Citing receding tail risks and building global momentum, HSBC strategists are making some big changes to the firm’s recommended portfolios. Among the moves -- shifting their inflation hedge from gold to Treasury Inflation Protected Securities. Why the makeover? HSBC’s Fredrik Nerbrand, the firm’s global head of asset allocation, believes the global recession risk is much smaller now, with reduced fears of a euro meltdown and/or apocalyptic U.S. fiscal situation. Expect below-trend growth and subdued inflation, but conditions should improve, he said. Here’s what HSBC says it’s adding to its strategic and tactical portfolios and where it’s selling:
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Less gold. HSBC strategists are cutting their gold allocation by more than half in their strategic portfolio. “With systemic risks receding, we see less reason to have a large weighting in gold which adds a lot of volatility to our portfolio,” the analysts say. In the event of a recession, they now expect gold prices to fall to $1,600 a troy ounce, rather than rising to $2,200 a troy ounce. The upshot, gold is no longer a sound investment in a recession, they say. Read more on gold.
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More TIPS. HSBC says something has to replace the gold position as an inflation hedge because the analysts still see chances of above-trend inflation increasing, owing to better emerging growth expectations and prolonged central-bank easing. So the strategists are increasing their exposure to Treasury Inflation Protected Securities by 3%. Over the last two years, they note TIPS have performed as well as gold and have also produced returns with much less volatility than the precious metal. Read more on bonds.
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More equities. HSBC strategists have lowered the probability of below-trend growth, and increased the probability of above-trend growth. They’re lifting their equity allocation by 8% and believe that stocks are still priced below fair value. Equity markets should benefit from rising price/earnings ratios, the key drivers of equity returns in their scenarios. They also appear good value on a longer-term basis, the strategists say. HSBC said last week in a separate note that European equities, especially, are still undervalued. Germany’s DAX on Friday closed at its highest level in five years. Read more on Europe Markets.
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Backing out of credit. In order to pay for that shift in equities, HSBC has cut its overall credit allocation by 4%. They’ve increased their allocation to high-yield credit so that it now accounts for around 9% of their strategic portfolio. They also cut their investment-grade position by 6% to 2%. By this move they continue to shift away from the middle-ground of the risk spectrum. In the photo, a picture of MGM Resorts , one of the biggest U.S. junk-bond issuers.
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Cutting portfolio duration. By increasing high-yield allocation and cutting investment-grade allocation, HSBC has reduced its portfolio duration, a strategy the bank’s strategists are keen to embrace right now. They note some speculation that the third round of quantitative easing could end sooner rather than later. While they don’t expect that to happen, the strategists concede there is more uncertainty around interest rates, and in that environment, they want to tilt to the shorter term.
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More Treasuries. HSBC strategists cut their 10-year Treasury bond allocation by 3% to 7%, but also increased their 5-year allocation by 6% to 16% as a way of lowering their portfolio duration and volatility. “The volatility of 10-year Treasuries started to increase in July 2011 and has remained stubbornly high since then,” they wrote.
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The final change HSBC analysts recommend is a marginal increase to local-currency emerging market debt and a reduction in hard-currency emerging market debt. That again helps reduce portfolio duration, say the strategists. With economic signals suggesting the global economy is entering a cyclical upswing, the strategists expect local-currency debt to benefit from EM currency appreciation. And they also see more stability in emerging market foreign exchange, which makes them more comfortable with this position. The capital of Mexico is shown left; the country is among debt-issuing emerging market countries. Also check out: Rich bond yields you’re likely missing