Leading equities to gain as commodities fall: HSBC

Long-term investors will struggle to make money in industrial metals while government bonds and high-quality equities are a sound bet in 2011, the manager of the HSBC Absolute Return Fund said.

The USD 2.5 billion fund cut its holdings in gold to 3% in November, from a peak of 12% last year, its manager Charles Morris said.

Gold is near a one-month low, and other metals that have enjoyed a strong run-up could follow this pattern of weakness.

"In regard to capital allocated to commodities, gold is the canary in the mine. We are in corrective mode."

He said a pattern of gold climbing in tandem with equities, and not falling when they dip, has been broken. Gold exchange traded funds (ETFs) have shown consistent outflows over the last few months.

"I want to see people allocating back into it before I am comfortable. For now it is a guess as to how low it goes."

Morris said spot gold might retreat to USD 1,160 an ounce, back to the long-term mean, from around USD 1,360 now.

The fund gained 9.2% in the year to end-January, 5.85 percentage points better than its peers according to data from Lipper Global, a Thomson Reuters company.

World Beaters

The fund takes positions in a select list of companies which Morris perceives as world beaters, those with dominant market positions that are hard to encroach on.

"You end up in beverages, tobacco and consumer goods," he said. "Things like Procter & Gamble, Pepsi, Microsoft, McDonald's, Unilever and Reckitt Benckiser."

He said the fund is "monstrously overweight" in these. "The market representation is relatively small, maybe 2% or 3%, and we have 50% of our equities in these stocks."

The fund is light in emerging markets, and is looking to build positions in energy-related areas because the spectre of rising prices should hurt the former and support the latter.

"Inflation is bad for emerging markets and a high energy price is going to be tricky for all, but good for energy-related stocks."

Morris said longer-term fears about the damage inflation may do to government bonds, which he said were deeply out of favour, look overdone.

"We are not going to get inflation taking off until we get bank lending taking off, and that is not likely to happen any time soon on both sides of the Atlantic," he said."

"We are comfortable on long-dated bonds. We think they are deeply oversold. We think the market hates them, and data shows that a typical investor is short," Morris said, adding the fund was looking to buy British government bonds (gilts).