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HSBC: Where to put your money now

Investors should be looking to boost exposure to yield plays as central banks in Europe and the U.S. signal interest rates aren't heading higher soon, according to HSBC's private bank.

"With long term interest rates lower for longer in Europe and the U.S., we think there is some scope to add credit markets exposure" and dividend yield, Benjamin Pedley, head of investment strategy for Asia at HSBC's private bank told CNBC in an interview.

The U.S. Federal Reserve surprised markets in September by leaving interest rates unchanged, spurring many analysts to move their expectations for the central bank's first hike in nine years into 2016. Last week, the European Central Bank left its key interest rates unchanged at 0.05 percent, but at the monetary policy meeting's press conference, ECB President Mario Draghi suggested the bank's quantitative easing (QE) program could be extended beyond September 2016.

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Bond prices in developed markets have rallied in recent sessions following the Fed's inaction, coupled with the prospect of further monetary stimulus by the ECB, with investors for some short-dated sovereign debt in Europe now being charged for the privilege of parking their money as yields are in negative territory.


An investor stands in front of an electronic board showing stock information in Fuyang, China.
Reuters
An investor stands in front of an electronic board showing stock information in Fuyang, China.

In the wake of those decisions, HSBC revised its forecast for the 10-year U.S. Treasury yield to 1.5 percent at the end of 2016, down from its previous 2.8 percent forecast, Pedley noted.

"That means anything that's got a bit of a yield is going to be reasonably attractive," he said.

In the credit space, he advises adding exposure to higher grade credit with the additional risk of longer tenures, saying maturities of five to seven years are the "sweet spot." Typically, a longer maturity would be considered riskier -- and would pay a higher coupon -- as the risks are higher that it won't be repaid or that interest rates would change during its tenor.

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Pedley said he likes dividend stocks in general, but noted that Eurozone dividend plays aren't overly expensive compared with the rest of the market. Within Asia, he likes the Singapore market as its yield is relatively high for the region and the volatility tends to be lower.

Singapore's trailing dividend yield is around 4.1 percent, compared with Asia ex-Japan's 2.7 percent, according to data from Credit Suisse.

Pedley also noted that HSBC clients have a tendency to be overweight on cash and underweight on hedge funds and he's been advising increasing exposure to alternative investments, particularly with managers who are "directional agnostics," or not biased on a particular market direction. A directional fund would bet on overall market movements, such as a "short" fund which would bet on market declines.

But he noted that transaction volumes have been relatively low across private and institutional banking. He believes that's due in part to usual fluctuations during the "northern hemisphere" summer period.

"It's also due to uncertainty on when the Federal Reserve will bit the bullet and move on interest rates," Pedley said. But he added that clients aren't pessimistic.

"The monetary easing from China and also signals from the ECB that they're prepared to extend QE -- this is probably some kind of reassurance to our clients," he said.

Late last week, China's central bank poured a "double shot" of easing measures, cutting interest rates by 25 basis points and reserve requirement ratios for banks by 50 basis points.