LONDON Cheap valuations offer potential for double-digit returns on global equities in 2012, with emerging markets likely to do especially well, the CIO of HSBC's wealth management division said on Monday, adding he had raised equity exposure at the expense of gold.
Alec Letchfield, CIO of wealth management at HSBC Global Asset Management, also told the Reuters 2012 Investment Outlook Summit that he favored hedging tail risks stemming from the euro zone crisis via a diversified portfolio, skewed towards equities.
"We favor equity markets and we favor emerging markets. That would typically be expecting 15 percent plus returns. Double-digit, we would not be surprised to see," Letchfield said at the summit, held at the Reuters office in London.
He noted that on a price-earnings basis, developed as well as emerging markets were trading at around 10 times forward earnings -- 20-25 year lows. On a price-book measure too, stocks looked attractive.
"Valuations look cheap on a multi-year basis ... yields on equity compared with government debt look extremely attractive," he said. "Even if you get up to 13-14 times P/E, that's considerable upside from (the present) 10 times."
Emerging stocks should do well after underperforming this year, Letchfield said, adding that UK or U.S. listed companies leveraged to emerging market growth also offered upside.
"Structurally, within the equity-positive bias we have, emerging markets still remain the best way of playing this," he said.
Letchfield acknowledged that the euro zone's uncertain outlook and the massive market turmoil that would follow any break-up of the single currency bloc made asset allocation tough. To hedge, he favored holding a broad range of asset classes -- a typical balanced portfolio for instance would include 40 percent equities, with a bias to emerging markets.
But he also said the risk-averse environment offered a "once-in-a-lifetime opportunity," provided investors took a 3-5 year investment horizon.
"The suspicion is it's not going to be as bad as the doom mongers would have it ... there's quite a bit of bad news being discounted by markets already," he added.
Letchfield has funded higher equity allocation by reducing exposure to gold.
"We still have gold in the portfolio but it's a bit less," he said. "We've been reducing (gold) since summer, we were buying equities. My suspicion is a bubble is being formed."
Euro zone policymakers meet on Friday for a summit that is widely viewed as make-or-break for the 12-year old single currency bloc. Letchfield predicted that European leaders would eventually come up with a solution.
"We're not advocates that you can simply walk away from this experiment," he said. "Based on that kind of uncertainty, and the potential catastrophe within markets, the logical thing would be for euro politicians to do what is right."
However, he remains unwilling to buy Spanish and Italian government debt.
"There are some things where the risks are so great that we don't see sense in going there. We don't feel the need to start diving into these uber-risky assets."
Instead he prefers to hold emerging debt, with local bonds seen benefiting from potential currency appreciation. He also likes corporate debt.
"Corporate debt, we're reasonably positive on. Corporates have been running their balance sheets in much more prudent fashion and they have built up their cash levels," he said. "Bankruptcies are not an issue because of cash levels."
(For summit blog: blogs.reuters.com/summits/; Editing by Susan Fenton; Graphics by Scott Barber)