HSBC backs corporate bonds and LatAm equities

AsianInvestor asked Simona Paravani of HSBC Global Asset Management and Northern Trust's Bert Rebelo for their outlook on multi-manager investments in 2010.

Simona Paravani is global investment strategist at HSBC Global Asset Management in London.

AsianInvestor: What are the best sectors, asset classes or countries for multimanager strategies to combine for successful returns in 2010, and why?

Simona Paravani: Within equities, there are interesting opportunities at the regional and sector level. In emerging markets for example, we continue to see potential in Latin America and recommend an overweight position in Latin American equities relative to emerging Asia.

There are three reasons for this positive stance. First, looking at the relative valuation of the two regions, Latin American equities trade at a significant discount, especially on a trailing earnings basis. Second, there is potential for positive surprises on the macro side, as our house view is for Brazil's 2010 GDP growth to be ahead of consensus, driven in part by a rebound in domestic demand as witnessed by retail sales growth. Third, because of Brazil's heavy commodity exposure, the country is a beneficiary of strong growth in Asia.

In developed markets, our preference is for defensive sectors such as healthcare and telecommunication services, which are now trading at an unusually high discount relative to the more cyclical areas of the market. In addition, these sectors offer reasonable dividend yields and generally more stable earnings profiles.

Finally, in the fixed-income arena, we have held a positive view on corporate bonds all year, both on investment-grade and high-yield debt. The strong performance from this asset class over the course of the year has generally led valuation levels to be less appealing, so we have taken some profits in this area.

That said, the current spread levels are still attractive relative to historical levels and to the very low levels of yield offered by government bonds. Companies remain focused on balance-sheet repair, which is a further supportive factor. Overall, therefore, we maintain a positive stance on corporate bonds.

What are the sectors, asset classes or countries for multimanager strategies to avoid (or avoid combining) in 2010, and why?

SP: At the moment, we have a moderately underweight allocation in equities relative to cash and overall, and we are not recommending aggressive bets on equities relative to other asset classes. When we look at the key factors that have driven the market rally this year - namely, improvements in the macro-economic picture, improving corporate profits, attractive valuations and ample liquidity - only the latter is likely to remain supportive, largely because monetary policy is expected to remain accommodative well into 2010.

Turning to the other factors -- first, from a macro-economic perspective, there is no doubt that a recovery is under way, but there are many doubts regarding the strength and sustainability of the recovery. While emerging markets are likely to continue to drive global growth, in the developed world the central scenario is one of relatively moderate growth, with regions such as Europe expected to grow by only about 1%. The key issue is that even with these rather anaemic rates of growth, the risk could be skewed to the downside, because the labour market remains weak and the high levels of household debt in the Anglo-Saxon countries represent a burden for future consumption.

Importantly, at the same time we face the possibility of a withdrawal of fiscal stimulus plans, as governments try to repair their balance sheets. As an example, for 2010, the average budget deficit for OECD member countries is forecast to be more than 8%. All these considerations suggest that the macro outlook remains clouded.

Turning to corporate profits, forecasts for 2010 earnings growth are quite ambitious, with global equities expected to post a 25% year-on-year profit. It helps that these numbers reference a low base, but they still represent some of the highest forecasts on record. These optimistic earnings-growth targets could be problematic, because equities are now trading on more demanding multiples than they did a year ago. Valuations are certainly not extreme relative to history, but they are significantly off the bargain levels of the first quarter. These two factors combined mean there is less of a cushion against negative surprises.

Overall, therefore, we have a moderately cautious view on equities as we move into 2010.

Bert Rebelo, director of Asia-Pacific product management and strategy at Northern Trust Global Investment in Hong Kong (to whom we put the same questions).

Our multi-manager philosophy is to not advocate that a particular sector, country or region is better suited than another for a given year. Rather, we believe that a diversified multi-manager approach is the best way to invest globally. We give our underlying managers in a multi-manager programme the ability to make these bets within their respective accounts, and our objective is to ensure we select and combine the right managers to achieve the best risk-adjusted returns.

Institutional investors have long recognised the benefits of taking a multi-manager approach to investing in complex and diverse asset classes.

At Northern Trust Global Advisors, we believe that employing top managerial talent with complementary skills and styles may be a particularly useful strategy for gaining exposure to global equity markets, where risk factors are more numerous.

In fact, multi-manager portfolios could mitigate some of the regional, country, sector, currency, liquidity, accounting and political risks inherent in global investing. These potential benefits result not only from enhanced diversification within the asset class itself, but also from the varied investment styles employed by the managers.

The objective of a multi-manager approach is to produce benchmark or better returns with less volatility, an especially worthy goal given the growth potential of many international markets in the context of a still-vulnerable global economy.

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