HSBC Private Bank has highlighted four themes that will move the market's direction and shape its investment strategy for 2017 in its annual outlook report.
In the release, titled Go West or East, head of investment strategy, Asia, Fan Cheuk Wan, said: 'Investors are confronted with two major structural challenges in 2017: the political uncertainty in Europe and the UK, and the increasingly uncertain global trade environment.
'Besides US equities, we are overweight equities in China, India and Indonesia, which are expected to outperform the regional peers due to their domestic-demand driven growth, positive progress of structural reforms and supportive policies.'
The expert highlighted the following themes for the year:
1. Bond yields to come down again
HSBC Private Bank believes the current yield level is unsustainable and forecasts US 10-year Treasury yield to come down to 1.35% after peaking in the first quarter of 2017, as the all-time high US government debt levels could push the costs of debt servicing to unsustainable levels.
'In our view, medium to long-term structural drivers, including global economic challenges, quantitative easing in Europe and Japan, elevated debt levels globally, should constrain the scope of the Federal Reserve to raise interest rates,' said Fan.
HSBC economists expect only two 25-basis point rate hikes by the Federal Reserve in 2017, followed by one rate hike in 2018.
'We also maintain our positive view on US investment grade and high yield bonds and emerging markets hard currency bonds as we believe any reversal of US yields after the first quarter of 2017 should support the global search for yield and recovery of the credit market,' Fan added.
2. Asia's structural growth
HSBC Private Bank stays positioned in Asian companies exposed to structural growth and reforms as they are resilient to withstand cyclical volatility in the global economy and impact of trade protectionism.
'We are positive on Asian investment grade and high-yield credits in hard currency with preference for Indian and Indonesian bonds.
'As we expect US bond yields to come down after peaking in the first quarter, the expected pullback in bond yields and the US dollar should support a recovery of Asian equities and Asian credits going into the second quarter of 2017,' Fan said.
3. US domestic focus
Against a largely lackluster global economy, HSBC expects US GDP growth to accelerate to 2.3% in 2017 from 1.6% in 2016 while growth in the eurozone is projected to decelerate to 1.2% in 2017 from 1.6% in 2016.
In the US, domestically focused companies are likely to benefit the most under any increases in trade tariffs, especially the small-and-mid cap companies because they are typically more domestically oriented than the multi-nationals.
A stronger US dollar potentially hurts corporate profits, but it should hurt domestically-focused companies less than exporters.
If US corporates can repatriate foreign profits with a preferential 10% corporate rate, it could provide the sector with plenty of liquidity for mergers and acquisitions activity, share buybacks and increased dividend payments, the report said.
Demographic shifts and technological innovation present opportunities even in a low return world with challengers and disruptors likely to emerge as winners, the private bank said.
Technology has driven a major cost efficiency through the rapid growth of artificial intelligence and its integration with the Internet of Things, from consumer electronics to cars.
Computing power and digital technology are evolving into an era where automation is entering a long-term secular growth phase.
Building on these four themes, the private bank has identified the top 10 investment ideas for Asian investors in 2017:
1. US 10-year Treasury yield should come down again after peaking in first quarter of 2017
2. Gold to rise to USD 1,550 per ounce
3. RMB to fall towards USD/CNY 7.20 by the end of 2017
4. US domestically focused stocks
5. Sustainable dividends, M&A and buybacks
6. US and Asian high yield
7. Support for oil and energy producers
8. Asian reformers: Indian and Indonesian stocks and bonds
9. China’s New Economy stocks
10. Alternatives for risk diversification