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HSBC Wealth Management
Looking past short-term market swings for potential returns
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CONTENTS
02
Looking past short-term market swings for potential returns
06
Implications of rising US yields on credit markets
10 14 20
What would QE tapering do to the bond markets and what can investors do about it?
Aug 8 Oct 10 2013
Recent market selloff: A pause, not a reversal
24
01
WEALTH STRATEGIES
Looking past short-term market swings for potential returns
02
Global equity markets was on a wild ride in the second quarter as investors were caught off guard by Chinas slowdown and the Federal Reserves signal that it may reduce the pace of asset purchases, provided economic data continue to improve. The prospect of the tapering of quantitative easing (QE) in the US, which sparked a surge in the US Treasury yields, has also put pressure on the overall bond markets.
Despite tapering talks increasing short-term volatility, company earnings had supported the performance of US equity, which delivered positive returns of +2.6% over the quarter. The Japanese equity market also continued its rising trend with a 3.7% gain on strong economic data although losing some ground following a long winning streak in Q1.
2.6 3.7
03
WEALTH STRATEGIES
7.68.1
6.86.6
7.7
Chinas recently released economic data, which pointed to a slowing economy, also added pressure to market sentiments.
04
10646 282.49%
6.1 3.0 2.8 1.3
2013
2013 Q2 market performance
Global Equity US Equity European Equity Japan Equity Asia Paci c ex. Japan Equity Emerging Market Equity China Equity Hong Kong Equity Global Emerging Market Bond Global High Yield Bond Global Investment Grade Corporate Bond Global Government Bond
-0.42% 2.58% -0.51% 3.72% -8.08% -6.76% -6.63% -6.06% -1.29% -2.79% -2.97%
Aug 8 Oct 10 2013
-7.61%
Morningstar2013630 JP Source: Morningstar. Data as of 30 June 2013 and in USD terms Global government bond refers to Citigroup World Government Bond Index; Global investment grade bond Barclays Capital Global Aggregate Bond Index; Global high yield bond Merrill Lynch Global High Yield Bond and global emerging market bond JPMorgan EMBI Global Composite. Global equity refers to MSCI World Free Index; US equity MSCI USA Index; European equity MSCI Europe Index; Japan equity Topix; Asia Pacific ex Japan equity MSCI Asia Pac ex Japan Index; Emerging market equity MSCI EM Index; China equity MSCI China Index and Hong Kong equity Hang Seng Index
05
WEALTH STRATEGIES
Implications of rising US yields on credit markets
Views from HSBC Global Asset Management
Julien Seetharamdoo
Recent comments from the US Federal Reserve (Fed), following intense market speculation, on plans to taper the US quantitative easing (QE) programme have led to a spike in US Treasury yields and caused a selloff in the broader market towards the end of the second quarter. Investors have become increasingly concerned about the impact that higher shortand long-term US interest rates could have on the global economy and asset markets, including the credit markets.
06
While volatility is expected to remain high in the near term, it will not be enough to disrupt the medium- to long-term performance of credit markets or the outlook for the global economy. The key to riding through all these tides is to remain focused on long-term fundamentals such as corporate profitability and valuations which are still supportive.
5 6
Investors continue to grapple with the prospect of reduced Fed stimulus. What is your view on this?
Since May, markets have become increasingly concerned about the US Federal Reserves plans to taper off QE measures. Yields have spiked further following the Federal Open Market Committee (FOMC) meeting in June, causing heightened volatility in the credit markets.
5
Yields have edged higher starting early May
11% 10% 9% 8% 7% 6% 5% 4% 3% 2% 1% Jan 2010 Jul 2010 Jan 2011 Jul 2011 Jan 2012 Jul 2012 Jan 2013
10
10-year US Treasury yield
30
US 30-year mortgage rates
JPMorgan EM Bond Index Global Spread 20136 Source: Bloomberg, HSBC Global Asset Management, as of June 2013
2014
its monthly QE asset purchases later this year and would continue to reduce the pace, in measured steps, to end purchases around mid-2014, if its economic projections prove broadly correct. The chances of QE tapering beginning this year have clearly increased. The key point is that QE tapering will begin only if the data, especially from the labour market, holds up and the Fed is convinced the US economy can sustain its recovery. The Fed will eventually have to reduce its extraordinary monetary accommodation but is likely to be cautious when tapering off QE, so the process of normalisation will be gradual.
07
WEALTH STRATEGIES
The Fed Chairman Bernanke said the central bank may scale back
What is the implication of the recent rise in Treasury yields on the credit markets?
After a period of stellar performance over the last year, the credit markets were recently hit by by the sharp rise in Treasury yields. Both investment grade and high yield bonds suffered as a result. In the short term, volatility is likely to remain high and credit markets could stay under pressure. However, we do not think it will be enough to disrupt the medium- to long-term performance of the credit markets or the outlook for the global economy. Monetary policy normalisation on the back of improving macroeconomic fundamentals should be positive for credit spreads. In the longer term, fundamentals such as corporate profitability and valuations will determine performance. Indeed, the Fed would not be contemplating tapering off the QE programme if it wasnt convinced the outlook for the US economy was improving.
Against the current backdrop, what is the outlook for credit markets, in particular high yield (HY) and emerging market (EM) bonds?
Overall, we prefer corporate bonds to government bonds, and we retain our overweight positions on investment grade and high yield debt. In general, credit selection is increasingly important but overall valuations dont seem overstretched, especially in less cyclical sectors in the high yield universe. Historically, there is only a loose correlation between rising US Treasury yields and HY credit spreads. Typically higher government bond yields are associated more with tighter HY credit spreads (i.e. a negative correlation) as US Treasury yields tend to rise when economic conditions are improving and therefore corporate default rates are low or falling and profitability is strong or increasing. In addition, any tapering of QE asset purchases and an eventual increase in policy rates is likely to take place only if the economic environment is improving. Hence profitability and credit quality should continue to be supportive of credit markets, even if Treasury bond yields continue to rise during the rest of this year and next. These positive fundamentals should limit the extent of any backup in HY bond yields, or at least provide profitable entry points for longterm investors, who are able to look past the short-term volatility.
08
High yield default rates are low
30
25
15
10
Emerging market high yield bonds 20136 Source: Bank of America Merrill Lynch, as of June 2013
May 2001 May 2003 May 2005 May 2007 May 2009 May 2011 May 2013
0 May 1999
In terms of the outlook for EM bonds, including Asian bonds, valuations are now more attractive, and from a longer-term perspective, we continue to favour this asset class because of improved credit fundamentals in many EM countries especially when compared to the developed world. Local currency bonds also offer exposure to many emerging market currencies that we expect to appreciate versus developed market currencies over the long term.
This article is provided by HSBC Global Asset Management (Hong Kong) Limited Investment involves risk. Past performance is not indicative of future performance. Please refer to the offering document for further details including the risk factors. The document has not been reviewed by the Securities and Futures Commission. The document is prepared for general information purposes only. All views expressed cannot be construed as an offer or recommendation by HSBC Global Asset Management (Hong Kong) limited (AMHK). AMHK and HSBC Group shall not be held liable for damages arising out of any persons reliance upon this information. Any person considering an investment should seek independent advice on the suitability or otherwise of the particular investment. AMHK has based this document on information obtained from sources it reasonably believes to be reliable. However, AMHK does not warrant, guarantee or represent, expressly or by implication, the accuracy, validity or completeness of such information.
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WEALTH STRATEGIES
We expect appreciation potential in a number of emerging market currencies over the long term
Views from HSBC Global Asset Management
Geoffrey Lunt
Director, Senior Product Specialist for Fixed Income, HSBC Global Asset Management
Concern that the US Federal Reserve may begin to withdraw the extraordinary monetary stimulus applied to the financial system in recent years has led to higher US Treasury yields and considerable volatility in asset markets.
10
2.4%10.5%1
Throughout the volatility, offshore RMB bond markets have held up well, and returned 2.4% this year, while emerging market bonds have fallen by 10.5%1. Good credit quality, low duration, attractive yields, and geographical diversification of issuers are some of the major reasons why investors are increasingly drawn to this asset class, and should consider RMB bonds as a medium- to long-term opportunity.
How have offshore RMB bonds performed through the recent market volatility?
Offshore RMB bonds have held up relatively well. Yields have risen but returns overall have outperformed other emerging bond markets. This asset class has a relatively low duration, and is thus less sensitive to interest rate risk and the movement of US Treasury yields than other credit markets. In fact, US Treasury and offshore RMB bonds have historically displayed a negative correlation in price (-0.3 since the beginning of 2011)2. As a result, the recent concern about rising interest rates and Treasury yields has not had as much impact. This in itself has been a significant draw for international investors.
2011 -0.3
2
Yield comparison between Asian hard currency bonds vs offshore RMB bonds
6%
4%
3%
2%
1% Jan 2011
In addition, investors have been attracted by the asset class fundamentals such as good credit quality, attractive yields and potential currency appreciation.
1) Source: Bloomberg as of 25 June 2013, in USD terms; indices referred to HSBC Offshore RMB Bond index and JP Morgan EMBI Global Total Return 2) Source: Bloomberg as of 25 June 2013
1) 2013625 2) 2013625
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WEALTH STRATEGIES
5%
How has the recent credit crunch concern in China affected the RMB bond market?
The recent spike in interbank money market rates has compounded investor worries over a further slowdown in the Chinese economy. This phenomenon had a number of causes including seasonal factors, the impact of tightened supervision of interbank bond transactions and shadow banking activities, as well as a sharp slowdown in capital inflows/FX carry trades. While the liquidity squeeze has eased, helped by The People's Bank of China (PBoC)s pledge to maintain market stability, deleveraging will likely continue as authorities crack down on financial risks in the system and reduce reliance on credit driven investment. Tighter liquidity/credit conditions and higher funding costs could pose downside risks to growth and increase default risks. However, these should apply more significantly to the onshore market, where lending concerns are far more pressing. The offshore RMB bond market is still protected somewhat by the relatively strong credit quality of issuers, and we do not anticipate a significant rise in default risks in this market. Tighter lending practices by banks in the onshore market may lead to mainland companies seeking financing via debt capital markets. This may result in an increase in offshore RMB bond issuance. This could lead to greater diversification and the liquidity in the offshore RMB market, making the asset class a more compelling opportunity to global investors.
What is the outlook for this asset class and what are the benefits of investing in offshore RMB bonds?
The outlook for offshore RMB bonds has several positive drivers, including strong growth in the asset class. The offshore RMB bond market has grown considerably since its inception and now stands at around RMB 500 billion, compared to a market size of less than RMB 50 billion in 2010, representing a 10x increase in just two and a half years. As at 5 June 2013, the year-to-date gross issuance of offshore RMB bonds has reached RMB 185 billion, which is around 50% higher than the figure recorded during the same period last year. In addition, the asset class continues to be supported by the factors mentioned earlier: low duration, attractive yields, geographical diversification of issuers, good credit quality and potential currency appreciation.
12
Currency appreciation continues to be positive factor, though it is likely to be gradual. The low duration nature of the market will continue to be a draw for investors worried about a rising interest rate environment. For international investors, the increasing diversification and credit quality of this asset class will be important too. Issuance of offshore RMB bonds is generally made up of Chinese and global issuers, with a skew towards the latter. The constituents include corporates, financials, sovereign and supranational entities. What this means is that the offshore RMB bond market is less correlated and thus less impacted by any negative news flow in China. It also has a relatively low correlation to other credit markets and asset classes. This suggests that an allocation to offshore RMB bonds can help diversify investor portfolios, which is valuable in light of trends that indicate market volatility will likely continue in the near term.
) ( ) ( This article is provided by HSBC Global Asset Management (Hong Kong) Limited Investment involves risk. Past performance is not indicative of future performance. Please refer to the offering document for further details including the risk factors. The document has not been reviewed by the Securities and Futures Commission. The document is prepared for general information purposes only. All views expressed cannot be construed as an offer or recommendation by HSBC Global Asset Management (Hong Kong) limited (AMHK). AMHK and HSBC Group shall not be held liable for damages arising out of any persons reliance upon this information. Any person considering an investment should seek independent advice on the suitability or otherwise of the particular investment. AMHK has based this document on information obtained from sources it reasonably believes to be reliable. However, AMHK does not warrant, guarantee or represent, expressly or by implication, the accuracy, validity or completeness of such information.
13
WEALTH STRATEGIES
What would QE tapering do to the bond markets and what can investors do about it?
14
What is QE?
Quantitative Easing refers to the action taken by the US central bank to purchase bonds from banks and other institutions with newly created money, injecting a large amount of funds into the financial system. The bondbuying action raises the prices of bonds and lowers their yield. In theory, the goal of a greater amount of funds and lower yields is to promote increased lending, investment and consumption activity.
15
WEALTH STRATEGIES
Chairman Bernanke surprised the markets by his clear signal about the time table of the asset purchase tapering. The US 10-year Treasury bonds yield continued to rise and USD sustained its upward momentum. Market is concerned that the indication of QE tapering may lead to end of a low interest rate environment. US Treasury yield shot up from a low of 1.6% in May 2013 to 2.6% as of July 2013.
What would QE tapering do to the bond markets and what can investors do about it?
3 HIBOR 19932013
HIBOR 3-month historical chart (1993-2013)
% 10
9.97
~ 3.42
Recent reading
0.38357 0.14
(12 Dec 31, 2009)
2011 2012 2013
1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
2008
What is the implication of quantitative easing tapering for Hong Kong investors?
Interest rates across the world have been at historical low level since the financial crisis in 2008, including Hong Kongs benchmark interbank rate, HIBOR. Since Hong Kongs monetary policy is correlated to the US, customers who are interested in hedging the value of their investments against a potential rise in interest rate could consider floating rate investments, such as those linked to HIBOR. Rather than paying a fixed rate of coupon, HIBOR floating rate investments offer interest payments which are reset periodically with rates tied to HIBOR.
(HIBOR)
HIBOR
HIBOR
HIBOR
16
The selloff in EM bonds has been moderating
4
USDm 0
-2
-4
-6 7Jul 2012
100 7
17
WEALTH STRATEGIES
What would QE tapering do to the bond markets and what can investors do about it?
5 8.2%
7.4%
7%
18
Reforms should invigorate the private sector and improve efficiency, lifting growth
Private enterprises is more efficient (return on assets)
16%
14%
12%
10%
8%
6%
Private enterprises
4%
SOEs
2%
CEIC
0 1996 1998 2000 2002 2004 2006 2008 2010 2012
Once implemented, these measures should invigorate the private sector and improve efficiency, lifting growth prospects in the medium to long term, and few would disagree that financial and fiscal reforms are the only solution to local government debt, shadow banking and other structural problems. HSBC also believes that Beijings focus on speeding up reforms will, once implemented, improve efficiency as well as revitalise private business. This will put China on a sustainable and steady growth path in the medium to long term. However, it will take time for the impact of the reforms to filter through, so growth is likely to
Aug 8 Oct 10 2013
stay lower in the near term, especially given weak global demand. Breaking the monopoly of state-owned enterprises one of the biggest challenges for the reform process and lowering entry barriers for private investments should improve investment efficiency and speed up the technology advancement.
2)
Infrastructure construction: With fiscal constraints and high debt burdens, local governments should invite private investment in urban infrastructure
3)
Service sectors such as education, finance and telecoms where there are huge potential consumer demand and the opportunity to create large numbers of jobs
19
WEALTH STRATEGIES
Where will the market go?
Views from Invesco Asset Management Asia Limited
Concerns that the US would taper quantitative easing policies sooner than expected have driven a heavy selloff in global equities. In addition, disappointing data out of China and concerns over financial sector risks following a spike in domestic interbank rates have also hit investor sentiment, leading to sharp falls in Asia Pacific ex-Japan markets.
20136
Asia Pacific ex Japan equities corrected in June 2013
10%
5% 0.2% -1.6%
0% -3.2% -4.9% -7 .9% -12.2% -15.6% -20% A China Philippines A-Shares Hang Seng (China) Hang Seng Thailand South Korea Indonesia Singapore India Australia Taiwan New Zealand -7 .1% -7 .1% -6.9% -4.9% -2.5% -2.3%
-5%
Factset2013 531628 Source: Invesco, Factset, data from 31 May to 28 June 2013. Local index returns in local currency terms. Note: Hang Seng (China) refers to Hang Seng China Enterprises Index instead of overall Hang Seng index
-10%
-15%
Malaysia
20
We believe that fundamentals in Asia ex-Japan are still relatively robust in the long run, but investors should be careful when they invest into the equity markets amid short-term volatility despite the attractive valuations.
2013628
5%
1.7% 0% -0.3% -2.4% -3.2% -5% -4.5% -2.2% -1.9% -1.3% -1.1%
-0.2%
-0.1%
-10% INR AUD NZD THB PHP MYR IDR KRW SGD TWD CNY JPY
20142015
21
WEALTH STRATEGIES
-5.0%
Factset20135 31628
While adjustment to this policy shift is leading to dislocations in markets that have become frothy during the prolonged period of monetary expansion, the recognition that eventual rate hikes will be gradual should eventually help to stabilise sentiment. Moreover, the improved US growth prospects that would be the prerequisite for quantitative easing exit should ultimately support risk assets, including emerging market, Asian equities and currencies, not to mention a more positive backdrop for Asian exporters as currency weakens.
22
Macro Assessment
* % % %
10
China Hong Kong # India# Indonesia South Korea Malaysia Philippines Singapore Taiwan Thailand Japan Brazil Mexico Turkey
3,311.6 317.4 259.7 112.8 327.0 139.7 83.8 259.3 403.2 181.6 1,268.1 362.1 153.5 98.3
20 27 6 7 8 9 16 17 18 9 18 11 0.4 0.4
2.3 1.3 -4.2 -2.8 3.8 6.4 2.9 18.6 10.3 0.7 1.0 -2.4 -1.0 -6.1
-0.2 7.5 3.6 2.8 -2.8 -2.5 2.3 -10.2 -6.6 3.2 -1.8 -0.1 4.0 -0.0
0.2 3.3 1.3 2.2 1.3 0.6 0.7 N/A 0.3 0.7 2.6 121.7 149.2 342.8
4.3 9.9 6.0 5.3 -0.9 3.2 4.2 6.1 -0.9 4.1 -5.5 8.3 7.4 24.1
* Based on retained import for Singapore and Hong Kong given the significant re-export portion
2009-2012 2009-2012 average
2013620
# Fiscal year
Another positive note we should take from the recent correction is that regional valuation remains accommodative versus its historical standard. On price-to-earnings (PE) terms, Asia ex-Japan is now trading at 10.8x 2013 PE, with consensus earnings growth of 15.4%. The region is equally supportive as measured by price-tobook (PB) metrics, at 1.6x trailing PB versus 10-year and 30-year average of 1.8x.
All data are sourced from Invesco dated 28 June 2013 unless otherwise stated The article provided by Invesco Asset Management Asia Limited This material has not been reviewed by the Securities and Futures Commission of Hong Kong. Investment involves risks. Past performance is not a guide to future performance. There is no guarantee that any forecasts made will come to pass. Reliance upon information in this material is at the sole discretion of the reader. This material is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. Any opinions contained herein, which reflect Invescos judgment at this date, and may change as subsequent conditions vary. The information and opinions contained in this material are derived from proprietary and non-proprietary sources deemed by Invesco to be reliable, are not necessarily all-inclusive and are not guaranteed as to accuracy. This material is for informational purposes only and does not constitute an offer or invitation to anyone to invest in any Invesco fund and has not been prepared in connection with any such offer. Any research in this material has been procured and may have been acted on by Invesco for its own purpose. The results of such research are being made available only incidentally.
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WEALTH STRATEGIES
Recent market selloff: A pause, not a reversal
Views by Standard & Poors
6
24
Global equity markets sold off sharply in June, resulting in generally disappointing second quarter performances for Asian markets and in particular, Hong Kong and Shanghai. Although the first six weeks of the quarter were promising with US economic data improving and China looking to a pick up in growth from 1Q pace, market sentiment and China news flow deteriorated.
(REIT)
On the US front, the Federal Reserves (the Fed) meeting minutes and Chairman Ben Bernankes indications that the Fed was looking to taper its bond purchases sent long-term Treasury yields higher and triggered a selloff in emerging market bonds. The rise in yields also sent investors out of high dividend yielding stocks, particularly REITs.
2013621
A difficult Q2 for Asian equities (as of June 21, 2013)
52 (%)
QTD -4.6% -7.1% -7.3% -15.2% -9.1% -0.3% -8.6% 6.7% 5.0% -9.7% -5.6% -9.1% -1.6% -10.3% 1.5% -4.6%
YTD 1.9% -8.1% -8.6% -19.2% -10.6% -4.0% 4.6% 27.3% 4.0% 6.4% -1.3% -8.7% 1.2% 0.6% 11.7% 0.3%
Pullback fr. 52-wk High -9.2% -16.5% -14.8% -24.4% -14.9% -8.4% -13.4% -15.3% -1.8% -16.4% -9.6% -10.3% -7.2% -14.8% -9.7%
Aug 8 Oct 10 2013
-4.6%
China added to monetary tightening worries when the Shanghai Interbank Offered Rate (SHIBOR) spiked up. The jump in SHIBOR rates has occurred on occasion triggered by events and also holiday periods where companies and individuals withdraw funds (this latest event coincided with the June 10-12 Duanwu festival holiday). However, this time round, with the fiscal-half year closing soon, and with authorities keen to clamp down on shadow banking activity, the jump in the SHIBOR could stay at relatively elevated levels for a few months. The Peoples Bank of China (PBoC) looks to be intent on punishing the provincial banks who are the net borrowers in the interbank market and who have not been managing risks and have gotten around lending restrictions through the shadow banking system.
25
WEALTH STRATEGIES
GDP 2.4%
1.8% GDP
4 2.6%
% y-o-y%
CPI
26
0.9 19%
Chinas big four banks have relatively cheap valuations at a weighted average PB of 0.9x vs. ROE of 19%, which reflects increased asset quality risks. While investors remain unconvinced by the low valuations, we believe the big banks remain best positioned to benefit from a potential upward rerating. This, we believe, will materialise as China cleans up its banking system risk and improves transparency over the next six months. The risk from deteriorating asset quality remains the key concern. Credit costs have averaged 50 bps for the large banks since 2009. Assuming non-performing loans (NPLs) jump to 2% (2008 levels) from the current 1% for the large banks, credit cost would need to rise to around 120 bps (2008 levels) to maintain provision coverage above 150% (it is 250%, currently). In this scenario, we estimate that large banks ROEs may decline to the mid-teens level from the current 19% average. Given that the large banks core capital ratios remain comfortable at above 9.5%, we do not expect any pressure on this front. Separately, assuming short-term rates remain elevated, we see minimal impact to net interest margins (NIMs) as lending rates are largely reset on an annual basis and given the short duration of their investment book, we expect market losses to be minimal.
2009 50
1% 2% 2008 120 2008
150% 250%
19% 9.5%
12%
10%
At assumed default rate of 9% (in line with recent experiences in emerging Asia), NPLs hit around 4% a manageable level.
8%
4%
2%
0%
27
WEALTH STRATEGIES
6%
14%
9% 4%
20%
We see a triple whammy for the small banks. Firstly, asset quality deteriorates faster than sector average given their higher exposure to small and medium enterprises (SMEs). Secondly, net interest margins continue to be under pressure, given their dependence on interbank assets (which account for 20% to 30% of their assets). Assuming rates stay elevated and we see a gradual winding down of their off-balance sheet book, we expect NIM pressure of 25 bps on a half year basis for H213. Hence, we expect the banks to limit off-balance sheet growth, going ahead. Lastly, as sales of WMPs slow, we expect fee income growth to slow to single digits.
30%
2013 25
The article is provided by Standard & Poors Investment Advisory Services (HK) Limited (S&P) In the case of inconsistencies between the English and Chinese version of this report, the English version prevails. Neither S&P nor its affiliates guarantee the accuracy of the translation, Assumptions, opinions and estimates constitute our judgment as of the date of this material and are subject to change without notice. Past performance is not necessarily indicative of future results. This material is not intended as an offer or solicitation for financial instruments or strategies mentioned herein may not suitable for all investors. Any opinions expressed herein are given in good faith, are subject to change without notice, and are only currents as of the stated date of their issue. This material is not intended for any specific investor and does not take into account your particular investment objectives, financial situations or needs and is not intended as a recommendation of particular securities, financial instruments or strategies to you. Before acting on any recommendation in this material, you should consider whether it is suitable for your particular circumstances and, if necessary, seek professional advice.
28
29
WEALTH STRATEGIES