。EQUITY STRATEGY ● GLOBAL31 January 20192 Steadying equity fund flowsFollowing sharp equity fund outflows since December2018 (see Pessimism prevails, 3 January 2019), we seesome signs of stabilisation in investor sentiment in 2019.Despite a further outflow of USD12bn from Europe andthe US, equity funds have posted marginal inflow ofUSD1bn in aggregate in 2019 (year-to-date). Returning to EMThe steadying in equity outflows can be largely attributedto emerging markets, where funds have posted netinflow of USD8bn in January, the highest across allregions. However, EM equities remain out of favour. In2018, global funds sharply reduced their allocations in allemerging markets except India. The biggest declineswhere in China, Korea and Taiwan, where funds havecollectively reduced their holdings by 2pps in 2018. Positive on Korea, cautious on TaiwanAcross emerging markets, global funds’ positioning inTaiwan and Korea is more than two standard deviationsbelow its long-term average value. Although bothmarkets are deeply unloved, we see more upside inKorean equities due to attractive valuations and potentialearnings upside (see Korea equities in 2019, Brighter2019, leaving the negatives behind, 23 January 2019). Incontrast, the outlook for Taiwan equities is moreconservative due to slowing tech cycle in 2019 andrelatively expensive valuations (see Taiwan EquityStrategy, 2019 Outlook: Prolonged tech winter to weighon the market, 11 January 2019). 1. Equity outflows have stabilised in 20192. Inflows into emerging markets and developedAsia Source: HSBC, EPFR GlobalSource: HSBC, EPFR Global *Using weekly fund flow data since 2-Jan-20193. Almost all EMs have seen a fall in their holdings in20184. Taiwan and Korea weightings are more than twostandard deviations below their long-term averageSource: MSCI, HSBC, EPFR Global, Refinitiv DatastreamSource: MSCI, HSBC, EPFR Global, Refinitiv Datastream *represents funds with mandate to invest in global benchmarks-50 0 50 100 150 200 Jan-18Apr-18Jul-18Oct-18Jan-19 Cu mu lati veflow(U SD bn,sin ce201 8) Bond fundsEquity funds 1 -10 -2 5 80.1 -14 -12 -10 -8 -6 -4 -2 0 2 YT D f undflo w ( US Db n)* -1.0-0.50.00.5 China Korea Taiwan Brazil Russia South Africa Indonesia Malaysia Mexico Thailand Argentina Philippines Turkey Egypt Indiachange in activeweights in 2018, pps -3 -2 -1 0 1 2 3 131415161718 act ivewe igh t, z -sc ore TaiwanKorea EQUITY STRATEGY ● GLOBAL31 January 20193 Falling cyclical holdingsWe have been highlighting regional funds’ rotation awayfrom cyclicals into defensives throughout most of 2018 andour data indicates that this trend continued in December. Infact, cyclical allocations are now over two standarddeviations below average relative to defensives – a levelnot seen since the 2008 global financial crisis. We believethat this is too pessimistic as cyclical sectors alreadyappear to have overshot the decline in the global PMIs. Werecently increased the beta of our allocations, adding toIndustrials and cutting Consumer Staples. We remainunderweight Health Care – the most loved sector globally.Consumer Durables is a big contrarian call in EuropeAcross the cyclical industry groups in Europe, ConsumerDurables positioning has fallen sharply over the last fewmonths on concerns over Chinese growth, and is nowclose to its lowest level in over five years. But there havebeen signs of improvement, with the sector outperformingyear-to-date. We think this continues as Chinese stimulustakes effect and growth fears ease.Funds starting to buy Utilities from low levelsAcross defensive sectors in Europe, funds have started tobuy Utilities from very low levels. We believe this willcontinue, particularly if bond yields remain low as our FixedIncome analysts expect. The sector has also seen animprovement in earnings momentum in recent months,with revisions now outpacing the wider market.In contrast, Pharma holdings have risen sharply over thepast year and funds are now significantly overweight thesector. This positioning is vulnerable if earnings slow. 5. Cyclical sectors’ relative holdings are at theirlowest level in over ten years 6. Cyclical sectors seems to have overshot thedecline in the global PMIsSource: MSCI, HSBC, EPFR Global, Refinitiv Datastream *Includes all funds in our sample that provide sector weights. We identify industry groups in materials,industrials & consumer discretionary as cyclical sectors; consumer staples, healthcare and utility as defensive sectors. Due to recent changes in GICs, active weights for media and retailing for Dec-18 arekept at same level as in Nov-18 Source: MSCI, HSBC, Refinitiv Datastream 7. Consumer Durables is a big contrarian call inEurope 8. Utilities is more out of favour than Pharma amongdefensive sectors in EuropeSource: MSCI, HSBC, EPFR Global, Refinitiv DatastreamSource: MSCI, HSBC, EPFR Global, Refinitiv Datastream-3 -2 -1 0 1 2 3 Jan-08Jan-10Jan-12Jan-14Jan-16Jan-18 act ivewe igh t, z -sc ore global funds*: cyc rel def (active wt, z-score) 40 42 44 46 48 50 52 54 56 58 -30% -20% -10% 0% 10% 20% 050607080910111213141516171819 Cyclicals/Defensives (%yr) Global PMI manufacturing (RHS) 80 90 100 110 120 130 140 150 -2.5 -2.0 -1.5 -1.0 -0.5 0.0 0.5 1.0 Dec-13Dec-14Dec-15Dec-16Dec-17Dec-18 z scoretotal return rel (RHS) act ivewe igh t, zsc ore ind ex,De c 2 013= 1 00 -3 -2 -1 0 1 2 3 4 131415161718 act ivewe igh t, z -sc ore UtilitiesPharma EQUITY STRATEGY ● GLOBAL31 January 20194 Impact of recent changes in GICSstructure on funds’ active weightsWhat has happenedOver the last few years, rapid progress in how wecommunicate, consume media, shop online, and accessother content means that there has been an increasingintegration between telecoms, consumer, and ITcompanies. As a result, MSCI and S&P decided toredefine the structure of the Global Industry ClassificationStandard (GICS).See below summary of changes in GICS structureannounced by MSCI and S&P Dow Jones Indices.1. The Telecommunication Services sector hasbeen renamed Communication Services sectorThe Telecommunication Services Sector hasbeen renamed to Communication Services. Itnow includes companies that enablecommunication and offer related servicesthrough various media. Subsequent changeshave results in: Media companies have moved fromConsumer Discretionary to CommunicationServices sector Internet services companies have movedfrom Information Technology toCommunication Services sector2. Information Technology sectorThe Internet Software & Services industry andsub-industry has been discontinued A new sub-industry has been created under theIT Services industry called Internet Services &Infrastructure Cloud-based software companies have beenincluded in the Application Software sub-industry.3. Consumer Discretionary sectorMedia industry group has moved out ofConsumer Discretionary sector into theCommunication Services sector, and it isrenamed as Media & Entertainment E-commerce companies have moved fromInformation Technology sector to ConsumerDiscretionary sectorHow it impacts active weightsThe latest holdings data from EPFR Global suggests thatnot all funds have moved across to the new classificationsystem yet, despite the change already being reflected intheir benchmark weights. As a result the ‘active weights’ for Media and Retailinghave registered a steep fall as the benchmark weight hasincreased significantly, whereas the ‘active weight’ forSoftware has registered a steep increase as thebenchmark weight has fallen. This then has knock-oneffects on the active weights for Communication Services,IT and Consumer Discretionary.How we are treating itIn the absence of stock level holdings data, it is notpossible to calculate the impact of changes in GICSstructure on individual funds’ industry group activeweights. Furthermore, as funds react independently tothis reclassification in sector weightings, we cannot adjustbenchmark weightings for all funds simultaneously. We compute sector level active weights by aggregati