HSBC Mid-month Equity Investment Strategy. Release Date: 20 May 2011 For distributor / broker use only

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Lee Carroll
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1 HSBC Mid-month Equity Investment Strategy Release Date: 20 May 2011 For distributor / broker use only

2 2 Index April 29,2011 May 13,2011 Returns (%) Sensex Nifty BSE BSE BSE MID-CAP Source: Bloomberg MSCI India ($ denominated) MSCI Emerging Market *Absolute returns during the period Markets slid downwards by about 3% in the first fortnight of May 2011, given the rate hikes announced by the Reserve Bank of India (RBI) in the Annual Monetary Policy. Among the key under-performing sectoral indices were BSE Metals and BSE Bankex, down 4.86% and 3.7% respectively. The only sectoral index to end positively in the above period was BSE FMCG, up 1.28%. The FIIs were net sellers to the tune of USD 1.5 bn during the fortnight (CYTD net sellers of USD 628 mn) while domestic Mutual Funds were net buyers to the tune of USD 100 mn during first fortnight of May 2011 (CYTD net buyers of USD 381mn). The Index of Industrial Production (IIP) for the month of March 2011 grew at 7.3% ahead of the 3.7% growth in February On a use-based classification, Capital Goods posted a strong growth of 12.9% YoY (as against a negative growth seen in the last few months). On a sectoral basis, Manufacturing and Electricity showed a growth of 7.9% and 7.2%, respectively. Growth for the full year (April-Mar FY11) was up 7.8% YoY as against 10.5% last year. With state elections over, the focus would shift back to the hike in regulated fuel prices and the consequent impact on inflation. Given that crude is at USD 110/bbl, the under-recoveries could be upwards of INR 170,000 crores. Lack of adequate support in the budgetary provisions to bear the same will lead to a gradual hike in prices of auto and cooking fuels, but the quantum remains to be seen. Thus, one could see the RBI maintaining its tightening stance with a clear intention, as highlighted in the Annual Monetary Policy of bringing down inflation even at the cost of some growth should take precedence. The market post 4QFY11 results will start focusing on the growth prospects and the extent of margin pressure for corporates, given the high inflation and interest rates in the system. Monsoon would be the other key factor which the market would keep a close watch on. Any uncertainty on the global front (escalation of Middle East crisis, resurfacing of European sovereign debt concerns etc.) would also weigh on the stock market performance. We maintain our long term positive view on the Indian equity markets and advice investors to remain invested for the longer term undeterred by short/near term volatility.

3 3 Strategy 1. Consumer discretionary: Neutral. The domestic Passenger Vehicles segment witnessed a deceleration in growth and was up 23% YoY during the month of April 2011 (vs. 29 % YoY growth in FY11). Meanwhile the 2- wheelers segment continued to grow robustly at 26% YoY (vs. 26% YoY growth in FY11). The Commercial Vehicles segment growth was weak at 8% (vs. 27 % YoY growth in FY11) on account of flat Medium & Heavy Commercial Vehicles volumes (vs. 32% YoY growth in FY11). Overall growth in FY12 is likely to remain lower than FY11 due to higher interest rates and high base effect. 2. Consumer staples: Neutral. We have trimmed exposure to the sector on account of high valuations. 3. Energy: Overweight. Rising crude oil prices has led to a cutback in exposure on Oil Marketing Companies (OMCs) amidst worries that a higher subsidy will de-rate the sector. However, we prefer to take exposure to the sector through upstream/e&p and refining companies. 4. Healthcare: Underweight. We have reduced our exposure due to rising valuations. 5. Financials: Underweight. We have maintained our underweight position expecting margin pressure in the future, given the sharp increase in deposit rates across the system recently. We maintain our preference for banks with a strong liability franchise as the margin impact would be much lower. 6. Industrials: Overweight. We maintain our positive stance on account of the continued focus of the Government for infrastructure spending. 7. Information Technology: Overweight. We maintain our exposure on back of positive commentary and guidance from the companies on the near term growth outlook. 8. Materials: Underweight. We maintain our underweight stance on this sector on the account of moderating economic growth in China post the recent tightening measures. We prefer to play the sector through companies having exposure to base/non-ferrous and precious metals. 9. Telecommunication: Overweight. We maintain our positive stance on this sector on account of its defensive nature. 10. Utilities: Underweight. We maintain an underweight position on the sector given rising interest rates and uncertainty on increase in gas transportation volumes in the country.

4 HSBC Mid-month Fixed Income Investment Strategy Release Date: 20 May 2011 For distributor / broker use only

5 5 Mid Month Review Market Assessment Domestic fixed income markets continued to remain under pressure on the back of rate increase prescribing RBI monetary policy and macro economic numbers, which continue to remain detrimental for bonds. Constant supply and higher than expected issuance of short term instruments by the Reserve Bank of India (RBI) in order to meet the government cash balances has fuelled further bearishness in the markets. Economic data The Index of Industrial Production (IIP) for the month of March 2011 recorded a growth of 7.3% as against market expectations of 3.8%, led by a significant jump in Capital Goods production. The growth in Capital Goods accelerated from -18.4% YoY in February 2011 to 12.9% YoY in March The Wholesale Price Index (WPI) for the month of April 2011 stood at 8.66%, marginally higher than market expectations of 8.50%. Non-food manufacturing and fuel group inflation contributed heavily to the current inflation although food inflation maintained its softening trend; albeit moderately. February inflation was revised sharply upwards to 9.54% from 8.31% reported earlier. This is the third consecutive month with a revision of more than 100bp. Recent hike in petrol prices and impending hike in diesel and LPG prices would ensure inflation prints remain stubborn in the coming months. Impact on the market The above data releases had its bearing on the bond yields as the same continued their hardening bias (leading to lower bond prices). Weekly supply of dated securities and emergence of Cash management bills over and above higher than expected supply of Treasury bills resulted in short end rates moving higher as compared to long tenor G-Secs. The difference between 1 yr T-bill and 10 year G-Secs became about 15 bps. Tight liquidity conditions ensured pressure on money market rates as the credit curve continued to remain inverted. One year CD rates hovered at % levels, while the 10 year corporate bonds traded in the range of % levels on the back of end investor demand. Global markets witnessed volatility on the account of weaker jobs data in US and the ECB President signaling unlikely a follow up rate hike in the month of June These signs of fragility on the growth front led to a sell off in USD denominated commodities and also weakened the Euro, as crude prices and other commodities witnessed a steep fall in recent time. The US treasury yields reduced by over 15 bps since the last fortnight, predominantly on the back of growth concerns. Going Forward We expect the domestic bond market yields to remain high and continue to remain under upward pressure (negative for bond prices) as macro economic numbers and expected continuity of supply of gilts across the tenor would quell appetite for duration assets. Bond funds and MIPs have been focusing on accrual and holding low duration, which to some extent protects from upward yield movement. Short-end funds should benefit due to higher short end yields.

6 Disclaimer 6 Market data sources: Reuters, Bloomberg, and Telerate Disclaimer This document has been prepared by HSBC Asset Management (India) Private Limited (HSBC) for information purposes only and should not be construed as an offer or solicitation of an offer for purchase of any of the funds of HSBC Mutual Fund. All information contained in this document (including that sourced from third parties), is obtained from sources HSBC, the third party believes to be reliable but which it has not independently verified and HSBC, the third party makes no guarantee, representation or warranty and accepts no responsibility or liability as to the accuracy or completeness of such information. The information and opinions contained within the document are based upon publicly available information and rates of taxation applicable at the time of publication, which are subject to change from time to time. Expressions of opinion are those of HSBC only and are subject to change without notice. It does not have regard to specific investment objectives, financial situation and the particular needs of any specific person who may receive this document. Investors should seek financial advice regarding the appropriateness of investing in any securities or investment strategies that may have been discussed or recommended in this report and should understand that the views regarding future prospects may or may not be realized. Neither this document nor the units of HSBC Mutual Fund have been registered in any jurisdiction. The distribution of this document in certain jurisdictions may be restricted or totally prohibited and accordingly, persons who come into possession of this document are required to inform themselves about, and to observe, any such restrictions. Mutual fund investments are subject to market risks. Please read the Scheme Information Document and Statement of Additional Information carefully before investing. Copyright HSBC Asset Management (India) Private Limited ALL RIGHTS RESERVED. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, on any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the prior written permission of HSBC Asset Management (India) Private Limited. HSBC Asset Management (India) Private Limited; 314, D. N. Road, Fort, Mumbai Tel: hsbcmf@hsbc.co.in. Investors may obtain Scheme Information Document, Statement of Additional Information and Key Information Memorandums along with application forms from the office of HSBC Mutual Fund, 314 D. N. Road, Fort, Mumbai Tel: Statutory Details: HSBC Mutual Fund has been set up as a trust by HSBC Securities and Capital Markets (India) Private Limited (liability restricted to the corpus of Rs 1 lakh). The Sponsor/associates of the Sponsor/Asset Management Company (AMC) are not responsible or liable for any loss or shortfall resulting from the operation of the Schemes. The Trustees of HSBC Mutual Fund have appointed HSBC Asset Management (India) Private Limited as the Investment Manager. Risk Factors: All investments in mutual funds and securities are subject to market risks and the Net Asset Value (NAV) of the Scheme(s) may go up or down depending on the factors and forces affecting the securities markets. There can be no assurance that the objectives of the Scheme(s) will be achieved. Past performance of the Sponsor, AMC, Mutual Fund or any associates of the Sponsor/AMC does not indicate the future performance of the Scheme(s) of the Mutual Fund. The names of the Schemes do not in any manner indicate the quality of the Schemes or their future prospects or returns. Read the Scheme Information Document and Statement of Additional Information carefully before investing.

HSBC Mid-month Equity Investment Strategy. Release Date: 21 September 2011 For distributor / broker use only

HSBC Mid-month Equity Investment Strategy Release Date: 21 September 2011 For distributor / broker use only 2 Market Performance Markets were relatively stable during the first fortnight of September 2011