rising US
production and gasoline inventories, offsetting speculation that OPEC may agree to extend output cuts into the second half of the
year. Finally 10-year US Treasuries rose (yields fell) on the back of high global geopolitical tensions, whilst investors continued to
assess the prospects of US fiscal stimulus. Eurozone equivalents also rose, with French bonds seeing a particularly large rally after
the first round Presidential election result (all data above as of close of 28 April in local currency, price return, month-to-date terms).

Disappointing March US nonfarm payrolls offset by dip in unemployment rate; Fed signals balance sheet normalisation
US data releases in April point to further growth momentum, albeit at a slower pace than seen so far this year. Perhaps most
dramatically, Marchs nonfarm payrolls release saw the largest disappointment since May 2016 at +98,000 against expectations of
180,000. However, this miss was somewhat offset by unemployment falling to a new cyclical low of 4.5% from 4.7%. Interestingly,
April consumer sentiment measures remain at or close to post-crisis highs, although retail sales are yet to reflect this. Attesting to
confidence in the strength of the economy, the FOMC minutes from the March meeting stated that there were extensive discussions
around reducing the size of the central banks balance sheet and that a change in policy would likely be appropriate later this year.

ECB acknowledges robust eurozone cyclical conditions although policy tightening remains a distant prospect
In the eurozone, activity data continues to point to an acceleration in GDP growth versus Q4s 0.4% qoq outturn, supported by a
tightening labour market and positive global demand conditions, boosting the export sector. The regions strong economic backdrop
was acknowledged at the April meeting of the European Central Bank (ECB), where ECB President Draghi noted that the recovery
was increasingly solid and that risks to the economic outlook had further diminished, albeit remained tilted to the downside. At
the same time, however, Draghi stated that underlying inflation lacked a convincing upward trend, signalling the need for a very
substantial degree of monetary accommodation, with no need to discuss exiting the Banks Asset Purchase Programme at present.

Chinese Q1 GDP accelerates amid positive export momentum; Bank of Japan remains on hold as inflation remains weak
Chinese data in March remained upbeat, with Q1 GDP gaining 6.9% yoy compared to 6.7% for 2016 as a whole. The industrial
sector has been boosted by improving exports and strong activity in the property sector. However, the economy remains fairly
dependent on strong credit growth to maintain current levels of expansion. Consequently, the Peoples Bank of China (PBoC) has
allowed interbank rates to increase to help contain leverage risks and offset downward pressure on the yuan as the Fed tightens
policy. Japanese growth momentum remains positive, supported by robust growth in exports as the global economy continues along
a solid footing, as well as supportive fiscal and monetary policy. However, despite improving activity data, inflationary pressures
remain extremely subdued amid sluggish wage growth. Consequently, at its April meeting, the Bank of Japan (BoJ) maintained its
quantitative easing policy, reiterating that it will continue expanding the monetary base until underlying inflation exceeds 2% and
stays above this target in a stable manner.

Emerging market assets continue to benefit from diminishing concerns over Trump policy
For emerging markets (EM) equities, investors continue to shrug off concerns over a hard-Trump policy agenda and are
responding to generally positive global economic news. Aggregate EM equity valuations no longer look anomalously cheap, but risk
premia are still attractive in selective markets such as Korea, Russia, Poland and Turkey. Many EMs also benefit from undervalued
currencies poised for medium-term appreciation. EM local-currency debt has not rallied as strongly as equities this year, and we
think prospective returns continue to look attractive against competing asset classes (less so for Malaysia, Thailand and Hungary).
In terms of economic developments during the month, Brazilian data releases were broadly better than expected, with retail sales
and the composite PMI showing improvement. Amid declining inflationary pressures, the Central Bank of Brazil cut the Selic rate by
100bps to 11.25%. Lower interest rates should help see the economy expand in 2017 for the first time since 2014. Recent Mexican
data releases show resilient consumption, likely supported by remittances from the US and strong job creation. Less positively,
despite having raised rates by 350bps since December 2015, the Bank of Mexicos March meeting minutes indicate the hiking cycle
is unlikely to be complete given high inflationary pressures. Elsewhere, the Reserve Bank of India (RBI) surprised markets at its April
meeting in the form of an increase in the reverse repo rate by 25bps to 6.0%, effectively narrowing the policy rate corridor. The bank
reiterated its neutral policy stance and commitment to bringing headline CPI inflation closer to 4.0% on a durable basis.
Current valuation of global equities in line with very long-run historical average
Global equities have performed well in 2017, with the equity risk premia on offer having compressed over the year. For now,
however, equities are not meaningfully overvalued and we maintain our neutral positioning, with a relative preference for Japan,
Europe and parts of EM. For credits, spreads have compressed substantially over the past 12 months, leaving a thin margin of
safety. But the prevailing macro environment remains supportive and the default outlook appears benign to us. Therefore, we remain
neutral overall, albeit with a negative bias for the riskier high-yield category. We remain underweight in DM government bonds.
Thematically, we expect global bond yields to move higher still amid stronger global activity and the prospect of fiscal easing.
However, we believe Treasuries have the scope to rally should bad news on growth or deflation materialise. In our view, the
investment case for local currency EM debt also still looks compelling, especially given that most EM currencies continue to look
undervalued, with prospective returns pointing to appreciation over the medium term. We are overweight in this category.

04/05/2017 Investment Monthly 6

Market Data
MTD 3M 1-year YTD 52-week 52-week Fwd
Close Change Change Change Change High Low P/E
Equity Indices (% ) (% ) (% ) (% ) (X)

World
MSCI AC World Index (USD) 455 1.4 4.4 12.4 7.9 457 379 16.5

North America
US Dow Jones Industrial Average 20,941 1.3 4.2 17.4 6.0 21,169 17,063 17.3
US S&P 500 Index 2,384 0.9 3.9 14.9 6.5 2,401 1,992 18.4
US NASDAQ Composite Index 6,048 2.3 6.8 25.9 12.3 6,101 4,574 23.2
Canada S&P/TSX Composite Index 15,586 0.2 0.1 12.2 2.0 15,943 13,536 16.9

Europe
MSCI AC Europe (USD) 440 3.2 6.8 6.8 9.9 442 354 15.2
Euro STOXX 50 Index 3,560 1.7 7.8 13.9 8.2 3,593 2,678 15.2
UK FTSE 100 Index 7,204 -1.6 0.3 13.9 0.9 7,447 5,789 14.9
Germany DAX Index* 12,438 1.0 5.3 20.5 8.3 12,486 9,214 14.1
France CAC-40 Index 5,267 2.8 8.8 15.6 8.3 5,297 3,956 15.6
Spain IBEX 35 Index 10,716 2.4 12.7 15.6 14.6 10,829 7,580 15.1

Asia Pacific
MSCI AC Asia Pacific ex Japan (USD) 487 1.5 7.2 16.3 14.0 489 394 13.7
Japan Nikkei-225 Stock Average 19,197 1.5 -1.4 15.2 0.4 19,668 14,864 17.0
Australian Stock Exchange 200 5,924 1.0 3.7 13.4 4.6 5,957 5,051 16.5
Hong Kong Hang Seng Index 24,615 2.1 5.4 15.1 11.9 24,774 19,595 12.3
Shanghai Stock Exchange Composite Index 3,155 -2.1 -0.1 7.1 1.6 3,301 2,781 13.7
Hang Seng China Enterprises Index 10,220 -0.5 4.2 12.8 8.8 10,698 8,176 8.2
Taiwan TAIEX Index 9,872 0.6 4.5 16.5 6.7 9,977 8,000 13.9
Korea KOSPI Index 2,205 2.1 5.8 10.2 8.8 2,230 1,893 9.7
India SENSEX 30 Index 29,918 1.0 7.3 16.9 12.4 30,184 25,058 17.8
Indonesia Jakarta Stock Price Index 5,685 2.1 7.0 17.3 7.3 5,727 4,691 16.2
Malaysia Kuala Lumpur Composite Index 1,768 1.6 4.8 5.6 7.7 1,782 1,612 16.8
Philippines Stock Exchange PSE Index 7,661 4.8 4.5 7.0 12.0 8,118 6,499 18.7
Singapore FTSE Straits Times Index 3,175 0.0 3.6 10.9 10.2 3,208 2,703 14.8
Thailand SET Index 1,566 -0.6 -1.5 11.9 1.5 1,601 1,343 15.2

Latam
Argentina Merval Index 21,020 3.7 9.4 53.0 24.2 21,315 12,351 9.1
Brazil Bovespa Index* 65,403 0.6 -1.0 20.4 8.6 69,488 48,067 12.2
Chile IPSA Index 4,795 0.2 12.1 19.2 15.5 4,905 3,847 17.7
Colombia COLCAP Index 1,372 0.4 -0.1 0.7 1.5 1,419 1,271 13.0
Mexico Index 49,261 1.5 3.9 8.2 7.9 50,147 43,902 18.3

EEMEA
Russia MICEX Index 2,017 1.0 -11.0 2.4 -9.7 2,294 1,842 6.4
South Africa JSE Index 53,817 3.4 1.6 1.1 6.2 54,704 48,936 14.6
Turkey ISE 100 Index* 94,655 6.4 12.9 10.7 21.1 95,330 70,426 9.4
*Indices expressed as total returns. All others are price returns.

3-month YTD 1-year 3-year 5-year

Change Change Change Change Change
Equity Indices - Total Return (% ) (% ) (% ) (% ) (% )
Global equities 5.0 8.6 14.7 17.7 53.3
US equities 4.4 7.2 16.8 33.0 82.4
Europe equities 7.9 11.0 10.0 -2.5 35.1
Asia Pacific ex Japan equities 7.7 14.6 19.6 11.4 28.7
Japan equities 2.0 5.6 12.1 24.4 46.3
Latam equities 2.8 12.1 16.8 -12.8 -24.1
Emerging Markets equities 7.2 13.9 18.6 5.8 8.4
All total returns quoted in USD terms.
Data sourced from MSCI AC World Total Return Index, MSCI USA Total Return Index, MSCI AC Europe Total Return Index, MSCI AC Asia Pacific ex Japan Total
Return Index, MSCI Japan Total Return Index, MSCI Latam Total Return Index and MSCI Emerging Markets Total Return Index.

Sources: Bloomberg, HSBC Global Asset Management. Data as at close of business 28 April 2017.
Past performance is not an indication of future returns.
04/05/2017 Investment Monthly 7
Market Data (continued)
MTD 3-month 1-year YTD
Close Change Change Change Change
Bond indices - Total Return (% ) (% ) (% ) (% )
BarCap GlobalAgg (Hedged in USD) 505 0.7 1.6 1.6 1.1
JPM EMBI Global 780 1.6 4.1 8.5 5.6
BarCap US Corporate Index (USD) 2,790 1.1 2.1 3.2 2.3
BarCap Euro Corporate Index (Eur) 243 0.5 1.5 2.6 0.8
BarCap Global High Yield (USD) 452 1.4 2.9 12.9 4.5
Markit iBoxx Asia ex-Japan Bond Index (USD) 191 0.5 2.1 3.9 2.8
Markit iBoxx Asia ex-Japan High-Yield Bond Index (USD) 245 0.7 2.9 11.2 4.4
Total return includes income from dividends and interest as well as appreciation or depreciation in the price of an asset over the given period

End of 3-mths 1-year Year End

Bonds Close last mth. Ago Ago 2016
US Treasury yields (%)
3-Month 0.79 0.75 0.51 0.21 0.50
2-Year 1.26 1.25 1.22 0.78 1.19
5-Year 1.81 1.92 1.95 1.29 1.93
10-Year 2.28 2.39 2.48 1.82 2.44
30-Year 2.95 3.01 3.06 2.68 3.07

Developed market 10-year bond yields (%)

Japan 0.01 0.07 0.08 -0.08 0.04
UK 1.08 1.14 1.47 1.61 1.24
Germany 0.32 0.33 0.46 0.26 0.20
France 0.83 0.97 1.03 0.60 0.68
Italy 2.28 2.31 2.22 1.48 1.81
Spain 1.64 1.65 1.58 1.60 1.38

End of 3-mths 1-year Year End 52-week 52-week

Currencies (vs USD) Latest last mth. Ago Ago 2016 High Low
Developed markets
EUR/USD 1.09 1.07 1.07 1.14 1.05 1.16 1.03
GBP/USD 1.30 1.26 1.26 1.46 1.23 1.50 1.18
CHF/USD 1.01 1.00 1.00 1.03 0.98 1.06 0.97
CAD 1.37 1.33 1.32 1.26 1.34 1.37 1.25
JPY 111.5 111.4 115.1 108.1 117.0 118.7 99.0
AUD 1.34 1.31 1.32 1.31 1.39 1.40 1.29
NZD 1.46 1.43 1.38 1.44 1.44 1.50 1.34

Asia
HKD 7.78 7.77 7.76 7.76 7.76 7.78 7.75
CNY 6.89 6.89 6.88 6.48 6.95 6.96 6.47
INR 64.25 64.85 68.04 66.52 67.92 68.86 63.93
MYR 4.34 4.43 4.43 3.90 4.49 4.50 3.90
KRW 1,138 1,118 1,171 1,138 1,206 1,212 1,090
TWD 30.21 30.35 31.53 32.30 32.33 32.82 29.95

Latam
BRL 3.18 3.12 3.14 3.49 3.26 3.67 3.04
COP 2,943 2,874 2,933 2,876 3,002 3,208 2,822
MXN 18.82 18.72 20.89 17.27 20.73 22.04 17.17

EEMEA
RUB 56.93 56.24 59.88 64.74 61.54 67.70 55.70
ZAR 13.37 13.41 13.47 14.29 13.74 15.98 12.31
TRY 3.55 3.64 3.87 2.81 3.52 3.94 2.79

Latest MTD 3-month 1-year YTD 52-week 52-week

Change Change Change Change High Low
Commodities (% ) (% ) (% ) (% )
Gold 1,268 1.5 6.5 0.2 10.1 1,375 1,121
Brent Oil 51.7 -2.1 -6.8 7.5 -9.0 58 42
WTI Crude Oil 49.3 -2.5 -7.2 7.2 -8.2 55 39
R/J CRB Futures Index 182 -2.2 -6.1 -0.8 -5.6 196 177
LME Copper 5,736 -1.7 -2.8 16.1 3.6 6,204 4,484

Sources: Bloomberg, HSBC Global Asset Management. Data as at close of business 28 April 2017.
Past performance is not an indication of future returns.
04/05/2017 Investment Monthly 8
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Issued by The Hongkong and Shanghai Banking Corporation Limited

Expiry date: 02/07/2017.

04/05/2017 Investment Monthly 9