Asset allocation: HSBC’s Davies bets on QE and corporate bonds

europe

HSBC’s multi-asset funds are set to benefit if European Central Bank president Mario Draghi turns the money taps back on, according to HSBC senior portfolio manager Jane Davies.

Draghi has committed to re-examining the quantitative easing programme in December, giving a clear signal that it plans to begin printing money again, says Davies. QE has been held at €60bn since January.

Davies says: “The ECB was more doveish and cautious on the recovery of the European periphery in the latest central bank meeting. The bank is looking to see if it will extend and increase QE, as well as lowering interest rates further down the line.

“We think valuations are supportive and there are still policies in place to sustain the recovery in Europe.”

Because of the “still accommodative” monetary policy in Europe, Davies, who leads portfolio management in HSBC’s multi-asset team, will remain overweight on European equities. She is also positive on valuations in Japan.

In the Balanced portfolio, one of three funds in the recently launched Global Strategies range together with the Cautious and Dynamic portfolios, European and Japanese stocks represent 10.2 per cent and 5 per cent of equity exposure respectively.

“We think valuations are supportive and there are still policies in place to sustain the recovery in Europe.”

Davies says: “Europe in particular is trading at valuation discounts compared with US equities, for example. Corporate earnings look good and there is more scope for recovery.”

The multi-asset fund maintains a diversified asset allocation, mostly investing through passives to keep fund fees low, Davies explains.

HSBC recently cut the cost of some of its index trackers by more than half. Fees have been cut in the American and European index funds, which make up 22.17 per cent and 8.84 per cent of the top 10 holdings of the Balanced fund respectively.

In the Balanced fund, which has collected more than £13m since it started trading in mid-October, the management team is taking “more risk” in credit by overweighting corporate bonds, which make up 29 per cent of the portfolio.

At the same time Davies says the fund will remain underweight government bonds, which are currently 5 per cent of the fund. She says: “We are underweight in duration because of poor valuation in developed government bonds, even though the recent market volatility was a bear time for the bond market.”

Davies says the third quarter of this year has also been a “very difficult” period for emerging market equities.

Although these “idiosyncratic macro risks” and mixed fundamentals originate in emerging market countries, the fund has maintained a 6.7 per cent weighting to the region.

Davies says: “We see some regions struggling, like Latin America – particularly Brazil – but other regions have very attractive value stocks, such as in some parts of Asia. The volatility reinforces the importance of diversification but we don’t think the data is as negative as people think. The market has overreacted in relation to the underlying factors.”

For Davies, however, a clearer risk to the positions of the multi-asset funds comes from a possible further tightening of US monetary policy.

She says: “We have been underweight US equities since May. What would concern us more is a further tightening of monetary policy and that would be negative for equities.

“However, the timing of the interest rates hike is not as important as the trajectory the rate rise  might have.”

WEB_291015_AssetAllocation_Graph