Global Investment Perspective
March 2011
Global Investment Perspective
IN THIS ISSUE
Highlights
1 Highlights
Despite fears that unrest in Libya and other Arab countries would see a spike in oil prices that would choke global economic growth, leading equity markets posted positive returns in February. Although emerging markets were harder hit, they fared better overall than investors had expected at the beginning of February. In developed markets, positive performance was driven by encouraging economic data, including stronger consumer activity, manufacturing growth and corporate earnings. High unemployment and rising inflation remain a concern in developed economies, but US jobless numbers released March 4 suggest a more positive trend could be developing. Meanwhile, within emerging countries, economic growth remained robust, but
2 Short-Term Investment Outlook 4 Macro Assessment 6 Equity Markets 8 Fixed Income 10 Other Investments and Currency
inflation persisted. Consequently, governments in China, India and Russia tightened their monetary policy in a bid to dampen prices, especially for food.
February Market Recap In equities, the MSCI World Index rose 3.6% in February, while the MSCI Emerging Markets Index fell 0.8%. The S&P 500 Index gained 3.3%, and the S&P/TSX Composite Index rose 4.3%. The MSCI Europe Index was up 3.2%. (All returns in local currency.) Within fixed income, yields on 10-year US Treasuries finished the month largely unchanged at 3.42% after trading as high as 3.75%. Canadian 10-year bonds moved as high as 3.5% in February, but finished the month at 3.3%.
Outlook & Strategy While the global economic recovery is making progress, conditions remain challenging and growth uncertainties persist. Our central scenario remains unchanged. Overall, we anticipate positive, albeit moderate, sub-trend economic growth in developed economies in 2011. We also expect ongoing strength in emerging economies. Our main concern is the prospect of further interest rate hikes in emerging economies, which would impact global growth prospects, given that low interest rates have been an important driver of the global economic recovery. In the developed world, the key risks remain government spending cuts and weak consumer consumption. Unemployment rates are still elevated, and consumers are continuing to cut back on spending as they try to reduce their debts, particularly in the US and the UK. In terms of specific asset classes, we maintain a modest overweight position in both developed- and emerging-market equities relative to cash and government bonds. Within developed-market equities, we maintain a preference for Japanese equities. Within emerging markets, we continue to favour Russia. In fixed income, with inflation under control in the developed world except the UK, we believe central banks are likely to keep interest rates low, which is broadly supportive for fixed income markets. We prefer developed-market corporate bonds because we see value on a total-return basis. From a valuation perspective, sovereign emerging-market debt remains less attractive than high-yield and other corporate debt.
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Short-Term Investment Outlook (6-12 Months)
ASSET CLASS
CURRENT VIEW
REASONING
Neutral
Equity valuations relative to cash and government debt remain supportive, particularly in view of continued low interest rates and accommodative central bank policy. There are still risks to the economic recovery, but our core scenario is for positive, albeit sub-trend, growth.
Neutral
Unemployment remains elevated at 8.9%. But US Federal Reserve policy remains accommodative and recent economic news has been encouraging.
Neutral
Economic conditions remain mixed. UK growth has slowed, austerity measures are in the process of being rolled out in parts of Europe, and the economic health of peripheral eurozone countries remains uncertain. That said, interest rates and inflation remain generally low, except in the UK. Corporate earnings news has also been encouraging.
Japan
Positive
We have a tactical, short-term preference for Japanese equities on the grounds of attractive stock valuations, a positive bias to recent economic data releases and our view that earnings growth expectations are no longer unrealistic. The stock market also has positive price momentum.
Asia ex-Japan
Neutral
From a macroeconomic perspective, the outlook remains generally positive, with strength in both the manufacturing and consumer sectors. However, from a valuation perspective, market prices have largely reflected the positive news, and concerns over rising interest rates have fuelled volatility.
Emerging Markets
Neutral
Emerging markets are likely to continue to lead the recovery because of robust domestic consumption and strong intra-regional trade. That said, as in developed markets, emergingmarket equities are exposed to volatility stemming from the question marks around the sustainability of the global economic recovery.
Canada
Neutral
The recovery in Canada is proceeding at a moderate pace. We remain cautiously optimistic about Canadian equities, largely because of global demand for commodities. The turmoil in North Africa and the Middle East has also benefited Canadian oil producers.
Latin America
Neutral
The economic performance of Latin American countries remains strong, and earnings growth estimates for 2011 look more reasonable. But the good news seems to be well reflected in market prices, and relative valuation measures show no strong signals.
Middle East
Neutral
Given the political unrest in the region, in the short term we expect volatility to persist. This will affect market performance. Investment potential will be largely determined by oil prices and supply uncertainties.
Eastern Europe
Neutral
Manufacturing data has varied within the different countries. Weak labour markets, high levels of government debt and ongoing concerns about eurozone debts are weighing on the outlook for the broader region.
Global Developed Market US Europe (Including the UK)
EQUITY
Sovereign US
Negative
Excess economic capacity in developed markets will keep inflationary pressures at bay, and the renewed commitment of key central banks to remain accommodative will support low yields. However, current yields offer very little value relative to history. Within fixed income, we prefer to own corporate debt, where we see greater total return opportunities.
Sovereign Eurozone
Negative
We have a negative stance on eurozone government bonds relative to cash because of uncertainties about the economic health of peripheral eurozone countries. Also, valuations for these bonds do not look particularly attractive, as they offer very limited protection against negative surprises.
Sovereign Canada
Negative
The broader Canadian bond market was 0.23% higher in January. Valuations for corporate and provincial debt are less compelling than they were at this time last year. But they remain reasonable from a historical perspective.
FIXED INCOME Corporate
Positive
Strong corporate earnings results, the view that major central banks will keep interest rates low and strong demand for yield have boosted investment-grade corporate bonds. With momentum likely to remain positive, we continue to be positive on the asset class.
High Yield
Positive
High-yield bonds continue to look attractive on a total-return basis. We have retained our positive view on the asset class given better-than-expected corporate results, declining default rates and growing expectations that interest rates could remain anchored at their current low levels because of growing uncertainties over global economic growth.
Negative
This asset class continues to look less attractive on valuation grounds than developed-market corporate debt, and high-yield debt in particular.
Negative
The sell-off in bonds makes the global inflation-linked bond market more expensive and other bonds less expensive.
Investment Grade
Sovereign US DollarDenominated Emerging Markets Debt Global Developed Inflation-Linked
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Short-Term Investment Outlook (6-12 Months)
ASSET CLASS
Oil
Neutral (range between US$75-95 per barrel)
Gold
Neutral (range between US$1,250-1,400 per troy ounce)
OTHER INVESTMENTS
CURRENT VIEW
Commercial Real Estate (unlisted markets)
Sterling, Japanese Yen and the US Dollar
We increased our forecast price by US$5 per barrel because demand is increasing in line with the global growth recovery. Political unrest in Arab countries is also contributing to price pressures.
We are neutral on gold now as opposed to having been somewhat negative in previous months. Moves by the US Federal Reserve to add further liquidity to markets, combined with ongoing macroeconomic uncertainty, remain supportive factors.
Neutral
Despite generally weak occupier markets, demand for prime investments in core markets in the US and Europe has increased and is expected to keep growing in the short term. But we remain cautious about these markets overall. Demand stemming from more positive economic growth in Asia-Pacific is expected to be met largely by developments in key markets in China, India and Singapore. Also, wide regional variations remain. UK property yields remain above our view of fair value, and so short-term performance is expected to be muted.
Neutral
Valuation indicators are not sending any clear signals at present. We see both event-driven and sentiment-driven risks contributing to ongoing volatility, which is why we continue to have a neutral view on currency exposures.
Euro, British Pound
CURRENCY
REASONING
Summary Overall, we have maintained a moderate overweight position in global equities relative to both government bonds and cash. In developed-market equities, we remain positive on Japan in the short term based on attractive stock valuations, positive price momentum and liquidity. Within emerging-market equities, our favourite market is still Russia. In fixed income, we have a negative view on government bonds relative to cash, although this view is less pronounced than it was last month. We have a positive stance on corporate debt — both investment grade and high yield. Positives for corporate bonds include attractive valuations and favourable issuer fundamentals. Our central economic scenario is for slow but positive growth in the major developed markets, a backdrop that is typically positive for credit markets. Turning to currencies, heightened volatility will likely continue in US dollars, yen, euros and pounds sterling. Valuation measures are not currently providing strong signals, and we therefore have a neutral stance on currency positions.
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Macro Assessment
US
UK
US economic activity maintained positive momentum
Economic activity was generally mixed, as the good news was
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US gross domestic product (GDP) grew 2.8% quarter-overquarter during the fourth quarter of 2010 — a solid reading but lower than the consensus forecast of 3.3%.
somewhat overshadowed by unemployment and inflation •
The Purchasing Managers’ Index for manufacturing and for services rose above consensus expectations in January, indicating solid expansion in both sectors of the UK economy.
There were encouraging readings in US consumer activity as well: retail sales increased month-over-month in January.
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The US unemployment rate came in at 8.9% and US employers added 192,000 workers in February, compared with the 196,000 median estimate of economists surveyed by Bloomberg News.
In consumer activity, following a relatively grim December, retail sales beat the consensus estimate in January, jumping from a low of 1% year-over-year in December to 5.3% a month later.
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GDP growth disappointed, coming in at -0.6% quarterover-quarter in the fourth quarter of 2010, while consumer confidence also fell in January.
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Unemployment remained high, and inflation hit 4% year-overyear in January from 3.7% in December.
Inflation climbed by 1.6% year-over-year in January, in line with the consensus estimate, while the core rate increased from 0.8% in December to 1.0% year-over-year. But these levels are still relatively low and suggest interest rates will not rise soon.
Japan Europe ex-UK
There continues to be a mixed bag of economic data in Japan
Economic data in the eurozone was generally mixed, with sharp divergence in economic activity at the country level •
Eurozone GDP expanded by 0.3% quarter-over-quarter in the fourth quarter of 2010, a positive reading but below the consensus estimate of 0.4%. There were also signs of slower economic activity.
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The contrast between the economic performance in various eurozone countries also persisted. For example, the German economy grew by 0.4% quarter-over-quarter in the fourth quarter of 2010, while Greece’s shrunk by 1.4%.
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Core inflation, which excludes the more volatile food and energy prices, remained below the European Central Bank’s (ECB) target of 2%, at 1.1% year-over-year in January. But the all-items Consumer Price Index (CPI) rose above the ECB’s target to 2.3%. Against this backdrop, the ECB signalled the possibility of an interest rate increase at its next policy meeting. But it’s important to recognize the ECB’s willingness to maintain its extraordinary liquidity measures to support the banking system in the region. As expected, the ECB maintained rates at all-time lows of 1%.
4
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Industrial production growth was solid in January against a month earlier, while retail trade growth jumped to 4.1% month-over-month in January from a decline of 4.2% in December. But the recovery in Japan remained fragile. Export growth softened more than expected, from 12.9% year-overyear in December to 1.4% in January. Consumer activity and public finances also continued to cause concern.
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Moody’s Investors Service said it was assigning a negative outlook to its Aa2 rating of Japan’s sovereign debt. This follows the downgrade by Standard & Poor’s in January to AA-, a notch below the current Moody’s level.
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Annual inflation was flat in January. This continued to underscore the weakness in Japanese consumer activity and show that deflation remains a problem.
Macro Assessment
Canada
Emerging Markets
Economic growth continued at a moderate pace, as commodity
Economic activity remained strong in emerging markets, although
prices remain high
high inflation continues to cause concern
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The recovery in Canada continued at a moderate pace. Commodity prices, especially for oil, continued to surge in February, supporting Canada’s resource-heavy economy.
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Higher prices for food and key agricultural inputs like fertilizer were also good news for Canada, which is a major producer of these commodities.
China’s trade data was particularly strong. The renewed strength in trade activity was also evident in other major emerging-market economies, including India, South Korea, Taiwan and Russia. The broad picture for consumer activity remained good as well.
•
Eastern Europe continued to lag the rest of the emergingmarket region.
But unemployment, at 7.8% in January, remains high. And consumer debt is expected to continue to restrain growth.
•
Inflation remained elevated in all the major countries, with food prices also rising relatively strongly.
•
Ongoing economic strength combined with rising levels of inflation continue to push interest rates higher.
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Inflation dynamics in Canada have been broadly in line with the Bank of Canada’s expectations. The Bank aims to keep inflation at the 2% target, the midpoint of the 1% to 3% inflation-control target range. The underlying pressures affecting prices remain largely unchanged and inflation hit 2.3% in January.
February 2011 consensus real GDP growth and inflation
US
Canada
Western Europe
Eurozone
UK
Japan
Asia Pacific
Asia ex-Japan
Latin America
Eastern Europe
Source: Consensus Economics, February 2011
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Equity Markets
Global Developed Markets
Japan
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Liquidity is expected to remain a positive factor for equity markets in general, given central bank stimulus and quantitative easing in the US.
•
The Japanese economy looks to be establishing positive, albeit moderate, growth, as normalization in the growth rates in key sectors, like industrial production, is under way.
•
Despite modestly higher levels of inflation in developed nations, central banks are likely to maintain accommodative monetary policies in 2011 and increase rates only gradually, if necessary.
•
Japanese companies continued to report strong results in February, while estimates of earnings growth for 2011 remained very encouraging at 13.7%.
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As the positive backdrop for equities is becoming more evident, we maintain a modest overweight position in equities against cash and government bonds.
We maintain our positive stance on Japanese equities against other developed equities, as valuations and price momentum continue to be supportive.
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That said, risks to our position remain, and therefore our preference is only moderate relative to other developed markets.
US •
Economic activity continues to improve in the US and remains supportive of our central scenario for positive growth in 2011.
•
Corporate earnings in the fourth quarter were strong, and 2011 earnings growth estimates for the US and other major developed economies continue to look generally encouraging, albeit below the record rates in 2010.
•
Against this positive backdrop and the ongoing accommodative monetary stance in the US, we maintained our preference for equities relative to government bonds and cash. We are neutral on US equities versus other equity markets.
Canada •
Seven of the Canadian market’s 10 subsectors advanced in February. Surging oil prices and strong demand for other commodities helped support markets.
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Information technology also posted strong gains on the back of increased investment by businesses in their operations. Business investment continued to expand rapidly as companies took advantage of low interest rates. Competitive pressures also spurred investment.
•
Ongoing strength in the global economy, particularly in the US, suggests that the outlook for Canadian equities remains strong.
•
The improving outlook saw us maintain our increased allocation to Canadian equities versus cash and government bonds.
Europe •
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Although fourth quarter 2010 GDP growth in the eurozone was disappointing, overall economic activity has improved in both the UK and the eurozone. We continue to expect moderate growth in 2011.
•
Despite growing expectations of central bank rate increases, we retain our central view for rates to remain accommodative during 2011, given the potential impact on fragile growth in the region.
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We maintain a modest overweight position in equities against cash and government bonds.
Equity Markets
Global Emerging Markets •
In line with our view on other equity markets, we have retained our moderately positive view for emerging-market equities against cash and government bonds.
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We do not expect the underperformance of emerging-market equities relative to developed-market equities to continue for a prolonged period, as fundamentals remain solid for emerging markets and corporate news is encouraging.
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However, inflationary pressure persists, particularly in Asia, adding to the risk of interest rate hikes. Although this is not our central scenario, these conditions have the potential to unsettle investors.
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We continue to like Russian equities relative to other emerging markets. Macroeconomic data remains supportive, while the recent increase in commodity prices, particularly oil, has been an important factor.
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Ongoing global financial flows from developed to emerging markets, fuelled by continued low interest rates in the developed world, continue to present a problem to emerging economies.
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Brazil, the largest market in Latin America, has already raised the tax on certain investments by foreigners from 2% to 6% in an effort to stem currency appreciation.
Middle East •
The civilian protests that started in Tunisia in December have since spread to other Middle Eastern and North African countries, most notably Egypt and now Libya.
•
In terms of market performance, the largest impact has been on oil prices, because the region is key for oil supplies.
•
The investment implications largely depend on whether the increase in oil prices proves to be temporary or not. Given that events in the region are still unfolding, it is simply too early to tell.
Asia ex-Japan •
Economic growth in Asia excluding Japan remains robust, although it could begin to slow down. Overall, our central scenario for emerging economies, and particularly Asia, to lead the economic recovery remains in place. Earnings growth forecasts for Asia ex-Japan companies remain encouraging for 2011.
•
Against this backdrop and given the flow of funds from developed economies, we retained a moderate overweight position in Asia ex-Japan equities, as we do for all other equity markets.
•
That said, at the country and regional level, we maintain a neutral position in Asia ex-Japan, as we also recognize the risk from inflationary pressures and a potential cycle of higher interest rates in the region.
Latin America •
The economic performance of Latin American countries remains strong, and earnings growth estimates for 2011 look encouraging and in line with our assessment of the business and consumption environment globally.
•
However, the good news already seems to be reflected in market prices.
Eastern Europe •
Russian equities continued to be among the best performers within emerging markets, rising by 3.5% in February.
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At the country level, we continue to like Russian equities relative to other emerging markets. Macroeconomic data remains supportive, while the recent increase in commodity prices, particularly oil, has been an important factor behind the rally in Russian equities. In addition, we continue to think valuations are attractive on a relative basis.
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In Eastern Europe, consumer price inflation indices increased in several countries, including Russia. However, given the outlook for domestic demand in this part of the emerging-market world, the risk of monetary policy changes remains lower than in Asia and Latin America.
7
Fixed Income
US Dollar Government Bonds
Sovereign Canada Bonds
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Although yields have increased in recent months, current yields are still not particularly attractive, despite inflationary pressures remaining fairly muted.
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The generally improving macroeconomic environment continues to support our modestly cautious view on US Treasuries relative to other asset classes.
Canadian 10-year bonds moved as high as 3.5% in February but finished the month at 3.3% as investors’ risk tolerance increased and they moved cautiously into higher-yielding assets like equities. We see this, and earlier increases in yields, as a healthy correction and not a signal of a fundamental shift.
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Given the risks to growth and slow improvements in employment, we continue to expect the federal funds rate to stay at current lows over the next six months.
The Bank of Canada continued to reiterate its commitment to looser monetary policy and, on March 1, elected to maintain its target for the overnight rate at 1%.
• •
Within fixed income markets, our preference remains for corporate bonds, both investment grade and, in particular, high yield.
The market consensus forecast is calling for, at most, three interest rate hikes in 2011. Our analysis suggests stronger economic growth and four hikes by the end of 2011.
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Overall, we still prefer corporate bonds because they continue to offer better values than government bonds.
Eurozone Government Bonds •
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The overriding mood in the financial markets is still volatile, and uncertainties over the economic health of peripheral eurozone countries remain, especially related to the potential for countries like Portugal and Spain to default on their debt. Although the bond markets of peripheral eurozone nations are priced to compensate for some risk, the ultimate solution to the debt difficulties is not clear, making it hard to evaluate whether the pricing is sufficiently attractive. Against this backdrop, we maintain a somewhat cautious outlook for eurozone government bonds. Overall, within fixed income, our preference remains for corporate rather than sovereign debt.
Investment-Grade Corporate Bonds •
Economic activity displayed positive momentum in February, particularly in the US. This provided a positive backdrop for corporate bonds, as this environment is generally favourable for company earnings.
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Current interest rate spreads over US Treasuries, albeit attractive on a stand-alone basis, do not provide much cushion should government bond yields rise and become relatively more attractive.
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Against this backdrop, we continue to prefer investmentgrade corporate bonds over government bonds, although we favour high-yield bonds as their extra yield offers more protection should government bond yields rise.
Fixed Income
High-Yield Bonds
Global Inflation-Linked Bonds:
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Although the market backdrop in 2011 may remain volatile, a number of medium-term drivers are still in place.
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In developed economies, inflation is expected to be relatively contained in the near term, as high unemployment and tighter fiscal policies are likely to weigh on growth.
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First, developed-market macroeconomic data has been signalling an upward shift in growth momentum, reducing the risk of a double-dip recession this year.
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The recent rise in nominal bond yields makes the global inflation-linked bond market more expensive relative to regular bonds, and so we retain an underweight stance.
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Second, although corporate earnings growth may slow in 2011 on a year-over-year basis, this is unlikely to prove negative for credit markets. Corporate balance sheets are generally in good health and still supportive of corporate bond returns.
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The high-yield bond market remains underpinned by improving fundamentals, as well as the ongoing search for yield and rapidly declining default rates. For example, Standard & Poor’s forecasts that the US corporate default rate will fall to 1.8% by December 2011, from 3.3% at the end of 2010.
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Overall, we retain our positive view on corporate bonds. Within this asset class, we continue to prefer high-yield over investment-grade corporate bonds.
Sovereign US Dollar-Denominated Emerging Markets Bonds •
As central banks in developed economies are likely to maintain low interest rates in 2011, the higher yields offered by emerging-market debt should remain appealing.
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However, inflationary pressures in many key emerging economies persist. Food prices continue to show double-digit year-over-year increases, while the rise in oil prices following the events in the Arab world has added some pressure.
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Combined with strong economic activity overall, the likelihood for the central banks of emerging economies to continue or perhaps accelerate the current cycle of interest rate hikes remains high, something that could hurt the appetite for riskier assets.
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Overall, our investment outlook for this asset class has not changed. We continue to prefer developed-market corporate debt to US-dollar-denominated emerging-market sovereign debt.
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Other Investments
Oil •
The price of oil increased from US$92.20 per barrel at the end of January to US$97 per barrel at the end of February. In early March, oil was trading in the US$105 to US$115 per barrel range.
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In late February, turmoil in Libya may have cut as much as 850,000 barrels a day of output, according to the International Energy Agency.
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Notwithstanding further political turmoil in the region, OPEC crude production is projected to rise slightly through 2011 to accommodate increasing global oil consumption.
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Despite the degree of spare capacity, the expected pick-up in demand and political turmoil in the Arab world have exerted upward pressure on oil prices. We expect oil to trade in a range, and have moved this range up from US$70-90 per barrel to US$75-95 per barrel over the next 6 to 12 months.
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In addition, ongoing uncertainty surrounding the sustainability of the economic recovery remains, adding to the attractiveness of holding the metal.
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However, some factors remain unsupportive, such as rising interest rates outside the US, especially in some developing economies.
Commercial Real Estate (Unlisted) •
The UK remains our preferred unlisted market over the medium to long term. Asia-Pacific has the strongest rental growth prospects, particularly in the short to medium term.
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In the US, fragile occupier markets persist. Outside core markets, it will take time for vacancy rates to go down and for rental growth to re-appear.
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In the eurozone, capital values generally remain expensive on a relative basis. Relatively low vacancy rates and limited development pipelines are likely to support rental values in core markets such as parts of France and the Nordic countries. However, significant country-level and local variations remain, and we continue to be cautious about Spain, Italy, Ireland and central and eastern Europe.
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The Arab world’s unrest has so far not significantly boosted the US dollar, the currency typically considered a safe haven in troubled times. This may change depending on how events unfold.
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Our view retains neutral positions for the US dollar, yen, euro and pound sterling.
Gold •
Actions by the US Federal Reserve are likely to continue to provide liquidity and potentially weaken the US dollar further — two factors that are likely to drive commodity prices, including gold, higher.
Currency •
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Our view of the likely path of official UK interest rates is somewhat different than the market’s. Market rates suggest the first rate rise could be as soon as this month. Our view is that the underlying fragility of the UK economy, coupled with significant further fiscal tightening in the pipeline, will persuade the Monetary Policy Committee to delay raising rates, something that will limit upward pressure on sterling. However, our confidence in this forecast has been reduced because inflation figures in the UK have been above the official target for a sustained period and continue to rise.
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Global Investment Perspective
IN THIS ISSUE
Highlights
1 Highlights
Despite fears that unrest in Libya and other Arab countries would see a spike in oil prices that would choke global economic growth, leading equity markets posted positive returns in February. Although emerging markets were harder hit, they fared better overall than investors had expected at the beginning of February. In developed markets, positive performance was driven by encouraging economic data, including stronger consumer activity, manufacturing growth and corporate earnings. High unemployment and rising inflation remain a concern in developed economies, but US jobless numbers released March 4 suggest a more positive trend could be developing. Meanwhile, within emerging countries, economic growth remained robust, but
2 Short-Term Investment Outlook 4 Macro Assessment 6 Equity Markets 8 Fixed Income 10 Other Investments and Currency
inflation persisted. Consequently, governments in China, India and Russia tightened their monetary policy in a bid to dampen prices, especially for food.
February Market Recap In equities, the MSCI World Index rose 3.6% in February, while the MSCI Emerging Markets Index fell 0.8%. The S&P 500 Index gained 3.3%, and the S&P/TSX Composite Index rose 4.3%. The MSCI Europe Index was up 3.2%. (All returns in local currency.) Within fixed income, yields on 10-year US Treasuries finished the month largely unchanged at 3.42% after trading as high as 3.75%. Canadian 10-year bonds moved as high as 3.5% in February, but finished the month at 3.3%.
Outlook & Strategy While the global economic recovery is making progress, conditions remain challenging and growth uncertainties persist. Our central scenario remains unchanged. Overall, we anticipate positive, albeit moderate, sub-trend economic growth in developed economies in 2011. We also expect ongoing strength in emerging economies. Our main concern is the prospect of further interest rate hikes in emerging economies, which would impact global growth prospects, given that low interest rates have been an important driver of the global economic recovery. In the developed world, the key risks remain government spending cuts and weak consumer consumption. Unemployment rates are still elevated, and consumers are continuing to cut back on spending as they try to reduce their debts, particularly in the US and the UK. In terms of specific asset classes, we maintain a modest overweight position in both developed- and emerging-market equities relative to cash and government bonds. Within developed-market equities, we maintain a preference for Japanese equities. Within emerging markets, we continue to favour Russia. In fixed income, with inflation under control in the developed world except the UK, we believe central banks are likely to keep interest rates low, which is broadly supportive for fixed income markets. We prefer developed-market corporate bonds because we see value on a total-return basis. From a valuation perspective, sovereign emerging-market debt remains less attractive than high-yield and other corporate debt.
1
Short-Term Investment Outlook (6-12 Months)
ASSET CLASS
CURRENT VIEW
REASONING
Neutral
Equity valuations relative to cash and government debt remain supportive, particularly in view of continued low interest rates and accommodative central bank policy. There are still risks to the economic recovery, but our core scenario is for positive, albeit sub-trend, growth.
Neutral
Unemployment remains elevated at 8.9%. But US Federal Reserve policy remains accommodative and recent economic news has been encouraging.
Neutral
Economic conditions remain mixed. UK growth has slowed, austerity measures are in the process of being rolled out in parts of Europe, and the economic health of peripheral eurozone countries remains uncertain. That said, interest rates and inflation remain generally low, except in the UK. Corporate earnings news has also been encouraging.
Japan
Positive
We have a tactical, short-term preference for Japanese equities on the grounds of attractive stock valuations, a positive bias to recent economic data releases and our view that earnings growth expectations are no longer unrealistic. The stock market also has positive price momentum.
Asia ex-Japan
Neutral
From a macroeconomic perspective, the outlook remains generally positive, with strength in both the manufacturing and consumer sectors. However, from a valuation perspective, market prices have largely reflected the positive news, and concerns over rising interest rates have fuelled volatility.
Emerging Markets
Neutral
Emerging markets are likely to continue to lead the recovery because of robust domestic consumption and strong intra-regional trade. That said, as in developed markets, emergingmarket equities are exposed to volatility stemming from the question marks around the sustainability of the global economic recovery.
Canada
Neutral
The recovery in Canada is proceeding at a moderate pace. We remain cautiously optimistic about Canadian equities, largely because of global demand for commodities. The turmoil in North Africa and the Middle East has also benefited Canadian oil producers.
Latin America
Neutral
The economic performance of Latin American countries remains strong, and earnings growth estimates for 2011 look more reasonable. But the good news seems to be well reflected in market prices, and relative valuation measures show no strong signals.
Middle East
Neutral
Given the political unrest in the region, in the short term we expect volatility to persist. This will affect market performance. Investment potential will be largely determined by oil prices and supply uncertainties.
Eastern Europe
Neutral
Manufacturing data has varied within the different countries. Weak labour markets, high levels of government debt and ongoing concerns about eurozone debts are weighing on the outlook for the broader region.
Global Developed Market US Europe (Including the UK)
EQUITY
Sovereign US
Negative
Excess economic capacity in developed markets will keep inflationary pressures at bay, and the renewed commitment of key central banks to remain accommodative will support low yields. However, current yields offer very little value relative to history. Within fixed income, we prefer to own corporate debt, where we see greater total return opportunities.
Sovereign Eurozone
Negative
We have a negative stance on eurozone government bonds relative to cash because of uncertainties about the economic health of peripheral eurozone countries. Also, valuations for these bonds do not look particularly attractive, as they offer very limited protection against negative surprises.
Sovereign Canada
Negative
The broader Canadian bond market was 0.23% higher in January. Valuations for corporate and provincial debt are less compelling than they were at this time last year. But they remain reasonable from a historical perspective.
FIXED INCOME Corporate
Positive
Strong corporate earnings results, the view that major central banks will keep interest rates low and strong demand for yield have boosted investment-grade corporate bonds. With momentum likely to remain positive, we continue to be positive on the asset class.
High Yield
Positive
High-yield bonds continue to look attractive on a total-return basis. We have retained our positive view on the asset class given better-than-expected corporate results, declining default rates and growing expectations that interest rates could remain anchored at their current low levels because of growing uncertainties over global economic growth.
Negative
This asset class continues to look less attractive on valuation grounds than developed-market corporate debt, and high-yield debt in particular.
Negative
The sell-off in bonds makes the global inflation-linked bond market more expensive and other bonds less expensive.
Investment Grade
Sovereign US DollarDenominated Emerging Markets Debt Global Developed Inflation-Linked
2
Short-Term Investment Outlook (6-12 Months)
ASSET CLASS
Oil
Neutral (range between US$75-95 per barrel)
Gold
Neutral (range between US$1,250-1,400 per troy ounce)
OTHER INVESTMENTS
CURRENT VIEW
Commercial Real Estate (unlisted markets)
Sterling, Japanese Yen and the US Dollar
We increased our forecast price by US$5 per barrel because demand is increasing in line with the global growth recovery. Political unrest in Arab countries is also contributing to price pressures.
We are neutral on gold now as opposed to having been somewhat negative in previous months. Moves by the US Federal Reserve to add further liquidity to markets, combined with ongoing macroeconomic uncertainty, remain supportive factors.
Neutral
Despite generally weak occupier markets, demand for prime investments in core markets in the US and Europe has increased and is expected to keep growing in the short term. But we remain cautious about these markets overall. Demand stemming from more positive economic growth in Asia-Pacific is expected to be met largely by developments in key markets in China, India and Singapore. Also, wide regional variations remain. UK property yields remain above our view of fair value, and so short-term performance is expected to be muted.
Neutral
Valuation indicators are not sending any clear signals at present. We see both event-driven and sentiment-driven risks contributing to ongoing volatility, which is why we continue to have a neutral view on currency exposures.
Euro, British Pound
CURRENCY
REASONING
Summary Overall, we have maintained a moderate overweight position in global equities relative to both government bonds and cash. In developed-market equities, we remain positive on Japan in the short term based on attractive stock valuations, positive price momentum and liquidity. Within emerging-market equities, our favourite market is still Russia. In fixed income, we have a negative view on government bonds relative to cash, although this view is less pronounced than it was last month. We have a positive stance on corporate debt — both investment grade and high yield. Positives for corporate bonds include attractive valuations and favourable issuer fundamentals. Our central economic scenario is for slow but positive growth in the major developed markets, a backdrop that is typically positive for credit markets. Turning to currencies, heightened volatility will likely continue in US dollars, yen, euros and pounds sterling. Valuation measures are not currently providing strong signals, and we therefore have a neutral stance on currency positions.
3
Macro Assessment
US
UK
US economic activity maintained positive momentum
Economic activity was generally mixed, as the good news was
•
•
•
•
US gross domestic product (GDP) grew 2.8% quarter-overquarter during the fourth quarter of 2010 — a solid reading but lower than the consensus forecast of 3.3%.
somewhat overshadowed by unemployment and inflation •
The Purchasing Managers’ Index for manufacturing and for services rose above consensus expectations in January, indicating solid expansion in both sectors of the UK economy.
There were encouraging readings in US consumer activity as well: retail sales increased month-over-month in January.
•
The US unemployment rate came in at 8.9% and US employers added 192,000 workers in February, compared with the 196,000 median estimate of economists surveyed by Bloomberg News.
In consumer activity, following a relatively grim December, retail sales beat the consensus estimate in January, jumping from a low of 1% year-over-year in December to 5.3% a month later.
•
GDP growth disappointed, coming in at -0.6% quarterover-quarter in the fourth quarter of 2010, while consumer confidence also fell in January.
•
Unemployment remained high, and inflation hit 4% year-overyear in January from 3.7% in December.
Inflation climbed by 1.6% year-over-year in January, in line with the consensus estimate, while the core rate increased from 0.8% in December to 1.0% year-over-year. But these levels are still relatively low and suggest interest rates will not rise soon.
Japan Europe ex-UK
There continues to be a mixed bag of economic data in Japan
Economic data in the eurozone was generally mixed, with sharp divergence in economic activity at the country level •
Eurozone GDP expanded by 0.3% quarter-over-quarter in the fourth quarter of 2010, a positive reading but below the consensus estimate of 0.4%. There were also signs of slower economic activity.
•
The contrast between the economic performance in various eurozone countries also persisted. For example, the German economy grew by 0.4% quarter-over-quarter in the fourth quarter of 2010, while Greece’s shrunk by 1.4%.
•
Core inflation, which excludes the more volatile food and energy prices, remained below the European Central Bank’s (ECB) target of 2%, at 1.1% year-over-year in January. But the all-items Consumer Price Index (CPI) rose above the ECB’s target to 2.3%. Against this backdrop, the ECB signalled the possibility of an interest rate increase at its next policy meeting. But it’s important to recognize the ECB’s willingness to maintain its extraordinary liquidity measures to support the banking system in the region. As expected, the ECB maintained rates at all-time lows of 1%.
4
•
Industrial production growth was solid in January against a month earlier, while retail trade growth jumped to 4.1% month-over-month in January from a decline of 4.2% in December. But the recovery in Japan remained fragile. Export growth softened more than expected, from 12.9% year-overyear in December to 1.4% in January. Consumer activity and public finances also continued to cause concern.
•
Moody’s Investors Service said it was assigning a negative outlook to its Aa2 rating of Japan’s sovereign debt. This follows the downgrade by Standard & Poor’s in January to AA-, a notch below the current Moody’s level.
•
Annual inflation was flat in January. This continued to underscore the weakness in Japanese consumer activity and show that deflation remains a problem.
Macro Assessment
Canada
Emerging Markets
Economic growth continued at a moderate pace, as commodity
Economic activity remained strong in emerging markets, although
prices remain high
high inflation continues to cause concern
•
The recovery in Canada continued at a moderate pace. Commodity prices, especially for oil, continued to surge in February, supporting Canada’s resource-heavy economy.
•
•
Higher prices for food and key agricultural inputs like fertilizer were also good news for Canada, which is a major producer of these commodities.
China’s trade data was particularly strong. The renewed strength in trade activity was also evident in other major emerging-market economies, including India, South Korea, Taiwan and Russia. The broad picture for consumer activity remained good as well.
•
Eastern Europe continued to lag the rest of the emergingmarket region.
But unemployment, at 7.8% in January, remains high. And consumer debt is expected to continue to restrain growth.
•
Inflation remained elevated in all the major countries, with food prices also rising relatively strongly.
•
Ongoing economic strength combined with rising levels of inflation continue to push interest rates higher.
•
•
Inflation dynamics in Canada have been broadly in line with the Bank of Canada’s expectations. The Bank aims to keep inflation at the 2% target, the midpoint of the 1% to 3% inflation-control target range. The underlying pressures affecting prices remain largely unchanged and inflation hit 2.3% in January.
February 2011 consensus real GDP growth and inflation
US
Canada
Western Europe
Eurozone
UK
Japan
Asia Pacific
Asia ex-Japan
Latin America
Eastern Europe
Source: Consensus Economics, February 2011
5
Equity Markets
Global Developed Markets
Japan
•
Liquidity is expected to remain a positive factor for equity markets in general, given central bank stimulus and quantitative easing in the US.
•
The Japanese economy looks to be establishing positive, albeit moderate, growth, as normalization in the growth rates in key sectors, like industrial production, is under way.
•
Despite modestly higher levels of inflation in developed nations, central banks are likely to maintain accommodative monetary policies in 2011 and increase rates only gradually, if necessary.
•
Japanese companies continued to report strong results in February, while estimates of earnings growth for 2011 remained very encouraging at 13.7%.
•
•
As the positive backdrop for equities is becoming more evident, we maintain a modest overweight position in equities against cash and government bonds.
We maintain our positive stance on Japanese equities against other developed equities, as valuations and price momentum continue to be supportive.
•
That said, risks to our position remain, and therefore our preference is only moderate relative to other developed markets.
US •
Economic activity continues to improve in the US and remains supportive of our central scenario for positive growth in 2011.
•
Corporate earnings in the fourth quarter were strong, and 2011 earnings growth estimates for the US and other major developed economies continue to look generally encouraging, albeit below the record rates in 2010.
•
Against this positive backdrop and the ongoing accommodative monetary stance in the US, we maintained our preference for equities relative to government bonds and cash. We are neutral on US equities versus other equity markets.
Canada •
Seven of the Canadian market’s 10 subsectors advanced in February. Surging oil prices and strong demand for other commodities helped support markets.
•
Information technology also posted strong gains on the back of increased investment by businesses in their operations. Business investment continued to expand rapidly as companies took advantage of low interest rates. Competitive pressures also spurred investment.
•
Ongoing strength in the global economy, particularly in the US, suggests that the outlook for Canadian equities remains strong.
•
The improving outlook saw us maintain our increased allocation to Canadian equities versus cash and government bonds.
Europe •
6
Although fourth quarter 2010 GDP growth in the eurozone was disappointing, overall economic activity has improved in both the UK and the eurozone. We continue to expect moderate growth in 2011.
•
Despite growing expectations of central bank rate increases, we retain our central view for rates to remain accommodative during 2011, given the potential impact on fragile growth in the region.
•
We maintain a modest overweight position in equities against cash and government bonds.
Equity Markets
Global Emerging Markets •
In line with our view on other equity markets, we have retained our moderately positive view for emerging-market equities against cash and government bonds.
•
We do not expect the underperformance of emerging-market equities relative to developed-market equities to continue for a prolonged period, as fundamentals remain solid for emerging markets and corporate news is encouraging.
•
However, inflationary pressure persists, particularly in Asia, adding to the risk of interest rate hikes. Although this is not our central scenario, these conditions have the potential to unsettle investors.
•
We continue to like Russian equities relative to other emerging markets. Macroeconomic data remains supportive, while the recent increase in commodity prices, particularly oil, has been an important factor.
•
Ongoing global financial flows from developed to emerging markets, fuelled by continued low interest rates in the developed world, continue to present a problem to emerging economies.
•
Brazil, the largest market in Latin America, has already raised the tax on certain investments by foreigners from 2% to 6% in an effort to stem currency appreciation.
Middle East •
The civilian protests that started in Tunisia in December have since spread to other Middle Eastern and North African countries, most notably Egypt and now Libya.
•
In terms of market performance, the largest impact has been on oil prices, because the region is key for oil supplies.
•
The investment implications largely depend on whether the increase in oil prices proves to be temporary or not. Given that events in the region are still unfolding, it is simply too early to tell.
Asia ex-Japan •
Economic growth in Asia excluding Japan remains robust, although it could begin to slow down. Overall, our central scenario for emerging economies, and particularly Asia, to lead the economic recovery remains in place. Earnings growth forecasts for Asia ex-Japan companies remain encouraging for 2011.
•
Against this backdrop and given the flow of funds from developed economies, we retained a moderate overweight position in Asia ex-Japan equities, as we do for all other equity markets.
•
That said, at the country and regional level, we maintain a neutral position in Asia ex-Japan, as we also recognize the risk from inflationary pressures and a potential cycle of higher interest rates in the region.
Latin America •
The economic performance of Latin American countries remains strong, and earnings growth estimates for 2011 look encouraging and in line with our assessment of the business and consumption environment globally.
•
However, the good news already seems to be reflected in market prices.
Eastern Europe •
Russian equities continued to be among the best performers within emerging markets, rising by 3.5% in February.
•
At the country level, we continue to like Russian equities relative to other emerging markets. Macroeconomic data remains supportive, while the recent increase in commodity prices, particularly oil, has been an important factor behind the rally in Russian equities. In addition, we continue to think valuations are attractive on a relative basis.
•
In Eastern Europe, consumer price inflation indices increased in several countries, including Russia. However, given the outlook for domestic demand in this part of the emerging-market world, the risk of monetary policy changes remains lower than in Asia and Latin America.
7
Fixed Income
US Dollar Government Bonds
Sovereign Canada Bonds
•
Although yields have increased in recent months, current yields are still not particularly attractive, despite inflationary pressures remaining fairly muted.
•
•
The generally improving macroeconomic environment continues to support our modestly cautious view on US Treasuries relative to other asset classes.
Canadian 10-year bonds moved as high as 3.5% in February but finished the month at 3.3% as investors’ risk tolerance increased and they moved cautiously into higher-yielding assets like equities. We see this, and earlier increases in yields, as a healthy correction and not a signal of a fundamental shift.
• •
Given the risks to growth and slow improvements in employment, we continue to expect the federal funds rate to stay at current lows over the next six months.
The Bank of Canada continued to reiterate its commitment to looser monetary policy and, on March 1, elected to maintain its target for the overnight rate at 1%.
• •
Within fixed income markets, our preference remains for corporate bonds, both investment grade and, in particular, high yield.
The market consensus forecast is calling for, at most, three interest rate hikes in 2011. Our analysis suggests stronger economic growth and four hikes by the end of 2011.
•
Overall, we still prefer corporate bonds because they continue to offer better values than government bonds.
Eurozone Government Bonds •
•
•
8
The overriding mood in the financial markets is still volatile, and uncertainties over the economic health of peripheral eurozone countries remain, especially related to the potential for countries like Portugal and Spain to default on their debt. Although the bond markets of peripheral eurozone nations are priced to compensate for some risk, the ultimate solution to the debt difficulties is not clear, making it hard to evaluate whether the pricing is sufficiently attractive. Against this backdrop, we maintain a somewhat cautious outlook for eurozone government bonds. Overall, within fixed income, our preference remains for corporate rather than sovereign debt.
Investment-Grade Corporate Bonds •
Economic activity displayed positive momentum in February, particularly in the US. This provided a positive backdrop for corporate bonds, as this environment is generally favourable for company earnings.
•
Current interest rate spreads over US Treasuries, albeit attractive on a stand-alone basis, do not provide much cushion should government bond yields rise and become relatively more attractive.
•
Against this backdrop, we continue to prefer investmentgrade corporate bonds over government bonds, although we favour high-yield bonds as their extra yield offers more protection should government bond yields rise.
Fixed Income
High-Yield Bonds
Global Inflation-Linked Bonds:
•
Although the market backdrop in 2011 may remain volatile, a number of medium-term drivers are still in place.
•
In developed economies, inflation is expected to be relatively contained in the near term, as high unemployment and tighter fiscal policies are likely to weigh on growth.
•
First, developed-market macroeconomic data has been signalling an upward shift in growth momentum, reducing the risk of a double-dip recession this year.
•
The recent rise in nominal bond yields makes the global inflation-linked bond market more expensive relative to regular bonds, and so we retain an underweight stance.
•
Second, although corporate earnings growth may slow in 2011 on a year-over-year basis, this is unlikely to prove negative for credit markets. Corporate balance sheets are generally in good health and still supportive of corporate bond returns.
•
The high-yield bond market remains underpinned by improving fundamentals, as well as the ongoing search for yield and rapidly declining default rates. For example, Standard & Poor’s forecasts that the US corporate default rate will fall to 1.8% by December 2011, from 3.3% at the end of 2010.
•
Overall, we retain our positive view on corporate bonds. Within this asset class, we continue to prefer high-yield over investment-grade corporate bonds.
Sovereign US Dollar-Denominated Emerging Markets Bonds •
As central banks in developed economies are likely to maintain low interest rates in 2011, the higher yields offered by emerging-market debt should remain appealing.
•
However, inflationary pressures in many key emerging economies persist. Food prices continue to show double-digit year-over-year increases, while the rise in oil prices following the events in the Arab world has added some pressure.
•
Combined with strong economic activity overall, the likelihood for the central banks of emerging economies to continue or perhaps accelerate the current cycle of interest rate hikes remains high, something that could hurt the appetite for riskier assets.
•
Overall, our investment outlook for this asset class has not changed. We continue to prefer developed-market corporate debt to US-dollar-denominated emerging-market sovereign debt.
9
Other Investments
Oil •
The price of oil increased from US$92.20 per barrel at the end of January to US$97 per barrel at the end of February. In early March, oil was trading in the US$105 to US$115 per barrel range.
•
In late February, turmoil in Libya may have cut as much as 850,000 barrels a day of output, according to the International Energy Agency.
•
Notwithstanding further political turmoil in the region, OPEC crude production is projected to rise slightly through 2011 to accommodate increasing global oil consumption.
•
Despite the degree of spare capacity, the expected pick-up in demand and political turmoil in the Arab world have exerted upward pressure on oil prices. We expect oil to trade in a range, and have moved this range up from US$70-90 per barrel to US$75-95 per barrel over the next 6 to 12 months.
•
In addition, ongoing uncertainty surrounding the sustainability of the economic recovery remains, adding to the attractiveness of holding the metal.
•
However, some factors remain unsupportive, such as rising interest rates outside the US, especially in some developing economies.
Commercial Real Estate (Unlisted) •
The UK remains our preferred unlisted market over the medium to long term. Asia-Pacific has the strongest rental growth prospects, particularly in the short to medium term.
•
In the US, fragile occupier markets persist. Outside core markets, it will take time for vacancy rates to go down and for rental growth to re-appear.
•
In the eurozone, capital values generally remain expensive on a relative basis. Relatively low vacancy rates and limited development pipelines are likely to support rental values in core markets such as parts of France and the Nordic countries. However, significant country-level and local variations remain, and we continue to be cautious about Spain, Italy, Ireland and central and eastern Europe.
•
The Arab world’s unrest has so far not significantly boosted the US dollar, the currency typically considered a safe haven in troubled times. This may change depending on how events unfold.
•
Our view retains neutral positions for the US dollar, yen, euro and pound sterling.
Gold •
Actions by the US Federal Reserve are likely to continue to provide liquidity and potentially weaken the US dollar further — two factors that are likely to drive commodity prices, including gold, higher.
Currency •
•
10
Our view of the likely path of official UK interest rates is somewhat different than the market’s. Market rates suggest the first rate rise could be as soon as this month. Our view is that the underlying fragility of the UK economy, coupled with significant further fiscal tightening in the pipeline, will persuade the Monetary Policy Committee to delay raising rates, something that will limit upward pressure on sterling. However, our confidence in this forecast has been reduced because inflation figures in the UK have been above the official target for a sustained period and continue to rise.
All data and charts are sourced from Datastream, Bloomberg, Barclays Capital, Citigroup World Government Bond indices and HSBC Global Asset Management. All returns are total monthly returns expressed in local currencies. Securities and Annuity products are provided by Registered Representatives and Insurance Agents of HSBC Securities (USA) Inc., member NYSE/FINRA/SIPC, a registered Futures Commission Merchant, a wholly owned subsidiary of HSBC Markets (USA) Inc. and an indirectly wholly owned subsidiary of HSBC Holdings plc. In California, HSBC Securities (USA) Inc. conducts insurance business as HSBC Securities Insurance Services. License #: OE67746. Insurance products are offered through Insurance Agents of HSBC Insurance Agency (USA) Inc., a wholly owned subsidiary of HSBC Bank USA, N.A., and an indirectly wholly owned subsidiary of HSBC Holdings plc. Products and services may vary by state and are not available in all states. California license #: OD36843. Securities, Annuity and Insurance Products are: Not a deposit or other obligation of the bank or any of its affiliates; Not FDIC insured or insured by any federal government agency of the United States; Not guaranteed by the bank or any of its affiliates; and subject to investment risk, including possible loss of principal invested. All decisions regarding the tax implications of your investment(s) should be made in connection with your independent tax advisor. Global Investment Perspective is a joint publication of HSBC Global Asset Management (USA) Inc. and HSBC Global Asset Management (Canada) Limited (collectively “we”). This document is distributed by HSBC Global Asset Management (USA) Inc., HSBC Global Asset Management (Canada) Limited and HSBC Global Asset Management (Bermuda) Limited. It should not be viewed as a solicitation or an offer to purchase or subscribe for any investment or advisory service. The information contained in this document is for information purposes only and is based on sources believed to be reliable. However, we have not independently verified such information and make no guarantee, representation or warranty and accept no responsibility or liability as to its accuracy or completeness. Opinions expressed in the document are subject to change without notice and this information is not intended to provide professional advice and should not be relied upon in that regard. Investing entails risks, including possible loss of principal. Investors should be aware that performance returns are affected by market fluctuations and note that the use of derivatives and investments involving a currency other than their own involves special risks. Emerging markets are often characterized by even less economic diversity and political stability than more developed international markets, and individual securities may demonstrate greater price volatility and a lack of liquidity. Investors should consider their investment objectives, whether or not they can assume these risks and should undertake their own appropriate professional advice. Past performance does not guarantee future results. This information is not, and under no circumstances should be construed as, a solicitation to act as a securities broker or dealer in any jurisdiction by any person or company that is not legally permitted to carry on the business of a securities broker or dealer in that jurisdiction. HSBC Global Asset Management (USA) Inc., HSBC Global Asset Management (Canada) Limited and HSBC Global Asset Management (Bermuda) Limited are part of HSBC Global Asset Management, the global investment management business of HSBC Holdings plc. HSBC Global Asset Management (USA) Inc. is a separate legal entity registered with the United States Securities and Exchange Commission. HSBC Global Asset Management (Canada) Limited is also a separate legal entity and is a subsidiary of HSBC Bank Canada. HSBC Global Asset Management (Canada) Limited is registered in all provinces of Canada except for Prince Edward Island. HSBC Global Asset Management (Bermuda) Limited of 6 Front Street, Hamilton, Bermuda, is a wholly owned subsidiary of HSBC Bank Bermuda Limited, and is licensed to conduct investment business by the Bermuda Monetary Authority. CA#M1103088
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