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HSBC Investment Outlook Q1 2023

Investment Outlook Q1 2023 Looking for the Silver Lining Global Private Banking

Global Private Banking Investment Outlook Report Global Chief Investment Officer Contributors Willem Sels [email protected] +44 (0)207 860 5258 Director, Global Market Strategist Head of Asset Allocation and Managing Editor Stanko Milojevic Neha Sahni [email protected] [email protected] +44 (0)207 024 6577 +44 (0)207 024 1341 Regional Chief Investment Officers Chief Investment Officer, Asia Chief Investment Officer, North Asia Cheuk Wan Fan Patrick Ho [email protected] [email protected] +852 2899 8648 +852 2899 8691 Chief Investment Officer, Southeast Asia Chief Investment Officer, China James Cheo Desmond Kuang [email protected] [email protected] +65 6658 3885 +86 21 38881020 Chief Investment Officer, EMEA and Switzerland Chief Investment Officer, UK & CI Georgios Leontaris Jonathan Sparks [email protected] [email protected] +41 (0)58 705 5746 +44 (0)20 7860 3248 Chief Investment Officer, Americas Jose Rasco Global Head of Fixed Income Global Head of Equities Laurent Lacroix Kevin Lyne Smith [email protected] [email protected] +44 (0)207 024 0613 +44 (0)207 860 6597 FX & Commodities Product Specialist Senior Fixed Income Credit Specialist Rodolphe Bohn Elena Kolchina [email protected] [email protected] +44 (0)203 359 1177 +44 (0)207 860 3058 Global Market Analyst, Director, Global Equities Real Estate Investment Bryan O’Carroll Guy Sheppard [email protected] [email protected] +44 (0)203 268 4220 +44 (0)207 024 0522 Senior Product Specialist, Private Market Investments Head of European Hedge Fund Research Jorge Huitron Alex Grievson [email protected] [email protected] +44 (0)203 359 7040 +44 (0)203 359 7065 2

Global Private Banking Contents Letter to Clients 05 Our Portfolio Strategy 06 Are Diversified Portfolios Still a Better Option than Cash? 12 Top Four Trends and High Conviction Themes 14 1. Remaking Asia’s Future 14 2. Opportunities Amid High Rates and Slowing Growth 18 3. Digital Transformation 20 4. Investing for a Sustainable Future 22 Equities 24 Fixed Income 28 Currencies and Commodities 32 Hedge Funds 34 Private Markets 36 Real Estate 38 Disclaimers 40 3

HSBC Investment Outlook Q1 2023 - Page 3

Global Private Banking Investment Outlook Report 4

Global Private Banking Welcome Dear client As we look into 2023, the headwinds with the yield level of short-to-medium hedge funds and a core allocation to from slowing growth and higher rates dated and highly rated bonds, which we private assets and real estate. And finally, that have been plaguing investors will overweight. Adjusted for their relative we position in structural trends, noting remain key market drivers. But while risk levels, bonds have sold off more that many companies that are well the cyclical outlook remains a major than equities this year, making them placed for such trends now often trade at challenge, we are starting to see a silver look cheap. We also like bonds for cheap valuations. lining on the rate front. diversification purposes, because their One case in point is sustainability. Some Let’s look at the bad news first. Global correlation with equities typically drops governments have allowed more oil and economic momentum continues to in times of slowing economic growth. gas drilling to secure energy supplies, slow, with the Eurozone and UK in We further diversify portfolios through but this does not put into question the recession, US growth well below normal, our overweight in hedge funds, which long term investment case for climate and China’s 2023 recovery likely to be benefit from high volatility, the diverging mitigation and adaptation solutions. shallow. This cyclical headwind largely fundamentals of different countries, and In fact, the same governments have determines how we feel about stocks. the rising income hedge funds receive on also invested in renewable energy We expect consensus earnings growth to their cash balances. and nuclear, while households and slow further, so we are underweight on While our confidence in short-to-medium businesses have invested in solar and global equities, with a defensive sector dated bonds, our upgrade of Chinese increased insulation, and are making bias and a focus on quality stocks with stocks and downgrade of USD are signs production processes more efficient to strong market positions. Geographically, that we see a silver lining, we will keep save on high energy bills. So the short- the relative resilience of the US leads monitoring important milestones that term cost incentive is adding to the long- us to prefer US stocks over European could make us add more risk. When term sustainability driver, compressing stocks. In Asia, we have upgraded the peak in core inflation and Fed rates the green premium and advancing new Chinese stocks because policy is eventually confirmed, we may well green solutions and technologies. measures are easing COVID and increase our rate exposure through At the end of a difficult year, investors housing related risks. Asia’s reopening is increased duration and add back to our face an important balancing act. On supportive of economic activity but the tech exposure. Good news on the rate the one hand, there is great uncertainty tech cycle is slow. front may help stocks too, but before we around geopolitics and the timing of On the rate front, markets have tried see a sustained equity rally, the cyclical the turn in the rate, inflation and growth several times to anticipate peak rates, outlook first needs to stabilise. That will cycles. On the other hand, almost all but so far fallen back each time. The have to wait, as rate hikes have a lagged assets have repriced since the start of lower-than-expected US inflation print effect on economic growth. But once the 2022. The good news is that even quality for October, however, signals that we are cycle is more stable, we could get more assets are now much cheaper and getting closer to peak rates, even if we’re positive on stocks and lower rated credit. investors can build resilient portfolios not quite there yet. Commodity price Stronger global risk appetite would with respectable expected returns, and inflation, transportation costs and supply eventually also lead us to take a bearish wait for better fundamentals to take chain issues are all easing. Rents are view on USD. riskier positions. still rising but should plateau in coming Those are potential reasons for future months, as they tend to follow house optimism, but for now, we remain prices, which have been falling. cautious and see four priorities for As the Fed approaches peak rates, investors. First, we rebalance portfolios USD’s impressive bull run should come towards high rated bonds. Secondly, we to a halt. We therefore adopt a neutral build recession resistant portfolios by view on the greenback. And with bond focusing on quality stocks and partial Willem Sels, markets already pricing a 5% Fed funds inflation hedges. Third, we enhance the Global Chief Investment Officer rate for Q1 2023, we feel comfortable diversification from bonds by adding 23 November 2022 5

Global Private Banking Investment Outlook Report Our Portfolio Strategy The global economic slowdown will Fixed income: overweight keep rates high for longer, which should remain a key headwind for stocks continue to slow growth, with a lag. for some time and we are mildly Focus on high quality borrowers Housing markets are already seeing the underweight in global equities. An Keep overall duration below effect of higher rates, with prices, sales overweight in high-rated bonds benchmark and construction activity levels down can provide diversification, and in developed markets (DM). Consumers bond yields already price in a lot of have seen their mortgage payments rise tightening. As the growth cycle lags Equities: mildly underweight (sometimes double or triple) and the the rate cycle, we much rather take Prefer US over Eurozone and UK cost of petrol, food, clothing and utility rate risk than cyclical risk. We are bills shoot up. For the vast majority, also overweight in hedge funds to Prefer EM Asia and Latin America over wages have not kept up with inflation, diversify and mitigate uncertainties. EM Europe forcing them to reduce spending We look for the silver lining and Maintain a defensive sector tilt, with a on discretionary items in particular. explore what could eventually focus on quality and income Governments have come to the rescue, make us more bullish. And we but as their cost of borrowing has shot continue to highlight structural Alternatives: overweight up, their ability to act is limited: the most opportunities at attractive dramatic recent illustration was the UK, valuations, related to sustainability, Overweight in hedge funds where the government was forced by technology and in Asia. Keep core allocations to private markets to abandon spending plans markets and real estate and raise taxes instead (ending many 1. The way we see the world economists’ belief in Modern Monetary The global economic slowdown will Theory in the process). remain a major driver for markets. The downside tail risks for housing markets Slower economic growth should Eurozone and the UK are going through and ease COVID-related bottle necks, gradually lead inflation to come down, a recession, and although the US is more but economic activity is unlikely to and the October US CPI figure triggered resilient, growth is below normal there accelerate sharply. hopes in this direction. The good news too, and we may see one or two negative While low rates in the past decade were is that oil, natural gas and transportation quarters of US growth in 2023. China’s designed to boost growth and avoid costs are down already, and the shortage growth rate could bottom as supportive deflation, the interplay between rates, of semiconductors is easing. This monetary policy should start to pay some growth and inflation now works the other is contributing to lower goods price benefits. Recent policy measures reduce way around. Sticky inflation is bound to 6

Global Private Banking inflation, which we think will continue to difficult. In addition, the lag with which question the sustainability revolution. ease, and may surprise to the downside. all the rates hikes we’ve seen around We don’t think this is the case: On the other hand, though, there are the world will affect inflation and households and companies have reacted plenty of sticky inflation items, related growth, is highly uncertain, creating to the war by installing more solar to rents (which lag house prices) and the risk of policy error (too little or too panels, insulating their houses better and services, propped up by a still strong much tightening). Political topics are trying to reduce energy consumption, labour market. So while inflation should key too: China’s COVID policy is closely while governments have also invested in come down in 2023, it is unlikely to get watched by markets, the outlook of the renewable energy and nuclear. COP27 anywhere near the typical 2% central Russia-Ukraine war is unpredictable and COP15 have illustrated that climate bank targets. That means that central but has big implications, and the policy change and biodiversity are impacting banks are not yet done with their rate gridlock in the US congress could lead each other, and addressing the cause hikes, and many will want to keep their to challenges around the debt ceiling. of either also tends to help address the rates in restrictive territory to ensure We’re also seeing a rise in insolvencies other challenge. Much more needs to the inflation dragon is really slain. of some smaller and weaker corporates be done urgently, and the effort needs In the case of the US Federal Reserve, as a result of higher rates, higher input to be sustained, if we want a chance we think rates will go to 5% in Q1 and and labour costs though not a credit to hit the 1.5C target. We think the then stay around that level through crisis (due to the careful management of structural support for sustainability 2023 and 2024. leverage by households and corporates themes is enhanced by the short term In summary, we expect a fundamental in recent years). Finally, the hawkish tone need to save on costly energy, fertilisers, market backdrop of slowing global of the ECB, coupled with the new Italian packaging, transport etc. Among other growth, while rates continue to rise for government, may test investors’ nerves structural trends, we think the much now, and plateau later (China is a notable in the Eurozone’s periphery. debated de-globalisation and US-China exception, as its growth is slow but Amid this uncertainty, luckily, there strategic competition leads to supply finding a bottom, and Chinese rates are are some structural trends that remain chain diversification, re-onshoring and relatively stable). in place and give investors some long nearshoring, benefiting Mexico, our But a big issue for investors is that term direction. Some commentators Total Security and ASEAN Tigers there are huge uncertainties around are wondering whether the Russia- themes. We discuss the long term this outlook. The many components Ukraine war, which has caused some trends more in our chapter on High entering into CPI create a confusing governments to drill for more oil and Conviction (HiCo) Themes. picture and make accurate forecasts gas to secure energy supplies, puts into 7

Global Private Banking Investment Outlook Report 2. Our current positioning How does our world view affect our investment priorities? Our portfolio strategy adapts to Four key priorities for investors Related focus areas the serious cyclical challenges Rebalancing positions towards bonds Overweight on IG bonds in DM and EM, but recognises the run-up in bond ahead of peaking interest rates with 2-5 year maturities yields to date. We’re much happier to take some interest rate risk than HiCo themes in Short-to-Medium Dated cyclical risk, and are therefore mildly Quality credit, and DM financials underweight in equities, focusing Building recession resistant portfolios Quality stocks and bonds on quality, income and a defensive sector positioning. In bonds, we think Focus on income, partial inflation short-to-medium maturities are the hedges and HiCo themes on American place to be, as they incorporate almost Resilience, Asia’s Reopening Winners all of the rate hikes we expect to and Durable Dividends see, while extending duration would Risk diversification to mitigate market Diversification through our hedge funds increase volatility without giving volatility and geopolitical uncertainty overweight and core allocation investors much more yield (as yield to alternatives curves are flat or inverted). Clearly, the economic downturn also directs us Positioning in structural growth trends Energy Transition and Independence, to high credit ratings, and we favour supported by tailwinds ASEAN Tigers, Asia’s Green investment grade borrowers in DM Transformation and EM. Rising rates hurt both equities Financing Biodiversity Action and bonds in 2022, but with many Total Security and Smart Mobility rate hikes priced in, and the focus of market focus increasingly turning to the economic cycle, we think bonds As our table shows, we believe there are ® Thirdly, amid all the uncertainty and and equities will become less correlated, four priorities for investors. the risk scenarios we have discussed, with high quality bonds becoming a ® First, we rebalance portfolios towards we emphasize diversification. The better diversifier than they were in 2022. bonds, focusing on investment grade low rate environment of the past We add further diversification through in developed and emerging markets. decade was sometimes referred our hedge funds (HF) overweight, and Our related High Conviction themes to as TINA (There Is No Alternative believe HF continue to benefit from are in Short-to Medium Dated Quality to equities), and until recently, our Credit, DM Financial bonds at the top capital market assumptions used to a great opportunity set amid high end of the capital structure, and Asian consider cash and high rated bonds volatility, rotation between sectors and Quality Credit. the least attractive assets from a markets, and geographical differences in ® Secondly, we try to make portfolios risk/return perspective. The rise in monetary policy and growth momentum. more resistant to recession risk (which yields has corrected that, and the We also note that many hedge fund is in part triggered by sticky inflation), new environment is now sometimes strategies that use futures and OTC by focusing on quality stocks and referred to as TARA (There Are derivatives, complemented with cash bonds, companies providing dividend Reasonable Alternatives to equities; related instruments, see their return income or those whose revenues are including bonds, some cash, and potential lifted by higher cash rates. boosted by inflation (energy, staples, alternative assets). So we diversify infrastructure). Our HiCo themes with high rated bonds and hedge of American Resilience, Durable funds, and believe other alternatives Dividends and Hedging Against such as private assets and real estate Inflation can help achieve this. are key parts of well-diversified portfolios too. By using spikes in 8

Global Private Banking volatility to generate income trend. Asia’s short term dynamics the number of themes under the or partial downside protection, have been held back by the delayed ‘Digital Transformation’ umbrella, investors can take positions with recovery in China, but Beijing’s as rising rates hurt growth stocks, limited directional risk. recent pivot towards optimisation of and some companies in this area ® Lastly, our HiCo themes tap into COVID policy and property easing are hit by semiconductor shortages, structural trends, which can measures are giving us some more waning demand for consumer sometimes be crowded out by the confidence. We have moved our electronics and lower ad revenues. noise coming from the rate and focus towards Southeast Asia, We retain our themes related to growth debate, but which remain and towards the beneficiaries of Smart Mobility and Total Security as in place. We continue to hit the supply chain reorientation and they have the strongest short term green button with themes under our the reopening post-COVID. We support in our view. ‘Investing for a Sustainable Future’ have consciously been reducing 9

Global Private Banking Investment Outlook Report Historically, equities and bonds become less correlated when the economic cycle slows. US economic momentum 65 Correlation between bonds and euities S 0.6 0.4 60 0.2 55 0 -0.2 ISM index50 -0.4 -0.6 45 -0.8 40 -1 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020 2022 Source: Bloomberg, HSBC Global Private Banking as at 22 November 2022. Past performance is not a reliable indicator of future performance. The fall in valuations has pushed up bond yields and equities’ earnings yield, but the move in bonds is more significant. 14 Fed funds 5-yr US Treasury US Inesen rade 12 US euiies loal euiies 10 8 6 4 Bond yield and earnings yield (%) 2 0 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020 2022 Source: Bloomberg, HSBC Global Private Banking as at 22 November 2022. Past performance is not a reliable indicator of future performance. Note: equities’ earnings yield is the inverse of the Price / Earnings ratio. 10

Global Private Banking 3. What could make us more could happen in Q1 or early Q2, and growth or a small earnings recession, constructive? would create a more constructive bond and earnings momentum stabilises, We’ve outlined our core views and the environment and allow us to increase this could be the signal for markets that uncertainties around that view, which our duration exposure. FX markets enough pessimism is priced in. This were mainly focused on the downside would be affected too: we moved USD would be a key milestone allowing us risks. But what could make us more to a neutral view after the lower-than- to add back to equities and take a less positive? We’re currently still facing the expected October CPI figure, which defensive sector stance. Local factors worst possible combination of slowing will make it harder for markets to keep matter too: while recent policy measures growth, high inflation and rising rates. forecasting ever higher rates, and have made us more positive on China, But almost all assets have become much should halt the widening in interest rate we would want to see an easing of the cheaper than they were in early 2022, differentials between USD and other energy crisis and the Russia-Ukraine and if markets become more confident currencies. In equities, more stable – or war before upgrading Europe. In the that some of the fundamentals are even lower – bond yields would mean UK, increased trust in government stabilising, and risks are appropriately more support for growth stocks, and policies helps, but it is hard to see a priced, markets could bottom and even this could lead us to add back more high sharp and sustained market rebound recover later in 2023. conviction themes under the ‘Digital amid a prolonged recession. In stage 3, Our table shows a possible path towards Transformation’ trend. We note though improved risk appetite would reduce the a more constructive environment. We that we would still continue to stick to safe haven appeal of USD, leading to think we’re more likely to see better rate quality stocks and bonds until the cycle more support for cyclical currencies and sentiment before we see better news starts to bottom. those with a more attractive yield. on the growth front. Markets will try to From a cyclical perspective, we foresee For now, we maintain our cautious assess when the Fed can be confident a possible bottoming of global economic portfolio composition, but we think that inflation is well on its way down, data around Q2 or Q3, but little upward it is useful to continue to watch key because that will allow it to slow hikes economic momentum from there. On milestones as we are hopeful that some and eventually pause. It’s impossible the earnings side, we think consensus markets will see a rebound sometime in to know for sure, but this milestone forecasts need to come down further, 2023, and investors need to be nimble. but once analysts forecast zero earnings How could our views change when rates peak or growth bottoms? Current position ® Underweight equities – building recession resistant portfolios ® Overweight bonds but with a focus on short-to-medium maturities and quality borrowers ® We moved USD to neutral Milestone 1: What could we change after rates have peaked? ® Extend duration of bond holdings ® Less challenging environment for tech and other growth stocks ® Stick to quality stocks and bonds Milestone 2: What could we change when economic growth and earnings stabilise? ® Add to equity exposure and become less defensive ® Selectively add to credit risk ® Geographical preferences depend on improvement in key local challenges ® USD to decline 11

Global Private Banking Investment Outlook Report Are Diversified Portfolios Still a Better Option than Cash? Perhaps disheartened by the 2022 First, whilst cash rates have indeed Remaining invested and diversified market sell-off and enticed by increased, so have risk premia across across the asset class is a useful rising interest rates, some investors global markets. Second, regardless of investment principle that helps instil wonder whether making substantial whether the Fed gets inflation under discipline and avoid pitfalls of market allocations to cash is becoming a control, history shows that most timing. Evidence shows that embracing viable strategy. We recognise that asset classes should outperform cash market volatility is a rewarding strategy cash is now less unattractive in both scenarios, which strengthens for investor with a long-term horizon. than it used to be, and we have the case for diversification. Finally, Due to the absence of prolonged, tactically upgraded it to neutral. following a historical repricing deep selloffs in the 15 years following But our strategic allocation to cash episode, we believe that fixed income the Global Financial Crisis (GFC), this remains low, and we see three is now offering positive excess principle may have felt particularly easy reasons to remain diversified across returns over cash rates, and this to follow. In addition, cash rates were asset classes. is reflected in our strategic asset effectively zero over most of the period. allocation for 2023. With nothing to be gained from holding cash and plenty to be lost to inflation, While cash rates have moved up, long term return expectations for bonds in astute investors embraced market risk by particular have moved up much more sharply. investing in a mix of bonds, stocks, and 2023 2022 alternatives, whilst limiting their cash 8% Equity allocations during this period. Risky FI 7% But 2022 has been painful for both stock 6% and bond investors. Following a rapid Defensive FI adjustment of the Fed’s monetary policy 5% stance, cash rates are now sitting at 4% 4%, levels not seen since 2007. Perhaps Cash disheartened by the recent sell-off and 3% enticed by higher interest rates, some te­€ ­etu­ns f­€ ate sh‚n2% investors wonder whether cash has 1% become a more attractive proposition than it used to be. We sympathise 0% with this view, mainly on the basis that Exete n0% 2% 4% 6% 8% 10% 12% 14% 16% 18% the regime of financial repression is Exete vatiity probably behind us, and we may again Source: HSBC Global Asset Management, HSBC Private Banking, 22 November 2022. Defensive FI: Government see a regime where cash returns begin Bonds, Corporate Credit, Securitised Credit and Inflation-linked Bonds. Risky FI: High Yield and Emerging Market to outpace inflation again (in the US, Debt. Equities: Developed and Emerging equities. All expected returns are shown in USD. 12

Global Private Banking we think inflation could fall below the USD, 0.81% in the Eurozone, 1.70% in of potential asset class performance Fed policy rate in H2 2023). With that in the UK and 3.09% in China. At the same in the forthcoming period outside of mind, we have recently upgraded our time, our estimate of the expected equity our core scenario, we have to venture Are Diversified view on cash to neutral. risk premium has increased from 4.12% away from the post-GFC experience of But one needs to compare the outlook to 4.91% over the last twelve months. As near-zero interest rates and base our for cash against all other asset classes seen in chart below, fixed income risk scenarios on periods with high cash as viable alternatives when allocating premia are particularly elevated relative rates: the 1970s, when cash rates were Portfolios Still a assets. In spite of their recent increase, to history, and our long term return high and inflation kept escalating, and the market consensus is that cash forecasts have moved up considerably, the 1980s, when cash rates were equally rates are not going to remain at these especially for defensive fixed income. elevated, but inflation was brought levels for a long period of time. Our Whilst we agree cash is no longer under control. Evaluating both scenarios expectation is that the Fed will cut rates unattractive, we must emphasize that can give us some insight on what we Better Option from 2025, and that the cash rate will positive real returns on cash are far from may reasonably expect, regardless of average 2.58% over the next 10 years in guaranteed. To get some idea whether the Fed gets inflation under control in coming years. The first inference to be made from than Cash?Scenario 1: High cash rates and spiralling inflation (1970s) these scenarios is that most asset 35% classes tend to outperform cash even when cash rates are elevated, 30% reinforcing the case for remaining invested in a diversified portfolio. 25% Equities are particularly sensitive to 20% inflation dynamics – they may struggle to do better than cash if inflation 15% remains problematic (1970s), but Anualisedreturn10% they should deliver superior returns if monetary policymakers regain control 5% (1980s). Broad commodities remain a relevant hedge against particularly 0% severe inflationary episodes. And Commodities Property CPI Treasuries Coroporate Cash Stock perhaps most interestingly, fixed income Bonds Market outperforms cash in both reflationary and disinflationary scenarios. In our Strategic Asset Allocation update Scenario 2: High cash rate and declining inflation (1980s) for 2023, we are marginally increasing our allocation to fixed income. We are 25% putting a particular emphasis on inflation linked bonds, as their real yields have 20% returned to levels not seen in more than a decade. Tactically, we increased our 15% cash allocation to neutral this year. But at its neutral weight, cash still represents 10% the smallest percentage allocation in Anualised return our diversified multi-asset portfolio, and we continue to advocate broad 5% diversification across the investable asset classes as a time-tested strategy 0% Stock Treasuries Corporate Commodities Cash Property CPI for the long run. Market Bonds Source: HSBC Private Banking, Bloomberg, Yale University, Dartmouth college, 22 November 2022 . Returns are shown in USD between 31 Dec 1969 and 31 Dec 1989. 13

Global Private Banking Investment Outlook Report Remaking Asia’s Future Against a challenging macro control measures and stop excessive backdrop of global downturn, Asian Our four high conviction themes local containment restrictions marked economies continue to stand out as an important milestone in the gradual a relative safe haven with resilient 1. Asia’s Reopening Winners relaxation of the Zero COVID policy. We domestic fundamentals to weather 2. ASEAN Tigers expect China will likely announce more the recession risks. We believe meaningful reopening measures after Asian economies can maintain their 3. Asia’s Green Transformation the State Council leadership reshuffle relative outperformance against the 4. Asian Quality Credit at the National People’s Congress in global peers with silver linings of March 2023 when booster vaccinations accelerating economic reopening Our new High Conviction Theme of are ramped up more broadly across the and more growth supportive policy Asia’s Reopening Winners focuses on nation in the coming months. initiatives. China’s recent pivot beneficiaries of the widening reopening We expect North Asian economies, towards gradual relaxation of trend across the region. The 20 new including Mainland China, Hong Kong, the Zero COVID policy and more measures announced by China’s Taiwan, South Korea and Japan, should comprehensive policy support for National Health Commission to cut feel the largest positive impact of the property sector are notable quarantine time, optimise pandemic reopening in 2023 given their border drivers to support its gradual Asia has the largest potential upside in reopening growth recovery in 2023. We expect GDP growth in Asia ex- 100% Japan to accelerate to 4.5% in 2023 ­ s 24% from 3.9% in 2022, which is still l 26% e v80% 35% respectable compared with many  e 40% 43% s l developed economies which should l 1 va0 i r see close to zero growth in 2023. r f 260% t a 86% s We believe a recovery in China’s i r s % o u consumption and investment amid o 2 a l t2 a 040% its gradual reopening would boost  o i  2 the overall growth outlook for the t l a u  r region, given China is the single e t   20%   r largest trading partner of 16 major a u Asian economies.  a  0% Our Top Trend of Remaking Asia’s Middle East Europe Americas Africa World Asia Pacific Future looks for the most attractive % recovered % ot et recovered structural and tactical opportunities in the region. Source: UNWTO, HSBC Global Private Banking, 22 November 2022. 14

Global Private Banking reopening and relaxation of COVID trend to continue. Asia’s travel and integrated region through the Regional restrictions have lagged behind the rest tourism sectors are forecast to grow Comprehensive Economic Partnership, of the world. Southeast Asia should at an annualised rate of 8.5% over the which is the world’s largest free trade continue to benefit from the strong coming decade, double the pace of 4% bloc. We believe ASEAN economies can momentum of overseas travellers’ inflow growth for the regional economy. Riding also benefit from the reconfiguration and tourism boom. In Thailand, tourist on the reopening tailwinds, we favour and regionalisation of Asia’s supply arrivals have climbed to only half of pre- quality industry leaders in the travel, chains. And selected ASEAN markets, COVID levels. We expect the reopening- airlines, hospitality, food and beverages, such as Indonesia, can gain from driven recovery to continue in Southeast Macau gaming and mass consumption high commodity prices, proving to be Asia and tourism stands to benefit from sectors in Asia. defensive to the inflation shock. the boom. The ASEAN economies are showing ASEAN stock markets have recorded According to World Travel & Tourism silver linings of resilience with a strong one of the strongest earnings growth in Council estimates, Asia Pacific is consumer spending outlook amid 2022, outperforming global and regional expected to revert to pre-pandemic continued economic reopening. We peers, and we expect this trend to levels in terms of contribution of travel launch a new theme on ASEAN Tigers, continue going into 2023. Indonesia and and tourism to GDP in 2023. The capturing growth opportunities in Thailand have some of the most solid recovery of tourism in Asia was still consumption companies, infrastructure, economic momentum within Southeast half way through 2021, according to ASEAN banks and Singaporean REITs. Asia, thanks to strong consumer UNWTO, and we expect this recovery ASEAN is now a more economically demand. Valuations remain attractive ASEAN has played an increasingly important role in the global trade ASEAN’s global share of exports, % 8.0% 7.0% 6.0% 5.0% 4.0% 3.0% 1990 1995 2000 2005 2010 2015 2020 Source: UNCTAD Stat, HSBC Global Private Banking, 22 November 2022. 15

Global Private Banking Investment Outlook Report relative to history and other regional innovation of new energy vehicles benefit from the net zero transition. markets. Over the past decade, technologies in the region. We We expect China’s annual solar ASEAN economies have undergone favour renewable energy equipment installed capacity to reach 115GW a healthy reset as they have makers of solar, wind and green by 2023 and increase at a 15% deleveraged and continued to invest hydrogen, smart grid manufacturers CAGR to 150GW in 2025. in infrastructure. As a result, ASEAN and leaders in the Electric Vehicles In India, investments of around companies have developed resilient (EV) supply chains. The World USD300bn will be needed to fundamental strengths and stronger Bank estimates China needs to complete the 500GW of renewable balance sheets to withstand invest up to USD17trn for energy energy capacity target by 2030. headwinds from the strong dollar transition, green infrastructure and Southeast Asian countries are also and high US rates. technologies to meet its carbon rushing to issue green bonds to Among the structural growth neutrality goals by 2060. China is finance eco-friendly projects. In opportunities, our High growing into a global powerhouse ASEAN and East Asia, the amount Conviction Theme of Asia’s Green in EV, and one out of three new of sustainable bonds outstanding Transformation stays focused on cars sold in China is now electric. accounted for about 18% of world’s opportunities from the energy Pure EV plays, some conventional total, trailing only Europe as the transition and independence, green Original Equipment Manufacturers second-largest market, according to infrastructure development and (OEMs) and battery companies can Asian Development Bank. China should witness the strongest solar demand growth in the world over the next few years. 160 China Americas Europe 150 140 135 120 115 100 98 80 44 54 60 53 55 37 41 53 44 48 46 49 40 39 42 35 30 28 21 26 20 17 13 17 19 20 7 8 10 0- 2016 2017 2018 2019 2020 2021 2022e 2023e 2024e 2025e Source: SolarPower Europe, BNEF, HSBC estimates, HSBC Global Research, HSBC Global Private Banking, 22 November 2022. 16

Global Private Banking Positioning for moderating inflation and bonds and Indonesian hard currency peaking of the US interest rate cycle, bonds. With Hong Kong’s accelerating we remain bullish on the theme on reopening to the outside world, we Asian Quality Credit, especially amid favour investment grade bonds in the the substantial yield pick-up across retail and property space. We continue the Asian credit markets in 2022. to see attractive carry opportunities in However, this theme stays focused Indonesia’s quasi-sovereign investment on high quality corporate bonds in grade bonds, thanks to the country’s Asia, including high grade Hong Kong improving fiscal position in a strong corporate bonds, Chinese TMT commodity cycle. We prefer short-to- medium duration Asian investment grade bonds which are expected to see lower price volatility relative to longer- dated credit amid rate volatility. Asian IG credit spreads are attractive versus US IG bonds 250 Asian IG Spread US IG Spread 200 s t n i o s p150 i s a n b s i d a 100 e r p t s i d e r C 50 0 03/01/2022 03/03/2022 03/05/2022 03/07/2022 03/09/2022 03/11/2022 Source: Bloomberg, HSBC Global Private Banking, 22 November 2022. Past performance is not a reliable indicator of future performance. 17

Global Private Banking Investment Outlook Report Opportunities Amid High Rates and Slowing Growth The set of themes under our second American Resilience: The US economy staples, as consumers trade down to trend balance the attraction of is growing at below-normal speed, lower cost goods, but keep spending. improved valuations in equities but it still remains more resilient than Durable Dividends: Dividends can and bonds against the current other economies. Key to this is the fact substantially add to total returns, deterioration of the cyclical that it is an energy exporter, so we see especially when the potential for momentum and the high level of opportunities in oil and gas. Many US sustained upside in equity markets is uncertainty. They also act as a households managed to save during the limited. Of course, as the cycle slows, counter-weight to many of our pandemic and unemployment remains it is important to select companies that other themes, which typically have very low. So while we have been shifting have sufficiently strong cash flows to a growth-style bias and follow out of discretionary consumer goods and pay out constant or growing dividends. longer-term trends. We recognise services, we see support for consumer But dividend expectations have been there is some overlap between the themes we discuss below, but by Consumers have seen their mortgage payments and inflation jump, and this combining some of the ideas, all is weighing heavily on their confidence. focused on quality and/or cyclical defensiveness, investors can find Inflation Mortgage rate Consumer confidence (RHS tangible ways to help compose a 10 120 defensive portfolio with reasonable return potential. 8 100 6 Our six high conviction themes 80 4 1. American Resilience % 60 2. Durable Dividends 2 3. Recession Survivors 40 0 4. Hedging Against Inflation 20 5. Short-to-Medium Dated -2 Quality Credit -4 0 6. DM Financials – Moving Up the 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020 2022 Capital Structure Source: Bloomberg, HSBC Global Private Banking as at 22 November 2022 18

Global Private Banking recovering, in part because banks Hedging Against Inflation: In Short-to-Medium Dated Quality (typically among the high dividend financial markets, no inflation Credit: our large overweight of payers) are getting a lift from rising hedge is perfect, but we find three short-to-medium dated and high- rates. From a style perspective, avenues attractive. Firstly, the energy rated bonds in our core portfolio is dividend stocks tend to be value sector should continue to generate also reflected in our high conviction oriented, which can help balance substantial cash flows, even after themes. We continue to focus on portfolios that are heavy on growth the fall of energy prices. And in investment grade, because we think stocks. They also tend to have a the event that prices were to spike high yield spreads are somewhat quality bias and often qualify as ‘low again and cause CPI to rebound, the too tight and sensitive to the growth volatility’ stocks, which should help sector would outperform. Second, slowdown. And we prefer short-to- as we expect market volatility to we like consumer staples stocks medium maturities as credit yield remain higher than usual. with strong market positions as food curves are very flat and hence, it Recession Survivors: The UK is and goods inflation is often passed does not pay to try to get a higher in recession and we expect the on to the consumer, lifting revenues yield by extending duration. Investors Eurozone to enter a recession soon. for those companies. And lastly, we who worry that policy rates could go So we are underweight on the region look at infrastructure, as many of even higher than what is currently in our equity portfolios and look them benefit from a link (often set priced in can add floating rate notes. for companies that can weather a by the regulator) between their input DM Financials – Moving up recession. Such companies will have costs and the prices they charge, the Capital Structure: Banks a quality bias, i.e. strong market which protects their profits. We have strengthened their capital positions and resilient earnings, as have removed real estate from this and liquidity ratios in response to well as manageable leverage. In high conviction theme, as higher stringent regulatory requirements addition, the companies we look borrowing costs may continue to under the Basel III accord. That said, for tend to be in defensive sectors, weigh on real estate values, but Tier 1 capital can be sensitive to such as energy, consumer staples real estate continues to be a key the local economy and sovereign and healthcare. component in a well-diversified spreads, especially in Europe, where core portfolio. the economy is weakening. In that context, we are moving up the capital structure, to Tier 2 and Senior unsecured bonds. We find yields attractive in this area, compared to both sovereign and non-financial bond yields. 19

Global Private Banking Investment Outlook Report Digital Transformation Amid slowing global growth, Smart Mobility 1) The integration of smart technologies trade tensions and high inflation, Rarely do several separate strands of into the infrastructure and the governments, corporates and technology converge in the ways we modes of transport that facilitate the consumers have shifted priorities are seeing in the transportation sector movement of people and goods. in an attempt to limit the impact of and these technologies will transform 2) The beneficiaries of limiting the use of those disruptive forces by focusing many aspects of the way people travel fossil fuels in transportation. on things like alternative sources both locally and over long distances. Let’s look at a practical example of of energy and supply chains’ Smart mobility has multiple benefits as it each to illustrate how this is already reconfiguration. Where does this increases access; provides alternatives; happening in the real world. leave the global wave of digital improves the experience and expands transformation? options. Our investment theme focuses Over the last two decades, leisure and on two key areas: business travel has been transformed at almost every step by automation and Our two high conviction themes digitisation. A new wave of innovations is being unleashed as 5G networks and 1. Smart Mobility Global CO2 emissions from transport by sub-sector in the Net Zero Scenario, 2. Total Security 2000-2021 Road Rail Shipping Aviation ipeline anspotation We think it actually provides 9 renewed impetus to digitisation. 8 The diversification, shortening and automation of supply chains that 7 companies are seeking often involves 6 much more digitisation. And the 5 efficiency drives to tackle inflation often lead to manually intensive processes 4 being substituted for digital alternatives. 3 Digital technologies are transforming Gigatonnes of CO2 society both by substituting existing 2 technologies or processes or devices, 1 and also by opening up new avenues of 0 doing things. 2000 2003 2006 2009 2012 2015 2018 2021 Source: International Energy Agency, HSBC Global Private Banking as at 22 November 2022 20

Global Private Banking low-earth orbit satellites are connecting vehicles powered by petrol or beneficiaries in this broad topic in our existing infrastructure users, devices diesel engines from 2030 or 2035 Total Security investment theme. and transportation. Fully integrated which will accelerate the adoption of The digital transformation has many transportation systems are becoming electric vehicles. benefits, but it also leads to a new a reality. Anybody with a smart phone The opportunity for investors lies security threat, namely, cybercrime. can purchase a ticket on an airline, train with the associated new technologies Governments and companies are or bus for many of the world’s transport replacing those reliant on fossil fuels. investing heavily to protect digital networks before they even arrive in the Based on currently available technology, infrastructure, software and confidential country. Smart technologies allow you lithium batteries offer the best alternative data in an attempt to deter physical and to see passenger loading when selecting source of power for everything from digital attacks. The technology industry a seat; choose less busy routes or times gadgets and sensors to vehicles. is responding to these multiple threats when driving; be informed of delays or Commercial vehicles and trains could by developing software that detects congestion in real time; view locations benefit from the advancements in spyware and computer viruses, using streaming. Simple enhancements hydrogen fuel cell technology although unlocks ransomware and creates give the traveller more choices and allow its adoption is still some way behind firewalls to block hacking. A service them to be in greater control of their lithium batteries. industry has evolved to provide advice own destiny, literally! Therefore, travel is set to become a to potential targets. Let’s look at the second aspect of our more pleasant and environmentally In recent years, wider security risks to Smart Mobility theme, the beneficiaries friendly experience. physical assets and their supply lines of the transition away from use of fossil Total Security have reappeared with many goods fuels to power transportation. According including food, water and energy. to the IEA, in 2021 transportation To many people, the world today seems Governments and companies are trying accounted for 37% of global CO2 a less safe place than at the turn of to mitigate the effects by increasing emissions from end use sectors, the century which is strange given all inventories, diversifying sources and equivalent to 7.7 gigatons of carbon. The the advances in commerce, science, supply chains, investing in alternative Paris Agreement, the COP26 and the technology, communication and life energy and developing more local IPCC climate study give an even greater expectancy until recently. There is capabilities. sense of urgency to the adoption of increased awareness of vulnerabilities zero-emission technologies. Electricity, at national, corporate, and personal As the world’s population continues hydrogen, biofuels and ammonia are level and increased demand for security. to expand and resources become ever potential zero-emission or green fuels Governments are not solely responsible more constrained this will drive growth that should help reduce emissions. for security, as popular culture frames in demand for security product and Governments in several countries have it “everybody has skin in the game’. We services, although sentiment and growth mandated a ban on the sale of new examine potential developments and may ebb and flow with perceived risks and threats. 21

Global Private Banking Investment Outlook Report Investing for a Sustainable Future The 27th Conference of the Parties Projected annual investment in energy storage of the United Nations Framework Convention on Climate Change 70 APAC EMEA Americas Rest o or (or COP 27 for short) had a raised urgency compared to other years 60 and the acceptance and activity on 50 sustainability issues is markedly higher than it has ever been. There 40 is a broad spectrum of crises facing life on earth, the majority of which USD bn30 are a result of human activity and it is now widely accepted 20 that we need to move quickly to limit the impact of our historic 10 mistakes. The good news is that 0 we have everything we need to 2018 2020 2022 2024 2026 2028 2030 2032 2034 2036 2038 2040 get to where we need to be in 2019 2021 2023 2025 2027 2029 2031 2033 2035 2037 2039 terms of sustainability: we have Source: Bloomberg Finance L.P. HSBC Global Private Banking, 22 November 2022. the understanding, the technology, the capital and increasingly the desire. As a result, for investors, the Annual Renewable Energy Capacity Pipeline opportunity set is getting deeper 450 and broader every day and we have identified 4 themes within the 400 sustainability trend that we believe 350 represent excellent opportunities 300 going forward. 250 200 Our four high conviction themes USD bn150 1. Energy Transition and Independence 100 2. Financing Biodiversity Action 50 3. Sourcing Income in a 0 Sustainable Way 2004 2006 2008 2010 2012 2014 2016 2018 2020 Q3 2022 4. The Rise of S in ESG 2005 2007 2009 2011 2013 2015 2017 2019 2021 Source: Bloomberg New Energy Finance (BNEF), HSBC Global Research, HSBC Global Private Banking as at 22 November 2022 22

Global Private Banking Energy Transition and Independence Financing Biodiversity Action can deliver attractive dividends but also The energy transition from high carbon Biodiversity is rapidly moving up the do so in a sustainable way. This way fossil fuels to a lower carbon mix of agenda and seeing many initiatives to try investors can get the benefits of fossil fuels and renewables has been and reverse some of the damage that we an attractive investment approach well underway for many years with have caused to our natural environment. aligned to the current investment solar, wind and other renewable sources The recent win by Luiz Inácio Lula da environment while also supporting a such as hydro gaining a bigger share Silva in the Brazilian presidential race is sustainable future. of the energy mix. Still, the transition a good example. This win was at least The Rise of S in ESG is in a relatively early stage with plenty to some extent a result of his stance of opportunities left. Grids, cables on the protection of the Amazon which The social impact of a company’s role and substations for example need to was in marked contrast to his opponent in the broader society is becoming an be updated to accommodate these and incumbent, Jair Bolsonaro. It was ever more important consideration for renewable energy formats and the a clear message from the people of investors. The pandemic was a key growing trend for residential renewable Brazil, echoed by those concerned trigger that brought the social side of energy generation also needs support with sustainability around the world corporate behaviours (good and bad) to and a framework to operate effectively that preservation and regeneration of the forefront of the headlines. Workers within. Likewise, battery technology our planet’s biodiversity are now a top who had been considered disposable and its wider infrastructure needs to priority. At the local level we are seeing were reclassified as essential and as be considered alongside these new a growing appetite for rewilding, refilling a result their bargaining power has considerations. The cost of clear areas of land with the natural gained ground. Inflation has now added storage is falling and global energy wild flora, native grasses, trees and to employee motivations and created storage installations are expected to flowers which we have learned carries a further drive within worker bodies grow exponentially from 33GWh in benefits to our natural ecosystem far for better pay and conditions. Train 2020 to 1055GWh in 2030 according beyond what is immediately apparent. strikes have been ongoing in the UK to Bloomberg. The biodiversity of our planet has been for example, as the unions there look The War in Ukraine has added greatly reduced in the last 150 years for a larger portion of profits to go to momentum to the energy transition and we are only now realising the roles the workers. In the US, calls for higher trend and highlighted the dangers and that many plants and animals play in minimum wage levels and resulting cost of being overly reliant on others for protecting our environment and keeping unionisation discussions have been domestic energy supplies. Europe, and it in balance. Policy and social demand dampened by some major retailers Germany in particular, have suffered is now building behind this theme, raising their pay and benefits beyond from rapidly rising energy prices boosting the potential of businesses the level legally required but this may and threats of blackouts. This gave active in this area. not last. What this means for investors governments globally a new reason to is that some companies will be better support and accelerate their sustainable Sourcing Income in a positioned than others to navigate the energy plans as a sustainable future is Sustainable Way mounting pressures from these issues. also a domestically generated future. With markets undergoing a significant Companies that perform well in areas Germany for example, saw demand for de-rating in 2022, investors are looking such as diversity and inclusion, and residential solar panels surge following for more stable investments that have strive to achieve equality as well as the onset of the conflict with sales in an income component to their returns. equity, will have the draw of talent, in the first 6 months of 2022 equivalent Through our theme of Sourcing Income turn resulting in better relations with to the total number for 2021. Overall, in a Sustainable Way, we have identified regulatory bodies and clients, and in a the trend of renewable energy expansion companies which have a stable stronger bottom line. is ongoing. foundation at the business level and 23

Global Private Banking Investment Outlook Report Equities Global equities struggled in 2022 Asia’s growth should gradually pickup, also like the energy sector, as supply as markets repriced stocks for in part because of recent policy constraints should keep inventories issues like COVID, the impact of the announcements in China that reduce tail tight and prices high; renewable energy Russia-Ukraine war, high inflation, risk and signal an increased focus on generation benefits from people’s desire global tightening of monetary balancing COVID control with growth. to save on costly oil and gas, as well as policy, tighter corporate margins, Meanwhile, Europe and the UK seem the continued structural trend. and slower earnings growth. As we destined to be in recession. In the US, In terms of style, we focus on quality enter 2023, we do so with some the healthy balance sheets put together companies with resilient earnings. trepidation. The repricing we’ve in 2021 could prevent the economy from Companies that maintain high levels of seen makes valuations now look toppling over into outright recession but cash should be able to maintain dividend attractive, but until earnings growth slower growth seems inevitable. We policies, providing attractive total return is downgraded sufficiently to reflect maintain a defensive sector positioning, opportunities for income investors. And the new reality, the risk premium starting with an overweight in consumer with bond yields still remaining high is unlikely to compress much, and staples as rising food prices may keep and volatile, we maintain our balance volatility should remain in place. margins wider than anticipated. We between value and growth stocks. Overweight Daily bond yield moves have been much larger than usual, providing hedge Markets: US, Mexico, Brazil, funds with many opportunities. Switzerland, Mainland China, USA Europe ex-UK UK E Asa Indonesia, Thailand and Hong Kong 200 Sectors: Consumer Staples and 180 Energy (including renewables) 160 Underweight 140 Markets: UK, Germany, Spain, Italy, South Africa, Turkey, South Korea 120 and Taiwan 100 Sectors: Industrials and Consumer rebased to 100 five years ago Discretionary 80 Global style bias 60 Nov-17 Nov-18 Nov-19 Nov-20 Nov-21 Nov-22 Quality and Income Source: Bloomberg, HSBC Global Private Banking as at 22 November 2022. Past performance is not a reliable indicator of future performance. 24

Global Private Banking Europe on the brink hard by the Chinese zero tolerance economic performance, further In Europe, recession seems all but a policy against the COVID pandemic. earnings downgrades seem probable certainty as food and energy prices Because of the cyclical challenges, and we think we will need to wait remain stubbornly high and the war we’re even more defensive in for an easing of the energy crisis continues to create fiscal drag in Europe than in other regions, with before the valuation gap with the the region. Equities in Europe are an overweight in healthcare and US can compress. The UK market also being weighed down by weak an underweight in financials. As in continues to do better than the state domestic demand. Global trade other regions, tight supplies and of the local economy would suggest, flows, which have often helped lift good profitability has allowed us to thanks to the presence of many European equity markets, are set to also keep our overweight position global companies, but the deep cost slow further in the face of this global on the European energy companies. of living crisis and fiscal tightening slowdown. Europe has been hit Valuations look compelling but should nevertheless weigh on given the outlook for the region’s performance in our view. A split congress has historically been relatively constructive for US stocks, under a Democratic president. 20 Democrat Repulican 15 10 % 5 0 -5 -10 Supportive Mildly Supportive Mixed Mildly Hostile Hostile Congress Congress Congress Congress Congress Source: HSBC Global Asset Management, HSBC Global Private Banking as at 22 November 2022. Past performance is not a reliable indicator of future performance. 25

Global Private Banking Investment Outlook Report Mildly overweight on EM Asia Maintaining our overweight in position. Therefore, while the higher Asian equity markets have seen quite the Americas inflation and rate structure will take a a disparity in terms of performance. Slower economic growth and bite out of growth and demand in the Some Southeast Asian markets have contracting margins should weigh on US, we feel that both the corporate outperformed as border reopening US earnings growth in 2023. Equity and consumer sectors remain liquid has boosted consumption and investors also continue to struggle enough to survive the downturn. shifting supply chains have lifted with the Fed’s historically aggressive Nevertheless, the weakening cycle production. In addition, food and tightening of monetary policy and means that we maintain a defensive energy producers in the region have still very high inflation. High rates are posture with overweight positions benefited from the same global particularly painful for technology, in consumer staples, energy and trends we have seen in other regions. which is a large sector in the US. utilities. Also, domestic demand has been Still, US equities remain our main In Latin America, equity markets more resilient and intraregional overweight globally as we believe have fared better than their other EM trade has kept markets buoyed the US may avert outright recession. counterparts. Central banks in the and economies have reopened. Many US companies refinanced their region tightened monetary policy Taiwan and South Korea however balance sheets and extended the earlier than others, and are now have been hit by the fading global duration of their bonds when rates more advanced, giving some like demand for semiconductors and the were still low in 2021. This implies Brazil the possibility to start cutting global competition in technology. It they do not have to refinance in the rates in Q2 2023. As China’s COVID is in China that we have made the near term, and should be good for measures are adjusted, providing big change, upgrading the market their cash levels and profitability. further stimulus for the domestic to a mild overweight after weak US stocks rallied going into the economy, Latin America, especially performance. Although we do midterm elections and a split Brazil and Chile, could benefit not see a big pickup in economic congress has traditionally been substantially from the improvement growth, we believe the downside good for US stocks. in trade flows. And in Mexico, the risk related to housing and COVID Many US consumers refinanced their near shoring theme is providing has been reduced by Beijing’s mortgages too in 2021, and many of a boost. As American companies recent policy pivot towards growth them have long maturities and fixed move supply chain management recovery. The market now expects rates, which should now help cap closer to US borders, the economy more initiatives in coming months. their debt service costs for some has already begun to see an Reduced risk coupled with time. This, combined with faster improvement due to this long- attractive valuations have made the wage growth, has put consumer term theme. market more attractive, warranting balance sheets in a fairly healthy the upgrade. China’s valuations are particularly cheap compared to other markets, and reduced downside economic risk leads us to upgrade Chinese equities to mildly overweight. 24 US rope e-U o i t hina merging ar ets a 22 s r g n i 20 n r a e / e18 c i r 16 d p r a 14 w r o h f t 12 n o m - 10 12 8 Nov-17 Nov-18 Nov-19 Nov-20 Nov-21 Nov-22 Source: Bloomberg, HSBC Global Private Banking as at 22 November 2022. Past performance is not a reliable indicator of future performance. 26

Global Private Banking Two milestones ahead – before we would see more for improved total returns. We take a While we remain cautious on global sustained and widespread support balanced equities for now, we could take more for stocks. view between growth and value. positive steps when two milestones In the meantime, we focus on quality While we pay close attention to are reached. Further evidence companies that produce solid cash sector bets, this remains a stock- of rates peaking would benefit flows and maintain low levels of pickers’ market, and close attention rate-sensitive stocks, including net debt. We also continue to look should be paid to resilience of technology. But we would need for income, either through dividend underlying business models. to reach the second milestone – a payouts or stock re-purchase stabilisation of growth and earnings programs to enhance the potential Higher rates have hurt growth stocks, while high dividend stocks have done well. Amid the slowdown, the recent pickup in cyclicals looks odd to us. 120 Cyclicals / Defensives ratio ale / rot ratio 110 Dividend stocs / ­C€ orld ratio o g100 s a r a e e y90 v 0 fi 0 o 180 d t e s a 70 b e r 60 50 Nov-17 Nov-18 Nov-19 Nov-20 Nov-21 Nov-22 Source: Bloomberg, HSBC Global Private Banking as at 22 November 2022. Past performance is not a reliable indicator of future performance. 27

Global Private Banking Investment Outlook Report Fixed Income Rate volatility remains elevated on Rate volatility has been detrimental to bond returns the back of hawkish central banks’ rhetoric and high inflation prints, YTD 3M which have been detrimental to 0% bond market returns. The silver lining is that bond valuations price -5% in most of the rate hikes we foresee and have gained in attractiveness -10% relative to other asset classes, such as equities. As a consequence, we -15% hold an overweight in fixed income, but we remain cautious and focus on quality corporate credit, mostly -20% in investment grade (EM and DM) -7.3% -7.8% -8.1% -5.0% -4.0% -6.3% -7.2% -4.9% and at the “short-to-medium” part -25% -15.2% -14.0% -19.2% -12.9% -13.4% -19.8% -21.3% -17.3% of the yield curve. The flat or even US US US I US Y U Y M  r­ M S € M S € L inverted yield curve shapes do not Treasury Treasury   USD Linkers Un‚eƒ„eƒ adequately compensate for taking additional duration exposure in our opinion. We expect DM sovereign Source: HSBC Global Private Banking, JP Morgan, BOFAML indices as at 22 November 2022. Past performance is not a reliable indicator of the future performance bond yields to remain volatile in the short-term but to decline over 2023 as inflation and economic growth head south and corporate credit spreads continue to widen, especially for lower-rated issuers. US Treasury valuations have improved relative to equities Overweight 0% UST Index Yield - S&P 500 Enin Yield Government bonds: UK Gilts -1% Credit and EM: US, European and -2% UK IG; Australian and New Zealand -3% corporate bonds; GCC and Mexican Hard Currency bonds; Brazilian -4% HC corporate bonds; Mexican and Yields Brazilian Local Currency bonds -5% Underweight -6% Government bonds: German -7% and Japanese government bonds, -8% European Periphery debt Nov-07 Nov-09 Nov-11 Nov-13 Nov-15 Nov-17 Nov-19 Nov-21 Credit and EM: Argentinian, Turkish Source: HSBC Global Private Banking, Bloomberg as at 22 November 2022. Past performance is not a and Ukrainian Hard Currency bonds; reliable indicator of the future performance Turkish and Indian Local Currency bonds, Russian debt in Hard and Local currency 28

Global Private Banking Developed Markets: overweight with a focus on carry opportunities at the short-to-medium end of the corporate credit curve Following the repricing for tighter monetary policies and the high level of DM real rates, which are almost back to pre-2008 levels, we believe it is right to hold a mild overweight for bonds and a modest underweight in equities. But the uncertainty around the global economy and central banks’ inflation fight “at all costs”, force us to be cautious in our bond allocation, especially when considering that the Federal Reserve has already hiked interest rates to a restrictive territory. Consequently, we reduced our long-held underweight position in DM government bonds, which represent the safest part of our bond allocation and serve as a diversifier to risk assets (i.e. their returns function generally counter-cyclically). Another supportive argument is the differential between US Treasuries and the S&P 500 earnings yield, which is at its tightest since 2007, making bond valuations more attractive on a relative basis. Finally, with a 5% Fed funds peak rate now priced in by markets, we also believe that a peak in DM bond yields rates is not too far away. Some DM rates may have even seen their peak already: this might be the case in the UK, where the BoE met market expectations with an outsized 75bp hike to 3% in November, but struck a distinctly dovish tone. This supports our view that the end of tightening cycle is very close and Gilt yields may have 29

Global Private Banking Investment Outlook Report peaked in October, following the mini- At the sector level, we mostly weak China property sector. As of the budget announcement. We therefore concentrate on Energy and Financial end of October, EM sovereign bonds upgraded our view on Gilts to a mild companies, with a preference for the had a negative return of 23.8% and EM overweight in November, while keeping top-end of their capital structure (refer to corporate bonds delivered a negative a full overweight on quality credit, short- our Theme on DM Financials: Moving Up return of 19.8%. EM local bonds were dated IG bonds in GBP. They offer the the Capital Structure). In other sectors, more resilient, declining by 9.5% on widest credit spreads on average across we focus on companies with strong average, but including FX weakness, DM IG markets. balance sheets, declining leverage and they provided quite similar negative Overall, our global bonds overweight increasing cash flow generation and return of 19.3% in USD terms. consists of an overweight in global IG healthy bond maturity profiles. A flight to quality also led to significant (i.e. USD, EUR, GBP), neutral Global HY Emerging Markets: focus on short- outflows from EM funds this year, which and a small underweight in sovereign to-medium dated quality credit added pressure to EM bond prices debt. We continue to focus on carry as fund managers had to liquidate opportunities at the short-end of the Emerging market bonds in hard positions in illiquid markets in order to corporate credit curves (2-5-year currencies (HC) performed poorly this satisfy redemptions. All in all, EM credit maturities), focusing on Global IG and year, suffering from challenging global underperformed US High Yield bonds, high BB-rated companies, where the economic environment and rising rates which delivered a negative return of carry trade is the most attractive in our coupled with idiosyncratic stories such 12.2% as of the end of October. view when compared to relative risks. as the Russia-Ukraine war and the EM corporate fundamentals are at the strongest level in over 10 years Net leverage IG companies 4 EM IG  IG Ero IG 3.5 3 2.5 2 1.5 1 0.5 0 2008 2010 2012 2014 2016 2018 2020 2022 2009 2011 2013 2015 2017 2019 2021 Source: HSBC Global Private Banking as at 22 November 2022; JP Morgan estimates as of Q2 2022 30

Global Private Banking At the same time, emerging market remains limited at just 1.2% and is focusing on cash-rich companies with economies are now much more resilient similar to DM markets where the default low refinancing risks and stress the to global challenges and EM corporate rate is 1.5% for US HY and 0.3% for importance of diversification. fundamentals are at the strongest European HY. Within EM, the default rate On a regional basis we prefer Brazil, level in over 10 years. As of the end of is unsurprisingly the highest in Mexico and the GCC which have Q2 2022, the average net leverage of EM Europe at 21.7% and Asia at 12.8% demonstrated more economic resilience Global EM was 1.3x (see graph). US IG while Middle East & Africa remains at in the current global environment. We companies had an average net leverage 0.0% and Latin America is at a fairly recently upgraded Brazil from neutral of 2.5x and European IG at 3.3x. Despite contained 2.2%. to a mild overweight stance based on macro headwinds, EM companies’ While macro risks remain elevated in the an improved macroeconomic backdrop credit metrics should remain stable this near term and volatility in risky assets and reduced political uncertainty as the year as most companies continued might continue, we find that short-to- presidential elections are behind us. We to see revenue and EBITDA growth medium dated quality EM credit offers remain neutral on EM LC markets as and were able to pass on rising costs value due to solid credit quality and global risks remain elevated, pressuring to customers. improved valuations. On average, EM EM countries’ fiscal and current The EM corporate default rate, excluding corporate bonds provide a yield of 8.7% accounts. The only two local markets the troubled areas of Chinese property, and have an investment grade rating where we are mildly overweight are Russian and Ukrainian issuers, also of BBB. However, we remain selective Brazil and Mexico. EM corporate fundamentals are at the strongest level in over 10 years Net leverage HY companies EM HY U HY Ero HY 7 6 5 4 3 2 1 0 2008 2010 2012 2014 2016 2018 2020 2022 2009 2011 2013 2015 2017 2019 2021 Source: HSBC Global Private Banking as at 22 November 2022; JP Morgan estimates as of Q2 2022 31

Global Private Banking Investment Outlook Report Currencies and Commodities USD strength has been a key As a result, we recently downgraded Bullish dynamic of financial markets since USD to neutral; upgraded EUR and the start of 2021, but the outlook GBP to a neutral view; and JPY JPY, SGD, BRL is changing. The dollar benefited and SGD to a bullish view. In the from the leadership of the Fed in commodities space, we remain Neutral setting the pace of monetary policy neutral on Gold, Silver and Oil as USD, EUR, GBP, CHF, AUD, NZD, CAD, tightening and an attractive rate we see muted momentum. EM FX (including RMB), Gold, Silver pickup compared to many other G10 USD strength has been a very consistent and Oil currencies. But as we get closer story over the past two years and to peak rate levels, we think those investors who have stuck with it have Bearish rate differentials are unlikely to benefited from strong currency gains, widen further, and the gap may even with the USD index trading at 20 year KRW narrow with some countries. As a highs in early November. While there result, the main tailwind for USD is were three main tailwinds (widening The October US CPI figure, which finally fading fast. USD will still get some interest rate differentials, weakening showed a decline in core inflation, support however from weakening global economic growth, weak risk is giving markets hope that we are global economic growth, relative appetite), at least one of them (rate approaching peak rates, and as a economic resilience in the US and differentials) is quickly falling away. result, there is reduced upside risk to mixed-to-weak risk appetite. 32

Global Private Banking the 5% peak rate level that markets around macroeconomic forecasts will for now. We keep our prudent stance on currently price in. We think it is too early continue to generate some FX volatility, KRW, however. KRW could continue to to become negative on USD however, which investors can exploit, while others suffer from the weak technology cycle. as the Fed still needs to implement may look at hedging unwanted USD We see further upside risks for SGD, due additional 100bps of rate hikes and the exposure to lock in and protect gains to strong economic fundamentals and US economy is still relatively resilient made so far. the Monetary Authority of Singapore’s amid a struggling global economy. While EUR and GBP will probably move tightening policy. Outside of Asia, we Moreover, until risk appetite improves sideways, we believe JPY will manage to are constructive on BRL. The country and equities see a more sustainable recover and we move to a bullish view. shows robust economic drivers, and the bounce, the safe haven characteristics Of course, the pronounced weakness currency offers one of the largest real of USD also provide it with some to date is one factor, in addition to the rates among EM. In addition, political downside support. likelihood of further intervention. The uncertainties largely reduced since The mirror image of our USD downgrade yen is also helped by a strong reduction elections have passed. is an upgrade of EUR and GBP to a in investors’ bearish positioning and Despite the recent bounce in commodity neutral view. Both currencies are cheap some volatility in global risk appetite, prices, we do not expect Gold and Silver following the sharp USD rally. But both and this should help compensate for the to outperform in the coming months. are also facing recessions, limiting continued yield disadvantage. USD’s recent strength has weighed the potential for upside. Of course, The cyclical character of AUD means that on both metals, while higher rates and commodity prices play a key role here. it will likely struggle to capitalise on the real bond yields create a competitive European nations are commodity fading USD momentum. AUD also faces disadvantage for gold compared importers, and the recent rise in oil and domestic risks given the rapid tightening to cash and bonds. Oil prices have gas prices has forced the European and cycle compared to other major central decreased since the beginning of June UK central banks to tighten policy in the banks. CHF could be supported by and although we do not expect them midst of an unprecedented cost of living relatively robust local economic drivers to decrease further, we do not expect a crisis. Central banks are therefore left but the yield differential with the US will strong rebound either. Global supply has in a dilemma as the room for tightening continue to limit CHF’s upward potential. picked up given the increase in Russia’s further narrows: the BoE recently In EM Asia, low Chinese inflation production, but demand is softer than became more dovish due to weak translates into an attractive real yield, before. The market seems adequately growth prospects, while the ECB remains which supported RMB. We see upside supplied for now, so we believe somewhat more hawkish and still does risks if China’s economy rebounds in prices will trade sideways in the not forecast a recession. The uncertainty 2023, but hold a neutral view on RMB coming months. USD momentum is stalling 120 115 110 105 100 95 90 USD index85 80 75 70 Jan-90 Jan-94 Jan-98 Jan-02 Jan-06 Jan-10 Jan-14 Jan-18 Jan-22 Source: Bloomberg, HSBC Global Private Banking as at 22 November 2022. Past performance is not a reliable indicator of future performance. 33

Global Private Banking Investment Outlook Report Hedge Funds We maintain our positive outlook USD strength remains a key trend with profits, and the outsized price action this for hedge funds because market the Fed further ahead in its hiking cycle year continues to be beneficial. This is conditions, which we forecast to than the rest of the world. Tactical shorts particularly true for managers who have persist well into the first half of in equity markets are popular exposures shorter lookback windows and are more 2023, are supportive for a number of as stocks come under pressure from reactive. For other approaches, market strategies. In addition, higher cash both higher rates and recession fears. neutral systematic in particular, we note rates provide a tailwind for certain In contrast we maintain our neutral that the current environment of elevated strategies such as managed futures negative outlook for EM focused macro dispersion at a sector and single stock and equity market neutral. We have managers due to geopolitical and level along with heightened volatility the strongest positive conviction economic headwinds. Idiosyncratic provide a ripe opportunity as we on developed market discretionary opportunities do however exist in certain continue to see outsized contributions macro, systematic market neutral markets. But these bright spots are from idiosyncratic stock selection. and multi-PM strategies all of which nonetheless challenged by the negative We continue to maintain an outright have made money during 2022. sentiment, elevated volatility and low positive outlook on multi-strategy and The environment remains supportive levels of liquidity making trading difficult. multi-PM managers. Many multi-PM for developed market focused macro We remain neutral on Managed Futures managers have continued to deliver managers. Divergences in the timing, strategies, neutral positive for Market strong returns in this unpredictable and speed and magnitude of monetary Neutral Systematic and neutral negative whipsaw market, which continues to tightening and potential recession across for Equity Long-Bias Systematic. For validate our high conviction in the space. G10 economies should offer fertile managed futures while trend followers Risk management at multi-PM shops is opportunities in both directional and are not necessarily long volatility, they notoriously sophisticated and involved, relative-value fixed income trades. In FX, need ‘something to happen’ to make and its varied sources of uncorrelated Daily bond yield moves were much larger than usual, providing hedge funds with many opportunities 0.5 0.4 0.3 0.2 0.1 year Treasury yields (%)0 - -0.1 -0.2 -0.3 Daily moves in 10-0.4 -0.5 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020 2022 Source: Bloomberg, HSBC Global Private Banking as at 22 November 2022. Past performance is not a reliable indicator of future performance. 34

Global Private Banking return streams have worked well and and become a natural replacement for and geographies. In addition, there helped create resilience in this uncertain longer-biased equity exposure, with remains are remains a robust level of market. In our view, the ability to attract increased alpha. Turning to Asia, while activist campaigns increasingly focused and retain talent continues to be one the earnings picture remains weak, around “sell the company” demands, of the most important differentiating significant de-risking over the past strategy/operational improvement and factors of a successful multi-PM fund. 9 months has meant that valuations corporate governance. We maintain our neutral outlook on are below fair value with a number of Within credit our view for Structured Equity long/short across US, Europe, fundamentally strong companies Credit remains neutral/positive, and Technology, and neutral positive outlook trading cheaply. our outlook for both Credit Distressed for Asia Equity long/short. Against the We maintain our neutral rating on and Credit Long/short remains neutral. backdrop of rising rates, many equity Event Driven strategies and favour However, considerable improvements in long/short managers continue to run managers who have broad expertise spread, carry and dispersion continue to with reduced risk as they expect markets across sub-strategies and the ability get our attention as we believe the next to remain volatile in the near term. Many to opportunistically allocate across all credit cycle may be nearing. Structured have also reduced their index hedges, asset classes. As a result of the rapid Credit appears to be the most attractive switching to more single name equity tightening of monetary policy, we could currently as loss adjusted yields have shorts as dispersion is expected to be be on the cusp of the next credit cycle, improved into the high single/low higher in this environment. In summary, although credit issues should remain double digits. whilst there may be more asymmetry to substantially less than in 2008. Still, this the downside for equity markets during should represent a fertile opportunity set 1H 2023, this is an environment where for managers that can redeploy capital equity long short managers can perform dynamically across the capital structure Volatility has picked up across markets, but particularly in bonds Equity volatility FX volatility Bond volatility index (R 90 300 80 250 70 60 200 50 % 150 40 30 100 20 50 10 0 0 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020 2022 Source: Bloomberg, HSBC Global Private Banking as at 22 November 2022. Past performance is not a reliable indicator of future performance. 35

Global Private Banking Investment Outlook Report Private Markets Amid sharp declines in public As the macroeconomic picture worsens, have seen strong levels of fundraising markets, Private Equity (PE) most PE firms have been forced to in Q3 compared to last year. Despite valuations have dropped and re-examine and write down the value the headwinds in the broader market, continue to soften, but less than of their investments on the back of investor appetite for PE remains strong. public markets. Fundraising and lower public valuations, higher costs We have seen an increase in value of exits have dropped too, but activity of capital, and a deteriorating growth $166.1bn in Q3 compared with the same levels should still remain in line outlook. That said, in many cases, period last year of $157.9bn. However, with historical averages. Despite the valuation compression has been we are witnessing a lower number of the challenging environment, we muted, partly explained by the lower PE fund closings (3,347 vs 1,6242) as believe PE provides opportunities to correlation between public market equity Limited Partners (LPs) are focusing on take advantage of targets, especially valuations and private market valuations. re-ups, resulting in a thinning of the in sectors where public valuations Manager performance continues to vary herd and leading to more “mega-funds”. have suffered the steepest declines considerably and the gap between Looking ahead, we think many LPs (such as technology and healthcare). top and bottom quartile funds is have already hit their allocation targets And we believe there are attractive increasingly apparent. for the year and Q4 figures will be deals in the secondary market to While fundraising activity continued more subdued. acquire high quality exposures at to decline, it remains in line with In the secondary market, overall discounted levels. historical quarterly averages and we transaction volumes in H1 2022 36

Global Private Banking increased by 18% compared to H1 rather than being forced sellers in an lengthen. GPs are not under pressure to 2021, reaching $57bn of assets traded. unattractive market environment, thus deploy capital and competition around In our opinion, this reflects the appeal slowing the flow of exits year to date. deals has been a bit lower than it has of the secondary market as a source of When looking at Buyouts, IPOs as an been for a couple of years. Despite liquidity for private equity asset owners exit path suffered the most notable the headwinds in the broader market, and managers in uncertain market decline. Last year, IPOs accounted for pockets of activity remain. Investor conditions. This presents a compelling roughly 25% of exits, compared to 17% appetite for IT deals remains robust opportunity for secondary buyers this year in value terms, and only 5% by given the long-term trends in increased to acquire high quality exposures at deal number, as investors shy away from digitalisation and tech innovation that attractive pricing levels, especially in IPOs amid market volatility and issuers will drive attractive long-term growth sectors that have suffered the from the low valuations. Still, exit values opportunities in the sector. Many steepest declines (such as technology should roughly be aligned with pre- investors view the shift in valuations and healthcare). pandemic levels. as a buying opportunity for assets that In terms of exits, we are seeing General Deployment has been slower so far this were previously perceived as being too Partners (GPs) biding their time for year as GPs are more disciplined and expensive, and we expect PE firms to the right exit opportunities and PE cautious given the macro environment find attractive take-private targets. firms holding on to their investments and we expect due diligence timelines to Buyout capital backed exits by type Restruturin Sale to  ri ate anaement laement erer Sale to ­ Trade Sale €‚its ƒalue „R…S† 3500 1000 3000 900 800 2500 700 2000 600 500 1500 400 number of deals1000 300 USD billions 500 200 100 0 0 2012 2014 2016 2018 2020 2022 2013 2015 2017 2019 2021 YTD Source: Preqin, HSBC Global Private Banking as at 22 November 2022. 37

Global Private Banking Investment Outlook Report Real Estate Higher interest rates have pushed and current owners. As a result, supply at a time of falling demand, up property yields, causing values activity declined 21% YoY in Q3 in the adding further to downward pressure to decline and opening up a US, 37% in Europe and 38% in Asia on values although ‘fire sales’ can widening gap in price expectations (source: Real Capital Analytics). usually be avoided by managers between potential buyers and The sharpest corrections have been deferring redemptions. Withdrawals sellers. We anticipate further recorded in sectors that used to be are also a function of falls in bond capital value declines. Property the most sought after, where property and equity values in portfolios, which fundamentals yields were the lowest and which still have rendered investors over-exposed are generally still healthy, though have the strongest long-term outlook to property and trigger a need for a weakening economy indicates for rental growth and occupancy. portfolio rebalancing. rental growth should slow in the This is most apparent for the logistics Occupier market fundamentals are coming quarters. and residential sectors as strong generally still in reasonable health but Rising rates have triggered a competition between investors for slowing economic growth weighs on widespread increase of property the best assets often implied record leasing demand across all property yields, hitting capital values. low yields and the use of leverage. types. Expansion plans and or costs According to Green Street Advisers, Although values have now fallen can be reduced, putting downward values have fallen by 10-15% in the US sharply for the lowest yielding sectors, pressure on rents and values. Unlike and Europe in Q3 2022. Despite the this mainly reflects a paring back of previous downturns, however, rise in property yields, the spread with gains rather than a change of fortunes. development activity does not bond yields remains historically low, Just as investor demand has been pose a major risk as the profitability pointing further potential declines in curtailed, some open-ended property of developing has been sharply property values. Falling values have funds are dealing with a wave of curtailed by high costs of materials, opened up a widening gap in price redemption requests. To raise cash, labour and debt. expectations between potential buyers they may need to sell assets, adding 38

Global Private Banking The office sector has been most in city centres are struggling with slow because people usually cut impacted by the pandemic due to lower footfall from tourism (which discretionary spending (such as eating the permanent shift towards hybrid remains well below pre-pandemic out and holidays) before missing working. Geographically, this shift has levels) and the reduced frequency their monthly rent payments. In been greater in the US and Europe of white collar workers going into addition, higher interest rates have than in Asia-Pacific where a stronger the office. reduced the affordability of buying cultural attachment to the office and E-commerce spending (as a share of flats and houses, further sustaining higher density cities support office all retail sales) has fallen back into line demand from renters. Whilst there working. Whilst occupiers may have with its pre-pandemic trend in many may be some signs, specifically in the reduced their overall need for office economies. Still, logistics leasing US, of multifamily rents stabilising, space, there has been a notable shift remains above trend as, in addition demographic tailwinds continue to towards leasing better quality space to demand related to e-commerce support other parts of the residential that supports corporate sustainability spending, businesses invest in sector such as single-family and targets. Offices in secondary improving supply chain resilience after senior housing. locations needing substantial several years of disruption caused Direct property valuations rely on capital expenditure due to by the pandemic and geopolitical evidence of market transactions and, environmental regulations are upheaval. Market rents are typically as a result, will take time to adjust considered most at risk. above in-place rents currently paid by to the current environment of higher Retail property fundamentals have tenants indicating substantial income interest rates, slowing economies and been recovering from the big COVID- growth for landlords even if market weaker investor demand. By contrast, pandemic hit. However, the cost of rental growth slows. publicly-listed real estate equities are living crisis hurts retail spending. Residential property is amongst the marked to market and adjust quickly. Moreover, many prime retail locations more defensive sectors as economies 39

Global Private Banking Investment Outlook Report Disclaimer Risks to our View invested principal in certain circumstances. Interest Should the China Central Government tighten the The key risk factors include adverse regulatory payments may be variable, deferred or canceled. control, the liquidity of renminbi or even renminbi changes, health concerns, spectrum cost and Investors may face uncertainties over when and bonds in Hong Kong will be affected and you may allocation issues excess capital expenditure by how much they can receive such payments. be exposed to higher liquidity risks. Investors telecom operators, trade tensions, evolvement of • Contingent convertible or bail-in debentures should be prepared that you may need to hold a 5G standards, uncertainties in pricing and demand - Contingent convertible and bail-in debentures renminbi bond until maturity. for new products and services in 5G and related are hybrid debt-equity instruments that may be Risk disclosure on Emerging Markets offerings. written off or converted to common stock on Investment in emerging markets may involve Risk Disclosures the occurrence of a trigger event. Contingent certain, additional risks which may not be typically convertible debentures refer to debentures that associated with investing in more established Risks of investment in fixed income contain a clause requiring them to be written off or economies and/or securities markets. Such risks converted to common stock on the occurrence of include (a) the risk of nationalization or expropriation There are several key issues that one should a trigger event. These debentures generally absorb consider before making an investment into fixed losses while the issuer remains a going concern (i.e. of assets; (b) economic and political uncertainty; income. The risk specific to this type of investment in advance of the point of non-viability). “Bail-in” (c) less liquidity in so far of securities markets; (d) may include, but are not limited to: generally refers to (a) contractual mechanisms fluctuations in currency exchange rate; (c) higher (i.e. contractual bail-in) under which debentures rates of inflation; (f) less oversight by a regulator Credit risk contain a clause requiring them to be written off of local securities market; (g) longer settlement Investor is subject to the credit risk of the issuer. or converted to common stock on the occurrence periods in so far as securities transactions and (h) Investor is also subject to the credit risk of the of a trigger event, or (b) statutory mechanisms (i.e. less stringent laws in so far the duties of company government and/or the appointed trustee for debts statutory bail-in) whereby a national resolution officers and protection of Investors. that are guaranteed by the government. authority writes down or converts debentures Risk disclosure on FX Margin under specified conditions to common stock. Risks associated with high yield fixed income Bail-in debentures generally absorb losses at the The price fluctuation of FX could be substantial instruments point of non-viability. These features can introduce under certain market conditions and/or occurrence High yield fixed income instruments are typically notable risks to investors who may lose all their of certain events, news or developments and rated below investment grade or are unrated and invested principal. this could pose significant risk to the Customer. as such are often subject to a higher risk of issuer Changes in legislation and/or regulation Leveraged FX trading carry a high degree of risk default. The net asset value of a high-yield bond and the Customer may suffer losses exceeding their fund may decline or be negatively affected if there Changes in legislation and/or regulation could initial margin funds. Market conditions may make is a default of any of the high yield bonds that it affect the performance, prices and mark-to-market it impossible to square/close-out FX contracts/ invests in or if interest rates change. The special valuation on the investment. options. Customers could face substantial margin features and risks of high-yield bond funds may also calls and therefore liquidity problems if the relevant include the following: Nationalization risk price of the currency goes against them. • Capital growth risk - some high-yield bond funds The uncertainty as to the coupons and principal Currency risk – where product relates to other may have fees and/ or dividends paid out of capital. will be paid on schedule and/or that the risk currencies As a result, the capital that the fund has available on the ranking of the bond seniority would be When an investment is denominated in a currency for investment in the future and capital growth may compromised following nationalization. other than your local or reporting currency, changes be reduced; and Reinvestment risk in exchange rates may have a negative effect on • Dividend distributions - some high-yield bond A decline in interest rate would affect investors as your investment. funds may not distribute dividends, but instead coupons received and any return of principal may Chinese Yuan (“CNY”) risks reinvest the dividends into the fund or alternatively, be reinvested at a lower rate. the investment manager may have discretion on There is a liquidity risk associated with CNY whether or not to make any distribution out of Changes in interest rate, volatility, credit spread, products, especially if such investments do not income and/ or capital of the fund. Also, a high rating agencies actions, liquidity and market have an active secondary market and their prices distribution yield does not imply a positive or high conditions may significantly affect the prices and have large bid/offer spreads. return on the total investment. mark-to-market valuation. CNY is currently not freely convertible and • Vulnerability to economic cycles - during Risk disclosure on Dim Sum Bonds conversion of CNY through banks in Hong Kong economic downturns such instruments may Although sovereign bonds may be guaranteed by and Singapore is subject to certain restrictions. typically fall more in value than investment grade the China Central Government, investors should CNY products are denominated and settled in CNY bonds as (i) investors become more risk averse and note that unless otherwise specified, other renminbi deliverable in Hong Kong and Singapore, which (ii) default risk rises. bonds will not be guaranteed by the China Central represents a market which is different from that of Government. CNY deliverable in Mainland China. Risks associated with subordinated debentures, perpetual debentures, and contingent convertible Renminbi bonds are settled in renminbi, changes in There is a possibility of not receiving the full amount or bail-in debentures exchange rates may have an adverse effect on the in CNY upon settlement, if the Bank is not able to value of that investment. You may not get back the obtain sufficient amount of CNY in a timely manner • Subordinated debentures - subordinated due to the exchange controls and restrictions debentures will bear higher risks than holders of same amount of Hong Kong Dollars upon maturity applicable to the currency. senior debentures of the issuer due to a lower of the bond. priority of claim in the event of the issuer’s There may not be active secondary market available Illiquid markets/products liquidation. even if a renminbi bond is listed. Therefore, you In the case of investments for which there is no • Perpetual debentures - perpetual debentures need to face a certain degree of liquidity risk. recognised market, it may be difficult for investors often are callable, do not have maturity dates and Renminbi is subject to foreign exchange control. to sell their investments or to obtain reliable are subordinated. Investors may incur reinvestment Renminbi is not freely convertible in Hong Kong. information about their value or the extent of the and subordination risks. Investors may lose all their risk to which they are exposed. 40

Global Private Banking Disclosure concerning sustainable investments Important notice not necessarily reflect the views and opinions of “Sustainable investments” include investment The following may be subject to local requirements. other market participants and are subject to change approaches or instruments which consider without notice. Actual results may differ materially environmental, social, governance and/or other This is a marketing communication issued by from the forecasts/estimates. When an investment sustainability factors (collectively, “sustainability”) HSBC Private Banking. This document does not is denominated in a currency other than your to varying degrees. Certain instruments we include constitute independent investment research under local or reporting currency, changes in exchange within this category may be in the process of the European Markets in Financial Instruments rates may have an adverse effect on the value of changing to deliver sustainability outcomes. Directive (‘MiFID’), or other relevant law or that investment. There is no guarantee of positive regulation, and is not subject to any prohibition trading performance. There is no guarantee that sustainable investments on dealing ahead of its distribution. HSBC Private Foreign securities carry particular risks, such as will produce returns similar to those which don’t Banking is the principal private banking business exposure to currency fluctuations, less developed consider these factors. Sustainable investments of the HSBC Group. Private Banking may be or less efficient trading markets, political instability, may diverge from traditional market benchmarks. carried out internationally by different HSBC legal a lack of company information, differing auditing In addition, there is no standard definition of, or entities according to local regulatory requirements. and legal standards, volatility and, potentially, less measurement criteria for sustainable investments, Different companies within HSBC Private Banking liquidity. or the impact of sustainable investments or the HSBC Group may provide the services listed (“sustainability impact”). Sustainable investment in this document. Some services are not available in Investment in emerging markets may involve and sustainability impact measurement criteria are certain locations. 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The information of assets; (b) economic and political uncertainty; and/or reported by third party providers or issuers. contained within this document is intended for (c) less liquidity in so far of securities markets; (d) HSBC does not always conduct its own specific general circulation to HSBC Private Banking fluctuations in currency exchange rate; (e) higher due diligence in relation to measurement criteria. clients and it has not been prepared in light of rates of inflation; (f) less oversight by a regulator There is no guarantee: (a) that the nature of the your personal circumstances (including your of local securities market; (g) longer settlement sustainability impact or measurement criteria of specific investment objectives, financial situation periods in so far as securities transactions and (h) an investment will be aligned with any particular or particular needs) and does not constitute a less stringent laws in so far the duties of company investor’s sustainability goals; or (b) that the stated personal recommendation, nor should it be relied officers and protection of Investors. level or target level of sustainability impact will be upon as a substitute for the exercise of independent You should contact your Relationship Manager achieved. judgement. 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Such investments are including information from sources believed to be with the non-UK offices of the HSBC Group. generally intended for experienced and financially reliable, no representation or warranty, expressed This publication is a Financial Promotion for the sophisticated investors who are willing to bear the or implied, is or will be made by HSBC Private purposes of Section 21 of the Financial Services risks associated with such investments, which can Banking or any part of the HSBC Group or by any & Markets Act 2000 and has been approved for include: loss of all or a substantial portion of the of their respective officers, employees or agents as distribution in the United Kingdom in accordance investment, increased risk of loss due to leveraging, to or in relation to the accuracy or completeness of with the Financial Promotion Rules by HSBC UK short-selling, or other speculative investment this document. Bank plc, which is authorised by the Prudential practices; lack of liquidity in that there may be no Regulation Authority and regulated by the Financial secondary market for the fund and none expected It is important to note that the capital value of, and Conduct Authority and the Prudential Regulation to develop; volatility of returns; prohibitions and/ income from, any investment may go down as well Authority. or material restrictions on transferring interests as up and you may not get back the original amount in the fund; absence of information regarding invested. Past performance is not a guide to future In Guernsey, this material is distributed by HSBC valuations and pricing; delays in tax reporting; - key performance. Forward-looking statements, views Private Banking (C.I.) a division of HSBC Bank plc, man and adviser risk; limited or no transparency and opinions expressed and estimates given Guernsey Branch which is licensed by the Guernsey to underlying investments; limited or no regulatory constitute HSBC Private Banking’s best judgement Financial Services Commission for Banking, oversight and less regulation and higher fees than at the time of publication, are solely expressed Insurance Intermediary and Investment Business. mutual funds. as general commentary and do not constitute In Jersey, this material is issued by HSBC Private investment advice or a guarantee of returns and do Banking (Jersey) which is a division of HSBC Bank 41

Global Private Banking Investment Outlook Report plc, Jersey Branch: HSBC House, Esplanade, St. In Abu Dhabi Global Markets (ADGM), this In Hong Kong and Singapore, THE CONTENTS OF Helier, Jersey, JE1 1HS. HSBC Bank plc, Jersey material is distributed by HSBC Bank Middle East THIS DOCUMENT HAVE NOT BEEN REVIEWED OR Branch is regulated by the Jersey Financial Services Limited, ADGM Branch, 3526, Al Maqam Tower, ENDORSED BY ANY REGULATORY AUTHORITY Commission for Banking, General Insurance ADGM, Abu Dhabi, which is regulated by the ADGM IN HONG KONG OR SINGAPORE. HSBC Private Mediation, Fund Services and Investment Business. Financial Services Regulatory Authority (FSRA). Banking is a division of Hongkong and Shanghai HSBC Bank plc is registered in England and Wales, Content in this material is directed at Professional Banking Corporation Limited. In Hong Kong, this number 14259. Registered office 8 Canada Square, Clients only as defined by the FSRA and should not document has been distributed by The Hongkong London, E14 5HQ. HSBC Bank plc is authorised by be acted upon by any other person. and Shanghai Banking Corporation Limited in the the Prudential Regulation Authority and regulated by In Dubai International Financial Center (DIFC), this conduct of its Hong Kong regulated business. the Financial Conduct Authority and the Prudential material is distributed by HSBC Private Bank (Suisse) In Singapore, the document is distributed by the Regulation Authority. S.A., DIFC Branch, P.O. Box 506553 Dubai, United Singapore Branch of The Hongkong and Shanghai In France, this material is distributed by HSBC Arab Emirates, which is regulated by the Dubai Banking Corporation Limited. Both Hongkong Continental Europe. HSBC Private Banking is the Financial Services Authority (DFSA) and is permitted and Shanghai Banking Corporation Limited and private banking department of the HSBC Group to only deal with Professional Clients as defined by Singapore Branch of Hongkong and Shanghai in France. HSBC Continental Europe is subject to the DFSA. Banking Corporation Limited are part of the HSBC approval and control by the Autorité de Contrôle Group. This document is not intended for and must Prudentiel et de Résolution [Prudential Control In South Africa, this material is distributed by not be distributed to retail investors in Hong Kong and Resolution Authority] as a credit entity. HSBC HSBC Private Bank (Suisse) SA’s Representative and Singapore. The recipient(s) should qualify Private Banking department of HSBC Continental Office approved by the South African Reserve Board as professional investor(s) as defined under the Europe, Public Limited Company with share capital (SARB) under registration no. 00252 and authorized Securities and Futures Ordinance in Hong Kong of 491,155,980.00 €- SIREN 775 670 284 Trade and as a financial services provider (FSP) for the provision or accredited investor(s) or institutional investor(s) Companies Register of Paris Bank and Insurance of Advice and Intermediary Services by the Financial or other relevant person(s) as defined under the Intermediary registered with the Organisme pour Sector Conduct Authority of South Africa (FSCA) Securities and Futures Act in Singapore. Please le Registre des Intermédiaires en Assurances under registration no. 49434. The Representative contact a representative of The Hong Kong and [Organisation for the Register of Insurance Office has its registered address at 2 Exchange Shanghai Banking Corporation Limited or the Intermediaries] under no. 07 005 894 ( Square, 85 Maude Street, Sandown, Sandton. Singapore Branch of The Hong Kong and Shanghai - Intra-community VAT number: FR 707 756 702 84. Banking Corporation Limited respectively in respect HSBC Private Banking - HSBC Continental Europe In Bahrain and Qatar, this material is distributed by of any matters arising from, or in connection with - Registered office: 38, avenue Kléber 75116 Paris- the respective branches of HSBC Bank Middle East this report. FRANCE- Tel. +33 (0) 1 49 52 20 00. Limited, which is locally regulated by the respective local country Central Banks (Central Bank of Bahrain Some of the products are only available to In Switzerland, this marketing material is distributed and Qatar Central Bank respectively) and lead professional investors as defined under the Securities by HSBC Private Bank (Suisse) SA, a bank regulated regulated by the Dubai Financial Services Authority. and Futures Ordinance in Hong Kong / accredited by the Swiss Financial Market Supervisory Authority investor(s), institutional investor(s) or other relevant FINMA, whose office is located at Quai des Bergues In Lebanon, this material is handed out by HSBC person(s) as defined under the Securities and Futures 9-17, 1201 Genève, Switzerland. This document Financial Services (Lebanon) S.A.L. (“HFLB”), Act in Singapore. Please contact your Relationship does not constitute independent financial research, licensed by the Capital Markets Authority as a Manager for more details. and has not been prepared in accordance with financial intermediation company Sub N°12/8/18 to carry out Advising and Arranging activities, having The specific investment objectives, personal the Swiss Bankers Association’s “Directive on the its registered address at Centre Ville 1341 Building, situation and particular needs of any specific Independence of Financial Research”, or any other 4th floor, Patriarche Howayek Street, Beirut, persons were not taken into consideration in relevant body of law. Lebanon, P.O. Box Riad El Solh 9597. the writing of this document. To the extent we are required to conduct a suitability assessment in Hong Kong where this is permitted by cross border rules depending on your place of domicile or incorporation, we will take reasonable steps to ensure the suitability of the solicitation and/ 42

Global Private Banking or recommendation. In all other cases, you are In the United States, HSBC Private Banking offers In Germany, this material is distributed by HSBC responsible for assessing and satisfying yourself that banking services through HSBC Bank USA, N.A., Trinkaus & Burkhardt AG, a bank regulated by the any investment or other dealing to be entered into is Member FDIC. Investments and certain insurance Bundesanstalt für Finanzdiensleistungsaufsicht, in your best interest and is suitable for you. products, including annuities are offered by HSBC whose office is located at Hansaallee 3, 40549 In all cases, we recommend that you make Securities (USA) Inc. (“HSI”), Member NYSE/FINRA/ Düsseldorf, Germany. The General Data Protection investment decisions only after having carefully SIPC. HSI is an affiliate of HSBC Bank USA, N.A. In Regulation (GDPR) has been in force in all EU reviewed the relevant investment product and California, HSI conducts insurance business as HSBC Member States since May 25, 2018. Our updated offering documentation, HSBC’s Standard Terms Securities Insurance Services. License #: OE67746. privacy policy can be found here: and Conditions, the “Risk Disclosure Statement” Whole life, universal life, term life, and other types de/de-de/datenschutzhinweise. If not explicitly detailed in the Account Opening Booklet, and all of insurance are offered by HSBC Insurance Agency stated, transaction costs and if applicable custody notices, risk warnings and disclaimers contained (USA) Inc., a wholly owned subsidiary of HSBC Bank fees are not taken into account in the calculation in or accompanying such documents and having USA, N. A. 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Investment products are: Not a deposit or other for buying and selling are 1,00 % each time, and In addition to any suitability assessment made in obligation of the bank or any affiliates; Not FDIC the custody fee is 0,50 % per year (for our actual Hong Kong by HSBC (if any), you should exercise insured or insured by any federal government fee structure please see our schedule of prices & your own judgment in deciding whether or not a agency of the United States; Not guaranteed by services), the performance over a 5-year-investment- particular product is appropriate for you, taking into the bank or any of its affiliates; and are subject horizon would be reduced 45 EUR account your own circumstances (including, without to investment risk, including possible loss of Where your location of residence differs from limitation, the possible tax consequences, legal principal invested. that of the HSBC entity where your account is requirements and any foreign exchange restrictions Australia held, please refer to the disclaimer at https:// or exchange control requirements which you may encounter under the laws of the countries of your If you are receiving this document in Australia, border-disclosure for disclosure of cross-border citizenship, residence or domicile and which may the products and services are provided by The considerations regarding your location of residence. be relevant to the subscription, holding or disposal Hongkong and Shanghai Banking Corporation No part of this publication may be reproduced, of any investment) and, where appropriate, you Limited (ABN 65 117 925 970, AFSL 301737) stored in a retrieval system, or transmitted, on any should consider taking professional advice including for “wholesale” customers (as defined in the form or by any means, electronic, mechanical, as to your legal, tax or accounting position. 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