More liquidity flows into emerging markets in 2011 for higher returns – HSBC experts

HSBC Global Asset Management expects that liquidity and inflation will be the key issues for the global economy, and emerging markets will continue to lead the economic growth in 2011.

Two investment experts from the company shared their global market outlook with Asian investors in Hong Kong, Singapore, Taiwan and Japan.

The global economy is expected to post a moderate growth of 4.1 per cent in 2010 and fall to 3.6 per cent in 2011. The low growth scenario in the developed world should continue to keep interest rates very low and financial markets awash with liquidity as a result of the quantitative easing in the US.

Philip Poole, Global Head of Macro and Investment Strategy, HSBC Global Asset Management, said: “Given the Fed’s commitment to keep policy ultra-loose, a US double-dip looks less likely than continued moderate growth. Additional liquidity is leading to concerns about inflation and asset price bubbles in the emerging world. In our view, valuations are not yet at levels that signal bubble territory but this is a risk that needs monitoring. Global inflation will be largely in line with 2010 with an upside bias for emerging markets. However, this should not interrupt the overall growth story. ”

In contrast to on-going loose policy in the developed world, policy makers in many emerging markets will need to tighten monetary policy to prevent overheating. As a result, additional liquidity from monetary stimulus in the developed world is likely to seek out higher returns in emerging markets and commodity-based economies and currencies. Growth in emerging markets will continue to benefit from rising domestic consumption, as well as a growing need for huge infrastructure investment in a number of markets.

Philip added, “We are positive on Latin America as a region. It is rich in natural resources and there are also diversification opportunities across sectors and markets. The corporate sector has delivered top-tier earnings growth over the last ten years and we expect this to continue. Russian equities also look attractive on valuation grounds and this is one of our preferred ways to play the commodity theme.”

Ayaz Ebrahim, Chief Investment Officer, Asia-Pacific, HSBC Global Asset Management, said: “Asia will continue to be supported by low interest rates, ample liquidity and strong profit margins in 2011. In particular, we see good value in Korea and Taiwan from the valuation perspective and for their exposure to the Asian technology sector, which could benefit as investors switch to more cyclical, export-driven markets on the strength of the global recovery. Economic growth in China and India is expected to remain robust at 9.2 per cent and 8.5 per cent respectively.”

The investment themes for the bond market are also selective. Poole favours corporate bonds in both developed and emerging markets for their stronger balance sheets and yield pick-up. To hedge against rising inflation in emerging markets, investors may also consider protection measures via inflation-linked bonds.

Ebrahim expects liquidity to remain supportive of Asia backed by its strong fundamentals, demand for Asian credit and healthy issuance. Several Asian currencies are undervalued and have room for further appreciation, including the RMB and the Malaysian Ringgit.

HSBC Global Asset Management is a leading asset manager in emerging markets with over US$100 billion of assets under management in this area.