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June 2011
For Professional Clients Only
Done Surfin’?By Philip Poole, Global Head of Macro and Investment Strategy
Headwinds but recovery still looks sustainable
Investment performance since the announcement of the
second stage of quantitative easing (QE2) by the Fed late
last year has been mostly about surfing a huge liquidity
wave while trying not to get ‘blown out’ by powerful market
squalls blowing up from inside the Eurozone periphery and
elsewhere. Now we are at an inflexion point with future
drivers for asset prices less clear cut. US QE2 is over
and the ECB has kicked off the G3 monetary tightening
cycle. As a result the market’s focus has shifted to the
implications of the withdrawal of monetary accommodation.
This has increased uncertainty and reduced the conviction
of market participants, in turn feeding back into heightened
volatility because investors have become less prepared to
hold positions and stick with views. In emerging markets,
inflation risks have materialised and in many cases central
banks are playing catch-up with the market worrying that
China will be forced to tighten aggressively and growth
there will slow precipitously.
The transmission mechanism for this heightened
uncertainty could well be via the re-pricing of the treasury
market higher in yield in the second half. If no serious
proposal to cut the deficit emerges soon, investors could
well start to worry about US debt sustainability. There
should be implications for treasuries. Treasury yields will
likely need to adjust higher as a result and if this adjustment
ends up being substantial it will likely have a broader impact
on risk assets. However, markets are likely to continue to
benefit from a bid from the flush liquidity still inside the
global financial system, so long as economic recovery
is not overly compromised. Of course there will be risks
along the way and we consider a whole raft of them. But
the good news, we believe, is that, despite something of
a soft patch at present, the global recovery is sustainable.
We expect recovery to continue, albeit with only moderate
growth in developed markets (DM.) Moreover, China is
unlikely to slam on the policy breaks but rather use policy
tools judiciously to avoid a hard landing. In our view, the
on-going strength of the economy and the tightening that it
necessitates should be considered more a positive than a
negative for markets.
Investment strategies (see page 21)
With so much volatility, investors should seek out thematic
anchors where the fundamental investment rationale is strong.
We like credit relative to government debt in Europe, the US
and emerging markets (EM.) Low DM government bond yields
are likely to continue to push investors into credit in order to
hit return targets and corporate balance sheets are generally in
good shape, in contrast to governments. On the equity side we
Overview
see long-term upside in emerging consumption and investment
themes which should be played via both EM and DM domiciled
companies that are exposed to it. Filter stocks on exposure
to the theme and then apply a PB/ROE or similar screen to
determine value. Short-term, we also like Asian cyclical equity
markets/sectors (eg. Korea, Taiwan, China H, Japan.) These
markets were unloved for much of 2010 and valuations are
attractive. They should, ultimately, be beneficiaries of a more
sustainable view of global recovery.
In terms of currencies, we highlight long positions in selected
EM currencies vs. DM currencies (USD/EUR/JPY.) Target
EM carry currencies that are fundamentally undervalued, in
particular where there is limited or no intervention and where
central banks are prepared to hike rates and allow currency
appreciation to fight it. Such conditions should ensure that
real appreciation results more from nominal moves than via
an adverse inflation differential. (Examples include CNY,
INR, IDR, KRW, MYR, SGD, CLP and MXN.) In DM, despite
strong performance, AUD still looks interesting. It has an
attractive positive interest differential, a central bank that is
not intervening to prevent currency appreciation and is also
a relatively liquid DM play on Chinese growth and upside for
commodities.
Following the recent sell-off we see value in commodities,
hard and soft. Commodity prices should be supported via
strong demand from rapidly growing populous emerging
economies where per capita consumption is coming off
a very low base. Moreover, in the short-term the supply
response to high prices is likely to be limited as a result of
the cancellation of investment projects in hard commodities
and continued climatic disruption on the soft commodity
side. This theme could be expressed via outright exposure
to commodities or to stocks in the sector. Russia (energy
and hard commodities) and Latam (soft and hard) equities
and currencies remain our preferred ways to play it. Gold
should continue to benefit from supportive demand,
particularly in view of the fact that buying from emerging
Asia seems set to continue to grow and real interest rates in
much of the developed world are likely to remain very low
or negative for some time to come.
We believe that the consensus expectation for EM inflation
continues to lag reality and investors should seek out some
insurance against inflation running for longer than the market is
pricing. EM inflation-linkers still offer value, in contrast to linkers
in DM where the inflation risk is probably overstated. While
stocks are in no sense a perfect inflation hedge, subject to
valuations, investors should seek out asset-intensive exposure
in EM. Asset intensive businesses that potentially fit the bill
include banks, real estate companies and most conglomerates.
22
In our investment outlook for 2011 (see ‘Surfin’ USA,
December 2010) we argued that market performance in
the first half of 2011 would be mostly about riding a liquidity
wave that would build courtesy of the US Federal Reserve
while trying not to get ‘blown out’ by the inevitable market
squalls. We highlighted the fundamental tension between
residual concerns about economic activity and the resulting
commitment to ultra loose monetary policy. At the time,
we took the view that the key question for risk assets was
likely to be which eventually won out – the wall of liquidity
or the risk that global recovery hit the wall. We believed that
a double-dip in the US was much less likely than continued
low to moderate growth there – and in most of the rest of
Of course, all this is now just history. And things are
certainly changing. QE2 will be over at the end of the month
and the ECB has already started to raise rates, leading the
G3 hiking cycle with many arguing that other developed
world central banks need to follow suit and soon.
In emerging markets, inflation risks have materialised
and in many cases central banks are playing catch-up
with the market worrying that China, in particular, will
be forced to tighten aggressively and growth will slow
sharply. Moreover, there is a renewed questioning of the
sustainability of the recovery in the US. Having surprised
positively from September 2010 through March 2011 the
It wasn’t so bad after all
the industrialised world – and that this low grade growth
scenario in the developed world would keep both DM policy
and market rates very low and financial markets awash with
QE-related liquidity. By contrast we expected EM growth to
remain robust and believed that policy would continue to be
tightened.
For the most part this is the way the activity data and
resulting monetary policy played out. There was no US
double dip – Q42010 GDP grew by 2.8% yoy and Q12011
by 2.3%. While this was no stellar recovery, neither was it
the slip back into recession that many feared at the time.
It kept the Fed on hold, along with the BoJ, the Bank of
England (and until very recently the ECB) and ensured
implementation of QE2.
US activity data has, on balance, disappointed in recent
months (see chart above). And problems in the Eurozone
periphery have not gone away with a continued absence of
political will to take decisive action.
So is it time to put the surfboard away and accept that the
positive liquidity drivers are yesterday’s story?
In what follows, we examine what the market is pricing in
for the rest of 2011, look at likely risks along the way and
conclude by attempting to identify value in financial assets and
currencies, with a bias to investment opportunities in EM.
3
US activity surprise index
Time to put the board away?
-15
-10
-5
0
5
10
15
09/1
0
09/1
0
10/1
0
10/1
0
11/1
0
11/1
0
12/1
0
12/1
0
01/1
1
01/1
1
02/1
1
02/1
1
03/1
1
03/1
1
04/1
1
04/1
1
05/1
0
USSource: HSBC Global research, May 2011
3
GDP forecast
Consensus 2011 2012
2011 2012 High Low High Low
US 2.7 3.2 3.1 2.2 4.3 2.4
Canada 2.9 2.7 3.2 2.4 3.1 2.4
Australia 2.7 3.8 3.4 2.0 4.5 3.2
New Zealand 1.2 3.9 1.8 0.6 4.6 2.9
Japan 0.0 2.8 1.0 -1.9 5.1 2.1
Eurozone 1.7 1.7 2.2 1.4 2.2 1.2
Germany 2.8 1.9 3.7 2.3 2.5 0.7
France 1.6 1.7 2.1 1.3 1.9 1.3
Italy 1.0 1.1 1.4 0.7 1.4 0.8
UK 1.6 2.2 2.0 1.2 3.1 1.5
Sweden 4.3 2.9 5.0 3.6 3.6 2.4
Norway 3.1 3.3 3.3 2.9 3.9 2.9
Switzerland 2.4 2.0 3.1 1.8 2.4 1.1
China 9.3 8.9 10.0 8.9 10.0 8.0
Hong Kong 5.3 4.8 7.7 4.7 5.6 4.0
India 8.0 8.5 8.7 7.5 9.0 7.5
Indonesia 6.3 6.5 6.6 5.5 7.1 5.5
Malaysia 5.2 5.5 5.7 3.9 6.1 4.8
Philippines 5.1 5.3 6.5 4.4 5.9 4.3
Singapore 5.7 5.3 7.0 5.0 6.5 4.3
South Korea 4.4 4.5 5.2 3.5 5.2 3.9
Taiwan 4.6 5.1 5.7 3.8 7.2 4.2
Thailand 4.2 4.9 4.9 3.6 5.7 4.5
Argentina 6.5 4.3 7.5 5.0 6.5 2.0
Brazil 4.1 4.3 4.5 3.4 5.1 3.7
Chile 6.2 5.1 6.7 5.8 5.5 4.5
Mexico 4.5 4.0 5.0 4.0 4.6 3.5
Czech Republic 2.2 2.9 3.0 1.5 4.4 2.0
Hungry 2.6 3.1 3.1 2.0 3.5 2.8
Poland 4.0 4.1 4.4 3.0 4.8 3.5
Russia 4.6 4.6 5.0 4.0 5.7 3.5
Turkey 5.2 4.4 5.6 4.2 5.0 3.7
4
Searching for a new paradigm
Source: Consensus Economics, May 2011
GDP Consensus forecasts
4
5
CPI forecast
Consensus 2011 2012
2011 2012 High Low High Low
US 3.0 2.1 3.3 1.8 3.5 1.4
Canada 2.7 2.1 3.8 2.1 2.6 1.7
Australia 3.3 2.9 3.7 2.8 3.5 1.7
New Zealand 4.4 2.8 4.8 3.9 4.2 1.9
Japan 0.4 0.2 1.0 -0.2 1.0 -0.6
Eurozone 2.5 1.9 2.9 2.2 2.2 1.4
Germany 2.3 2.0 2.6 1.9 2.5 1.2
France 2.0 1.7 2.4 1.4 2.4 0.6
Italy 2.5 2.1 2.9 1.8 2.5 1.8
UK 4.1 2.3 4.5 2.5 3.6 1.5
Sweden 2.9 2.4 3.4 1.9 2.9 1.9
Norway 1.6 1.9 1.8 1.1 2.5 1.5
Switzerland 1.0 1.4 1.5 0.7 2.1 0.5
China 4.7 3.8 5.2 3.9 5.2 2.9
Hong Kong 4.5 3.9 5.3 3.8 5.7 2.5
India 7.8 6.8 9.7 6.0 7.8 5.0
Indonesia 6.4 6.1 7.5 5.8 7.0 5.0
Malaysia 3.2 3.0 3.6 2.4 3.6 2.3
Philippines 5.0 4.5 6.0 4.1 6.4 3.6
Singapore 4.0 2.6 4.6 2.4 3.4 1.5
South Korea 4.1 3.3 4.6 3.5 4.7 2.1
Taiwan 2.0 2.2 2.7 1.5 3.4 1.5
Thailand 3.7 3.4 4.4 2.6 4.8 2.5
Argentina 10.8 13.6 14.0 9.5 25.0 9.4
Brazil 6.2 5.1 6.8 5.2 6.0 4.5
Chile 4.3 3.3 5.5 3.1 4.4 1.4
Mexico 3.8 3.7 4.1 3.5 4.1 3.1
Czech Republic 2.0 2.5 2.6 1.6 3.1 1.8
Hungry 4.2 3.5 5.0 3.3 4.1 2.5
Poland 4.0 3.0 4.5 3.2 3.8 2.5
Russia 8.4 7.5 9.5 7.5 10.9 6.6
Turkey 5.7 6.2 6.2 4.8 7.1 5.0
CPI Consensus forecasts
Source: Consensus Economics, May 2011
5
6
In terms of the underlying macro drivers, the consensus
growth forecasts in the developed world have been
generally upgraded over the last 6 months (with the notable
exception of the UK.) They may now have some downside
risk attached but are probably not too far out of line with the
likely outcome and we see the scope for disappointment
as limited (see preceding table) For sure, recent activity
data has been weak but we agree with HSBC Global
Research that this is mostly about an inventory correction,
compounded by temporary headwinds, such as Japanese
supply disruptions – in our view, the global economy is not
heading for a hard landing. The expansion remains intact,
On the liquidity front there is a need to distinguish between
the stock and flow of liquidity. While the QE-related wave
may have largely passed, the world remains flooded with
liquidity. The most likely outcome seems to be that the
Fed will prefer not to pull the plug, instead buying at the
margin to effectively freeze the size of its balance sheet.
In our view, there should be implications for treasuries –
and treasury yields will likely need to adjust higher as a
result – but risk assets are likely to continue to benefit from
a bid from the liquidity still inside the system, so long as
economic recovery is not overly compromised.
even if at a reduced pace; PMI readings globally are mostly
still in positive territory above 50 and not consistent with a
hard landing.
Inflation risks have certainly been re-priced during the
course of the year. The consensus is probably still lagging
here when it comes to emerging markets, suggesting that
central banks are likely to need to do more to get to grips
with it. By contrast, developed world inflation risks seem
overstated given negative output gaps which are likely to
limit pass through from commodity price pressures (see
‘Who Let the Tigers Out, May 2011.)
Consensus GDP growth revisions (%)
Central bank policy
US EU Germany WorldUK
Nov-10 May-11
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
Source: Consensus Economics, May 2011
Fed and ECB balance sheet
FED Assets (lhs)
US
$ bi
llion
Eur
o bi
llion
ECB Assets (rhs)
08/0702/08
08/0802/09
08/0902/10 02/11
08/100
500
1000
1500
2000
2500
3000
050010001500200025003000350040004500
Source: Federal Reserve Bank and ECB
lhs = left hand side; rhs = right hand side
6
7
When it comes to policy rates, in our view the labour
market will be key. As the charts above show in the US,
Japan and the UK the unemployment rate remains well
above the non-accelerating inflation rate of unemployment
(NAIRU), indicating that while headline inflation may be
rising as a result of commodity price shocks the risk of
second round effects from the labour market is limited.
Germany is an exception and, together with its unitary
inflation-targeting mandate, validates the move by the ECB
to begin the rate hiking cycle.
01 02 03 04 05 06 07 08 09 10 11 12
NAIRU Unemployment rate
4.0
4.5
5.0
5.5
6.0
6.5
7.0
7.5
8.0
8.5
01 02 03 04 05 06 07 08 09 10 11 12
NAIRU Unemployment rate
6.0
6.5
7.0
7.5
8.0
8.5
9.0
9.5
10.0
10.5
11.0
01 02 03 04 05 06 07 08 09 10 11 12
NAIRU Unemployment rate
3.0
3.5
4.0
4.5
5.0
5.5
6.0
01 02 03 04 05 06 07 08 09 10 11 12
NAIRU Unemployment rate
2
3
4
5
6
7
8
9
10
11
Source: OECD, May 2011
UK (%)
US (%) Japan (%)
Germany (%)
Labour markets in the developed world
7
8
DM policy rates
EM policy rates
The current consensus expectation for DM rates seems to
reflect this reality pretty well. The consensus view is that
neither the Fed nor the Bank of Japan is likely to raise rates
materially in the course of the next 12 months. And even
where rates are expected to go higher – for example hikes
from the ECB and the Bank of England – this is likely to
leave real rates negative on headline inflation.
* replaced the overnight rate in May 2010Sources and expectations : analysts’consensus, Bloomberg, HSBC Global Asset Management Quantitative R&D calculationsData as of 10 June 2011
Source: Analysts’ consensus, Bloomberg, HSBC Global Asset Management, data as of 10 June 2011
Official rates Last change Date of change
Expected in 3 months
Expected in 12 months
Brazil Selic Overnight rate 12.25 25.0 bp 8/6/2011 12.50 12.5 / 12.75
Chile Overnight rate 5.00 50.0 bp 12/5/2011 5.50 6.00
Colombia Repo rate 4.00 25.0 bp 30/5/2011 4.50 5.25
Mexico Repo rate 4.50 -25.0 bp 17/7/2009 4.50 5.25
Peru Reference rate 4.25 25.0 bp 12/5/2011 4.50 5.00
China 1-day Lending rate 6.31 25.0 bp 6/4/2011 6.5 / 6.75 6.75
India Repo rate 7.25 50.0 bp 3/5/2011 7.75 8.00
Indonesia BI Reference rate 6.75 25.0 bp 4/2/2011 7.00 7.50
South Korea Base rate 3.25 25.0 bp 10/6/2011 3.50 3.75
Malaysia Overnight Policy rate 3.00 25.0 bp 5/5/2011 3.25 3.25
Philippines Reverse Repo rate 4.50 25.0 bp 5/5/2011 4.75 5 / 5.25
Taiwan Official discount rate 1.75 12.5 bp 31/3/2011 2.00 2.25 / 2.5
Thailand 1-day Repurchase rate 3.00 25.0 bp 1/6/2011 3 / 3.25 3.50
South Africa Repo rate 5.50 -50.0 bp 19/11/2010 5.75 6.75 / 7
Czech Republic 2-week Repo rate 0.75 -25.0 bp 6/5/2010 1.00 1.5 / 1.75
Hungary 2-week Deposit rate 6.00 25.0 bp 24/1/2011 6.00 6.25
Poland 7-day intervention rate 4.50 25.0 bp 8/6/2011 4.5 / 4.75 5.00
Russia Refinancing rate 8.25 25.0 bp 29/4/2011 8.25 8.25 / 8.5
Turkey Benchmark Repo rate* 6.25 -25.0 bp 20/1/2011 6.5 / 6.75 7.75 / 8
Official rates Last change Date of change
Expected in 3 months
Expected in 12 months
United States Fed Funds rate 0 / 0.25 -87.5 bp 16 /12/2008 0 / 0.25 0.25 / 0.5
Canada Overnight funding rate 1.00 25.0 bp 8/9/2010 1.25 2.25
Eurozone Refi rate 1.25 25.0 bp 7/4/2011 1.50 2 / 2.25
UK Repo rate 0.50 -50.0 bp 6/3/2009 0.5 / 0.75 1.25
Switzerland SNB Libor target range 0.25 25.0 bp 12/3/2009 0.25 / 0.5 1.00
Norway Deposit rate 2.25 25.0 bp 12/5/2011 2.50 3 / 3.25
Sweden Repo rate 1.75 25.0 bp 20/4/2011 2 / 2.25 3.00
Japan Overnight Call rate 0 / 0.10 -5.0 bp 5/10/2010 0 / 0.10 0 / 0.10
Australia Cash rate 4.75 25.0 bp 2/11/2010 5.00 5.25 / 5.5
New Zealand Cash rate 2.50 -50.0 bp 10/3/2011 2.50 3.25
Hong Kong Discount window base rate 0.50 -100.0 bp 17/12/2008 0.50 0.75 / 1.00
Singapore 3- Month SIBOR (MAS) 0.44 -0.1 bp 30/12/2010 0.50 0.75
8
9
Real Rates in EM
Risk on – Risk off is still driving markets
Brazil Russia India China Thailand Taiwan Malaysia Indonesia SA Turkey Mexico
Q2 2011 5.5 -1.4 -2.7 0.8 -1.4 0.1 -0.5 0.8 1.3 -0.9 1.3
Q1 2011 5.7 -1.5 -1.6 1.2 -0.7 0.2 -0.3 0.1 1.4 -2.5 1.2
Q4 2010 4.8 -1.9 -3.2 1.2 -1.1 0.4 0.8 -0.5 2.0 -4.9 -0.1
Q3 2010 6.1 -1.1 -2.9 1.7 -1.3 1.1 1.0 0.7 2.8 -3.0 0.7
Q2 2010 5.4 -0.4 -5.0 2.4 -2.1 0.2 0.9 1.5 2.3 -1.9 0.9
Q1 2010 3.6 0.8 -5.2 2.9 -2.2 0.0 0.9 3.1 1.4 -3.1 -0.5
Q4 2009 4.4 1.8 -2.2 3.4 -2.3 1.5 0.9 3.7 0.7 0.0 0.9
Q3 2009 4.4 3.9 3.7 6.1 2.3 2.1 4.0 3.7 0.9 2.0 -0.4
Q2 2009 4.5 6.0 5.5 7.0 5.3 3.2 3.4 3.4 0.6 3.0 -0.8
Q1 2009 5.6 7.2 3.5 6.5 1.7 1.4 -1.5 -0.2 1.0 2.6 1.0
Q4 2008 7.9 7.0 -0.1 4.1 2.5 0.7 -1.1 -1.8 2.0 4.9 1.5
Q3 2008 7.5 5.0 -1.8 2.6 -2.3 0.4 -4.7 -2.9 -1.1 5.6 2.7
Q2 2008 6.2 4.3 -2.4 0.4 -5.5 -1.3 -4.2 -2.5 -0.2 5.6 2.3
Q1 2008 6.5 3.1 0.0 -0.8 -2.1 -0.4 0.7 1.7 0.4 6.1 3.2
Q4 2007 6.8 2.0 3.7 1.0 0.0 0.0 1.1 3.1 2.1 7.4 3.7
Q3 2007 7.1 1.2 4.2 1.1 1.2 0.1 1.7 2.4 2.8 10.2 3.4
Q2 2007 8.3 0.9 3.1 2.2 1.6 3.0 2.1 3.4 2.5 8.9 3.2
Source: Bloomberg, May 2011NB. Q2 2011 data relates to latest available data
But contrast, with inflation still not tamed, there is a general
expectation that rates in the emerging world will need to
go higher from here. This is likely to be accompanied by
additional quantitative tightening measures in a number
of these markets and, additionally, greater tolerance of
currency appreciation as a way of combating inflation (see
the section on investment implications below.)
It’s still ‘Risk on – Risk off’
The Risk on – Risk off paradigm (RoRo) is still central to the
way the market is behaving and, in our view, this seems set
to continue through year end. Sentiment still seems to turn
with alarming frequency and on precious little change in the
underlying fundamentals.
Source: HSBC Global research, May 2011
1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 20022003200420052006200720082009 2010 2011
risk
on –
ris
k of
f pa
radi
gm s
tren
gthe
ning
0
0.1
0.2
0.3
0.4
0.5
0
0.1
0.2
0.3
0.4
0.5
Ris
k O
n - R
isk
Off
Inde
x
9
10
As HSBC Global Research notes, this phenomenon has
a dramatic influence on returns and is a major consideration
for market participants making investment decisions. The
Risk On – Risk Off index (see preceding figure) provides
a simple way to track the dominance of this factor in the
markets. The RoRo index has fallen but remains at elevated
levels. This indicates that whilst the Risk on – Risk off
phenomenon has weakened, it is still strong.
As noted above, US activity data having surprised positively
relative to market expectations for the first quarter has been
surprising negatively since then and Chinese data has also
been weaker than the market expected. In the US case this
seems to be partly about expectations having been revised
up rather than all the data being especially soft – something
that often happens when there has been period of positive
data surprises. UK data has also continued to be weak,
reflecting on-going pressures on the recovery including the
impact of cuts in public sector spending.
Beyond China, in much of the rest of emerging Asia there
have been signs of softening in the pace of activity but
in reality this is what is needed. Many Asian economies,
including China, are running too hot and there is a need
to curb the pace of growth in order to get to grips with
inflation. By contrast, Eurozone Q1 GDP releases were
encouraging with both Germany and France surprising to
the upside relative to expectations.
Beyond the short-term data signals, more generally, drivers
for asset prices are less clear cut than was the case during
the second half of 2010 through Q12011. With US QE2
drawing to a close at the end of June and the ECB having
raised rates for the first time since the global recession
the market’s focus has shifted to the implications of the
withdrawal of this monetary accommodation. This has
increased uncertainty and reduced the conviction of market
participants, in turn feeding back into heightened volatility
because investors have become less prepared to hold
positions and stick with views.
The transmission mechanism for this uncertainty could well
end up being via the re-pricing of the US treasury market
higher in yield over the course of the rest of the year. To
what extent treasury yields have to back up is difficult to
call. While the stock of liquidity in the system is likely to
remain relatively static, the lack of incremental flow is likely
to have a negative impact. In addition, if no serious proposal
to cut the deficit emerges soon, investors could well start to
worry about debt sustainability (see section on risks below.)
If this adjustment ends up being substantial it will have a
broader impact on risk assets, in our view.
10
Making sense of the risks
Will the global recovery stall?
Back in the summer of 2010 the risk of a ‘double dip’
recession was the major worry for investors. US data
was coming in weaker than expected and when investors
fretted about double dip risks, US concerns were often
automatically translated into global risks, ignoring the fact
that in large parts of the rest of the world activity remained
robust. While we are now passed the technical possibility of
a double dip there are still questions about downside risks
to US and global growth. To the question ‘will the global
recovery stall´ in our view the answer remains ‘no’ but there
is a need to recognise that growth in the developed world
will be constrained by high levels of indebtedness in the
government and household sectors. There are on-going
risks, including the US housing market and unresolved
problems in the municipal bond market but, given the Fed’s
expected commitment to keep policy ultra loose, moderate
US growth rather than a return to recession still looks like
the most likely outcome.
Then there is the related question of whether the EM cycle
has already matured as evidenced by inflation pressures
(see below.) In particular, rather than welcoming it as
necessary to preserve and sustain growth in the medium
term, the market is hung up on Chinese tightening, fearing
that China will slow precipitously as policy makers hit
the brakes. China has become so central to prospects
for almost every other market that a major upset or
deterioration in outlook there would lead to wide-spread
contagion for risk assets. As a result, Chinese GDP,
domestic demand and credit growth are indicators
that need to be tracked carefully – especially growth in
domestic consumption because of its significance for global
rebalancing. A sharp slowdown in growth would impact
Chinese assets and risk appetite more generally, including
emerging Asian and commodity-related currencies as well
as cyclical stocks. However, in our view, this risk, triggered
by excessive tightening, looks relatively low probability at
this point. China is unlikely to slam on the policy breaks but
rather use policy tools judiciously to avoid this outcome. We
believe that the on-going strength of the economy and the
tightening that it necessitates should be considered more a
positive than a negative.
The inflation threat – still a tale of two worlds
The way inflation concerns shape up should also clearly be
an important element in the macro environment generally
and the path of US treasury and other government bond
yields, specifically. Over the last couple of months inflation
concerns have risen in the developed world. This has led
to increased discussion of when the Fed and the Bank of
England will start to tighten and just how aggressively the
ECB will be in normalising policy.
In our view, inflation risks in the developed world have
been overstated. The commodity price shock has been
common to both emerging and developed markets but
the key difference between these two cases is the risk of
second round effects. In most of the developed world there
is still a lot of spare capacity – output gaps are still large and
negative (the key exception being Germany.) While the ECB
has felt itself forced to tighten given its inflation-targeting
mandate and a focus on headline not core inflation, the Fed
and the Bank of England with their more flexible mandates
have rightly stayed on hold, looking through the headline
inflation uplift from commodity prices and a number of one-
off factors. In response to the earthquake and tsunami – but
also reflecting the absence of price pressures – the Bank of
Japan has eased further, resorting to renewed quantitative
easing measures.
This pattern seems set to continue through year end. While
the European Central Bank (ECB) is going its own way and
has started to raise rates, the Fed, the Bank of Japan and
most likely the Bank of England seem likely to keep policy
ultra loose through year end – erring on the side of caution
regarding the strength of the recovery, not incipient inflation
risks.
11
12
Output gaps tells a divergent story
Q4
1991
Q4
1993
Q4
1995
Q4
1997
Q4
1999
Q4
2001
Q4
2003
Q4
2005
Q4
2007
Q4
2009
UK (lhs) China (rhs)
-6
-5
-4
-3
-2
-1
0
1
2
3
4
-2.0
-1.5
-1.0
-0.5
0.0
0.5
1.0
1.5
By contrast, inflation is a serious problem in much of
the emerging world, particularly in Asia and parts of
Latin America. In many cases, capacity constraints have
tightened and output gaps have turned positive. Wage
inflation is also a sign that the risk of second round effects
is much higher. But in trying to deal with the inflation
threat EM central banks have been fighting the Fed. In a
sense it’s been ‘Catch 22.’ By raising rates the risk has
been that it would simply suck in more of the Fed-created
liquidity. For a time central banks shied away from raising
rates, preferring to use so-called ‘quantitative tightening’
measures such as hikes in bank reserve requirements and
inward capital flows in an effort to fight inflation. As a result,
in a number of markets, India for example, real interest
rates (the policy rate less current inflation) are negative,
something which looks highly inappropriate given inflation
pressures. In addition, currency appreciation – which could
also help to curb inflation – was resisted. The net result is
that in a number of emerging markets the inflation threat
has not been dealt with.
In recent weeks there has been evidence that central banks
have become more prepared to tighten using conventional
as well as unconventional measures. This has added to
concern that overly aggressive tightening could kill growth
(see above.) However, in our view the market has been too
sanguine on the emerging inflation risk. Investors should
worry more that central banks are failing to curb it than that
tightening will dramatically cut growth.
Has global rebalancing stalled?
For the world economy to sustain a high-growth trajectory,
the economies that had excessive current account deficits
before the crisis need to consolidate their public finances
in ways that limit the damage to potential growth and
demand. Concurrently, economies that ran excessive
current account surpluses will need to increase domestic
demand to sustain economic growth, if excessive-
deficit economies curb their demand. As the currencies
of economies with excessive deficits depreciate, those
running surpluses should appreciate. Such rebalancing
will likely produce a world where deflationary concerns,
muted growth and de-leveraging keep interest rates low in
developed countries, but where robust activity is likely to
create inflation pressures and the risk of periodic asset price
bubbles in the emerging world.
Source: HSBC Global Asset Management, OECD estimates, May 2011
12
13
US budget balance and household savings (% of GDP)
03 /6
9
03 /7
2
03 /7
5
03 /7
8
03 /8
1
03 /8
4
03 /8
7
03 /9
0
03 /9
3
03 /9
6
03 /9
9
03 /0
2
03 /0
5
03 /0
8
03 /1
1
Budget balance plus household savings (%GDP)
-8
-6
-4
-2
0
2
4
6
8
10
Source: Bloomberg, May 2011
While rebalancing has not completely stalled it is
proceeding slowly. Progress has been curtailed by
continued dissaving in the developed world, particularly the
US, on the one hand and currency intervention by policy
makers in the emerging world on the other. In the run up to
the global financial crisis indebtedness was building in both
the government and household sectors in the US, the UK
and elsewhere in the developed world. Fiscal adjustment
is already a reality in the UK, peripheral Europe and some
core EU countries like Germany but not the US. Despite
a rise in household savings as a proportion of disposable
income, when the deficit in the government sector is taken
into account the US continues to dissave at an alarming
rate (see chart above showing the government deficit less
household savings.) This cannot continue indefinitely but a
lack of action so far has curbed the extent to which global
imbalances have shrunk.
On the currency front the focus of the debate has been
mostly on what the US has consistently argued is a lack of
currency appreciation on the part of China. The continued
build up in foreign currency reserves shows that China’s
balance of payments surplus remains large. The lack of
currency flexibility is the other key element that has so far
constrained the extent of global rebalancing, in our view.
The currency is the most important price in any economy.
By allowing currency appreciation to change relative
prices, appreciation would send a price signal supportive
of rebalancing. It would indicate to domestic producers in
markets like China that, at the margin, the domestic market
was becoming more important relative to the external
market and would increase household domestic purchasing
power in dollar terms.
For their part, policy makers in China continue to argue that
too much weight is put on the currency in terms of the path
of adjustment. They argue for a broader, staggered policy
package that would also boost domestic demand; push
through structural reforms; accelerate wage growth; and
liberalise resource prices. Chinese policy makers point to
an important, on-going adjustment in relative wage rates,
and measures to establish a social safety net to reduce
precautionary saving and increase domestic consumption.
Over the medium-term, the wage adjustment in China is
potentially very important in the global rebalancing process.
Moreover, because of concern about inflation recent
evidence suggests that China and central banks in other
emerging market economies have become more prepared to
allow additional currency strength to combat inflation. This
in turn should act as a signal that supports domestically-
focussed corporate activities and rebalancing.
Sovereign risk in developed markets
Periphery
When we produced our previous market outlook report last
December we argued that indebtedness problems in the
Eurozone periphery were not being addressed cautioning
that the problem was far from over and would likely come
back to bite. Since then Portugal has followed Greece and
Ireland in slipping over the edge into the arms of the IMF.
It has also become clear that the austerity package for
Greece has not restored market access in the way it was
meant to and the IMF and other Eurozone countries have
consequently been engaged in more horse trading in an
effort to come up with an additional funding package. It
has also become abundantly clear that the inability of the
Eurozone periphery to adjust relative prices via currency
depreciation makes for a difficult and drawn out austerity
programme via domestic prices and wages. All of which
has led to increased discussion of debt re-profiling (or ‘soft’
restructuring as it is being called.) What is clear is that
the debt workout in the Eurozone periphery will take time
and the risk of contagion to other markets and the broader
banking system in Europe and beyond remains.
It is likely to remain an overhang for markets for several
years to come. In our view, short-term the focus is likely to
remain on Spain which is making progress in its adjustment
effort but where recapitalising the banking sector remains a
key challenge.
13
14
Italian and Spanish yields
11/0
7
01/0
8
03/0
8
05/0
8
07/0
8
09/0
8
11/0
8
01/0
9
03/0
9
05/0
9
07/0
9
09/0
9
11/0
9
01/1
0
03/1
0
05/1
0
07/1
0
09/1
0
11/1
0
01/1
1
03/1
1
ItalySpain
2.0
2.5
3.0
3.5
4.0
4.5
5.0
5.5
NB: 5 year yields Source: Bloomberg, May 2011
Core
Leverage in the government sector is not a problem that is
limited to the periphery of the Eurozone. But while many
European governments are at least starting to tackle the
issue by curbing fiscal deficits so far the US has not acted.
Rather than cutting to address the disturbing deterioration
in fiscal and debt metrics the US administration has
continued to spend. In May S&P sounded the alarm. While
confirming the AAA long-term debt rating the agency cut
its outlook for the US from stable to negative, signalling the
risk that there could be a rating downgrade by 2013 if things
don’t improve. S&P’s warning is the culmination of more
than 10 years of US fiscal laxity from a combination of tax
cuts and spending increases, aggravated by the impact of
deep recession which further cut revenues and increased
spending. According to the OECD, in gross terms US
general government debt has increased by 70% since 2000
(from 54.5% of GDP to an estimated 92.8% in 2010.)
This continued deterioration is evidence of the lack of
will on the part of US politicians to get to grips with the
problem. In effect the US has been in denial and according
to S&P the risk is that it stays there until after national
elections in 2012; in which case the coveted AAA rating
could be consigned to history. The result is that, rather
than falling, the US fiscal deficit will remain at an unhealthy
11% of GDP this year (IMF forecast.) Moreover, the fiscal
implications of an ageing population add a structural
component to the longer-term challenge of reining in the
deficit. Ageing will increase dependency ratios, pushing up
the cost of entitlement programmes and eroding the tax
base as the proportion of workers falls. And this will happen
quite quickly. The ratio of the population over retirement age
to those of working age will increase by 5 percentage points
in the next ten years.
The rating action could finally force politicians to get real on
the deficit. If action is not taken soon to curb expenditures
and raise revenues, it will become increasingly difficult to
bring it under control. Risks include a sharp rise in treasury
yields from current historically low levels. As it is, interest
payments on government debt are likely to rise to 20% of
federal revenues by the end of the decade. As the debt
servicing burden rises it further reduces the room for fiscal
manoeuvre and increases the need for underlying action on
either the revenue or the expenditure front. HSBC Global
Research points out that this development has the potential
to unnerve foreign holders of US dollars. And there are
lots of them. With roughly 50% of marketable treasury
securities held abroad, the dollar will likely be vulnerable
to negative developments on the debt front, in particular
relative to emerging market currencies where economies
are generally much less leveraged.
14
15
Investments by asset class
EM currency valuations look cheap relative to purchasing
power parity (PPP) levels and real appreciation is likely to
be a significant component of EM returns for equity and
local currency bond strategies in the future
From a pure currency perspective, in an environment
where DM yields are likely to remain low the EM carry
pick-up continues to look attractive
Inflation concerns in many emerging markets suggest
that EM policy makers could be more prepared to use
additional currency appreciation than in the recent past,
including in China
This should add potential appreciation to the carry
attraction of EM currencies
Fund these positions from the major currencies,
including the US dollar, the yen, sterling and the euro
which all have fundamental weaknesses
Depending on what is the latest scare from the
developed world, at any given time one will be weaker
than another
In selecting carry currencies it is important to bear in
mind the nature of the flows that are driving them
Our qualitative view on drivers of EM currencies remains
generally positive
But currencies where the support comes from ‘sticky’
inflows like remittances and foreign direct investment
are likely to react less negatively to external risk events
than those driven by net portfolio flows
Currencies
FX Interest rate differential (against USD)
-1 Y Current PPP -1 Y -3m Current
Argentina 3.9 4.1 2.1 0.2 0.3 0.3
Brazil 1.9 1.6 1.7 8.8 10.2 11.75
Chile 546.1 468.4 403.0 -0.6 -0.1 0.1
China 6.8 6.5 3.2 2.3 3.5 4.3
Czech Rep 21.8 16.6 14.6 0.4 0.6 0.6
Hungary 238.5 181.8 144.6 4.8 5.2 5.7
India 47.1 45.0 15.0 4.5 6.6 7.7
Indonesia (x 0.01) 92.5 85.1 54.3 5.2 5.3 5.4
Korea (x 0.01) 12.4 10.8 8.2 1.9 2.4 3.1
Malaysia 3.3 3.0 1.9 2.1 2.6 2.8
Mexico 12.9 11.7 8.2 4.1 4.1 4.1
Philippines 46.8 43.2 24.4 3.3 0.4 1.9
Poland 3.5 2.7 1.9 3.1 3.4 3.9
Russia 31.8 27.8 17.9 4.1 3.9 3.9
South-Africa 7.8 6.7 5.7 6.0 5.2 5.1
Taiwan 32.4 28.7 17.9 0.3 0.6 0.7
Thailand 32.4 28.7 17.9 1.5 1.7 1.7
Turkey 1.6 1.6 1.1 7.2 7.5 8.4
Source: HSBC Global Asset Management
Equities
MSCI DM/MSCI EM
96
98
100
102
104
106
108
110
112
12/10 01/11 03/11 04/11 05/11
MSCI DM/MSCI EM
YTD DM vs. EM equity performance
Source: Bloomberg, May 2011
15
5 7 9 11 13 15 170%
5%
10%
15%
20%
25%
PE (2011)
EP
S g
row
th (2
012)
Russia CzechPoland
Brazil
Turkey Peru
Korea
ChinaThailand
Hungary
EgyptSouth Africa Taiwan
IndiaIndonesia
Mexico
PhilippinesMalaysia
Chile
Colombia
16
PE vs EPS growthEmerging Markets
Developed Markets
8 9 10 11 12 13 144%
5%
6%
7%
8%
9%
10%
11%
12%
EPS
grow
th (2
012)
PE (2011)
Spain
UK
Germany
France
JapanSweden
USA
SwitzerlandAustralia Canada
Source: IBES Estimates, Datastream, May 2011
16
17
Developed world stocks have outperformed emerging
markets stocks so far this year
This should be seen as a one off rotation as a result
of investors re-pricing an improved view of the
sustainability of DM growth
In the future, de-leveraging in the developed world
is likely to have powerful implications for companies
operating there
For government deficits to fall, private sector cash flows
must also fall by the same amount (the sum of all sector
cash flows must net to zero)
Either businesses or households have to take the hit or
current account surpluses need to be run with the rest of
the world
Given that most developed countries running fiscal
deficits are unlikely to move quickly to current account
surplus and DM household savings rates are likely to
increase not fall company cash flows are likely to be
vulnerable
2011 F 2012 F
United States 13.8 10.9
Canada 13.1 9.2
Euro zone 13.6 9.2
United Kingdom 10.1 5.8
Switzerland 12.1 7.5
Japan 13.2 22.2
Australia 10.3 7.4
China 15.7 15.6
India 16.1 18.0
Indonesia 19.1 16.7
Philippines 7.3 11.9
Korea 22.8 12.5
Malaysia 12.5 12.9
Taiwan 9.3 20.6
Thailand 16.9 14.6
Czech -9.1 6.1
Hungary 16.1 17.7
Poland 20.3 6.7
Egypt 23.6 20.6
Russia 18.5 6.3
South Africa 33.5 20.5
Turkey -1.1 11.7
Brazil 9.4 9.1
Colombia 24.3 16.2
Mexico 47.8 15.1
With so much volatility, investors should seek out
thematic anchors where the fundamental rationale is
strong
These are likely to be mostly EM themes but should be
played through a global portfolio
These themes include overweighting emerging
consumption via EM and DM stocks
The EM consumption story will be powerful as global
growth rebalances
The approach should be to identify sectors and
companies that will perform well/poorly as a result
of this trend and bias the portfolio to overweight/
underweight (short) accordingly
The same approach should be used to play the emerging
infrastructure story
In markets like India, Indonesia and Russia there will
need to be huge infrastructure spending if growth rates
are to be sustained
Rapid urbanisation will also power the investment
process
By contrast, as rebalancing proceeds it should make
sense to be less favourably disposed to EM export
stories where the source of end final demand is in DMExpected earnings growth
Source: IBES estimates, May 2011
17
93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11
2 yr 10 yr
0
1
2
3
4
5
6
7
8
9
18
US treasury 2 and 10 yr yields
Government debt
Source: Bloomberg, May 2011
Investors should run underweight positions in
government bonds, in our view
A flattening trend seems to be underway in Europe
The ECB announced the fall in commodity prices opened
room for yields to decline
But core European economic growth remains solid and
more rate hikes are likely to be priced again
We are constructive on Italy and Spain but underweight
in Ireland and Portugal
Weak growth is likely to keep pressure on the Eurozone
periphery
We have a more neutral stance on the US dollar curve
with a Fed rate hike further away
There is still no credible structural fiscal adjustment
package in sight in the US to bring down excessive
government deficits
There is also the key question of how the accumulated
portfolios of central bank holdings of government debt
will be reduced over time
Both effects suggest that yields will need to rise through
year end
We see little value in developed world inflation break-
evens
We now favour a more cautious stance on emerging
markets with modest beta, local currency exposure at its
lows and on-going inflation pressures in key markets
The short-end of local EM curves is preferred
Low yields in the developed world and improved relative
debt metrics should lend support to EM external debt
spreads
18
0
50
100
150
200
250
300
350
400
450
500
0
200
400
600
800
1000
1200
01/0
0
07/0
0
01/0
1
07/0
1
01/0
2
07/0
2
01/0
3
07/0
3
01/0
4
07/0
4
01/0
5
07/0
5
01/0
6
07/0
6
01/0
7
07/0
7
01/0
8
07/0
8
01/0
9
07/0
9
01/1
0
07/1
0
JP Morgan EMBI Global index spread (lhs) Ratio of JPM EMBI spread over 5yr UST (%, rhs)
19
Relative credit spreads for EMD
Credit
Source: JP Morgan, Bloomberg, May 2011
Our in-house models give generally positive signals for
DM corporate bonds relative to 10 year government
bonds
Corporate balance sheets in DM and EM are generally
in relatively good shape in relation both to governments
and households
Corporate fundamentals continue to improve and
support the credit markets
Global default rates have declined steadily year to date
and upgrade/downgrade ratios are neutral or in positive
territory
Banks and insurance companies maintain historically
high solvency ratios
Profitability has also been improving but leverage has
started to increase again
Difficulties in the EU periphery are likely to lead to
targeted downgrades but we do not expect this to cause
significant contagion for corporates
Valuations close to historical averages point to further
tightening potential which is also supported by
improvement in credit quality relative to government
debt
Euro spreads have now converged with USD equivalents
Leveraged BB to B names favoured in high yield rather
than CCCs as refinancing risks remain
Hybrids (corporate and banks) and telecoms remain our
favourite sector/industry bets with underweights on
expensive industrials and utilities
Quality emerging market corporate credit spreads still
also have room to tighten further in our view as investors
search for yield in a world where it is likely to remain in
short supply
19
Commodities
20
Recent weakness in commodity prices looks more like
a short-term correction than the end of the longer-term
bull run
We expect the balance of demand and supply forces
to continue to be supportive for commodities, although
prices will likely remain volatile
The key drivers of demand, both hard and soft, are now
economies in the emerging not the developed world
Key emerging economies are entrenched in a self-
sustaining, commodity-intensive phase of development,
which promises to keep commodity consumption growth
high, even if growth in industrialised economies is weak
There is room for commodity demand to rise further
Incomes and consumption levels in emerging markets
remain low by western standards and are likely to rise
There are near term supply constraints for hard
commodities as a result of the cancellation of investment
projects during the global financial crisis
Agricultural supplies continue to suffer from climatic
disruption
Oil-Brent
US$ US$/oz
Gold - U$/oz
90
95
100
105
110
115
120
125
130
12/1
0
01/1
1
01/1
1
02/1
1
02/1
1
03/1
1
03/1
1
04/1
1
04/1
1
05/1
1
12/1
0
01/1
1
01/1
1
02/1
1
02/1
1
03/1
1
03/1
1
04/1
1
04/1
1
05/1
1
1300
1350
1400
1450
1500
1550
1600
Cents/Bushel US$/MetricTonne
Wheat Cts/Bu Copper, Grade A Cash U$/MT
12/1
0
01/1
1
01/1
1
02/1
1
02/1
1
03/1
1
03/1
1
04/1
1
04/1
1
05/1
1
600
650
700
750
800
850
900
950
12/1
0
01/1
1
01/1
1
02/1
1
02/1
1
03/1
1
03/1
1
04/1
1
04/1
1
05/1
1
8700
8900
9100
9300
9500
9700
9900
10100
10300
Source: Bloomberg, May 2011
20
21
Generic investment ideas
Long selected EM currencies vs. DM currencies (USD/
EUR/JPY)
Target EM carry currencies that are fundamentally
undervalued in particular where there is limited or no
intervention and where central banks have strong inflation
fighting credentials. Such conditions should ensure that
real appreciation results more from nominal moves than via
an adverse inflation differential. (Examples include CNY,
INR, IDR, KRW, MYR, SGD, CLP and MXN)
Long AUD vs. USD/EUR/JPY
Attractive positive interest differential and a central bank
that is not intervening to prevent currency appreciation. Also
a relatively liquid DM play on Chinese growth and upside for
commodities
Emerging consumption theme via EM and DM stocks
(medium-term theme)
The shift in the balance of global consumption from DM to
EM will be a powerful secular trend. This theme should be
played via both EM and DM domiciled companies that are
exposed to it. Filter stocks on exposure to the theme and
then apply a PB/ROE or similar screen to determine value
Emerging infrastructure theme via EM and DM stocks
(medium-term theme)
In markets like India, Indonesia and Russia there will need
to be a huge infrastructure spend if growth rates are to be
sustained. Rapid urbanisation will also continue to support
the investment process in China. This theme should be
played via both EM and DM domiciled companies that are
exposed to it. Filter stocks on exposure to the theme and
then apply a PB/ROE or similar screen to determine value
Overweight Asian cyclical equity markets/sectors (eg.
Korea, Taiwan, China H, Japan)
These markets were unloved for much of 2010 but should
ultimately be beneficiaries of a more sustainable view of US
activity/global recovery in 2011
Long commodities (hard and soft)
Commodity prices should be supported by strong demand
from rapidly growing populous emerging economies where
per capita consumption is coming off a very low base.
Consumers in these economies are literally moving up the
food chain putting upward pressure on grain prices. For
hard commodities, the short-term response will be limited
by project postponements during the crisis and geopolitical
risks. This will continue to fuel M&A activity. In terms of
soft commodities, climatic uncertainty will likely continue
to disrupt harvests. This theme could be expressed via
outright exposure to commodities or to stocks in the sector.
Russia (energy and hard commodities) and Latam (soft and
hard) equities and currencies are ways to play it
Gold and precious metals
Gold should continue to benefit from supportive demand,
particularly in view of the fact that demand from emerging
Asia seems set to continue to grow rapidly and real interest
rates in much of the developed world are likely to remain
very low for some time to come
Long inflation-linkers in EM
The consensus expectation for EM inflation continues to
lag reality in our view and investors should seek out some
insurance against inflation running for longer than the
market is currently pricing. Inflation-linkers still offer value
Long asset-intensive equity markets as a hedge
against EM inflation
Stocks are in no sense a perfect inflation hedge but, subject
to valuations, investors should seek out asset-intensive
exposure. Asset intensive businesses that potentially fit
the bill include banks, real estate companies and most
conglomerates
Long credit (Europe, USD and EM)
Quant models point to value in credit. For some time
to come, ultra low government bond yields are likely to
continue to push investors into credit in order to hit return
targets. Corporate balance sheets are generally in good
shape (in contrast to governments)
21
22
Important Information: For Professional / Institutional
Investors, Professional Clients within the EU only
and should not be distributed or relied upon by Retail
Clients.
The contents of this document may not be reproduced or
further distributed to any person or entity, whether in whole
or in part, for any purpose. All non-authorised reproduction
or use of this document will be the responsibility of the user
and may lead to legal proceedings. The material contained
in this document is for general information purposes only
and does not constitute advice or a recommendation to
buy or sell investments. This document has no contractual
value and is not by any means intended as a solicitation, nor
a recommendation for the purchase or sale of any financial
instrument in any jurisdiction in which such an offer is
not lawful. The views and opinions expressed herein are
those of HSBC Global Asset Management at the time of
preparation, are subject to change at any time.
The value of investments and the income from them can
go down as well as up and investors may not get back the
amount originally invested. The past performance of any
fund and the manager and any economic and market trends/
forecast are not necessarily indicative of the future or likely
performance of that fund. Where overseas investments are
held the rate of currency exchange may cause the value of
such investments to go down as well as up. Investments
in emerging markets are by their nature higher risk and
potentially more volatile than those inherent in established
markets. Economies in Emerging Markets generally are
heavily dependent upon international trade and, accordingly,
have been and may continue to be affected adversely by
trade barriers, exchange controls, managed adjustments in
relative currency values and other protectionist measures
imposed or negotiated by the countries with which they
trade. These economies also have been and may continue
to be affected adversely by economic conditions in the
countries in which they trade.
Any third party information obtained from sources
we believe to be reliable but which have not been
independently verified; therefore we accept no
responsibility for its accuracy and/or completeness.
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for the asset management business of HSBC Group.
The above communication is issued by the following
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Company authorised by the French regulatory authority
AMF (no. GP99026); in Germany by HSBC Global Asset
Management (Deutschland) which is regulated by BaFin;
in Hong Kong by HSBC Global Asset Management (Hong
Kong) Limited, which is regulated by the Securities ad
Futures Commission; in Singapore by HSBC Global Asset
Management (Singapore) Limited, which is regulated by
the Monetary Authority of Singapore (HSBC Global Asset
Management (Singapore) Limited, or its ultimate and
intermediate holding companies, subsidiaries, affiliates,
clients, directors and/or staff may, at anytime, have a
position in the markets referred herein, and may buy or sell
securities, currencies, or any other financial instruments
in such markets. HSBC Global Asset Management
(Singapore) Limited is an Exempt Financial Adviser and has
been granted specific exemption under Regulation 36 of the
Financial Advisers Regulation from complying with Sections
25 to 29, 32, 34 and 36 of the Financial Advisers Act), in
Canada by HSBC Global Asset Management (Canada)
Limited which is registered in all provinces of Canada
except Prince Edward Island, in Malta by HSBC Global
Asset Management (Malta) Limited, which is regulated
by the Malta Financial Services Authority, in Bermuda by
HSBC Global Asset Management (Bermuda) Limited, of
6 Front Street, Hamilton, Bermuda which is licensed to
conduct investment business by the Bermuda Monetary
Authority and in the United States by HSBC Global Asset
Management (USA) which is regulated by the Securities
and Exchange Commission.
20606/602011/FP11-0975
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