Global Emerging Market Equity. Could emerging market equities regain momentum? December 2016
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1 Global Emerging Market Equity Could emerging market equities regain momentum? December 216 This document is intended for Professional Clients only and should not be distributed to or relied upon by Retail Clients. The information contained in this document is not intended as investment advice or recommendation. Non contractual document.
2 Contents Introduction 3 Economic Development 4 Profit Outlook 7 Environmental, Social, Governance (ESG) 9 Investment Opportunity 12 Conclusion 14 2 Non contractual document
3 déc.-4 déc.-5 déc.-6 déc.-7 déc.-8 déc.-9 déc.-1 déc.-11 déc.-12 déc.-13 déc.-14 déc.-15 déc.-99 déc.-1 déc.-3 déc.-5 déc.-7 déc.-9 déc.-11 déc.-13 déc.-15 Introduction In the mid-to-late 2s, investors were captivated by the favourable demographics and secular development of emerging market economies and the potential for capital appreciation in these markets. Between September 21 and October 27, emerging market equities appreciated 515% in USD terms, or 35% annualised, as indicated by the MSCI Daily TR Emerging Markets Net USD index (Figure 1). However, the path of emerging market equity returns has been range-bound over the last five years, and far from exciting for long-term investors. In 211, emerging markets even began to underperform developed markets on a five-year annualised return basis (Figure 2). As emerging market equities rebounded from lows in February this year, investors gained new enthusiasm and net inflows increased as emerging market exports began to accelerate and individual country industrial production looked to improve. However, the recent US Presidential election has brought additional headwinds for the asset class, as proposed policies may harm the emerging market export engine, through onshoring manufacturing, imposition of tariffs, limitation of remittances or repatriation of foreign profits. It remains to be seen the extent to which these and other proposals are implemented, and this could generate market volatility as debate unfolds. At the time of writing, specific asset classes, markets, subsectors and currencies have moved on anticipation of proposed changes. So an important question remains: could emerging market equities regain momentum? Figure 1 Emerging market equity performance (MSCI Daily TR Emerging Markets Net USD) Source: HSBC Global Asset Management, Bloomberg as at 3 September 216. For illustrative purposes. Figure 2 Emerging markets versus developed markets (Five-year annualised return difference, USD, %) 25% 2% 15% 1% 5% % -5% -1% -15% MSCI Daily TR Emerging Markets net versus MSCI Daily TR World net Source: HSBC Global Asset Management, Bloomberg as at 3 September 216. For illustrative purposes. Fundamentally, emerging market equity continue to be attractive and the long-term investment theme remains intact. Looking at economic development trends and the outlook for company profits, we believe emerging markets continue to offer investment opportunities, and investors today are being paid to take risk in emerging market equities. We believe asset allocators and active managers can be proactive in looking for attractive entry points and take advantage of perceived mispricing to capture the long-term investment potential of emerging markets. The performance figures displayed in the document relate to the past and past performance should not be seen as an indication of future returns. 3 Non contractual document
4 GDP per capita, USD Economic development Despite the recent lacklustre performance in emerging market equities, economic development continues, providing a solid foundation for profit growth. As a long-term investment theme, the case for emerging markets remains intact. Four key trends support the emerging markets story: Favourable demographics Increasing urbanisation Growing Industrialisation Developing institutions Demographics In emerging markets, the overall population and the share of the working-age population (Figure 3) both continue to grow. Urbanisation Urbanisation has also increased in a majority of emerging market countries. This is relevant because urbanisation is consistent with a lift in GDP per capita (Figure 4): it creates demand for infrastructure investment while supporting an expanding workforce with a higher consumption potential. Industrialisation Industrialisation can be illustrated by growth in electricity generation. In fact, electricity generation is often considered a reference for growth, like Gross Domestic Product. Across emerging markets, net electricity generation grew from 5.6 trillion kilowatt-hours (kwh) in 23 to 1.2 trillion kwh in 212, an increase of 8%, or 6.9% annualised (Figure 5). Figure 3 Working age population (Percentage of total population, %) 7% 65% 6% 55% 5% Emerging Markets Developed Markets Source: HSBC Global Asset Management, International Monetary Fund, World Economic Outlook Database, April 216. For illustrative purposes. Figure 4 Urbanisation versus GDP per capita % 2% 4% 6% 8% 1% Urban population as share of total, % Brazil China Czech Republic Greece India Korea, Rep. Mexico Philippines Qatar South Africa Turkey Source: HSBC Global Asset Management, World Bank as at 3 September 216. For illustrative purposes. Figure 5 Net electricity generation (Billion kilowatt-hours) Chile Colombia Egypt, Arab Rep. Hungary Indonesia Malaysia Peru Poland Russian Federation Thailand United Arab Emirates The performance figures displayed in the document relate to the past and past performance should not be seen as an indication of future returns. Emerging Markets Frontier Markets Developed Markets Source: HSBC Global Asset Management, U.S. Energy Information Administration, September 216. For illustrative purposes. 4 Non contractual document
5 juin-8 juin-9 juin-1 juin-11 juin-12 juin-13 juin-14 juin-15 juin déc.-9 déc.-94 déc.-98 déc.-2 déc.-6 déc.-1 déc.-14 Institutions The development of institutions has led the Ease of Doing Business ranking of many emerging countries to improve, which can facilitate business development (Figure 6). As an example, patent applications in emerging markets has grown by 21% annually between (Figure 7). Not only does this reflect positive business dynamics, but patents can help companies move up the value chain in the production of goods and services. This has supported growth in emerging market company Value-Added, which highlights the contribution of emerging markets to the global economy as measured by Gross National Product (GNP). This growth has continued despite a relatively flat equity market (Figure 8). Figure 6 Improvement in Ease of Doing Business (Positive change in country rank, ) At the same time, local capital markets have grown. The proportion of external debt has declined, with the duration mix more towards medium-term and long-term funding, and the proportion is well below that of developed market countries. This means emerging markets are becoming less sensitive to foreign exchange movements when it comes to financing growth (Figure 9). Improving Ease of Doing Business and growing local capital markets, support the investment thesis for emerging market companies. Figure 7: Patent applications (Thousands) Country Source: HSBC Global Asset Management, World Bank Group, Doing Business 216. For illustrative purposes. Figure 8: Emerging market Value-Added (Billions) Emerging Markets Developed Markets Source: HSBC Global Asset Management, DataStream, 3 September 216. For illustrative purposes. Figure 9: External debt as a % of GDP 12% 1% 8% 6% 4% 2% IMF Forecast Value-Added MSCI Daily TR Emerging Markets Net USD (RHS) Source: HSBC Global Asset Management, Euromoney, Bloomberg as at 3 June 216. For illustrative purposes. Gross government debt - emerging economies Gross government debt - advanced economies External debt -emerging economies Source: HSBC Global Asset Management, International Monetary Fund, World Economic Outlook Database, October 216. For illustrative purposes. The performance figures displayed in the document relate to the past and past performance should not be seen as an indication of future returns. Any forecast, projection or target where provided is indicative only and is not guaranteed in any way. HSBC Global Asset Management (France) accepts no liability for any failure to meet such forecast, projection or target. 5 Non contractual document
6 Economic growth This robust development has indeed translated into economic growth. Emerging markets have outpaced developed markets in terms of Gross Domestic Product (GDP) growth, and now contribute about a third of overall global GDP and half of global growth (Figure 1). To this end, it is a matter of time before China becomes the world s largest economy. We may also see rapid growth within frontier markets such as Vietnam and Argentina. Figure 11 Current account balance as a % of GDP 6% 4% 2% % -2% Forecast This tremendous growth has been achieved with an improving current account balance (Figure 11). But countries aren t standing still. Several are planning additional structural reforms, which could continue to reinforce their long-term economic growth (Figure 12). Figure 1 Contribution to global GDP growth 6% 4% 2% % -2% Emerging markets Forecast Developed markets Source: HSBC Global Asset Management, DataStream as at 3 September 216. For illustrative purposes. Emerging economies Source: HSBC Global Asset Management, International Monetary Fund, World Economic Outlook Database, October 216. For illustrative purposes. Figure 12 Examples of potential structural reforms China Further privatisation State-owned enterprise reform One-belt, One-road program Hong Kong Shanghai Stock Connect Interest rate liberalisation Capital account liberalisation, freefloating currency India Unlock bottlenecks Goods & Services Tax Bill Philippines Infrastructure spending Korea Chaebol reform Brazil Labour and pension reform Reduce corruption Mexico Energy reform Financial reform Labour and education reform Legal and judicial reform Advanced economies Source: HSBC Global Asset Management as at 3 September 216. For illustrative purposes. The performance figures displayed in the document relate to the past and past performance should not be seen as an indication of future returns. Any forecast, projection or target where provided is indicative only and is not guaranteed in any way. HSBC Global Asset Management (France) accepts no liability for any failure to meet such forecast, projection or target. 6 Non contractual document
7 janv.-95 janv.-97 janv.-99 janv.-1 janv.-3 janv.-5 janv.-7 janv.-9 janv.-11 janv.-13 janv.-15 Price-to-book (x) déc.-99 déc.-1 déc.-3 déc.-5 déc.-7 déc.-9 déc.-11 déc.-13 déc.-15 déc.-99 déc.-1 déc.-3 déc.-5 déc.-7 déc.-9 déc.-11 déc.-13 déc.-15 Profit outlook We believe that, over the long term, corporate profits and growth expectations for those profits are the fundamental drivers of share prices and equity markets. Emerging market profits grew rapidly from December 1999 to their peak in July 211, but have trended lower since then (Figure 13). Unsurprisingly, we see valuations, whether Price-to-Book or Price-to Earnings, near historic lows and close to the bottom of a trading range (Figure 14). Weak global growth has affected profitability (Return On Equity) in both emerging and developed markets, suggesting that trends in emerging markets are not unique (Figure 15). For emerging market corporates, lower ROE in recent years seems to owe far more to investments in future growth than to lacklustre business performance. Figure 13 Emerging market profits Economic expansion, industrialisation and new product development require capital expenditure, and higher depreciation has put pressure on both margins and asset turnover, while requiring increased financing and leverage. The relationship between profitability and valuation suggests an investment opportunity, in our view (Figure 16). If investors start seeing a recovery in profitability, they may anticipate an expansion in valuation multiples. As a consequence, while low valuation is often given as the primary reason to invest in emerging markets, we believe that investors should focus first and foremost on the direction of corporate profits. To this end, consideration should also be given to Environmental, Social, Governance (ESG) factors that may materially impact company fundamentals. We discuss this theme in more detail in the following section. Figure 14 Price-to-Book valuation (x) 1 6 4, , 2, 1,, Net income, USD billions (LHS) MSCI Daily TR Emerging Markets Net USD (RHS) Emerging Markets Developed Markets Figure 15 Return on Equity 2% 15% Figure 16 The relationship between profitability and valuation 2,5 2, 28 1% 5% 1,5 1,, %, % 5% 1% 15% 2% Emerging Markets Developed Markets Return-on-Equity (%) Trailing estimates, Emerging Markets: MSCI Emerging Markets USD and Developed Markets: MSCI World USD Source: HSBC Global Asset Management, DataStream, Bloomberg as at 3 September 216. For illustrative purposes. The performance figures displayed in the document relate to the past and past performance should not be seen as an indication of future returns. 7 Non contractual document
8 janv.-95 janv.-97 janv.-99 janv.-1 janv.-3 janv.-5 janv.-7 janv.-9 janv.-11 janv.-13 janv.-15 janv.-95 janv.-97 janv.-99 janv.-1 janv.-3 janv.-5 janv.-7 janv.-9 janv.-11 janv.-13 janv.-15 USD billions USD billions janv.-95 janv.-97 janv.-99 janv.-1 janv.-3 janv.-5 janv.-7 janv.-9 janv.-11 janv.-13 janv.-15 janv.-95 janv.-97 janv.-99 janv.-1 janv.-3 janv.-5 janv.-7 janv.-9 janv.-11 janv.-13 janv.-15 USD billions USD billions Profits by sector The relatively flat profit growth of emerging markets masks underlying trends at the sector level. The growth in profits in the energy and materials sectors was a key driver of overall emerging market profits throughout the period to 211, comprising 37% of overall profits at December 211. Since then, these profits have declined almost USD2 billion to 11% of overall profits because of softer commodity prices (Figure 17). A rise in commodity prices could reduce this headwind to overall emerging market profit growth. The financial sector generates by far the largest portion (59%) of overall emerging market profits, and has helped offset commodity weakness, but profit growth has been flat given the environment of subdued economic growth and lower interest rates (Figure 18). The technology and healthcare sectors have delivered profit growth despite economic headwinds (Figure 19). Within technology, existing companies have grown while world-class New Economy companies such as Tencent, Alibaba and Yandex have listed1. Rapid technology adoption could support higher levels of economic growth over the long term, despite a recent dip in profits. The index weight of technology in the MSCI Emerging Markets index is now 23.6% as compared to 15.1% in the developed markets MSCI World.2 Healthcare has also shown steady growth, though starting from a smaller base. This underscores the increasing consumption of this kind of products and services that should continue to support profits in this sector. Consumer sector profits (Figure 2) have moved sideways recently, as have industrials profits, while telecom and utilities have been facing deflationary pressures. The financial sector contributes the most to profits generated in emerging markets, while technology and healthcare drive profit growth. Figure 17 Commodity sectors profits Figure 18 Financial sector profits Oil & Gas Materials Figure 19 Technology, Healthcare sector profits Figure 2 Consumer, Industrial, Telecom, Utilities sector profits Technology Health Care Consumer Goods Industrials Utilities Consumer Services Telecommunications 1 For illustrative purposes only and does not constitute any investment recommendation in the above mentioned companies. 2 For illustrative purposes. Source: Bloomberg as of 31 October 216. Source: HSBC Global Asset Management, Datastream as at 3 September 216. For illustrative purposes. The performance figures displayed in the document relate to the past and past performance should not be seen as an indication of future returns. 8 Non contractual document
9 Environmental, Social, Governance (ESG) Importance to company profits We see ESG factors as a key driver of longterm profits, as these factors can have a material impact on a company s fundamental outlook. Asset managers have been encouraged to consider ESG factors in investment decisions, and we see such ESG integration as an essential component of investment due diligence, and critical to a holistic, sustainable Responsible Investment approach that would include engagement, voting and reporting. For active managers, the consideration of a company s ESG profile could sit alongside other analyses like the strategic or financial analysis to provide investment insight, whether evaluating equity or credit. Whether ESG factors can drive investment returns is often debated and academic studies are inconclusive. In our view, investment opportunity is driven by whether a company s fundamental outlook is reflected in the share price, and it would be difficult to argue that a single piece of analysis in isolation could be a predictor of performance. Broad support and reinforcement The attention to ESG has been reinforced from several directions. The PRI (Principles for Responsible Investment) have been pivotal in developing awareness and commitment. More asset owners are requiring asset managers to communicate how they integrate such analysis in their investment decision-making. Stock exchanges are also involved. For example, the Bovespa in Brazil manages its own sustainability index, while the Johannesburg Stock Exchange is working to increase South African corporates ESG disclosure. The Hong Kong Exchange announced ESG would form part of its reporting requirements going forward, Figure 21 Distribution of ESG scores (Industry-adjusted score: 215) stating "Issuers starting to report on their ESG performance may reap the benefits of better risk management, improved access to capital, greater capacity to meet supply chain demands and lower operational costs, to name a few of the advantages that ESG reporting could bring to issuers' businesses. In June 216, China s State Administration of Taxation issued much more stringent disclosure rules on related-party transactions. ESG in emerging markets The nature of developing economies may encourage investors to consider ESG issues. In emerging markets, there is a prevalence of environmentally sensitive sectors e.g. resources and power generation. Global issues such as water availability and climate change may have a disproportionate impact on developing countries. Social issues are present given labour-intensive industries and the impact of investments on communities. Governance issues are also visible, with State-Owned Enterprises or family-owners as majority shareholders. Such analysis is important at the company level, as there is a breadth of scores across companies (Figure 21), and because a company s ESG profile can change. We have seen that, within three and five years, about half of the universe improved while the other half saw their ESG score declining (Figure 22). This data highlights how the availability of emerging market ESG information has improved. Currently, investors can access information for over 1,6 emerging market companies, whereas about 28 companies have a three-year history and only about 8 companies have a five-year history. Figure 22 Distribution of ESG score change (Industry-adjusted score: , ) Companies Companies Based on companies within the MSCI ESG database Source: HSBC Global Asset Management, MSCI as at 3 September 216. For illustrative purposes. Based on companies with historic information within the MSCI ESG database Source: HSBC Global Asset Management, MSCI as at 3 September 216. For illustrative purposes. 9 Non contractual document
10 The environment and emerging markets Within the Environment pillar of ESG, it is clear that environmental issues, climate change and carbon pricing can impact long-term profits, and recent environmental initiatives have amplified these ESG trends. For example, by signing the Dubai declaration in late October 216, the core of the United Arab Emirates financial institutions have committed to integrating ESG and Green Investing in their practices. Another illustration is the deal agreed in Kigali, Rwanda, in October 216, whereby 197 countries signed a legallybinding document committing to reducing the use of hydro-fluorocarbons, a powerful greenhouse gas used in refrigerators and airconditioners. Although the latter is undoubtedly important, it cannot eclipse the United Nations Conference on Climate Change, COP21, which brought increased attention to the broad impact of climate change on the global economy. The Paris Agreement on Climate has now been ratified by some 76 countries committing to help limit global warming to 2 o C and totalling close to 6% of the world s CO 2 emissions. Three of the largest emerging markets are also among the world s five largest carbon emitters: together Brazil, India and China represent 26% of the world s CO 2 emissions. These three countries have ratified the Paris Agreement, and they are considering using market mechanisms to further their aims. Whilst a global carbon price wasn t agreed in Paris, it was referenced in the Agreement, which recognises the important role of providing incentives for emission reduction activities, including tools such as domestic policies and carbon pricing. Indeed, more than 9 of the National Determined Contributions to the Paris Agreement included proposals for emissions trading schemes (ETS), carbon taxes and other carbon-pricing initiatives. In fact, in 215 the World Bank Group and the OECD issued a report on carbon pricing schemes using input from the IMF. Globally, there are already 4 national carbon-pricing schemes such as ETS or carbon taxes and another 23 at the level of cities, states and regions (Figure 23). At the time these represented about 7 billion tonnes of CO2, or 12% of global greenhouse-gas emissions. Carbon pricing took a major step forward in September 215 when China announced its plans for a national ETS. Chinese President Xi Jinping stated that the national ETS would begin in 217, and initial indicators suggest that the scheme will cover the iron and steel, nonferrous metals, power generation, cement and glass, chemicals, petrochemicals, pulp and paper, and aviation sectors. Figure 23 Existing, emerging and potential regional, national and subnational carbon pricing initiatives (ETS and tax). ETS implemented or scheduled for implementation Carbon tax implemented or scheduled for implementation ETS or carbon tax under consideration ETS and carbon tax implemented or scheduled ETS implemented or scheduled, tax under consideration Carbon tax implemented or scheduled, ETS under consideration Source: World Bank Group Non contractual document
11 Percent of listed company emissions Going forward, we believe the Paris Agreement will prove to be a game changer, as it will very likely trigger a wave of changes in terms of power generation, smart-grid-related innovation, transport and many other industries as part of an industrial transition to a low carbon economy that creates opportunities and risks as well as winners and losers. These parameters will increasingly become drivers of investment decisions. Companies that consider this transition within their corporate strategy should be better placed to maintain or enhance their competitive position, with the potential to deliver sustained or improving profitability in the future. As asset managers sign the Montreal Carbon Pledge, committing to report investment portfolio carbon exposure, carbon could begin to influence portfolio decision-making. Figure 24 Cumulative emissions (CO 2 equivalents) 1% 8% 6% 4% 2% % Number of companies (cumulative) Universe comprises emerging markets companies within the Trucost database Source: HSBC Global Asset Management, Trucost; 214 emissions as at April 216. For illustrative purposes. Analysis suggests that relatively few emerging market companies comprise a significant proportion of total emissions within the listed emerging market universe (Figure 24); these may be most exposed to regulation and industrial change. 11 Non contractual document
12 Price-to-Book (x) déc.-9 déc.-1 déc.-11 déc.-12 déc.-13 déc.-14 déc.-15 Investment opportunity Emerging market beta For asset allocation and investment decision making purposes, we assess medium-term expected returns for emerging markets equity. We base this assessment on dividend yield, earnings per share growth, and market repricing. The results show that, as at 3 September 216, emerging market equities expected returns appear attractive versus developed market equities, government bonds and cash (Figure 25). In a low interest-rate environment, emerging markets have also been offering an attractive dividend yield relative to developed market equities, indicating discipline in their cash flow management (Figure 26). Emerging markets equities could be additive to an equity allocation. The correlation between emerging market and developed market returns has remained relatively low, which means an allocation to emerging markets may not significantly raise the overall portfolio volatility. Alpha opportunity Many investors may wish to seek excess return over emerging market beta. The inherent excess volatility in emerging markets may enable an alternative weighting scheme, such as fundamental weighting or lower volatility, to utilise systematic rebalancing to capture excess returns. For active stock selection, there is an array of investment opportunities over 8 names across 23 countries and 11 sectors in the standard MSCI Emerging Markets index and the wide breadth of historic stock returns confirms that stock selection has the potential to add value. Looking forward, we see a dispersion in the relationship between Profitability and Valuation (Figure 27), indicating a potential investment opportunity that could be confirmed through proprietary fundamental research. Figure 25 Expected 1-year nominal returns (Annualised, USD unhedged, %) Global Emerging Markets Asia ex Japan Developed Markets Global listed real estate Local EM Debt US High Yield EUR High Yield US Corporate Credit US Government Bonds UK Gilts German Bunds (1,%) Japan JGBs (1,6%),9%,6% 5,5% 5,1% 5,9% 8,8% 9,% 6,9% 4,2% 2,7% 2,7% (5%) % 5% 1% 15% Source: HSBC Global Asset Management as at 3 September 216. For illustrative purposes only. Any forecast, projection or targets 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 targets. Figure 26 Dividend yield (12m forward, %) 4,5% 4,% 3,5% 3,% 2,5% 2,% Emerging Markets Developed Markets Source: IBES, MSCI, DataStream, HSBC Global Asset Management as at 3 September 216. For illustrative purposes. Figure 27 Dispersion in Profitability-Valuation (Return on Equity and Price-to-Book) 8 6 As we have shown in the previous section, ESG analysis has the potential to becoming an integral component of the investment research and due diligence that active managers carry. By providing an additional insight, the ESG profile of a company, may improve stock selection and search for alpha. The performance figures displayed in the document relate to the past and past performance should not be seen as an indication of future returns. 4 2 % 1% 2% 3% 4% 5% Return on Equity (%) Source: HSBC Global Asset Management as of 3 September 216. For illustrative purposes. 12 Non contractual document
13 janv.-96 janv.-98 janv.- janv.-2 janv.-4 janv.-6 janv.-8 janv.-1 janv.-12 janv.-14 janv.-16 janv.-95 janv.-97 janv.-99 janv.-1 janv.-3 janv.-5 janv.-7 janv.-9 janv.-11 janv.-13 janv.-15 janv.-95 janv.-97 janv.-99 janv.-1 janv.-3 janv.-5 janv.-7 janv.-9 janv.-11 janv.-13 janv.-15 Tactical allocation considerations In making tactical allocations to emerging market equities, investors have traditionally considered the direction of oil prices, the strength of the US Dollar, and the direction of interest rates when aiming to understand the potential direction of emerging market equities. Oil price sensitivity There appears to be an historic positive relationship between the level of emerging market equities and the level of oil prices (Figure 28). Oil prices could be an indication of economic growth, with marginal demand largely arising from emerging markets. Certainly, a rise in oil and commodity prices could have a beneficial impact on overall profitability and index return, though the impact could be more muted than expected, as energy and materials names now comprise only a 13.6% weighting within the MSCI Emerging Markets index. US Dollar sensitivity There appears to be an historic inverse relationship between the level of emerging markets and the level of the Dollar Index, possibly reflecting the historic sensitivity of external debt positions of emerging market countries to foreign exchange movements (Figure 29). As we have seen, external debt positions have fallen over time, and there has been a shift away from short-term debt towards medium to long-term debt. Foreign exchange reserves may offer a buffer for short-term external debt. A strong US dollar may also be beneficial to emerging market exports. Direction of interest rates There is a relatively low correlation between emerging market returns and changes in US 1- year Treasury yields (Figure 3), averaging.2 over the past twenty years. The communications of the US Federal Reserve may contribute to this, as policy moves are wellsignalled. Rising interest rates may also signal confidence in economic growth, which could be supportive of emerging market profits, though it may raise the discount rate for long duration assets. Figure 28 Oil prices (Brent Crude $/bbl) Figure 29 Dollar Index (DXY) MSCI Emerging Markets Brent Crude ($/bbl, RHS) Source: HSBC Global Asset Management, Bloomberg as at 3 September 216. For illustrative purposes. MSCI Emerging Markets Dollar Index (DXY inverted, RHS) Source: HSBC Global Asset Management, Bloomberg as at 3 September 216. For illustrative purposes. Figure 3 Correlation with interest rate changes (MSCI Daily TR Emerging Markets Net vs US 1-Year Treasury yield),8,6,4,2, -,2 -,4 -,6 Correlation US 1-Year Treasury yield (%, RHS) Source: HSBC Global Asset Management, Bloomberg as at 3 September 216. For illustrative purposes The performance figures displayed in the document relate to the past and past performance should not be seen as an indication of future returns. 13 Non contractual document
14 Conclusion The secular economic development theme in emerging markets remains robust, and we see profit growth as key in supporting further emerging market equity appreciation. We believe there are several potential catalysts for profit growth: Improvements in global growth Stabilisation in commodity sector profits Accelerating growth of local economies Valuation multiple expansion on rising expectations for profit growth Company (and investor) attention to Environment, Social and Governance considerations We believe emerging market equities can be a core building block of an asset allocation, as correlations between emerging market and developed market equity returns has remained relatively low. Apparent headwinds, such as oil prices, US Dollar strength, and interest rate hikes, appear to reflect an historic perspective rather than current reality. While the US Presidential election may create headwinds and uncertainty leading to market volatility, we believe asset allocators and active managers can be proactive in looking for attractive entry points and take advantage of perceived mispricing. Capturing this investment potential of emerging markets requires robust investment solutions. HSBC Global Asset Management offers a breadth of equity investment capabilities that are differentiated by design and tailored to deliver clients investment objectives. Contacts Client Management Tel: +33 () client.services-am@hsbc.fr 14 Non contractual document
15 Important information This document is distributed by HSBC Global Asset Management (France) and is only intended for professional investors as defined by MiFID. The information contained herein is subject to change without notice. All non-authorised reproduction or use of this commentary and analysis will be the responsibility of the user and will be likely to lead to legal proceedings. 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 commentary and analysis presented in this document reflect the opinion of HSBC Global Asset Management on the markets, according to the information available to date. They do not constitute any kind of commitment from HSBC Global Asset Management (France). Consequently, HSBC 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. It is important to remember that the value of investments and any income from them can go down as well as up and is not guaranteed. Investments in emerging markets are by their nature higher risk and potentially more volatile than those inherent in established markets. Fluctuations in the rate of exchange of currencies may have a significant impact on performance. The value of the underlying assets are strongly affected by interest rate fluctuations and by changes in the credit ratings of the underlying issuer of the assets. All data from HSBC Global Asset Management unless otherwise specified. Any third party information has been obtained from sources we believe to be reliable, but which we have not independently verified. Past performance is not a guide to future performance. The MSCI information may only be used for your internal use, may not be reproduced or redisseminated in any form and may not be used as a basis for or a component of any financial instruments or products or indices. None of the MSCI information is intended to constitute investment advice or a recommendation to make (or refrain from making) any kind of investment decision and may not be relied on as such. Historical data and analysis should not be taken as an indication or guarantee of any future performance analysis, forecast or prediction. The MSCI information is provided on an as is basis and the user of this information assumes the entire risk of any use made of this information. MSCI, each of its affiliates and each other person involved in or related to compiling, computing or creating any MSCI information (collectively, the MSCI Parties ) expressly disclaims all warranties (including, without limitation, any warranties of originality, accuracy, completeness, timeliness, non-infringement, merchantability and fitness for a particular purpose) with respect to this information. Without limiting any of the foregoing, in no event shall any MSCI Party have any liability for any direct, indirect, special, incidental, punitive, consequential (including, without limitation, lost profits) or any other damages. ( Important information for Luxembourg investors: HSBC entities in Luxembourg are regulated and authorised by the Commission de Surveillance du Secteur Financier (CSSF). Important information for Swiss investors: This document is intended exclusively towards qualified investors in the meaning of Art. 1 para 3, 3bis and 3ter of the Federal Collective Investment Schemes Act (CISA). HSBC Global Asset Management is the brand name for the asset management business of HSBC Group. The above document has been produced by HSBC Global Asset Management (France) and has been approved for distribution/issue by the following entity: HSBC Global Asset Management (France) RCS Nanterre. Portfolio management company authorised by the French regulatory authority AMF (no. GP9926) with capital of euros. Postal address: Paris cedex 8, France. Offices: Immeuble Coeur Défense Tour A - Etage 21, 11, esplanade du Général de Gaulle Courbevoie - La Défense 4 (Website: HSBC Global Asset Management (Switzerland) Limited Bederstrasse 49, P.O. Box, CH-827 Zurich, Switzerland (Website: Copyright 216. HSBC Global Asset Management (France). All rights reserved. Updated in December 216. AMFR_EXT_629_ Non contractual document
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