1 FINANZMÄRKTE Emerging Markets. 2 MSCI Emerging Markets Free Index.
Emerging markets equity outlook - HSBC€¦ · Emerging markets equity outlook Earnings growth...
Transcript of Emerging markets equity outlook - HSBC€¦ · Emerging markets equity outlook Earnings growth...
March 2018
Emerging markets equity outlook
This presentation is intended for Professional Clients as defined by MIFID only and should not be
distributed to or relied upon by Non professional clients. The information contained in this publication is
not intended as investment advice or recommendation. For illustrative purpose only, this document is a
global view of the recent evolution of the economic conditions. This is a marketing support which does
not constitute neither an investment advice or a recommendation to buy or sell investment. This
commentary is not the result of investment research. It has not been prepared in accordance with legal
requirements designed to promote the independence of investment research and is not subject to any
prohibition on dealing ahead of its dissemination.
Non contractual document
2
Emerging markets equity outlook2018 market performance
Investment involves risks. Past performance is not indicative of future performanceSource, HSBC Global Asset Management as of February 2018.
The views expressed above were held at the time of preparation and are subject to change without notice. Any forecast, projection or target where provided is indicative only and is not guaranteed in any
way. HSBC Global Asset Management accepts no liability for any failure to meet such forecast, projection or target. For illustrative purposes only.
95
100
105
110
29 D
ec 1
7
5 J
an 1
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12 J
an 1
8
19 J
an 1
8
26 J
an 1
8
2 F
eb
18
9 F
eb
18
16 F
eb 1
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MSCI Emerging Markets MSCI ACWI S&P 500
Strong inflows into equities in early January drove a
continuation of the 2017 rally
Higher than expected US wage growth triggered
inflation fears and concerns that interest rates would
rise faster than expected, leading to a sharp correction
Emerging markets have since recovered back to
positive territory year-to-date
The positive outlook for emerging markets equities has
not changed
– Attractive expected returns
– Operating leverage and capital expenditure could allow for
further growth in earnings and improvements in profitability
– Macro environment remains supportive
– Valuation-profitability looks attractive versus own history and
versus developed markets
Global growth should drive cyclical inflation; the key
market risk is whether this inflation increases faster
than expected
Equity market performance
(Rebased to 100 on 29 Dec 2017)
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Emerging markets equity outlookExpected returns
Forecast 10-year nominal returns
(annualised, USD unhedged)
Equities offer more attractive potential returns relative to bonds
and cash
Within equities, emerging markets offer favourable returns
versus developed markets
Investment involves risks. Past performance is not indicative of future performanceSource: HSBC Global Asset Management as at 31 January 2018.
The views expressed above were held at the time of preparation and are subject to change without notice. Any forecast, projection or target where provided is indicative only and is not guaranteed in any
way. HSBC Global Asset Management accepts no liability for any failure to meet such forecast, projection or target. For illustrative purposes only.
0% 2% 4% 6% 8% 10%
Global bonds
US Corporate Credit
EUR High Yield
US High Yield
Local EM Debt
Global listed real estate
Asia ex Japan
Emerging markets
Japan
UK
Euroland
Canada
US
Developed markets
Global
Equity
Earnings
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Emerging markets equity outlookEarnings outlook – summary
Upward trend in earnings revisions
Earnings growth supported by improvements in operating margins
Increase in capital expenditures underscores positive corporate outlook
Earnings growth evident across sectors
Profitability has improved
Investment involves risks. Past performance is not indicative of future performanceSource, HSBC Global Asset Management as of February 2018.
The views expressed above were held at the time of preparation and are subject to change without notice. Any forecast, projection or target where provided is indicative only and is not guaranteed in any
way. HSBC Global Asset Management accepts no liability for any failure to meet such forecast, projection or target. For illustrative purposes only.
6
Emerging markets equity outlook Earnings revisions
Emerging markets earnings revisions
(MSCI Emerging Markets)
Continued upward trend in net earnings revisions
Source: HSBC Global Asset Management, Bloomberg as of 31 January 2018.
-60
-40
-20
0
20
2013 2014 2015 2016 2017 2018
Net num
ber
of com
panie
s w
ith p
ositiv
e r
evis
ions a
s a
% o
f to
tal
5-year average
Investment involves risks. Past performance is not indicative of future performanceThe views expressed above were held at the time of preparation and are subject to change without notice. Any forecast, projection or target where provided is indicative only and is not guaranteed in any
way. HSBC Global Asset Management accepts no liability for any failure to meet such forecast, projection or target. For illustrative purposes only.
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Emerging markets equity outlookEarnings growth
Emerging markets equity earnings growth
(MSCI Emerging Markets)
2017 saw strong earnings growth with economic acceleration
Consensus estimates double digit growth of 13.3% in 2018
Source: HSBC Global Asset Management, Bloomberg as at 31 January 2018.
For illustrative purposes only.
-50
-40
-30
-20
-10
0
10
20
30
40
50
60
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
Year-
on-y
ear
Earn
ings P
er
Share
gro
wth
(%
)
2018e 2017 2016
Emerging Markets 13.3% 23.4% 7.5%
Source: Bank of America Merrill Lynch Global Research, MSCI, IBES estimates, as at 31 January
2018. For illustrative purposes only.
Emerging markets equity earnings growth
(MSCI Emerging Markets)
Investment involves risks. Past performance is not indicative of future performanceThe views expressed above were held at the time of preparation and are subject to change without notice. Any forecast, projection or target where provided is indicative only and is not guaranteed in any
way. HSBC Global Asset Management accepts no liability for any failure to meet such forecast, projection or target. For illustrative purposes only.
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Emerging markets equity outlookOperating margin
Operating margin
(MSCI Emerging Markets)
Operating margin has improved
Source: HSBC Global Asset Management, Bloomberg as at 31 January 2018.
8
10
12
14
16
2007 2009 2011 2013 2015 2017
Opera
tin
g m
arg
in (
%)
Investment involves risks. Past performance is not indicative of future performanceThe views expressed above were held at the time of preparation and are subject to change without notice. Any forecast, projection or target where provided is indicative only and is not guaranteed in any
way. HSBC Global Asset Management accepts no liability for any failure to meet such forecast, projection or target. For illustrative purposes only.
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Emerging markets equity outlookCapital expenditure
Capital expenditure
(MSCI Emerging Markets)
Increase in capital spending underscores positive corporate
outlook
Source: HSBC Global Asset Management, Bloomberg as at 31 January 2018.
-140
-120
-100
-80
-60
2013 2014 2015 2016 2017
Capital expenditure
Investment involves risks. Past performance is not indicative of future performanceThe views expressed above were held at the time of preparation and are subject to change without notice. Any forecast, projection or target where provided is indicative only and is not guaranteed in any
way. HSBC Global Asset Management accepts no liability for any failure to meet such forecast, projection or target. For illustrative purposes only.
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Emerging markets equity outlookFree cash flow
Free cash flow
(MSCI Emerging Markets)
Higher free cash flow could support shareholder returns
Source: HSBC Global Asset Management, Bloomberg as at 31 January 2018.
0
10
20
30
40
50
60
70
80
2013 2014 2015 2016 2017 2018
Fre
e c
ash flo
w p
er
share
Investment involves risks. Past performance is not indicative of future performanceThe views expressed above were held at the time of preparation and are subject to change without notice. Any forecast, projection or target where provided is indicative only and is not guaranteed in any
way. HSBC Global Asset Management accepts no liability for any failure to meet such forecast, projection or target. For illustrative purposes only.
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Emerging markets equity outlookEarnings breadth
Emerging markets sector earnings growth
(MSCI Emerging Markets)
Most sectors are accelerating
Materials and energy slowing from high levels
Source: HSBC Global Asset Management, Bloomberg as of 31 January 2018.
-100
-80
-60
-40
-20
0
20
40
60
80
100
2013 2014 2015 2016 2017 2018
Year-
on-y
ear
Earn
ings P
er
Share
gro
wth
(%
)
Consumer Discretionary Industrials Materials
Energy Financials Real Estate
Technology Consumer Staples Health Care
Telecom Utilities
Investment involves risks. Past performance is not indicative of future performanceThe views expressed above were held at the time of preparation and are subject to change without notice. Any forecast, projection or target where provided is indicative only and is not guaranteed in any
way. HSBC Global Asset Management accepts no liability for any failure to meet such forecast, projection or target. For illustrative purposes only.
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Emerging markets equity outlookProfitability
Source: HSBC Global Asset Management, Bloomberg as at 31 January 2018.
8
10
12
14
2013 2014 2015 2016 2017 2018
Retu
rn o
n e
quity (
%)
Return on equity
(MSCI Emerging Markets)
Profitability has improved
Investment involves risks. Past performance is not indicative of future performanceThe views expressed above were held at the time of preparation and are subject to change without notice. Any forecast, projection or target where provided is indicative only and is not guaranteed in any
way. HSBC Global Asset Management accepts no liability for any failure to meet such forecast, projection or target. For illustrative purposes only.
Economic activity
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Emerging markets equity outlookEconomic activity – summary
Global growth continues to expand at a robust pace
Economic acceleration across emerging markets
PMIs over 50 and rising
Inflation remains low and has allowed for accommodative monetary policies
Investment involves risks. Past performance is not indicative of future performanceSource: HSBC Global Asset Management. February 2018.
The views expressed above were held at the time of preparation and are subject to change without notice. Any forecast, projection or target where provided is indicative only and is not guaranteed in any
way. HSBC Global Asset Management accepts no liability for any failure to meet such forecast, projection or target. For illustrative purposes only.
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Emerging markets equity outlookGlobal growth
Global economy continues to expand at a robust pace
Composite lead indicator
(Industrial confidence, Consumer confidence, Capacity utilization, Unemployment, Producer Prices, Credit spreads, Earnings
revision ratio)
Source: BofA Merrill Lynch Global Quantitative Strategy, MSCI, IBES as of 17 January 2018
Investment involves risks. Past performance is not indicative of future performanceThe views expressed above were held at the time of preparation and are subject to change without notice. Any forecast, projection or target where provided is indicative only and is not guaranteed in any
way. HSBC Global Asset Management accepts no liability for any failure to meet such forecast, projection or target. For illustrative purposes only.
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Emerging markets equity outlookGlobal growth
Recovery in global investment growth
Emerging markets are a beneficiary of global demand
World Real Investment
(Gross fixed capital formation, year on year %)
Source: Haver Analytics, IMF, national sources, World Bank, Morgan Stanley Research as of February 2018
Investment involves risks. Past performance is not indicative of future performanceThe views expressed above were held at the time of preparation and are subject to change without notice. Any forecast, projection or target where provided is indicative only and is not guaranteed in any
way. HSBC Global Asset Management accepts no liability for any failure to meet such forecast, projection or target. For illustrative purposes only.
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Emerging markets equity outlookGDP growth
GDP growth
(Emerging markets)
Emerging markets growth accelerating along with global growth
Source: HSBC Global Asset Management, Bloomberg as at 31 January 2018.
3
4
5
6
2012 2013 2014 2015 2016 2017
Year-
on-y
ear
real G
DP
(%
)
Investment involves risks. Past performance is not indicative of future performanceThe views expressed above were held at the time of preparation and are subject to change without notice. Any forecast, projection or target where provided is indicative only and is not guaranteed in any
way. HSBC Global Asset Management accepts no liability for any failure to meet such forecast, projection or target. For illustrative purposes only.
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Emerging markets equity outlookExports
Exports
(Emerging markets)
Emerging markets export engine has restarted
Source: HSBC Global Asset Management, CPB Netherlands Bureau for Economic Policy Analysis as of 22 December 2017.
-30%
-20%
-10%
0%
10%
20%
30%
janv.-01 janv.-03 janv.-05 janv.-07 janv.-09 janv.-11 janv.-13 janv.-15 janv.-17
Year-
on-y
ear
Export
s (
%)
Value Volume
Investment involves risks. Past performance is not indicative of future performanceThe views expressed above were held at the time of preparation and are subject to change without notice. Any forecast, projection or target where provided is indicative only and is not guaranteed in any
way. HSBC Global Asset Management accepts no liability for any failure to meet such forecast, projection or target. For illustrative purposes only.
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Emerging markets equity outlookPMIs
Source: HSBC Global Asset Management, Markit, Bloomberg as at 31 January 2018.
Manufacturing and Services PMIs are in expansionary territory
PMI Manufacturing
(Emerging Markets)
PMI Services
(Emerging Markets)
48
50
52
54
2015 2016 2017 2018
PM
I M
anufa
ctu
rin
g
48
50
52
54
2015 2016 2017 2018
PM
I S
erv
ices
PMI >50 implies expansionary PMI >50 implies expansionary
Investment involves risks. Past performance is not indicative of future performanceThe views expressed above were held at the time of preparation and are subject to change without notice. Any forecast, projection or target where provided is indicative only and is not guaranteed in any
way. HSBC Global Asset Management accepts no liability for any failure to meet such forecast, projection or target. For illustrative purposes only.
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2
4
6
8
10
2007 2009 2011 2013 2015 2017
Year-on-year CPI Central Bank Rate
(%)
Emerging markets equity outlookInflation
Source: HSBC Global Asset Management, Bloomberg as at 31 January 2018.
Inflation is low in emerging markets
Provides governments with flexibility to ease policy
Inflation and Central Bank Rate
(Emerging markets)
Investment involves risks. Past performance is not indicative of future performanceThe views expressed above were held at the time of preparation and are subject to change without notice. Any forecast, projection or target where provided is indicative only and is not guaranteed in any
way. HSBC Global Asset Management accepts no liability for any failure to meet such forecast, projection or target. For illustrative purposes only.
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Emerging markets equity outlookCurrent account balances
Current account deficit as a percentage of GDP
(Emerging markets)
Improved current account positions reduce financial
vulnerability of emerging markets
Better fiscal balances should help achieve more sustainable
growth
Source: HSBC Global Asset Management, Bloomberg as at 31 January 2018.
0
1
2
3
4
5
6
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
Curr
ent
account deficit a
s %
of
GD
P
Investment involves risks. Past performance is not indicative of future performanceThe views expressed above were held at the time of preparation and are subject to change without notice. Any forecast, projection or target where provided is indicative only and is not guaranteed in any
way. HSBC Global Asset Management accepts no liability for any failure to meet such forecast, projection or target. For illustrative purposes only.
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Emerging markets equity outlookMonetary policy
Source: HSBC Global Asset Management, Bloomberg as at 31 January 2018.
Global liquidity remains accommodative
Investment involves risks. Past performance is not indicative of future performanceThe views expressed above were held at the time of preparation and are subject to change without notice. Any forecast, projection or target where provided is indicative only and is not guaranteed in any
way. HSBC Global Asset Management accepts no liability for any failure to meet such forecast, projection or target. For illustrative purposes only.
Valuations
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Emerging markets equity outlookValuation and profitability
Source: HSBC Global Asset Management, Bloomberg as at 31 January 2018.
Valuation and profitability is attractive compared to historic levels and versus developed markets
Valuation-Profitability
(MSCI Emerging Markets, Jan 2000 – Jan 2018)
Valuation-Profitability
(MSCI Emerging Markets, MSCI World)
Emerging Markets
Developed Markets
1,0
1,5
2,0
2,5
3,0
10 11 12 13
Price-t
o-B
ook (
x)
Return on Equity (%)
1
1,5
2
2,5
3
5 7 9 11 13 15 17 19 21
Price-t
o-B
ook (
x)
Return on Equity (%)
2000
20182017
2016
2008
2010
Investment involves risks. Past performance is not indicative of future performanceThe views expressed above were held at the time of preparation and are subject to change without notice. Any forecast, projection or target where provided is indicative only and is not guaranteed in any
way. HSBC Global Asset Management accepts no liability for any failure to meet such forecast, projection or target. For illustrative purposes only.
25
Emerging markets equity outlookValuations
Source: HSBC Global Asset Management, Bloomberg as at 31 January 2018.
Valuations have risen with earnings
Multiple expansion from these levels may be limited
Price-to-Earnings
(MSCI Emerging Markets)
Price-to-Book
(MSCI Emerging Markets)
6
10
14
18
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
Price-t
o-E
arn
ings (
x)
1
2
3
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
Price
-to-b
ook (
x)
5-yr average
5-yr average
Investment involves risks. Past performance is not indicative of future performanceThe views expressed above were held at the time of preparation and are subject to change without notice. Any forecast, projection or target where provided is indicative only and is not guaranteed in any
way. HSBC Global Asset Management accepts no liability for any failure to meet such forecast, projection or target. For illustrative purposes only.
Risks
27
Emerging markets equity outlookRisks we are monitoring
Key risks
Lo
w t
o h
igh
im
pact
Lower to higher probability
Political uncertainty/geopolitics
Monetary
policy actions
China growth
slowdown
Market volatility
Inflation expectations
US Dollar recovery
Oil price collapse
Trade frictions
Investor sentiment
Source: HSBC Global Asset Management, as at 31 January 2018.
Investment involves risks. Past performance is not indicative of future performanceThe views expressed above were held at the time of preparation and are subject to change without notice. Any forecast, projection or target where provided is indicative only and is not guaranteed in any
way. HSBC Global Asset Management accepts no liability for any failure to meet such forecast, projection or target. For illustrative purposes only.
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Risks Views
Inflation expectations • Higher than expected inflationary pressures could cause the Federal Reserve to raise rates faster than
expected
Monetary policy actions • Policy rates in G3 economies to normalise at a gradual pace
• Market has priced in three US rate hikes in 2018
• ECB’s forward guidance remains dovish
• QE in Japan likely to continue
Market volatility • Market volatility near pre-crisis lows
• Markets may react sharply to specific data releases or small events
US Dollar recovery • Emerging markets debt has shifted towards local currency versus US Dollar
• Improvements in current account balances and FX reserves
China growth slowdown • Government focus on deleveraging, supply side structural reforms
• Stimulus-led sectors (energy, industrials, materials) may see slowdown
• Growth could become more consumption driven
• High-tech and services sectors continue to grow
Oil price collapse • OPEC has been coordinated and continues to cut daily output
• Difficult to predict supplies outside OPEC (e.g. shale)
Trade frictions • NAFTA negotiations ongoing
Political uncertainty / geopolitics • Brazil Presidential election in October key to continuing reforms
• Several global hot spots
Investor sentiment • Significant flows year to date
• Strong equity flows are positive for share prices but can create technical risk
Emerging markets equity outlookRisks we are monitoring – summary
Source: HSBC Global Asset Management, as at 31 January 2018. Investment involves risks. Past performance is not indicative of future performanceThe views expressed above were held at the time of preparation and are subject to change without notice. Any forecast, projection or target where provided is indicative only and is not guaranteed in any
way. HSBC Global Asset Management accepts no liability for any failure to meet such forecast, projection or target. For illustrative purposes only.
29
Emerging markets equity outlookRisks – inflation expectations
Source: HSBC Global Asset Management, Bloomberg as at 31 January 2018.
Should expect cyclical inflation given strong global growth
Signs of some inflation acceleration in the US
Market assumes a continuation of low inflation, which adds to the risk of an inflation shock
US fiscal stimulus could affect bond yields
University of Michigan expected change in prices CPI consensus forecasts
(Developed Markets)
0,5
1,0
1,5
2,0
2,5
3,0
avr.-16 juil.-16 oct.-16 janv.-17 avr.-17 juil.-17 oct.-17 janv.-18
US Eurozone JapanYe
ar-o
n-y
ear
(%)
2
3
4
20
12
20
13
20
14
20
15
20
16
20
17
(%)
Next year Next 5-10 years
Investment involves risks. Past performance is not indicative of future performanceThe views expressed above were held at the time of preparation and are subject to change without notice. Any forecast, projection or target where provided is indicative only and is not guaranteed in any
way. HSBC Global Asset Management accepts no liability for any failure to meet such forecast, projection or target. For illustrative purposes only.
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Implied Fed Funds target rate
Emerging markets equity outlookRisks – monetary policy actions
Expect policy normalisation to be at a gradual pace in G3 countries
Market has priced in three US rate hikes in 2018
Could see a reduction in Eurozone stimulus towards September on improved growth and inflation
Inflation in Japan remains too low to consider exiting QE policies
Source: HSBC Global Asset Management, Bloomberg as at 31 January 2018.
Central Banks’ balance sheets
-200
-100
0
100
200
300
400
déc.-17mars-18 juin-18 sept.-18déc.-18mars-19 juin-19 sept.-19déc.-19
ECB FED BoJ G3 total
US
Dbn (
change fro
m p
revio
us q
uart
er)
Investment involves risks. Past performance is not indicative of future performanceThe views expressed above were held at the time of preparation and are subject to change without notice. Any forecast, projection or target where provided is indicative only and is not guaranteed in any
way. HSBC Global Asset Management accepts no liability for any failure to meet such forecast, projection or target. For illustrative purposes only.
31
Emerging markets equity outlookRisks – market volatility
Equity market volatility
(MSCI Emerging Markets)
Equity market volatility below pre-crisis lows
Emerging markets equities are nearing 2007 and 2010 levels
Markets may react sharply to specific data releases or small
events
Source: HSBC Global Asset Management, Bloomberg as at 23 February 2018.
0
5
10
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30
35
40
45
50
0
200
400
600
800
1 000
1 200
1 400
1 600
janv. 06
janv. 08
janv. 10
janv. 12
janv. 14
janv. 16
janv. 18
MSCI Emerging Markets 260 Day Volatility (RHS)
Investment involves risks. Past performance is not indicative of future performanceThe views expressed above were held at the time of preparation and are subject to change without notice. Any forecast, projection or target where provided is indicative only and is not guaranteed in any
way. HSBC Global Asset Management accepts no liability for any failure to meet such forecast, projection or target. For illustrative purposes only.
32
Emerging markets equity outlookRisks – China growth slowdown
China sector earnings growth
(MSCI China)
Most sectors are accelerating
Materials and energy growth is positive but could be slowing
Some concern that stimulus-led sectors may slow once stimulus is removed
Source: HSBC Global Asset Management, Bloomberg as at 31 January 2018.
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-40
-20
0
20
40
60
80
100
120
2012 2013 2014 2015 2016 2017
Year-
on-y
ear
Earn
ings P
er
Share
gro
wth
(%
)
Consumer Discretionary Industrials Materials
Energy Financials Real Estate
Technology Consumer Staples Health Care
Telecom Utilities
Industries supported by China’s stimulus plan
Sector
• Infrastructure – railways, roads, grids
• Real estate - low cost housing
• Manufacturing – machinery, textile
• Auto, steel industries
• Energy efficiency and environmental projects
Investment involves risks. Past performance is not indicative of future performanceThe views expressed above were held at the time of preparation and are subject to change without notice. Any forecast, projection or target where provided is indicative only and is not guaranteed in any
way. HSBC Global Asset Management accepts no liability for any failure to meet such forecast, projection or target. For illustrative purposes only.
33
Emerging markets equity outlookRisks – China growth slowdown
Source: HSBC Global Asset Management as of February 2018.
0
10
20
30
40
50
60
70
Info
rma
tio
nT
echnolo
gy
Real E
sta
te
Consum
er
Dis
cre
tio
nary
Ma
teria
ls
Fin
ancia
ls
Health C
are
Consum
er
Sta
ple
s
Industr
ials
En
erg
y
Te
lecom
min
catio
nS
erv
ices
Utilit
ies
MSCI Emerging Markets index performance
(2017 USD returns, %)
Technology performed strongly in 2017 retuning 61.5%, with index heavyweights Tencent and Alibaba rising more than 90%
Emerging market equities, without the contribution of those holdings would have still delivered double digit returns of 31.5%
Sectors such as real estate, consumer discretionary, materials and financials have generated strong returns contributing to
overall performance
MSCI Emerging Markets sector returns
(2017 USD returns, %)
31,47
6,36
0
5
10
15
20
25
30
35
40
Contribution of Alibaba and Tencent to performance
MSCI Emerging Markets performance without Alibaba and Tecent
Investment involves risks. Past performance is not indicative of future performanceThe views expressed above were held at the time of preparation and are subject to change without notice. Any forecast, projection or target where provided is indicative only and is not guaranteed in any
way. HSBC Global Asset Management accepts no liability for any failure to meet such forecast, projection or target. For illustrative purposes only.
34
Emerging markets equity outlookRisks – US Dollar recovery
US Dollar
(DXY Index and MSCI Emerging Markets)
USD weakness attributed to growth differentials
Well-signalled pace of Federal Reserve interest rate
normalisation
Some USD support from overseas USD repatriation given
Trump’s tax plan
Strong USD beneficial to emerging market exports
Source: HSBC Global Asset Management, Bloomberg as at 31 January 2018.
60
70
80
90
100
110
120600
800
1 000
1 200
1 400
2013 2014 2015 2016 2017 2018
MSCI Emerging Markets Dollar Index (DXY inverted, RHS)
Investment involves risks. Past performance is not indicative of future performanceThe views expressed above were held at the time of preparation and are subject to change without notice. Any forecast, projection or target where provided is indicative only and is not guaranteed in any
way. HSBC Global Asset Management accepts no liability for any failure to meet such forecast, projection or target. For illustrative purposes only.
35
Emerging markets equity outlookRisks – US Dollar recovery
Debt in Emerging Markets, and Asia in particular, has shifted towards local currency versus US Dollars,
helping Emerging Markets to be less vulnerable to foreign exchange movements
Source: HSBC Global Asset Management, Bloomberg as at 31 January 2018.
FX reserves
(Select Emerging Markets countries)
Source: Worldscope, FactSet, Citi Research, as at 14 February 2018.
Debt exposure by currency
(Emerging Markets)
50
100
150
200
250
300
350
400
450
India Indonesia Korea Malaysia Phillipines Taiwan Thailand
Dec-2014 Dec-2016 Nov-2017
US
Dolla
r, b
illio
ns
Total debt by currency
Local USD EUR Other
Emerging Markets 63% 21% 2% 14%
Asia ex Japan 70% 13% 1% 16%
EMEA 39% 46% 12% 3%
Latin America 32% 60% 5% 3%
Investment involves risks. Past performance is not indicative of future performanceThe views expressed above were held at the time of preparation and are subject to change without notice. Any forecast, projection or target where provided is indicative only and is not guaranteed in any
way. HSBC Global Asset Management accepts no liability for any failure to meet such forecast, projection or target. For illustrative purposes only.
36
0
200
400
600
800
1000
1200
1400
1600
0
20
40
60
80
100
120
140
160
19
97
19
99
20
01
20
03
20
05
20
07
20
09
20
11
20
13
20
15
20
17
Brent Crude (US Dollar/bbl) MSCI Emerging Markets
Emerging markets equity outlookRisks – oil price collapse
Brent Crude and MSCI Emerging Markets OPEC has been coordinated and continues to cut daily output
Difficult to predict supplies outside OPEC (e.g. shale)
Source: HSBC Global Asset Management, Bloomberg as at 31 January 2018.
Investment involves risks. Past performance is not indicative of future performanceThe views expressed above were held at the time of preparation and are subject to change without notice. Any forecast, projection or target where provided is indicative only and is not guaranteed in any
way. HSBC Global Asset Management accepts no liability for any failure to meet such forecast, projection or target. For illustrative purposes only.
37
Emerging markets equity outlookRisks – trade frictions
Source: HSBC Global Asset Management as at 31 January 2018.
NAFTA Trans-Pacific Partnership
The North American Free Trade Agreement is an
agreement signed by Canada, Mexico, and the United
States, creating a trilateral trade bloc in North America
Trade agreement between Australia, Brunei, Canada,
Chile, Japan, Malaysia, Mexico, New Zealand, Peru,
Singapore and Vietnam
Negotiations have started on a new trade agreement
called Comprehensive and Progressive Agreement for
Trans-Pacific Partnership
The agreement came into force on January 1, 1994 Signed on 4 February 2016; has not entered into force
Ongoing negotiations The United States withdrew from it afterwards
Investment involves risks. Past performance is not indicative of future performanceThe views expressed above were held at the time of preparation and are subject to change without notice. Any forecast, projection or target where provided is indicative only and is not guaranteed in any
way. HSBC Global Asset Management accepts no liability for any failure to meet such forecast, projection or target. For illustrative purposes only.
38
Emerging markets equity outlookRisks – political uncertainty
Source: HSBC Global Asset Management, Bloomberg as at 31 January 2018.
Country Date Office
Russia 18 March – first round
1 April – second round
President
Egypt 26 March President
Colombia 27 May President
South Korea 13 June Local election
Indonesia 27 June Local election
Mexico 1 July President
Chamber (all)
Senate (all)
Pakistan 15 July President
Malaysia On/before 24 August Parliament
Brazil 7 October – first round
28 October – second round
President
Vice President
National Congress
State Governors
Electoral calendar in 2018 is busy across emerging markets
Investment involves risks. Past performance is not indicative of future performanceThe views expressed above were held at the time of preparation and are subject to change without notice. Any forecast, projection or target where provided is indicative only and is not guaranteed in any
way. HSBC Global Asset Management accepts no liability for any failure to meet such forecast, projection or target. For illustrative purposes only.
39
Emerging markets equity outlookRisks – geopolitics
Source: HSBC Global Asset Management as at 31 January 2018.
Area/country/region Outlook
North Korea Difficult to predict
Syria
Jerusalem
Iran
Qatar
Yemen
Difficult to predict
Russia / Crimea We believe sanctions are priced in
Afghanistan Difficult to predict
Investment involves risks. Past performance is not indicative of future performanceThe views expressed above were held at the time of preparation and are subject to change without notice. Any forecast, projection or target where provided is indicative only and is not guaranteed in any
way. HSBC Global Asset Management accepts no liability for any failure to meet such forecast, projection or target. For illustrative purposes only.
40
Emerging markets equity outlookRisks – investor sentiment
*Year to date 21 February 2018.
Source: EPFR Global Equity Fund Flows Database, Morgan Stanley Research, HSBC Global Asset Management, as at February 2018.
Significant flows year to date
Strong equity flows are positive for share prices but can create technical risk
Emerging Markets (ex-China A) equity fund flows
(USD, billion)
Emerging Markets (ex-China A) equity fund flows
(USD, billion)
53,6
-53,3
83,393,1
-45,8
47,9
-25,1 -23,3
-47,6
4,6
87,5
31,4
-80
-60
-40
-20
0
20
40
60
80
100
120
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 YTD2018*
Investment involves risks. Past performance is not indicative of future performanceThe views expressed above were held at the time of preparation and are subject to change without notice. Any forecast, projection or target where provided is indicative only and is not guaranteed in any
way. HSBC Global Asset Management accepts no liability for any failure to meet such forecast, projection or target. For illustrative purposes only.
Appendix – BRIC outlook
42
Emerging markets country outlookBrazil
Source: HSBC Global Asset Management, CEIC, Bloomberg as at 31 January 2018.
Domestic economic recovery should continue to support earnings growth
Falling inflation provides scope for further easing
Reform progress could provide impetus to growth
Presidential elections in October 2018 may create uncertainty
GDP and PMI
25
30
35
40
45
50
55
60
65
70
75
-5
-4
-3
-2
-1
0
1
2
3
4
5
2006
2008
2010
2012
2014
2016
Real GDP QoQ % Manufacturing PMI
Inflation and interest rates
(%)
Earnings growth
(MSCI Brazil, earnings per share)
0
50
100
150
200
250
300
350
2000
2002
2004
2006
2008
2010
2012
2014
2016
2018 (
e)
EPS Earnings, positive
0
2
4
6
8
10
12
14
16
0
2
4
6
8
10
12
2006
2008
2010
2012
2014
2016
CPI SELIC
Investment involves risks. Past performance is not indicative of future performanceThe views expressed above were held at the time of preparation and are subject to change without notice. Any forecast, projection or target where provided is indicative only and is not guaranteed in any
way. HSBC Global Asset Management accepts no liability for any failure to meet such forecast, projection or target. For illustrative purposes only.
43
Emerging markets country outlookRussia
Source: HSBC Global Asset Management, CEIC, Bloomberg as at 31 January 2018.
Domestic economic recovery should continue to support earnings growth
Oil price remains a key driver; if current strength maintained, will be a tailwind for GDP and earnings
Government fiscal reforms such as the newly adopted fiscal rule which limits budget expenditures should reduce the economy’s
dependence on oil and gas and contribute to economic stability
GDP and PMI Correlation with oil
(MSCI Russia and Brent Crude)
Earnings growth
(MSCI Russia, earnings per share)
25
30
35
40
45
50
55
60
65
70
75
-15
-10
-5
0
5
10
15
2005
2007
2009
2011
2013
2015
2017
Real GDP QoQ % (LHS) Manufacturing PMI (RHS)
(20%)
0%
20%
40%
60%
80%
100%
2001
2003
2005
2007
2009
2011
2013
2015
2017
MSCI Russia vs Brent (52wk rolling correlation)
-60%
-40%
-20%
0%
20%
40%
60%
2013
2014
2015
2016
2017
2018
Investment involves risks. Past performance is not indicative of future performanceThe views expressed above were held at the time of preparation and are subject to change without notice. Any forecast, projection or target where provided is indicative only and is not guaranteed in any
way. HSBC Global Asset Management accepts no liability for any failure to meet such forecast, projection or target. For illustrative purposes only.
44
Emerging markets country outlookIndia
Source: HSBC Global Asset Management, Bloomberg as at 31
January 2018.
Positive macro environment to support corporate earnings growth
Governments reform focus is positive longer term, may serve challenges in the near term
State elections in 2018 and general elections in 2019 may bring market volatility
GDP and PMI Structural reforms
(Example: Goods and services tax)
Earnings growth
(MSCI India, earnings per share)
Source: HSBC Global Asset Management, Bloomberg as at 31
January 2018.
44
46
48
50
52
54
56
58
60
62
64
-6%
-4%
-2%
0%
2%
4%
6%
8%
10%
12%
14%
2006
2008
2010
2012
2014
2016
Real GDP, qoq, % (LHS) Manufacturing PMI (RHS)
-40%
-20%
0%
20%
40%
60%
2007
2009
2011
2013
2015
2017
Source: HSBC Global Asset Management, PIB, Business Line,
MTEF of Union Government, YES BANK as of August
Investment involves risks. Past performance is not indicative of future performanceThe views expressed above were held at the time of preparation and are subject to change without notice. Any forecast, projection or target where provided is indicative only and is not guaranteed in any
way. HSBC Global Asset Management accepts no liability for any failure to meet such forecast, projection or target. For illustrative purposes only.
45
Emerging markets country outlookChina
Source: HSBC Global Asset Management, Bloomberg as at 31
January 2018.
Economy is rebalancing gradually, with consumption replacing investment
Ongoing supply-side reforms should boost China’s production efficiency and translate into better earnings
Could see tighter credit policies to mitigate risk from rising debt levels
GDP
(Breakdown of components)
State-owned enterprise reforms
(Return on equity)
Earning revisions
(MSCI China, earnings per share)
-5
-3
-1
1
3
5
7
9
11
13
15
1998 2001 2004 2007 2010 2013 2016
Consumption Investments
Net exports Real GDP
20,9%
10,5%
17,5%
0
5
10
15
20
25
30
1996
1999
2002
2005
2008
2011
2014
20
17 Y
TD
Non-SOESOEAll industrial enterprises
Source: HSBC Global Asset Management, Bloomberg as at
31 January 2018.
Source: HSBC Global Asset Management, CEIC, Bloomberg, as
of December 2017.
-40%
-20%
0%
20%
40%
60%
20
07
20
09
20
11
20
13
20
15
20
17
Investment involves risks. Past performance is not indicative of future performanceThe views expressed above were held at the time of preparation and are subject to change without notice. Any forecast, projection or target where provided is indicative only and is not guaranteed in any
way. HSBC Global Asset Management accepts no liability for any failure to meet such forecast, projection or target. For illustrative purposes only.
Important information
47
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