Investors must think longer-term to find strong returns, says HSBC GAM

In its investment outlook for 2014, HSBC Global Asset Management expects global economic growth to pick up in 2014 relative to 2013, especially in the developed world. In particular, there should be much less of a “fiscal drag”, in the US and Europe than there was in 2013.

From a long-term multi-asset investment perspective, HSBC Global Asset Management prefers risk assets such as developed and emerging market (EM) equities and high yielding bonds over safe haven government bonds. However, investors need to be selective, and should be prepared for continued volatility, especially for emerging market assets. Given current valuations, in its latest IQ (Investment Quarterly) report, HSBC Global Asset Management expects emerging market equities to marginally outperform developed market equities over the long-tem, despite the likelihood of seeing more volatility.

Indeed, emerging and frontier markets are seen as attractively valued for long-term investors in emerging market equity and bond markets, with stronger fundamentals than seen in the past. However, ongoing concerns around US central bank QE tapering and elections in many EM countries in 2014 could contribute to continued volatility in EM asset markets in the short term.

Opportunities for Smart Beta in the current investment landscape

Alternative indexing or “smart-beta” products aim to track a financial market, but use strategies that aim to give better return characteristics than traditional index trackers. Using a “smart beta” approach, such as alternative indices and HSBC’s Economic Scale Index, will factor in volatile market conditions to weight stocks on their economic size and “value added”. The key feature of all alternative indexing strategies is that the weights of stocks in the template index are slowly varying, not based on market prices, and that the index periodically rebalances back to these weights. This rebalancing captures excess volatility and mean reversion in the prices of the stocks and is the origin of the strategy’s capacity to outperform conventional capitalisation weighted indexing.

Frontier markets

In today’s dynamic and expanding markets, along with the changing composition of growth economies, Rabia Bhopal, Macro and Investment Strategist at HSBC Global Asset Management, identifies reasons why frontier market growth has the potential to be so robust. Bhopal said, “Interest in Frontier Markets is on the rise, especially in light of Qatar and UAE’s recent upgrade from frontier, to emerging markets, and the case for long-term economic development is strong.” In recent years, frontier markets have demonstrated strong economic growth, attractive valuations and diversification opportunities, supported by increasing FDI and M&A flows, low levels of debt and natural resources. They also have strong population growth, and generally improving policy and reform agendas.

However, Bhopal concluded: “Frontier market countries are by no means a homogenous group, with vast differences and risks between them. They have also demonstrated strong economic growth in recent years, providing vast diversification opportunities, and we continue to see attractive potential returns in the future.”

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