Global Emerging Markets Fixed Income

Transcription

1 Global Emerging Markets Fixed Income Does Volatility Justify Allocation? February 216 Presentation only intended for professional investors as defined by MIFID. Non contractual document.

2 215 in summary

3 Mixed returns for 215 the dispersion continues Emerging Markets Debt Benchmarks and Returns Asset Class Definition Benchmark 214 Return 215 Return Change Hard Currency USD Denominated Emerging Markets Bonds JPM EMBIG 5.5% 1.23% Hard Currency IG USD Denominated Investment Grade Emerging Markets Bonds JPM EMBIG IG 9.1% (1.8%) Hard Currency HY USD Denominated High Yield Emerging Markets Bonds JPM EMBIG HY (3.2%) 6.7% Local Debt Local Currency Denominated Emerging Markets Bonds JPM GBI-EM GD (5.7%) (14.9%) Local Currency Local Currency Market JPM ELMI+ (7.%) (7.6%) Corporate USD Denominated Emerging Markets Corporate Bonds JPM CEMBI 5.7% 1.1% Concerns regarding the slowdown in global growth, notably in China, volatile commodity prices, and the expected rise in U.S. interest rates marked emerging markets in 215, especially in the second half of the year In August, China devaluated the yuan Brazil was downgraded to high yield in September and December Hard currency assets benefited from strong technical factors while local debt reflected fundamentals Due to tight valuations, we generally remained cautious on hard currency debt, but built-up large positions in Brazil amidst the volatility surrounding the country Investments in select high beta and high carry currencies in August complemented these positions Source: JPMorgan, Bloomberg, Benchmark returns as of 31 December 215. 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

4 216: the big picture

5 Multiple headwinds, but opportunities exist The slowdown in China, the drop in commodity prices is putting pressure on emerging economies The rise in UST could negatively impact EMD spreads and currencies EM currencies have been volatile Market sentiment and technicals are weak Many EM countries are more robust today and can manage the transition However, the market is only pricing in 1 hike Currencies have acted as a shock absorber to stabilize their current account deficits select currencies now look attractive with implied yields ranging from 1%-15+% But not necessarily coherent with fundamentals Attractive yields of 6.4% for hard currency and 7.1% for local bonds, especially when compared to much of developed country fixed income Source: HSBC Global Asset Management. The views expressed in this material were held at the time of preparation and are subject to change without notice. 5 Non contractual document

6 déc.-2 juil.-3 févr.-4 sept.-4 avr.-5 nov.-5 juin-6 janv.-7 août-7 mars-8 oct.-8 mai-9 déc.-9 juil.-1 févr.-11 sept.-11 avr.-12 nov.-12 juin-13 janv.-14 août-14 mars-15 oct.-15 mars-4 sept.-4 mars-5 sept.-5 mars-6 sept.-6 mars-7 sept.-7 mars-8 sept.-8 mars-9 sept.-9 mars-1 sept.-1 mars-11 sept.-11 mars-12 sept.-12 mars-13 sept.-13 mars-14 sept.-14 mars-15 sept.-15 Terms of Trade Real Effective Exchange Rates (REER) Commodity exporters with flexible currencies have started to adjust The terms of trade for EM commodity exporters have fallen since 211 to current levels now comparable to early 2 s and real effective exchange rates have fallen even more Commodity exporters have started to show signs of adjustment in current account Current account surplus of EM countries has helped EM build countries a large buffer for rainy days Recent recover of current account surplus of EM countries have been caused by shrinking of imports instead of growing exports There are 3 solutions for EM to correct the situation: reduce investment, tighten fiscal policy, or allow the currency to depreciate Terms of Trade and Real Effective Exchange Rates 1 Current Account/GDP Terms of Trade REER (rhs) Source: Bloomberg, data as of 31 October 215. Source: Bloomberg, data as of 31 October Equally weighted across 8 commodity exporting countries (Brazil, Chile, Colombia, Peru, Russia, South Africa, Indonesia, and Mexico) For illustrative purposes only. Past performance is no guarantee of future results. The performance figures displayed in the document relate to the past and past performance should not be seen as an indication of future returns. 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. Consequently, HSBC Global Asset Management will not be held responsible for any investment or disinvestment decision taken on the basis of the commentary and/or analysis in this document. 6 Non contractual document

7 The Grand Normalization of the economy is underway LHS: Current Account in 1 USD LHS: Current Account in 1 USD US+Eurozone Baltic Dry Index (rhs) US+Eurozone Commodity Index (rhs) The Super Cycle inflated by US and Euro zone country running huge current account deficit is officially over Global trade and Commodity prices are back to normal After a decade of benefiting from external demand, EM countries will show divergence driven by the quality of governance Source: Bloomberg, HSBC Global Asset Management, January 216. 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. Consequently, HSBC Global Asset Management will not be held responsible for any investment or disinvestment decision taken on the basis of the commentary and/or analysis in this document. 7 Non contractual document

8 Reserves feeling the pressure of the unwinding of the Petro Dollars and the Saving s Glut International reserves are put into use now but only part of the reserves will be unwound because most of the EM countries now have flexible exchange rate policy. The reduction of the international reserves are impacting EM growth negatively as the high power money supply is shrinking. World s international reserves in 1mmUSD Source: EIU, Bloomberg. Data as of January 216. 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. Consequently, HSBC Global Asset Management will not be held responsible for any investment or disinvestment decision taken on the basis of the commentary and/or analysis in this document 8 Non contractual document

9 US Monetary Policy: how many hikes can the market digest? US past hiking cycles vs current expected cycle US HY 1y spreads and Fed fund rate Length of tightening cycle Market conditions at beginning of hiking cycle N: Nonfarm payrolls P: PCE Core* G: GDP Growth F: Fed funds rate US HY 1y spread Fed funds Healthy labor market number and rising wages are likely to keep the Fed motived to hike more than the market has priced in. US high yield market is under stress. Historically, we always enter a cutting cycle rather a hiking when spreads are as high or higher than today. Source: Bloomberg as 19 January 216. For illustrative purposes only. Past performance is no guarantee of future results. *PCE Core is the Personal Consumption Expenditures Price Index. 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. Consequently, HSBC Global Asset Management will not be held responsible for any investment or disinvestment decision taken on the basis of the commentary and/or analysis in this document 9 Non contractual document

10 China is going to have a year of great uncertainty yet we need to differentiate Sentimental events Stock Market not the main funding of corporate China limited wealth effect The RMB tightening the financial prudential rules gradualism is still in the bone of Chinese policy makers SOE bankrupts and large layoffs only small portion of labor force, have done so in the 9s with bigger scale when no private economy exited for laid-off works to find jobs immediately the inevitable cleansing of zombie corporations which have lived on subsidies Corporate/wealth management product defaults more social impact than economic impact process of building market mechanism with less moral hazard Fundamental events Re-balancing two speed economy with healthy growth in consumption and services but slow down in investment limited fiscal space for stimulus package bigger and more matured economy can growth with slower speed without causing huge disruptions Real Estate still under painful de-stocking in 3-4 tier cities harder push on urbanization from policy makers Supply Side reforms long waited cleansing in state owned companies serious cut in excess capacity Bank NPLs not transparent data likely to go up significantly but risk is contained Source: HSBC Global Asset Management, as of 18 January 216. 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. Consequently, HSBC Global Asset Management will not be held responsible for any investment or disinvestment decision taken on the basis of the commentary and/or analysis in this document. The views expressed in this material were held at the time of preparation and are subject to change without notice. 1 Non contractual document

11 % of GDP BRL, million The case for Brazil: Fiscal imbalance at the core of crisis, however liquidity buffers should help buy time for reform 5 Brazil primary fiscal balance breakdown Brazil Primary Public Budget balance (% GDP) (lhs) Expenditures 12m moving average Revenue 12m moving average Source: HSBC Global Asset Management, as of 18 January 216. The views expressed in this material were held at the time of preparation and are subject to change without notice. 11 Non contractual document

12 The case for Brazil: Can inflation subside? 2.% 15.% IPCA Adminstered Prices 1.% 5.%.% Jan-12 Jun-12 Nov-12 Apr-13 Sep-13 Feb-14 Jul-14 Dec-14 May-15 Oct-15 (%) Actual inflation 216 Expected inflation 217 Expected inflation 218 Expected inflation. Jan-14 Apr-14 Jul-14 Oct-14 Jan-15 Apr-15 Jul-15 Oct-15 Note: Inflation expectations of market participants, Central Bank focus survey (%) (% yoy) Real GDP expectations (% yoy) central bank forecast Actual GDP Expected GDP Expected GDP 218 Expected GDP -4. Feb-14 May-14 Aug-14 Nov-14 Feb-15 May-15 Aug-15 Nov M 6M 1Y 2Y 3Y 4Y 5Y 6Y 7Y 8Y 9Y 1Y 12Y 15Y 2Y Source: HSBC Global Asset Management, as of 18 January 216. Forecasts, projections or targets where provided are indicative only and are not guaranteed in any way. HSBC Global Asset Management accepts no liability for any failure to meet such forecasts, projections or targets. 12 Non contractual document

13 Where do we see opportunities?

14 Potential medium and long-term projections for the asset class remain attractive External Debt Return Expectations Current Level Over 3-yr Period Over 5-yr Period Change in yield of high quality component 1.6% 1.6% JPM EMBIG IG Spread 2.93% 3.2% 3.2% 1 YR Treasury Rate 2.21% 3.% 3.% Duration (yrs) Capital impact (3.78%) (2.24%) Default impact (5.88%) (5.88%) Annualized Expected Return 3.27% 4.97% Local Debt Return Expectations Current Level Over 3-yr Period Over 5-yr Period JPM GBI-EM GD Yield 7.6% 8.2% 8.2% Duration (yrs) Currency component.%.% Capital loss due to yield (2.3%).% Annualized Expected Return 6.24% 7.6% Source: HSBC Global Asset Management, Bloomberg, JP Morgan. As of 18 December 215. The expected returns shown herein are hypothetical and are based on the assumption above. The assumptions reflect our views of possible market changes and is for illustrative purposes only. The expected results are not representative of any actual investment results, should not be relied upon for predicting future performance, and are not a guarantee of future performance. Any changes to the assumptions herein could have a material impact on the results. Actual results could differ materially from those illustrated herein. HSBC accepts no liability for any failure to meet these estimates. All investments involve risks including the possible loss of principal. The information above is provided by and represents the opinions of HSBC Global Asset Management and is subject to change without notice. Any forecast, projection or target contained in this presentation is for information purposes only and is not guaranteed in any way. HSBC accepts no liability for any failure to meet such forecasts, projections or targets. 14 Non contractual document

15 Hard Currency: Spreads appear relatively attractive amongst commodity producers Investment grade rated commodity importers with floating currencies Countries with heavily managed currencies Poland Mexico Turkey Philippines Croatia Hungary Malaysia China Lebanon Kazakhstan Panama Commodity producers with floating currencies Venezuela Russia Brazil Indonesia Colombia South Africa Peru Chile Source: JP Morgan as of 22 December 215. For illustrative purposes only. Past performance is no guarantee of future results. 15 Non contractual document

16 EM local rates have further to adjust, even though currency valuations have improved GBI-EM Global Diversified Yield (%) EM local rates vs G3 EM local rates G3 Rates Emerging Market FX Valuation USD/ELMI historical USD/ELMI theoretical Currency valuations have improved somewhat, however deteriorating fundamentals and challenging external environment point to further weakness in currencies Source: Bloomberg, HSBC Global Asset Management. as of 19 Jan 216. Past performance is no guarantee of future results. USD/ELMI theoretical is composed of HSBC Global Asset Management calculations based on inflation-adjusted productivity differentials between EM and US productivity indices. 16 Non contractual document

17 # MXN Contracts Local Currency Level # USD Contracts While technical currency positioning seems clean, weaker fundamentals could continue to exert pressure Speculative Currency Positioning Dec-6 Dec-7 Dec-8 Dec-9 Dec-1 Dec-11 Dec-12 Dec-13 Dec-14 Dec-15 Mexican Peso Positioning Local currency index IMMUSD Index Dec-6 Dec-7 Dec-8 Dec-9 Dec-1 Dec-11 Dec-12 Dec-13 Dec-14 Dec-15 Source: HSBC Global Asset Management, Bloomberg. Data as of 15 December 215. The data presented is for informational purposes only and is not intended as an offer or solicitation for the purchase or sale of any financial instrument or investment strategy. Past performance is no guarantee of future results. USD positions expressed as the sum of the number of contracts of MXN, CAD, AUD, EUR, and GBP that speculative accounts were long/short vs USD at the Chicago Mercantile Exchange (CME). 17 Non contractual document

18 Implied Yield 6 months EM local currencies could be a profitable play in 216 as long as they are played correctly Currency spot returns since 211 versus implied yields Trade balance 3 months 6 months 14% 12% IDR TRY BRL RUB ZAR.8%.6% TRY.6%.9% BRL.2%.2% 1% 8% ZAR 6% INR PEN COP 4% 2% CNY PHP THB KRW TWD SGD HUF PLN CLP MXN MYR % ILS -2% -15% -1% -5% % 5% 1% 15% 2% 25% 3% 35% 4% Decline in REER over last 5 years EM high yield currencies offer value given attractive yields and valuations following the sell-off Asian currencies still have further room to adjust and offer low, or in some cases, negative yields Source: Bloomberg, HSBC Global Asset Management. as of 28 August 215. Past performance is no guarantee of future results. 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. Consequently, HSBC Global Asset Management will not be held responsible for any investment or disinvestment decision taken on the basis of the commentary and/or analysis in this document 18 Non contractual document

19 Positioning: Hard Currency strategy Generally cautious on the benchmark, but overweight commodity exporters with floating exchange regimes (Brazil, Columbia, Mexico, Indonesia, South Africa and Kazakhstan) Underweight many Asian and Eastern European countries (Philippines, Malaysia, Russia, Poland, Hungary) Almost very low exposure to frontier names (Lebanon, Egypt, Pakistan, Nambia) Very cautious on special situations No exposure to Argentina and Ukraine Slightly overweight Venezuela Underweight interest rate and spread duration Underweights compensated by off benchmark currency positions (MXN, IDR, TRY, RUB) Source: HSBC Global Asset Management as of 22 January 216. The benchmark is the JPM EMBI Global Index. Any portfolio characteristics shown herein, including average position sizes and sector allocations among others, are for illustrative purposes and reflects the representative account of the Emerging Markets Debt composite. The information should not be construed as a recommendation or solicitation to buy or sell securities within the sectors, regions or countries shown. 19 Non contractual document

20 Positioning: Local Debt strategy Underweight local rates by approx.4 years vs. benchmark Overweight Brazil Underweight Malaysia, Mexico, Hungary and Thailand Market weight most other names in the benchmark Underweights compensated by long and short currency positions Long BRL, MXN, IDR, TRY, RUB, ZAR) Short ILS, KRW, SGD Source: HSBC Global Asset Management as of 22 January 216. The benchmark is the JPM EMBI Global Index. Any portfolio characteristics shown herein, including average position sizes and sector allocations among others, are for illustrative purposes and reflects the representative account of the Emerging Markets Debt composite. The information should not be construed as a recommendation or solicitation to buy or sell securities within the sectors, regions or countries shown. 2 Non contractual document

21 22% 2% 23% 21% 2% 26% 26% 23% 23% 22% 24% 32% 3% 3% 31% 37% 35% 38% 37% 4% 43% 51% 48% 47% 52% 49% 54% 64% 63% 64% 67% 68% 75% 74% 75% 72% 8% 79% 84% 82% 8% 88% 93% 94% 91% 91% 99% 12% Positioning: Total Return strategy 12% 12. 1% 1. 8% 8. 6% 6. Duration (years) 4% 4. 2% 2. (%). (2%) (2.) janv.-12 avr.-12 juil.-12 oct.-12 janv.-13 avr.-13 juil.-13 oct.-13 janv.-14 avr.-14 juil.-14 oct.-14 janv.-15 avr.-15 juil.-15 oct.-15 Sovereign Quasi Corporate Local Rates Local Fx Equity Net Exposure Duration (rhs) Source: HSBC Global Asset Management. Data as of 31 December 215. Weightings and holdings are subject to change without notice. Please see important disclosure at the end of this presentation concerning calculation methodology for characteristics. Any portfolio characteristics shown herein, including average position sizes and sector allocations among others, are for illustrative purposes and reflects the representative account of the composite. Information should not be construed as a recommendation or solicitation to buy or sell any securities within the sectors shown. Each portfolio may differ due to individual client restrictions and guidelines. Accordingly individual results will vary. Past performance is no guarantee of future results. 21 Non contractual document

22 Outlook summary and strategy Dispersion in emerging markets will continue creating both reasons to be cautious, but opportunities do exist The medium and long term return projections for the asset class are decent, but should compensate short-term volatility along the way Factors such as China, commodities and the FED may have already been priced into some segments of the EM market Ensure liquidity premiums compensate for the risk to avoid chasing yield Keep a buffer of cash in the portfolios to manage flows and to allocate to new opportunities as they arise Source: HSBC Global Asset Management. as of 23 January 216. The information above is provided by and represents the opinions of HSBC Global Asset Management and is subject to change without notice. 22 Non contractual document

23 Important Information

24 Important information Risk Considerations. There is no assurance that a portfolio will achieve its investment objective. In addition, there is no guarantee that any investment strategy will work under all market conditions, and each investor should evaluate their ability to invest for the long-term, especially during periods of downturn in the market. Portfolios are subject to market risk, which is the possibility that the market values of securities owned by the portfolio will decline. Accordingly, you can lose money investing in any of these strategies. Please be aware that these strategies may be subject to certain additional risks, which should be considered carefully along with the strategy s investment objectives and fees before investing. Equity. In general equity securities values also fluctuate in response to activities specific to a company. Foreign and emerging markets. Investments in foreign markets entail special risks such as currency, political, economic, and market risks. The risks of investing in emerging-market countries are greater than the risks generally associated with foreign investments. Fixed income securities. Subject to credit and interest-rate risk. Credit risk refers to the ability of an issuer to make timely payments of interest and principal. Interest-rate risk refers to fluctuations in the value of a fixed-income security resulting from changes in the general level of interest rates. In a declining interest-rate environment, the portfolio may generate less income. In a rising interest-rate environment, bond prices fall. Credit Quality. Investments in high-yield securities (commonly referred to as junk bonds ) are often considered speculative investments and have significantly higher credit risk than investment-grade securities. The prices of high-yield securities, which may be less liquid than higher rated securities, may be more vulnerable to adverse market, economic or political conditions. Convertibles. Subject to the risks of equity securities when the underlying stock price is high relative to the conversion price (because more of the security s value resides in the conversion feature) and debt instruments when the underlying stock price is low relative to the conversion price (because the conversion feature is less valuable). A convertible bond is not as sensitive to interest rate changes as a similar non-convertible debt instrument, and generally has less potential for gain or loss than the underlying equity security. Exchange-Traded Fund Risk. Subject to the underlying securities the ETF is designed to track, although lack of liquidity in an ETF could result in it being more volatile than the underlying portfolio of securities. Disruptions in the markets for the securities underlying ETFs could result in losses on the Portfolio s investments. ETFs also have management fees that increase their costs versus owning the underlying securities directly. Derivative instruments. Derivatives can be illiquid, may disproportionately increase losses and may have a potentially large negative impact on performance. Non-diversification. Focusing investments in a small number of issuers, industries, foreign currencies or particular countries or regions increases the risks associated with a single economic, political or regulatory occurrence. Benchmark definitions. These indices are presented to provide you with an understanding of their historic long-term performance, and are not presented to illustrate the performance of any security or trading strategy. All indices are unmanaged. Index returns do not reflect any fees, expenses or sales charges associated with investing. Investors cannot invest directly in an index. The JP Morgan EMBI-Global (EMBIG) Index includes USD-denominated Brady bonds, Eurobonds, and traded loans issued by sovereign and quasi-sovereign entities, and is a traditional market-capitalization weighted index. The JP Morgan GBI-EM Diversified Index provides a measure of local currency denominated, fixed rate, government debt issued in emerging markets. Weightings among the countries are more evenly distributed within the diversified index compared to its three main composite indices consisting of the GBI-EM, GBI EM Global, and GBI EM Broad indices. The JP Morgan GBI-EM Global Diversified Index is a comprehensive global local emerging markets index, and consists of liquid, fixed rate, domestic currency government bonds. The JP Morgan ELMI+ Index is an emerging markets currency (FX) benchmark; the index contains more countries and also brings in the currency aspect of the market, which is an important component of our strategy. The JPM Corporate Emerging Markets Bond Index (JPM CEMBI) measures the performance of corporate bonds issued in emerging markets. The CEMBI Broad is a comprehensive version of the CEMBI, and is also available in a Diversified version, in which weightings are more evenly distributed. The S&P 5 Index is widely regarded as a gauge of the U.S. equities market. It includes 5 leading companies in leading industries of the U.S. economy. 24 Non contractual document

25 Important information This presentation is distributed by HSBC Global Asset Management (France) and is only intended for professional investors as defined by MiFID. It is incomplete without the oral briefing provided by the representatives of HSBC Global Asset Management (France). 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. 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. The performance figures displayed in the document relate to the past and past performance should not be seen as an indication of future returns. The value of investments and any income from them can go down as well as up. Capital is not guaranteed. Investments in emerging markets are by their nature higher risk and potentially more volatile than those inherent in established markets. Investors are reminded that investments in High Yield issues represent a higher risk of default compared to Investment Grade issues. Investments in Credit Default Swaps (CDS) are less liquid than standard bond issues. Fluctuations in the rate of exchange of currencies may have a significant impact on performance. Investment in Financial Derivative Instruments (FDI) may result in losses in excess of the amount invested. This is because a small movement in the price of the underlying financial instrument may result in a substantial movement in the price of the FDI. The strategies can invest in sub investment grade bonds, which may produce a higher level of income than investment grade bonds, but carry increased risk of default on repayment. 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. The Total Return strategy does not imply there is any protection of capital or guarantee of a positive return over time. The sub-fund is subject to market risks at any time. 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 Ile de France - 4 place de la Pyramide - La Défense Puteaux France. (Website: Copyright 216. HSBC Global Asset Management (France). All rights reserved. Non contractual document updated in February AMFR_Ext_69_ Non contractual document