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The 10 Key Trends Changing Investment Management: and How They Will Affect Asset Prices
The 10 Key Trends Changing Investment Management: and How They Will Affect Asset Prices
September 2012
Garry Evans*
Global Head of Equity Strategy
The Hongkong and Shanghai Banking Corporation Limited
+852 2996 6916
garryevans@hsbc.com.hk
Garry heads HSBC's equity strategy team worldwide. His previous roles at HSBC include Asia Pacific Equity Strategist, Head of
Pan-Asian Equity Research, and Japan Strategist. Garry began his career as a financial journalist and was editor of Euromoney
magazine for eight years before joining HSBC in Tokyo in 1998. Garry is based in Hong Kong.
*Employed by a non-US affiliate of HSBC Securities (USA) Inc, and is not registered/qualified pursuant to FINRA regulations.
Disclosures and Disclaimer This report must be read with the disclosures and analyst
certifications in the Disclosure appendix, and with the Disclaimer, which forms part of it
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Summary
How is a world of low interest rates, risk aversion and unusually high
correlations affecting the investment management industry? We
identify 10 trends changing how investors invest, and assess their
impact on the price of assets
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10
Yield
Spread
8
6
4
2
0
03
04
05
06
07
08
09
10
11
12
Source: Bloomberg
6.5
6.0
Equity
Bond
Cash
5.5
5.0
4.5
88 90 92 94 96 98 00 02 04 06 08 10 12
Source: Bloomberg, MSCI (*Equity=MSCI ACWI TR Gross, Bonds=JP Morgan
Aggregate Bond Index TR Unhedged USD, Cash=3-month T-bills)
Risk minimising strategies. Investors ideally would like equity-style returns with bond-like
volatility. Thats rarely possible. But fund managers are developing products that offer different
combinations of risk and return. Such strategies include: multi-asset funds, long/short equity
strategies, risk parity products, minimum volatility equity funds and using options to target a level of
risk. Page 20
The growth of multi-asset. The fastest growing type of risk minimising strategy, especially in the
UK, is the absolute return fund, most famously Standard Lifes GARS. Such funds target Libor-plus
absolute returns, with bond-like volatility and costs lower than hedge funds. They have their
detractors (do they really create alpha, or are they just leveraged bond funds?) but look likely to grow
further, even in the US where they have yet to take off. Page 22
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800
Passiv e
Activ e
600
400
USDbn
200
0
-200 01 02 03 04 05 06 07 08 09 10 11 12
-400
-600
Source: EPFR
1,600
1,400
US
Europe
Other
1,200
1,000
800
600
400
200
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012*
350
300
HF index
L/S equity
Macro HFs
250
200
150
100
00 01 02 03 04 05 06 07 08 09 10 11 12
abc
400
300
200
100
0
Equity
bonds
bonds
30
25
20
15
10
2010
2009
2008
2007
2006
2005
2004
2003
5
0
2002
500
2001
bp
Pension insurance
10
8
6
4
2
0
2005
2007
2010
Europe SRI AUM ($tn)
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Contents
Introduction: an unusual world
Cyclical or evolutionary?
7
7
13
13
17
17
Risk-minimising strategies
Tailoring risk, not return
31
34
34
36
36
20
20
31
42
42
22
22
24
24
28
28
Disclosure appendix
46
Disclaimer
48
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Introduction: an unusual
world
Low rates, high volatility, high correlation the world has changed
Fund managers are struggling to cope: how to find returns without
too much risk, and provide solutions to investors with new needs
We indentify three threads: the search for income, tailoring risk,
Cyclical or evolutionary?
We are in a very unusual investment world.
Interest rates are at historical lows, equities more
volatile than normal, different assets classes
abnormally correlated (the risk on-risk off
phenomenon) and demographics are altering
savings patterns in rich countries.
These developments have already caused a big
shift in investment flows over the past five years.
Investors have:
Sold equities and bought bonds in huge
volumes: in the US since end-2007 bond
mutual funds have seen inflows of USD920bn
and equity funds outflows of USD430bn.
Garry Evans*
Strategist
The Hongkong and Shanghai
Banking Corporation Limited
+852 2996 6916
garryevans@hsbc.com.hk
40
AA to below AA+
AA+ to below AAA
AAA
35
30
25
20
15
10
5
0
01
02
03 04
05
06 07
08
09
10 11
Source: BIS (Ratings used are the simple averages of the long-term foreign currency
sovereign ratings from Fitch, Moodys and S&P.)
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30%
29%
28%
27%
26%
25%
24%
23%
22%
21%
20%
28%
26%
24%
22%
20%
1990
2000
2010
2020
2030
2040
2050
1990
2010
2030
Emerging
2050
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PE, 2.6
HFs, 1.8
ETFs, 1.3
Pension
SWFs, 4.2
funds, 29.9
Insurance
funds, 24.6
Mutual
funds, 24.7
Source: TheCityUK estimates
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Pension funds
Insurance assets
Mutual funds
60
40
30
20
Other
Switz.
NL
Germany
France
Japan
UK
10
Source: TheCityUK estimates based on OECD, Investment Company, SwissRe and UBS
data. (Figures are for domestically sourced funds regardless of where they are managed.
No reliable comparisons are available for total funds under management buy country.)
10
50
US
40
35
30
25
20
15
10
5
0
0
80
85
UK
90
95
US
00
AU
05
10
CH
15
JP
Source: IMF
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1980
UK
1990
2000
US
2010
Germany
2020
1970
1980
UK
Common threads
70%
60%
50%
40%
30%
20%
10%
0%
1990
2000
US
2010
Germany
2020
11
12
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abc
300
Gov t
Credit
Other
250
USDbn
200
150
100
50
0
-50 07
08
09
10
11
12
-100
Source: EPFR (Other includes muni funds, MBS funds, total return bonds, and funds
able to invest in a mix of bond types)
13
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Name
Manager
Objective
TGIRX US
OIBIX US
WAPRX US
OSIIX US
OGLIX US
PSTQX US
AEMSX US
OIGIX US
MSKHX US
MSFKX US
PEFAX US
CMCPX US
Thornburg
Oppenheimer
Western Asset
Oppenheimer
Oppenheimer
Pridential
Aberdeen
Oppenheimer
Morgan Stanley
MFS
Pimco
Columbia
5/1/2012
1/27/2012
5/1/2012
1/27/2012
1/27/2012
3/2/2012
2/27/2012
4/27/2012
6/15/2012
6/1/2012
5/31/2012
4/20/2012
Equity
Debt
Debt
Debt
Equity
Debt
Equity
Equity
Equity
Asset Allocation
Debt
Debt
International Equity
International Debt
Govt/Corp Intermediate
Government/Corporate
Global Equity
Corporate/Preferred-Inv Grade
Emerging Market-Equity
International Equity
Growth-Mid Cap
Balanced
Index Fund-Debt
Government/Corporate
JP Morgan
John Hancock
Oppenheimer
MFS
John Hancock
Western Asset
MFS
John Hancock
7/2/2012
3/1/2012
4/27/2012
6/1/2012
3/1/2012
5/1/2012
6/1/2012
2/29/2012
Debt
Asset Allocation
Equity
Equity
Debt
Debt
Debt
Equity
OBBCX US
JQLAX US
OEIIX US
MIDLX US
JIPPX US
WABRX US
MFBKX US
JDVPX US
AUM
(USDbn)
26.5
12.6
9.6
8.6
8.3
8.0
7.5
6.2
6.0
5.8
5.4
4.7
4.1
3.7
3.3
3.2
3.1
3.0
2.8
2.8
Source: Bloomberg
10
12
Yield
Spread
Yield
10
Spread
8
6
6
4
0
0
00 01 02 03 04 05 06 07 08 09 10 11 12
03
04
05
06
07
08
09
10
11
12
Source: Bloomberg
14
Source: HSBC
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Div idend
Balanced/multi asset
Gold
Commodity
80
60
USDbn
40
20
0
-20
00 01 02 03 04 05 06 07 08 09 10 11
Source: EPFR
USDbn
700
600
International
500
Grow th
Balanced
400
Agg grow th
300
Global
200
EM
100
Sector
Income
0
90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12
Source: ICI
15
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16
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another 1994?
1.5
Equity funds
Bond funds
1.0
0.5
0.0
98 99 00 01 02 03 04 05 06 07 08 09 10 11 12
Source: ICI
17
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6.5
Equity
Bond
Cash
6.0
5.5
5.0
4.5
88 90 92 94 96 98 00 02 04 06 08 10 12
Source: Bloomberg, MSCI (*Equity=MSCI ACWI TR Gross, Bonds=JP Morgan
Aggregate Bond Index TR Unhedged USD, Cash=3-month T-bills)
16
14
12
1 year
2 years
5 years
10 years
20 years
1992-1999
Since 1988
10
Equity
Bond
Cash
9.8%
8.1%
-0.9%
8.0%
7.1%
16%
7.2%
1.4%
5.2%
6.4%
6.7%
6.4%
6%
7.1%
0.2%
0.2%
1.1%
2.1%
3.5%
5%
4.3%
8
6
4
2
0
1880
1900
1920
1940
1960
1980
2000
1 year
2 years
5 years
10 years
20 years
1992-1999
Since 1988
Source: Bloomberg, MSCI
18
Equity
Bond
Cash
20%
18%
24%
19%
17%
13%
17%
4%
5%
6%
6%
6%
5%
6%
0%
0%
0%
0%
0%
0%
0%
abc
35
30
25
20
15
10
5
0
1870
1890
1910
1930
1950
1970
1990
2010
19
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Risk-minimising
strategies
Investors want equity-style returns with bond-like volatility
Fund houses are developing products that tailor a level of risk in
20
abc
21
abc
22
abc
23
abc
60
50
40
USDbn
30
20
10
0
-10
1997 1999 2001 2003 2005 2007 2009 2011
800
Passiv e
Activ e
600
USDbn
400
World equity
Source: ICI
200
0
-200 01 02 03 04 05 06 07 08 09 10 11 12
-400
-600
Source: EPFR
24
Domestic equity
abc
80
70
60
50
40
30
20
10
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
Source: Standard & Poors (Large cap funds were compared with S&P500, small cap
funds with S&P SmallCap 600)
25
abc
2002-2006
60
2007-11
50
40
5. Performance of S&P500 market cap and equally weighted
30
2500
20
SPX Index
10
SPW Index
2000
HY
MBS
Global
income
EM debt
long funds
Government
General
intermediate
1500
1000
500
0
26
90 92 94 96 98 00 02 04 06 08 10 12
Source: Bloomberg
1.0
Av erage
0.8
0.6
0.4
0.2
0.0
90 92
94 96 98 00 02 04 06
08 10 12
abc
90
80
70
60
50
40
30
20
10
0
Implied correlation
07
08
09
10
11
12
27
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1,600
1,400
US
Europe
Other
1,200
1,000
800
600
400
200
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012*
28
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29
abc
30
abc
to converge
350
300
HF index
L/S equity
Macro HFs
250
200
2,500
2,000
Assets (USDbn)
150
100
1,500
00 01 02 03 04 05 06 07 08 09 10 11 12
1,000
500
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012*
31
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100%
Convertible Arbitrage
Multi-strategy
Event Driven
Total
6%
9%
2%
7%
11%
Equity long/short
10%
Distressed Securities
13%
Merger Arbitrage
2%
12%
Sector specific
8%
Fixed income
5%
Macro
10%
% of total HF AUM
2%
13%
0%
-5%
-10%
Emerging markets
-15%
32
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33
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34
Equity
Government bonds
Covered bonds
Corporate bonds
AAA
AA
A
BBB
Investment grade
BB
B
CCC
Speculative grade
Illiquidity premium
estimate (bp)
No. of studies
450
39
18
50
11
15
30
31
53
110
173
420
180
2
5
2
9
2
3
3
3
1
2
1
1
1
abc
35
abc
36
abc
30
25
20
2010
2009
2008
2007
2006
2005
2004
2003
80%
2002
100%
5
0
2001
15
10
Pension insurance
60%
40%
20%
0%
1962 1968 1974 1980 1986 1992 1998 2004 2010
Debt
Equities
Source: ONS
100%
80%
60%
40%
20%
0%
50 55 60 65 70 75 80 85 90 95 00 05 10
Debt
Equities
37
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2014, will require capital to be held against assetside, as well as insurance, risks; equities will carry
a higher capital requirement than other assets.
60%
50%
40%
30%
20%
10%
0%
1980
1985
US
1990
Japan
1995
2000
UK
2005
2010
Eurozone
38
abc
25
20
15
10
5
2026-2030
2021-2025
2016-2020
2011-2015
2006-2010
2001-2005
1996-2000
1991-1995
1986-1990
0
1981-1985
1976-1980
Wealth management
It is very hard to know exactly how much private
wealth there is out there (and it depends on how
you define it). Estimates put the total at between
USD26trn and USD120trn.
What is clear, though, is that the wealth is
growing rapidly (mainly in emerging markets)
and that the wealthy are becoming more
demanding about the sort of investment products
they want.
We will not run through here all the data for the
number of high net worth individuals around the
world. Suffice it to say that Wealth-Xs World
Ultra Wealth Report 2012-2013 estimates the
total wealth this year of ultra high net worth
individuals (UHNWI) at USD25.8trn. Of that,
USD8.9trn is in the US and USD3.4trn (13%) in
39
abc
2012
12
2017
USDtrn
10
8
6
4
2
Africa
Oceania
Middle East
Latin America
Asia
Europe
North America
100
90
80
70
60
50
40
30
20
10
0
USA
Taiw an
UK
Japan
Singapore
Germany
China
India
Indonesia
Source: The World Distribution of Household Wealth by James B. Davies, Susanna Sandstrom, Anthony Shorrocks, and Edward N. Wolff, University o9f Ontario, New York University,
UNU-WIDER (2006), HSBC
40
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100%
80%
60%
40%
Other
Cash
Equities
Korea
China
NZ
Fix ed income
Ireland
commd.
SWFs, 2.1
Australia
Non-
Canada
0%
SWFs, 2.7
Norway
8.1
Chile
reserv es,
20%
Commodity
Official FX
Alternativ e assets
Source: IMF
sov ereign
inv estment
v ehicles*,
7.2
Source: TheCityUK estimates (*includes development funds, pension reserve funds,
state-owned companies, reserve investment corporations)
41
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Unavoidable momentum
ESG (environmental, social, governance) and SRI
(socially responsible investment) are buzzwords
that have a lot of investment managers scratching
their heads. They know that plan sponsors
particularly for public pension funds in Europe
increasingly take these concepts seriously, but
many investment managers dont quite know how
to respond.
1. SRI assets under management (USDtrn)
10
8
6
4
2
0
2005
2007
2010
Europe SRI AUM ($tn)
42
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2. United Nations Principles for Responsible Investment, and examples of possible actions
1 We will incorporate ESG issues into investment analysis and decision-making processes
Address ESG issues in investment policy statements
Support development of ESG-related tools, metrics, and analyses
Assess the capabilities of internal investment managers to incorporate ESG issues
2 We will be active owners and incorporate ESG issues into our ownership policies and practices
Develop and disclose an active ownership policy consistent with the Principles
Exercise voting rights or monitor compliance with voting policy (if outsourced)
Engage with companies on ESG issues
3 We will seek appropriate disclosure on ESG issues by the entities in which we invest
Ask for standardised reporting on ESG issues (using tools such as the Global Reporting Initiative)
Support shareholder initiatives and resolutions promoting ESG disclosure
4 We will promote acceptance and implementation of the Principles within the investment industry
Include Principles-related requirements in requests for proposals (RFPs)
Align investment mandates, monitoring procedures, performance indicators and incentive structures accordingly (for example, ensure
investment management processes reflect long-term time horizons when appropriate)
5 We will work together to enhance our effectiveness in implementing the Principles
Support/participate in networks and information platforms to share tools, pool resources, and make use of investor reporting as a source of
learning
6 We will each report on our activities and progress towards implementing the Principles
Disclose how ESG issues are integrated within investment practices
Disclose active ownership activities (voting, engagement, and/or policy dialogue)
Report on progress and/or achievements relating to the Principles using a 'Comply or Explain'1 approach
Source: www.unpri.org
43
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Compared
to
MSCI ACWI
Relative perf
1Y
2Y
1.9%
n/a
n/a
44
5Y
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Notes
45
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Disclosure appendix
Analyst Certification
The following analyst(s), economist(s), and/or strategist(s) who is(are) primarily responsible for this report, certifies(y) that the
opinion(s) on the subject security(ies) or issuer(s) and/or any other views or forecasts expressed herein accurately reflect their
personal view(s) and that no part of their compensation was, is or will be directly or indirectly related to the specific
recommendation(s) or views contained in this research report: Garry Evans
Important disclosures
Stock ratings and basis for financial analysis
HSBC believes that investors utilise various disciplines and investment horizons when making investment decisions, which
depend largely on individual circumstances such as the investor's existing holdings, risk tolerance and other considerations.
Given these differences, HSBC has two principal aims in its equity research: 1) to identify long-term investment opportunities
based on particular themes or ideas that may affect the future earnings or cash flows of companies on a 12 month time horizon;
and 2) from time to time to identify short-term investment opportunities that are derived from fundamental, quantitative,
technical or event-driven techniques on a 0-3 month time horizon and which may differ from our long-term investment rating.
HSBC has assigned ratings for its long-term investment opportunities as described below.
This report addresses only the long-term investment opportunities of the companies referred to in the report. As and when
HSBC publishes a short-term trading idea the stocks to which these relate are identified on the website at
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HSBC believes an investor's decision to buy or sell a stock should depend on individual circumstances such as the investor's
existing holdings and other considerations. Different securities firms use a variety of ratings terms as well as different rating
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HSBC assigns ratings to its stocks in this sector on the following basis:
For each stock we set a required rate of return calculated from the cost of equity for that stocks domestic or, as appropriate,
regional market established by our strategy team. The price target for a stock represents the value the analyst expects the stock
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potential return, which equals the percentage difference between the current share price and the target price, including the
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Our ratings are re-calibrated against these bands at the time of any 'material change' (initiation of coverage, change of volatility
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expected returns will be permitted to move outside the bands as a result of normal share price fluctuations without necessarily
triggering a rating change.
46
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*A stock will be classified as volatile if its historical volatility has exceeded 40%, if the stock has been listed for less than 12
months (unless it is in an industry or sector where volatility is low) or if the analyst expects significant volatility. However,
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month's average of the daily 365-day moving average volatilities. In order to avoid misleadingly frequent changes in rating,
however, volatility has to move 2.5 percentage points past the 40% benchmark in either direction for a stock's status to change.
38%
Underweight (Sell)
14%
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* HSBC Legal Entities are listed in the Disclaimer below.
Additional disclosures
1
2
3
47
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Disclaimer
* Legal entities as at 8 August 2012
Issuer of report
UAE HSBC Bank Middle East Limited, Dubai; HK The Hongkong and Shanghai Banking Corporation
The Hongkong and Shanghai Banking
Limited, Hong Kong; TW HSBC Securities (Taiwan) Corporation Limited; 'CA' HSBC Bank Canada,
Corporation Limited
Toronto; HSBC Bank, Paris Branch; HSBC France; DE HSBC Trinkaus & Burkhardt AG, Dsseldorf; 000
Level 19, 1 Queens Road Central
HSBC Bank (RR), Moscow; IN HSBC Securities and Capital Markets (India) Private Limited, Mumbai;
Hong Kong SAR
JP HSBC Securities (Japan) Limited, Tokyo; EG HSBC Securities Egypt SAE, Cairo; CN HSBC
Investment Bank Asia Limited, Beijing Representative Office; The Hongkong and Shanghai Banking
Telephone: +852 2843 9111
Corporation Limited, Singapore Branch; The Hongkong and Shanghai Banking Corporation Limited, Seoul
Telex: 75100 CAPEL HX
Securities Branch; The Hongkong and Shanghai Banking Corporation Limited, Seoul Branch; HSBC
Fax: +852 2596 0200
Securities (South Africa) (Pty) Ltd, Johannesburg; HSBC Bank plc, London, Madrid, Milan, Stockholm, Tel
Website: www.research.hsbc.com
Aviv; US HSBC Securities (USA) Inc, New York; HSBC Yatirim Menkul Degerler AS, Istanbul; HSBC
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Hongkong and Shanghai Banking Corporation Limited, New Zealand Branch incorporated in Hong Kong
SAR
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Garry Evans*
Global Head of Equity Strategy
The Hongkong and Shanghai Banking Corporation Limited
+852 2996 6916
garryevans@hsbc.com.hk
Garry heads HSBC's equity strategy team worldwide. His previous roles at HSBC include Asia Pacific Equity Strategist, Head of
Pan-Asian Equity Research, and Japan Strategist. Garry began his career as a financial journalist and was editor of Euromoney
magazine for eight years before joining HSBC in Tokyo in 1998. Garry is based in Hong Kong.
*Employed by a non-US affiliate of HSBC Securities (USA) Inc, and is not registered/qualified pursuant to FINRA regulations.
Disclosures and Disclaimer This report must be read with the disclosures and analyst
certifications in the Disclosure appendix, and with the Disclaimer, which forms part of it