Emerging markets equity outlook - HSBC€¦ · Emerging markets equity outlook Earnings growth...

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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
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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

    8

    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

    8

    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)

  • 3

    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

  • 5

    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.

  • 7

    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.

  • 8

    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.

  • 9

    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.

  • 10

    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.

  • 11

    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.

  • 12

    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

  • 14

    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.

  • 15

    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.

  • 16

    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.

  • 17

    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.

  • 18

    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.

  • 19

    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.

  • 20

    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.

  • 21

    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.

  • 22

    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

  • 24

    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.

  • 28

    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.

  • 30

    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

    15

    20

    25

    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.

    -60

    -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

    This presentation is distributed in France, Italy, Spain and Sweden by HSBC Global Asset Management (France), in Switzerland by HSBC Global Asset Management (Switzerland) Ltd and is only intended

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    purchase or sale of any financial instrument in any jurisdiction in which such an offer is not lawful. The commentary and analysis presented in this document reflect the opinion of HSBC Global Asset

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    Global Asset Management (France) will not be held responsible for any investment or disinvestment decision taken on the basis of the commentary and/or analysis in this document. All data from HSBC

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