HSBC Fund Update April 2016 HSBC GIF Global Emerging Markets Bond Market overview The rally in Emerging Market (EM) assets continued in March given the improvement in global risk sentiment on the back of European Central Bank (ECB) easing, dovish Fed messages and higher commodity prices. In the US, Fed Chairwoman Janet Yellen cited heighted downside risks to global growth, among other factors, which turned the Federal Open Market Committee (FOMC) more cautious in its outlook for policy rate hikes. The dovish FOMC statements and forecast revisions sparked a rally in risk assets given the reduced risk that Fed tightening will be more aggressive than what markets have priced in. This kept UST yields low, with the 10-year Treasury yield ending March at 1.77%. At its March meeting, the ECB announced the scope of additional policy accommodation, including the purchase of corporate bonds, and signaled that further rate cuts are less likely, which helped to compress credit spreads. The spread on the hard currency index (JPM EMBIG) compressed by 50 basis points over the month, ending March at 433 basis points. Oil prices rallied in March with Brent oil up +10% (C01 Commodity) contributed in part by the acceleration in the decline in the US supply data as well as the Organization of the Petroleum Exporting Countries (OPEC s) comments on potential production freezes. Positive performance in EM was supported by flows momentum, which has broadly turned positive over the past few weeks. According to JP Morgan, cumulative Year-To-Date (YTD) flows now stand at -US$1.6bn, with hard currency flows totaling +US$2.5bn and local currency flows totaling US$-4.1bn after having reached cumulative outflows of -US$4.7bn in hard currency and -US$3.5bn in local currency at the worst moment around mid-february. The more supportive central bank policy, along with diminished concern about a US recession, and supportive technical flows drove the positive returns on EM hard currency bonds. Meanwhile, the dovish FOMC statements led to broad USD weakness which contributed to the rally in EM currencies in the month of March: Hard currency sovereign bonds returned 3.34% (JP Morgan EMBI Global) Hard currency corporate bonds returned 3.56% (JP Morgan CEMBI Diversified) Local currencies returned 6.07% (JP Morgan ELMI+) Local currency bonds returned 9.06% (JP Morgan GBI-EM Global Diversified) Portfolio strategy The strategy underperformed the benchmark in March. The largest detractor to relative performance was the strategy s defensive positioning including the allocation to cash and the underweight to hard currency duration given the strong performance for the asset class with the JPM EMBIG index returning 3.3% in March. The overweight to shorter-dated bonds in Indonesia and Turkey detracted from relative performance as longer dated bonds outperformed in the month s risk-on environment. Security selection in Venezuela detracted from performance in the month. The strategy s overweight to Mexico boosted performance as the sovereign bonds had previously been trading at wider spread levels and tightened in March given the rally in EM assets. The underweight to Philippines and Poland contributed to relative performance as these countries lagged in March given tight valuation levels relative to other investment grade rated countries entering the month. The underweight to Russia helped relative returns as the country underperformed due to technical factors causing expensive valuations. The strategy s off-benchmark exposure to the Mexican peso contributed to performance as the currency was up over +5% in March given improved macro sentiment from the central banks surprise interest rate hike and new currency intervention policy. The strategy s underweight to spread duration increased slightly to -1.65 years versus the benchmark, while the underweight to hard currency duration remained unchanged at -1.7 years versus the benchmark. The strategy s exposure to currencies declined to 4.6%, including allocations to the Mexican peso and the Colombian peso.
Outlook The external backdrop for emerging market countries remains challenging given the decline in commodity prices in the past few years, the more recent fall in oil prices, as well as the end of highly accommodative monetary policy in the US. Given these factors combined with the deterioration in fundamentals in select EM countries, the pace of rating downgrades continues to surpass upgrades in EM. As a result, market volatility has spiked which has created opportunities in select sectors, countries and currencies. For example, emerging market currencies have experienced significant depreciation over the past three years in response to lower commodity prices and expectations of higher interest rates in the US. Select currencies now offer attractive investment opportunities given the improved valuations and high levels of carry. The depreciation of currencies is also translating into an improving external position as we observe strengthening trade balances and current accounts. In addition, the technical position for emerging market currencies is supportive as speculative investors maintain short currency positions, vulnerable to reversal. We remain cautious with respect corporate issuers given tight valuations relative to the additional liquidity and sovereign risk versus the sovereigns and prefer to focus on geographically diversified businesses, with strong balance sheets, and credible management teams. Finally, we maintain an underweight in local rate duration as we believe that local currency yields are likely to widen due to rising inflationary pressures resulting from significant currency depreciation as well as given the potential tighter trajectory of monetary policy in the US relative to the policy path implied by the markets. Source: HSBC Global Asset Management (Hong Kong) Limited as of 28 April 2016. Data shown is for illustrative purposes only and does not constitute investment recommendation to buy or sell in the above-mentioned indices, currencies, countries or asset classes. Past performance is not indicative of future returns. 2
Country allocation 1 Sector allocation 1 Cash 16.7% Mexico 12.2% Brazil 11.4% Corporate (Hard Ccy), 2.0% Local FX, 5.0% Others 26.5% Quasi (Hard Ccy), 17% 18% South Africa 4.1% Indonesia 10.1% Colombia 4.3% China 5.9% Turkey 8.9% Sovereign (Hard Ccy), 74.0% 74% Currency allocation 1,2 Credit rating allocation 1,2 COP 1.0% MXN 3.0% BB- 4.0% B+ 2.0% CCC 4.0% AA- 6.0% A- 8.0% BB 2.0% USD 96.0% BB+ 19.0% BBB+ 14.0% BBB- 26.0% BBB 13.0% Portfolio characteristics 1,2 Duration 4.97 years Average credit rating BBB- No. of holdings 235 Yield to maturity* 4.77% Top 10 holdings 1 Name Weight (%) Turkey (Republic of)-global 6.25% 26/09/22 3.5 Republic of Indonesia 3.75% 25/04/22 2.4 Turkey (Republic of)-global 7% 11/03/19 2.2 Hungary Republic of 5.375% 21/02/23 1.9 United Mex States-Global 6.05% 11/01/40 1.9 Republic of Indonesia 4.875% 05/05/21 1.8 Hungary Republic of - Global 6.375% 29/03/21 1.7 Colombia (Rep of)-global 6.125% 18/01/41 1.6 South Africa Rep of - Global 5.5% 09/03/20 1.5 Kazakhstan (Republic of) 5.125% 21/07/25 1.5 *The level of yield is not guaranteed and may rise or fall in the future. Source: 1. HSBC Investment Funds (Hong Kong) Limited as at 31 March 2016. Data shown is for illustrative purposes only and does not constitute to any investment recommendation to buy or sell in the above-mentioned countries, sectors, currencies, securities, or rating categorised assets. 2. The information provided is based on un-audited data and is for reference only. The average quality is calculated according to HSBC methodology which is a weighted average of each of the Fund's holdings. 3
Performance 3 HSBC GIF Emerging Markets Bond Class PD Annualised % 1 mth 3 mths 6 mths 1 yr 3 yrs 5 yrs Inception (9 July 1999) NAV 3.2 4.6 6.2 1.8 0.8 4.7 9.7 NAV* 0.1 1.5 3.0-1.2-0.2 4.1 9.5 BM 3.3 5.2 6.8 4.4 2.4 6.0 9.7 Dividend table (Class AM) 4 Month Dividend amount NAV as of ex-dividend date Annualised yield # Mar-15 USD0.1095 USD24.899 5.28% Apr-15 USD0.0982 USD25.484 4.63% May-15 USD0.0947 USD25.038 4.54% Jun-15 USD0.0886 USD24.598 4.32% Jul-15 USD0.0868 USD24.507 4.25% Aug-15 USD0.0889 USD24.053 4.43% Sep-15 USD0.1028 USD23.549 5.24% Oct-15 USD0.1151 USD24.025 5.75% Nov-15 USD0.1112 USD23.982 5.57% Dec-15 USD0.1110 USD23.334 5.71% Jan-16 USD0.1093 USD23.207 5.65% Feb-16 USD0.1148 USD23.484 5.87% Mar-16 USD0.1054 USD23.967 5.28% Source: 3. HSBC Global Asset Management & Morningstar, Inc. date as at 31 March 2016. *Net of sales charge. BM = Benchmark was JP Morgan EMBI+ Composite before January 2000 and was changed to JP Morgan EMBI Global afterwards. Class PD (known as class AD before 1 January 2011) is not available for new subscriptions, except for investors who had an existing Regular Savings Plan before 1 January 2011. Investors who wish to subscribe should refer to the new Class AD of the same fund. Past performance is not indicative of future returns. 4. HSBC Investment Funds (Hong Kong) Limited as at 31 March 2016. Dividend is not guaranteed and may be paid out of capital which will result in reduction in net asset value. A positive distribution yield does not imply a positive return. # The calculation method of annualized yield: based on Class AM (USD) for calculation (dividend value / bid price as of ex-dividend date) x 12. The dividend yield of a dividend distribution currency hedged class may be lower or higher than the dividend yield of other corresponding unhedged classes due to costs of hedging and difference in interest rate between currencies. 4
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