Investing in Asian equity September 2018 The information contained in this publication is not intended as investment advice or recommendation. Non contractual document. This commentary provides a high level overview of the recent economic environment, and is for information purposes only. It is a marketing communication and does not constitute investment advice or a recommendation to any reader of this content to buy or sell investments nor should it be regarded as investment research. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of its dissemination. 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 accepts no liability for any failure to meet such forecast, projection or target.
Contents P.3 Asian equity market structure P.4 Breakdown of the Asian equity market P.5 Long-term themes for Asian equity P.6 Focusing on fundamentals P.7 Assessing returns and volatility P.8 Benefits of adding Asian equity P.9 Benchmark selection and active management P.10 Why does active management work? P.11 HSBC Global Asset Management Asian equity capabilities P.12 Appendix I: Markets in focus India P.13 Appendix II: Markets in focus China 2
Asian equity market structure The underrepresentation of a US$20 trillion market While Asia is made up of a mixture of developed and developing markets, the largest chunks of the region are still developing. But even at this stage of its economic development, Asia Pacific ex Japan already makes up over 38% of the world s GDP, which is more than the US and Western Europe combined. Meanwhile, the financial markets of the region are also sizable with a market capitalisation of US$20 trillion, Asia Pacific ex Japan equities represent 26% of the world s equity market but has only a 12% representation in a major world index that is widely tracked by global portfolios. Developments in Asia s capital markets, including the gradual liberalisation of onshore Chinese equities, point to potential for a significant increase in the index weighting in the coming years. Index weighting of Asia Pacific ex Japan is set to increase from a low level GDP as % of world Index weight Others Japan Western Europe 38.6% 12.7% United States Asia Pacific ex Japan Index weight refers to the market s weight within MSCI All-Country World Index, which includes MSCI s June 2018 inclusion of Chinese onshore A-shares. GDP data is based on purchasing power parity (PPP) share of world total. Source: IMF, Bloomberg, MSCI, HSBC Global Asset Management as of 31 July 2018. Asia Pacific ex Japan equity market Market capitalization US$20.6 trillion Number of markets 15 Number of listed companies ~22,000 P/B 1 1.6x P/E 1 13.3x ROE 1 12.1% 2018 EPS growth 1 13.4% Dividend yield 1 2.9% Note 1: Refers to characteristics of MSCI AC Asia Pacific ex Japan Index and includes MSCI s June 2018 inclusion of Chinese onshore A-shares. 2018 EPS growth is based on consensus data. Source: Bloomberg, IBES, World Federation of Exchanges, HSBC Global Asset Management, data as of July 2018. Any forecast, projection or target where provided is indicative only and is not guaranteed in any way. HSBC accepts no liability for any failure to meet such forecasts, projections or targets. For illustrative purposes only. 3
Breakdown of the Asian equity market Diversified composition in Asian equity Asia is made up of different individual economies, each with their own macro framework, structural reforms, and growth characteristics. Similarly, Asian equities are made up of markets with diverse profiles, exhibiting a varying range of corporate earnings growth, valuations and income yields. The Asian market s inherent features provides an important diversification benefit to a global portfolio. China GDP growth: +6.6% GDP per capita: US$8,643 Market cap: US$7.4 trillion No. of stocks: ~3,500 MSCI Apac ex Jp 1 : 25.3% 2018 EPS growth: 16.9% Thailand GDP growth: +4.2% GDP per capita: US$6,590 Market cap: US$525 billion No. of stocks: ~700 MSCI Apac ex Jp 1 : 2.2% 2018 EPS growth: 6.2% Taiwan GDP growth: +2.7% GDP per capita: US$24,577 Market cap: US$ 1.2 trillion No. of stocks: ~1,700 MSCI Apac ex Jp 1 : 11.1% 2018 EPS growth: 6.1% Korea GDP growth: +2.9% GDP per capita: US$29,891 Market cap: US$1.6 trillion No. of stocks: ~2,100 MSCI Apac ex Jp 1 : 13.2% 2018 EPS growth: 15.8% India GDP growth: +7.4% GDP per capita: US$1,983 Market cap: US$2.2 trillion No. of stocks: ~5,000 MSCI Apac ex Jp 1 : 8.4% 2018 EPS growth: 19.9% Hong Kong GDP growth: +3.6% GDP per capita: US$46,109 Market cap: US$4.2 trillion No. of stocks: ~2,200 MSCI Apac ex Jp 1 : 12.7% 2018 EPS growth: 10.6% Malaysia GDP growth: +5.2% GDP per capita: US$9,813 Market cap: US$446 billion No. of stocks: ~900 MSCI Apac ex Jp 1 : 2.3% 2018 EPS growth: 5.8% Philippines GDP growth: +6.6% GDP per capita: US$2,976 Market cap: US$261 billion No. of stocks: ~250 MSCI Apac ex Jp 1 : 0.9% 2018 EPS growth: 7.2% Singapore GDP growth: +3.0% GDP per capita: US$57,713 Market cap: US$733 billion No. of stocks: ~750 MSCI Apac ex Jp 1 : 3.2% 2018 EPS growth: 14.3% Australia GDP growth: +2.9% GDP per capita: US$55,707 Market cap: US$1.5 trillion No. of stocks: ~2,100 MSCI Apac ex Jp 1 : 17.3% 2018 EPS growth: 6.4% Indonesia GDP growth: +5.2% GDP per capita: US$3,876 Market cap: US$464 billion No. of stocks: ~600 MSCI Apac ex Jp 1 : 1.8% 2018 EPS growth: 13.3% New Zealand GDP growth: +2.8% GDP per capita: US$41,593 Market cap: US$92 billion No. of stocks: ~200 MSCI Apac ex Jp 1 : 0.5% 2018 EPS growth: 7.9% Note 1: Refers to market s weight within the MSCI AC Asia Pacific ex Japan Index of as 31 July 2018. GDP growth is based on 2018 consensus forecast. GDP per capita based on current prices as of 31 December 2017. 2018 EPS growth is based on consensus estimates of the respective MSCI indices. Source: IMF, World Federation of Exchanges, Bloomberg, MSCI, IBES, Credit Suisse, HSBC Global Asset Management, as of July 2018. Any forecast, projection or target where provided is indicative only and is not guaranteed in any way. HSBC accepts no liability for any failure to meet such forecasts, projections or targets. For illustrative purposes only. 4
Long term themes for Asian equity Consumption powers on Asia s consumption is undergoing rapid growth, with household consumption expenditures of China, India and Indonesia growing at year-on-year rates of 5.9% to 9.5% Rising incomes, an increasing middle class and rapid urbanisation in Asia are three important long-term drivers that will continue to power consumption Consumers in Asia are increasingly willing to pay higher prices for premium products and are seeking more lifestyle experiences; this trend, otherwise termed consumption upgrade, is a catalyst to Asian consumption and is impacting the region s investment landscape The force of Asia s middle class Breakdown of the world s next billion middle class entrants Rest of the world 13.3% Source: Brookings as of July 2017. 86.7% of new middle class entrants will be from Asia Pacific Rising income is empowering consumers Growth in gross national income per capita since 2009 (developing Asia) China India Philippines Indonesia Malaysia Thailand OECD 24% 51% 50% 42% 37% 67% Source: World Bank data as of December 2016 (latest available), based on international dollars using PPP. 85% Innovation is driving development Innovation across industries in Asia, including in manufacturing, services and finance, will be a key driver of growth In China, sectors such as new energy vehicles and industrial robots have seen their production increase by over 50% annually in the last two years Healthcare is another important area for innovation, as Asian pharmaceutical companies move up the value chain through research and development Asia is leading industrial robot installation Top 7 markets (represents 77% of 2017 s worldwide purchases) Industrial robots purchased in 000 of units China Japan Korea USA Germany Taiwan 0 20 40 60 80 100 120 140 Asia s investment in industrial robots and the growth over the years point to Asia s serious investment in automation and innovation Vietnam 2017 2016 2015 2017 sales are based on estimated numbers. Source: World Robotics Report 2018 by International Federation of Robotics. Going digital Digitalisation is giving rise to new ways of doing business and impacting trade and productivity trends. China, India and Indonesia are driving digitalisation in Asia While digitalisation is surging in Asia, the overall levels of digital use are still low, indicating the potential for sizable future growth. The US, for instance, is seeing smartphone penetration rate of 70%, while in Asia that figure is only 34% Room for growth: Smartphone penetration grew by 4x in the last 7 years but is still low Smartphone penetration rate as share of population (Asia Pacific) 34% 29% 24% 19% 14% 9% 4% 2011 2012 2013 2014 2015 2016 2017 2018 Source: Statista as of July 2018. Any forecast, projection or target where provided is indicative only and is not guaranteed in any way. HSBC accepts no liability for any failure to meet such forecasts, projections or targets. For illustrative purposes only. 5
01/13 07/13 01/14 07/14 01/15 07/15 01/16 07/16 01/17 07/17 01/18 07/18 12/16 02/17 04/17 06/17 08/17 10/17 12/17 02/18 04/18 06/18 12/10 06/11 12/11 06/12 12/12 06/13 12/13 06/14 12/14 06/15 12/15 06/16 12/16 06/17 12/17 06/18 07/07 07/08 07/09 07/10 07/11 07/12 07/13 07/14 07/15 07/16 07/17 07/18 Focusing on fundamentals The rise of ROEs and profitability 16 14 12 10 8 Asian equities are seeing a recovery in return-onequity (ROE), after having hit a low in 2016. Declining profit margins contributed to the downward path of ROE between 2013 and 2016 A number of important factors are driving the current recovery in ROE, including higher profit margins and industry consolidation ROE of Asia Pacific ex Japan is currently at 12.1%. The improvement in ROE is broad-based, with China, Australia, India, Korea, Malaysia and other markets experiencing an increase in ROE An ongoing improvement in ROE points to higher valuations in the years ahead Ongoing improvement in ROE ROE (%) of Asia Pacific ex Japan Healthy balance sheets Balance sheets amongst corporates in Asia have been improving on the back of rising margins and better cash flows Net debt to equity has fallen in markets across the region, helped by more disciplined capex spending and improved balance sheet management Improving balance sheet management Asia Pacific ex Japan Free cash flow per share 40 35 30 25 20 15 10 5 Net debt to equity 80% 70% 60% 50% 40% 30% free cash flow per share net debt to equity Source: MSCI, Bloomberg as of July 2018. Attractive valuations 2.6 2.2 1.8 1.4 1.0 The Asia Pacific ex Japan equity market trades at a significant discount to other global markets. On price-to-book terms, the discount is currently 34% versus developed markets; this current discount is larger than the long-term average discount (since 1996) of 23% Asia Pacific ex Japan trades at attractive valuations and at discount to developed markets Price-to-book 2.4 1.6 Current discount = 34% Average discount = 23% Free cash flow and dividends Source: MSCI, Bloomberg as of July 2018. 16 15 14 13 12 Healthier balance sheets amongst Asian companies has improved the potential for higher dividend payments and share buybacks, a positive trend over the past few years Increasing dividends over the years Dividend per share of Asia Pacific ex Japan Asia Pacific ex Japan Source: MSCI, Bloomberg as of July 2018. Developed markets Source: MSCI, Bloomberg as of July 2018. Any forecast, projection or target where provided is indicative only and is not guaranteed in any way. HSBC accepts no liability for any failure to meet such forecasts, projections or targets. For illustrative purposes only. 6
12/02 12/03 12/04 12/05 12/06 12/07 12/08 12/09 12/10 12/11 12/12 12/13 12/14 12/15 12/16 12/17 12/02 12/03 12/04 12/05 12/06 12/07 12/08 12/09 12/10 12/11 12/12 12/13 12/14 12/15 12/16 12/17 Assessing returns and volatility Comparing equities in Asia vs. US vs. Europe Since 2002, cumulative net returns of Asia Pacific ex Japan was 382% versus 306% for USA and 208% for Europe The higher returns of Asia Pacific ex Japan were achieved with only slightly higher volatility than the US and Europe Asia Pacific ex Japan outperforms over the long-term MSCI indices net return local currency cumulative performance 31/12/2002=100 560 500 440 380 320 260 200 140 80 Asia Pacific ex Japan s volatility is in line with the US and Europe particularly after 2010 Standard deviation (12-month rolling) annualized, local currency 50% 45% 40% 35% 30% 25% 20% 15% 10% 5% 0% Volatility in the three markets is in the same range Asia Pacific ex Japan USA Europe Asia Pacific ex Japan USA Europe Standard deviation was calculated based on monthly returns over a 12-month rolling basis. Net return local currency indices of the respective MSCI indices were used. Source: MSCI, Bloomberg as of July 2018. Performance during market events Comparison of performance during different market conditions Market performance 60% 35% 10% -15% -40% -65% Global financial crisis (Oct 2007 - Feb 2009) Europe sovereign debt crisis (Apr 2011 to Oct 2011) US Fed tightening (June 2004- June 2006) US Fed tightening (Dec 2015- Current) Asia Pacific ex Japan USA Europe During the global financial crisis, all equity markets of Asia, US and Europe fell in tandem. Not one market was left unscathed, although it is important to note that Asia Pacific ex Japan did not experience any more downside than the US and Europe Asia Pacific ex Japan equities rallied during the US Fed tightening cycle of 2004-2006 and also in the current cycle. In 2004-2006, Asia Pacific ex Japan experienced a period of strong growth not captured in US equities Net return local currency indices of respective MSCI indices were used. Global financial crisis peak was 31 Oct 2007, trough was 9 March 2009; European sovereign debt crisis peak was 29 Apr 2011, trough was 3 Oct 2011; US Fed tightening cycle of 2004-2006 began on 30 June 2004; US Fed tightening cycle of 2015 to current began on 16 Dec 2015. These dates were used in the above calculations. Source: MSCI, Bloomberg as of July 2018. Investment involves risks. Past performance is not indicative of future performance. Any forecast, projection or target where provided is indicative only and is not guaranteed in any way. HSBC accepts no liability for any failure to meet such forecasts, projections or targets. For illustrative purposes only. 7
Benefits of adding Asian equity Comparing Asian equity with other asset classes Annualized return vs volatility Annualized return 18% 16% 14% Indian equity China equity Single country investments (India and China) display the benefits of much higher returns versus developed markets but at higher risk. 12% 10% 8% 6% 4% 2% Euro bonds Global bonds US bonds Asia Pac ex Japan equity US equity DM equity Europe equity EM Asia equity 0% 0% 5% 10% 15% 20% 25% 30% Annualized volatility Asia Pacific ex Japan equity has the benefit of adding additional return (annualized overperformance of +1.2% over the US and +3.1% over Europe), with marginal additional risk. Asia Pacific ex Japan equity has the benefit of diversification as the asset class has a low monthly correlation of 0.29 to global bonds, 0.08 to US bonds and 0.01 to Euro bonds Net return local currency MSCI indices of respective markets were used. Annualized return and annualized volatility were calculated between 31 December 2002 to July 2018. Volatility was calculated based on monthly returns. Source: Bloomberg as of July 2018. Adding Asian equity to investment portfolios Diversification of regional exposure A decision to add Asian equity to portfolios involves choosing between Asia Pacific equity, Asia Pacific ex Japan equity, Asia ex Japan equity (which excludes Australasia), or Emerging Market Asia equity (which excludes Australasia, Hong Kong and Singapore) Investing in single country funds, such as Chinese equity or Indian equity, can potentially capture more specific opportunities. Historical data since 2002 shows that investment in Chinese equity or Indian equity has generated significantly higher returns than the region. Investors are able to combat the problem of underrepresentation of the China and India markets in MSCI indices by directly investing in single country funds. However there is a relatively higher risk involved Using Asian equity to enhance strategies High dividend Asian equity Investors looking for regular income can enhance their income strategy by adding high dividend Asian equity. Dividend focused strategies tend to be less volatile compared to traditional strategies. Importantly, dividends contribute significantly to returns, accounting for 65% of total returns for Asia Pacific ex Japan equity (looking at the period between 2000-2018) Small cap Asian equity Investors looking for more niche opportunities can broaden their exposure by considering small cap Asian equity, which has the potential of providing investors access to emerging opportunities and ones that are less covered by sell side research Investment involves risks. Past performance is not indicative of future performance. Any forecast, projection or target where provided is indicative only and is not guaranteed in any way. HSBC accepts no liability for any failure to meet such forecasts, projections or targets. For illustrative purposes only. 8
12/13 02/14 04/14 06/14 08/14 10/14 12/14 02/15 04/15 06/15 08/15 10/15 12/15 02/16 04/16 06/16 08/16 10/16 12/16 02/17 04/17 06/17 08/17 10/17 12/17 02/18 04/18 06/18 Benchmark selection and active management Benchmark selection and active management MSCI indices are widely tracked by portfolios globally, and while we have likewise used MSCI indices in this document, these indices may not be a broad representation of the opportunities in the respective markets. MSCI s standard indices (large and mid cap) have the intention of reflecting the investable opportunity sets, but the index methodology is reliant on market capitalization in its construction, which leaves out companies not passing the minimum size requirement In the Indian stock market, there are about 5,000 stocks available the MSCI India Index has only 79 constituents and tends to capture large cap stocks. It can be argued that a better representation of the Indian market is available in other Indian equity indices, such as the S&P IFCI India Index, which has 358 constituents. Aside from different characteristics, the performance of these two indices has also differed Comparison of Indian equity indices Cumulative performance 31/12/2013=100 190 170 150 130 110 90 MSCI India S&P IFCI India Source: Bloomberg as of July 2018 The role of active management to underweight, overweight, or exclude stocks, and the further ability to add offbenchmark stocks to a portfolio can potentially enhance total risk-adjusted returns; there is a limitation in the ability of indices to include stocks that can add risk-adjusted returns to a portfolio after all, enhancing index returns is not the ultimate goal of the index provider Further, the eligibility of stocks in indices heavily involves factors such as free float and market capitalization size, which sometimes does not speak to the potential success of the individual company and the returns it can deliver Any forecast, projection or target where provided is indicative only and is not guaranteed in any way. HSBC accepts no liability for any failure to meet such forecasts, projections or targets. For illustrative purposes only. 9
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Why does active management work in Asia? Cashing in on market inefficiencies and mispricing Asia s capital markets have undergone big changes in the last few decades but many of them are still evolving and some markets are still not transparent. There are mispricing opportunities available in Asian local markets due to the inefficiencies. This is where a value investment approach comes in handy as it focuses on the long term prospects and profitability of companies, and views short-term volatility as an opportunity to buy stocks inexpensively Median manager excess performance (gross of fees) 7% 5% 3% 1% -1% -3% -5% The active median manager in the Mercer Asia ex Japan universe has outperformed the index in 9 out of 12 calendar years Source: Mercer, as of December 2017 Taking stock of multiple market drivers Economies in Asia are still undergoing major transitions and some of the large markets are rapidly evolving and opening up. Against this backdrop, factors such as government policy, regulatory changes, consumption patterns and investment trends play an important role in determining growth prospects for the Asian economy and companies. Local expertise, in the form of experienced investment professionals, is paramount in understanding these changing dynamics, interpreting their implications correctly and taking the right action Implementing a disciplined investment process While performance of an investment is ultimately governed by a host of factors, an active asset manager can maximise outperformance through a clear, disciplined and repeatable process. A well-considered investment philosophy and process can help investors identify interesting opportunities amongst 24,000+ stocks in the Asia Pacific ex Japan equity universe based on the valuations and profitability of these companies Managing and limiting risk Source: HSBC Global Asset Management, data as of July 2018. Understanding inherent risks at various levels market, liquidity, counterparty and portfolio are key to achieving investment objectives in a consistent manner. Professional asset managers have the resources to set up risk management frameworks that can help control exposure to financial losses through continuous risk assessment, rigorous testing of control processes and regular oversight Any forecast, projection or target where provided is indicative only and is not guaranteed in any way. HSBC accepts no liability for any failure to meet such forecasts, projections or targets. For illustrative purposes only. 10
HSBC Global Asset Management Asian equity capabilities We offer clients fulfillment options via our fund range or, if preferred, a segregated mandate, encompassing Asian equity large cap, high dividend, small cap, low volatility and single country investments Key strategies Asian large cap equity Asian high dividend equity Asian small cap equity Asian equity volatility focused Chinese equity Indian equity Key proposition Style-blended (growth and value) and diversified approach to capture growth opportunities Aims to provide dividend yield whilst also maximising total return Invests in smaller, lessestablished companies to seek structural and economic growth of the region Aims to deliver lower portfolio volatility relative to that of the benchmark High conviction portfolio seeking access to the structural and economic growth of China High conviction and diversified Indian equity portfolio with differentiated strategy Benchmark MSCI AC Asia ex Japan MSCI AC Asia Pacific ex Japan MSCI AC Asia ex Japan Small Cap MSCI AC Asia Pacific ex Japan MSCI China 10/40 S&P / IFCI India Investment universe Asia Pacific ex Japan / Asia ex Japan equity Asia Pacific ex Japan equity Asia ex Japan small cap equity Asia Pacific ex Japan equity Chinese equity, including offshore and onshore Indian equity Why Asian equity with HSBC Global Asset Management? Over 30 years of investing in Asian equity: HSBC Global Asset Management manages some of the longest established Asian equity products in the market Accumulation of experience through various market cycles, with a deep understanding of local markets Award winning Asian equity team Investment teams are stationed across four locations in Asia with over 60 portfolio managers and analysts, with support from a research support team, dedicated macro/strategy team, and a BRIC/GEM team HSBC Global Asset Management has proven local market expertise Active investing in inefficient markets: Asian portfolios benefit from HSBC Global Asset Management s robust investment process built on solid proprietary research, particularly due to the inefficiencies in the local Asian markets Reputation and brand equity open doors: The actively managed portfolios benefit from goodwill and strong relationships that come with being a part of the HSBC Group Source: HSBC Global Asset Management, data as of July 2018. Any forecast, projection or target where provided is indicative only and is not guaranteed in any way. HSBC accepts no liability for any failure to meet such forecasts, projections or targets. For illustrative purposes only. 11
FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18E FY19E 03/14 07/14 11/14 03/15 07/15 11/15 03/16 07/16 11/16 03/17 07/17 11/17 03/18 Appendix I: Markets in focus India The pace of India s economic growth is amongst the highest in the world, and now India is the sixth largest economy, having recently surpassed France. India s structural reforms have also led to substantial progress in formalising the economy, enhancing transparency in governance, and improving ease of doing business. All this is contributing to the compelling environment for opportunities in India s large and diversified equity market. India GDP growth: +7.4% Market cap: US$2.2 trillion P/E: 19.3x ROE: 14.6% 2018 EPS growth: +19.9% Div yld: 1.4% Earnings recovery 8 7 6 5 4 3 2 1 0 Between FY2001 and FY2008, corporate profits jumped 10 times, bringing corporate profits to 7.1% of GDP. Today corporate profits are only 2.9% of GDP, suggesting that earnings are at a cyclical low Corporate earnings in India had been on a downtrend, but there are signs pointing to a recovery. CY2018 EPS growth is registering a 20% growth. Favourable factors include a low base and increase in domestic demand and consumption Corporate earnings are at cyclical low India corporate profit as % of GDP Championed by domestic investors Domestic investor flow into Indian equities are now a lot higher as compared to the past: average monthly flows since 2017 has been US$1.6 billion, whereas between 2012 to 2015, it was only US$0.2 billion This trend can be explained by the increasing financialisation of savings, as domestic households reduce their allocation to physical assets and instead shift them to financial products Domestic institutional investor flow Rolling 12-month net inflow in equity mutual funds (USD billion) 25 20 15 10 5 0-5 Source: CLSA, as of May 2018 Source: Motilal Oswal, SEBI, NSE as of June 2018 Investment opportunities: Well capitalised private sector lenders Acceleration of NPL resolution: Private banks have been focusing on cleaning up their balance sheets. Resolution of NPLs could prompt a re-rating of well capitalized corporate lenders Strong deposit franchises: A key strength of some of the large cap private lenders is their strong deposit franchises as they continually invest in branches, their brand and quality services Loan growth strength: The loan growth for some private banks continues to look healthy as they have been de-risking their corporate loan book and increasing their exposure to the retail segment Valuation: Private sector banks trade at a substantial discount, despite a bottoming out of their asset quality and an improving earnings outlook Growth for private sector banks FY2018 year-on-year growth Private banks Public sector banks (non-pca) Public sector banks (PCA) -6% 0% 6% 12% 18% 24% Deposit growth Gross loan growth Source: Credit Suisse as of June 2018. PCA refers to Reserve Bank of India s prompt corrective action Investment involves risks. Past performance is not indicative of future performance. Any forecast, projection or target where provided is indicative only and is not guaranteed in any way. HSBC accepts no liability for any failure to meet such forecasts, projections or targets. For illustrative purposes only. 12
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 12/06 09/07 06/08 03/09 12/09 09/10 06/11 03/12 12/12 09/13 06/14 03/15 12/15 09/16 06/17 03/18 Appendix II: Markets in focus China China is a key player of the global economy, yet one that is still developing and undergoing an important structural transition from an investment driven growth model to one led by consumption and value added manufacturing and services. Related to this transition is China s gradual liberalisation of its capital markets, which is giving new impetus to global investors to reassess the Chinese equity opportunity set. MSCI inclusion of onshore Chinese A-shares: see China Market Access Primer China GDP growth: +6.6% Market cap (onshore): US$7.4 trillion Offshore Onshore P/E: 12.4x 12.4x ROE: 14.0% 12.3% 18 EPS growth: 16.9% 15.2% Div yld: 2.1% 2.0% Industry consolidation Consolidation is occurring across industries in China and playing a part in improving operational efficiency, promoting elimination of excess production and strengthening market concentration of industry leaders Both private sector and state-owned companies are undergoing consolidation, with state-owned companies driven to cut overcapacity as a result of policies M&A deals for Chinese companies M&A deal count Volume (USD billion) 2013 1,676 170 2014 1,644 235 2015 1,812 408 2016 1,742 422 2017 2,080 280 2018-07 747 36 Total 9,701 1,551 Source: Bloomberg, as of July 2018 Margin improvement expected to continue Chinese equities has seen their margins stabilize and ROE improve since 2016. Aside from industry consolidation (see left hand side), other factors that will continue to support higher margins are premiumization and demographics ROE improving and margins stabilizing MSCI China EBITDA margin MSCI China ROE % 21 20 20 19 18 17 16 15 14 EBITDA margin (LHS) ROE (RHS) Source: Bloomberg, HSBC Global Asset Management as of July 2018 18 16 14 12 10 Investment opportunities: Healthcare companies China s healthcare is comparable to the US or Europe in 1970-80. In 1970, US healthcare expenditure as a percentage of GDP was 7.0%, as compared to 17.1% today. China, on the other hand, spends only 6.3% of GDP on healthcare. Healthcare expenditure of China also lags other Asian markets These low levels, in addition to the government s spending and support on the healthcare industry, an aging population, increasing chronic diseases, rising health awareness, and increasing incomes, point to huge growth potential for the industry as well as infinite room for demand growth China s healthcare industry, particularly the pharmaceutical market, remains fragmented. The top 10 pharmaceutical companies only account for 11.3% of China s drug market. Further consolidation is an important factor that will benefit the industry s leading companies Chinese healthcare expenditure has grown at an extraordinary rate but the rise is nowhere near done RMB billion 5,000 4,000 3,000 2,000 1,000 0 CAGR of 17% Out-of-pocket Health Expenditure Social Health Expenditure Government Health Expenditure Source: National Bureau of Statistics as of July 2018 Investment involves risks. Past performance is not indicative of future performance. Any forecast, projection or target where provided is indicative only and is not guaranteed in any way. HSBC accepts no liability for any failure to meet such forecasts, projections or targets. For illustrative purposes only. 13
Key risks The value of investments and any income from them can go down as well as up and investors may not get back the amount originally invested. Exchange rate risk: Investing in assets denominated in a currency other than that of the investor s own currency perspective exposes the value of the investment to exchange rate fluctuations Liquidity risk: Liquidity is a measure of how easily an investment can be converted to cash without a loss of capital and/or income in the process. The value of assets may be significantly impacted by liquidity risk during adverse market conditions Emerging market risk: Emerging economies typically exhibit higher levels of investment risk. Markets are not always well regulated or efficient and investments can be affected by reduced liquidity Derivative risk: The use of derivatives instruments can involve risks different from, and in certain cases greater than, the risks associated with more traditional assets. The value of derivative contracts is dependent upon the performance of underlying assets. A small movement in the value of the underlying assets can cause a large movement in the exposure and value of derivatives. Unlike exchange traded derivatives, over-the-counter (OTC) derivatives have credit and legal risk associated with the counterparty or the institution that facilitates the trade Operational risk: The main risks are related to systems and process failures. Investment processes are overseen by independent risk functions which are subject to independent audit and supervised by regulators Concentration risk: Funds with a narrow or concentrated investment strategy may experience higher risk and return fluctuations and lower liquidity than funds with a broader portfolio Interest rate risk: As interest rates rise debt securities will fall in value. The value of debt securities is inversely proportional to interest rate movements Derivative risk (leverage): The value of derivative contracts depends on the performance of an underlying asset. A small movement in the value of the underlying can cause a large movement in the value of the derivative. Over-the-counter (OTC) derivatives have credit risk associated with the counterparty or institution facilitating the trade. Investing in derivatives involves leverage (sometimes known as gearing). High degrees of leverage can present risks to sub-funds by magnifying the impact of asset price or rate movements Emerging market fixed income risk: Emerging economies typically exhibit higher levels of investment risk. Markets are not always well regulated or efficient and investments can be affected by reduced liquidity, a measure of how easily an investment can be converted to cash without a loss of capital, and a higher risk of debt securities failing to meet their repayment obligations, known as default 14
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We do not undertake any obligation to update the forward-looking statements contained herein, or to update the reasons why actual results could differ from those projected in the forward-looking statements. 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, and are subject to change at any time. These views may not necessarily indicate current portfolios' composition. Individual portfolios managed by HSBC Global Asset Management primarily reflect individual clients' objectives, risk preferences, time horizon, and market liquidity. 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. Past performance contained in this document is not a reliable indicator of future performance whilst any forecasts, projections and simulations contained herein should not be relied upon as an indication of future results. 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 some 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. Mutual fund investments are subject to market risks, read all scheme related documents carefully. We accept no responsibility for the accuracy and/or completeness of any third party information obtained from sources we believe to be reliable but which have not been independently verified. This document has not been reviewed by the Securities and Futures Commission. Copyright HSBC Global Asset Management (Hong Kong) Limited 2018. 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 Global Asset Management (Hong Kong) Limited. Issued by HSBC Global Asset Management (Hong Kong) Limited. Source: S&P IFCI India with official price levels calculated in local currency and USD. Source: MSCI. 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 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 as 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, all 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. (www.msci.com) 15