Disclaimer & Disclosures: This report must be read with the disclosures and the analyst
certifcations in the Disclosure appendix, and with the Disclaimer, which forms part of it
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Global Sector Playbook
Sixteen high-conviction themes
HSBC’s global sector analysts’ key
sector themes and stock ideas for
an increasingly fragmented world
Four common themes: impact
of high commodity prices
and infation; digital economy
disruptions; regulatory roll-back;
and corporate restructuring and
self-help
56 international stock benefciaries,
from Nestle and Verizon, to
Samsung and Hyundai, and
Sberbank and Petrobras
EQUITY STRATEGY
GLOBAL
February 2017
By: Ben Laidler, Daniel Grosvenor, and the HSBC Global Equity Sector TeamsEQUITY STRATEGY ● GLOBAL
February 2017
16 conviction sector themes (and 56 international stock ideas)
Global equities have started the year on a strong footing with a nascent cyclical recovery and
faith in a dramatic shift in US fiscal policy driving market optimism. But we see only modest
market upside in 2017, with a rebound in earnings growth partly offset by lower valuation
multiples. And risks are skewed to the downside, in our view. Valuations look stretched,
economic policy uncertainty is at record highs and structural headwinds to growth remain.
We favor the US and Emerging Markets (EM) where we see the greatest likelihood that
consensus earnings expectations are met, with support in the US from a proposed corporate tax
reform, and in EM from a depressed and turning earnings cycle. And are we are cautious on
Europe, where a heavy political calendar reduces visibility and is likely to weigh on investor
sentiment (see Global equities in 2017: Walking a tightrope).
1. View from the top: HSBCs multi-asset views for 2017
Asset Class 2017 view
Economics Global growth to accelerate modestly to 2.5% in 2017. Inflation at 3%.
Fixed Income Structural factors support lower yields. We forecast the 10 year UST at 1.35% at year-end
FX USD momentum to fade in the second half. We forecast EUR-USD at 1.10 at year-end
Equities Low single digit returns. Overweight US and EM, underweight Europe
Asset Allocation Tactically positioned for 'America-first'
Source: HSBC
Macroeconomic trends remain important in this world, with timing the end of the reflation trade
likely to be key driver behind fund performance in 2017, in our view. But there are increasing
bottom-up opportunities. Equity correlations have fallen sharply since the US election and are
now near their lowest level since early 2007 (charts 2 and 3). What was once a market
dominated by risk on-risk off has now become far more fragmented (see Trump off, Trump on:
Making sense of post-election market moves).
With this in mind we survey our senior global sector analysts for the conviction themes they believe
will drive returns in their sector in the year ahead. This report covers 16 global sectors – from airlines
through to utilities – and highlights 56 international stocks identified by HSBC analysts as benefitting
most from these sector themes. Themes and stocks are summarized in table 4.
2. Equity correlations have fallen sharply
since the US election…
3. …and are now below their long-term
average
Source: Bloomberg, HSBCSource:Bloomberg, HSBC
Conviction themes for a
fragmenting world
Cautious global equity view +
lowest equity correlations in
a decade = a focus on bottom
up drivers
Analysts’ conviction themes
across 16 global sectors that
will drive 2017 performance
EQUITY STRATEGY ● GLOBAL
February 2017Common themes
Although the themes identified are deliberately bottom up, it is possible to identify a few
common threads.
prices, inflation, margins and pricing power, for the first time in a number of years. In the
last six months, inflation break-evens are up c70bp globally, and the GS Commodity Index
is up by a third. This is a clear positive for Oil & Gas (page 47) and segments within Metals
& Mining (page 38) and Chemicals (page 24), but it presents challenges for consumer
sectors (page 35 and 44) and is likely to determine relative winners and losers within
Airlines (page 10). This mirrors our top-down strategy overweights of the commodity sectors
relative to consumer cyclicals.
goods and services disrupting the operating environment in a number of sectors, including
Non-Food Retail (page 44), Luxury Goods (page 35), Financials (page 17), and Real Estate
(page 41). China often leads here with a technology ‘blank canvas’ allowing a leapfrogging
of legacy infrastructure and business models.
potential watering down of Basel IV regulations – and Telecoms (page 54) – where US style
telecom-media convergence may not be possible elsewhere. The Trump administration has
proposed to roll back the estimated 40% increase in US regulatory burden of the last decade.
LatAm Utilities (page 58). This process of ‘creative destruction’ is strong in US industrials
and going global. We are also seeing in China’s asset privatization program, and in
European and LatAm utilities.
Four themes – inflation;
digital economy; regulation;
and restructuringEQUITY STRATEGY ● GLOBAL
February 2017
4. Sixteen conviction sector themes
Sector & Author Conviction theme Highlighted stocks
1. Airlines
Andrew Lobbenberg
Global airlines past the peak – stock picking needed
Fuel prices rise yet fare increases lag. Our highest conviction Buys
are the recovery businesses and those especially cheap
EasyJet, China Eastern-
H, Aeromexico, Turkish
Airlines
2. Automobiles Developed markets reaching peak plateau; hope is on EM Hyundai Mobis, Peugeot,
Continental
Horst Schneider Developed markets reaching peak, opportunities in suppliers on
valuation, US and Chinese autos have downside risks
3. Banks US banks to benefit most from Trump’s policies UBS, Sberbank,
SanMex, Barclays,
HDFC Bank
Carlo Digrandi Banks should benefit from more benign operating environment with
recovering volume, margin stability, greater visibility on regulations
4. Building Materials Projecting an upturn in global construction activity Cemex Holdings,
LafargeHolcim, ACS John Fraser-Andrews The first synchronised global construction rally since the financial
crisis should take hold this year
5. Chemicals Chinese coal price impact on commodity chemical cost curves LG Chemical, Mexichem,
Formosa Plastics,
Sipchem
Sriharsha Pappu Impact of higher coal prices and China capacity curtailment on cost
curves; Higher coal to push prices in PVC & methanol chains.
6. Food & HPC The return of commodity inflation a boon or a curse Danone, Nestlé
Damian McNeela Gross margin compression from rising input costs can be more
than offset by cost savings, and could help improve organic growth
7. Food Retailing
David McCarthy
A localized industry with common themes
Food retail a scale industry, with inelastic demand, high cross price
elasticity, operational gearing. Focus on market leaders with growth.
Tesco, Ahold Delhaize,
Carrefour, Booker Group
8. Industrials Creative Destruction – In admiration of Joseph Schumpeter Atlas Copco, Sandvik,
Crompton Greaves Michael HagmannSee companies seeking value creation through downsizing - splits,
spin offs or disposals. Started in US; arrived in EU; will go to EM.
9. Luxury Goods Management changes to be most impactful on stock prices Coach, Kering,
Ferragamo Antoine Belge & Erwan Rambourg Need for generational change to better connect with a young,
demanding, mostly Asian consumer brought up on mobile
10. Metals & Mining More bullish but selective on commodity prices Glencore, Rio Tinto,
Anglo American David Pleming Cyclical recovery driving commodity optimism. Stocks linked to
base and precious metals to outperform those driven by bulks.
11. Real Estate iRobot, the logistics disruptor Fibra Prologis, Segro
Stephen Bramley-Jackson Returns from e-Commerce led logistics real estate investment are
bucking all trends, yet robots are a pending disrupter.
12. Retail Online & value-based retailers with low cost operating models AB Foods, Inditex
Paul Rossington Growth in online is largest structural shift, we see relevance for
price-led store based offers with low cost operating models.
13. Oil & Gas Returns set to improve (at last) Petrobras, Total, Lukoil,
Chevron, PTTEP Gordon Gray Sector’s return on capital might finally have reached a trough,
which could lead to a re-rating of P/BV multiples
14. Tech Hardware Tech hardware set up for a better 2017 with numerous drivers LG Innotek, Largan
Precision, Samsung
Electr., Delta Electr.
Steven Pelayo Myriad new technologies ramping, yet smartphones still largest.
Risk: China smartphone overbuild; pause ahead of next gen iPhone
15. Telecoms 5G on horizon; net neutrality a deciding factor for telcos NTT DoCoMo, Verizon,
Proximus, Deutsche
Telecom, Magyar
Telekom
Stephen Howard EU regulation better; globally, net neutrality a deciding factor in
content acquisitions. 5G on horizon: unlikely to boost revenue
16. Utilities & Alternative Energy Renewables, bond proxies and inorganic growth plays China Longyuan Power,
National Grid, CTEEP,
SABESP
Evan Li Energy transition in China favors renewable energy. In Europe,
regulated bond proxies the best. Latin America offers strong growth
Source: HSBC
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