Problems have been deferred, not solved, says HSBC CIO

Leon Goldfeld of HSBC Global Asset Management (HK) believes the slow-down could be deeper than investors are currently thinking.

Leon Goldfeld, chief investment officer at HSBC Global Asset Management (HK), manages more than $400 billion of assets. He explains why top-down decision making, a sharp focus and sensitivity to risk are important.

Who are your investors?
We are a very big player in the institutional market, particularly Hong Kong's Mandatory Provident Fund. We also attract money from charities, retail through our branches, corporates, family offices and regional sovereigns. We manage more than $60 billion in Asia-Pacific, including $20 billion in our multi-asset portfolios. Worldwide, we manage assets worth over $416 billion.

How do you make your investment decisions?
Our investment platform is flexible, and we draw on the skills of our proprietary strengths, and where appropriate, use the expertise available externally through our multimanager teams. The relationship with the broader HSBC Group and its strategic partnerships is important. We can advise clients on hedge funds, structured products, infrastructure investment, private equity and currency solutions, as well as the more traditional asset classes, such as equities, bonds, property and commodities. But it is a continuous process, where we always review and fine-tune our selections within a regular structure. Asset allocation positions are reviewed on an on-going basis as we monitor key indicators and performance. To make tactical asset allocation shifts, we normally look for directional market trends of 10% or more and normally hold positions from three to 12 months.

What is your investment strategy and style?
There are three main drivers for our top-down decision-making process, and they all need to be aligned before we make final allocations. These can be categorised as: strategic (or structural trends), current economic and policy cycle, and market valuation. For example, while we like Asia as a strategic long-term investment, the current cyclical environment and valuations are not attractive. Therefore we reduced our Asian exposure in late 2009 from an overweight position, which we had held for most of last year. 

Who makes the decisions?
I decide with a team of eight on the final allocation between asset classes, such as bonds and equities and regions after receiving the advice of our specialist fund managers, for instance Halbis Capital Management or Sinopia Asset Management [both part of HSBC Global Asset Management]. They will then choose industry sectors and their individual experts will select the best stocks or bonds based on an analysis of various valuation criteria.

In your career, what has been your best investment call?
Asian equity markets were seriously undervalued following the bursting of the technology share bubble in 2001 and 2002. Already major industry and corporate restructuring was underway, especially in China, India, Korea and Taiwan. All three boxes -- strategic, cyclical and valuation -- were ticked, and we rode a highly successful trend up until 2007.

What has been your worst investment call?
In the late 1990s, I was covering the Australian equity market. There was a particular Australian telecom equipment provider that had a clear business strategy, strong management, leading edge products and a solid balance sheet. Unfortunately, when the bubble burst and telecom operators stopped spending on capex, sales completely dried up and the company could not survive as a standalone entity. What this experience emphasised is that one needs to think deeper about extreme risks, even when traditional fundamentals look solid. It was a good lesson to have under one's belt in 2008. 

What one conclusion would you highlight about the financial and economic crisis?
A major cause of the crisis was the structural imbalances throughout the world, not least highly leveraged households in the US and elsewhere in the West. In order to protect economies from collapse, governments have spent a tremendous amount of money. However, the problems that led up to the crisis have not been solved, just deferred. We believe the global economy is headed for slower growth with a heightened level of risk over the next few years.

Where do we go from here?
In developed economies, economic growth should appear robust in the first half of the year, but will slow as the source of that growth transfers from the public to the private sectors in the latter part of 2010. The slow-down could be deeper than what investors are currently thinking and equity and commodity markets could suffer corrections. There are few great opportunities in fixed income, but government and other high quality bonds provide a safe haven and higher yielding alternative to cash.

Are you more positive about Asia?
In Asia, we expect markets to mark time in the first half of the year due to worries over inflation and aggressive monetary policy tightening throughout the region. Around the middle of the year we should reach an inflexion point. Inflation fears should subside once the low base effects of the early part of 2009 are taken out of the equation and after regional central banks have acted appropriately. In the second half, tightening pressure should lessen and Asian growth should remain robust as it is not encumbered by structural constraints. Given an improved backdrop in the second half of the year, we expect Asian equity markets will perform well, although we see stronger potential in markets with solid domestic demand and asset plays rather than exporters. We expect good returns from mainland China, and are very bullish about the Hong Kong market. Korea, despite its export bias, is also attractive on a valuation basis and the currency is under-valued. 

This article first appeared in the March 2010 issue of FinanceAsia magazine. 

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