The Big Reset - Investment Outlook Q1 2022 - HSBC Global ...
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Investment
Outlook
Q1 2022
The
Big Reset
Global Private Banking
Global Private Banking Investment Outlook Report
Contributors Global Chief Investment Officer
Willem Sels
willem.sels@hsbcpb.com
+44 (0)207 860 5258
Global Investment Strategist,
Managing Editor Head of Asset Allocation
Neha Sahni Stanko Milojevic
neha.sahni@hsbcpb.com stanko.milojevic@hsbcpb.com
+44 (0)207 024 1341 +44 (0)207 024 6577
Regional Chief Investment Officers
Chief Investment Officer, Europe International
and MENA Chief Investment Officer, UK & CI
Georgios Leontaris Jonathan Sparks
georgios.leontaris@hsbcpb.com jonathan.sparks@hsbcpb.com
+41 (0) 58 705 5746 +44 (0)20 7860 3248
Chief Investment Officer, Asia
Cheuk Wan Fan
Chief Investment Officer, Americas cheuk.wan.fan@hsbcpb.com
Jose Rasco +852 2899 8648
Chief Investment Officer, North Asia Chief Investment Officer, Southeast Asia
Patrick Ho James Cheo
patrick.w.w.ho@hsbcpb.com james.cheo@hsbcpb.com
+852 2899 8691 +65 6658 3885
CIO of Wealth Management and
Global Head of Research and Insights Global Head of Equities
Xian Chan Kevin Lyne Smith
Xian.chan@hsbc.com kevin.lyne-smith@hsbc.com
+44 (0)207 991 9198 +44 (0)207 860 6597
Global Head of Fixed Income Senior Fixed Income Credit Specialist
Laurent Lacroix Elena Kolchina
laurent.lacroix@hsbcpb.com elena.kolchina@hsbcpb.com
+44 (0)207 024 0613 +44 (0)207 860 3058
Global FX Coordinator
Nicoletta Trovisi
nicolettatrovisi@hsbc.com
+44 (0)207 005 8569
Global Market Analyst, Real Estate Investment Head of European Hedge Fund Research
Guy Sheppard Alex Grievson
guy.r.sheppard@hsbc.com Alex.grievson@hsbc.com
+44 (0)207 024 0522 +44 (0) 203 359 7065
Senior Product Specialist,
Private Market Investments
Jorge Huitron
jorge.emilio.huitron@hsbc.com
+44 (0) 203 359 7040
2
Global Private Banking
Contents
Letter to clients 05
Our portfolio strategy 06
Strategic asset allocation 12
Top four trends and
high conviction themes 16
1. Remaking Asia’s future 16
2. Investing for a sustainable future 20
3. Digital transformation 22
4. Policy support for mid-cycle growth 24
Equities26
Fixed income 30
Currencies and commodities 34
Hedge funds 38
Private markets 40
Real estate 43
Disclaimers44
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Global Private Banking Investment Outlook Report
Click below to watch
Our portfolio strategy and themes for 2022
4
Global Private Banking
Welcome
Dear client
2021 was the year of the global execution risk and the likelihood of more a selective search for carry in bond
reopening, which boosted investor market volatility, especially as there is markets and a preference for quality
optimism and companies’ cash flows. considerable uncertainty around the stocks, while we also hold an overweight
And although the jump in demand timing of the fall of global inflation and position in hedge funds and position
contributed to supply chain issues the potential for further COVID waves (as for mild further USD strength. We have
and labour market shortages, causing exemplified by the most recent volatility reduced the number of sectors and
inflation to spike, these factors did not linked to the Omicron variant). markets that we have an overweight
halt global equity markets’ progress. While policy makers are navigating this position in, with the US, the Eurozone
Most companies managed to protect transition, they are also planning a big and EM Asia being our principal
their margins, and central banks very reset for the global economy, together overweights, while we keep a neutral
helpfully decided not to react too quickly with the world’s CEOs, investors, voters stance on the UK and China for now.
to rising inflation, keeping interest rates and consumers. Clearly, the sustainability At the same time, we position for the
very low. revolution is the biggest project of all, big reset by integrating sustainability
As we head into 2022, the economy and it is no exaggeration to say that throughout our portfolio, and by looking
has moved from the reopening to the every company will be affected by the at long term structural themes. Asia
mid-cycle stage. In that part of the cycle, new regulation, huge investments and remains a region with much potential,
equity market returns typically slow opportunities, shareholder pressure and our focus on long-term themes
but remain respectable, and volatility and changing consumer choices. We under the trend of “Remaking Asia’s
picks up somewhat. And policy is also believe sustainability should be part of future” helps us balance the long term
transitioning: some central banks have both the core portfolio and investment value and opportunity against short term
started tapering, while the US Fed and thematics to manage risks and exploit uncertainty. And of course, the reset
the Bank of England should soon start opportunities, and before we invest in would never be possible without the
to hike rates. On the fiscal side as well, any company, we need to understand digital transformation, with interesting
we should see the start of some tax where they stand on all ESG aspects. opportunities in biotech, automation,
hikes and less fiscal support than during We are already seeing evidence of digital security, and smart mobility.
the pandemic. companies participating in the big reset, Most of the market headlines may
But both fiscal and monetary tightening as capex is picking up, and companies well continue to be around the short
will be gradual. Central banks agree with put some of their bumper cash positions term policy transition. But it is key that
us that inflation will come down some to work. They want to make their supply investors position for the Big Reset which
time in 2022, and hence, the four rate chains more resilient by diversifying them is redefining the investment landscape.
hikes we expect from the Fed between and they are investing in automation and We wish our clients a happy and
June 2022 and September 2023 are AI. In China, companies’ investments prosperous 2022.
somewhat slower than what we’ve are in line with the country’s desire
historically seen. And governments will to become more technologically self-
try to avoid the backlash against the sufficient and upgrade its manufacturing.
austerity that followed the Great Financial So, as investors, we need to position
Crisis, and keep investing in priorities for both the mid-cycle transition and
such as healthcare and infrastructure. the big reset. We do the former by
That gradual approach should allow remaining invested to capture the upside, Willem Sels,
economic and earnings growth to but by constructing resilient portfolios Global Chief Investment Officer
continue, and keep bond yields low. Any to navigate the volatility. We therefore 1st of December 2021
transition, however, comes with some focus on portfolio diversification with
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Global Private Banking Investment Outlook Report
Our portfolio
strategy
The mid-cycle stage is still a positive What we believe we know: the cycle, the labour market before doing any
environment for riskier assets, inflation, policy and structural trends serious tightening, and neither tapering
and hence we remain invested The major market drivers for 2022 are nor rate hikes can solve the short term
with a mild risk-on stance. But the relatively clear, in our mind. First and supply-chain bottlenecks anyhow. We
exact inflation and growth path foremost, we are in the mid-cycle stage, expect the Fed to hike rates by 0.25%
is uncertain and will remain hotly and not at the end of the economic in June 22, September 22, March 23
debated in coming months, leading cycle. While growth is slowing, and and September 23, but this gradual
to continued volatility. So how can we don’t yet know the full impact of path should still leave its policy rate well
investors prepare for continued the new Omicron variant discovered in below the historical average.
growth, as well as the significant South Africa, some parts of the economy So the combination of growth and
uncertainties? We become more are still reopening and accelerating. inflation that we foresee in 2022 does not
selective in our country, sector and Governments are making sure that correspond to the stagflation scenario
stock picks, focusing on areas with any fiscal tightening will not crush the that some investors worry about. As
strong support, which warrant the recovery. We are also seeing a strong the cycle continues, we remain positive
valuation multiples. And to further pickup in corporate investment, boosting on equities, even though the slowdown
increase portfolio resilience and the capex cycle, as CEOs put to work means that we have reduced the
broaden the opportunity set, we are some of their considerable cash piles, cyclicality of our sector exposure. We
now overweight on hedge funds. and invest to adapt to the post-pandemic have also become more selective in the
world. Granted, corporate earnings geographies we are exposed to. The
Fixed income growth will slow from the record levels US remains our principal stock market
we saw during the reopening, as demand overweight due to the resilience of the
Overweight: Global High yield, EM growth will slow, input costs remain high US economy and its quality style bias.
Hard currency bonds (government and for now and taxes are bound to rise. But We are also overweight on Eurozone
corporate) earnings growth should still manage to stocks, as its economic recovery is
Underweight: Developed market match or beat historical averages. lagging and therefore still has good
sovereign bonds and inflation linked We also remain of the view that inflation momentum behind it, whilst also being
bonds will remain high in the short term, but supported by the EU Next Generation
come down in the course of 2022, fund investments. By contrast we cut
Equities UK stocks to neutral in the last quarter
although it is impossible to know when
exactly this will happen. This is largely of 2021 due to the planned rate hikes
Overweight: USA, Eurozone, EM Asia
because wage inflation and supply and fiscal tightening there, and remain
Underweight: EM Latin America, EM chain issues still push up inflation, but neutral on China as investors want more
EMEA structural deflationary forces such as policy clarity. Till then, we invest in our
technology, increasingly global labour long term High Conviction Themes,
Alternatives markets and the growth of the service and diversify within Asia, which is our
industry remain in place. Central banks overweight region within EM equities.
Overweight Hedge Funds thus tend to refer to current high inflation Elsewhere, we are underweight on Latin
levels as ‘transitory’. And consequently, America and EM EMEA as we believe
rightly or wrongly, the policy tightening commodity prices will start to plateau.
they are planning will be done as slowly The low interest rate environment
as possible. Most central banks still keeps us away from cash and directs us
want to see further improvement in towards select carry opportunities in high
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Global Private Banking
yield and EM markets, with a preference investment, while the increased focus on and private investment, collaboration
for corporates over governments. The people’s health should benefit biotech, on technological innovation, the rapid
fact that the Fed policy normalisation genomics and devices, given the great expansion of financing, and the focus on
remains ahead of most other central recent innovation in this space. But first biodiversity. The stakes for companies
banks means that the US dollar should and foremost, it is the sustainability topic have just gone up dramatically, when
continue to see some mild upside. that will see huge investment and focus they put a foot wrong with clients
Aside from these macro-economic from all stakeholders in 2022, and long or investors, miss out on the huge
drivers, there are a number of thematic into the future. One of the main insights opportunity or lag their competitors.
drivers that are important for our asset we took away from the COP26 summit Hence investors should consider
allocation as well. Governments’ fiscal was the sheer number of aspects that sustainability throughout their portfolio
priorities should support infrastructure will impact companies and investors, strategy, through an enhanced, thematic
from regulation, to the huge government or impact approach.
How we see the 2022 investment environment: what we know and what’s uncertain
What we know How do we prepare
1. The economic cycle continues, but earnings growth slows Still invested, but we trimmed our global equity OW and reduced cyclicality
2. Commodity base effects will fade over time We cut EM Latam and EM EMEA to underweight
3. Although inflation remains well above normal, central bank tightening is gradual Underweight cash. Stay invested in selective fixed income carry strategies
4. The Fed is ahead of most other major economies Position for mild USD strength
5. Sustainability is high on the agenda for all stakeholders Use ESG enhanced, thematic and impact approaches
6. Businesses start a capex cycle to innovate and prepare for the future Automation & AI, Next Generation Asian Tech Leaders themes
7. Governments want to be better prepared for a pandemic Biotechnology, Genomics & Devices theme
8. Fiscal policy has to tighten but spending on priorities continues Infrastructure 2.0. Focus on companies with margin power
9. Long term opportunity in Asia vs short term challenges Invest in long term Asian themes, diversification within Asia
10. The world’s biggest economy keeps running above trend US is our largest equity overweight, American Renewal theme
What’s uncertain How do we prepare
1. Timing of the fall in inflation and central bank policy changes A focus on quality stocks with strong margin power. Recent cut of EM LC bonds
2. Will COVID waves extend labour market shortages and supply chain issues Overweight consumer cyclicals, underweight industrials
3. Timing of the shifting market concerns over growth and inflation risks Overweight hedge funds. Remain exposed to both growth & value, cyclicals &
defensives
4. Timing of policy triggers to lift investor confidence and China’s market performance Tactically neutral Chinese equities and Chinese hard currency bonds.
5. Geopolitical risks and elections Global diversification
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Global Private Banking Investment Outlook Report 8
Global Private Banking
What is uncertain: timing and vaccination could speed up the return to normalisation. That should anchor
sentiment work. Other workers may have made the Treasury yields, but market nervousness
While we think the big drivers for decision to take a long break or retire. around the outlook should make those
markets are relatively clear, it is more There are just too many moving variables yields volatile. We therefore expect
difficult than usual to time the market for one to be absolutely sure about to see a ‘low but volatile’ Treasury
or forecast changes in sentiment. Most market timing and sentiment. environment, with 10-year yields in a
importantly, it is almost impossible to The good news is that we can manage broad 1-2% range. To manage our fixed
know when inflation will come down. this uncertainty, to some extent. To income risk amid the expected volatility,
Our core case is that year-on-year deal with the risk of inflation remaining we have cut EM local currency bonds
changes in US CPI will start to ease late higher for even longer, we focus on to neutral, as they are the most volatile
in Q2 or in Q3 2022. But we don’t really quality companies with strong margin sub-asset class within fixed income.
know when supply chain bottlenecks power. Labour market shortages could Regarding investor sentiment, we find
will ease, or when labour markets will boost wages more than expected, which it difficult to assess when international
see fewer shortages. Some workers still should help consumer discretionary, investors in particular will feel that they
seem uncomfortable with going back to while the risk of extended supply chain have enough clarity to move back into
work, and their return could be delayed if shortages argues for an underweight of Chinese stocks. Low valuations are a
new variants such as the latest Omicron industrials. good starting point, though, and more
were shown to be easily transmitted Uncertainty around the labour market monetary or fiscal support measures,
or if the vaccines are less effective is one reason why both the US Fed and and clarity around the 20th National
than previously hoped. Conversely, if Bank of England recently said they want Party Congress priorities should help
new variants are not too threatening, to adopt a wait-and-see attitude and create a rebound some time in 2022.
any advances in COVID treatment or a slow approach to monetary policy Until that happens, we remain neutral
Four growth / inflation scenarios and what they mean for portfolio strategy
1 High growth, high inflation 3 Lower growth, high inflation
Continued rebound, with some bottlenecks Bottlenecks restrict growth, inflation hurts
disposable income
Policy action hurts sentiment
Mild risk-on environment Risk-off environment, volatility spikes
Equity style bias: value Sector stance: defensive
EM: selective in EM bonds, more support for EM equities EM: high volatility across equities and bonds: highly
but DM outperforms EM selective stance with focus on quality
FX: mild USD strength FX: pronounced USD strength
Real assets including commodities and infrastructure Real assets including infrastructure
Still good growth, falling Normalised growth and
2 inflation
4 normalised inflation
Bottlenecks prove to be temporary while With time, the cycle naturally matures and
the cycle continues bottlenecks ease
Risk-on environment, volatility drops Mild risk-on environment
Sector / style stance: mildly cyclical Equity style bias: growth
EM: positive for equities and bonds. Strong support for EM: support for carry and quality strategies
carry strategies FX: mild USD weakness
FX: USD stalls
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Global Private Banking Investment Outlook Report
on Chinese equities and Chinese hard our portfolios, which is important in a
currency bonds, and focus on longer year where we expect more volatility
term themes. and lower returns for equities. We
We think that in 2022, markets will particularly like macro, multi-strategy,
continue to see periods of optimism event driven and distressed strategies as
and pessimism on both inflation and they should be well positioned to take
growth, and flip-flop between those advantage of the differences between
views until there is more clarity. In our countries’ positioning in the cycle,
four quadrant scenario analysis on the relative market valuations, the M&A and
previous page, we show what areas credit default cycle, and companies’
of the market would typically do well competitive positioning in a rapidly
in each of those circumstances. Our changing world.
view is that scenarios 1 and 2 (above We prefer hedge funds over gold as a
average growth) are much more realistic diversifier, as mild US dollar strength,
than scenarios 3 and 4 (significantly market fears of tapering pushing up real
lower growth), but we think that market yields, and the mild risk-on tone of equity
opinion will shift between all four, and markets are headwinds for gold. We
bad news around the omicron variant think that the market is less enamoured
could temporarily push us into with gold, possibly because some see
scenario 3. cryptocurrencies as a diversifier. We
As market opinion shifts back and indeed find that cryptocurrencies can
forth, we think we will have periods help diversify portfolios with equities and
of outperformance of cyclicals over risky fixed income, but they are not safe
defensives, and value over growth, but havens and do not seem to behave as
other periods where we get the opposite. an inflation hedge. Correlations of crypto
Timing this will be near impossible with riskier assets have been rising and
and could be counterproductive. But we do not have a return forecast for
it should create a lot of opportunities them, making it difficult to include
for hedge funds to exploit. We are them in a portfolio optimisation process
overweight on hedge funds to diversify at this stage.
Our current positioning along different risk assets
Risk aversion Risk appetite
Fixed Income Equity
DM Bonds EM Bonds
Short duration Long duration
Sovereign Bonds Corporate Bonds
DM equities EM Equities
Large cap equities Small cap equities
Defensives Cyclicals
Value Growth
Note: arrows show how we have adjusted our views and positioning in the past quarter.
10Global Private Banking
Although equities are not expensive compared to bonds, valuations are above
the historical average and we have become more selective
MSCI All Country World P/E ratio
21 Equity risk premium (RHS) 4.5
20
19 4.0
18
3.5
17
16
3.0
15
14 2.5
13
12 2.0
Nov-16 Nov-17 Nov-18 Nov-19 Nov-20 Nov-21
Source: Bloomberg, I/B/E/S, HSBC Global Private Banking as at 30 November 2021.
Past performance is not a reliable indicator of future performance
11Global Private Banking Investment Outlook Report Strategic Asset Allocation: A long term view for the low-yield world 12
Global Private Banking
Low yields and low interest rates Some of the asset classes that are and such scenarios may challenge their
indicate that returns over the next currently valued more attractively are typical negative correlation with equities.
decade are unlikely to be as strong emerging market equities and bonds, In this context, hedge funds present a
as over the last ten years. Traditional including corporate EM debt, and these more flexible alternative with a potential
portfolio diversifiers such as high allocations are currently emphasised to be more adaptive to evolving market
grade bonds look expensive in in our strategic asset allocation. conditions. The rich universe of hedge
historical context. And following Furthermore, we see attractive funds strategies can help improve
an uninterrupted rally since March opportunities to diversify the portfolios risk/return outcomes by introducing
2020, our expected returns for and reduce downside risk via hedge low-correlated sources of return to
equities are also substantially funds, and to boost expected portfolio investment portfolios. Our second
lower than their long-term average returns by building and maintaining chart, below, illustrates two historical
performance. So how can investors long term allocations to Private Equity. efficient frontiers from a simplified
construct a portfolio with best Our chart below shows the detailed investment universe consisting of a mix
possible risk-adjusted returns? breakdown of our moderate risk strategic of global stocks and global bonds, and a
Hedge funds and private equity can asset allocation. composite of hedge funds. With a crude
be helpful additions, and we believe Government bonds have been a very 20% allocation to hedge funds integrated
that an ESG approach can add effective portfolio diversifier in recent into naïve stock-bond portfolios,
elements of quality in the security years, but we expect very low returns risk-adjusted returns were enhanced
selection without hurting returns. from this asset class in the coming through an upward, or leftward, shift of
decades. Government bonds are the efficient frontier all across the risk
particularly vulnerable to rising inflation, spectrum.
Strategic Asset Allocation, Moderate risk (USD)
Equity related Credit related Rates related Diversifiers
Developed Global IG Credit (11%) Global Government Cash (2%)
markets (29%) Bonds (10%)
Global High Yield (5%) Commodity (5%)
EMD Hard Currency (2%) EMD Local Currency *Other HFs (3%)
(3%)
Emerging Markets (6%) EM Corporates (2%)
Credit HFs (2%) Inflation-linked (1%) Real Estate (3%)
Equity Long/Short (2%) Macro (3%)
Event Driven (2%)
Private Equity (5%) Private Debt (3%)
* Other HFs: Market Neutral, Managed Futures, Multi-Strategy Source: HSBC Global Private Banking, as at 30th November 2021.
13Global Private Banking Investment Outlook Report
Realised risk and return outcomes with and without Hedge Funds governance (ESG) objectives is likely
8.5% to affect the overall portfolio returns.
The analysis in our chart below shows
8.0% that expected returns for ESG market
indices are not materially different from
the traditional market-cap indices.
7.5%
This should encourage investors to
incorporate ESG considerations in their
Annualised Return
7.0%
investment choices across the multi-
asset universe as a strategic proposition.
6.5%
Finally, keeping a long-term focus, being
and remaining invested, and building
6.0%
diversified portfolios will remain the key
ingredients for success in investing, in
5.5%
our view. It may be tempting to ignore
Traditional Assets these principles at times when markets
5.0%
are seemingly driven by hype, fear and
Traditional Assets + 20% Hedge Funds
greed. However, history has shown that
4.5% sticking to a strategic asset allocation
2% 3% 4% 5% 6% 7% 8% 9% 10% 11% 12%
Annualised Volatility framework remains a reliable method of
Source: Refinitiv, Bloomberg, HSBC Global Private Banking, 30th November 2021. Annualised historical total achieving investment objectives over the
returns and volatility of global MSCI, ICE BofA, HFRI indices denominated in USD, FX-hedged for bonds. Time long term.
period between 1996 and 2021.
Private equity is one of the asset new vintages, but also incorporating
classes that continues to offer a high coinvestments and secondaries as
return potential, due to the long-term additional opportunities to diversify and
nature, carefully crafted leverage, and keep the allocation at target.
highly active management. This asset On the subject of risks and return,
class continues to experience strong most investors now readily accept that
growth, both in the size of the overall companies with better ESG credentials
opportunity set and in investor interest, will on average run lower risk of missing
but incorporating private equity into opportunities or making costly mistakes.
the broader portfolio is not always But some investors still question how the
straightforward. The “right” portfolio inclusion of environmental, social, and
allocation to private equity can vary
widely, and largely depends on each Comparison of expected returns between traditional market-cap and ESG indices
investor’s time horizon and tolerance
for illiquidity, amongst other factors, 9%
including eligibility. Market Cap ESG
8%
Another challenge in private equity
is to actively maintain the strategic 7%
asset allocation at target, as opposed 6%
to allowing the capital calls and
5%
distributions to dictate the broader
asset allocation dynamics. This can 4%
be done by funding capital calls 3%
from existing liquid investments and
2%
using bridge financing or leverage
when making the initial allocation. In 1%
subsequent years, as distributions begin 0%
to flow in, remaining fully invested and IG Credit Globla HY EMD (Local) EMD (Hard) Corporate DM EM
maintaining diversification can be done EMD Equities Equities
by regularly reinvesting distributions into Source: HSBC Asset Management, as at 30th November 2021. For illustrative purpose only. Based on a range
of index data from Bloomberg, MSCI and JP Morgan.
14Global Private Banking
15Global Private Banking Investment Outlook Report
Top four trends and
high conviction
themes
1. Remaking Asia’s Future
Asia’s fundamental strength has PMI order backlogs in the US and EU much more severe than in Asia
been on full display as the region 65
has gained market share in global longer backlogs
60
trade during the pandemic and
stayed relatively resilient to supply 55
chain disruptions. In response 50
to the pandemic, supply chain
bottlenecks and the energy crunch, 45
Asian economies have stepped 40
up the technology upgrade,
35
energy transition, vaccination and Jan-12 Jan-14 Jan-16 Jan-18 Jan-20
structural reforms to remake their
US & EU Emerging Asia
economies into a more sustainable,
Source: Markit, HSBC Global Private Banking as at 30 November 2021.
quality-focused and resilient
growth model. Beijing’s pursuit demand towards consumer goods and strong driver to support robust capex
of “common prosperity” and the industrial products manufactured in Asia. investment in Asia’s manufacturing
shift of its economic growth model Export volumes in Asia ex-Japan are upgrade, automation and technological
from property construction towards currently 15% above the pre-pandemic innovation.
high-end manufacturing and green level, and the region’s market share Asia stands out as a global leader in
investments reflects a significant has risen due to its highly competitive energy transition and clean energy
change from the decades-long focus manufacturing supply chains. investments, and revamping the region’s
on quantity of growth to high- But notably, around 60% of goods power mix and industrial processes
quality, low-carbon and inclusive traded by the Asian economies and away from coal power towards clean
growth. 60% of FDI are intra-regional. ASEAN energy and electrification will be key
As the home of 80% of global has become China’s largest trading to the successful implementation of
semiconductor manufacturing capacity, partner for the first time, overtaking the COP26’s ‘Glasgow Climate Pact’. Asia
Asia is well placed to lead the world’s EU, with the share of China’s exports to accounted for 52% of global carbon
electronics supply chain upgrade ASEAN economies jumping from 12% emissions in 2020 while China and
and technological innovation to meet in 2015 to 15% in H1 2021. We believe India are the world’s number one and
unabated demand growth for chips Asia’s powerful intra-regional trade third-largest carbon emitting countries.
and electronic products resulting from networks and positive structural growth Asia currently has 45% share of global
the global wave of digitalization and will underpin further concentration installed renewable capacity, well
automation. Continued supply chain of the global manufacturing supply above 25% in Europe and 16% in North
disruptions in the West have shifted chains in the region. This will provide a America. The International Energy
16Global Private Banking
Agency (IEA) projects Asia alone will 2022 to accelerate corporate investment accounts for over 20% of global
account for 64% of new renewable in industrial upgrading and net zero R&D spending. We see attractive
capacity additions globally between transition. opportunities in domestic leaders
2019 and 2040. in innovative industries, high-tech
Next Generation Asia Tech Leaders hardware industries, and providers of
The surprise China-US joint declaration
on enhancing climate actions announced Asia is currently a global centre of critical technologies. Metaverse should
during COP26, together with new net technological innovation with mainland take off with the successful launch of
zero targets announced by India (2070), China, Japan, South Korea, Taiwan Oculus Quest 2 to be followed by social
Thailand (2050, CO2 only) and Vietnam and Singapore being recognised as networking and fitness apps. Asia
(2050), should offer new catalysts to world leaders in the development of supply chains in displays, Fresnel lenses,
accelerate Asia’s green investments 5G technology, artificial intelligence, waveguide optics and cameras should
to achieve carbon neutrality. The IEA big data, semiconductor, fintech, benefit from the metaverse innovation.
estimates that China would need to automation and health sciences. Under We find attractive investment
invest more than RMB200trn (equivalent the common trade rules in the Regional opportunities in Asia’s technology
Comprehensive Economic Partnership leaders in the semiconductor, smart
signed by 10 ASEAN countries, China, manufacturing, robotics, advanced
Our four high conviction themes Japan, South Korea, Australia and New machinery, electric vehicles, high-
Zealand, effective on 1 January 2022, the tech materials and semiconductor
1. Next Generation Asia Tech Leaders optimisation of the Asian supply chains materials sectors in mainland China,
will be further enhanced. Japan, Taiwan and South Korea. Taking
2. China’s Green Revolution
In its 14th Five-Year Plan (2021-2025), advantage of the global supply chain
3. Asia’s Consumer Revival
the technology upgrade and self- diversification trend, ASEAN countries
4. Asian Credit Opportunities
sufficiency is a strategic focus for are expected to record an increase in
China. We forecast Chinese high-end manufacturing FDI of up to USD22bn
to 200% of GDP in 2020) in the next 40
manufacturing investment to grow by per annum, according to BCG forecasts.
years to achieve carbon neutrality. We
over 12% y-o-y per annum in the next Strong FDI inflows into ASEAN and India
see a potential RMB2trn (around 2% of
five years. China is now the world’s should bring new opportunities for the
GDP) technology and green stimulus
second largest spender on R&D and domestic leaders in advanced and smart
package to be rolled out by Beijing in
manufacturing.
China is transitioning to more high-end manufacturing
China’s Green Revolution
Industrial production (annual), RMB trn
35 As China aims to reach the peak of its
30 carbon emissions by 2030 and carbon
neutrality by 2060, it will significantly
25
ramp up investments in renewable
20 energy, EV supply chains and green
15 technologies with strong green financing
10 support from the PBoC. The IEA
estimates that China will need to invest
5
an average RMB5trn every year till 2060
0 in clean energy and industrial upgrading
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
to achieve carbon neutrality, with
Low end manufacturing Medium low Medium high High electrification likely the largest driver of
Source: CEIC, HSBC Global Private Banking as of 30 November 2021. Past performance is not a reliable green investments in the years ahead.
indicator of the future performance.
17Global Private Banking Investment Outlook Report
On 8 November, the PBoC rolled out Thanks to strong government policy and new developments in COVID
a new liquidity tool to offer low-cost support and changing consumer treatment should facilitate the economic
re-lending to encourage bank lending preference, the adoption of NEV (New reopening and recovery of consumer
to green projects with preferential rates. Energy Vehicles) is picking up rapidly spending in Asia, supporting a rebound
This should help drive rapid growth across the country under Beijing’s in the service industry.
in solar and wind energy installations appeal to step up electrification of Southeast Asia is now quickly reopening,
during the 14th Five-Year Plan. China the transportation sector. We project led by Singapore which has expanded
has targeted to raise its total energy 2021-23e NEV annual growth to reach its Vaccinated Travel Lane with 17
mix from non-fossil fuel sources to 117%, 37% and 28%, respectively, and countries for quarantine-free travel. And
80% by 2060 to achieve the net zero EV penetration rate could hit 31% in since 1 November, Thailand has allowed
goals. China’s total installed capacity of 2025e and 59% in 2030e, offering strong vaccinated tourists from 63 low-risk
renewable energy is estimated to surge support for companies in the EV and EV countries to visit the country without
to over 1,200GW by 2030. We expect the supply chains sector. quarantine requirement. We therefore
cumulative solar and wind installations Asia’s Consumer Revival see attractive opportunities in the
to rise to 602GW and 557GW in 2025, domestic leaders in the travel, hospitality
With rising vaccination rates and
respectively, from 252GW and 282GW and ecommerce in Southeast Asia.
medical breakthroughs in oral antiviral
in 2020. The recent nationwide power
COVID-19 drugs, more Asian countries In China, the pursuit of “common
crunch has highlighted the urgency to
are moving away from lockdowns prosperity” should lead to further
secure stable renewable energy supply
towards the “Living with COVID-19” urbanisation, rising personal income
via better energy storage. So, we expect
strategy. China, Singapore, South Korea, and the expansion of middle class
China’s renewable energy storage
Japan and Malaysia have vaccinated consumers. During the CCP’s Sixth
demand to jump dramatically to 890GW
close to 80% of their populations. In our Plenum in November, Chinese President
in 2030, up 24.4x from 35GW in 2020.
view, the positive vaccination progress Xi Jinping highlighted the strategic
China’s annual green investments are estimated to surpass RMB5trn on
average between 2020-2060
USDtrn
1.0
0.8
0.6
0.4
0.2
0.0
2016-20 2030 2040 2050 2060
Fuel Production Elec tric ity Generation
Infrastruc ture Industry
Transportation Buildings
Source: IEA estimates, HSBC Global Private Banking as at 30 November 2021.
18Global Private Banking
goal to achieve “common prosperity” concentrated on the more fragile EM Asia credit, we favour Indonesian
which aims to boost household income lower-rated developers while the Asian hard currency bonds whose credit
and promote a more even distribution high-grade sector has remained resilient fundamentals remain strong in the face
of wealth. We expect the promotion as IG issuers benefit from their safe- of the easing pandemic headwinds
of “common prosperity” to support haven qualities. We continue see credit and most SOEs with USD bonds will
demand for mass consumption, opportunities in Asia, as the region offers continue to receive support from the
consumption upgrade, digital and green an important source of yield pickup government. The Indonesian HY sector is
consumption and healthcare services. over DM bonds. We manage China well supported by the positive demand-
The increased consumer preference for property contagion risks by increasing supply dynamics and recent sharp rally
local Chinese goods and services should our focus on quality issuers in Asian IG of coal prices amid the global energy
provide tailwinds for strong domestic and Chinese SOEs. We also search for crunch.
consumer brands. In February 2022, carry opportunities in Indonesian hard China property HY bond yields are
China will host the Winter Olympics currency bonds, better quality Chinese trading at a decade high, as aftershocks
which will boost aspiration consumption green-tier developers and selected from defaults, missed payments and
and bring tactical opportunities in Indian hard currency corporate credit. ratings downgrades ripple through
domestic sportswear companies with Asian IG, which accounts for 80% the China HY bond market. To capture
strong brand names. of the overall Asian credit market, opportunities from the China property
Asian Credit Opportunities has seen credit spreads remaining sector dislocation, we selectively
The sharp selloff in the Asian credit elevated compared to pre-pandemic position in the BB+ to BBB- developers
markets in recent months has been levels and remains attractive versus with improving balance sheets, decent
driven by intensified market concerns their DM and EM IG. We see scope for credit profiles, clear deleveraging plans
about China’s property contagion risks. credit spreading tightening for Asian and a strong track record on sales
Notably, the selloff has been mostly IG credit in coming months. Within momentum and cash flow generation.
Asian IG credit has remained resilient amid the China property HY selloff
1200
EM Corp LatAm
1000 EM Corp CEEMEA
EM Corp Asia
EM Corp Asia H Y
800
USD HY
Spread (bps)
600
400
200
0
May-15 May-16 May-17 May-18 May-19 May-20 May-20
Source: HSBC Global Private Banking, Bloomberg, JPM, ICE BOFAML indices as at 30 November 2021.
Past performance is not a reliable indicator of the future performance.
19Global Private Banking Investment Outlook Report
2. Investing for a Sustainable future
Mother nature is yearning for help. If take advantage of structural investment that socially responsible companies
the recent natural calamities around opportunities which offer the potential to greatly benefit from a diverse workforce.
the globe epitomise anything, it generate handsome returns. Companies with more diversity and
is the urgency to tackle climate Energy Transition: With the realisation inclusion are more innovative and less
change. It is really here and we that tackling climate change is an prone to making big mistakes, due to
all need to do our bit to halt what urgency, global initiatives to move diversity of thought. A diverse work
some scientists call the potential away from fossil fuels towards climate force can improve employee motivation
beginning of the ‘Sixth Mass friendly renewable sources of energy and retention, broaden the talent
Extinction’. It’s time to turn words have started in earnest. These include pool and better serve their diverse
into action as humanity stands at development of green infrastructure clientele. All these are key components
the “edge of an abyss”, using the which will reshape the energy model for of corporate success. Beyond D&I,
phrase of UN Secretary-General the society, technology upgrade which social issues such as nutrition, quality
Antonio Guterres. education, access to clean water and
The COP26 conference held in Glasgow sanitation are all growing in importance.
Our four high conviction themes
in November 2021 marked one such Well-being is another UN SDG which
time to take action. Thousands of has gained relevance in the wake of the
1. Energy Transition pandemic. Plus, longer expectancy of
delegates from the private sector,
climate activists and hundreds of heads 2. Sourcing Income in a life in general and higher government
of states gathered together with the Sustainable Way deficits have raised the demand for
ambition to keep global warming limited 3. The rise of ‘S’ in ESG sustainable healthcare, a key component
to 1.5C, mostly by targeting net zero of fiscal spending in the developed
4. Financing Biodiversity Action
carbon emissions by 2050 and halving world. Sustainable healthcare needs
global emissions by 2030. To get there, will help renewable energy generation, to be affordable, made possible by
it is clear that action is needed at every carbon capture, sequestration technological and pharmaceutical
level. and energy management. Heavy research and advancements. These
infrastructure spending in these areas areas offer attractive sustainable
HSBC and other financial institutions
offer attractive investment opportunities investment opportunities, in our view.
have taken several initiatives to stem
climate change and reverse its adverse for investors in our view. Financing Biodiversity Action:
impact. At COP26, for example, HSBC Sourcing Income in a Sustainable Biodiversity is vital for maintaining
joined the “Powering Past Coal Alliance” Way: Finding income in a ‘low natural cycles of weather, the food chain
to tackle the hard issues head-on, which growth, low yield’ world remains a and life on earth. But climate change and
includes phasing out the financing challenge for all investors in today’s rising pollution levels are increasingly
of coal-fired power and thermal coal investment landscape. But by investing contributing to loss of natural habitats
mining by 2030 in the EU and the OECD in sustainable companies, investors and as a result, the earth’s biodiversity is
and 2040 in all other markets. We are will tend to increase their exposure to in a sharp decline. The population sizes
working on structuring a relatively high quality growth companies, while of mammals, birds, fish, amphibians
speedy decarbonisation strategy; aligned also weaving in ESG and sustainability and reptiles have seen an alarming
with science-based targets for limiting factors. That can make the portfolio average drop of 68% since 1970. It’s
global warming to 1.5C above pre- more resilient, without denting its alarming that 50% of world’s habitable
industrial levels in 2100. returns or income. It is also noteworthy land area is being used for agriculture
that since the sustainable investments and is leading to a sharp reduction
Beyond the action by governments and
universe is multi-asset in nature, in biodiversity. With more and more
institutions, individuals will play a key
investing in an array of sustainable of such stark statistics coming to the
role as well, and the way we invest will
investments diversifies the risk exposure. fore, public opinion is turning against
need to become more sustainable. We
companies which harm biodiversity,
believe sustainability should feature both The rise of ‘S’ in ESG: While
putting pressure on corporates to
in the core portfolio strategy, but also in environmental issues are often in the
preserve resources by facilitating
the thematic satellites, under our trend of spotlight, social issues are just as
recycling and focusing on development
‘Investing for a Sustainable Future’. By important and form an important part
of a circular economy. Shareholders
doing so, investors would not only help of almost all UN SDGs (Sustainable
are calling on companies to adopt
save the planet, they’d also be able to Development Goals). Research shows
20Global Private Banking
targets to cut carbon emissions. But potential economic benefits too. open up new sustainable possibilities to
focusing on this isn’t just a charitable Innovative new technologies which meet the demand of a rising population.
effort. Adoption of such sustainability lead to better farming practices, use of Sustainable fishing practices and water
focused measures comes with big new ingredients like alternative protein sanitisation, development of new
biodegradable materials as alternatives
for plastic - all offer attractive structural
More needs to be done investment opportunities for investors.
Along with the above four High
Conviction investment themes, we
think that an adequate allocation to
sustainable investments via Hedge
Funds and Private Equity (PE) also
10/130 0.82c 33yr offers new and attractive investment
opportunities. Hedge Funds and PE can
The number of What women get paid US women’s labour force play a pivotal role in decarbonising the
female world for every 1$ men get participation is at a economy through their active ownership
leaders at COP26 paid in the US. 33-year low, as more approach. As new technologies often
against the number take on a caretaker role originate in private markets and need
of male leaders at home due to remote
time to develop, the longer-term
depicts how we are schooling.
still far from investment horizon of PE may be
gender parity. well adapted. HF and PE are often
able to spot early stage investment
opportunities, which, if successful, can
Source: HSBC Global Private Banking, COP 26, UK Office of National Statistics, US Bureau of Labor Statistics,
as at 30th November proliferate and be exited later at lucrative
multiples.
The environmental impact of food production
Agriculture is responsible for Food systems release Agriculture accounts for
80% of global deforestation 29% of global GHGs 70% of freshwater use
80% 29% 70%
GLOBAL DEFORESTATION GLOBAL GHGs FRESHWATER USE
Drivers linked to food production cause Drivers linked to food production cause 52% of agricultural
70% of terrestrial biodiversity loss 50% of freshwater biodiversity loss production land is degraded
70% 50% 52%
TERRESTRIAL FRESHWATER DEGRADED
BIODIVERSITY LOSS BIODIVERSITY LOSS AGRICULTURAL LAND
Source: WWF Living planet report 2020; - CBD, GSDR, ELD initiative. As at 30th November 2021.
21Global Private Banking Investment Outlook Report
3. Digital Transformation
The world has been undergoing population expands by the predicted 2 region. Automation is undergoing a
incremental disruptive technological billion over the next 30 years, this will wave of innovation spurred by advances
change in a host of areas for several stress transportation systems and the in AI (artificial intelligence) facilitating
decades. However, it is only in climate even further unless we adopt a greater number of applications.
recent years that the transformation new transportation-related technologies. AI use of deep learning, specialised
has gained serious momentum A number of industry segments should semiconductors and gaming engines
as technological advances have benefit from these positive trends enables automation software to be
caught up with ambitions and including electric vehicle manufacturers enhanced through self-teaching,
the real benefits are starting and their suppliers; hydrogen and thus expanding and improving their
to emerge. Digitalisation is not fuel cell industries; electrical and 5G capabilities. Whether that is reading text
merely the switching of analogue infrastructure manufacturers; battery on a parcel or letter; selecting the right
to an electronic data format, it is manufacturers and developers; and the components on a production line; or
what that new format facilitates. semiconductors and sensors industries. recognising a person in a crowd, these
A parallel analogy would be if The industrial economy is reliant on new technologies will require continual
suddenly everyone in the world automation to improve productivity, software and hardware development,
could fluently speak and read a especially at a time of rising inflation and especially in semiconductors. For
single language, which would wage costs. Until recently the limits of example, an electric vehicle requires
transform communication and technology hardware and software have over eight times more semiconductors
society. An example of the new limited their applications. But that has compared with its petrol engine
formats is the shift of businesses started to change. The World Robotics equivalent. This rapidly evolving area
to the metaverse that is gaining 2021 Industrial Robots report showed provides much potential for investors.
traction with the introduction of an there are 3 million robots in factories Healthcare budgets continue to be
interactive and more immersive 3D around the world with robot sales challenged, so the sector needs to act
virtual world, which is helping to booming. The International Federation intelligently. The use of AI offers some
drive growth in the digital economy. of Robotics (IFR) forecasts unit sales of interesting application opportunities for
Digitisation facilitates and enables autonomous mobile robots rising by 31% healthcare companies. Let’s start by
these developments. between 2020 and 2023. considering the fundamental building
The majority of the market is in five blocks for life, namely DNA and the
Our four high conviction themes countries: China, Japan, the US, South sequence of chemical bases that provide
Korea and Germany with Asia being the unique biological code for each
1. Smart Mobility
the largest consumer with 71% of new living organism. The human genome
2. Automation & AI contains 3 billion chemical bases that
installations in 2020 coming from the
3. Biotechnology, Genomics & Devices are unique to that individual. That is a
4. Total Security Smart Mobility
Global passenger vehicle sales by powertrain
We have decided to focus on 120
four key areas where the wave of
100
transformational changes is underway
and offer the greatest opportunity to 80
Millions
investors given their current state of flux.
60
In an increasingly environmentally
challenged world where transportation 40
is a significant source of harmful 20
emissions and pollution, the move to
smarter forms of mobility is logical and 0
2019 2021 2023 2025 2027 2029 2031 2033 2035 2037 2039
socially necessary. But smart mobility 2020 2022 2024 2026 2028 2030 2032 2034 2036 2038 2040
is not just about smarter choices or
modes of transport, it is also about the Internal combustion engine vehicles (ICE) Battery electric vehicles (BEV)
integration of intelligent technologies in Plug-in hybrid electric vehicles (PHEV) Fuel cell vehicles (FCV)
transportation systems. If the world’s
Source: Bloomberg, HSBC Global Private Bank as at 30th November 2021.
22Global Private Banking
Automation and AI Biotechnology companies have used
Organisational Actions to Automate Business Functions (%) other innovative technologies, such as
100% CRISPR to totally replace faulty genetic
Have set up a program for sequences with corrected versions, and
automation across the business 90% 16 15
they are using stem cells to regenerate
80% irreparably damaged tissue. The benefits
16 are clear even if the science is complex.
Have at least 1 process but
70% 13
not scaled across business The need for physical and digital security
60% has increased with globalization and
35 more connected devices, companies,
Piloting automation in 1 function 50%
28 governments, and people. Recent
40% cybercrime and terrorist attacks on
Have not begun to automate financial, infrastructure and government
30%
but plan to do so in the next year networks have served to underline
18 14
20% the need for greater vigilance and
10% more robust security. This should
Have not begun to automate 20 16
and have no plans to do so. exponentially increase the cybersecurity
0% spending in the near future, offering
2018 2020
attractive investment opportunities to
Source: Mckinsey & Company, HSBC Global Private Bank as at 30th November 2021.
investors.
large amount of data in itself. Imagine Biotechnology companies have been Digitalisation brings many positive
scientists wanting to compare the very effective at working on these new aspects associated with the unhindered
genomes of several thousand humans to AI applications and developing new flow of data, but that in itself brings
detect genetics anomalies or mutations targeted medicines that have greater certain security risks. The digital
that may be responsible for a particular efficacy and fewer side-effects. By transformation that has accelerated
medical condition. A combination of identifying specific genetic mutations, in recent years with the rise in remote
automated sequencing and screening scientists can develop proteins that working, contactless payments,
using AI software can both enhance can act directly on a gene to prevent its e-commerce, video conferencing,
and accelerate a process that would be expression, thereby blocking any harmful etc., has brought with it an increase in
almost impossible by manual methods. effects. security risks to people, business and
the state.
The increase in capital spending by
Biotechnology, Genomics and Devices
companies and through government
Global average national health expenditure (% of GDP)
infrastructure spending programs should
10.2 also boost spending on both physical
10 and digital security. Digital security
incorporates hardware, software, and
9.8
services to prevent and deter physical
9.6 and digital attacks.
9.4 The four different areas we have selected
9.2 clearly illustrate how digitalisation is not
9
only driving a wave of innovation, but
also positively transforming businesses
8.8
and the global economy.
8.6
8.4
8.2
8
2000 2002 2004 2006 2008 2010 2012 2014 2016 2018
Source: The World Bank, HSBC Global Private Bank as at 30th November 2021.
23Global Private Banking Investment Outlook Report
4. Policy support for backlash. This time around, any tax reform will probably be
highly progressive, with tax increases oriented towards high
mid-cycle growth
incomes and strong corporates on the one hand, but improved
social security and rising minimum wages on the other.
If tax policies are implemented in this way, labour markets
Economic growth and inflation have been well above continue to improve, and governments continue to roll out
normal in 2021, and both should come down in 2022. In effective vaccination programmes, consumer spending and the
the case of economic growth, the fear is that it slows outlook for consumer stocks should remain resilient. A resilient
too quickly, while for inflation, the fear is that it does consumer and infrastructure investment should both contribute
not come down quickly enough. In other words, our to a soft landing for the economy. However, rising taxation and
hope and belief is that the inflation cycle is shorter rising wages will probably lead earnings growth to slow from
than the economic cycle; while those who worry about the record pace of recent months.
stagflation believe the opposite, i.e. that the inflation will
remain stubbornly high and contribute to the economic Monetary policy
slowdown. Policy makers have a big role to play on Engineering a soft landing of inflation is the task of central
both fronts and markets will therefore pay very close banks. They generally believe that some of the drivers of
attention to the policy measures they will take, on both inflation (such as used car prices and commodity price base
the fiscal and monetary policy front. effects) are temporary, and that inflation should therefore come
We believe the policy mix still remains favourable, and supports down in the coming quarters. That should allow them to take
a range of thematics across equity and fixed income markets. a gradual approach to policy tightening, and in turn keep real
yields relatively low. But on the other hand, it is impossible to
know when the supply chain issues and shortages in the labour
Our five high conviction themes
market will start to ease, and markets will therefore continue
to react to the volatile economic news flow. So there are two
1. Infrastructure 2.0
aspects to the rate outlook: still low, but more volatile. And as
2. European Growth Leaders
a result, we continue to forecast a ‘low but volatile’ Treasury
3. American Renewal outlook. Relative to 2021, where the 10-year US Treasury
4. Resilient Carry in High Yield and EM mostly traded in a 1-1.5% range, we think we will see a broader
5. DM Financials – Focus on Subordination 1-2% range in 2022, as there is more uncertainty and inflation
may stay high for most of H1.
Fiscal policy: spending and taxes In summary, our ‘policy support for mid-cycle growth’ Top
Trend refers to the stabilising forces coming from fiscal and
Through fiscal policy, governments can have a direct impact on
monetary policy, which will help extend the cycle and dampen
economic growth. Big investments in infrastructure are likely to
stagflation risks by trying to engineer a soft landing of growth
boost activity for several years and extend the economic cycle,
and inflation. There are of course execution risks and potential
given the long duration of most infrastructure projects. This
market surprises, which we will continue to monitor. But
is taking place around the world, in the US, Europe and Asia.
overall, the fiscal policy measures we’ve seen so far support our
Investment in infrastructure such as roads, bridges, schools,
high conviction themes related to infrastructure, the American
healthcare and digital infrastructure is much overdue in many
renewal and European growth leaders. Monetary policy is
countries across developed and emerging markets.
supportive of the search for yield and our High Conviction
Infrastructure can help fulfil another increasingly common Investment Themes of Resilient carry in high yield and EM,
objective as well, of increased fairness and the fight against and DM financials – focus on subordination.
inequality. The pandemic has further increased inequalities,
and inflation has put pressure on lower income households’ Our investment themes
finances. We think that governments will try to fine-tune their Infrastructure 2.0: We are at the beginning of a multi-year
fiscal and social policies to try to halt or reverse the growing rollout of next generation technologies that are expected to
inequality. So while governments cannot continue to spend lift productivity and profitability across the globe. Physical
at the same pace as they did during the pandemic, and need infrastructure should benefit from renewal, upgrades or
to address the rapid growth of the debt pile over the past replacements, while digital infrastructure, especially next
few years, it is unlikely that they will resort to the austerity generation mobile networks like 5G, is a key enabling
measures that were common after the great financial crisis, component of the infrastructure upgrade.
because they increased inequality and produced a political
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