Focus on multiples not earnings

Disclaimer & Disclosures This report must be read with the disclosures and the analyst certifications in the Disclosure appendix, and with the Disclaimer, which forms part of it. Issuer of report: HSBC Securities (USA) Inc View HSBC Global Research at: https://www.research.hsbc.com Highlights of the data The Fed’s decision to raise the federal funds rate 25bp was widely expected, but an upward shift in the dot plot came as a surprise with bond yields moving higher and the US dollar strengthening (see FOMC reaction: Dots surprise). Equities have shrugged off this move, but we believe will remain sensitive to the pace of further hikes in 2017. We forecast only modest global equity upside for the year, with tighter monetary policy placing downward pressure on valuations and partly offsetting a strong rebound in earnings growth. P/E valuations are at a 20% premium to history, and multiples have contracted 8% p.a. in a typical Fed upcycle. We continue to favour the US and EM on potential earnings upside and are cautious Europe given the heavy political calendar. We have a balanced sector view and would not chase the reflation trade (see Global equities in 2017: Walking a tightrope). This is the last Global Equity Data Monitor of 2016. Happy Christmas! Key data points 1. Global equities were flat the past week (to 15 Dec) but currency moves dominated returns. The Eurozone and Japan both declined in USD terms, but rose almost 2% in their local currencies. EM was the worst performing region with China and Brazil the laggards (page 8). Healthcare led sector performance, with Materials lagging. 2. EM equity funds saw small inflows leading into the Fed decision, after redemptions in five of the previous six weeks. All EM regions saw inflows, but LatAm and EMEA led (page 43). Our equity strategists believe the desynchronisation between commodity prices and the world trade cycle means commodity plays remain well placed (GEMs equities in 2017), and are focused on Brazil, Russia, and South Africa. 3. Chinese activity data for November surprised on the upside with a softer housing market offset by resilient infrastructure spending (page 50). The Fed’s rate projections have shifted upwards Multiples typically contract throughout Fed tightening cycles Source: HSBC, US Federal Reserve Source: MSCI, Thomson Reuters Datastream, HSBC 0.000.501.001.502.002.503.003.500.000.501.001.502.002.503.003.50Jun-16Dec-16Jun-17Dec-17Jun-18Dec-18%%HSBC forecastFed Dots18 December 2016 Ben Laidler Global Equity Strategist HSBC Securities (USA) Inc. ben.m.laidler@us.hsbc.com +1 212 525 3460 Daniel Grosvenor* Equity Strategist HSBC Bank plc daniel.grosvenor@hsbcib.com +44 20 7991 4246 Yevgeniy Shelkovskiy Equity Strategist HSBC Securities (USA) Inc. yevgeniy.x.shelkovskiy@us.hsbc.com +1 212 525 3035 * Employed by a non-US affiliate of HSBC Securities (USA) Inc, and is not registered/ qualified pursuant to FINRA regulations Global Equity Data Monitor EQUITY STRATEGY GLOBAL HSBC COUNTRY STRATEGY ALLOCATION Country/Region HSBC Consensus US Overweight Overweight UK Neutral Overweight Eurozone Underweight Underweight Japan Neutral Underweight EM Overweight Underweight - Brazil Overweight Overweight - China Neutral Underweight - India Neutral Underweight - Russia Overweight Underweight Key Views Overweight US and EM Overweight Commodities, Utilities, Staples *Note: Consensus ratings are EPFR global funds active weights compared to history, where positive Z score is overweight and negative Z score is underweight Source: HSBC, EPFR Global. Focus on multiples not earnings  EQUITY STRATEGY ● GLOBAL 18 December 2016 2 Highlights of the data 1 Latest equity strategy reports 3 HSBC Sector Recommendations 5 This week’s calendar 6 Performance 7 Regions/countries 8 Global sectors 11 Top stocks by region* 12 Investment styles 13 Small Caps 15 Disaggregation of MSCI Index weights 16 Region-sector matrices 17 Indexes vs. earnings 18 Valuations 20 Regions/countries 21 Regions/countries - z scores 22 Sector neutral PEs 23 Global sectors 24 Global sectors ‒ z scores 25 Top stocks by region* 26 Earnings 27 Earning season analysis 28 Consensus 12M forward EPS change 29 Earnings growth forecasts – regions/countries 30 Earnings revision ratios – regions/countries 31 Earnings growth forecasts – global sectors 32 Earnings revision ratios – global sectors 34 Earnings revision ratio – Top stocks by region* 36 Earnings vs peak and trend 37 Sentiment 39 Sentiment indicators 40 Analyst recommendations 41 Top stocks by region* 42 Fund Flows 43 Institutional investor holdings 44 Technical Indicators 46 Technical indicators 47 Correlations 48 Macro 49 Economic indicators 50 Lending standards and rates 52 Monetary condition and FX 53 Liquidity indicators 54 Commodity prices 55 Economic Context 56 Supply & Demand 57 Global equity issuance 58 Global M&A deals 59 HSBC Economic Forecasts 60 Key economic, interest rate and currency forecasts 61 Discl