HSBC - Emerging Markets Strategist

Document Sample
HSBC -  Emerging Markets Strategist Powered By Docstoc
					                                                                             Global Emerging Markets
                                                                                  Multi-asset strategy
                                                                                         January 2013

     Emerging Markets Strategist
     2013 outlook: Loosen your seatbelts

             We retain our positive outlook as we enter 2013: The emerging market asset class is likely
                                                               to deliver another year of strong returns

            We expect flows into EM to remain solid; while low volatility is likely to continue to attract
                             foreign investors into debt, we expect a strong rotation toward equities

               It is time to take more risk: We recommend investors increase exposure to EM equities,
                           remain invested in hard currency bonds, and selectively extend duration and
                                                            buy inflation-linked bonds in local markets

                                        By Pablo Goldberg and the Emerging Markets Research teams

Disclosures and Disclaimer This report must be read with the disclosures and analyst
 certifications in the Disclosure appendix, and with the Disclaimer, which forms part of it
   Global Emerging Markets
   Multi-asset strategy                                                                                    abc
   15 January 2013

Emerging markets in 2013
HSBC’s Emerging Markets Strategist identifies the best trading opportunities across asset classes, building on our teams’
analysis across all EM regions. Find below our key calls for emerging markets for 2013, encompassing external and local
debt, EM corporate credit, foreign exchange, and equities.

 We remain positive as we begin 2013, and we expect EM assets to have another year of strong returns. While markets are
  unlikely to completely shed “risk-on/risk-off” dynamics, we believe, these sentiment swings should be less sharp than in
  the past 18 months, thus encouraging risk-taking.

 The risks confronting the global economy in 2012 have not disappeared. Yet conditions do not have to be perfect; just
  enough of a reduction of the most significant tail risks is all that is necessary for EM economies and assets to perform well.

 A calmer global backdrop, together with solid local fundamentals, means EM funds should continue to attract inflows. We
  expect that the rotation in favor of equities that is already taking place may intensify.

 We expect EM economies to accelerate in 2013 to average 5.4% growth for the year versus 4.8% in 2012, accounting for
  85% of global growth. Yet there is no “one” EM, as we expect regional and country divergence to persist.

 We remain bulls on China, where we expect economic growth of around 8.6% in 2013. This should lift other Asian
  economies and support commodity prices.

 Should external headwinds intensify, we see room for EM policymakers to take stimulus actions. While inflation is likely
  to remain subdued, in particular during the first half of the year, we expect to see a divergence in monetary policy in the
  second half, with some rate increases likely in Asia.

 As a moderate risk-on scenario is likely to put appreciation pressure on EM FX, we expect monetary authorities to keep
  leaning against the winds of appreciation and to tighten financial conditions if necessary through macroprudential policies,
  using interest rates only as a second option.

 We recommend investors stay fully invested in hard-currency bonds, as we expect 5-7% returns for the index, and we
  believe that the aggregate yield might test the 4% level driven by crossover investor flows.

 Scarcity in the sovereign debt market is leading investors to take longer positions in the corporate space, which should
  remain a very fast-growing asset class after record supply in 2012.

 We see potential for further positive credit rating actions in Indonesia, Philippines, Turkey, Peru, Chile, and Mexico, while
  South Africa, Hungary, Ukraine, and Argentina could have their credit ratings lowered.

 Local curves might flatten even further, yet most of the return in the local markets this year should come from coupons.
  We expect a return between 6-7% for bonds in local currency plus an added 1.5-2.0% from EM FX.

 We recommend investors increase positions in EM equities, which is the asset class we believe has the most upside. We
  expect returns close to 20% for the MSCI EM this year with reduced volatility, compared with 2012.

    Global Emerging Markets
    Multi-asset strategy                                                    abc
    15 January 2013

                              This page has been left blank intentionally

   Global Emerging Markets
   Multi-asset strategy                                                                                 abc
   15 January 2013

Emerging markets in 2013                                  1    EM Corporates: Value
                                                               remains                                                      42
Loosen your seatbelts                                     4    EM corporates offer attractive spread to sovereigns          42
2013: Another year of strong returns expected              4   Balance sheet strength varies significantly across regions   42
Our investment strategy: Interplay of risk and growth      5   Issuance should remain strong but below record high          43
More two-way ratings dynamics in 2013                     14   Secondary trading volumes                                    44
Flows to EM to stay strong but rotating toward equities   17   Increasing importance of the financials sector               44
Total return expectations                                 19
                                                               2013 economic outlooks                                       47
2013 asset class outlooks                                 23
                                                               Asia in 2013                                                 48
EXD still offering good risk-                                  Back in orbit, China picks up                                48
reward                                                    24   Growth: Local, not global                                    48
How much tighter?                                         24   Inflation: On the rise                                       50
Total return scenarios for 2013                           25   Policy: Responding to inflation                              51
EXD superior Sharpe ratio                                 26
Supply-and-demand dynamics                                26
                                                               Latin America in 2013                                        52
                                                               Runners versus walkers                                       52
Strategies and top trades                                 27
                                                               Growth: A shrinking gap                                      52
Local rates: Decent carry and                                  Inflation: A mixed picture                                   54
some alpha                                                28   Policy: Limited rates action                                 54
Outlook and drivers for 2013                              28
                                                               CEEMEA in 2013                                               56
Risks and scenarios                                       29
                                                               No obvious drivers of growth                                 56
Strategies to begin the year                              30
                                                               Growth: Monetary stimulus may offer some help                58
Supply in the local markets                               32
                                                               Inflation: Abating pressures                                 58
Bond supply summary table                                 33
                                                               Policy: More monetary easing                                 59
EM FX: Stay long but                                           Middle East and North Africa
selectively so                                            34   in 2013                                                      60
Fewer pitfalls in sight                                   34
                                                               The ‘haves’ and ‘have-nots’                                  60
Asia: Improving, but selectively                          35
                                                               Growth: Oil or nothing                                       60
                                                               Inflation: Risks to the upside                               62
EM Equities: We expect a                                       Policy: FX unchanged, fiscal tightening for oil importers    62
strong year                                               38   Emerging markets elections calendar                          64
GEMs equity are cheap                                     38
MSCI EM returns between 13-28% in 2013e                   39   Multi-asset strategy summary                                 65
EM consumption should remain the main catalyst            40
Strategies to begin the year                              40   Disclosure appendix                                          92
                                                               Disclaimer                                                   96

    Global Emerging Markets
    Multi-asset strategy                                                                                      abc
    15 January 2013

Loosen your seatbelts
 We retain our positive outlook as we enter 2013: Emerging market
    assets appear likely to deliver another year of strong returns
 We expect flows into EM to remain solid; while low volatility is
    likely to continue to attract foreign investors into debt, we expect a
    strong rotation toward equities
 It is time to take more risk: Investors should add exposure to EM
    equities, remain invested in hard currency bonds, and selectively
    extend duration and buy inflation-linked bonds in local markets

2013: Another year of strong                           The combination of an expected “calmer”                Pablo Goldberg
                                                                                                              Global Head, EM Research
returns expected                                       external front and accelerated economic                HSBC Securities (USA) Inc.
                                                       growth should lead to positive credit rating           +1 212 525 8729
It is time to loosen your seatbelts and further                                                     
                                                       momentum and attract inflows into EM,
increase exposure to the emerging markets. We                                                                 Bertrand Delgado
                                                       despite valuations being more stretched than at        EM Strategist
retain our constructive bias going into 2013 (see                                                             HSBC Securities (USA) Inc.
                                                       the beginning of 2012. In a less-risky                 +1 212 525 0745
Emerging Markets Strategist: Let’s risk again,
                                                       environment, the force of quantitative easing (QE)
14 September 2012), and we believe that 2013
                                                       should be felt in an even stronger fashion than        Aaron Gifford
could mark another year of strong returns. Our                                                                EM Research Analyst
                                                       before, especially for the riskier portion of the EM   HSBC Securities (USA) Inc.
expectations of global appetite for risk and EM                                                               +1 212 525 3277
                                                       asset class: FX and equities.
economic growth suggest that while markets are                                                      
unlikely to completely shrug off the “risk-on/risk-    EM equities are the only asset class, in our
off” dynamics of the past, these will be less sharp    view, with the option to produce higher returns
than in the past 18 months, thus encouraging           in 2013 than last year. With global allocations to
risk-taking.                                           equities at a low secular point, this asset class
                                                       finds itself in a very good technical position for a
The risks confronting the global economy have
                                                       sustained rally. Further revaluing of EM equities
not disappeared; yet, things do not have to be
                                                       does not need a significant improvement in
perfect for EM economies and assets to
                                                       growth expectations but rather a reduction of
perform well once again. Just enough of a
                                                       perceived risks.
reduction of the most significant tail risks is what
is necessary for EM to have another year of            The upside for bonds is more limited than in
strong performance.                                    2012, yet positive demand/supply dynamics
                                                       appear likely to drive positive returns. EM
                                                       hard-currency bonds have matured and became a

   Global Emerging Markets
   Multi-asset strategy                                                                                                                                      abc
   15 January 2013

destination for not only those searching for yield                                             the LTRO-driven rally of 1Q12), the risk-off
but also for safety. Contained global risks                                                    period brought by concerns about Spain (2Q12),
translate into lower EM FX volatility and                                                      the relief rally that followed European Central
encourage carry trades into EM local markets. We                                               Bank President Mario Draghi’s “whatever it takes
might see foreign participation resume an                                                      to save the euro” phrase on 26 July 2012, and the
upward trend.                                                                                  market uncertainties that prevailed around the US
                                                                                               presidential elections.
Our investment strategy:
Interplay of risk and growth                                                                   Given the dominant role of external over
                                                                                               domestic factors, our asset allocation
Since 2011, we have been basing our cross-
                                                                                               preference in emerging markets had been until
asset allocation selection process on our
                                                                                               late 3Q12 to maximize risk-adjusted returns.
expectations for two variables: 1. Appetite for
                                                                                               Note how volatile EM equities and currencies
risk and 2. Economic growth prospects. Chart
                                                                                               have been during the past quarters and their strong
A1 shows how we rank the different assets
                                                                                               performance when adjusted by volatility as
according to these two parameters and our view
                                                                                               evidenced by hard-currency bonds (especially the
on how sensitive each group is to changes in these
                                                                                               high-grade sector) and front-end local rates. These
conditions (steeper vs flatter arrows).
                                                                                               were our preferred asset classes in 2012.
This selection process was extremely effective
                                                                                               Following recent actions to reduce tail risks, we
in picking winners and losers among the EM
                                                                                               have adopted a more-risky stance in our asset
asset classes during the last two years of
                                                                                               allocation recommendation, aiming to
alternating risk on-risk off dynamics. Chart A2
                                                                                               maximize overall performance. We have been
shows the performance of high-grade and high-
                                                                                               of the view (see Emerging Markets Strategist:
yield hard-currency bonds, short-term local rates,
                                                                                               Let’s Risk Again, 14 September 2012) that
USD-denominated returns of local-currency
                                                                                               policymakers’ actions in the US and Europe have
bonds, EM FX, and EM equities during different
                                                                                               reduced the chances of a financial calamity (and a
periods of risk-on/risk-off (eg second half of 2011
                                                                                               subsequent strong risk-aversion shock) and
– a potential Greek exit from the eurozone, and
                                                                                               together with the stimulus in China, put a floor

 Chart A1. Last year was about ‘risk-on/ risk-off’                                                     Chart A2. Various EM asset classes: Total return

                                      +                                            -
  Risk appetite



 Note: Green box denotes risk-on (eg 1Q12, 3Q12) and red box denotes risk-off (eg 2H11, 2Q12, 4Q12).   Source: Bloomberg, Thomson Reuters Datastream, MSCI
 Source: HSBC

      Global Emerging Markets
      Multi-asset strategy                                                                                                      abc
      15 January 2013

8nder global growth. In terms of our asset                               Reduced tail risks are key
selection process, these developments are cutting                        The macroeconomic backdrop confronting
the bottom and right areas of our Chart A3,                              emerging markets this year is likely to be very
suggesting a more risk-on stance: the center of                          similar to that of 2012, we believe. Economic
gravity for returns moving toward less-                                  growth in developed markets should remain
conservative investments.                                                subpar, to say the least. We forecast an expansion
We recommend investors:                                                  of 0.9% for developed markets vs 1.2%% for
                                                                         2012. A heavy debt load should keep developed
 Add overall exposure to emerging markets.                              markets’ consumers on the defensive, while
 Cut longstanding underweight positions in                              governments will remain embarked on a process
  EM equities (see page 38).                                             of fiscal consolidation that still has many years to
                                                                         run its course (see Global Economics Quarterly,
 Stay invested in EM hard currency debt due to                          The Great Rotation, by Stephen King, 20
  its superior Sharpe ratio (see page 24).                               December 20120). However, the outlook for
 Extend duration in some key local markets                              investing in the emerging markets has improved
  (see page 28).                                                         for several reasons.

 Increase exposure to inflation-linked bonds                            Low growth in developed markets means that
  (see page 31).                                                         core central banks will stay in full-reflation
                                                                         mode, yet the money printed there will find its
 Remain long EM FX, although being selective                            way to emerging markets (see Rolling in the
  is recommended (see page 34).                                          Money: Tracking the shift in flows in global bond
                                                                         markets, 27 November 2012). QE flows continue
                                                                         to reduce the cost of funding for EM sovereigns

    Chart A3. 2013: Continue to add risk as tail risks are reduced and growth accelerates

                                                       +                                              -

             Risk Appetite


                                                Fiscal cliff/debt ceiling resolution?

                                                                           OMT / QE3

    Source: HSBC

    Global Emerging Markets
    Multi-asset strategy                                                                                                                                abc
    15 January 2013

and companies, while credit in the South                                         likely to affect markets from time to time.
continues to expand at a good pace.                                              In this sense, monetary authorities are
Second, policymakers’ resolution to prevent a                                    somewhat setting a ceiling both for rates in the
repetition of the great financial crisis has been                                US and in Europe, reducing tail risks and
tested and proven by markets. The result is                                      encouraging risk taking. In a less risky
likely to continue to be one of action (by the                                   environment, the force of liquidity injections due
markets) and reaction (by authorities), but in a                                 to QE should be felt in an even stronger fashion
way in which risks will remain contained. Debt                                   than before, especially for the more risky portion
dynamics in the developed markets are such that
                                                                                 of the EM asset class: FX and equities. We see
the tension between the need for fiscal
                                                                                 UST 10-year potentially touching 2.2% in Q1, but
consolidation and the need for growth will persist
                                                                                 only to come back closer to 1.5% by year-end.
for some time, generating gyrations that appear

Table A1. Global risks update

  ___________________________ US ___________________________         ______________________Eurozone ______________________
                                                       Latest developments
The congressional resolution on the “fiscal cliff” on 1 January prevented an                 In 2012, eurozone leaders set out the beginnings of a roadmap for integration of
economic disaster, but it did little to solve the nation’s long-term fiscal problems.        economic and monetary union, a widely feared Greek exit from the eurozone was
Consequently, contentious negotiations between the two political parties in                  avoided, and most important, European Central Bank head Mario Draghi promised to
Washington over longer-run problems are likely to continue for the next several              do “whatever it takes” to preserve the euro, a commitment that has seen peripheral
months.                                                                                      bond spreads narrow to their tightest levels since mid-2011 even though the ECB
                                                                                             has yet to have to buy a single euro of government bonds under the outright
                                                                                             monetary transactions (OMT) program. The eurozone recession is expected to have
                                                                                             deepened in Q4 but there are recent signs of stabilization.

- Mid-Feb/early March: Treasury’s debt ceiling approval deadline                             - February 24-25: Italian parliamentary elections
- March 1: Automatic across-the-board spending cuts (“sequestration”) kick in                - June 27 – 28: European Council meeting where the next set of decisions on the
- March 27: Expiration of the current continuing budget resolution                           other areas of future eurozone integration may be made
                                                                                             - September: German parliamentary elections

                                                                                 Short-term outlook
A compromise deal that produces a grand bargain in the time before the                       Partly because of the German elections in September, when an Angela Merkel-led
sequestration deadline on 1 March may be highly unlikely, as the two parties are             “Grand Coalition” is considered likely to be elected, 2013 is set to be a year when the
too far apart on too many issues.                                                            next stages of eurozone integration are agreed on and drafting of legislation begins,
                                                                                             rather than much becoming operational. Ms. Merkel will not be rushed into making
                                                                                             any quick decisions on future fiscal integration and eventual common bond issuance,
                                                                                             so any solidarity should come from the ECB.

A series of start-and-stop negotiations could chip away at underlying problems               Deleveraging, austerity, and rising unemployment mean growth will depend on
without making much headway on a substantive solution to long-term fiscal                    external demand, particularly in the periphery. An upturn in the world trade cycle
imbalances.                                                                                  should provide some relief in 2013, but much of the eurozone will remain highly
                                                                                             vulnerable to any renewed weakness in global growth.

                                                                                   Long-term risks
Growth deceleration: A major risk for the economy would be implementation of                 Unstable debt dynamics: A lack of growth, combined with the low inflation that
the scheduled sequestration starting 1 March. This would involve USD86bn in                  arises from the need to regain competitiveness, implies government debt projections
spending cuts compressed into the remaining seven months of the fiscal year. The             in the periphery in particular will continue to be revised up. A failure to meet fiscal
cuts would amount to roughly 1.0% of GDP and would come on top of the roughly                targets or stick to the spirit of reforms is likely to trigger market pressure.
USD100bn increase in the payroll tax put in place on 1 January.

Ratings downgrade: The major credit rating agencies have the US sovereign                    Public opposition: The promise of ECB action has not lessened the need for
rating on negative watch. If Congress postpones the sequestration and cannot                 austerity and structural reform or improved the lot of the increasing number of
agree on other significant and credible reductions in future deficit spending, the           unemployed. It is probably inevitable that a further increase in labor strikes and
likelihood of a ratings downgrade should increase significantly.                             demonstrations across the periphery will accompany the rise in joblessness. ECB
                                                                                             action could stabilize the situation, but there is much opposition in Germany to the
                                                                                             planned OMT policy, and with property prices on an upward trend, German concerns
                                                                                             about an eventual pickup in inflation appear likely to grow.

Source: HSBC

      Global Emerging Markets
      Multi-asset strategy                                                                                                     abc
      15 January 2013

Third, the more immediate concerns appear to                             Expected lower volatility than in 2012
have rotated away from a eurozone breakup                                Years of high volatility and severe losses have
(see Back from the Abyss, by Janet Henry, 20                             made global investors more risk averse,
December 2012) and toward the US fiscal                                  fuelling demand for low volatility assets. This
situation (remaining budget discussions and                              has translated into a reduction of allocations to
the debt ceiling -- Please see Roadmap to fiscal                         stocks, and a preference for fixed income. In
roadblocks, by Kevin Logan, 14 January 2013.).                           Searching for Safety (September 2012), we
However, the risks of a US recession appear to                           showed how demand for EM hard currency has
have been averted through a last-minute deal.                            resulted from risk-off sentiment in a world facing
(Table A1).                                                              a scarcity of safe assets.
Fourth, the room for bearish calls on China                              A reduction of tail risk should allow for the
has been reduced significantly. The economy                              beginning of the unwinding of the long
has not only started to react to stimulus measures,                      standing underweight positions in stocks,
but also any policy paralysis that could have come                       among them those from EM. This is a process that
from the leadership change will soon become a                            feeds on itself, and could take some time, but even
thing of the past. Investors’ expectations on                            in its initial phase, could have important
China’s growth have not only improved, but its                           implications for valuations. The second half of
range should also be narrowing. While forecasts                          2011 was marked by a significant surge in equity
could still vary between a 7- or 8-handle range,                         volatility, to levels not seen since the financial
some acceleration is expected, which removes                             crisis of 2008. It took almost a full year for
another important source of uncertainty from the                         investors to be willing to add allocations to EM
markets. In particular, we expect the Asian giant’s                      stocks again.
economy to grow 8.6% in 2013 (see Asian
Economics Quarterly: Bank in Orbit, by Qu
Hongbin, 10 January 2013).

    Chart A4. Emerging markets to contribute 85% of world’s growth, most of it coming out of Asia

              pp contribution to growth                                                                     Forecast
              2002    2003    2004     2005     2006     2007     2008      2009    2010    2011    2012   2013    2014
                             China                           Rest of Asia                    Latam
                             EMEA                            DM                              World growth, % yoy
    Source: HSBC

   Global Emerging Markets
   Multi-asset strategy                                                                                                            abc
   15 January 2013

 Chart A5. Volatility slowly reducing                              Table A2. HSBC growth and inflation forecasts
  70%                                                                                _ GDP growth (%) __ __ Inflation (%) ___
                                                                   Country           2012e 2013f 2014f 2012e 2013f 2014f
                                                                   Developed            1.2     0.9    1.7     1.9    1.7    1.8
                                                                   US                   2.2     1.7    2.5     2.1    1.9    2.2
  40%                                                              Eurozone            -0.5    -0.2    1.0     2.5    1.8    1.6
                                                                   Germany              0.9     0.6    1.7     2.1    2.0    2.0
  30%                                                              Japan                1.9     0.2    0.2     0.0    0.0    0.3
                                                                   Emerging             4.8     5.4    5.8     5.5    5.6    5.7
                                                                   Asia-Pacific         4.4     4.2    4.5     2.4    2.5    2.7
  10%                                                              China                7.8     8.6    8.4     2.9    3.1    2.7
                                                                   Hong Kong            1.7     4.7    4.5     4.1    4.5    4.4
   0%                                                              India                5.2     6.2    7.5     9.9    7.6    7.4
     2008       2009       2010         2011     2012       2013   Indonesia            6.1     6.1    6.1     4.3    5.1    5.2
                EM EXD       EM Equities - RHS     EM LDM          Malaysia             5.3     4.8    5.0     1.7    1.7    2.3
                                                                   Philippines          6.2     4.9    5.4     3.1    3.9    4.5
 Source: HSBC
                                                                   South Korea          2.2     3.8    4.4     2.2    3.1    3.4
                                                                   Singapore            1.2     3.0    5.0     4.5    2.9    3.1
                                                                   Sri Lanka            5.8     6.1    7.4     7.5    7.4    7.1
EM growth should accelerate in 2013                                Taiwan               1.1     4.2    4.4     1.9    1.9    2.1
                                                                   Thailand             6.0     4.6    4.1     3.0    3.2    3.8
Our more risk-on asset allocation is also                          Vietnam              5.0     5.5    5.6     9.3    9.5    9.8
supported by an improving economic outlook                         LatAm                2.7     3.1    3.7     8.1    9.0    9.5
                                                                   Argentina            2.0     2.5    3.0    24.0   25.0   23.0
for the region: when it comes to growth, EM                        Brazil               1.1     3.0    3.8     5.7    5.5    6.5
                                                                   Chile                5.6     4.8    5.0     1.8    3.0    3.0
remains the only game in town. Shrugging off                       Colombia             3.9     4.3    4.5     2.7    2.9    3.0
the disappointments of 2012, we expect EM to                       Mexico               3.9     3.2    3.6     3.9    3.6    3.6
                                                                   Panama               9.6     8.0    7.6     4.9    5.3    4.5
expand by 5.4% in 2013, versus an estimated                        Peru                 6.2     6.2    6.4     2.7    2.5    2.5
                                                                   Uruguay              3.5     4.0    5.0     7.5    7.5    7.0
4.8% in 2012. EM will contribute with roughly                      Venezuela            5.1     0.5    2.5    20.0   32.1   26.4
85% of the total global growth we expect this                      CEEMEA               2.6     2.8    3.1     6.1    5.6    5.0
                                                                   Czech Rep.          -1.0     0.5    1.9     3.3    1.9    2.0
year. We expect three-fourths of the contribution                  Estonia              3.5     3.0    4.0     4.2    4.0    3.5
to come from Asia, with the rest equally divided                   Hungary             -1.3     0.5    0.9     5.7    3.0    3.0
                                                                   Israel               3.3     3.1    4.3     1.6    1.3    2.4
between Latin America and CEEMEA. While we                         Kazakhstan           5.1     5.3    7.0     5.3    6.7    6.0
                                                                   Latvia               5.0     3.5    4.0     2.2    2.0    2.1
estimate that three EM countries had a recession                   Lithuania            3.5     3.0    3.5     3.2    3.1    3.0
in 2012 (Serbia, Hungary, and Czech Republic),                     Poland               2.1     1.6    2.9     3.7    2.1    1.7
                                                                   Romania              0.6     2.5    3.3     3.3    4.0    3.0
we expect no economic contractions in emerging                     Russia               3.0     2.5    2.0     5.1    6.7    5.5
                                                                   South Africa         2.5     2.6    2.9     5.7    5.6    5.5
markets for 2013 (Table A2).                                       Turkey               2.7     3.8    4.3     8.9    6.3    6.6
                                                                   Ukraine              0.8     1.5    3.0     0.6    3.0    4.6
Weaker investment and external demand led to                       MENA                 4.5     4.0    4.1     5.0    5.6    5.6
                                                                   Algeria              3.5     4.3    4.0     9.0    8.0    6.0
disappointing EM growth in 2012. The jitters                       Bahrain              4.2     3.2    3.1     2.5    3.0    3.0
from abroad, appreciated local currencies in some                  Egypt                2.2     2.7    3.7     8.7    5.3    6.9
                                                                   Kuwait               5.5     3.9    4.0     4.0    3.8    4.4
countries, lack of progress on structural reforms,                 Jordan               2.7     2.8    2.9     5.0    4.0    3.5
                                                                   Lebanon              1.4     2.0    2.4     7.0    6.0    4.0
and excess regulation, kept animal spirits down in                 Morocco              2.5     3.1    3.6     1.5    2.5    3.5
the most vibrant regions of the world. Yet the EM                  Oman                 5.0     4.8    4.3     2.5    2.5    2.0
                                                                   Pakistan             4.2     2.7    2.9    13.1   12.6   10.4
consumer is very much alive; domestic demand                       Qatar                6.3     5.2    5.4     3.5    4.7    5.0
and a stronger China should lift growth in 2013.                   Saudi Arabia         5.4     4.3    3.7     3.9    5.5    5.5
                                                                   UAE                  3.7     3.9    4.1     1.2    1.6    3.5
                                                                   Source: HSBC
The last round of EM PMIs of 2012 shows EM
economics getting momentum going into 2013
(Chart A7); with inflation pressures contained
(Charts A6 & A8), this paves the way to a

     Global Emerging Markets
     Multi-asset strategy                                                                                                                                                                             abc
     15 January 2013

Chart A6. HSBC Growth Tracker

                                             2007                          2008                            2009                                2010                                2011                             2012
   B r az il                                                                                                                                                                                                                            BR
   M exico                                                                                                                                                                                                                              MX
   C hile                                                                                                                                                                                                                               CH
   PR                                                                                                                                                                                                                                   PR
   C o lo mb ia                                                                                                                                                                                                                         CB
   Hung ar y                                                                                                                                                                                                                            HU
   R ussia                                                                                                                                                                                                                              RU
   Po land                                                                                                                                                                                                                              PO
   T ur key                                                                                                                                                                                                                             TK
   So ut h A f r ica                                                                                                                                                                                                                    ZA
   Ko r ea                                                                                                                                                                                                                              KO
   Ho ng Ko ng                                                                                                                                                                                                                          HK
   T aiw an                                                                                                                                                                                                                             TW
   T hailand                                                                                                                                                                                                                            TH
   C hina                                                                                                                                                                                                                               CH
   Ind ia                                                                                                                                                                                                                               IN
   Si ng ap o r e                                                                                                                                                                                                                       SG

                                Grow th above trend and rising                              Grow th above trend and moderating                  Grow th below trend and rising
                                Grow th below trend and moderating                          Contraction at a moderating rate                    Contraction at an increasing rate

Source: HSBC Note: until Nov’12

Chart A7. HSBC Inflation Tracker
                                     2007                                2008                            2009                                  2010                                 2011                             2012
Argentina                                                                                                                                                                                                                               AR
Brazil                                                                                                                                                                                                                                  BR
Chile                                                                                                                                                                                                                                   CH
Colombia                                                                                                                                                                                                                                CO
Mexico                                                                                                                                                                                                                                  MX
Peru                                                                                                                                                                                                                                    PE
Venezuela                                                                                                                                                                                                                               VN
Poland                                                                                                                                                                                                                                  PO
Hungary                                                                                                                                                                                                                                 HU
South Africa                                                                                                                                                                                                                            ZA
Russia                                                                                                                                                                                                                                  RU
Turkey                                                                                                                                                                                                                                  TK
Czech Republic                                                                                                                                                                                                                          CZ
Israel                                                                                                                                                                                                                                  IS
Egypt                                                                                                                                                                                                                                   EG
China                                                                                                                                                                                                                                   CN
Hong Kong                                                                                                                                                                                                                               HK
India                                                                                                                                                                                                                                   IN
Indonesia                                                                                                                                                                                                                               ID
Korea                                                                                                                                                                                                                                   KO
Malaysia                                                                                                                                                                                                                                MY
Singapore                                                                                                                                                                                                                               SG
Philippines                                                                                                                                                                                                                             PH
Taiwan                                                                                                                                                                                                                                  TW
Thailand                                                                                                                                                                                                                                TH

                                      Strong acceleration            Moderate acceleration             Stable inflation             Moderate deceleration                Deceleration

Source: HSBC. Note: - until Nov’12

Chart A8. EM PMI Heatmap
                                        PMI-M                                   Output                           Output prices                                New orders                                  Employment
                       Dec 12     Nov 12       Oct 12   Sep 12   Dec 12   Nov 12    Oct 12    Sep 12   Dec 12    Nov 12    Oct 12     Sep 12    Dec 12      Nov 12     Oct 12     Sep 12     Dec 12      Nov 12       Oct 12   Sep 12
  Brazil                51.1         52.2       50.2     49.8     52.5     53.9      51.3      51.0     52.5      51.4      52.0        52.7     52.3        54.4       50.5       48.9        49.6       49.9         48.8      49.1   BR
  Mexico                57.1         55.6       55.5     54.4     60.1     57.6      57.0      57.3     51.8      52.2      52.3        53.2     61.6        59.1       59.0       56.8        51.7       52.8         53.8      53.1   MX
  China                 51.5         50.5       49.5     47.9     51.9     51.3      48.2      47.3     51.7      49.9      50.8        45.0     52.9        50.8       51.2       47.3        50.1       49.0         48.5      48.4   CH
  Hongkong              51.7         52.2       50.5     49.6     53.7     53.1      51.2      49.0                                              52.9        53.6       49.7       49.1        51.0       51.2         50.4      48.5   HK
  India                 54.7         53.7       52.9     52.8     57.7     55.4      52.7      53.2     55.9      56.0      52.9        56.8     58.0        55.8       54.9       54.4        51.1       51.4         52.1      52.8   IN
  Indonesia             50.7         51.5       51.9     50.5     52.3     51.9      52.7      51.6     52.4      52.3      51.2        51.5     51.8        53.8       53.3       50.6        48.3       49.8         50.5      49.0   ID
  Singapore             48.6         48.8       48.3     48.7     47.1     47.4      48.8      49.6                                              48.5        49.1       46.5       47.5        49.0       48.6         47.8      48.2   SG
  South Korea           50.1         48.2       47.4     45.7     50.1     46.3      44.7      43.0     47.8      48.5      47.9        48.7     50.3        47.9       45.0       42.9        50.2       49.3         51.6      49.9   KO
  Taiwan                50.6         47.4       47.8     45.6     50.4     45.2      46.5      43.1     46.7      48.5      48.7        46.6     50.3        45.1       45.8       42.3        51.3       50.9         50.0      49.9   TAI
  Vietnam               49.3         50.5       48.7     49.2     50.1     51.6      49.3      49.9     45.5      46.6      47.5        48.2     49.0        51.1       47.2       48.9        51.3       51.4         50.8      49.7   VI
  Czech Republic        46.0         48.2       47.2     48.0     44.3     46.9      46.8      46.6     46.7      46.8      48.2        48.4     45.5        47.8       44.5       47.2        46.5       48.0         48.3      48.8   CZ
  Hungary               48.9         52.1       49.9     52.4                                                                                                                                                                           HU
  Israel                             43.7       37.6     38.0              49.5      40.3      43.8                                                          37.1       37.0       34.9                   40.3         37.1      38.5   ISR
  Poland                48.5         48.2       47.3     47.0     48.3     48.1      47.8      46.9     49.2      50.0      48.7        48.9     48.3        47.3       47.1       44.6        48.0       48.2         46.6      48.1   PO
  Russia                50.0         52.2       52.9     52.4     50.6     54.6      55.3      53.9     52.9      52.9      54.2        54.8     52.9        55.0       56.2       54.0        46.9       49.8         50.3      51.8   RU
  Saudi Arabia          58.9         57.0       59.8     60.3     62.6     60.2      64.5      64.8     51.5      52.3      53.7        50.8     67.3        64.0       69.2       70.2        54.3       53.5         52.9      55.3   SAU
  South Africa                       49.5       47.1     48.3              45.9      43.2      46.2                                                          47.7       45.3       48.3                   52.0         49.2      47.9   ZA
  Turkey                53.12        51.57      52.5     52.2     54.3     51.1      53.9      53.5     52.4      52.8      53.1        50.7     54.5        51.8       52.0       51.0        55.0       53.8         53.9      52.8   TU
  UAE                   55.6         53.7       53.8     53.8     56.3     53.5      54.3      54.2     50.1      49.5      50.6        50.4     63.2        60.1       60.3       60.7        52.6       51.6         52.3      52.1   UAE
  Egypt                 37.1         49.8       49.5     50.5     27.2     49.0      48.8      51.3     50.5      49.1      49.8        50.5     26.5        49.7       48.9       50.8        48.0       49.5         49.2      49.7   EGY
                       * for HK, SAU, UAE, Egypt- Whole Economy                                                    Above 50+ rising       Above 50+ falling         Below 50+ falling      Below 50+ rising       Data unavailable

Source: HSBC, Bloomberg, Markit

   Global Emerging Markets
   Multi-asset strategy                                                                                                                      abc
   15 January 2013

cheerful start of 2013. China’s full-fledged          Chart A9. Domestic demand-led growth, except in Asean
progress as reflected in almost all the PMI sub-                                                LatAm
indices is very encouraging, taking the smaller        8
Asian economies up with it. On the other hand,         6
CEEMEA manufacturing, particularly in CEE,             4
remained weak, while Turkey’s strongest PMI            2

employment gain in a year signals domestic             0

demand should stay strong. In LatAm, as the PMI        -2

heatmap shows (see previous page), Mexico is           -4
                                                            2007          2008    2009     2010      2011       2012        2013F    2014F
running faster and more stable than Brazil, with                     PCE            GFCF            GCE           X-M               GDP

the steadier new order, output, and employment                                                  EMEA
indices and supportive output prices.                   8
South-South trade and healthy domestic                  4

financial sectors should support growth in EM.          2
As developed markets remain weak, domestic             -2
demand should be the main driver of activity in        -4
EM, with the exception of the Asean region,
which appears likely to get pulled by the                    2007         2008    2009      2010     2011       2012        2013F    2014F
                                                                            PCE          GFCF            GCE          X-M           GDP
acceleration in China. Government spending
would remain a positive impulse to growth, with
the exception of the CEEMEA region, where
some sort of fiscal consolidation is still under
way. Investment in China should add to growth
that is double than anywhere else in the EM
space, while in LatAm, consumption should
remain the main engine (Charts A5).

We remain China bulls, HSBC Economics sees
above-consensus 8.6% GDP growth this year,
                                                            %                                   China
helping Southeast Asia to finally get a lift after    16
a difficult 2012. As suggested by HSBC Asia
Chief Economist Fred Neumann, the relative
impact of a 1ppt increase in China’s economy on
the rest of the region has roughly doubled since
2003. We are less optimistic on India. Leif            0

Eskesen, HSBC India Economist, now expects the         -4
                                                            2007      2008        2009     2010     2011       2012     2013F       2014F
recovery to be more protracted and forecasts                        PCE           GFCF          NET EX         GCE             GDP yoy

growth of 5.2% for FY2012-13 and 6.2% for
                                                      Source: HSBC Economics
FY2013-14. The slowdown in growth over the
past few years has been more structural than
cyclical due to insufficient progress on structural
reforms (see “Asia in 2013” on page 48).

     Global Emerging Markets
     Multi-asset strategy                                                                                                                     abc
     15 January 2013

In LatAm, the fortunes of Brazil and Mexico               Chart A10. Little slack but not a worry for inflation
are likely to continue to diverge. HSBC                   5

Economics sees Brazil struggling with growth              4

(3% in 2013), while Mexico, on the other hand,            3
could be a candidate of a credit rating upgrade           2
to single-A, if President Enrique Peña Nieto              1
comes through on promises of structural reforms.
Far from negative, an announced delay of reforms
may increase their chances of approval (see “Latin
America in 2013” on page 52).                                      BR CL CO MX PE CZ HU PL RU IL ZA TK TH SG MY CN PH ID TW
                                                                                             2013      3Q07-2Q08
CEEMEA still await a wink from Europe. The                Note: Output gaps calculated with HP filters for consistency (actual – potential)
                                                          Source: HSBC
region appears at the bottom end of our forecasts,
as we expect another year of disappointing
                                                         Many countries in EM show little slack, yet
activity. Things appear a little better for Turkey,
                                                         output gaps seem unlikely to put too much
where we expect growth to accelerate to 3.8%, but
                                                         pressure on inflation for the time being, unless
flat to worse for South Africa and Russia,
                                                         growth surprises significantly on the upside, of
according to HSBC CEEMEA Chief Economist
                                                         course. Chart A11 compares the position of the
Murat Ulgen (see “CEEMEA in 2013” on
                                                         business cycle through the use of HP filters, not a
page 56).
                                                         perfect yet a cross-country consistent way to look
In MENA, the situation is very polarized                 at output gaps. Note how much “overheated” EM
between the oil exporters that are in a strong           countries were during the inflation scare that
position and those countries that are still involved     preceded the financial crisis (3Q07-2Q08). Also, a
in political transitions. This is where the macro        constructive call on EM FX should help keep
risks are the highest in the EM space, according to      price pressures under control.
MENA Chief Economist Simon Williams (see
                                                         Most of the EM central banks targeting
“Middle East & North Africa in 2013” on
                                                         inflation fulfilled their objectives in 2012, and
page 60).
                                                         appear likely to do it again this year (Chart
Inflation should not challenge growth                    A11), without the need of significant
                                                         adjustments in rates. We expect a mixed picture
Inflation should not be a significant headwind
for growth for now, but pressures could build
                                                          Chart A11. Inflation targets to be met in 2013
by the end of the year, particularly in Asia.                  %
Year-over-year figures should also receive the
benefit of positive base effects during the first part    7
of the year. Commodity prices had a strong 1Q12,          6
raising concerns about an inflation explosion in
EM; now is time for payback. Inflation in the             3
emerging markets appears to be less sensitive to          2

changes in commodity prices than in pre-crisis.           1
This could allow regional central banks to wait                    IL CZ PO BR CL CO ZA TH KR MX HU PE PH ID RO TR
and see about commodity price cycles, rather than                                      Target           2012E           2013F

to have to be too reactive to them.                       Source: Bloomberg, HSBC

   Global Emerging Markets
   Multi-asset strategy                                                                                                                             abc
   15 January 2013

in terms of inflation performance in 2013, with       Table A3. Policy rate forecasts (%)
some countries doing better than in 2012, but         Country                    2011        2012           1Q13     2Q13            3Q13    4Q13
some seeing higher inflation. Notable are the         Brazil                    11.00         7.25          7.25       7.25           7.25   7.25
                                                      Chile                      5.25         5.00          5.00       5.00           5.00   5.00
cases of Brazil, Turkey, and South Africa, where      Colombia                   4.75         4.25          4.00       4.00           4.00   4.00
we see inflation remaining persistently at the top    Mexico                     4.50         4.50          4.50       4.50           4.50   4.50
                                                      Peru                       4.25         4.25          4.25       4.25           4.25   4.25
end of the targeted bands. We expect a                Uruguay                    8.00         9.25          9.25       9.25           9.25   9.25
deceleration of inflation in Hungary, and Poland      China                      6.56 6.00                   6.00 6.00                6.00 6.00
                                                      Hong Kong                  0.50 0.50                   0.50 0.50                0.50 0.50
due to lower energy price hikes (or cuts) in 2013.    India                      8.50 8.00                   7.50 7.50                7.50 7.50
                                                      Indonesia                  6.00 5.75                   5.75 6.25                6.50 6.50
Hungary also benefits from the base effect of a       Korea                      3.25 2.75                   2.75 2.75                3.00 3.25
value added tax hike that became effective in         Malaysia                   3.00 3.00                   3.00 3.25                3.50 3.50
                                                      Philippines                4.50 3.50                   3.50 3.50                3.50 3.75
January 2012. Thailand, Indonesia, and the            Singapore                  0.39 0.38                   0.30 0.30                0.30 0.30
                                                      Sri Lanka                  8.50 9.50                   9.50 9.50                9.50 9.75
Philippines could see inflation accelerating,
                                                      Taiwan                    1.875 1.875                 2.000 2.125              2.250 2.375
putting pressure on policymakers to act.              Thailand                   3.25 2.75                   2.75 3.00                3.25 3.25
                                                      Vietnam                    9.00 7.00                   7.00 7.00                7.00 8.00
Structurally, the output-inflation trade-off          Czech Republic                0.75      0.05          0.05       0.05           0.05   0.05
                                                      Hungary                       7.00      5.75          5.50       5.00           5.00   5.00
appears to be deteriorating around EM. In             Poland                        4.50      4.25          3.75       3.25           3.25   3.25
CEEMEA and Brazil, inflation has not dropped          Romania                       6.00      5.25          5.25       5.25           5.25   5.25
                                                      Russia                        6.00      5.50          5.50       5.50           5.25   4.75
despite the region’s weak output performance, and     South Africa                  5.50      5.00          4.50       4.50           4.50   4.50
                                                      Turkey                        5.75      5.50          5.50       5.50           5.50   5.50
in Asia, each cycle brings higher levels of core
                                                      Note: RED denotes hikes, GREY denotes cuts.
inflation each time. Tight labor markets and          Source: HSBC

decreasing productivity are partly responsible for
this deterioration. Overall, the region could be      However, if anything, the risk is for very little
sensitive to an inflation scare if growth proves to   action on the monetary side. A PMI-based
be stronger than expected. In this case, regional     Taylor rule for the emerging markets suggests
policymakers might find themselves in a bind          there is still an easing bias in EM, which could be
once again.                                           closed if acceleration in commodity prices leads
                                                      to higher inflation expectations (Chart A12). In a
Monetary policy to stay loose, yet                    world of exceptional policy accommodation by
tone likely more hawkish                              the largest central banks of the world, real rates in
A still-benign inflation picture should allow         the emerging markets should stay below levels
policymakers to keep a loose monetary stance          considered neutral in the past.
in most of the region. With inflation pressures
contained and a still-fragile external backdrop,         Chart A12. Monetary policy should remain loose in EM

policymakers are in no rush to remove existing                 10

accommodation, not unless there is more evidence                5

that inflation is on the rise.                                  0

While 2012 was a year of generalized easing in                 -5

monetary policy, we expect a more diverse                     -10

stance in 2013. We see most of LatAm being on                 -15
hold, expect some minor residual interest rate cuts
in CEEMEA, and potential hikes in Asia by the                       2007     2008          2009         2010        2011             2012
                                                                                      Policy rates change          PMI Taylor Rule
end of the year (Table A3).
                                                         Source: Bloomberg, HSBC

      Global Emerging Markets
      Multi-asset strategy                                                                                                                                         abc
      15 January 2013

Good news globally could be bad news for local                                   we called this process the “Big Convergence” (see
monetary authorities: Should tail risks                                          The Big Convergence: The blurring lines between
continue to be reduced, EM policymakers may                                      EM and DM bond risks, by Pablo Goldberg, 18
again find themselves seeing local currency                                      December 2011). As many as 22 emerging
appreciation due to increased appetite for risk,                                 nations graduated to investment grade (IG) from
rather than due to a pickup in external                                          junk, the most notable examples being Russia,
demand. EM exports could then suffer a double                                    Mexico, Brazil, and India, and partially Turkey
pinch (appreciating REER and weak demand), a                                     and Indonesia. Two countries that had lost their
situation that in the past led to an intensification                             IG ratings managed to recover them: Colombia
of “currency wars.” If this is combined with a                                   and Uruguay. This qualification has made those
pickup in inflation, we could see delays in the                                  EM nations a destiny of ‘search for safety’ funds,
removal of the current monetary stimulus. In this                                which have pushed borrowing costs for these
case, it might not be surprising to see the use of                               sovereigns and the respective corporates to their
macroprudential policies as a first line of defense                              lowest levels ever.
against inflation pressures or asset bubbles. In an
                                                                                 The enhancement in EM credit quality took a
extreme case, we could see the comeback of some
                                                                                 breather in 2012, in line with the deterioration
sort of capital controls similar to that at the end of
                                                                                 in the business cycle. Lingering worries about
2010 (see Manning the Barricades: The return of
                                                                                 fiscal and economic hardships in developed
capital controls and the implications for global
                                                                                 markets, as well as political unrest in places like
markets, by Stephen King, 2 November 2010).
                                                                                 the Middle East, put pressure on credit ratings in
More two-way ratings                                                             EM in 2012. For 68 countries that broadly
dynamics in 2013                                                                 encompass the EM world, 2012 showed roughly
                                                                                 the same number of positive and negative rating
Following a challenging 2012, we expect credit
                                                                                 actions (by S&P and Moody’s), the worst such
ratings dynamics in the emerging markets to
                                                                                 performance since 2008. Hungary, South Africa,
recover a favorable trend, yet with less impetus
                                                                                 Argentina, Venezuela, and several countries in the
than in the past. Implementation of stronger yet
                                                                                 Middle East fell under the downgrade spell.
flexible macro policy frameworks led to high and
strong rates of growth, which led to a sustained                                 The horizon for EM credit ratings should turn
wave of upgrades starting in 2002 (Chart A13);                                   positive again in 2013, as we expect growth to

 Chart A13. EM credit rating dynamics to improve with growth                      Chart A14. Fallen angels dominate rising stars in 2012
          Rating actions                                                %         70
     5                                                                      10
     4                                                                      9

     3                                                                      8     50

     2                                                                      7
     1                                                                      6

     0                                                                      5     30

     -1                                                                     4     20

     -2                                                                     3
     -3                                                                     2

     -4                                                                     1      0
                                                                                       '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12
          97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14
                                                                                                   High grade                          High yield
                 EM GDP Growth (rhs)   Positive - negative rating actions               IG   Initiated at IG   Rising Star   Fallen Angel   Initiated at HY   HY

 Source: S&P, Moody's, HSBC                                                       Source: S&P, Moody's, HSBC

   Global Emerging Markets
   Multi-asset strategy                                                                                    abc
   15 January 2013

2013 key ratings watch list
Potential upgrades
Indonesia (BB+ pos / Baa3 sta)                       Peru (BBB pos / Baa2 pos)
HSBC Economics expects Indonesia to be               HSBC Research expects a one-notch upgrade for
upgraded by S&P to BBB- from BB+ in 1H ’13,          Peru by perhaps all the major rating agencies
in line with ratings assigned to the country’s       inasmuch as the country continues expanding at
sovereign debt by Moody’s and Fitch a year ago.      potential growth regardless of stability in metal
Despite currency weakness and concerns about         prices and as government stimulus and capital
attaining parliamentary approval for oil subsidy     inflows remain intact. Our conviction has
reductions, sufficiently robust credit metrics –     increased as inflation continues a downward trend
including a decade-long decline in government        to the center of its targeted band of 1-3%
debt- and external debt-to-GDP ratios –              (inflation is projected to be around 2.5% for both
comfortably place Indonesia in the investment-       2013 and 2014) and as the country continues to
grade rating bucket.                                 detach itself from the short-term
                                                     commodities cycle.
Philippines (BB+ pos / Ba1 sta)
The resilience of the Philippines’ political and     Latvia (BBB pos / Baa3 pos)
economic landscape makes a strong case for an        As Latvia successfully meets the accession
upgrade of the country’s debt to BBB- in 2013.       criteria to join the European Monetary Union,
The Aquino administration’s push for greater         HSBC Economics expects that the country will
transparency in government and more judicial         see a credit rating upgrade in 2013 from all three
independence has boosted confidence in the           rating agencies. The ECB evaluation report
country. Additionally, improving credit metrics in   detailing Latvia’s compliance with all five
terms of a healthy current account surplus, a push   convergence criteria is due in May 2013 in
for more onshore financing, improving debt-to-       preparation for its accession on 1 January 2014.
GDP ratios, and a forecasted primary surplus and     Mexico (BBB sta/ Baa1 sta)
balanced budget by 2016 make a strong case for       HSBC Research expects a one-notch credit
the country’s debt to be within the investment-      upgrade for Mexico to BBB+ from S&P and Fitch
grade category.                                      in 2013. Since Mexico was last downgraded in
Turkey (BB sta / Ba1 pos)                            2009 due to worries about the country’s fiscal
HSBC Economics believes that upgrades to             dependence on oil revenues, as well as mild
Turkey’s sovereign debt by S&P and Moody’s to        growth, the country has averaged a yearly growth
Baa3 and BB+, are likely.. Turkey’s public debt-     rate at or above 4%, similar to the average for
to-GDP ratio continues to fall, and economic         Latin America and a faster rate than Brazil.
activity is expected to pick up toward a 4.0%        Growth for this year is expected to be in line with
growth rate with the help of domestic demand,        the average for the region, yet could reach as
from an estimated 2.7% for 2012. In addition,        much as 5% in the medium term off the back of
economic imbalances, inflation, and a current        successfully implemented labor, fiscal, and energy
account deficit have all recently surprised to       reforms. The outlook for reforms remains
the downside.                                        promising and resolves the main reasons for the
                                                     country's downgrades previously.

     Global Emerging Markets
     Multi-asset strategy                                                                                     abc
     15 January 2013

Kazakhstan (BBB+ sta / Baa2 sta)                      Hungary (BB sta / Ba1 neg)
We believe that Kazakhstan could be upgraded          S&P’s latest downgrade on Hungary sovereign
another notch toward year-end 2013 by S&P and         debt highlights Hungary's vulnerable position,
Moody’s to the extent that GDP is maintained          even if Fitch surprisingly followed with a change
above a 5% growth rate. We forecast a 5.3%            to rating outlook from negative to stable on its
growth rate for 2013.                                 BB- rating. The country is in recession, and
                                                      domestic demand has been very weak since the
Belarus (B- sta / B3 neg)
                                                      global crisis. The government’s fiscal policies are
We believe (yet assign somewhat of a low
                                                      unpredictable (eg ad hoc taxes, pressure on the
probability) that Belarus may see a one-notch
                                                      banking sector), causing a drag on investor and
upgrade in 2H ’13 from S&P or Moody’s if the
                                                      business sentiment. The prospects of an IMF
country manages to restore economic growth
                                                      program have almost fully evaporated. The
while getting inflation to more manageable levels.
                                                      headline budget deficit looks OK, but the quality
We see inflation declining to 19% for 2013 from
                                                      of underlying fiscal adjustment is poor, ie it is the
68% previously and a slightly higher growth rate
                                                      question of sustainability of Hungary’s adjustment
over 2012 (2.8% vs 2.6%).
                                                      without confidence and growth.
Uruguay (BBB- sta / Baa3 pos)
                                                      Ukraine (B neg / B3 neg)
It seems likely that Uruguay will get a one-notch
                                                      HSBC Economics expects a high likelihood of a
positive move from Fitch, putting the country
                                                      downgrade for Ukraine in 2013 if the country fails
fully on investment-grade status, in line with the
                                                      to negotiate a new standby program with the IMF.
rating already given by Moody’s and S&P. Fitch
                                                      The large distortions in the balance of payments,
has had a positive outlook on Uruguay since
                                                      weak institutions (that, among other things, have
April 2012.
                                                      impeded implementation of an IMF program), a
Chile (AA- sta / Aa3 sta)                             weakened fiscal position, and the worsened
We expect an upgrade of one notch by Fitch off        economic outlook are the key reasons for the
the back of the recent upgrade given by S&P.          worsening credit metrics. There is some
Fitch just finished a trip to Chile, and a decision   probability of a two-notch downgrade during the
on an upgrade of the outlook or the rating is         course of 2013 if very little is done to address the
expected for Q1 2013.                                 macroeconomic challenges in Ukraine.

Potential downgrades                                  Argentina (B- neg / B3 neg)

South Africa (BBB neg / Baa1 neg)                     A combination of negative rulings by the US
Following downgrades by all three major rating        Court of Appeals forcing Argentina to pay
agencies between September 2012 and January           defaulted debt holders, and political backlash that
2013, HSBC Economics suspects that South              suggests that payment might be refused, could put
Africa could face another round of downgrades in      ratings under severe stress. A technical default, if
the second half of the year if 1H ‘13 performance     it occurs, could lead to a downgrade to selective
turns out poorly. We see first-quarter growth         default (SD).
expanding 3.0% y-o-y over an expected Q4 ’12
print of 2.1%, yet see overall growth tepidly
moving around 2.6% for the year, only slightly
above that in 2012.

   Global Emerging Markets
   Multi-asset strategy                                                                                                            abc
   15 January 2013

pick up, although the pace of net upgrades seems        Flows to EM to stay strong but
unlikely to recover the strength of previous years.     rotating toward equities
As depicted in our “2013 key ratings watch list”
                                                        Fund flows into the emerging markets are
(see the previous pages), HSBC Economics
                                                        likely to remain strong in 2013, supporting a
expects several countries’ ratings to be upgraded
                                                        strong performance for the different EM asset
by one or more credit rating agencies next year,
                                                        classes. Quantitative easing continues to be a
including four – Indonesia, the Philippines,
                                                        powerful force behind inflows into EM, in which
Turkey, and Romania – to the investment-grade
                                                        fundamentals remain attractive. The different
level by at least one agency.
                                                        rounds of QE have had a decreasing effect on
We also expect more of a two-way flow going             inflows into EM equities, while its force has been
forward, as the number of those falling into            increasing in the case of EM bonds (Chart A15).
“junk” (fallen angels) is likely to come closer to      However, China’s improving economic
that of those maturing into investment grade            momentum and its expected impact on other EM
(rising stars). While at the turn of the century, the   countries have boosted flows into EM equity
majority of EM countries were non-investment-           funds by the end of last year and the beginning
grade or high-yield (HY), this distribution now is      of 2013.
more evenly split at 50%, given the high number
                                                         Chart A15. EM funds and QEs, % increase of AUM
of rising stars. Furthermore, if it were not for the
fact that most of the newly rated countries come                            QE1 EM FI       QE2 EM FI        QE3 EM FI
in as junk, the asset class would have most of its                          Q1 EM Eq        Q2 EM Eq         Q3 EM Eq
members in the IG category. Yet the number of
fallen angels has been on the increase, the most
notable being Romania, Tunisia, Morocco,
Hungary, and Croatia (Chart A14).                           5

Appetite for EM should remain strong
nevertheless, as the positive trend of ratings                   0   4     8 12 16 20 24 28 32 36 40 44 48 52

continues to outperform the negative trend in                   Weeks after (QE1: 03/18/09; pre QE2: 08/25/10 and QE3: 08/01/12)

                                                         Source: EPFR Global, HSBC
the developed world. Following the same logic,
investors should pay special attention to the rating    The patterns of 2012 offer vital information on
rotation within the EM space. Our 2013 key              what may happen in the new year. Despite
ratings watch list suggests a positive view on          2012’S being challenging, EM funds surveyed by
Indonesia, the Philippines, Turkey, Peru, Latvia,       EPFR added USD106bn to their assets under
and Mexico, among others, and a more guarded            management. Chart A16 shows a clear bias
approach toward South Africa, Ukraine,                  toward bonds over equity (+USD58bn, or 28% of
Argentina, and Hungary.                                 AUM vs +USD48bn, or 6.1% of AUM),
                                                        particularly hard-currency debt, until 3Q2012.
                                                        This portion of the asset class benefited from very
                                                        low level of volatility, which became a strong
                                                        argument for investors seeking a powerful
                                                        combination of high return (search for yield) and
                                                        low risk.

      Global Emerging Markets
      Multi-asset strategy                                                                                                                                  abc
      15 January 2013

 Chart A16: EM bond and equity funds (USDbn)                             Chart A17: EM FX implied 3 months vol and LCD yields (%)
            USDbn                                                          40                                                                       9.5
     80                                                                    35
     60                                                                    30
                                                                           25                                                                       7.5
                                                                           20                                                                       7.0
     (20)                                                                                                                                           6.0
     (40)                                                                  10

     (60)                                                                       5                                                                   5.0
            2005    2006     2007   2008   2009   2010    2011   2012            2005    2006    2007   2008    2009   2010   2011    2012   2013
                                EM FI             EM Eq                                    EM FX 3months implied vol     LC yield (RHS)

 Source: EPFR Global, HSBC                                               Source: Bloomberg

We expect 2013 to look more like 2H2012 than                            trades in the local markets. In addition, under a
1H, with investors’ preference rebalancing                              continuation of QE and US fiscal issues, LCD
more toward equities and local currency debt.                           funds should benefit from a structurally weak
Strong movements on the monetary side to                                USD. As risk-on/risk-off lose force as a common
contain tail risk in the US and Europe made                             factor behind currency moves, idiosyncratic
investors more comfortable to take “growth” and                         factors should become more important. A
“currency” risk in the emerging world. Starting in                      continuation of the low EM FX volatility
August 2012, we saw an important pickup in                              environment should continue to drive LCD yields
flows to both equities and local currency bonds.                        to lower levels (ChartA17).
Indeed, net inflows surged after QE3 was
                                                                        EXD funds should remain well-supported by
announced by mid-September and renewed
                                                                        the search for yield environment on the back of
optimism about China’s economic rebound in
                                                                        low for longer UST yields and supporting
2013, with average weekly inflows into EM
                                                                        country-specific issues (Chart A18). On the
equity funds growing almost 5x to USD2.7bn in
                                                                        latter, countries that are prone to institute
the period 13 September 2012 to 9 January 2013,
                                                                        structural reforms or are already in the reform
compared to USD450m between Jan to 12 Sept,
                                                                        process to improve competitiveness and efficiency
and into local-currency debt funds by 3x to
                                                                        should ripe the fruits of credit upgrades and
USD500m in the same comparable periods.
                                                                        capital inflows. We have already seen strong
Average weekly inflows into EXD funds
advanced a marginal 24% to USD500m.                                      Chart A18. Funds to EM EXD surge in low UST vol. periods
                                                                                 % AUM                                                         Index
                                                                         1.5                                                                        0
EM equity funds have become strong
competitors to bond funds for foreign interest,                                                                                                       50
while among bonds, we expect to see a more
                                                                         0.0                                                                          100
balanced approach between EM local-currency
(LCD) and hard-currency (EXD) debt funds.                                                                                                             150
While risk-on/risk-off dynamics led to high EM                                                                                                        200
FX volatility in 2011 and a good part of 2012, a
                                                                         -2.0                                                                         250
reduction of tail risks should preserve the current                          2005       2006     2007 2008 2009 2010 2011 2012 2013
                                                                                               UST option volatility 1m (rhs) Flows into EXD
low-volume scenario, which is conducive to carry
                                                                         Source: EFPR, Bloomberg

   Global Emerging Markets
   Multi-asset strategy                                                                                               abc
   15 January 2013

inflows into country funds like China, Mexico,               markets, even if growth disappoints, as long as
Indonesia, Turkey, and Peru, among others. Yet               chances of tail risks are reduced.
the huge accumulation seen in 2012 seems
                                                             Our bullish view on EM assets for 2013 rests
unlikely to be repeated in 2013.
                                                             on our view that demand for EM assets will
We expect a strong pickup in flows toward EM                 significantly exceed supply, due to the
equities, a process that appears to have started             combination of three strong forces: 1) the
already (Chart A19). A muddling-through                      overall increase of money seeking assets globally,
investment environment should encourage                      2) the overall size of the asset class relative to the
positioning in the most volatile portions of the             global pool of financial assets, 3) and its relative
asset class. We also expect EM growth to                     strength vis-a-vis alternative assets. In Rolling In
accelerate in 2013 and 2014, widening the gap                the Money: Tracking the shift in flows in global
with DM even further. We believe a lot of                    bond markets, by Andre de Silva, 27 November
attention should be paid to the EM consumer                  2012, we explained the impact that several rounds
story, as well as limited global inflation pressures         of quantitative easing had in financial markets. As
and benign valuations. Also, investors’ improving            shown, bonds benefited the most, as each round of
confidence and potentially stronger EM FX and,               easing played more of a role of containing further
in some cases, constructive reform outlooks                  deterioration, rather than promoting economic
should boost EM flows into these funds (see                  activity. Not surprisingly, global investors have
LatAm, Asia, and CEEMEA Equities in 2013).                   gone for the more-secure asset class.

Total return expectations                                    The dual process of convergence of EM toward
                                                             DM, and the fracture in DM between true
 Chart A19: Investors’ confidence (momentum)                 sovereigns and not, has led to very strong
   3                                                         crossover funds looking to substitute into EM
   2                                                         and get a piece of the action. As the EM market
                                                             cap represents only a very small fraction of assets
                                                             under management by global portfolios, it takes
                                                             only minimum allocation shifts to have a
  -1                                                         significant impact on EM valuation. We expect all
  -2                                                         these three forces to stay very much alive in 2013.
                                                             Furthermore, the supply of assets by EM should
    2008         2009        2010     2011     2012   2013   remain vibrant, yet not strong enough to quench
                     EM Equity      EXD      LCD
                                                             demand from domestic and foreign investors.
 Source: EPFR Global, HSBC

                                                             The key for the year, we believe, is whether
With the amount of money floating around and                 global policymakers will finally manage to
the very low level of return provided by “safe-              convince global investors that they should
haven” assets, economic growth is less an                    abandon a secular reduction in equity allocation
important variable in determining returns than               that started back in 2000.
perceived risks. What we mean by this is that the
reflation process embarked upon by global
policymakers particularly benefits emerging

      Global Emerging Markets
      Multi-asset strategy                                                                                                                                   abc
      15 January 2013

The rally in hard-currency debt is not                                         The experience of 2012 is very telling of the
over: 5-7% returns in 2013                                                     forces at play. Chart A21 shows a decomposition
Technical factors, not fundamental                                             of returns for hard currency debt. Though 2012
improvements, appear likely to be once again                                   cannot be characterized as a year of risk-on, EM
the main driver of demand for EM hard                                          hard-currency debt returned north of 17% on the
currency debt. In Searching for Safety, we                                     back of a strong spread tightening (of around
explained how in a world where investors and                                   150bps).
regulators have become very risk-averse, the price
investors are willing to pay for safety has                                     Chart A21: Spread compression behind 2012’s returns in EM
                                                                                hard currency bonds
skyrocketed (eg 10yr UST 1.6%; Swiss 2yr                                              %
-0.28%). A structural imbalance in the market of
safe-haven assets, which is explained by supply
and demand considerations, should continue to                                   10
push global investors to search for alternative                                  0

sources of safety. EM hard-currency debt is                                     -10

particularly well-positioned to profit from this                                -20

dynamic, we believe.
                                                                                      2005     2006   2007    2008    2009    2010    2011   2012    2013F
We forecast the yield of the EM hard-currency
                                                                                             Coupon     UST          Spread      Residual      Tot Return
index to test, and potentially cross, the 4%
                                                                                Source: HSBC
level, to finish 2013 at spreads close to 230bps,
or 30bps tighter than today. EM-dedicated                                      We expect 2013 to be a small version of 2012,
investors, particularly those with long experience                             and returns to come in between 5-7% this year,
in the market, will most likely feel extremely                                 yet with a very low level of volatility, once again.
uncomfortable with these proposed valuations, we                               We do not expect UST to provide much of a lift
believe, yet this is not the case for crossover                                this time around; neither is such spread
investors that compared to different benchmarks                                compression is likely to be repeated, and thus
(Chart A20). We believe that a strong                                          most of the return would come from clipping
combination of crossover money looking for safe-
                                                                               coupons and some round of spread-tightening.
have assets with some yield will be an overriding
force to take yields to our targeted levels.                                   We expect EM corporate bond returns to be
                                                                               less significant this year than in 2012.
 Chart A20. EM EXD yields expensive to history, but cheap to
 alternatives                                                                  Nevertheless, with risk-free rates continuing to
           % Yield                                                             remain low for longer, we prefer the additional
 12                                                                      4.5
                                                                               spread that corporates offer over sovereigns. With
 11                                                                      4.0
                                                                               less room for yield compression, most of the value
                                                                               in the corporate space should come from coupons.
                                                                               We recommend buying on market over-reactions
                                                                         2.5   and holding more BB names.
  6                                                                            We expect primary issuance in 2013 to
  5                                                                      1.5
                                                                               continue at elevated levels, as issuers take
  4                                                                      1.0
      04       05    06      07       08     09      10     11      12
                                                                               advantage of low rates and investors’ seemingly
                     EM Yields - Libor     Ratio EM / UST 10y (rhs)            insatiable appetite for bonds. Financials are
 Source: HSBC

   Global Emerging Markets
   Multi-asset strategy                                                                                                                                               abc
   15 January 2013

becoming increasingly important for returns. We                                        EM equities returns could beat last
favor Brazil IG, Colombia, India, and Vietnam.                                         year’s; expected returns of 14-28%
It is about alpha and FX in local rates:                                               We recommend investors reduce structural
7% returns expected in local currency                                                  underweights in EM equities. With tail risk
                                                                                       contained and growth accelerating, this asset class
With the easing cycle in EM virtually done,
                                                                                       appears very well-positioned to beat even the
monetary policy will not be a driver of returns
                                                                                       strong returns of 2012. In the context of reduced
for the local debt markets as it was in 2012, in
                                                                                       equity risk premium, we believe that the MSCI
our view. With anchored yield curves in the core
                                                                                       EM could return as high as 20+% this year.
markets, search-for-yield flows appear likely to
come to EM local markets, in particular if EM FX                                       Fund flows data are already reporting a
continues to show a reduced level of volatility.                                       comeback to the asset class, which we believe
We expect EM FX appreciation to provide around                                         has legs. With fixed income becoming
2% of added return in a weighted average.                                              increasingly more expensive for the current
                                                                                       position in the cycle, EM equities could do very
Clipping coupons should be the main driver of
                                                                                       well in a context of portfolio rebalancing if
returns. Local curves are flat, but barring a
                                                                                       growth proves to be stronger than expected.
change in the rates outlook in the US and Europe
(unlikely, in our view), they should remain that                                       Crucial for a reallocation toward stocks is a
way. Therefore, we see duration exposure as a                                          reduction of the volatility witnessed by the
source of gaining alpha in places like Mexico,                                         market over recent years. EM PEs are well
Turkey, Indonesia, and Russia.                                                         below their post-2000 average; thus, positive
                                                                                       returns may occur even in the context of mediocre
Local bonds and equities could support each
                                                                                       economic growth (Chart A23). We particularly
other through the FX channel, but in a good
                                                                                       like to be exposed to the EM consumer through
scenario the latter should beat the former, as
                                                                                       stocks in the larger market caps. Thus we
growing inflation expectations could put pressure
                                                                                       overweight China, Brazil, Russia, Korea,
on yields. Inflation linkers could serve as a good
                                                                                       and Indonesia.
source of hedge and diversification as the business
cycle heats up.

 Chart A22. 2013 local currency bond returns to come mostly                             Chart A23. EM Equities PE
 from coupons
 15                                                                                        16
  0                                                                                        12
 -15                                                                                        8
           2005     2006   2007    2008      2009   2010       2011   2012     2013F
                                                                                                00   01   02   03   04   05   06   07   08   09   10   11   12   13
                  Coupon      FX          Yield     Residual          Tot Return USD                                EMG 12MTH FWD P/E RTIO

 Source: HSBC                                                                           Source: Datastream

     Global Emerging Markets
     Multi-asset strategy                                                    abc
     15 January 2013

                               This page has been left blank intentionally

Global Emerging Markets
Multi-asset strategy                  abc
15 January 2013

                          2013 asset class

     Global Emerging Markets
     Multi-asset strategy                                                                                    abc
     15 January 2013

EXD still offering good
 The hunt for yield and safety should                 Is there still value left? EM spreads are starting    Gordian Kemen
                                                                                                             Chief Strategist, LatAm FI
  continue to benefit EM EXD                           2013 much tighter than at the beginning of 2012.      HSBC Securities (USA) Inc.
                                                       Throughout 2012, a representative EM hard-            +1 212 525 2593
 We estimate 2013 total returns between 5%                                                        
                                                       currency sovereign debt index tightened by
  and 7% and expect new spread/yield lows                                                                    Alejandro Martinez-Cruz
                                                       147bp, with even low-beta spreads moving on           LatAm FI Strategist
 Supply/demand dynamics remain                        average 126bp tighter (high betas by 180bp). Yet      HSBC Mexico S.A.
                                                                                                             +52 55 5721 2380
  supportive, in our view                              the EXD index spread is still 76bp wide to its all-

                                                       time tightest levels (June 2007).                     Di Luo
How much tighter?                                                                                            EMEA FI Strategist
                                                                                                             HSBC Bank plc
                                                       Should UST10 stay stable, we see good chances         +44 20 7991 6753
We expect 2013 to be a toned-down version of                                                       
                                                       that the EM index yield may test 4%, ie a
2012, with carry and some spread compression                                                                 Victor Fu
                                                       spread compression of around 40bps from its
the main drivers for performance. Returns are not                                                            EM Quantitative Strategist
                                                       end 2012 level. How can we get there? Clearly         HSBC Securities (USA) Inc.
likely to be as strong as they were in 2012, at                                                              +1 212 525 4219
                                                       there is more room for spread compression in the
more than 17%, but still attractive enough for                                                     
                                                       high-yielders than in the low-yielders. According     Dilip Shahani
investors to remain fully invested in this asset
                                                       to our analysis, if there is a 60bp compression in    Head of Asia-Pacific Research
class, in our view.                                                                                          The Hong Kong and Shanghai
                                                       spreads for the high-yielders (HY), which account     Banking Corporation Limited
The worldwide hunt for high-quality assets                                                                   +852 2822 4520
                                                       for 38% of the index in terms of market cap, 20bp
continues to benefit EXD. As highlighted in            of spread tightening on average in high-grade
Pablo Goldberg’s 25 September 2012 report,             (HG) credits is needed. If there is an 80bp spread
Searching for Safety: A new source of demand for       tightening in HY, only 10bp of spread tightening
EM assets, a relative scarcity of safe-haven assets    in HG is needed. This analysis does not take into
globally should continue to boost demand for EM        consideration any support from another rally in
hard currency bonds, despite record-low yields.        US Treasuries. The strong structural demand for
Demand is not only about the search for yield, it is   safe-haven assets has also changed the
also the search for “safety” – stable credits and      traditionally inverse relationship between spreads
low volatility – that has benefited EXD.               and US Treasury yields to a more asymmetric
Fundamentally, the asset class remains sound, as       one, with low-beta credits performing strongly
evidenced by the strong migration of emerging          even when Treasuries rally.
market sovereigns toward investment grade in
                                                       Risk to our view is a UST sell-off from, for
recent years, even though in 2012 ratings
                                                       example, upside surprises in US growth.
momentum (defined by the difference between
                                                       However, the negative correlation between UST
positive and negative ratings action in notches)
                                                       and spread moves provides a built-in cushion in
turned slightly negative for the first time
                                                       that case. Also, the recent US Treasury sell-off
since 2009.
                                                       following the deal to prevent the US “fiscal cliff”
                                                       of tax increases and spending cuts has done very

      Global Emerging Markets
      Multi-asset strategy                                                                                                                                            abc
      15 January 2013

 little damage to EM hard currency debt. Indeed,                                       EM into HY and IG, both are trading about
 ratings’ positive momentum could return, as we                                        100bp wide to their respective US
 expect EM growth to accelerate. Much more                                             corporate counterparts.
 important than the direction of US Treasuries is
                                                                                       Total return scenarios for 2013
 the driver behind it, in particular with respect to
 shifts in risk sentiment. If anything, the positive                                   We expect 2013 total return for EXD of about
 correlation between the equity and credit markets                                     6.8%. As in previous years, we construct total return
 has risen in recent years.                                                            scenarios for EM EXD, with US Treasury yields and
                                                                                       risk aversion the key variables to watch. We vary US
 Sharpe ratios still favor EXD over LMD. This
                                                                                       Treasury yields between 1.4% and 2.9%. Likewise,
 is not surprising, given that hard currency debt
                                                                                       we vary risk aversion, the other key component of
 does not incur volatile FX moves. With average
                                                                                       total return, between 0.5 lower (risk-loving) and
 yields somewhat similar – 5.5% and 4.4% for
                                                                                       1 and 2 standard deviations higher (risk-averse). In
 LDM and EXD, respectively – we continue to
                                                                                       Table B1, we update our total return scenario
 prefer the latter on a risk-adjusted basis, as we see
                                                                                       analysis for EM EXD in 2013.
 hard currency bonds in a better technical position
 with a superior Sharpe ratio on an index level,                                       We do not expect a lot of support from US
 given the vulnerability of local markets to                                           Treasuries this year, but in our base case, risk
 currency moves.                                                                       appetite will remain constant or even increase. If
                                                                                       things stay just the same, our model predicts a total
 EXD is trading nearly 100bp wide to US high-
                                                                                       return of about 4% from EXD (see the “Muddle
 grade now. This means there is still relative value
                                                                                       through” scenario in the table on EM EXD total
 in EXD, even though the spread differential has
                                                                                       return scenarios). This is mainly the carry of the
 narrowed from 170bp a year ago. If we dissect
                                                                                       index. To that number we add our expectation of
 Table B1. EM EXD total return scenarios
                                                       Risk aversion
     UST          Risk aversion shock1                  increases1                   Risk aversion constant               Risk aversion declines1

     -50bp                Accident                      Crisis returns                                Massive and credible stimulus
                      Spread Δ:124bp                    Spread Δ:67bp                      Spread Δ:29bp                         Spread Δ:10bp
                      Exp. Return:-1.9%                Exp. return:2.7%                   Exp. return:5.8%                       Exp. return:7.5%

     +0bp                                                                                                     Muddle through
                       Spread Δ:96bp                    Spread Δ:38bp                       Spread Δ:0bp                         Spread Δ:-19bp
                      Exp. Return:-3.6%                Exp. return:0.9%                   Exp. return:4.0%                       Exp. return:5.6%

    +50bp               Perfect storm                   Inflation scare                                       Mild US recovery
                       Spread Δ:67bp                     Spread Δ:9bp                      Spread Δ:-29bp                        Spread Δ:-48bp
                      Exp. Return:-5.2%                Exp. return:-0.7%                  Exp. return:2.3%                       Exp. return:3.8%

    +100bp                                                                                                   Strong US recovery
                       Spread Δ:38bp                    Spread Δ:-20bp                     Spread Δ:-58bp                        Spread Δ:-77bp
                      Exp. Return:-6.7%                Exp. Return:-2.4%                  Exp. return:0.6%                       Exp. return:2.1%

 Calculation is done as of 4-Jan-13 with UST at 1.90% and EM EXD spread at 241bp
 1: We assume that the current level of our proprietary risk aversion index decreases by one-half standard deviation, stays the same, or increases between 1 and 2
 (shock) standard deviations. A standard deviation is measured with respect to our index over the entire sampling period since January 2001. Note: We estimate the
 historical relationship via multivariate OLS regression of the form:

  ΔSpdt = β0 + β1ΔUSTt +β2ΔMRAIt + β3d1ΔUSTt + β4d2ΔMRAIt + εt
wwhere Spd denotes the EM index spread, UST the 10y UST yield, and MRAI our proprietary risk aversion index. We use weekly average changes for all the variables.
 Based on our analysis, we find that the index spread exhibits a higher sensitivity to UST when UST is lower than 3.63% than otherwise and that the spread moves
 more rapidly when MRAI is greater than 0.35(risk-averse) than otherwise. To model these effects, we use two dummy variables, d1 and d2, which take a value of 1 or
 0 based on the two states of UST and those of MRAI.
 Source: HSBC

     Global Emerging Markets
     Multi-asset strategy                                                                                                  abc
     15 January 2013

about 20-40bp of spread tightening on the back of          Chart B1. Absolute contributions to EM EXD total return, 2012

the global hunt for yield, for another 1.6-2.8% of         2.5%

total return. This adds up to our expected total return    2.0%
between 5-7% for the year. If UST 10yr yields return
to around 1.6%, EM EXD total return could go close
to 8% in 2013.                                             1.0%

A rise in US Treasury yields would eat into EXD
performance. If the sell-off were to be driven by          0.0%

                                                                  South Africa


                                                                    Sri Lanka








higher growth expectations, we would expect the
asset class to come under increasing competition
from equities. Based on the strength of the US yield       Source: HSBC, Datastream

sell-off, our model predicts returns could shrink to as
low as 0.6-2.1% in the case of a strong US recovery.      daily total return standard deviations, 3.3% of
Again, the model here may underestimate the effect        annual total return was achieved. This compares
of global flows into the asset class that may be          very favorably with a Sharpe ratio of 1.7 for LMD
reinforced by stronger growth outlooks in                 in USD terms in 2012. We believe this makes
EM countries.                                             EXD still an attractive investment destination,
                                                          in spite of lower expected returns this year.
The downside scenarios with risk aversion
increasing by one standard deviation as a                 Three factors surprised us in 2012, and we
consequence of a renewed sense of global crisis           believe they hold lessons for this year, as well:
still provide total returns between 0.9% and              (1) The HG performance in 2012 was impressive,
2.7%, depending on US Treasuries; a still relatively      with almost the entire investment-grade bloc
benign outcome, in our view. As in previous years,        producing double-digit returns, while generating
risk aversion remains the single most important           some of the highest Sharpe ratios in EXD.
determinant of returns. In extreme downside               (2) HG versus HY performance was more
scenarios, such as if there were a “financial accident”   differentiated in 2012, with 15% total return for
in Europe, EXD total returns could be close to -4%        the former and 22% for the latter, compared with
or even worse, we estimate.                               12% and 11%, respectively, in 2011. Venezuela
                                                          with a 47% total return and Ukraine with 24%
EXD superior Sharpe ratio                                 clearly contributed very strongly to that outcome.
With a total return of more than 17%, EM                  (3) There were no severe underperformers: The
external debt had a strong performance in                 worst-performing credits, Lebanon and Jamaica,
2012, much better than the 7.4% in 2011. EXD              still returned close to 5%.
outperformed US high-grade debt and high yield,
with 10.4% and 15.4% total returns, respectively.
                                                          Supply-and-demand dynamics
It also outperformed emerging local market debt           We expect the total supply of hard-currency
(LMD) in local currency terms (13.7%), but came           sovereign bonds at around USD75bn in 2013.
surprisingly close to local market debt in USD            This would be roughly 10% higher than the 2012
terms (16.8%). What is important is that this             supply. Low spread levels and favorable
performance was achieved with relatively low              supply/demand conditions will possibly prompt
levels of volatility. The ex-post Sharpe ratio for        some issuers to front-load issuance, as was the case
the index is 3.3, ie per unit of risk measured in         in 2011. Also, some issuers may consider pre-

    Global Emerging Markets
    Multi-asset strategy                                                                                                                       abc
    15 January 2013

funding 2014 issuance in the second half of 2013 if                                     remains very complex, and with little upside, we
market conditions remain favorable.                                                     believe, especially given the recent rally.

Redemptions and coupon payments in 2013                                                 In terms of relative value opportunities, we
amount to USD79bn. These figures relate to 55 EM                                        suggest buying the basis in Venezuela as a
sovereigns and seven quasi-sovereigns and consist of                                    protective trade with significant positive carry.
56% of coupon payments and 44% redemptions.                                             We also like long Mexico versus Brazil as a relative
The calendar is very heavily concentrated in January                                    value macro play, given diverging growth paths. We
(USD15bn), March, and July (cUSD9bn each),                                              see relative value in UMS versus Pemex
while August to December will see below-average                                         spread tighteners.
of such reflows.
                                                                                        For CEEMEA, we recommend an overweight in
By region, LatAm and CEEMEA account for 85%                                             Turkey as a potential upgrade candidate. We
of reflows in almost equal part, with only 15% due                                      would also look to revisit long basis trades in
in Asia. In LatAm, Venezuela and PdVSA combined                                         Turkey to position for the credit improvement.
top the list with almost USD9bn. In CEEMEA,                                             Meanwhile, we are underweight Hungary and
Poland has the largest reflows with USD6.3bn.                                           Ukraine. In both cases, external liquidity
                                                                                        conditions remain vulnerable, absent an external
 Chart B2. EM EXD redemptions and coupons, 2013
                                                                                        funding anchor. In terms of relative value
            USD bn
  16                                                                                    opportunities, we recommend short Hungary
                                                                                        versus Romania as a relative value macro play:
                                                                                        Outperformance of Romania should continue
   8                                                                                    as the new government re-engages with the
   6                                                                                    International Monetary Fund in 2013, while
                                                                                        Hungary is slipping.
   0                                                                                    In Asia, we see little value in sovereigns at
          Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
                                                                                        current levels. We are defensive in Q1, as we
                              LATAM                EMEA                ASIA
                                                                                        expect the ADBI spread to widen moderately on
 Note: Included are 55 EM countries plus the seven largest quasi-sovereign countries.
 Source: HSBC, Bloomberg                                                                concerns that fiscal consolidation in both the US
                                                                                        and the eurozone might undermine growth, and
Strategies and top trades                                                               with no additional measures to bolster growth in
In Latin America, we remain overweight Mexico                                           China likely before a key leadership meeting
due to our view that the credit will continue to                                        expected in March. From 2Q13 onward, we
benefit due to positive government reform                                               expect an improved cyclical global economic
momentum. We also stay overweight Venezuela                                             story and additional monetary stimulus from
for carry and possible political upside, though                                         central banks.
with an adaptive approach, depending on how
political events unfold. We continue to advise
caution regarding Argentina. While payments
of the restructured bonds are secured until the end
of February at least, and the risk of technical
default has been averted for now, the situation

      Global Emerging Markets
      Multi-asset strategy                                                                                                                      abc
      15 January 2013

Local rates: Decent carry
and some alpha

 We expect local markets to deliver total                                              if it can be achieved without the kind of volatility    Gordian Kemen
                                                                                                                                                Chief Strategist, LatAm FI
  returns of about 6.6% in local currency                                               – particularly from EM currencies – that frustrated     HSBC Securities (USA) Inc.
                                                                                                                                                +1 212 525 2593
  terms in 2013, with a potential extra 1.8%                                            many local market investors in 1H2012.        
  coming from EM FX appreciation
                                                                                        Our forecast is broken down as follows: Coupon          Di Luo, CFA
                                                                                                                                                EMEA FI Strategist
 LatAm central banks should be mostly on                                               return will dominate with 6.0%, followed by             HSBC Bank plc
                                                                                                                                                +44 20 7991 6753
  hold in 2013, while we expect some hikes in                                           currency gains of 1.7%. Duration return amounts
  Asia later in the year and some cuts in                                               to only 0.6%, according to our forecasts, which is      Andre de Silva, CFA
  CEEMEA                                                                                not surprising, given the end of the easing cycle in    Head, Asia Rates Strategy
                                                                                                                                                The Hong Kong and Shanghai
                                                                                        most countries.                                         Banking Corporation Limited
 We recommend taking duration in the long                                                                                                      +852 2822 4665
  ends of select markets, and we see value in                                           Our relatively constructive outlook for local 

  inflation assets as a strategic theme                                                 markets is based on four key drivers:                   Alejandro Martinez-Cruz
                                                                                                                                                LatAm FI Strategist
Outlook and drivers for 2013                                                             The permanence of low US Treasury yields
                                                                                                                                                HSBC Mexico SA
                                                                                                                                                +52 55 5721 2380
                                                                                          fosters the search for yield and duration in
For 2013, we expect EM local markets to                                                                                                         mailto:
                                                                                          select local markets, not only by EM-
generate total returns of 6.6% in local
                                                                                          dedicated, but also cross-over fixed
currency terms, and 8.3% in USD terms. These
                                                                                          income investors.
projected total returns pale in comparison to the
almost 16% in USD terms reached in 2012.                                                 Diverging growth and macro trends
Nonetheless, it still would be attractive, especially                                     between EM and DM continue to attract

 Chart B3. Expected total returns for 2013                                               Chart B4. Inflows into EM local currency and blended
                                                                                         currency funds (USDbn)
  15%                                                                                     2.5
     0%                                                                                   1.5
     -5%                                                                                  1.0




















                       Duration Return                   Coupon Return
                       FX return                         TOTAL USD Return
                                                                                                                           2011   2012
 Forecasts are based on HSBC forecasts of 5y rates and currencies with respect to the
 end of 2013.                                                                            Data for 2012 through November 2012.
 Source: HSBC                                                                            Source: HSBC, EPFR

    Global Emerging Markets
    Multi-asset strategy                                                                                               abc
    15 January 2013

      inflows into local markets (“search for safety”               sharpest depreciation we expect is for Brazil
      and diversification). These flows picked up                   (-12%), and the remainder of countries falls in
      sharply in 2012, and we expect them to                        between. A significant number of countries
      remain robust and even to accelerate in                       continue to experience appreciation pressures,
      some cases.                                                   and in some cases, strong inflows may prompt
                                                                    similar responses as during the “currency
 Monetary easing cycles in EM have, for the
                                                                    wars” of 2010. In other cases (for example, in
  most part, ended, but significant hikes are
                                                                    Mexico and Uruguay), central banks may
  also not likely, in our view. Current monetary
                                                                    allow for further appreciation to ease inflation
  policy forecasts reflect the growth divergence
                                                                    pressures coming from supply shocks.
  between the regions. While CEEMEA still
                                                                    Ultimately, we expect periods of increased
  may have some easing to do, we expect
                                                                    central bank intervention to pin currencies
  LatAm to remain on hold this year (with the
                                                                    into stable ranges, which in turn provides a
  exception of Colombia), and Asia is getting
                                                                    decent backdrop for carry-driven strategies.
  ready to see some hikes. However, given the
                                                                    Nonetheless, we are mindful of
  fragility of global growth, most EM central
                                                                    misalignments, and we suggest hedging
  banks will likely stay accommodative and
                                                                    currency exposure of bond positions on an
  only fine-tune monetary policy in 2013, we
                                                                    opportunistic basis.
  expect. With a few exceptions, we see little
  value in the front end – another argument in                  Risks and scenarios
  favor of duration extension in markets that
                                                                But there are risks as well, including:
  still have room for flattening.
                                                                 Global reflation prompts reallocation out of
  Chart B5. Implied policy rate changes vs HSBC forecasts for
  2013 YE                                                         the asset class. This would be driven by
           bps                                                    higher core-market yields on improved
    40                                                            growth expectations.
     0                                                           Risk aversion rises: Flight into the USD and
   -40                                                            US Treasuries, possibly on the back of
                                                                  renewed stress in the eurozone or
  -100                                                            geopolitical risks.







                                                                 Inflation picks up on the back of supply and
                                                                  commodity price shocks, making EM central
                 Cum Change YE 2013   HSBC 2013 Rate Change       banks more hawkish.
  Source: HSBC, Bloomberg
                                                                 Global recession fears would drive US
 EM currencies should remain supportive,                         Treasuries lower and hurt EM FX vis-à-vis
  and in particular less volatile than in 1H12.                   core currencies, deteriorating local markets’
  In aggregate, we do not expect FX                               returns when translated into foreign investors’
  appreciation to be a key driver of total returns                home currencies.
  (1.7% contribution), but there are country-
                                                                We see total returns in local currency terms
  specific variations with decent appreciation
                                                                ranging between 4-9% across different
  potential (9-12%) still expected in Hungary
                                                                scenarios accounting for the above-mentioned
  and South Africa. On the other hand, the
                                                                risks. We have constructed a model that allows us

     Global Emerging Markets
     Multi-asset strategy                                                                                                                             abc
     15 January 2013

to shock our base case by modifying US Treasury                                                  2012, or Rolling in the money: Tracking the shift
yields and the monetary policy bias in EM. The                                                   in flows in global bond markets, by Andre de
model takes into account all constituents of the                                                 Silva, 27 November 12), we believe that secular
main local market index using current country                                                    dynamics are at play that will continue to exert
weights. We use (1) alternative scenarios for US                                                 flattening pressure on these curves.
Treasuries with yields deviating 50bp and 100bp
                                                                                                 Carry and roll-down also favor the long end of
up and 50bp down from our base case, and
                                                                                                 local curves, with the exception of Thailand,
(2) two alternative risk scenarios for EM rates, a
                                                                                                 Turkey, and Chile. Moreover, an unattractive
bear case with 50bp hikes and a bull case with
                                                                                                 carry/roll-down proposition in the front end
50bp cuts (in addition to our respective base case
                                                                                                 should encourage domestic fixed-income
for a country). For details, see the footnote under
                                                                                                 investors to extend duration. For leveraged
Table B2.
                                                                                                 investors, flatteners enjoy attractive carry/roll-
Table B2. LMD total returns scenario analysis                                                    down profile in many curves, eg Poland, Hungary,
                   UST - 50bp            UST base          UST +50bp UST +100bp                  and Israel.
Dovish EM                    9.07%              8.22%              7.38%                 6.05%
Base EM                      7.45%              6.60%              5.75%                 4.75%   Strategies to begin the year
Hawkish                      5.66%              4.82%              3.89%                 2.96%
Note: Base case based on HSBC forecasts of individual countries’ policy rates and UST            Front end-based monetary policy strategies
yields; EM hawkish scenario is computed by shifting the 1y rate of each EM curve by 50bp
up; EM dovish scenario is computed by shifting all EM 1y rates lower by 50bp. Forecasts of
5y yield are derived from: 5y yield = 1y yield projection+1s5s fair value+ macro adjustment       In LatAm, receive 2-year sector in Brazil DI.
terms, where 1s5s fair value= intercept + beta1* country PC1 score +beta2* USD PC1
score+ beta3* USD PC2 score; PC scores are obtained by applying PCA on IRS daily
changes since May 2009.                                                                           In CEEMEA, receive 1y1y ZAR IRS versus
Source: HSBC
                                                                                                   pay 1y1y PLN above 190bp.
Our analysis also finds that most curves in EM
                                                                                                  In Asia, receive CNY1yr NDIRS versus pay
local markets now are too flat historically. This
                                                                                                   AUD1yr OIS.
may seem inconsistent with our call for duration
extension or even flatter curves, and could add                                                  Compared to last year, we do not see a lot of
another layer of risk to the already present                                                     opportunities left in this space, given the few
vulnerability of high foreign positioning.                                                       opportunities where implied market pricing and
However, as we have shown elsewhere (see                                                         monetary policy forecasts are diverging. On the
Searching for Safety: A new source of demand for                                                 one hand, we continue to see value in receiving
EM assets, by Pablo Goldberg, 25 September                                                       rates in the front ends of Brazil and potentially
                                                                                                 Turkey, as in both places the market is pricing in
  Chart B6. Curve (2s10s) fitted against PC1 vs market levels
                                                                                                 too many hikes for the year, we believe. We also
  %                                                                                              remain receivers in China, and in South Africa,
                                     flatten               steepen                               where we believe the curve is pricing in too few
                                                                                                 cuts. In other places, the market has overshot and
  150             Market       Fitted
                                                                                                 is pricing in too many cuts (Poland and Hungary).
  100                                                                                            Here we are neutral, but biased to pay.
                                                                                                 Long-end duration extension to gain alpha

   -50                                                                                            Mexico (10y Mbono or TIIE), Peru



                                                                                                   (Soberanos ’31).
  Note: Fair values are obtained based on linear regression between curve slope and
  country factors (country PCA) and US rates factors (US PCA).
                                                                                                  Turkey 09/22 (FX hedged) above 7%.
  Source: HSBC, Bloomberg

   Global Emerging Markets
   Multi-asset strategy                                                                                                       abc
   15 January 2013

 20-year Indonesia government bonds (FR65);               Chart B7. Inflation break-evens vs inflation forecasts (2Y)

  long 10-year Philippines global peso notes              7.0%
  (Nov 2022).
This is the category that has the most potential to       4.0%
generate alpha, in our view. However, given
already low yield levels, curves that are already
flat by historical standards, and ultra-long foreign      0.0%
positions, we believe that investors should seek                    BR     CL      CO         IL       MX     TR         ZA
                                                                                  2y BEI   HSBC 2y forecast
markets that combine yield pickup vis-à-vis core
                                                           Source: HSBC
market yields, with some sort of positive
dynamics such as reform momentum, upgrade
                                                         tool. Break-even inflation is low in Thailand,
potential, or technical factors such as potential
                                                         Brazil, and Turkey in comparison to our inflation
index inclusion or impending market
                                                         projections. Also, real yields in Brazil are still
liberalization. In Asia, our top picks in this respect
                                                         among the highest in the asset class. We expect
are the Philippines (upgrade candidate) and India
                                                         liquidity in this market segment to increase, with
(fiscal reforms), as well as Malaysia and
                                                         many LatAm investors increasing the inflation-
Indonesia on valuations and strong foreign
                                                         linked part of their domestic debt stock and new
inflows. In CEEMEA, we prefer Turkey (potential
                                                         Asian issuers expected to appear, such as in the
ratings upgrade) and Russia (access to new
                                                         Philippines, India, and Singapore. In EMEA,
investor base, given Euroclear-ability). In LatAm,
                                                         inflation-linked issuance may increase in Turkey,
Mexico is our top pick (reform momentum and
                                                         Israel, and South Africa. Linkers in Poland also
potential upgrade), followed by Peru and
                                                         attract significant interest among investors.
Colombia (possible easing of taxation for
foreign investors).                                      Idiosyncratic trades to hedge or diversify

Inflation-linked bonds for relative value and             Buy T-bills in Uruguay, biased to sell peso
diversification                                            bonds in Argentina.

 Buy inflation-linked bonds in Brazil (10-12-            South Africa 2s5s IRS steepener, and short
  year sector of the NTN-B curve)                          the R186 vs 5yfwd5y, and flattener
                                                           in Hungary.
 Buy Turkey TURKGB CPI Feb 2022 yield
  above 1.5%                                              Enter steepener in Thailand.

 Buy inflation-linked bonds in Thailand                 Here we see opportunities in Peru and Uruguay,
  (10-year sector)                                       which are shielded from global jitters more than
                                                         other countries in LatAm. In Argentina, we
Inflation-linked bonds markedly underperformed
                                                         remain bearish on peso bonds. In CEEMEA, we
nominal bonds, given that there has been little
                                                         recommend steepeners in South Africa to position
need for inflation protection. Nonetheless, we
                                                         for potential fiscal slippage and rating downgrade
believe that inflation risks could resurface again
                                                         risks, as well as flatteners in Hungary. In Asia, we
over the course of the year, and moreover, that the
                                                         recommend curve steepeners in Thailand to
current market price for inflation protection is
                                                         prepare for an impending supply shock.
very low. We advocate long exposure to the asset
class as a strategic investment and diversification

     Global Emerging Markets
     Multi-asset strategy                                                                                  abc
     15 January 2013

Supply in the local markets                           EMEA
Latin America                                         In South Africa, duration extension may
                                                      continue. The Treasury has focused on the long
We expect Brazil’s gross issuance in the local
                                                      end of the curve to finance deficits. We expect
markets to decrease 29% this year%, though
                                                      supply to be concentrated from R2023 onward.
net issuance should remain constant. Gross
issuance in 2012 surprised to the upside. The debt    Turkey faces significantly higher gross
management strategy remains to extend the             borrowing requirement in 2013 than in 2012
duration of the debt stock.                           due to heavier redemptions – c48% higher gross
                                                      increase and c13% higher net issuance. We expect
Mexico should return to a balanced budget in
                                                      the Treasury to increase supply gradually in the
2013. The Treasury will focus on increasing
                                                      long end of the curve.
duration of the domestic debt stock through a
reduction in Cetes and an increase in MBonos and      Poland has already prefinanced 15-20% of its
Udibonos issuance. Net borrowing should be 83%        financing requirement for 2013, and is aiming
lower than last year.                                 to complete 50% of its total financing by the end
                                                      of Q1. We expect a 6% decline in gross issuance.
In Chile, we see issuance decline 15% in gross
terms and 33% in net terms. Issuance is still         In Hungary, the government plans to retap the
close to 60% in inflation-linked bonds, but fixed-    Eurobond market in 2013 to mitigate the burden
rate nominal bonds are gaining ground. Chile will     for the local currency bond market. We expect net
issue its first 30-year Treasury bond ever.           domestic bond issuance to be HUF496bn,
                                                      compared with HUF1.2trn in 2012.
In Argentina, we expect an increase of only 3%
in gross issuance. Net issuance appears likely to     Asia
drop to USD3.5bn from more than USD6bn last           The most significant jump in net bond issuance
year. In addition, the use of central bank reserves   in the region will come from China, where the
would complete FX needs for 2012.                     fiscal deficit is projected to expand by 50%. In
The Treasury in Colombia will focus on local          absolute terms, net issuance should increase
issuance to finance its borrowing requirements.       RMB400bn. In the offshore dim sum market,
The government plans to increase gross issuance       gross issuance is forecast to reach CNY280bn, of
by 19%. Net issuance of local TES bonds should        which CNY30bn would be government bonds.
be 5% lower than in 2012.                             There are upside risks to supply in Thailand,
In Uruguay, gross issuance should be 20%              given the need to fund a THB2trn infrastructure
lower than in 2012, due to lower financing needs      project across nine years. Based on a conservative
and amortizations. Net issuance should be down        estimate, net bond issuance could rise 25% in the
44%. Uruguay will continue to reduce its hard-        current fiscal year.
currency liabilities.                                 In Malaysia, we expect issuance to decline this
In Peru, the fiscal surplus of 2% in 2012 will        year. The first 20yr Government Investment Issue
provide room to ease net issuance in 2013 by          will be issued in August and the first 30yr
33%. Gross local issuance is expected to fall by      Malaysian Government Security in September.
17%. The strategy will focus more on the long         Taiwan will reintroduce the 15-year bond in
end of the curve, where the appetite of foreign       January following a seven-year hiatus.
investors is concentrated.

     Global Emerging Markets
     Multi-asset strategy                                                                                                                                                                         abc
     15 January 2013

Bond supply summary table
Table B3. Estimated gross and net issuance of EM local government bonds
                              _________ 2013e issuance target __________ __________ 2012a issuance ___________ ______________ Change _______________
                                   Gross issuance           Net issuance   Gross issuance         Net issuance     Gross issuance        Net issuance
Argentina                                      USD8bn                          USD3.5bn                    USD7.8bn                         USD6.4bn                                  3%                             -45%
Brazil                                        BRL375bn                         -BRL97bn                    BRL525bn                        -BRL100bn                                -29%                              -3%
Chile**                                       CLP3.9trn                        CLP1.3trn                   CLP4.6trn                        CLP2.0trn                               -15%                             -33%
Colombia                                     COP30.0trn                       -COP3.6trn                  COP25.2trn                       -COP3.8trn                                19%                              -5%
Mexico                                        MXN2.0trn                        MXN50bn                     MXN2.1trn                       MXN301bn                                  -5%                             -83%
Peru                                          PEN2.5bn                         PEN0.2bn                    PEN3.0bn                         PEN0.3bn                                -17%                             -33%
Uruguay                                      UYU23.4bn                        UYU8.76bn                   UYU29.3bn                        UYU15.7bn                                -20%                             -44%

Czech Republic                             CZK149.3bn                       CZK40.7bn                  CZK167.5bn                         CZK 42.9bn                                 -9%                              -5%
Hungary (bonds)                            HUF 1530bn                       HUF 474bn                   HUF1982bn                          HUF774bn                                 -23%                             -39%
Hungary (T-bills)                          HUF1869bn                          HUF22bn                   HUF1847bn                          HUF385bn                                   1%                             -94%
Israel                                       ILS81.0bn                       ILS26.0bn                   ILS 82.3bn                         ILS20.0bn                                -2%                              30%
Poland                                     PLN109.6bn                       PLN25.5bn                  PLN116.7bn                          PLN22.2bn                                 -6%                              15%
Russia                                     RUB 1213bn                      RUB 448.6bn                RUB 1147.6bn                         RUB 777bn                                  6%                             -42%
South Africa***                            ZAR151.1bn                        ZAR135bn                    ZAR157bn                         ZAR126.3bn                                 -4%                               7%
Turkey                                     TRY150.6bn                       TRY19.8bn                  TRY101.9bn                          TRY17.5bn                                 48%                              13%

China offshore                             CNY30bn                            CNY23bn                    CNY22bn                           CNY17bn                                   36%                              35%
China onshore                              CNY1.7trn                          CNY1.2trn                 CNY1.5trn                         CNY0.8trn                                  14%                              50%
Hong Kong*                              HKD18-19bn                         HKD11-12bn                  HKD17.5bn                         HKD10.5bn                                    6%                              10%
India*                                       INR6trn                            INR5trn                  INR5.7trn                         INR4.8trn                                  5%                               4%
Indonesia                                IDR281.8trn                        IDR180.4trn               IDR267.3trn                       IDR159.6trn                                   5%                              13%
Korea+                                   KRW79.7trn                        KRW22.4trn                 KRW79.8trn                          KRW25bn                                     0%                             -10%
Malaysia                                 MYR90.6bn                            MYR40bn                 MYR96.2bn                            MYR48bn                                   -6%                             -17%
Philippines*                              PHP388bn                           PHP138bn                  PHP320bn                          PHP121bn                                    20%                              14%
Singapore                             SGD14.3-16.3bn                      SGD2.9-4.9bn             SGD14.3-16.3bn                      SGD2.9-4.9bn                                  -7%                              22%
Taiwan                                    TWD620bn                           TWD240bn                  TWD620bn                          TWD240bn                                    -7%                             -10%
Thailand*+                                THB591bn                           THB383bn                   THB507bn                          THB378bn                                   17%                               1%
* 2013 refers to March 2013 to August 2014 for Hong Kong, October 2012 to September 2013 for Thailand, April 2013 to March 2014 for India, July 2013 to June 2014. Philippine issuance figures do not include retail
Treasury bonds. **Chile: including central bank bonds. + Does not include estimates of potential supplementary budgets,*** South Africa 2012 actual issuance is as per National Treasury’s revised estimate as of 3 Jan 2013.
Source: HSBC estimates.

Table B4. Estimated tenor distributions
                     _2013e issuance target by tenors (%)_ Remarks
                       <=5yr    5-10yr 10-20yr 20yr+
Argentina                90%            10%            0%           0%       Most of government issuance will be short-term for monetary regulation purposes
Brazil                   55%            30%           10%            5%      Goal: to increase average duration and replace floating-rate debt with fixed-rate and inflation-linked bonds
Chile**                  25%            41%           18%           15%      The Treasury will continue to focus on fixed-rate and inflation-linked bonds; first 30y BTP ever
Colombia                 39%            37%           24%            0%      The foreign tax reduction may increase inflows in 2013; Treasury may issue longer-tenor TES
Mexico                   80%             5%           10%            5%      The Treasury will increase the duration of its debt portfolio through higher issuance in the long end
Peru                      2%            10%           68%           20%      Issuance strategy will continue to focus on 20yr and 30yr bonds
Uruguay                  80%            20%            0%            0%      The strategy will be to establish benchmarks in the UYU and UI curves
Czech Rep.               23%            36%           33%           8%       Renewed fiscal austerity by the government should help curtail financing needs
Hungary                  69%            25%            6%            0%      Should the AKK retap the foreign market, local currency bond supply pressures may soften
Israel                   62%             6%           32%            0%      Fiscal dynamics post-election appear likely to turn positive
Poland                   70%            25%            5%            0%      Advanced in pre-financing budget, supply dynamic will be favorable in H2
South Africa              0%            25%           35%           40%      Duration extension strategy will continue to drive issuance
Turkey                   64%            36%            0%           0%       The Treasury will gradually increase issuance in key tenors (2y,5y,10y), to be issued monthly
China offshore           65%           30%            5%              - Expect larger-sized government bond issuance in 2013
China onshore            23%           31%            30%           16% Deficit financing needs to jump 50% on proactive fiscal policy
Hong Kong*               89%           11%              -             - Supply to remain largely stable
India*                    0%           25%            60%           15% Government expected to underestimate the bond supply during the budget speech
Indonesia                38%           23%            34%            5% Issuance to be skewed more toward the short end of the curve
Korea                    52%           30%             8%           10% Front-loaded government spending seems likely to result in heavier bond supply in 1H13
Malaysia                 35%           44%            18%            3% Average duration set to increase with inaugural 30yr MGS and 20yr GII
Philippines              15%           50%            25%           10% Government plans to reduce dollar bond issuance further to USD750m-USD1bn and to raise funding instead
                                                                        in domestic market
Singapore                48%            26%           15%           11% Larger supply of long-dated SGS appears likely
Taiwan                   27%            21%           33%           19% 15yr bond reintroduced for the first time since 2005
Thailand*                33%            36%           17%           14% Potential upside surprise to bond supply due to infrastructure project
*2013 refers to March 2013 to August 2014 for Hong Kong, October 2012 to September 2013 for Thailand, April 2013 to March 2014 for India, July 2013 to June 2014. **Chile: including central bank bonds.
Source: HSBC estimates.

     Global Emerging Markets
     Multi-asset strategy                                                                                               abc
     15 January 2013

EM FX: Stay long but
selectively so

 We are broadly constructive on the outlook                        As conditions for EM FX improve, we see a
                                                                                                                        Marjorie Hernandez
  for EM currencies, albeit with certain                            risk for increased intervention across all          FX Strategist, LatAm
                                                                                                                        HSBC Securities (USA) Inc
  caveats and exceptions                                            regions, though not necessarily with the same       +1 212 525 4109
                                                                    force in all countries. In the regional sections
 As conditions for EM FX improve, we see a                                                                             Clyde Wardle
                                                                    below, we outline those countries that we regard
  risk for increased intervention across all                                                                            Senior FX Strategist, Emerging
                                                                    as more vulnerable to increased intervention.       Markets
  regions                                                                                                               HSBC Securities (USA) Inc
                                                                    Overall, however, official resistance to            +1 212 525 3345
 Our biggest out-of-consensus call is for                          appreciation tempers our expectations for gains

  USD-BRL to be at 2.30 by year-end                                 in EM FX.                                           Murat Toprak
                                                                                                                        FX Strategist, EMEA
                                                                                                                        HSBC Bank plc
Fewer pitfalls in sight                                             Valuations too look stretched, in particular        +44 20 7991 5415
                                                                    for the EMEA and LatAm regions. In these  
We start the year more comfortable about the
                                                                    cases, we believe that fundamentals would have      Paul Mackel
outlook for EM FX in 2013. Relative to 2012,                                                                            Head of Asian Currency Research
                                                                    to improve to validate more-sustained gains         The Hongkong and Shanghai
the external backdrop is improving. China is                                                                            Banking Corporation Limited
                                                                    from current levels. The select currencies that     +852 2966 6565
rebounding, European sovereign risks have been
                                                                    stand out in terms of attractive fundamentals are
contained, and fiscal issues in the US are being
                                                                    the MXN, ZAR, and ILS, which are among our
addressed. We also see support from a turnaround
                                                                    preferred picks for the year.
in the growth cycle of many EM countries.

 Chart B8. HSBC EM FX REER indices deviation from 10-year average

 Source: BIS, Bloomberg, HSBC

   Global Emerging Markets
   Multi-asset strategy                                                                                            abc
   15 January 2013

In any case, it will likely not be smooth sailing       more visible in the RMB curves as a result of both
from here, in our view. Conditions remain fickle        a less-interventionist FX policy shift and the
and the “risk-on/risk-off” paradigm continues to        development of onshore money markets.
hold. We have seen currencies take the brunt of
                                                        We remain cautious on the IDR but we expect
these shifts in market sentiment, and while we
                                                        the INR to make a recovery. The INR, however,
continue to see a muddling-through in an
                                                        will remain on a bumpy ride, in our view, and
improving but still-frail global environment, we
                                                        while it faces challenges, given India’s relatively
expect currencies to follow a bumpy path. We
                                                        weaker balance of payments backdrop, its high
discuss individual currencies in more detail and
                                                        carry is attractive, as the external environment
present our preferred picks for the region in the
                                                        looks better than it did in 2012. Should the path
regional sections below.
                                                        toward reform bear greater fruit and the current
Asia: Improving, but                                    account deficit narrow, as HSBC economists
selectively                                             expect, the INR can do better.

The outlook for most Asian currencies is                 Chart B9. 2013 HSBC total return forecasts vs consensus
turning for the better, and we expect this to
continue through 2013. Two factors should see
investors pivot more toward Asian currencies.
First, global tail risks are subsiding, in particular
in the eurozone. Second, growth in Asia is turning
stronger, which should benefit the cyclical nature
of the region’s currencies. Putting these factors
together shapes our underlying view that the
region’s currencies can do better. That said, we         Source: Bloomberg, HSBC

believe that this year will still require a selective
approach toward Asian FX.                               More macroprudential measures
                                                        Although global tail risks have been subsiding
Breaking down the outlook for the region’s
                                                        and the impact from looser monetary policy at
currencies, we remain positive on the KRW
                                                        the US Federal Reserve, Bank of Japan, and
and PHP, even though they were the top-
                                                        European Central Bank should benefit Asian
performing currencies last year, and the impetus
                                                        currencies, the pushback by local authorities
for fresh macro prudential measures to slow
                                                        should linger. FX policy has evolved over the
currency appreciation is becoming stronger. We
                                                        past year, especially as pronounced inflow
also expect the THB to perform better than the
                                                        pressures provided by the region’s current
SGD, MYR, and TWD.
                                                        accounts have subsided. This led to slower reserve
The RMB will appreciate slowly this year, we            accumulation and a greater focus on managing
expect, but the CNH should offer a greater              exchange rate volatility. This trend will continue
source of value, given its solid convergence with       in 2013, we believe.
the onshore spot rate and attractive carry-to-
                                                        That said, the region’s authorities will not sit idly
volatility ratio. We expect continued convergence
                                                        by and allow their currencies to strengthen
between the CNH and onshore CNY forward
                                                        excessively versus the rest of the region. Some
curves as the capital account opens up further. We
                                                        policy makers have already stepped up to the
also expect interest rate parity to become even
                                                        plate by slowly introducing more

     Global Emerging Markets
     Multi-asset strategy                                                                                     abc
     15 January 2013

macroprudential measures to cool inflow                Argentina and Brazil, we are seeing a
pressures. This is likely to continue, we believe.     combination of buying and selling to keep their
These measures not only help stem appreciation         currencies within desired ranges.
pressures, but also help ensure the financial
                                                       Elsewhere, such as in Mexico and Chile, we are
stability that seems to be the focus of most central
                                                       not seeing any active central bank intervention,
banks in the region. Countries that have sound
                                                       although in the latter’s case, it is possible that
balance of payments fundamentals and that face
                                                       USD purchases could resume, should the CLP
the strongest inflow pressures – Korea, the
                                                       become too strong. The only country that appears
Philippines, and Taiwan, for example – appear
                                                       to be safe from intervention is Mexico, where we
likely to have a higher chance of introducing
                                                       do not expect active intervention due both to still-
these measures.
                                                       cheap valuations and a strong commitment by the
Our constructive view on Asian currencies still        authorities to orthodox and market-
holds. However, at the same time, we                   friendly practices.
acknowledge that increasing efforts by
                                                       The MXN is our favorite pick for the year on
policymakers to shield their economies from
                                                       the back of an optimistic outlook for the new
excessive flows are likely to see a more gradual
                                                       government’s ambitious reform agenda in 2H13.
pace of appreciation.
                                                       We believe that passage of fiscal and energy
LatAm: A mixed bag                                     reforms could see Mexico embark on an important
                                                       phase of structural improvement, hailing a re-
We expect modest gains in LatAm FX in 2013
                                                       rating of the country’s risk along with sizable
but we recommend being selective. Global
                                                       investment inflows. Besides the story, the MXN is
conditions also look slightly more reassuring as
                                                       one of the few EM currencies that offer
important tail risks have been contained. For
                                                       attractive valuations.
LatAm in particular, the China rebound story
could provide important support via higher             The COP and PEN should continue to benefit
commodity prices and some recovery in                  from abundant FX flows and healthy growth
trade balances.                                        rates, but a bias for even stronger intervention
                                                       should see the pace of appreciation moderate. We
Central banks in the region have likely ended
                                                       also expect the threat of intervention to hang
their easing cycles at rates that still make the
                                                       over the CLP in 2013, which, combined with a
LatAm FX “carry” compelling. Net FX inflows,
                                                       rapidly widening current account deficit, leaves us
however, are moderating as current accounts
                                                       neutral on this currency, despite its strong credit
widen, weakening an important source of
                                                       and carry profile.
currency appreciation.
                                                       We also note that policy decisions have become
This does not mean, however, that markets will
                                                       increasingly more decisive in explaining longer-
not try to push for stronger currencies,
                                                       term trends. Currencies with home-grown
especially in the context of reduced tail risks
                                                       problems or weak policies or both should continue
abroad. An improvement in risk appetite is likely
                                                       to underperform, and so we call for further
to be countered by even more intervention.
                                                       depreciation in the BRL and ARS.
Already we are seeing active intervention in a
number of places. In some cases, these are             The BRL perhaps offers the best example of a
involved primarily with USD purchases, such as         currency whose positive multiyear trend has been
Colombia and Peru. But in other cases such as          undermined by perceptions of poor economic

   Global Emerging Markets
   Multi-asset strategy                                                                                                 abc
   15 January 2013

policy and excessive FX intervention. We expect             monetary conditions further. The CNB has
growth in Brazil to remain below-trend in 2013              exhausted the interest rate tool, and a significantly
and for the authorities to continue to lean on a            weaker CZK is the only option left to support the
weak BRL policy to support lagging industry.                economy and counter the deflationary risk. We
In Argentina, we see the current model of                   believe that the CNB will intervene directly in the
financial repression leading to slower growth but           FX market.
higher inflation. The latter means real FX
                                                            Although rather quiet for now, the Bank of
appreciation, necessitating a faster pace of
                                                            Israel is another central bank that may
nominal ARS weakness to maintain
                                                            intervene if the ILS becomes too strong, we
                                                            believe. The BoI has intervened heavily in the FX
EMEA: Between idiosyncratic                                 market in 2009-2011. In a context of low interest
value and interventionism                                   rates and exports constituting a large part of the
                                                            Israeli economy, FX interventions again could
It will be a difficult task to find value in the
                                                            have some merits for the central bank.
EMEA FX space in 2013, we believe. Several
currencies in the region posted significant gains           So the performances of EMEA currencies might
last year. On real effective exchange rate basis,           be disconnected from macro fundamentals. The
the HUF appreciated about 10%, the TRY 8%,                  currencies carrying a low risk of FX
and the PLN about 5.0%. Our valuation metrics               interventions may perform rather well. The
suggest that these currencies are rather expensive          PLN, RUB and HUF fall into this category.
relative to their macro fundamentals.
                                                            Overall, we believe that the combination of
On the other side of the spectrum, the                      valuation and intervention risk makes the ZAR
performances of the ZAR and ILS were poor in                and the ILS the most attractive currencies. The
2012. Valuation-wise, these currencies also                 risk of intervention in South Africa is practically
appear to be the most attractive as the                     nonexistent, while the ILS has room to appreciate
depreciation that occurred last year was excessive          before the BoI shows its teeth, in our opinion. To
to their fundamentals.                                      a lesser extent, the RUB also offers this
                                                            attractive combination. On the other side, we
The Czech central bank also sees the exchange
                                                            are cautious on the CZK.
rate as an important tool to loosen domestic

 Chart B10. 2013 HSBC total return forecasts vs consensus    Chart B11. 2013 HSBC total return forecasts vs consensus

 Source: Bloomberg, HSBC
                                                             Source: Bloomberg, HSBC

             Global Emerging Markets
             Multi-asset strategy                                                                                                                                           abc
             15 January 2013

EM Equities: We expect a
strong year

 EM equities present significant upside                                                      at the kind of level that has typically been                                  John Lomax*
                                                                                                                                                                            GEMS Equity Strategist
  potential, we believe, due to cheap initial                                                 associated with good annual returns. Attractive                               HSBC Bank plc
  valuations in the context of diminishing                                                    valuations are the result of investors’                                       +44 20 7992 3712
  tail risks                                                                                  assessment of the likelihood of tail risks, which
                                                                                                                                                                            Wietse Nijenhuis*
                                                                                              are present in all of the main geographies. Some                              GEMS Equity Strategist
 We see returns between 13-28% for this                                                                                                                                    HSBC Bank plc
                                                                                              of these appear likely to recede over the next 12                             +44 20 7992 3680
  year for the MSCI EM, as the equity risk
                                                                                              months, but others may well prove more stubborn.                    
  premium continues to shrink
                                                                                                                                                                            *Employed by a non-US affiliate
                                                                                              We expect the perception of US and European                                   of HSBC Securities (USA) Inc,
 Financials and consumer discretionary                                                                                                                                     and is not registered/ qualified
                                                                                              fiscal risk to subside, leading to a reduction in                             pursuant to FINRA regulations
  sectors are superior fundamental plays to
                                                                                              the EM equity risk premium. In the US, the
  staples, in our view
                                                                                              “fiscal cliff” of tax increases and spending cuts at
GEMs equity are cheap                                                                         the beginning of 2012 was avoided, but fiscal
                                                                                              concerns persist. In Europe, Spain’s likely
On the surface, EM valuations appear rather
                                                                                              application for eurozone financial assistance
cheap in aggregate. For example, as a summary
                                                                                              should unleash a more-aggressive monetary
measure, the forward PE on the asset class is
                                                                                              stimulus from the European Central Bank, we
about 12% below its post-2001 average, and it is

  Chart B12. Consensus 2013e PE versus 2014e earnings growth by country*


                                                              Hungary                                                                                           Dubai

                                                     Egy pt                                                                     Indonesia
  EPS growth (2014e)

                       15%                                                                                                                                    Mex ico
                                                                                                                Kuw ait           India
                                                                        Korea China Turkey                           South Africa
                                                                                                                                       Taiw an
                       10%                                                                                                                       Chile   Philippines
                                                                                               Saudi Arabia
                                                                                     Brazil                                        Malay sia
                       5%                                                                  Qatar
                                                                            Oman                              Poland Abu Dhabi

                       0%            Russia
                                                                                           Czech                                                         Colombia

                             4   5        6      7            8         9          10         11       12              13     14        15        16       17          18
                                                                                            PE (2013e)

  *All numbers are I/B/E/S consensus except for GCC markets, which are based on HSBC bottom-up aggregated estimates.
  Source: MSCI, I/B/E/S, Thomson Reuters DataStream, HSBC

            Global Emerging Markets
            Multi-asset strategy                                                                                                                abc
            15 January 2013

believe. In neither the US nor, especially, the                                    growth in the developed world, especially the US.
eurozone will growth be strong; however,                                           Around 2001, when China entered the World Trade
concerns about worst-case scenarios should                                         Organization, it took over as the prime growth
dissipate progressively. In China, growth is                                       driver for the EM universe. This lasted until about
stabilizing and more policy stimulus should come                                   2009, when the China-led model also degenerated.
through; China needs to rebalance away from the                                    At this point, there was a further transformation,
export-investment model and toward consumption.                                    and broad EM consumption became the most
This means that spending is likely to be focused                                   important catalyst, which is the model we believe
less on hard infrastructure and more on welfare.                                   continues to dominate today.
We expect, for example, more emphasis on income
                                                                                   MSCI EM returns between
distribution and medical care. This is likely to
change the economic relationship that China has
                                                                                   13-28% in 2013e
with the rest of the world, as Chinese growth will                                 We have developed scenarios to estimate the
be significantly less resource-intensive in the future                             potential return on the MSCI EM index for
than it has been in the past. There are also                                       2013. Yet identifying the current stage of the EM
downside risks to Chinese growth forecasts to the                                  equity cycle had turned very difficult because of
extent that the transition to consumption-led growth                               mixed macroeconomic data from the major EMs.
is more stressed than we expect in our base case.                                  This uncertainty to a larger extent also affects
                                                                                   one’s ability to forecast equity returns in the
For EM, we arrive at a couple of particularly
                                                                                   year ahead.
important conclusions from this analysis: We want
to own markets and sectors that are more sensitive to                              For this, by using historical and current forward
the US and Europe (and especially US and European                                  estimates data, we expect returns between 13-
monetary policy) than to China.                                                    28% for the MSCI EM this year. An expansion
                                                                                   of the MSCI EM PE toward the post-2000
Equally, the model of what drives EM equities has
                                                                                   average level of 13.0x by end of 2013 with no
changed. In the 1990s, EMs were primarily led by
                                                                                   earnings growth in the year would lead to total

 Chart B13. What could MSCI EM index return in 2013? Scenario analysis based on PE changes and earnings growth

                                                                               P/E Contraction / expansion scenarios
       Potential return on MSCI EM index
       during 2013 based on various
                                                         Avg. historical   To 2008 low PE                 To post 2000 avg Highest historical
       scenarios of P/E expansion and
       earnings growth expectations                       contraction          of 8.6x      No change       PE of 13.0x       expansion
                                                            -29%                -23%           0%               15%             65%
                             Lowest historical
                                                  -58%       -87%              -82%            -58%            -43%                7%
 Earnings growth scenarios

                             2008 EPS growth      -17%       -47%              -41%            -17%             -2%               48%

                             No growth            0%         -29%              -23%            0%               15%               65%

                             As expected by
                                                  13%        -17%              -11%            13%              28%               78%
                             Highest historical
                                                  41%        12%               18%             41%              57%              106%

 Source: MSCI, I/B/E/S, Thomson Reuters DataStream, HSBC

     Global Emerging Markets
     Multi-asset strategy                                                                                     abc
     15 January 2013

return for the index of 15%. Should earnings grow       against cutting too many of last year’s winning
c13% (as expected by I/B/E/S consensus), the            positions prematurely.
MSCI EM index could return c28% by end-2013.
                                                        Strategies to begin the year
Some of the scenarios presented in Table B5 are
                                                        In CEEMEA, our preferred market is Turkey.
overly optimistic, and some are excessively
                                                        Turkey shows a great consumer trajectory, but the
pessimistic, and one should not take these
                                                        stock market also has a plethora of different ways
extremes as the base-case scenarios. It is clear that
                                                        to play this. We recently raised our Turkish
equity returns are extremely sensitive to swings in
                                                        weight further, to 4.5% from 3% (see CEEMEA
the equity risk premium that contributes to
                                                        Equities in 2013: Fishing in choppy seas,
changes in PE.
                                                        2 December 2012).
EM consumption should                                   Another classic EM secular story is Egypt, on
remain the main catalyst                                which we also have an overweight. Valuations
Our EM country and sector allocation is                 remain attractive, we believe, despite the rally in
skewed very broadly toward strong secular               2012. Fundamental support comes from
markets and sectors. By sector in EM, we broadly        political transition, paving the way for
prefer consumer discretionary themes over the more-     cyclical normalization.
expensive staples. We also like banks, which
                                                        We also like Russia, where valuations remain
should be viewed as a generic play on EM
                                                        extremely cheap. However, the structural
consumer demand.
                                                        environment appears tough, in particular in the
Insofar as the consumer is likely to be the             natural resources segment, which is also hostage to
prime driver of equity performance as we look           the outlook for the Chinese economic cycle. In
ahead, one factor that is likely to be very             terms of the domestic story, several dynamic
important is simply the representation of               consumer themes are underpinned by rapid
consumer-related segments in the benchmark.             growth in household credit. This trend has scope
We define these very broadly as consumer staples,       to persist, as leverage is low (household debt as a
consumer discretionary, and financials. Indeed, by      share of disposable income is just 15%), while
quick inspection, it can be seen that performance       low inflation and interest rates are fairly
of markets in 2012 already substantially reflected      supportive. We recently reduced our Russian
such representation.                                    weight to 7.5% from 9.0% (see CEEMEA Equities
                                                        in 2013: Fishing in choppy seas).
It is striking that not just in CEEMEA, but also
across GEM as a whole, Turkey has the highest           Brazil is our focus for 2013 in LatAm. It is a
representation of consumer-facing sectors in the        strong cyclical story, but a weak structural one.
index and Russia the lowest. Some of the smaller        Earnings are very depressed, the economy is
Asian markets also have relatively high                 recovering slowly, and government efforts to
representation. Most GEM consumer names have            reduce the cost of doing business in Brazil are
performed well, which has disproportionately            potentially relevant. Valuations are undemanding,
supported those markets with the heaviest               and government intervention risks are largely
consumer weights. In our view, this trend is likely     priced in; we see these pressures easing as the
to continue. We expect that the broader                 economy recovers. Investor sentiment and
environment will probably not be very different         positioning is at multiyear lows, and
from that of last year, and accordingly we caution      hence supportive.

   Global Emerging Markets
   Multi-asset strategy                                                                                                                  abc
   15 January 2013

We are cautious on Mexico. The market is                    Table B5. Weight of consumer sectors in emerging market MSCI
trading at historically high valuations, which are
the highest in emerging markets. Earnings                                     Consumer                                        oriented
expectations are high, and likely to be undermined                            Discretion- Consumer               Financials    sectors
                                                                                  ary (A) Staples (B)                   (C)   (A+B+C)
by recent weak reported earnings, we believe. The
                                                            Turkey                      3.4             14.0              55.4    72.8
market is well-owned and faces short-term                   Morocco                     0.0              0.0              64.4    64.4
                                                            Indonesia                  16.5             12.5              31.8    60.7
headwinds from US growth concerns (90%                      Thailand                    2.4             11.8              39.2    53.4
correlation with MSCI Mexico), a high-beta                  Malaysia                    9.6             11.5              30.7    51.9
                                                            South Africa               18.3              7.3              25.8    51.3
currency, and a hawkish central bank. Mexico’s              Egypt                       0.0              0.0              51.1    51.1
robust economic growth, competitiveness, and                Poland                      2.3              3.7              44.8    50.8
                                                            Mexico                      7.3             29.9              11.5    48.6
structural reform momentum are only partial                 China                       5.0              5.6              37.4    48.0
                                                            India                       8.1             10.1              29.5    47.7
offsets. We see relative underperformance rather            Colombia                    0.0              8.0              37.9    45.9
than absolute downside.                                     Brazil                      4.2             14.1              25.1    43.5
                                                            Philippines                 3.2              4.6              35.0    42.8
                                                            Hungary                     0.0              0.0              37.9    37.9
Peru is our favorite LatAm “peripheral”                     Peru                        0.0              0.0              36.2    36.2
market. Peru is LatAm’s highest-growth                      Korea                      16.8              5.7              13.5    35.9
                                                            Chile                       7.4             11.8              15.7    34.8
economy and we believe it is set to be one of the           Czech                       0.0              0.0              27.7    27.7
                                                            Taiwan                      4.2              2.9              14.7    21.8
world’s most dynamic consumer markets in the                Russia                      0.0              4.4              15.5    19.9
coming years. Investor concerns about politics,             EMs                         7.9              8.7              25.5    42.1
                                                            Source: MSCI, Thomson Reuters Datastream, HSBC calculations
social tensions, FDI trends, and China linkages
are overdone, in our view. Liquidity is poor,
                                                            We remain overweight on Indonesia. We like this
however, and valuations are not cheap. Yet the
                                                            market because of the probability of positive growth
strong fundamentals argue for a continued
                                                            surprises, a lack of optimism among investors and
scarcity premium supporting valuations, and
                                                            the sell-side’s following the recent
justify efforts to invest in lower-liquidity stocks.
                                                            underperformance relative to Asean, and a domestic
We remain overweight on China in Asia. We                   demand-led, high ROE growth story.
believe that further upside for Chinese equities has to
come from stable growth, structural adjustment, and
benign inflation. A reform agenda and associated
key events could serve as re-rating catalysts for
Chinese equities, we believe. China is also the
cheapest market in the region and fits our theme in
Asia of preferring value over growth style.

We remain overweight on Korea. Valuations are
attractive, in our view, as the market is trading at less
than its own historical average and the current
regional average, even after huge foreign inflows.
With exports likely to recover before domestic
demand, we believe that a sustained recovery in the
global economy is what will benefit Korea most
now. Another important factor is the recent
improvement in China’s economy, an important
market for Korean exports.

     Global Emerging Markets
     Multi-asset strategy                                                                                                         abc
     15 January 2013

EM Corporates: Value

 Market over-reactions and sub-investment-                                   sovereigns, and we prefer the additional yield      Sarah Leshner
                                                                                                                                  LatAm Corporate Credit
  grade names offer best chance to grab yield                                 offered by corporates.                              Analyst
                                                                                                                                  HSBC Securities (USA) Inc
 We expect issuance to remain high in 2013,                                  We expect the record inflows to EM fixed income     +1 212 525 3132
  but unlikely to top record USD300bn of 2012                                 in 2012 to provide demand for bonds in 2013, but
                                                                                                                                  Devendran Mahendran
                                                                              given the lower spread levels at the beginning of   Senior Analyst, Sovereigns and
 Financials are increasingly important: We                                                                                       Financial Institutions
                                                                              this year, we do not expect returns to be as        The Hongkong and Shanghai
  favor Brazil IG, Colombia, India, Vietnam
                                                                              significant in 2012. Less room for yield            Banking Corporation Limited
                                                                                                                                  +852 2822 4521
EM corporates offer attractive                                                compression means most value in 2013 will come
spread to sovereigns                                                          from coupons. We recommend buying on market         Philip Wickham
                                                                              over-reactions to uncertainties or shifts, and      Director, Corporate Credit
In 2012, corporates bolstered their significance                                                                                  Research
                                                                              holding more BB names.                              The Hongkong and Shanghai
as a key emerging market asset class. Now, now                                                                                    Banking Corporation Limited,
almost USD1trn of bonds are outstanding in this                                                                                   Singapore Branch
                                                                              Many concerns in developed markets have             +65 6658 0618
asset class, and issuance in 2012 reached a record                            rolled from 2012 to 2013 (the “fiscal cliff,”
USD300bn from corporates, banks, and agencies.                                eurozone challenges, weak growth prospects),        Keith Chan
                                                                                                                                  Director, Corporate Credit
Secondary trading volumes are steadily                                        but most EM sovereign backdrops are stable to       Research
converging with historically more-liquid                                      moderately improving – with few notable             The Hongkong and Shanghai
                                                                                                                                  Banking Corporation Limited
sovereign bonds (see Chart B14).                                              exceptions such as Argentina on the negative side   +852 2822 4522
                                                                              and China on the positive. The world’s major
With our house view that risk-free rates are likely                                                                               Pavel Simacek
                                                                              central banks’ commitment to continue injecting     Analyst
to remain lower for longer, we see less value in
                                                                              liquidity has mitigated many global risks and       HSBC Bank plc
                                                                                                                                  +44 20 7992 3714
 Chart B14. EM secondary market trading volumes                               uncertainties, offering a solid backdrop to EM
           USD                                                                corporate credit.                                   Raffaele Semonella
  600                                                                         Balance sheet strength varies                       HSBC Bank Middle East
                                                                                                                                  +971 442 36 54
  500                                                                         significantly across regions              
                                                                              While corporate downgrades outnumbered
                                                                              upgrades last year, we see improving credit
                                                                              metrics in certain CEEMEA markets in 2013, a
                                                                              mixed performance in LatAm, and generally
         2004    2005   2006    2007      2008   2009   2010    2011   2012   softer EBITDA and expansionary capex in much
                        Corporate Bonds             Sovereign Bonds
                                                                              of Asia, with select exceptions such as the
 Source: EMTA                                                                 property sector.

   Global Emerging Markets
   Multi-asset strategy                                                                                                                         abc
   15 January 2013

In CEEMEA, we highlight stable or declining             profiles and reduces refinancing risks – evident in
leverage as a standout trend, which reconciles          the low volume of debt maturities corporates are
with rating agency expectations for steady cash         facing in the next 24 months. LatAm corporates
generation and adequate liquidity. This is in the       have most successfully extended tenors, and less
context, however, of Fitch’s call of “not out of the    than USD7bn of debt comes due in that region
woods yet” and positive outlooks on only 6% of          in 2013.
corporates in the region; 13% have a negative
                                                         Chart B15. Average maturities for EM new issues
outlook, and 81% are stable.
In LatAm, we see lower EBITDA and slowed
growth, but a healthy liquidity position that             10
should mitigate continued depression of cash               9

flows (see LatAm Corporate Liquidity: Liquidity            8
undeterred, 13 December 2012). Government                  6
intervention in Brazil and Argentina could                 5

challenge some sectors, but as we stated in our            4
                                                                      2007        2008           2009    2010     2011              2012
liquidity report, “overall numbers still tell a                                     Asia            EMEA      LatAm

compelling story even if growth slows.”                  Source: HSBC, bondradar

In Asia, we see high investments and lower
                                                        We also highlight the correlation between inflows
cash flows, with select corporates focused on
                                                        to the asset class and primary issuance. Given the
capital structure deleveraging anticipated to
                                                        strength of inflows in 2012, we see enough of a
have static to slightly improving fundamentals
                                                        cushion to sustain prolonged demand for new
in 2013. In addition, we highlight Chinese and
                                                        bonds in this asset class even if flows are not
Hong Kong property names and hotels as our
                                                        maintained at the same levels. As can be seen in
preferred industries. Ratings outlooks are slightly
                                                        Chart B16, strong flows in 2010 mitigated the
negative for oil and gas, positive for utilities, and
                                                        decline in flows in 2011. A 70% reduction in
stable for banks (see discussion below).
                                                        flows in 2011 only resulted in 16% less issuance
Issuance should remain                                  (and we are not expecting outflows of this
strong but below record high                            magnitude in the coming year).

We expect primary issuance in 2013 to                    Chart B16. Flows into EM external debt funds, EM corporate
continue at elevated levels, as issuers take             issuance
                                                                 USD bn                                                          USD bn
advantage of low rates and investors’                    300                                                                               12

seemingly insatiable appetite for bonds. We              250
highlight a factor missing from drivers of new           200
issuance: re-financings or liquidity crunches. EM
maturities for corporates and banks total less than                                                                                        0
USD90bn for 2013 and 2014, with Asian 2014
maturities the only bucket exceeding USD20bn.             50

                                                           0                                                                               -8
We attribute the lack of needed refinancings to                2004    2005     2006    2007      2008    2009    2010    2011    2012

EM corporates’ effective locking in of historically                       Corp. Primary Market           Flows into EM EXD funds (RHS)

low rates. Strength in the new issue market has          Source: HSBC

been used to extend tenors, which improves credit

     Global Emerging Markets
     Multi-asset strategy                                                                                           abc
     15 January 2013

Secondary trading volumes                             While Brazilian corporates have consistently
                                                      represented 40-50% of issuance, Brazilian banks
The aforementioned record inflows and
                                                      represented 91% of issuance among all financial
primary market activity are reflected in
                                                      institutions in 2008, and that share has been
elevated secondary market trading volumes –
                                                      decreasing ever since. Previous non-players are
2013 has gotten off to a strong start – but it
                                                      also increasingly important, and Brazil accounted
remains below record levels. We attribute this
                                                      for just 51% of the 2012 total. Colombian banks
globally to the negative effect of regulations on
                                                      now represent 11%, with four different issuers.
liquidity. In valuing corporate bonds, we price in
                                                      Mexican banks are 9.5% and Peruvian and
an important premium for liquidity, and in certain
                                                      Chilean banks are 8% each, with five, three, and
markets, we recommend staying close to
                                                      six issuers, respectively. See the Chart B17 for
benchmarks. The market has shown in the past
                                                      detail on growth outside Brazil.
couple of years that liquidity can dry up very
quickly in times of uncertainty.                      Chart B17. Brazil vs non-Brazil bank issuance, 2007-2012

Increasing importance of the                             30
                                                                 USD bn

financials sector                                        25

Financial sector credits became an increasingly          20

important component of the EM corporate                  15
market, with a compound annual growth rate               10
(CAGR) of 22% over the past five years. Since
the 2008 global financial crisis, the CAGR for
banks has been 70%, compared to 54% for                           2007       2008   2009       2010   2011   2012
corporates and just 38% for sovereigns. The bulk                                    Brazil issuance

of this growth has come from LatAm and Asia.           Source: HSBC, bondradar

LatAm banks: Increasing diversification,              Asian banks: Structural traps and cyclical
growth from peripheral markets                        headwinds
We expect growth in LatAm banks to come from          In Asia, China’s banking industry overshadows
Brazilian investment-grade names and from             the region. Private sector indebtedness has been
historically less-represented markets. LatAm          rising since the global credit crisis, and China
financial institutions have been outpacing the        currently needs USD2trn annually to finance
growth in the rest of EM: USD issuance in 2012        growth. China’s relatively high savings,
was more than 10 times what it was five years ago     domestically financed banking system, and
and now represents almost one-third of the total      manageable loan/deposit ratio of 72% for the
LatAm issuance, versus less than 9% five years        banking system as a whole suggest that there are
ago. Most of this growth has come out of              no imminent threats to the current financing
traditionally peripheral markets.                     model. In addition, the authorities appear to be
                                                      slowing credit growth to manage excess. The
Beginning with the 2008 financial crisis, there
                                                      primary risk to the system is a breakdown in
was virtually no issuance from countries other
                                                      smaller sub-segments of the credit market (such as
than Brazil, and most of that issuance was high-
                                                      shadow banking), disrupting the broader flow of
yield. Since then, there has been a sharp shift in
                                                      funding to the general economy.
issuance toward investment-grade Brazilian banks
and also growth of institutions in other countries.

    Global Emerging Markets
    Multi-asset strategy                                                                                       abc
    15 January 2013

Elsewhere in Asia, credit remains strong, fuelled        shape of their economies with their varying levels
by quantitative easing and with some signs of            of resilience to external shocks. The gap between
asset price inflation. See the Table B6 for details.     the winners and the losers has been widening. We
We are least concerned about Singaporean banks,          believe that the strong financial institutions are
which are fundamentally strong and continue to           likely to gain momentum as weaker players
increase their regional footprint. In Hong Kong,         continue to redesign their operations. Large banks
although the regulatory oversight of banks is good       with strong ties to their respective governments
and capitalization is strong, there is pressure on       have benefited the most from the current situation.
profitability in the current low interest-rate           This tendency has been especially strong in
environment. Also, risks from lending to China-          Russia, where government-owned banks further
related corporates need to be monitored.                 strengthened their leading market positions and
                                                         benefited from access to the capital markets.
Table B6. Loan growth in Asian banking system
China                               14%           16%    The rapidly evolving regulatory framework also is
Hong Kong                           20%            8%    a challenge. Banks are facing, in addition to a
India                               16%           16%
Indonesia                           25%           23%    weak operating environment, a changing
Korea*                               7%            7%    regulatory environment as governments, central
Malaysia                            14%           12%
Philippines*                        14%           11%    banks and regulators adopt measures to restore
Singapore                           24%           10%
Thailand                            12%           12%
                                                         stability and strengthen banking systems.
Vietnam                             14%
Japan                                0%            1%    The competitive landscape is changing as many
*As of June 2012                                         European banks exit foreign markets, leaving
                                                         room for the best-prepared domestic players.
From an investment perspective, we like                  Eurozone financial institutions historically have
Singaporean and select Hong Kong banks’ lower            actively provided funding to CEEMEA banks.
Tier-2s, as well as Vietnam’s slower credit              However, their willingness and ability to continue
growth, tighter loan classification standards, and       doing so has been significantly hampered by their
new regulation to improve financial disclosure.          own liquidity concerns and new regulatory
We also like the Indian sector, as we believe that       requirements. We view Ukrainian banks as
concerns about asset quality have resulted in            particularly high-risk, given reliance on external
discount in the credit markets, and concerns about       funding and high loan-to-deposit ratios. We
a credit downgrade are ebbing with incremental           believe that domestic banks prepared to fill in the
reforms being introduced and the government’s            gap may benefit from the exit from foreign
commitment to reach budget-deficit goals. We             markets, with market share being a determining
urge caution on Malaysian banks due to high              success factor.
household-debt levels, sovereign fiscal concerns,
                                                         Eurobonds are a fundraising option only for a
and possible volatility from general elections due
                                                         limited number of institutions. We believe the
to be called over the next six months.
                                                         CEEMEA banking universe is divided into two
CEEMEA banks: Braced for challenges in 2013              groups: one limited set of those capable of raising
Slower economic growth has introduced                    international funding, and the other with no access
uncertainty and volatility into the CEEMEA               to external funds regardless of price. However,
banking industry. The banks we cover have fallen         changing risk appetite and pricing conditions may
under varying degrees of pressure since the global       allow lower-rated (B level), privately owned
financial crisis, largely reflecting the structure and   banks to access international capital markets.

     Global Emerging Markets
     Multi-asset strategy                                                    abc
     15 January 2013

                               This page has been left blank intentionally

Global Emerging Markets
Multi-asset strategy                abc
15 January 2013

                          2013 economic

     Global Emerging Markets
     Multi-asset strategy                                                                                                abc
     15 January 2013

Asia in 2013

 China should grow 8.6% this year, helping                        Second, low interest rates and flush liquidity            Frederic Neumann
  support exports across Asia, notably Korea                       are stoking bank lending, particularly in the             The Hongkong and Shanghai
                                                                   Southeast Asian (Asean) region. These markets             Banking Corporation Limited
 Low interest rates and flush liquidity should                                                                              +852 2822 4556
                                                                   have almost universally shrugged off the lull in
  boost local demand, especially in Asean
                                                                   exports in recent quarters and maintained overall         Qu Hongbin
 Rising inflation pressures could prompt the                      growth through buoyant consumption and                    The Hongkong and Shanghai
                                                                   investment spending. Loose global monetary                Banking Corporation Limited
  resumption of tightening in the second half
                                                                                                                             +852 2822 2025
                                                                   conditions should accentuate this process over the
Back in orbit, China picks up                                      course of 2013. The region might receive another
After a sharp slowdown around midyear,                             dose of stimulus through actions of the Bank of
growth in Asia again accelerated in late 2012.                     Japan, which could significantly step up policy
Over the coming quarters, we expect demand to                      easing (see Asia Economics Quarterly:
firm further because of two factors.                               Back in orbit, 10 January 2013).

First, China is steaming up again. Gradual                         Growth: Local, not global
policy loosening and fading uncertainties from the
                                                                   China, once again, is forecast by HSBC
recent change in leadership of the Communist
                                                                   economists to top the regional growth rankings
Party are unleashing pent-up infrastructure
                                                                   in 2013. To achieve our forecast of 8.6% growth,
spending and reviving investment confidence.
                                                                   which is above consensus, China may not require
China’s strength should radiate out to other Asian
                                                                   significant extra stimulus. Already, more spending
markets, especially Hong Kong, Korea, and
                                                                   on infrastructure has been announced since mid-
Taiwan, which are most exposed to China.
                                                                   2012. This should have the biggest impact on

Table B7. Asia: Key forecasts
                ______ GDP _______ _____ Inflation ______ ____ Policy rate _____ _______ FX _________ Current accnt (% GDP) Fiscal accnt (% GDP)
               2012e 2013f 2014f 2012e 2013f 2014f 2012e 2013f 2014f 2012e 2013f 2014f 2012e 2013f 2014f 2012e 2013f 2014f
China            7.8     8.6    8.4    2.9    3.1    2.7    6.00      6.00    6.00  6.24   6.18  6.12    2.5    2.0    2.0     -1.6    -1.7     -1.2
Hong Kong        1.7     4.7    4.5    4.1    4.5    4.4    0.50      0.50    0.50   7.80  7.80  7.80    4.3    7.0    8.7      1.0     4.0      4.0
India            5.2     6.2    7.5    9.9    7.6    7.4    7.50      7.50    7.50  54.0  50.0  49.0    -4.5   -3.7   -3.1     -5.8    -5.3     -4.7
Indonesia        6.1     6.1    6.1    4.3    5.1    5.2    5.75      6.50    6.50 9750 9700 9600       -2.4   -0.8    0.8     -2.4    -1.8     -1.8
Korea            2.2     3.8    4.4    2.2    3.1    3.4    2.75      3.25    3.75 1070 1030 1010        3.6    3.0    2.1      1.6     1.6      2.6
Malaysia         5.3     4.8    5.0    1.7    1.7    2.3    3.00      3.50    3.50   3.06  2.99  2.94    4.6    3.7    4.4     -4.8    -4.5     -4.2
Philippines      6.2     4.9    5.4    3.1    3.9    4.5    3.50      3.75    4.00   40.9  39.5  39.0    4.3    4.8    4.4     -2.8    -2.8     -2.7
Singapore        1.5     3.0    5.0    4.5    2.9    3.1    0.35      0.30    0.30   1.21  1.17  1.15   16.9   19.3   22.1      1.1     1.3      1.3
Sri Lanka        6.7     7.4    7.5    7.7    8.3    7.1    9.50     10.50   10.00   129   131   131    -7.3   -5.9   -5.0     -6.6    -5.8     -5.3
Taiwan           1.1     4.2    4.4    2.1    1.9    2.1   1.875     2.375   2.375  29.1  28.6   28.3    8.6    6.2    6.2     -2.4    -1.7     -1.5
Thailand         6.0     4.6    4.1    3.0    3.2    3.8    2.75      3.25    3.00   30.6  29.8  29.5    0.7    4.6    5.5     -2.8    -3.5     -3.8
Vietnam          5.0     5.5    5.6    9.2   11.0    9.8    8.00     10.00    8.00 20900 21500 21500     2.5   -1.8   -2.0     -3.6    -2.6     -2.3
Japan            1.9     0.2    0.2    0.0    0.0    0.3    0.05      0.05    0.05     78    74    74    0.8    0.7    1.1    -10.1    -9.1     -7.3
Source: HSBC

   Global Emerging Markets
   Multi-asset strategy                                                                                                          abc
   15 January 2013

 Chart B18. Asia ex Japan: New orders minus inventories and IP growth

  10                                                                                                                        6


   0                                                                                                                        0


 -10                                                                                                                        -6
       06                     07             08                 09         10               11                12

                        Asia x JP new orders minus inventories (LHS)      IP % 3m/3m, Asia weighted avg. ex HK & JP (RHS)

 Source: HSBC, Markit, CEIC

growth in the first half of 2013. Meanwhile, the                       from strong demand in China, especially the large
property market in China has started to recover,                       commodity exporters of Malaysia and Indonesia.
helping support consumption and real estate
                                                                       However, the larger story in Asean is that
activity. However, to maintain growth at these
                                                                       highly accommodative financial conditions are
levels, the incoming leadership has to pursue
                                                                       stoking local demand. Record-low interest rates,
economic reforms. We expect important
                                                                       coupled with a torrent of capital inflows, have
initiatives in the first half of 2013, especially in
                                                                       pushed up bank lending, benefiting especially real
the financial sector (see our 5 November 2012
                                                                       estate markets. In Thailand and Malaysia, fiscal
report, China’s Big Bang: New leaders ready to
                                                                       spending was buoyant last year. Although this
revolutionise the financial system).
                                                                       may ease off in 2013, private demand appears
Among the best-placed economies to benefit                             robust enough to carry growth.
from China’s rebound is Korea. Here, too, we
                                                                       Indonesia, despite worries about its emerging
expect faster growth than consensus, mirroring the
                                                                       current account deficit, continues to deliver
fact that the country exports more to China than to
                                                                       impressive growth. Apart from rapid credit
the US and the European Union combined.
                                                                       growth and still-robust consumer demand, the
Locally, too, the newly elected South Korean
                                                                       economy appears to be regaining a measure of
administration of President-elect Park Geun-hye
                                                                       competitiveness in manufacturing, recently
appears likely to announce new growth-
                                                                       registering a record amount of foreign direct
supporting measures and to front-load budget
                                                                       investment (FDI). Rising wages, in part reflecting
expenditures to kick-start the economy. Growth in
                                                                       a recent political settlement in Jakarta, are not yet
Korea could thus hit 3.8% in 2013, we expect, up
                                                                       cause for worry, in our view. With competition for
sharply from an estimated 2.2% last year.
                                                                       access to energy resources heating up among
As mentioned, the Asean economies have so far                          Asia’s giants, Indonesia also stands to benefit in
delivered, with the possible exception of                              the coming years, attracting more investment into
Vietnam, strong growth, barely pausing for                             this sector, as well.
breath in 2012. These markets, too, would benefit

     Global Emerging Markets
     Multi-asset strategy                                                                                      abc
     15 January 2013

 Chart B19. Headline inflation                          Chart B20. Core inflation

 12                                                      8.0
                                                                 % y-o-y
          %y-o-y                                         7.0
     9                                                   6.0
     6                                                   5.0
     3                                                   3.0
     0                                                   1.0
         00 01 02 03 04 05 06 07 08 09 10 11 12         -1.0
                                                               00 01 02 03 04 05 06 07 08 09 10 11 12
                      Asia x JP   ASEAN    NIEs                              Asia x JP   ASEAN      NIE

 Source: CEIC, HSBC                                     Source: CEIC, HSBC

India has had its share of challenges in 2012:         past year in industrial activity, there has not been
Growth continued to slow for most of the year,         a commensurate slackening in job markets as is
and the central bank was unable to offer more          usually the case. The reasons for this are varied
support amidst sticky inflation. There are now         and include demographic headwinds, such as
signs that things are turning, with growth picking     slowing labor-force growth in China and buoyant
up into year-end and price pressures easing, as        demand for services across the region.
well. India’s central bank may be able to cut rates
                                                       Second, despite the slowdown in industrial
gently over the first half of 2013. This, along with
                                                       activity, spending has remained robust. This
improved business confidence, should help
                                                       has been helped by accommodative financial
growth recover a little this year, though not to the
                                                       conditions and lofty asset prices, which are lifting
heady pace seen before the global financial crisis,
                                                       spending through the wealth effect. Thus, while
we believe.
                                                       economic analysis of emerging markets tends to
Inflation: On the rise                                 focus on the production side of the economy –
                                                       where data are far more readily available – the
With growth heading back up, the question is
                                                       spending side has held up much better than in
when price pressures will once more burst into
                                                       previous cycles, explaining why price pressures
the open. So far, inflation has been reasonably
                                                       never cooled as much as in earlier slowdowns.
well-behaved, although, given the scale of the
deceleration last year, it has not slowed as much      Third, the risk of a sudden surge in food prices
as in previous cycles. Over the first half of 2013,    persists. Over the past few years, emerging Asia
most consumer price index (CPI) prints will again      has seen repeated cycles of spiking food costs,
tick up, we expect, if only because of base effects.   most sharply in 2008. While these are commonly
Faster growth, too, would raise price pressures.       attributed to supply disruptions, all of these cycles
                                                       have coincided with accelerating income growth,
But, there is something far more fundamental
                                                       suggesting that the latter is just as responsible for
going on. Inflation risks are growing for structural
                                                       rising food prices as the former.
reasons in Asia and could lead to another burst in
price increases if policy-makers do not cool           More likely, environmental factors, such as
growth in time. First, labor markets across the        urbanization, and poor productivity gains in
region are tight. Despite the deceleration over the    the agricultural sector mean that supply and

   Global Emerging Markets
   Multi-asset strategy                                                                                              abc
   15 January 2013

 Chart B21. Nominal policy rate






           CH         HK      IN   ID      KR        MA          PH       SG      SL      TW       TH      VN

                                           2005-2007 average            Latest

 Source: CEIC, HSBC

demand are finely balanced. Thus, accelerated                  In short, even gradual currency appreciation,
income growth, which we expect over the first                  while a promising first line of defense, will do
half of 2013, can quickly translate into rising food           little to tame price pressures and only raise the
prices and jumps in inflation more generally.                  need for an interest rate response over time.
                                                               The latter, as mentioned, could also prove
Policy: Responding to inflation
                                                               ineffective, if delivered in small doses, but
Policy-makers face a number of challenges. For                 inflation-targeting central banks will eventually
one, accelerating growth and rising price                      need to signal their commitment to price stability
pressures would warrant a gradual tightening of                and nudge policy rates higher. We thus expect
monetary policy over the course of the year. But               virtually all major Asian central banks, with the
extremely loose global monetary conditions make                notable exceptions of the India’s Reserve Bank
it difficult to tighten unilaterally. True, China has          and the People’s Bank of China, to deliver rate
more room to maneuver on this front, as it is still            hikes over the second half of 2013.
shielded behind a wall of capital controls.
                                                               Whether this will be sufficient to check Asia’s
Elsewhere, however, even marginal rate hikes
                                                               inflation problem remains questionable, in our
would risk attracting more capital inflows, thus
                                                               view. Other measures, such as aggressive fiscal
accentuating, rather than cooling, price pressures.
                                                               tightening, could prove more effective in taming
Gradual exchange-rate appreciation could, in                   growth and tightening monetary policy against the
principle, also help tame price pressures, even                tide of global capital washing up on the region’s
without outright increases in interest rates.                  shores. But politically, that could be difficult to
HSBC FX strategists expect broadly stronger                    deliver. The big risk in Asia, therefore, is that
currencies across the region this year. However, in            inflation will climb uncomfortably over the course
a world of exceptionally loose monetary                        of 2013, we believe.
conditions, gradual appreciation can have the
same effect on local financial conditions as rate
hikes: attracting more speculative capital inflows
and thus raising, not lowering, inflation pressures.

     Global Emerging Markets
     Multi-asset strategy                                                                                                            abc
     15 January 2013

Latin America in 2013

 A two-speed region of fast- and slow-growth                        7 January 2013).                                                    Andre Loes
                                                                                                                                         Chief economist, Latin America
  countries developed in 2012, and we expect
                                                                     Growth: A shrinking gap                                             HSBC Bank Brasil S.A. – Banco
  the gap between the two to narrow in 2013                                                                                              +55 11 3371 8184
                                                                     Overall LatAm growth should rise to 3.2% in               
 Overall LatAm growth should rise to 3.2%
                                                                     2013 from 2.7% in 2012 as Brazilian growth                          Dinkar Pawan
  from 2.7% in 2012, led by a Brazil rebound                                                                                             Associate
                                                                     picks up, rising to 3.0% in 2013 from a                             Bangalore
 Inflation contained and rates seen steady;                         disappointing 1.1% in 2012.
  fiscal reform implies upside risk for inflation
                                                                     On one side of the two-speed LatAm are the
  and rates in Mexico
                                                                     “runners,” with growth around potential and
Runners versus walkers                                               inflation at manageable levels. This group consists
                                                                     of Chile, Mexico, Panama, Peru, and, to a lesser
Despite a global backdrop of continued low
                                                                     extent, Colombia. On the other side are the
growth, China’s likely rebound would be
                                                                     “walkers”: Brazil, where higher economic growth
positive for Latin America in 2013. A rebound
                                                                     failed to materialize despite policy stimuli, a
in Brazil would help reduce a growth gap that
                                                                     situation close to stagflation in Argentina, and a
developed in LatAm in 2012 between more-
                                                                     combination of high inflation and weaker growth
competitive and transparent faster-growth
                                                                     in Uruguay. Venezuela showed good growth but
economies on the Pacific shore and lower-growth
                                                                     at the cost of a ballooning fiscal deficit.
countries on the Atlantic coast.
                                                                     The relative strength of fixed asset investment
A mixed picture for inflation should result in
                                                                     is key in differentiating the two groups. Brazil
very limited action in the rates space, with a
                                                                     and Argentina, for instance, have experienced a
downward risk in Colombia and upward risks in
                                                                     huge deceleration in investment since 2011.
Mexico and Uruguay (see Latin American
                                                                     Factors contributing to this included FX
Economics Quarterly: Runners versus walkers,
                                                                     appreciation, cost inflation, and competitiveness

Table B9. Latin America: Key forecasts
                ______ GDP _______ _____ Inflation ______ ____ Policy rate _____      _______ FX _________ Current accnt (% GDP) Fiscal accnt (% GDP)
               2012e 2013f 2014f 2012e 2013f 2014f 2012 2013f 2014f                    2012 2013f 2014f 2012e 2013f 2014f 2012e 2013f 2014f
Argentina        2.0     2.5     3.0     24.0   25.0   23.0   16.0      15.0   14.0    4.92      6.00     7.00     0.8     0.9     0.3     -3.5     -3.5    -2.2
Brazil           1.1     3.0     3.8      5.7    5.5    6.5   7.25      7.25   7.25    2.05     2.30     2.40     -2.4    -2.8    -2.6     -2.5     -2.8    -3.0
Chile            5.6     4.8     5.0      1.8    3.0    3.0   5.00      5.00   5.00     479      490      490     -3.3    -3.2    -3.1     -0.1     -0.2    -0.4
Colombia         3.9     4.3     4.5      2.4    2.9    3.0   4.25      4.00   4.75    1767     1725     1725     -3.5    -3.3    -3.4     -1.5     -1.2    -1.2
Mexico           3.9     3.2     3.6      3.9    3.6    3.6   4.50      4.50   5.00   12.99    12.15    12.15     -0.7    -0.9    -1.1     -2.0     -2.0    -2.0
Panama           9.6     8.0     7.6      4.9    5.3    4.5   2.30      2.10   2.30      1.0      1.0      1.0   -13.1   -12.2   -11.3     -2.6     -2.5    -2.0
Peru             6.2     6.2     6.4      2.7    2.5    2.5   4.25      4.25   4.25     2.55     2.50     2.42    -2.5    -2.6    -3.4      1.7      1.0     0.8
Uruguay          3.5     4.0     5.0      7.5    7.5    7.0   9.25      9.25   8.00   19.18    20.00    21.00     -2.6    -1.2     1.4     -1.3     -1.0    -1.0
Venezuela        5.1     0.5     2.5     20.0   32.1   26.4   16.5      18.5   20.1      4.3      6.5      7.8     4.3     5.1     5.7    -16.0     -9.3    -4.1
Source: HSBC

   Global Emerging Markets
   Multi-asset strategy                                                                                                 abc
   15 January 2013

problems of the lower-growth group, and rising                    unable to continue in office because of illness
uncertainty regarding the regulatory framework                    implies a rise in uncertainty. The country needs
and stability of policies.                                        adjustments in FX and on the fiscal front under
                                                                  any political scenario, but until political
In Brazil, growing intervention by the government,
                                                                  uncertainty clears, the government could postpone
including an attempt to reduce the cost of electric
                                                                  any adjustment. Our 2013 GDP growth forecast is
energy, damaged risk perceptions because of poor
                                                                  0.5%, a sharp slowdown from our 5.1% estimate
coordination and communication. In Argentina,
                                                                  for 2012, and is dependent on the timing of any
perceived levels of uncertainty grew. Escalation of
                                                                  such adjustments, and hence on politics.
FX restrictions increased uncertainty about access
to imported capital goods and components.                         The slowdown that followed the escalation of
Businesses also are concerned about possible                      FX controls in Argentina may have bottomed.
intervention in sensitive sectors like energy.                    Yet the 2.5% GDP growth rate we expect for 2013
                                                                  relies mostly on exogenous factors, namely a
Strong terms of trade to continue. With HSBC
                                                                  rebound in Brazil and a favorable soy crop. Still,
economists’ expecting Chinese economic growth
                                                                  we concede that this recovery faces downside
to rebound to north of 8%, prospects are favorable
                                                                  risks, a technical default being the most
for commodity prices and persistence of good
                                                                  significant one. A ruling by a New York court –
terms of trade that have benefited the region over
                                                                  currently on stay – mandates the sovereign to
the last couple of years; see Chart B22.
                                                                  make full payments to debt renegotiation
 Chart B22. LatAm Terms of Trade Index (12-month averages         holdouts. If not reversed, this ruling could force
 of export and import price indices in 2000 = 100)
                                                                  Argentina into a technical default, with the
                                                                  consequent tightening of credit conditions
 120                                                              damaging the fragile recovery.

 110                                                              Our 3.2% GDP growth forecasts for Mexico in
                                                                  2013, factors in a challenging external scenario,
 100                                                              thus have upside risks. Mexico’s recent approval
                                                                  of labor reforms and potential approval of other
       2000    2002         2004    2006    2008    2010   2012   key structural reforms the in fiscal, energy, and
                            LatAm terms of trade index            education areas could pave the way for higher
                                                                  investment. Its materialization depends on the
 Source: Datastream, HSBC
                                                                  reaction of economic agents to short-term effects
This is particularly positive for the Andean                      of fiscal reform, which might come in the form of
economies. The combination of favorable                           higher indirect taxes and subsidy cuts, with a
commodity dynamics, good macro fundamentals,                      temporary impact on inflation. It will be key to
and stable policies should lead Chile, Peru, and                  gauge whether Banco de México could respond
Colombia to grow at what we consider their                        with a pre-emptive rate increase.
potential growth rates – 4.8%, 6.2%, and 4.3%,                    We expect Brazil to accelerate to 3.0% in 2013,
respectively.                                                     contributing with 0.9% to the region’s incremental
Venezuela is at a crossroads. Despite the                         GDP growth this year. This is over and above the
positive news of sustained oil prices, the                        0.5% incremental growth we expect for the region
possibility that President Hugo Chavez may be                     overall. This is because we expect the economies of

     Global Emerging Markets
     Multi-asset strategy                                                                                                     abc
     15 January 2013

Chile, Mexico, and Venezuela to report lower             Chart B23. Expected headline inflation gap (year-end, %)

growth in 2013 in comparison to 2012. A rebound           2.5
is on its way, we believe, as consumption is              2.0
supported by real wage growth and expectations of         1.5
better credit conditions.

Yet an acceleration of investment will be                 0.5

needed if Brazil is to achieve our growth                 0.0
forecast. The authorities have responded to weak         -0.5
                                                                    BRA          CHI         COL         MEX      PER   URU
investment with sector-specific tax and labor-
charge relief and cuts in energy prices, and                                                     2012e    2013e

proposed a large number of concessions and               Source: Central banks, HSBC estimates

public private partnerships. These measures
should be effective if the government succeeds in       On the other hand, as shown in Chart B23, the
improving risk perception. Last but not least, we       “runners” may see inflation converging to their
believe the government will apply more fiscal           targets. Openness and better supply conditions
stimulus, as well as allowing for some additional       appear likely to support this convergence process.
FX depreciation in 2013; we forecast a fiscal           Mexico, as mentioned previously, presents an
stimulus of 0.5% of GDP and the BRL/USD at              upside risk for price pressures due to the
2.30 at end-2013.                                       potentially inflationary effect of tax increases,
                                                        which are likely to be part of the fiscal reform to
Inflation: A mixed picture                              be sent to congress.
The inflation picture in the region is mixed. As        Policy: Limited rates action
we enter 2013, stickiness of inflation may persist
in Brazil, Uruguay, and Argentina, while a              As a consequence of sticky inflation, central
devaluation in Venezuela may lead to a sharp            banks cannot afford to go overboard with
increase in inflation there.                            cutting interest rates. Other than a small
                                                        additional 25bp cut in Colombia, we do not see
Curiously, the countries in which economic              any further easing in the region in 2013.
growth disappointed have not yet had relief on
the inflation front. Chart B23 shows that the           Yet our base case also does not foresee rate
expected inflation gap has not narrowed for             hikes in 2013, not even among inflation targeters,
countries such as Brazil and Uruguay. The               where a sizable inflation gap should persist.
strength of labor markets and a pronounced rise in      In the case of Brazil, the central bank has
real wages sustain services inflation at high levels.   repeatedly called for a “low for long” policy
In Argentina, the sharp economic slowdown in            stance, and in our view, it would be comfortable
2012 was accompanied by a marked deterioration          using quantitative measures to tame inflation if
of the growth-inflation trade-off, as inflation         that were to surprise to the upside. On the easing
remained stable at c23%. FX restrictions produced       side, as stated previously, fiscal policy appears
a huge increase in liquidity in ARS, which so far       likely to be the instrument of choice.
has not translated into higher inflation, but risks
are on the upside, in our view.                         In Uruguay, the rate increase last December is a
                                                        reminder that risks are to the upside. Yet there are
                                                        limits to any material additional tightening, as this

   Global Emerging Markets
   Multi-asset strategy                                                                                                 abc
   15 January 2013

could fuel further appreciation of the UYU/BRL          Chart B24. Core inflation (%, y-o-y)

bilateral rate, which already strengthened ~17% in      10
2012. We forecast the BCU will remain on hold in
2013, and we expect the country to resort to more-
unorthodox tools, such as price agreements, as
well as fiscal tightening at the margin.                 4

In countries where growth is around potential, the
persistence of benign core inflation figures (see
                                                                 BRA         CHI   COL         MEX         PER   U RU
Chart 3) makes rate increases unnecessary.
                                                                                   Sep    Oct        Nov
Inflation is contained in both Chile and Peru, and
                                                        Source: Datastream, HSBC
we see no reason for any rates actions. Peru
recently increased reserve requirements to reduce      Such moves are likely to translate into higher
the pace of credit expansion. We see more of this      inflation, the magnitude of which will depend on
happening if the central bank is uncomfortable         the size of tax increases and how quickly they are
with the pace of credit growth, as it avoids           implemented. If a rise in inflation is sizable, it is
additional appreciation pressure.                      possible that Banco de México could decide in
                                                       favor of a pre-emptive hike to anchor expectations.
In Colombia, we expect the central bank to apply
an additional 25bp cut to the key rate and then to     In Argentina, policy action may remain on the
stay put for the remainder of the year. However,       unorthodox side, as government financing relies
Colombia remains the only country in the region        gradually more on central bank financing.
where risks to our call are on the downside – a        Moreover, if history is a guide, the fact that 2013
result of inflation’s being on target, recent soft     is a year of legislative elections could lead to
GDP growth, and widespread concern about de-           increased fiscal impulse, especially as the
industrialization pressures stemming from an           government’s popularity has been declining. We
appreciated COP.                                       expect the pace of depreciation of the ARS to be
                                                       only enough to stabilize the real exchange rate.
Mexico stands as the country where the risks of
some monetary policy tightening are the highest.       In Venezuela, the big question mark in our view
As mentioned previously, the increase in the           is when a pronounced depreciation will take place.
value-added tax (VAT) rate on products that now        Political uncertainties may postpone it, but we
benefit from a zero tax rate, as well as the           believe it is unlikely that the muddling-through
introduction of sales tax at the state level, appear   can last through 2013.
likely to be at the core of fiscal reform that could
be submitted to congress.

      Global Emerging Markets
      Multi-asset strategy                                                                                                              abc
      15 January 2013

CEEMEA in 2013

                                                                                                                                            Dr. Murat Ulgen
 CEEMEA continues to grapple with                                            diversify away from the ailing eurozone, although
                                                                                                                                            Chief Economist, Central &
  growth problems resulting from exposure                                     they have not become that competitive, in our                 Eastern Europe and Sub-Saharan
  to the eurozone                                                             view.                                                         HSBC Bank plc
                                                                                                                                            +44 20 7991 6782
 We expect regional growth to reach 2.8%                                     In general, we do not expect CEEMEA to boost        

  in 2013, up slightly from 2.6% in 2012                                      its production and gain market share from
                                                                              lackluster developed-world markets. Labor
 There is room for further interest rate cuts,
                                                                              productivity growth has been below real wage
  while the space for fiscal loosening is
                                                                              increases since the start of the global financial
                                                                              crisis, particularly in Russia, Turkey, and South
No obvious drivers of growth                                                  Africa. Real effective exchange rates (REER)
                                                                              have not resulted in much of an increase in
Overall, the region continues to grapple with
                                                                              competitiveness for the same period, with a few
weak growth, as the sovereign-debt crisis in the
                                                                              exceptions. Indeed, central Eastern Europe’s
eurozone remains a significant drag. In contrast
                                                                              market share in the European Union has barely
to elsewhere in the emerging world, such as in
                                                                              changed over the past five years (Chart 2).
Asia, European banks continue to reduce exposure
to CEEMEA (Chart 1). Trade remains another                                    The region needs to undertake sweeping
area of weakness, despite Germany’s relative                                  structural reforms to boost its growth
resilience. CEEMEA economies are trying to                                    potential. Russia is still too much dependent on

Table B10. CEEMEA key forecasts
                     ______ GDP _______ _____ Inflation ______ ____ Policy rate _____ _______ FX _________ Current accnt (% GDP) Fiscal accnt (% GDP)
                    2012e 2013f 2014f 2012e 2013f 2014f 2012e 2013f 2014f 2012e 2013f 2014f 2012e 2013f 2014f 2012e 2013f 2014f
Belarus                 2.0          2.5   3.0   67.5   19.0   12.5    30.0      18.0    12.0 8,700 10,000 11,000     -2.9   -6.4    -6.7     -0.1    -0.3    -0.7
Czech Rep.1            -1.0          0.5   1.9    3.3    1.9    2.0    0.05      0.05    0.05   25.0   25.5   24.5    -1.6   -2.1    -2.1     -5.0    -2.7    -2.8
Estonia2                3.5          3.0   4.0    4.2    4.0    3.5    0.50      0.50    0.50   1.35   1.37   1.37    -2.0   -1.0     0.0     -2.5    -0.7     0.0
Hungary1               -1.3          0.5   0.9    5.7    3.0    3.0    5.75      5.00    4.50    315    270    270     1.8    2.7     2.0     -2.6    -3.0    -3.5
Israel                  3.3          3.1   4.3    1.6    1.3    2.4    2.00      1.75    2.75   3.76   3.60   3.50    -0.8    1.5     2.4     -4.2    -3.7    -3.5
Kazakhstan              5.1          5.3   7.0    5.3    6.7    6.0    5.50      5.50    5.50    149    149    149     7.7    4.0     3.6     -2.5    -2.7    -1.8
Kenya                   4.7          5.3   5.8    9.6    8.2    8.5    11.0       9.0     9.0   86.0   88.0   89.5    -9.5   -9.9   -10.3     -6.4    -5.8    -5.5
Latvia                  5.0          3.5   4.0    2.2    2.0    2.1    2.50      2.25    2.25   0.53   0.51   0.50    -2.5   -2.9    -3.6     -1.5    -1.4    -1.2
Lithuania               3.5          3.0   3.5    3.2    3.1    3.0    1.50      1.25    1.25   2.61   2.56   2.56     1.2    1.3     2.0     -3.0    -2.5    -2.0
Nigeria                 6.4          6.6   7.0   12.1    9.8    9.5   12.00     11.00   10.00 156.15 158.50 157.00     3.6    3.3     2.7     -3.4    -2.8    -2.4
Poland1                 2.1          1.6   2.9    3.7    2.1    1.7    4.25      3.25    3.25   4.10   4.00   3.80    -3.5   -3.5    -4.2     -3.4    -3.3    -3.0
Romania1                0.6          2.5   3.3    3.3    4.0    3.0    5.25      5.25    5.25   4.50   4.40   4.30    -4.3   -5.6    -5.5     -2.8    -2.9    -2.8
Russia                  3.0          2.5   2.0    5.1    6.7    5.5    5.50      4.75    4.00 31.18 32.27 32.72        4.4    2.6     1.9      0.4    -0.9    -0.7
Serbia1                -2.0          1.3   3.3    7.3   10.8    6.0   10.95     10.00    8.00    115    110    110   -11.1   -7.8    -9.5     -6.7    -4.5    -3.0
S. Africa               2.5          2.6   2.9    5.7    5.6    5.5    5.00      4.50    4.50   8.48   7.80   7.50    -5.9   -5.3    -5.0     -4.2    -4.8    -4.5
Turkey                  2.7          3.8   4.3    8.9    6.3    6.6    5.50      5.50    5.50   1.78   1.75   1.70    -7.0   -6.7    -7.0     -2.2    -2.2    -2.0
Ukraine                 0.8          1.5   3.0    0.6    3.0    4.6    8.50      8.50    7.00   8.60 10.00 10.50      -8.2   -7.4    -6.7     -2.7    -2.8    -2.5
1FXforecasts vs. EUR
2EUR and ECB policy rate forecasts
Source: HSBC

   Global Emerging Markets
   Multi-asset strategy                                                                                                     abc
   15 January 2013

 Chart B25. Annual change in the consolidated foreign claims   Doing Business Survey by more than 100 places
 of BIS-reporting European banks
                                                               to No. 20 by 2018. This ambitious but appropriate
                                                               aim must be supported by necessary policy
                                                               changes by the government.

                                                               Turkey, on the other hand, has generally
                                                               strong growth dynamics. Still, some areas
                                                               require improvement, in particular on the
                                                               domestic savings front. Turkey’s national savings
                                                               rate fell from a high of 25% of GDP in 1998 to
 Source: BIS                                                   less than 15% in 2011.

                                                                Chart B27. Turkey: Central bank funding rate and domestic
oil & gas; hence, its vulnerability is a possible               credit growth
slump in global oil prices. That is also true for
public finances. The oil price that clears the
Russian budget has increased to nearly
USD107/barrel in the Brent oil price from about
USD20 a decade ago, leaving little wiggle room
for fiscal policy to transform the economy by
investing in productivity-boosting areas.
Similarly, sizable capital outflows at about 4% of
GDP estimated for 2012, close to the level in the
                                                                Source: BRSA, CBRT
previous year, argue for lower domestic
investments. This is possibly related to the
                                                               With investments corresponding to more than
prevailing investment environment in Russia.
                                                               20% of GDP, it is clear that Turkey’s savings
We believe that the authorities could do a lot to              shortfall presents a structural challenge to
cause a “local warming” in the investment                      sustainable growth. Some crucial steps have
climate in Russia. In particular, corruption and               been taken to address this challenge. In 2012, the
the administrative burden on businesses should be              government changed the private pension system,
reduced. Russian President Vladimir Putin has set              replacing incentives in the form of tax deductions
an objective of improving Russia’s rating in the               with matching contributions. Penalties for early
 Chart B26. Market share in EU imports                         withdrawals were also put in place to encourage
                                                               longer-term savings. Going forward, reducing
                                                               labor informality (which is estimated at about
                                                               40% by the Turkish Statistical Institute, based on
                                                               labor force surveys), increasing financial literacy,
                                                               and increasing female participation in the labour
                                                               force should all improve saving behavior.

                                                               Central & Eastern Europe’s (CEE) “old
                                                               practice” of eurozone export/investment-driven
                                                               growth has run its course. The region’s growth
                                                               model was based on foreign direct investments
 Source: National sources

     Global Emerging Markets
     Multi-asset strategy                                                                                                    abc
     15 January 2013

(FDI) that supported the transition from a planned                    the latter part of 2013.
to a market economy and the growing openness of
                                                                      However, we see potential for some upside
the economy. These boosted growth rates for the
                                                                      surprises on growth, in selected places. We
last couple of decades. On top of it came a credit
                                                                      expect domestic demand to rebound in Turkey in
boom in the decade before the 2008 financial
                                                                      2013, following substantial loosening of monetary
crisis. All this was geared to Europe, and as it
                                                                      conditions throughout 2012. Domestic credit
entered recession, FDI flows dried up,
                                                                      growth already had an uptick as of December last
deleveraging unfolded, and exports slowed.
                                                                      year (Chart 3). Russia may surprise with some
To return to high and sustainable growth, CEE                         improvements in business confidence, and Israel
countries should aim for better business                              expects windfall gains from the start of natural gas
conditions, further investment in                                     production in its newly discovered deposits.
infrastructure (with EU funds), and more-
                                                                      Meanwhile, trade diversification should help at
flexible labor markets. For now, it is mostly
                                                                      the margin, too. It is not only Turkey that has
Hungary that stands out, but for heading in the
                                                                      been successfully opening up the Middle East and
opposite direction, having increased in the last
                                                                      North Africa (MENA). China has trumped
couple of years the uncertainty in its legal and tax
                                                                      Germany as Russia’s main trading partner and has
                                                                      become a key export destination (Table 1). South
Growth: Monetary stimulus                                             African exports to Asia and sub-Saharan Africa
may offer some help                                                   were on an upward trend even before the global
                                                                      financial crisis. Poland and the Czech Republic
We expect growth for the region to accelerate
                                                                      trade more with Russia and Ukraine. Nonetheless,
slightly in 2013, to 2.8% from 2.6% in 2012,
                                                                      this dynamic should not be overplayed for CEE.
and further to 3.1% in 2014. The structural story
in the eurozone is unchanged, and even Germany                        Inflation: Abating pressures
is being dragged down by the rest of the region. In
                                                                      We expect the moderation in the inflation
our 20 December 2012 report, European
                                                                      outlook to continue in the early parts of 2013.
Economics Quarterly: Back from the abyss, we
                                                                      This owes to subdued domestic demand
forecast a further drag on the eurozone’s domestic
                                                                      conditions in general, particularly in CEE, as well
demand from deleveraging and fiscal austerity.
                                                                      as to softening cost pressures if global energy and
However, this impact should be partly offset for
                                                                      food prices gradually retreat.
by improving world trade, resulting in a smaller
contraction in overall eurozone growth this year                      While still not fully in line with central bank
and positive growth in 2014. This improvement                         targets, the sticky inflation picture during most
should feed through positively to CEEMEA                              of 2012 moderated somewhat toward year-end
economies with some lag, possibly showing up in                       (Chart 4). The main reasons were reduced cost-
                                                                      side pressures, on both food and energy. Sluggish
Table B11. Top five export destinations
             ________ 2007 ________ ________ 2012 ________            to weak domestic demand also pulled inflation
           Turkey’s     Russia’s   Turkey’s    Russia’s               down for the likes of Turkey and Poland. In
1          Germany              Netherlands   Germany   Netherlands   Russia, the rise in inflation turned out to be less
2          UK                   Italy         Iran      Germany
3          Italy                Germany       Iraq      China         than expected, with some moderation in food-
4          France               Turkey        UK        Italy         price pressure recently, while the impending
5          Russia               Belarus       UAE       Turkey
                                                                      slowdown in economic activity appears likely to
Source: National statistics office

   Global Emerging Markets
   Multi-asset strategy                                                                                    abc
   15 January 2013

help bring inflation even lower in the second half    Poland and Hungary have some way to go in
of 2013. In South Africa, underlying core inflation   their current easing cycle. In Turkey’s case,
has long been benign.                                 monetary easing may come in the form of a lower
                                                      rate corridor, although such a move would be
 Chart B28. Headline CPI versus target
                                                      intended more to safeguard financial stability, in
                                                      case the Turkish lira appreciates sharply. The
                                                      zero-bound policy rate in the Czech Republic
                                                      leaves not much of an alternative other than FX
                                                      intervention to ease monetary conditions.

                                                      The fiscal policy outlook, on the other hand, is
                                                      mixed. There was a notable loosening in Russia
                                                      and Turkey in 2012, so we expect some
 Source: National statistics offices                  consolidation this year, or at the very least a
                                                      neutral fiscal stance. CEE is still feeling the
Policy: More monetary easing                          impact of the excessive deficit procedure (EDP) –
We expect more easing in CEEMEA in many               the conditionality in the EU’s Stability and
economies throughout 2013 from already                Growth Pact for the member countries to keep
supportive monetary conditions. Central banks         their budget deficits below 3.0% of GDP –
in the world’s largest economies continue to pump     although the appetite to rush to the exit from the
liquidity into the financial system, while            EDP is somewhat diluted, with the exception of
commodity prices have been on a gradual retreat.      Hungary. South Africa’s fiscal room is
This backdrop offers the opportunity for a            constrained by risks of a further downgrade to its
continuation of current loose monetary policies in    sovereign credit rating. So hopes are tied once
the region.                                           again to looser monetary policy in many
                                                      CEEMEA economies.

     Global Emerging Markets
     Multi-asset strategy                                                                                                                      abc
     15 January 2013

Middle East and North
Africa in 2013

 Oil-exporting states can expect two more                                            For MENA’s non-oil states, however, strains
                                                                                                                                                     Simon Williams
  years of plenty and could weather even a                                            on public finances and external accounts are                   Economist
                                                                                                                                                     HSBC Bank Middle East Limited
  substantial drop in oil prices, we believe                                          already pronounced and look set to remain                      +9714 423 6925
                                                                                      severe. Indeed, we are concerned that the most       
 For non-oil exporters, the economic outlook
                                                                                      vulnerable of the non-oil producing states, such as            Liz Martins
  for 2013 is much more precarious, in our view                                                                                                      Economist
                                                                                      Egypt, Syria, Libya, and Tunisia, may have                     HSBC Bank Middle East Limited
                                                                                                                                                     +9714 423 6928
 Political uncertainty is the primary                                                reached a point where the outlook could quickly      
  constraint on economic performance                                                  become very much worse unless the political
                                                                                      situation stabilizes. (Please see our 8 January 2013
The ‘haves’ and ‘have-nots’                                                           report, Middle East Economics Quarterly: To the
Even allowing for a modest easing in oil prices                                       brink, again).
over 2013-14 from their 2011-12 record highs,                                         Growth: Oil or nothing
Middle East and North Africa (MENA) oil-
                                                                                      Our aggregate real GDP growth forecast of
exporters look set for another two years of
                                                                                      4.0% for the MENA region belies a widening
plenty, in our view. We expect strong
                                                                                      gap between the “haves” and “have-nots.” For
hydrocarbon revenues to support further increases
                                                                                      the oil exporters of the Middle East, most
in public spending that will drive growth while
                                                                                      governments have the means and motive to
also allowing continued wealth accumulation.
                                                                                      continue last year’s expansionary fiscal policies
Table B12. Middle East and North Africa: Key forecasts
                  _______ GDP _______                                                                  Current accnt (% GDP) Fiscal accnt (% GDP)
                                        _____Inflation _____ ____ Policy rate _____ ________ FX ________
                     2012e 2013f 2014f 2012e 2013f 2014f 2012e 2013f 2014f 2012e 2013f 2014f 2012e 2013f 2014f 2012e 2013f 2014f

Algeria                    3.5        4.3        4.0        9.0      8.0    6.0 4.00 4.00 4.00       75.5 74.4 74.4     10.5     8.6     6.0 -0.6       -1.7    -3.0
Bahrain                    4.2        3.2        3.1        2.5      3.0    3.0 2.25 2.25 2.25        0.4  0.4   0.4     9.6     9.7     8.2 -0.1       -1.7    -4.8
Egypt1                     2.2        2.1        3.3        7.2      8.0    8.0 9.50 9.50 9.50        6.1  6.8   7.0    -3.1    -3.7    -3.3 -11.2     -11.4    -9.3
Iraq                       6.7        6.3        7.5        5.0      6.5    7.0 6.00 5.50 5.00      1150 1150 1150      17.8    14.7    12.3   6.0       4.8     3.9
Jordan                     2.7        2.8        2.9        5.0      4.0    3.5 5.00 5.00 5.00        0.7  0.7   0.7   -16.3   -15.7   -14.6 -14.1     -13.6   -13.5
Kuwait                     5.5        3.9        4.0        4.0      3.8    4.4 2.00 2.00 2.00        0.3  0.3   0.3    35.8    35.4    31.7 30.5       30.9    30.8
Lebanon                    1.4        2.0        2.4        7.0      6.0    4.0 10.00 10.00 10.00   1507 1507 1507     -25.4   -22.8   -20.0 -7.1       -7.5    -7.3
Morocco                    2.5        3.1        3.6        1.5      2.5    3.5 3.00 3.00 3.00        8.3  8.0   8.0   -10.0    -8.3    -7.2 -5.7       -4.4    -3.9
Oman                       5.0        4.8        4.3        2.5      2.5    2.0 1.00 1.00 1.00        0.4  0.4   0.4    16.6    13.8    12.0   9.8       9.2     5.6
Pakistan1                  4.2        2.7        2.9       13.1     12.6   10.4 12.00 10.00 10.00   95.0 104.5 110.0    -2.2    -1.0    -2.1 -6.7       -6.1    -5.5
Qatar                      6.3        5.2        5.4        3.5      4.7    5.0 0.75 0.75 0.75        3.6  3.6   3.6    29.8    26.9    14.3   8.2       7.2     5.2
KSA                        5.4        4.3        3.7        3.9      5.5    5.5 0.25 0.25 0.25        3.7  3.7   3.7    24.3    20.8    18.1 14.2        9.0     3.8
Tunisia                    2.3        3.1        4.0        5.8      4.9    4.5 3.75 4.00 3.75        1.4  1.4   1.4    -9.0    -7.9    -6.5 -5.4       -5.9    -6.3
UAE                        3.7        3.9        4.1        1.2      1.6    3.5 1.00 1.00 1.00        3.7  3.7   3.7    10.1    11.4    11.8 12.1        9.2     9.0
¹ Fiscal year, where July 2011-June 2012 are referred to as 2012.
Source: MENA central banks, National statistical agencies, HSBC

   Global Emerging Markets
   Multi-asset strategy                                                                                                                                abc
   15 January 2013

into 2013, resulting in an aggregate expansion we                      Chart B30. MENA’s non-oil producers have been
                                                                       underperforming since the Arab spring
estimate at 4.5%.
For Saudi Arabia, Qatar, and Oman, the                                                                Real GDP growth (% )
outlook is particularly strong, we believe, with an
expansionary fiscal stance complemented by                              4
strong domestic credit growth and increasingly                          2
ready access to funding from overseas. Three
years after its downturn following a 10-year
                                                                                    2010            2011         2012e           2013f         2014f
boom, we see increasing evidence that the UAE
has found its feet, driven by the renewed vibrancy                                         Non oil producers           GCC         MENA
of Dubai’s export-oriented service sector and the
                                                                       Source: MENA central banks, National statistical agencies, HSBC
recycling of Abu Dhabi oil wealth.

For Bahrain, Kuwait, and Algeria, the advantage                        For Egypt in particular, political risk continues to
of record oil revenues is offset to some degree by                     weigh heavily on confidence among consumers,
political risk, although our growth forecasts in the                   investors, lenders, and tourists alike. Further delay
region of 3-4% are still higher than they are                          to an accord with the International Monetary Fund
outside the oil-producing world, where the                             – postponed in December due to escalating unrest
aggregate growth rate we forecast is 2.7%. In the                      – could yet trigger a further decline in economic
non-oil producers, policymakers face a perfect                         prospects, sending GDP into contraction territory.
storm of political instability, weak demand from
                                                                       We also have major concerns about Jordan,
the eurozone, fiscal austerity, deepening external
                                                                       where structural fiscal and current account deficits
imbalances, and monetary tightening. Our biggest
                                                                       have widened just as traditional aid flows have
concern is for the post-revolution economies of
                                                                       dried up, and the central bank has had to raise
Tunisia, Egypt, and Libya, which have not
                                                                       rates three times in the last two years to support
completed political transitions.
                                                                       the currency peg.

 Chart B29. In the Gulf, PMI readings are buoyant …                      Chart B31. … while the picture in Egypt could not be more

 60                                                                         46

 58                                                                         44

 56                                                                         42
      Aug-11 Oct-11 Dec-11 Feb-12 Apr-12 Jun-12 Aug-12 Oct-12 Dec-12        36
                                                                                 Apr-11    Jul-11   Oct-11    Jan-12 Apr-12         Jul-12   Oct-12
                        PMI     New Orders      Output
                                                                                                             Egypt PMI Index
 Source: Markit, HSBC                                                    Source: Markit, HSBC

     Global Emerging Markets
     Multi-asset strategy                                                                                            abc
     15 January 2013

Inflation: Risks to the upside                                 Policy: FX unchanged, fiscal
Inflation remained under control in both the
                                                               tightening for oil importers
oil and non-oil states of the MENA region in                   With robust growth and inflation under
2012. However, in 2013, we believe the risks are               control (if at somewhat higher levels than in
rising. In the Gulf Cooperation Council (GCC)                  2012), we do not anticipate any major change
states, we expect an uptick due to expansionary                in policy stance for the GCC region. With the
fiscal and monetary policy, strong demand                      possible exception of Bahrain and Algeria, we
growth, higher global food prices, and relative                believe that all of the MENA region’s oil
dollar weakness. Interest rates, tied to the US                exporters are likely to generate budget surpluses
through the dollar peg, are already negative in real           in 2013 for the fourth year in a row, allowing
terms and are unlikely to be raised in the                     them to add to their net stock of savings, even as
foreseeable future.                                            they increase spending. Although the oil-
                                                               exporting states are vulnerable to any sustained
Although we expect inflation to pick up, we do
                                                               weakness in hydrocarbon prices, high levels of
not forecast it will reach the double-digit rates
                                                               reserves (Saudi Arabia has sufficient liquid assets
recorded at the peak of the last cycle in 2008 –
                                                               to cover three years of budget spending) and low
a reflection of both the more-muted pace of
                                                               debt should ensure that fiscal plans are not
economic expansion and the hard-won recent
                                                               questioned and that spending remains strong.
experience of policymakers, who are newly
sensitized to the social costs of rising prices.               We also see no reason to doubt the GCC’s
                                                               willingness or ability to maintain the
For the region’s non-oil producers, subsidy
                                                               unchanging pegs to the dollar that have been
cuts – already enacted by Morocco, Tunisia,
                                                               the cornerstone of monetary policy for a
Egypt, and Jordan – will put pressure on
                                                               generation. Although a sharp drop in the value of
consumer and producer prices. While weak
                                                               USD might lead to fresh speculation on the
demand and tight fiscal and monetary policy may
                                                               region’s currencies, policymakers remain
offset this for much of the region, Egypt is at
                                                               committed to the pegs, particularly while inflation
greater risk of a rise in inflation, following the
                                                               is muted and questions about the euro persist. The
central bank’s decision in December to stop
                                                               depth of FX resources regional central banks have
supporting the currency.
                                                               at their disposal, and the dominant role they play
 Chart B32. Inflation has been elusive in the MENA region,     in their currency markets, also leave the central
 but risks may be to the upside in 2013
                                                               banks well-placed to defend the pegs if a drop in
 20                                                            oil earnings were to put them under downward
 15                                                            pressure.

 10                                                            For the rest of the region, however,
     5                                                         longstanding fiscal and monetary regimes are
                                                               under considerable strain. Public finances in
                                                               Egypt, Tunisia, Jordan, Lebanon, and Morocco
         2005 2006 2007 2008 2009 2010 2011 2012f 2013f
                                                               have all deteriorated as cyclical pressures and
                                                               poor political climates compounded longstanding
                     GCC    MENA           Non oil producers
                                                               structural shortcomings. To varying degrees, each
 Source: Bloomberg                                             should be forced to shift into austerity mode.

   Global Emerging Markets
   Multi-asset strategy                                                                                                    abc
   15 January 2013

Without access to substantial overseas financial       tempered in the event of a disbursement of funds
support from the commercial and concessional           under an IMF-led program of international
multilateral and bilateral sources, government         support that could come early in the first quarter
funding costs also appear likely to rise.              of 2013. With reserves so depleted, however,
                                                       Egypt’s room for maneuver is very limited, with
The weak economic and political environments
                                                       any further delay in the release of multilateral
will also raise questions about the stability of
                                                       funding potentially triggering a sustained and
the non-oil producers’ currencies, we believe.
                                                       disorderly drop in the dollar value of the Egyptian
In Lebanon, the depth of reserves the central bank
has at its disposal should allow it to support the
longstanding dollar peg, even if the political order    Chart B33. Giving up the fight: EGP depreciation accelerates
is affected by instability in neighboring Syria. We     40                                                           6.5
                                                        35                                                           6.4
are optimistic that Morocco, too, will have                                                                          6.3
sufficient resources to maintain order on its                                                                        6.2
                                                        25                                                           6.1
currency market.
                                                        20                                                           6.0
We are less comfortable, however, with the              15                                                           5.9
outlook for Jordan, where chronic budget and            10
external account shortfalls are being exacerbated        5                                                           5.6
by regional political disorder and weak European         0                                                           5.5
                                                          Dec-10            Jun-11        Dec-11     Jun-12    Dec-12
demand. The greatest uncertainty, however,                                           Reserves      EGP (rhs)
centers on Egypt, which was forced to end its           Source: Bloomberg

support for the Egyptian pound at the end of 2012
as its reserves approached exhaustion.

Our expectation is that the Egyptian currency
will continue to weaken, with the decline

     Global Emerging Markets
     Multi-asset strategy                                                                                                          abc
     15 January 2013

Emerging markets elections calendar
 Chart B34. 2013 political calendar

 *Estimated to occur within this month based off of historical election dates; election dates have not been officially announced
 Source: Consortium for Elections and Political Process Strengthening (CEPPS)

Global Emerging Markets
Multi-asset strategy             abc
15 January 2013

                 Multi-asset strategy


     Table B13. Summary of HSBC fixed income, FX, and equity views

                                                                                                                                                                                                                                                                              15 January 2013
                                                                                                                                                                                                                                                                              Multi-asset strategy
                                                                                                                                                                                                                                                                              Global Emerging Markets
     Country        EXD                                                             LDM                                                        FX                                                            Equity
     Argentina      Neutral                                                         Underweight                                              Long USD-ARS                                                    Overweight
                    Going toward the crucial February 27 hearing on the pari        Poor liquidity, FX risks, and capital controls make this A much more closed, centralized, and regulated economy, We are overweight Argentina, solely focused on perceived
                    passu ruling, Argentine bonds are likely to remain              market unattractive, in our view.                        coupled with tighter FX controls and uncertainty about the beneficiaries from the nominal peso devaluation.
                    undervalued to the country’s ability to pay. Investors are                                                               foreign debt position, are contributing to a negative outlook
                    unlikely to jump on “cheap” valuations, given the binary                                                                 for the ARS. That said, we expect the central bank to keep
                    scenarios that could come from the judicial event. We prefer                                                             control over the ARS and manage its nominal depreciation
                    local law bonds at this stage. It remains unclear whether the                                                            to maintain real exchange-rate stability. Yet should inflation
                    offering to reopen the debt exchange will be enough for to                                                               rise at a more rapid rate. A faster pace of nominal FX
                    convince the court that this is a reasonable remedy.                                                                     depreciation may be deemed necessary.
     Brazil         Neutral                                                  Receive Jan '15 DI and buy 10-year NTN-B                        Long USD-BRL                                                    Overweight
                                                                             We see value in front-end receivers (Jan '15 DI) to position The BRL continues to be highly managed by authorities to We are overweight on Brazilian equities. We see this market
                    With 12.5% total return in 2012, Brazil underperformed the
                    EXD index by almost 5%. However, with the exception of   for our expectation of no change in monetary policy this year limit volatility. Despite efforts to strengthen the BRL in recent as a strong cyclical story on the back of a domestic recovery
                                                                             and next, even as inflation pressures increase. The curve weeks (following the sharp December weakness), we still and the strong links to China. Earnings are very depressed
                    Peru and Uruguay, it performed in line with the other LatAm
                                                                             implies about 185bp in hikes by end-2014. As they have
                    low betas. The spread of Brazil's global USD bond index is                                                               believe that, as the growth rebound disappoints, we will see and valuations are undemanding. Investor sentiment and
                    now below the all-time tightest levels. We see little    some of the highest real yields available in the asset class, USD-BRL pushed higher during the year. We do not see              positioning are at multiyear lows, and hence supportive.
                                                                             we continue to favor inflation-linked bonds over nominal. We inflation pass-through via a weaker currency being a major
                    directional upside and remain neutral Brazil. On the curve,
                    we consider the long end as relatively cheap.            expect inflation risk premium and break-evens to continue to concern, but rather growth being the primary focus. We
                                                                             rise.                                                           expect USD-BRL to rise to 2.30 by year end.
     Czech Rep. Neutral                                                      Take profit in CZGB 3.85 Sep 2021; stay constructive            Long EUR-CZK                                                    Neutral
                We do not see much value in the Czech sovereign credit       We recommend locking in gains on long CZGB 3.85 Sep             We keep our bearish view on the CZK. Interest rates are         Czech equities have underperformed EM y-t-d. In the
                market. While we regard the sovereign credit metrics as      2021, cautioning against a further core rates sell-off. The     now at zero, and FX intervention is the next tool to ease       medium term, the Czech economy’s strengths continue to
                solid, the spreads are too tight to bear country-specific    spread between Czech bonds vs bunds has tightened to            further monetary conditions via a weaker CZK. From a            be its low debt burden, both in the private and public
                value.                                                       lows since 2009 – a liquidity risk premium hardly sufficient valuation standpoint, the CZK is not an attractive currency. sectors, and its healthy banking system, which could
                                                                             now. Also, the lack of CNB resoluteness to embark on QE in                                                                      support a solid recovery if the external situation improves.
                                                                             the near term leaves CZGBs vulnerable to external factors.                                                                      However, we regard it as too defensive to be a worthwhile
                                                                             We stay fundamentally constructive, but wait for a better                                                                       play on European financial stabilization.
                                                                             level to go long again.
     Chile                                                                   Neutral                                                         Neutral                                                         Underweight
                                                                             We see little value in the nominal curve. The front end is      We expect the CLP to remain broadly within recent ranges We are underweight Chilean equities on what we regard as
                                                                             pricing a 25bp hike in 2H13 due to recent upside surprises in the coming months, based on stronger growth, solid fiscal a lack of attractive bottom-up stock opportunities. Valuations
                                                                             to activity. We do not expect the central bank to move rates balance, and attractive interest rate differentials. Yet we see are at a regional premium (though they have been coming
                                                                             this year. The 2s10s curve is too flat to provide any incentive the threat of central bank intervention (USD buying), should down), earnings are weak, with a widening CAD, and foreign
                                                                             to extend duration. The inflation break-even curve is flat      the CLP strengthen toward or beyond 460/USD, and the            investors have already significantly narrowed their historical
                                                                             around 3% for all key tenors, close to inflation expectations widening of the current account deficit as the two factors        underweight positions.
                                                                             over the next two years. This remains low, in our view.         likely to limit CLP gains and possibly result in a modestly
                                                                                                                                             weaker CLP during the course of the year.
     China      Buy 5yr CDS at 63bps                                         5-2yr CNY NDIRS steepener                                       Short USD-CNY 1m NDF                                            Overweight
                We see no major economic initiatives on the table until      With more predictable monetary conditions and the               Reforms and internationalization should be the key themes We remain overweight on China. We see further upside
                newly elected senior representatives officially take their   continued economic recovery, we expect the 5-2yr sector of for 2013. We expect a more market-driven RMB as allowed from stable growth, structural adjustment, and benign
                positions at the National People’s Congress meeting slated the IRS curve to steepen to 50bp. Bonds are likely to             by further exchange rate deregulation. Recently, the PBoC inflation. A reform agenda and associated key events could
                for March 2013. We believe major policy issues and           outperform swaps, as easier liquidity conditions will keep      relaxed the USD1bn individual QFII investment cap on            serve as re-rating catalysts for Chinese equities. China is
                economic reforms will be discussed only at the third plenum, bonds supported. Given that the spread of policy bank           foreign banks and sovereign wealth funds. Cross-border          also the cheapest market in the region.
                which should be around October 2013. So there is the         bonds and PBoC bills to government bonds has narrowed in RMB loans have also started to be approved. This suggests
                potential for sentiment being hurt in coming months,         the past year, we believe investment value resides in the       continuous opening up of the capital account, which will
                especially if the government is forced to impose additional government bonds.                                                make the onshore and offshore markets more closely linked.
                measures to cool bubbling residential property markets.                                                                      We look for moderate appreciation of RMB by 1% in 2013.

     Colombia   Neutral, long Colombia ’17s short ’21s                       Receive 1Y IBR swap rate                                        Sell USD-COP above 1790                                         Underweight
                Colombia has traded in line with the bulk of LatAm low-beta We expect the recent rally to extend. We forecast BanRep The outlook for the COP remains well-supported by strong We are underweight Colombia, on what we believe is a lack
                credits in 2012, generating 12.4% total returns. Colombia's will cut the policy rate by 25bp to 4.0% in January, which is FDI inflows and the prospects for better portfolio inflows         of bottom-up stock opportunities, as the economy slows,
                macro fundamentals remain strong, and issuance is likely to only partly priced in by the swap curve. Moreover, we also following the lowering of taxes for foreign investments.              and foreign investors cut positions.
                be very benign in 2013, with only USD500m in global bonds consider the recently approved tax reform, which includes However, the threat of stepped-up intervention and
                expected. Nonetheless, from a valuation perspective, we do an easing in the taxation of foreign fixed-income investors, anticipated further interest rate easing will limit room for
                not see a lot of room for spread compression at this point to be supportive, as it may lead to increased foreign             COP gains, we believe. We would look to sell USDs around
                and leave the country at neutral. Intra-curve, we recommend participation. We recently reached the original target on our the 1,790-1,800 area.
                buying Colombia ’17s and short ’21s (target: 120bp, stop: receiver trade in 5-year IBR and lowered it to 4.40%.
     Source: HSBC
     Table B13: Summary of HSBC fixed income, FX, and equity views, cont’d

                                                                                                                                                                                                                                                                                         15 January 2013
                                                                                                                                                                                                                                                                                         Multi-asset strategy
                                                                                                                                                                                                                                                                                         Global Emerging Markets
     Country        EXD                                                               LDM                                                                FX                                                            Equity
     Egypt          Neutral                                                           Neutral                                                            Neutral                                                          Overweight
                    Sentiment has picked up strongly due to the formation of a        Political stabilization and the materialization of USD2bn of       Following political stabilization and some improvements in Valuations remain inexpensive in spite of the strong rally last
                    government and transfer of power to civilian institutions, as     concessional funding brought foreigners back to Egypt's            the balance of payments, the risk of a sharp drop in the         year. Benefits should occur to the degree that the political
                    well as the materialization of USD2bn in concessional             T-bill market for the first time since the revolution in August.   value of the currency has moderated, and we project              transition proceeds, which we expect to lead to cyclical
                    funding from Qatar. Yet lingering uncertainty will keep Egypt     Meanwhile, reserves have been up or flat in recent months,         stability around current levels in the short to medium term. normalization. There is currency risk, but in our view, the
                    vulnerable to bouts of risk aversion. An IMF deal is not yet      and the currency has stabilized. That said, supply-side risks      Although there are risks to the downside from further            local currency upside on the equity markets more than
                    done, parliament remains suspended, and the weak                  persist, given Egypt’s substantial borrowing needs.                political delays – and in particular, any sign that the IMF deal offsets likely Egyptian pound downside.
                    economic and political climate casts strong doubt on the                                                                             could fall through – we stay neutral on the currency.
                    government’s ability to rein in the gaping budget deficit.
     GCC            Overweight                                                                                                                           Neutral                                                       Overweight
                    GCC bonds still offer relatively good risk/reward profiles,                                                                          We expect no change to the GCC's USD-pegged                   Our main calls in the Gulf relate to Saudi Arabia and the
                    with yields favorable to EM peers. Qatar and Abu Dhabi are                                                                           currencies, which are supported by strong current account     UAE. In Saudi Arabia, we like both the petrochemical sector
                    well-placed due to their fiscal and current account surpluses                                                                        surpluses and ample reserves. With inflation pressures low,   and selected plays on domestic demand. Potential market
                    and ample savings pools. Dubai and Bahrain are weaker,                                                                               there will be little discussion of a policy shift in 2012.    liberalization creates worthwhile option value. UAE equities
                    due to limited oil revenues. After the recent rally, which took                                                                                                                                    should benefit from a continuing cyclical turnaround.
                    Dubai's CDS to below 250bps (its lowest level since 2008),
                    further gains may be limited, we believe.
     Hong Kong                                                                    Receive 5-10yr Hibor/Libor basis                              Neutral                                                        Underweight
                                                                                  We endorse receiving long-dated Hibor/Libor X-ccy basis       We saw the HKMA intervene for the first time since 2009        Our relatively cautious stance on Hong Kong is mainly
                                                                                  due to attractive carry. The 5-10yr segment rose sharply in because of appreciation pressures due to loose monetary based on its rich valuation and well-owned positions
                                                                                  2012 on liability hedging of local companies’ FX bond         policy across the world. We expect the monetary authority to indicated by mutual fund holdings.
                                                                                  issuance (paying). The high long-end Hibor/Libor basis may adopt necessary tools to maintain the peg, including greater
                                                                                  attract asset swap flows (receiving) from local insurance and use of macroprudential measures. Some concerns about
                                                                                  pension funds. Swapping USD-denominated assets back to fuelling inflation have been raised, but we believe that the
                                                                                  HKD helps make extra returns given the positive basis and authorities have a number of tools to deal with the situation.
                                                                                  removes the FX mismatch between USD assets and HKD
     Hungary        Underweight                                                   Stay with flattener bias                                      Neutral                                                        Neutral
                    Hungary's external liquidity position remains vulnerable, in With the front end of the IRS curve pricing in a 114bp rate We stay neutral on the HUF. Hungary has to find a way to Hungarian equities have performed well of late in response
                    our view, and we believe the AKK's pledged plan to issue cut, the curve steepening move has run its course. Also,           secure its medium-term financing needs, either through IMF to a pickup in risk appetite and hopes for an IMF deal.
                    cEUR4.5bn Eurobond is rather optimistic and a short-term with carry/rolldown profile attractive to pay the front end, we financial support or directly via international capital markets. Valuations are attractive, but political risk remains high.
                    approach. As the nation continues to slip away from           believe room for the rate to go much lower is limited. That The central bank appears likely to continue to reduce its
                    engaging with the IMF/EC, funding conditions going forward said, as the HGBs still offer one of the highest yields,         interest rates, but the approach should remain prudent.
                    will remain uncertain. We allocate an underweight in our      demand for long-dated bonds could persist. Thus, the risk/-
                    model portfolio, and we see relative value opportunities such reward is better to build 2s10s IRS flattener, with mitigated
                    as switch out of Hungarian bonds into Romania.                beta risk exposure and positive carry roll-down gains.
       India          Overweight - quasi-sovereign banks                             Initiate 5-1yr, 3mth forward OIS steepener                   Short USD--INR                                                 Neutral
                    Over the last weeks, the government has been willing to       Heading into 2013, 10-year Government Securities (GSec) Despite political hurdles evident in the winter session of           The government is making attempts to rein in fiscal deficit
                    move forward with structural reforms that were delayed by yields are expected to decline to at least 7.8% before rising parliament, we believe that the recent passage of the retail and pass important reforms. Economic growth is at inflection
                    political infighting in the past. The initiatives should be   again in 2H2013. Strong domestic demand, increased            FDI bill suggests that the reform process may be gaining       point and expected to bounce back to above 6%. The
                    enough to keep the sovereign rating at BBB- but unlikely to foreign interest and a reduction in repo rates are key          greater traction. The reforms process should help improve momentum of corporate earnings is also turning positive.
                    alter their 'negative' outlook. Focus will be on the Reserve favourable factors for GSecs in early 2013. With WPI           the investment outlook in coming months and help contain
                    Bank of India to gradually lower inflation by keeping tight   expected to decline in 1Q12, the RBI could deliver at least the twin-deficit problem. In any reforms rollback, downward
                    control over credit expansion by the financial sector. Thus, 50bp cut in repo rates in H1 2013. We recommend initiating pressures on the INR could unfold, in which case we would
                    we maintain our overweight on Indian banks on slowly          steepening positions on the OIS curve, particularly 5-1yr,    expect the RBI to intervene to limit INR weakness. Overall,
                    improving credit metrics and favourable valuation.            1mth forward steepeners on the back of RBI easing.            we retain a relatively bullish forecast for the INR into 2013.

     Indonesia      Sell 5-yr CDS at 132bps                                       Long 20-year government bonds (IndoGB)                        Long USD--IDR 3m NDF                                           Overweight
                    Indonesia continues to perform well on most credit metrics The government’s 2013 net financing need is IDR153.3trn, Deterioration in the current account has been one of the               Probability of positive growth surprises, lack of optimism
                    and should be rewarded investment grade by S&P in 1H’13. down 19% from 2012. The supply outlook is thus positive. major reasons for upside pressure on USD-IDR and our                     among investors and the sell side following recent
                    The government's willingness to roll back energy subsidies With the average maturity of bonds higher than the regional long held bearish view on the currency. The improvement in underperformance relative to ASEAN, and a domestic
                    and renewed efforts to implement structural reforms will be and at the highest level since 2009, the debt management global data points toward higher oil prices in the near future, demand-led, high ROE growth story.
                    key. With offshore borrowing cost very low, we believe the office might explore increased issuance of shorter-dated         suggesting a resurgence of pressure on the current account.
                    Indonesian authorities and quasi-sovereign entities will be bonds. This will ensure support for the long end of the curve. Dividend outflows through Q4 suggest continued weakening
                    keen to increase USD issuance with extended duration.         Thus, we favor going long 20-year benchmark IndoGB            of the IDR. In the absence of a sustained improvement in
                    From the investor perspective, increased longer dated USD (FR65). While gradual depreciation of rupiah could continue, the current account and much-needed fuel subsidy reforms,

                    issuance could result in some underperformance.               bond returns should more than offset FX losses.               we maintain our cautious view of the currency.
     Source: HSBC

     Table B13. Summary of HSBC fixed income, FX, and equity views, cont’d

                                                                                                                                                                                                                                                                                   15 January 2013
                                                                                                                                                                                                                                                                                   Multi-asset strategy
                                                                                                                                                                                                                                                                                   Global Emerging Markets
     Country        EXD                                                            LDM                                                            FX                                                             Equity
     Israel         Neutral                                                         Retain 5s10s IRS flattener                                     Sell USD-ILS
                    The spreads of Israeli sovereign credit should be driven        Despite the sharp steepening of the UST curve recently, the The shekel has an upside potential, we believe, based on
                    mainly by geopolitical risk development. We stay sidelined. 5s10s ILS IRS spread is stable, holding below 120bp. This resilient economic growth and an improving current account
                                                                                    reflects that the long end of the Israeli curve slope embeds a balance. The central bank may again cut its rates but its
                                                                                    high proportion of country specific risks: fiscal concerns and room to maneuver is limited and the ILS seems unlikely to
                                                                                    geopolitical risks. Once the election is over, we expect the be penalized when almost all EM central banks are cutting
                                                                                    risk premium in the Israeli curve to compress, and hold the rates. Valuation metrics suggest that the ILS is cheap.
                                                                                    curve flattener as a main trade for Israel into 2013.
     Korea          Neutral                                                         Market weight                                                  Neutral                                                        Overweight
                    Korea’s solid credentials were confirmed by Moody’s and Bond and swap curves should steepen in 2013. Additional The political focus has now shifted toward smaller                            Attractive valuation even after huge foreign inflows. Exports
                    Fitch’s decisions to upgrade the Korean sovereign rating to easing cannot be ruled out in 1H2013 to help the domestic companies and importers, away from export conglomerates. appear likely to recover from domestic demand and
                    Aa3/AA- with a stable outlook from A1/A+. We believe the economy and reduce appreciation pressure on the Korean This should result in less political pressure on the BoK to                   improvement in China’s economy. Large-cap global brands
                    good structural news is in the price, and hence it is difficult won. Yet as growth seems likely to speed up in H2 2013, the maintain a weaker KRW. The currency's strength is                 continue to gain market share; we believe there is a lot of
                    to see further spread compression from here, especially for easing cycle might be ending. Short-dated forward rate             supported by robust balance of payments inflows. However, potential to grow institutional assets, as well
                    corporates and financials. In particular, we believe that       agreements (FRAs) are pricing only 25% and 35%                 efforts to limit excess volatility of the KRW would continue
                    some market participants are not paying sufficient attention probabilities of a 25bp cut within the next 6 and 12 months, by means of macroprudential measures. These measures
                    to the cyclical slowdown that is starting to affect the Korean respectively, the lowest since Q1 2012. We recommend            would support KRW's gradual appreciation, as well as a
                    economy.                                                        maintaining paying 5yr KRW-MYR IRS spread and we               cyclical recovery of the economy. We expect USD-KRW to
                                                                                    expect the KRW IRS curve to gradually steepen.                 move lower to 1,030 by the end of 2013.
     Malaysia       Neutral                                                         Long 20yr MGS or 10-year bond swap spread                      Neutral                                                        Neutral
                    We maintain our view that Malaysia is an A-rated country HSBC FI Research’s favored trade for Malaysia in 2013 is Despite a strong current account, benign inflation, and                     No catalyst for the market but funds are underweight
                    with a stable outlook, in line with the view of all three major the long 10yr bond-swap spread. Based on our assumption robust growth, the MYR has not outperformed in Asia. While Malaysian equities. Valuations with 2013 earnings growth
                    rating agencies. Our concern is that risk aversion could        that the incumbent government stays after the election,        there is no direct concern about "capital flight" as foreign   expectations at 8% are also realistic, we believe. It would be
                    leave Malaysia vulnerable to sizable portfolio outflows. A      bonds should remain supported by fresh foreign inflows.        portfolio inflows are strong, locals are showing preference to prudent for investors to have some exposure to this market
                    trigger for such outflows could be deterioration of the         Should the US debt problems be averted and Malaysia            push funds abroad. Lack of meaningful uptick in commodity to cushion their portfolios during turbulent times, and the
                    political climate ahead of the general election that must be initiate a mini rate hike cycle following the fuel price hike,    prices and clarity on the political front should limit MYR     high dividend yield is an added advantage that we see.
                    called by mid-2013.                                             swaps should move higher much faster than the bonds.           appreciation. Now, we see room for mild MYR appreciation
                                                                                                                                                   but less scope for significant outperformance.
     Mexico         Overweight: Long Pemex short UMS ’19s                           Receive 10y TIIE                                               Sell USD-MXN on bounces                                        Underweight
                    We keep Mexico as overweight. We see room for spread            Reform momentum and receding inflation will be supportive We are biased to sell USD-MXN based on a relatively strong We are underweight on Mexican equities. The market is
                    compression versus other low-betas, given that Mexico is for Mexican rates, in our view. Even though the curve                 macroeconomic picture, an undervalued currency, prospects trading on historically high valuations, which also are the
                    trading wider than comparable spreads and also wider than remains historically flat, we believe that the current slope still for structural reforms, and the possibility that a new           highest in emerging markets. Earnings expectations are
                    its all-time tightest levels. In addition, momentum for fiscal makes duration extension worthwhile. The main risk for          mechanism will be put in place to reduce the pace of FX        high, and the market is well-owned and faces short-term
                    and energy reforms in 2013 makes Mexico a candidate for Mexican local rates at this point is a prolonged US Treasury reserves growth. Yet in the short term, the MXN may                      headwinds from US growth concerns. We see relative
                    ratings upgrades. We continue to see value in Pemex vis-a- sell-off, though reform momentum and still-rising foreign           struggle to gain ground given a) the government’s recent       underperformance rather than absolute downside.
                    vis UMS and recommend buying Pemex ’19 vs short UMS participation are mitigating this effect. We recommend                     announcement that reforms won't be presented until
                    Mar-19 (target: 60bp; stop: 120bp).                             investors receive 10Y TIIE (target: 5.6%; stop: 6.2%).         September, and b) FX positioning is currently very long
                                                                                                                                                   MXN. We would look to use any USD bounces to buy MXN.
     Panama         Neutral
                    Panama’s global USD bonds have printed 12.4% in total
                    return in 2012, slightly better than Colombia and slightly
                    worse than Brazil. Economic growth remains very strong,
                    but fiscal challenges, especially from recent flood damage,
                    make Panama a neutral weight for us. Also, spreads have
                    reached their all-time tightest levels, limiting upside for
                    bonds. On the global curve, we suggest switching from the

                    long end to the belly.
     Peru           Neutral                                                         Buy Soberanos ’31s                                             Sell USD-PEN                                                   Overweight
                    Peru was a top performer in the low-beta spectrum in 2012, During the recent sell-off in US Treasury yields, Peruvian          Per’'s economy continues to pump along at a healthy pace, Peru is our favorite LatAm “peripheral” equity market. Peru
                    with a 17% total return. Several factors contributed to this local yields have been very resilient. The long end of the        driven by strong domestic demand. This has led to some         is LatAm’s highest-growth economy, and appears set to be
                    impressive performance: a growth rate above 6%, tight fiscal Soberanos curve has rallied sharply. Reversal of food             deterioration in the current account deficit, but inward       one of the world’s most dynamic consumer markets in the
                    discipline, and very low borrowing requirements. All these inflation pressures, low financing needs, and stable                investment should amply finance Peru’s needs. With a very coming years.
                    factors should remain in place in 2013, but with valuations monetary policy appear likely to lend continued support to positive long-term growth and investment picture and the
                    tight in both global bonds and CDS with respect to its peers, local bonds. We recently lowered the target on our               ongoing de-dollarization process, we expect the PEN to
                    we do not see a lot of upside and stay neutral. On the curve, Soberanos ’31s recommendation to 4.5% from 5%.                   remain on a gradual strengthening path, held back by
                    we prefer Peru ’16s over '19s for a PECS pickup OF 20bp at                                                                     moderate central bank intervention.
                    lower duration.

     Source: HSBC
     Table B13. Summary of HSBC fixed income, FX, and equity views, cont’d

                                                                                                                                                                                                                                                                                      15 January 2013
                                                                                                                                                                                                                                                                                      Multi-asset strategy
                                                                                                                                                                                                                                                                                      Global Emerging Markets
     Country        EXD                                                             LDM                                                             FX                                                             Equity
     Philippines Neutral                                                            Overweight                                                    Neutral                                                          Underweight
                 The emphasis of President Benigno Aquino III’s                     All three major agencies rate the sovereign at a notch below Heading into 2013, the PHP remains one of our favored             We like the macro story, but investors have already priced in
                 administration is on the country’s economic and domestic           investment grade. It appears likely that the Philippines will currencies in the region, as we see strong remittance, BPO       this story, we believe, and equity markets are expensive. It
                 political environment, which has materially strengthened the       be rated BBB- by at least one agency within the next 12       and inward investment flows remaining strong in 2013.            is currently the most over-owned market in Asia. We expect
                 sovereign’s credit profile over the past two years, in our         months. Strong economic growth and increasing fiscal          Though the BSP has acted to limit some types of inflows by       the central bank to start tightening liquidity by 2Q 2013,
                 opinion. So we expect a continuation of the favorable              credibility are two major considerations cited for potential  stopping foreign money from entering into special deposit        which is again a risk for equities.
                 trajectory on both fronts to result in the Philippine              upgrades. HSBC FI Research favors the November 2022 accounts and clamping down on onshore participation in the
                 sovereign’s being upgraded to BBB- with a stable outlook in        GPN over the equivalent local currency bond as after-tax      NDF market, the PHP appreciation has continued. We look
                 H2 2013 by the three main credit rating agencies.                  returns of the latter are 10bp lower than the GPNs.           for USD-PHP to fall further to 39.5 by the end of 2013.
     Poland      Neutral                                                            Take profit in 2s5s IRS flattener                             Neutral                                                          Underweight
                 While sovereign fundamentals are solid in Poland, we are           After strong carry/rolldown gains in 2s5s PLN IRS flattener, The recent set of data showing a rapid economic                   We have Polish equities on an underweight stance.
                 wary of supply pressure in Q1, especially given the already        we recommend taking off flattener trades as the NBP might deterioration appears likely to prompt further rate cuts but         Valuations are high, which suggests that much of the
                 tight valuation. We are sidelined for now.                         accelerate its easing pace. While the total easing scale      the PLN sensitivity to the interest rate outlook is limited.     European financial stabilization story is now in the price.
                                                                                    priced in, 105bp, is consistent with economists’ forecasts, Signs of reduction of the current account deficit have             Polish macro is deteriorating, with growth slowing sharply.
                                                                                    chances of a more front-loaded move has increased. We will emerged. If confirmed, it would support the PLN. However,
                                                                                    look to rebuild front-end payer once this risk has            we stay side-lined on the PLN, as valuation-wise it does
                                                                                    materialized, potentially against receivers in South Africa. appear attractive.
     Russia       Overweight                                                     Positive                                                         Long RUB vs basket                                               Overweight
                  We remain modestly overweight on Russia. Oil prices            The Russian OFZ market faces significant expansion of            The RUB has performed well in the recent period. The             Russia now appears largely to be a play on global risk
                  remain at comfortable levels, and capital dynamics appear client base in 2013 alongside the Euroclear-ability progress. seasonally strong current account augmented by the                       appetite. Endless shifts from risk-on to risk-off last year were
                  likely to be positive in Q1 2013. Yet, compared to other       In addition, offering one of the highest yields in EM and        forthcoming Euroclear-ability of the local bond market has all a major market blockage. With global markets this year set
                  CEEMEA names, Russia sovereign credit could again be fiscally benefiting from higher oil prices, long-end OFZs                  the potential to prompt further RUB appreciation in 1Q13. to become less dysfunctional, in our view, Russian equities
                  the best candidate to express beta views, given the absence appear likely to be the alpha-generating instruments this                                                                            are set to perform more strongly. We particularly favor
                  of a short-selling ban and relatively good liquidity, hence    year. We hold a constructive stance.                                                                                              consumer-related segments.
                  having higher volatility going forward.
     Singapore Neutral; Temasek proxy sovereign for safe haven                   Receive 5yr SGD bond swap spread                                 Sell SGD-THB 1m Offshore                                         Neutral
                  Singapore’s authorities face a difficult task of safeguarding The 5yr SGS benchmark is excessively rich on both an              We think it will be difficult for the SGD to show too many       Stable, low-beta market with high dividend yield. Valuations
                  the country’s competitiveness, especially in the financial and intra- and inter-curve comparison. Enter into a 5yr SGD          signs of independent strength. By our estimates, the SGD are reasonable, and earnings growth expectations are low,
                  export areas for 2013. Notwithstanding strong portfolio and bond swap spread receiver at the top end of a six-month             NEER is currently trading around 40 pips away from the top but realistic. There might be negative news flow regarding
                  net foreign direct investment over the past few years, we are historical range. IRS receiving interests to emerge following of the trading band. This, coupled with the SGD's relatively the labor market.
                  uncertain about a similar performance in the future based on the start of an active issuance season for SGD-denominated low carry, makes it a key candidate as a funding currency in
                  rising domestic operating costs. We highlight the persistent corporate bonds.                                                   the region. For the THB, we think that 2013 will see a strong
                  rise in residential property prices in spite of the                                                                             performance. We trade this currency pair in the 1m offshore
                  government’s numerous measures to slow capital gain                                                                             DF, where liquidity is at its deepest and the positive implied
                  appreciation                                                                                                                    carry is around 1.5% annualized.
     South Africa Underweight; biased for 10s30s flattener                       Hold ZAR 2s5s IRS steepener                                      Neutral                                                          Underweight
                  Further rating downgrade risk, relatively tight spread to own The SA rates curve remains underpricing local tail risks.         The ZAR remains fragile but our valuation metrics suggest South Africa Q3 2012 GDP slowed sharply to an annualized
                  protection, and renewed social unrest concerns all point to Pure carry trades benefited the 5y sector in Dec 2012,              that it is attractive. The normalization of the situation in the rate of 1.2% as weakness in production spilled over into
                  cautiousness in SOAF credit. We remain underweight on          taking the spread even tighter to its fair value. We are wary key sectors of the economy appears likely to offer some             consumption. South African valuations have become deeply
                  this credit. As for intra curve trades, the spread between     of a relapse of mining industry disruption, given that key       support to the ZAR going forward. The very weak economic split: Domestic names are very expensive, compared to
                  SOAF41 vs SOAF22 could tighten further, as investors seek segments are due for wage negotiation, the risk of further growth put fiscal consolidation at risk. Maintenance of a                   equivalent GEM sectors, and resource names, on the same
                  convexity protection.                                          rating downgrade, and heavy positioning in the market. Also, credible fiscal policy is pivotal to avoid further rating            basis, are very cheap and are generally reflecting domestic
                                                                                 we believe fiscal slippage risks are still largely overlooked by downgrades and to continue to attract capital flows into the risks more aptly. We expect the market to underperform
                                                                                 the market, with a growth outlook that remains weak.             bond market.                                                     emerging markets more broadly looking ahead.
     Taiwan                                                                                                                                       Neutral                                                          Neutral
                                                                                                                                                  Improvement in China’s data is helping Taiwan’s economy Tech-dominated export-oriented equity market. It’s also an

                                                                                                                                                  turn for the better. Export orders have ticked into positive     unloved market that offers a high dividend yield. Taiwan is
                                                                                                                                                  territory and trade surplus remains wide. The recent             one of the most underweight markets in the region. On the
                                                                                                                                                  announcement of potential stimulus measures for the stock monetary side, money rates are still far below the policy
                                                                                                                                                  market seems to suggest a government stance that could rate, limiting the impact of stronger liquidity that any
                                                                                                                                                  help boost equity inflows. The TWD has been something of potential policy rate cut might have.
                                                                                                                                                  a laggard, and neither locals nor foreigners seem to be long
                                                                                                                                                  the currency aggressively. Lifers and exporters both appear
                                                                                                                                                  to be underhedged, suggesting further room to the downside

                                                                                                                                                  in USD-TWD.
     Source: HSBC

     Table B13: Summary of HSBC fixed income, FX, and equity views, cont’d

                                                                                                                                                                                                                                                                                     15 January 2013
                                                                                                                                                                                                                                                                                     Multi-asset strategy
                                                                                                                                                                                                                                                                                     Global Emerging Markets
     Country        EXD                                                                 LDM                                                           FX                                                                  Equity
     Thailand       Neutral                                                        Long 10-year Thailand ILBs                                           Sell SGD-THB 1m Offshore                                          Underweight
                    We are surprised by the relatively new elected government’s The parliament is due to approve a supplementary                        The THB should have a strong performance in 2013. The Growth is normalizing, adding to chances of rate hike in
                    moving so quickly to concentrate on sensitive and highly       infrastructure budget of THB2trn in early 2013. Funding for          current account surplus looks set to continue to rebound on 2013. It also has political risks. We believe the expectations
                    charged political issues. With these controversial matters to this stimulus has not been reflected in the bond supply               the back of an improving trade surplus. In Q1, less service for 2013 are also too high. The market is loved by both the
                    be brought up again in 1H13, we have decided to lower the calendar, as it has yet to be approved. The Ministry of                   and investment income outflows than in other quarters will buy and the sell sides, creating a huge margin for
                    Thai sovereign outlook to negative from stable. At the same Finance has already announced that it will issue THB591bn               help to boost the external balance. Meanwhile, the political disappointment. .However, it remains a good long-term
                    time, however, we believe the fundamental credit metrics       of government bonds in FY13. Investors could face a rough            situation has been relatively stable since the 2011 election, story, in our view
                    and the favorable institutional framework will support the     start to 2013 due to this heavy bond supply and a potential          and should this remain the case, capital account inflows
                    sovereign rating of A-.                                        announcement of an increase in the full-year funding target.         should remain robust. FX policy has shown very little sign of
                                                                                   We expect the 10-5yr sector of the bond curve to steepen to          aggressively resisting a stronger THB, and while broader
                                                                                   70bp, from 35bp currently, and we see better value in the            stability is preferred, there should be still room for
                                                                                   linkers (new 15-year linker) than conventional bonds.                appreciation in 2013.
     Turkey         Overweight, potential upgrade candidate                        Stay constructive                                                    Neutral                                                           Overweight
                    We allocate overweight to Turkey sovereign credit, given       We believe the TURKGBs are again the alpha generator                 We do not see value in the TRY, as it is now expensive. The Turkey is helped both by the domestic and international
                    what we see as its likely upgrade into investment grade in amidst peers in 2013, as the investor base will inevitably               central bank has eroded the carry and the risk is skewed for cycles. Domestically, weak growth has allowed the central
                    2013. The index tracking flows will mechanically help further increase should investment-grade status materialize. We               further monetary loosening. Moreover, the pace of                 bank to follow an extremely easy monetary policy, plus
                    inflows into Turkey USD bonds. In addition, we look to revisit look to reinitiate longs in the 10y sector at yields above 7%,       improvement of the current account balance is likely to slow Turkey has been a prime beneficiary of low international
                    the short-end long basis trades at a better entry level.       and we stay constructive on inflation-linked bonds.                  down. The CBRT is ready to fight any significant                  interest rates.
                                                                                                                                                        appreciation on the back of excessive capital inflows. It is
                                                                                                                                                        closely following the real effective exchange rate
     Ukraine        Underweight                                                         Defensive                                                       Case for UAH devaluation
                    Reserve depletion, renewed delay from an IMF deal,                  We advise avoiding UAH-denominated rates product for            Unsustainable current account deficit prompted by negative
                    financial sector vulnerability, and negative rating outlook         unfavourable currency exposure and insufficient liquidity risk terms-of-trade shock and the UAH appreciation to the pre-
                    leave the Ukrainian credit still attractive, in our view. Despite   premium.                                                        crisis level in real terms makes a strong case for
                    the relatively high yield, weak fundamentals argue for                                                                              devaluation. Local political constraints and the Ukraine’s
                    caution.                                                                                                                            ability to raise FX funding internationally and domestically
                                                                                                                                                        allowed the NBU to delay the necessary FX adjustment. Yet
                                                                                                                                                        after the formation of a new ruling coalition in the parliament
                                                                                                                                                        and appointment of a prime minister, political constraints
                                                                                                                                                        should be removed, paving a way for a phased devaluation.
     Uruguay        Neutral                                                             Preference for nominal bonds over UI                            Neutral USD-UYU
                    We keep Uruguay EXD at neutral as spreads remain very               We see value in 3y UYU Treasuries, given HSBC’s                 We expect a stable Uruguayan peso (UYU) against the US
                    close to higher-rated peers with better liquidity, in some          projected inflation path for the next three years. According to dollar in 2013. Concerns about inflation should keep the
                    cases even tighter (Panama and Colombia). Also, the high            our calculations, the 3y break-even level is c7.9%, or 70bp authorities from reintroducing a policy of depreciation, even
                    correlation of Uruguayan global bonds with US Treasury              above our projected inflation path of 7.2%. Thus, an inflation in the face of the continued appreciation of the UYU vs the
                    yields is a potential concern. On the curve, we believe             premium of 70bp for a 3-year Treasury note seems to be          BRL. Indeed, the bias for the UYU is more likely an
                    Global ‘33s remain cheap on the curve.                              more than enough to compensate for inflation risk, in our       appreciating one, based on good momentum in foreign
                                                                                        view.                                                           investment in the energy and infrastructure sectors and an
                                                                                                                                                        improving current account deficit.
     Venezuela      Overweight, Long Venz '22 vs 10-year CDS                                                                                            Neutral USD-VEF
                    We remain overweight Venezuela. As long as the possibility of a                                                                     Given the recent turn of events regarding President Hugo
                    new administration led by the opposition remains on the table,                                                                      Chavez's health, and the uncertainty surrounding the political
                    bond valuations have a strong anchor. However, with further                                                                         outlook, we believe that a VEF devaluation we had expected to
                    price upside limited, we consider Venezuela mainly a high-carry                                                                     see in 1Q'13 will likely be delayed. Even so, it appears that the
                    play. Venezuela offers more than 5% yield pickup over the EM                                                                        Chavez camp stands in a strong position to maintain political
                    index, a comfortable cushion in any spread widening scenario.                                                                       control going forward, which means that more broadly, FX policy

                    Bond supply could provide a major headwind, but we do not                                                                           is likely to remain unchanged.
                    expect any near-term issuance.
     Vietnam        Overweight, long by proxy CTVN 8 2017                                                                                             Neutral
                    We believe the authorities have done enough to stabilize                                                                          There has been a significant improvement in the trade position
                    Vietnam’s sovereign credit rating at BB-. We revise upward to                                                                     and inflation, while the fact that USDVND has been trading in the
                    stable the outlook for 2013 from a negative bias that we assigned                                                                 middle of the band should have allowed SBV to build its
                    in 2012. Yet credit rating agencies will be looking for the                                                                       reserves. However, risk remains that monetary easing spurs
                    government to follow through with promises of restructuring the                                                                   imports and inflation, putting pressure on the VND. We expect
                    economy to improve credit allocation and sustain faster growth                                                                    about 2-3% depreciation of VND later in 2013.
                    without triggering another boom-and-bust cycle.
     Source: HSBC
        Global Emerging Markets
        Multi-asset strategy                                                                                                                                           abc
        15 January 2013

Macroeconomic forecasts
                          _______ GDP ______ _____ Inflation _____ _____ Policy rate ____ _________FX _______ ____Current account ___ ____ Fiscal account ____
\                         2012e 2013f 2014f 2012e 2013f 2014f 2012e 2013f 2014f 2012 2013f 2014f 2012e 2013f 2014f 2012e 2013f 2014f
Argentina                      2.0      2.5        3.0      23.0    24.8       23.9    16.00    15.00   14.00 5.00      6.00       7.00       0.8       0.9       0.3       -2.5    -2.4        -1.5
Brazil                         1.1      3.0        3.8       5.4     5.8        6.3     7.25     7.25    7.25 2.10      2.30       2.40      -2.4      -2.8      -2.6       -2.5    -2.8        -3.0
Chile                          5.6      4.8        5.0       3.0     2.4        3.0     5.00     5.00    5.00   475      490        500      -3.3      -3.2      -3.1       -0.1    -0.2        -0.4
China                          7.8      8.6        8.4       2.9     3.1        2.7     6.00     6.00    6.00 6.23      6.18       6.12       2.5       2.0       2.0       -1.6    -1.7        -1.2
Colombia                       3.9      4.3        4.5       2.7     2.9        3.0     4.25     4.00    4.75 1800     1780       1770       -3.5      -3.3      -3.4       -1.5    -1.2        -1.2
Czech Republic*               -1.0      0.5        1.9       3.3     1.9        2.0     0.05     0.05    0.05 25.1      25.5       24.5      -1.6      -2.1      -2.1       -5.0    -2.7        -2.8
Egypt                          2.2      2.1        3.3       7.2     8.0        8.0     9.50     9.50    9.50 6.35      7.00       7.00      -3.1      -3.7      -3.3      -11.2   -11.4        -9.3
Hong Kong                      1.7      4.7        4.5       4.1     4.5        4.4     0.50     0.50    0.50 7.75      7.80       7.80       3.4       5.8       7.3        1.0     4.0         4.0
Hungary*                      -1.3      0.5        0.9       5.7     3.0        3.0     5.75     5.00    4.50   290      270        270       1.8       2.7       2.0       -2.6    -3.0        -3.5
India                          5.3      5.7        7.2       9.9     7.6        7.4     8.00     7.50    7.50 55.0      50.0       49.0      -4.5      -3.5      -2.9       -5.8    -5.3        -4.7
Indonesia                      6.1      6.1        6.1       4.3     5.1        5.2     5.75     6.50    6.50 9638     9700       9600       -2.4      -0.8       0.8       -2.4    -1.8        -1.8
Israel                         3.3      3.1        4.3       1.6     1.3        2.4     2.00     1.75    2.75 3.74      3.60       3.50      -0.8       1.5       2.4       -4.2    -3.7        -3.5
Korea                          2.2      3.8        4.4       2.2     3.1        3.4     2.75     3.25    3.75 1064     1030       1010        3.6       3.0       2.8        1.6     1.6         2.6
Lebanon                        1.4      2.0        2.4       7.0     6.0        4.0    10.00    10.00   10.00 1507     1507       1507      -25.4     -22.8     -20.0       -7.1    -7.5        -7.3
Malaysia                       5.3      4.8        5.0       1.7     1.7        2.3     3.00     3.50    3.50 3.06      2.99       2.94       4.6       3.7       4.4       -4.8    -4.5        -4.2
Mexico                         3.9      3.2        3.6       4.1     3.9        3.6     4.50     4.50    5.00 12.80   12.15      12.15       -0.7      -0.9      -1.1       -2.0    -2.0        -2.0
Panama                         9.6      8.0        7.6       4.9     5.3        4.5     2.30     2.10    2.30 1.00      1.00       1.00     -13.1     -12.2     -11.3       -2.6    -2.5        -2.0
Peru                           6.2      6.2        6.4       2.7     2.5        2.5     4.25     4.25    4.25 2.58      2.50       2.42      -2.5      -2.6      -3.4        1.7     1.0         0.8
Philippines                    6.2      4.9        5.4       3.1     3.9        4.5     3.50     3.75    4.00 41.1      39.5       39.0       3.8       5.3       4.8       -2.8    -2.8        -2.7
Poland*                        2.1      1.6        2.9       3.7     2.1        1.7     4.25     3.25    3.25 4.08      4.00       3.80      -3.5      -3.5      -4.2       -3.4    -3.3        -3.0
Russia **                      3.0      2.5        2.0       5.1     6.7        5.5     5.50     4.75    4.00 30.52   32.30      32.70        4.4       2.6       1.9        0.4    -0.9        -0.7
Singapore                      1.5      3.0        5.0       4.5     2.9        3.1     0.35     0.30    0.30 1.22      1.17       1.15      16.7      19.1      21.9        1.1     1.3         1.3
South Africa                   2.5      2.6        2.9       5.7     5.6        5.5     5.00     4.50    4.50 8.48      7.80       7.50      -5.9      -5.3      -5.0       -4.2    -4.8        -4.5
Taiwan                         1.1      4.2        4.4       2.1     1.9        2.1    1.875    2.375   2.375 29.0      28.6       28.3       8.6       6.2       6.2       -2.4    -1.7        -1.5
Thailand                       6.0      4.6        4.1       3.0     3.2        3.8     2.75     3.25    3.25 30.6      29.8       29.5       0.7       4.6       5.5       -2.8    -3.5        -3.8
Turkey                         2.7      3.8        4.3       8.9     6.3        6.6     5.50     5.50    5.50 1.78     1.75        1.70      -7.0      -6.7      -7.0       -2.2    -2.2        -2.0
UAE                            3.7      3.9        4.1       1.2     1.6        3.5     1.00     1.00    1.00 3.67      3.67       3.67      10.1      11.4      11.8       12.1     9.2         9.0
Ukraine **                     0.8      1.5        3.0       0.6     3.0        4.6     8.50     8.50    7.00 8.05    10.00      10.50       -8.2      -7.4      -6.7       -2.7    -2.8        -2.5
Uruguay                        3.5      4.0        5.0       7.5     7.5        7.0     9.25     9.25    8.00 19.50   20.00      21.00       -2.6      -1.2       1.4        0.8     1.1         1.4
Venezuela                      5.1      0.5        2.5      21.0    29.8       29.3    16.50    18.50   20.10 4.30      6.50       7.80       4.3       5.1       5.7      -16.0    -9.3        -4.1
Vietnam                        5.0      5.5        5.6       9.2    11.0        9.8     7.00     8.00    9.00 20835   21500      21500        2.5      -0.6      -1.4       -3.6    -2.6        -2.3

EM                             4.8      5.4        5.8        5.5    5.6        5.7
Developed                      1.2      0.9        1.7        1.9    1.7        1.8
US                             2.2      1.7        2.5        2.1    1.9        2.2 0-0.25 0-0.25 0-0.25        N/A      N/A       N/A       -2.9      -2.7         -2.6    -7.0    -5.8        -4.8
UK                            -0.1      1.1        2.0        2.8    2.8        2.3 0.50 0.50 0.50             1.63     1.52      1.50       -4.0      -2.6         -2.1    -5.5    -6.2        -5.4
Eurozone                      -0.5     -0.2        1.0        2.5    1.8        1.6 0.75 0.50 0.05             1.32     1.35      1.40        0.8       1.0          1.2    -3.5    -3.0        -2.8
Japan                          1.9      0.2        0.2        0.0    0.0        0.3 0.05 0.05 0.05               86       74        74        0.8       0.8          1.1   -10.1    -9.1        -7.3
*FX forecasts vs EUR
Source: HSBC

    Chart C2. GDP growth & contributions*                                  Chart C3. 2013 GDP growth ranking (%)                          Chart C4. 2013 Inflation ranking (%)

        %       Brazil        LatAm                  All
    8           Russia
                                                                                         China                                                         Israel
    7           India         Asia ex-J                                               Panama                                                             UAE
                                                                                                                       BEST 5

                                                                                                                                                                                           BEST 5

    6                                                                                     Peru                                                      Malaysia
    5                                                                              Indonesia                                                          Taiwan

    4                                                                                     India                                           Czech Republic*

    3                                                                                  Poland*                                                          India
                                                                                                                                                                                           WORST 5

                                                                                       Ukraine                                                         Egypt
                                                                                                                       WORST 5

                                                                                  Venezuela                                                          Vietnam
                                                                                      Hungary*                                                      Argentina
            '12e '13f '14f '12e '13f '14f '12e '13f '14f               Czech Republic*                                                          Venezuela
                BRIC            EM                 DM                                                                                                               0 5 10 15 20 25 30 35
                                                                                                     0 2 4 6 8 10 12
    Source: Bloomberg, HSBC   *Of each component to total growth           Source: Bloomberg, HSBC                                        Source: Bloomberg, HSBC

     Global Emerging Markets
     Multi-asset strategy                                                                                                                                  abc
     15 January 2013

EM FX forecasts
Table C2. Summary of HSBC EM FX forecasts
                                  2010      2011          2012    1Q13f     2Q13f       3Q13f       4Q13f       1Q14f          2Q14f   3Q14f     4Q14f
USD-ARS                            3.98      4.31       5.00        5.22      5.45        5.70        6.00        6.25       6.50        6.75      7.00
USD-BRL                             1.66      1.86       2.10       2.15      2.20        2.25        2.30        2.33       2.35        2.38      2.40
USD-CLP                             468       520        475         475       480         485         490         492        495         498       500
USD-CNY                             6.61      6.30       6.23       6.22      6.21        6.19        6.18        6.16       6.15        6.13      6.12
USD-COP                           1,920     1,938      1,800       1,790     1,780       1,780       1,780       1,775      1,770       1,770     1,770
EUR-CZK                             24.5      25.6       25.1       25.8      26.0        25.5        25.5        25.0       24.5        24.5      24.5
USD-EGP                            5.81      6.03       6.35        6.75      7.00        7.00        7.00        7.00       7.00        7.00      7.00
USD-HKD                             7.80      7.80       7.75       7.80      7.80        7.80        7.80        7.80       7.80        7.80      7.80
EUR-HUF                             278       315        290         280       275         270         270         270        270         270       270
USD-INR                             44.7      53.1       55.0       53.0      52.0        51.0        50.0        49.0       49.0        49.0      49.0
USD-IDR                            8996      9075       9638       9,800     9,800       9,750       9,700       9,650      9,600       9,600     9,600
USD-ILS                             3.57      3.81       3.74       3.70      3.70        3.65        3.60        3.60       3.55        3.55      3.50
USD-KRW                           1,126     1,160      1,064       1,060     1,050       1,040       1,030       1,020      1,010       1,010     1,010
USD-MYR                             3.06      3.17       3.06       3.05      3.03        3.01        2.99        2.97       2.96        2.95      2.94
USD-MXN                           12.36     13.95      12.80       12.60     12.45       12.30       12.15       12.15      12.15       12.15     12.15
USD-PEN                             2.81      2.69       2.58       2.56      2.54        2.52        2.50        2.48       2.46        2.44      2.42
USD-PHP                            43.8      43.9       41.1        40.6      40.3        39.9        39.5        39.4       39.3        39.2      39.0
EUR-PLN                             3.96      4.47       4.08       4.20      4.15        4.00        4.00        3.90       3.80        3.80      3.80
USD-SGD                            1.28      1.30       1.22        1.20      1.19        1.18        1.17        1.17       1.16        1.16      1.15
USD-ZAR                             6.62      8.08       8.48       8.50      8.20        8.00        7.80        7.80       7.50        7.50      7.50
USD-THB                            30.0      31.6       30.6        30.3      30.0        29.8        29.8        29.7       29.6        29.6      29.5
USD-TRY                             1.54      1.89       1.78       1.80      1.80        1.75        1.75        1.70       1.70        1.70      1.70
EUR-RON                            4.28      4.33       4.44          4.5       4.4         4.4         4.4         4.4        4.4         4.3       4.3
USD-RUB                             30.5      32.2       30.5       29.8      32.5        32.6        32.3        30.9       32.7        32.6      32.7
USD-TWD                            29.3      30.3       29.0        29.0      28.9        28.7        28.6        28.5       28.4        28.4      28.3
USD-UYU                           19.90     19.90      19.50        20.0      20.0        20.0        20.0        20.3       20.6        20.9      21.0
USD-VEF                            4.30      4.30       4.30          6.5       6.5         6.5         6.5         7.8        7.8         7.8       7.8
USD-VND                          19,498    21,035     20,835      21,000    21,000      21,500      21,500      21,500     21,500      21,500    21,500
Select G10
EUR-USD                            1.43      1.30         1.32      1.34      1.34           1.35     1.35        1.37          1.37     1.38      1.40
USD-JPY                            93.0      76.9         86.0      82.0      78.0           76.0     74.0        74.0          74.0     74.0      74.0
GBP-USD                            1.61      1.55         1.63      1.60      1.56           1.53     1.52        1.52          1.52     1.50      1.50
Source: HSBC

  Chart C5. Change over the past four weeks (%) vs USD                           Chart C6. Change year-to-date (%) vs USD

     BRL                                                                               CLP
     CLP                                                                              CNY
     CNY                                                                              COP
        -2%       -1%       0%      1%     2%        3%      4%      5%
                                                                                             -4% -2%       0%    2%       4%     6%    8% 10% 12%

  Source: Bloomberg, HSBC                                                        Source: Bloomberg, HSBC

     Global Emerging Markets
     Multi-asset strategy                                                                                                                                                abc
     15 January 2013

EM Central Bank Watcher
Table C3. HSBC forecasted and market implied policy rates
                                                            ___________ 2013 ____________
Country                                      Last 2013 2014 Jan Feb Mar Apr May Jun Risks
Brazil                             HSBC        7.25 7.25 7.25      =       --    =      =     =         -- We expect the central bank to resist raising rates in 2013, keeping them at 7.25%.
                                  Market implied*                +2            +9     +3    +7
Chile                                          5.00 5.00 5.00      =        =    =      =     =       = The central bank may increase rates if external risks dissipate and the economy fails to
                                                                                                         moderate as expected.
                                  Market implied*                +5       -3   -2     -2    +1      +4
China                                          6.00 6.00 6.00      =        =    =      =     =       = We anticipate a modest growth recovery, coupled with benign inflation in 2013. This
                                                                                                         leaves room for keeping an accommodative monetary policy stance.
Colombia                4.25                          4.00 4.75 - -25     =       =     =      =      = We believe BanRep will cut an additional 25bp to 4.0% at its January meeting and remain
                                                                                                         on hold for the rest of 2013. Risks relate to a further softening of activity.
           Market implied*                                       -18     0      -2    -4     -2      0
Czech Rep.              0.05                          0.05 0.05     =     =       =     =      =      = There is no room for further easing via rate cuts, we believe. If necessary, the CNB could
                                                                                                         consider FX interventions.
           Market implied*                                              -1      -6           -1     -1
Hungary                 5.75                          5.00 4.50   -25     =       =   -25    -25      = The NBH appears likely to continue its easing cycle as long as it does not trigger currency
           Market implied*                                             -11     -18   -14    -14    -21
India                   8.00                          7.50 7.50   -25     --    -25     --     =      -- Strengthening growth momentum, still-elevated inflation, and widening current account
                                                                                                         deficit point to rate stability. Yet the RBI is clearly gearing up for rate cuts, expecting a
                                                                                                         better inflation outlook, partly due to continued structural reform and fiscal consolidation.
                                  Market implied*                -31            -9          -43    -16
Indonesia                                      5.75 6.50 6.50       =      =      =     =      =   0.25 So far, BI has tightened only via macroprudential measures and a higher deposit rate
                                                                                                         (FASBI). Tightening via the policy rate could come in 2013 amid greater global stability.
Israel                                         2.00 2.00 2.75 1.75          =     =     =      =      = A rather proactive MPC appears likely to push rates lower in early 2013 and to begin to
                                                                                                         tighten gradually in Q413 as growth accelerates.
                                  Market implied*              -1         -2     0     0      0     -1
Korea                                          2.75 3.25 3.75    =          =     =     =      =      = President-elect Park seems likely to increase public spending once taking office in
                                                                                                         February to support growth, so there will be less pressure on the Bank of Korea to ease
                                  Market implied*              -2         -4    -4    -4     -1     -1 further.
Malaysia                                       3.00 3.50 3.50      =       --    =      -- 0.25       -- Better external demand and elevated household debt levels appear likely to prompt the BNM
                                                                                                         to start normalizing policy rates. We expect two 25bp moves, starting in May.
                                  Market implied*                +9            +6            0
Mexico                                         4.50 4.50 5.00      =       --    =      =     --     = Inflation has fallen below 4%, which is the upper bound of the inflation target. Thus, we
                                                                                                        believe that Banxico has room to maintain its monetary policy rate on hold.
                                  Market implied*                         0    -1           +1     +3
Peru                                           4.25 4.25 4.25      =       =     =      =     =      = We believe that Peru will keep rates unchanged, as growth remains around potential,
                                                                                                        while rate hikes could compound appreciation pressures on the exchange rate.
Philippines                                  3.50     3.75 4.00    =       =     =      =      =     = Slowing inflation motivated the BSP to keep rates accommodative. We expect rates to stay
                                                                                                        on hold for most of the year.
Russia                                       5.50     5.25 4.00    =       =     =      =      =     = The CBR seems likely to lower rates in H2 2013 amid falling inflation. CPI growth could peak
                                                                                                        at almost 8% y-o-y in March and drop slightly to below 6% y-o-y by the end of 2013.
Poland                    4.25 3.25 3.25                          -25   -25     =     -25  -25       = Below-target inflation and slowing growth allow for further easing in 2013 after two rate cuts,
                                                                                                        in November and December 2012.
             Market implied*                                            -7   -11     -14   -9      -9
South Africa              5.00 4.50 4.50                          -50     --    =       --   =       -- Growth is weak and fiscal policy is constrained. Monetary policy is the only tool for
                                                                                                        stimulus, in our view. We expect a single 50bp cut in 1Q 13.
             Market implied*                                      -3          -7           -5
Taiwan                   1.875 2.37 2.37                            =      = +12.       =    = +12. We expect the CBC to keep monetary conditions accommodative for a few months before
                                  5    5                                        5                 5 resuming a rates normalization process at the end of 1Q13, with a 12.5bp hike.
             Market implied*                                                +27                -12
Thailand                  2.75 3.25 3.25                           =       =    --      = 0.25    -- The central bank has turned more hawkish on improving external conditions. This,
                                                                                                     coupled with robust domestic demand and credit growth, should spur the BOT to
                                                                                                     normalize policy from 2Q.
Turkey                                         5.50 5.50 5.50      =     =       =      =    =    = The one-week policy rate should remain unchanged, but the CBRT could reduce the
                                                                                                     overnight borrowing rate (currently 5%) if the lira appreciates sharply in real terms.
                                  Market implied*                +1    +1      +2     +3 +3 +2
Vietnam                                        7.00 8.00 9.00      =     =       =      =    =    =  Inflation reached 6.8% in December and growth is slowing. The OMO appears likely to
                                                                                                     stay steady at 7% as the SBV is wary of a comeback in inflation.
* As of January 14, 2013. Source: HSBC

  Chart C7. Implied monetary policy path

        Implied changes (bp)

                                      Current       1m       2m         3m            4m           5m          6m         7m         8m          9m        10m        11m         12m
                                                    Brazil         India               Korea                Mexico              Poland             South Africa

  Source: HSBC

      Global Emerging Markets
      Multi-asset strategy                                                                                                                                                           abc
      15 January 2013

Surprise Indices
  Chart C8. Asia Inflation surprises                                                    Chart C9. Asia economic activity surprises

 Z-score                                                                               Z-score
 0.80                                                                     5.0           1.40                                                                             2.0
  0.60                                                                                  1.20                                                                             0.0
  0.40                                                                                  1.00                                                                             -2.0
  0.20                                                                    3.0           0.80
  0.00                                                                    2.0           0.60
 -0.20                                                                                  0.40
                                                                          1.0                                                                                            -8.0
 -0.40                                                                                  0.20
 -0.60                                                                                                                                                                   -10.0
                                                                          0.0           0.00
 -0.80                                                                                  -0.20                                                                            -12.0
 -1.00                                                                                  -0.40                                                                            -14.0
 -1.20                                                                    -2.0          -0.60                                                                            -16.0
     Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12                                       Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12
                  3mma Z score all (ex China) Inflation                                                   3mma Z score all (ex China) Ec. Activity
                  all (ex China) Inflation - cumulative surprise (RHS)                                    all (ex China) Ec. Activity - cumulat ive surprise (RHS)

  Source: HSBC FX Quant Strategy                                                        Source: HSBC FX Quant Strategy

  Chart C10. Latin America inflation surprises                                          Chart C11. Latin America economic activity surprises

       Z-score                                                                           Z-score
        1.0                                                               9.0            0.4                                                                              1.0
        0.8                                                               8.0            0.3                                                                              0.5
                                                                          7.0            0.2                                                                              0.0
                                                                          6.0            0.1
        0.4                                                               5.0                                                                                             -0.5
        0.2                                                               4.0                                                                                             -1.0
        0.0                                                               3.0                                                                                             -1.5
                                                                          2.0           -0.2
       -0.2                                                                                                                                                               -2.0
                                                                          1.0           -0.3
       -0.4                                                                             -0.4                                                                              -2.5
       -0.6                                                               -1.0          -0.5                                                                              -3.0
       -0.8                                                               -2.0          -0.6                                                                              -3.5
          Ja n-06 Ja n-07 Ja n-08Ja n-09 Ja n-10 Ja n-11Ja n-12                             Ja n-06 Ja n-07 Ja n-08 Ja n-09 Ja n-10 Ja n-11 Ja n-12
                      3mma Z score
                      accu mula ted z-score RHS                                                                     3mma Z score
                                                                                                                    accu mula ted z-score RHS
  Source: HSBC based on Bloomberg                                                       Source: HSBC based on Bloomberg

  Chart C12. EMEA inflation surprises                                                   Chart C13. EMEA economic activity surprises
                                                                                        1.5                                                                                     6
     1.0                                                                  8
     0.8                                                                                1.0                                                                                     4
     0.6                                                                  6             0.5
     0.4                                                                                0.0
     0.2                                                                                                                                                                        0
                                                                          4             -0.5
     0.0                                                                                                                                                                        -2
                                                                          3             -1.0
     -0.4                                                                 2             -1.5

     -0.6                                                                 1                                                                                                     -6
     -0.8                                                                 0
        Feb-0 6     Aug-07          Feb-0 9      Aug-10         Feb-1 2                 -2.5                                                                                    -8
                                                                                            Feb-06   Feb-07    Feb-08      Feb-09      Feb-10       Feb-11      Feb-12
                              3m m a Z sc ore (EM EA)
                              accu mula ted z-sc ore (EM EA) RH S                                        3mma Z score (EMEA)        accumulated z-score (EMEA) RHS

  Source: HSBC based on Bloomberg                                                       Source: HSBC based on Bloomberg

Note: The Surprise Indices are constructed using an average of normalized surprises based on the median from the Bloomberg survey of expectations of a variety of
inflation and economic activity indices.

     Global Emerging Markets
     Multi-asset strategy                                                                                 abc
     15 January 2013

Trade Ideas
Table C4. Total return portfolio
  Country                   Trade idea                               Entry date   Entry price    Last*    Target     Stop

  Qatar                     EXD 2020 vs 2022 steepener                6/18/2012         24bp     43bp      55bp        8bp
  Mexico                    Buy Pemex 19 vs short UMS Mar-19          5/10/2012         96bp     64bp      60bp      120bp
  Colombia                  Buy Colombia ’17s vs short '21s           8/22/2012         86bp    114bp     120bp       65bp
  Venezuela                 Buy 2022 vs 10y CDS basis                10/17/2012       -182bp    -96bp     -85bp     -232bp
  Singapore                 Receive 5y SGD bond swap spread           1/14/2013         64bp     64bp      45bp      75bp
  South Africa              Short R186 vs receive 5y5y IRS            1/10/2013       -102bp    -118bp       0bp    -160bp
  China                     China 2s5s IRS steepener                  12/3/2012         20bp      27bp      50bp        0bp
  China/Australia           Receive China pay Australia 1y IRS        12/3/2012         38bp      50bp       0bp      60bp
  India                     Buy India IGB 8.15 6/22                   12/3/2012        8.17%     7.87%    7.80%      8.35%
  India                     Receive India 1y1m pay 5y1m fwd OIS       12/3/2012        -53bp     -53bp     -20bp      70bp
  Malaysia                  Buy Malaysia MGS3.418 8/22 pay 10y IRS    12/3/2012         20bp      36bp      50bp        0bp
  Indonesia                 Buy Indonesia INDOGB 6.625 5/33           12/3/2012        6.10%     6.07%    5.70%      6.30%
  Philippines               Buy Philippines GPN 3.90 11/22            12/3/2012        3.62%     3.40%    3.40%      3.80%
  Thailand                  Thailand 2s5s IRS steepener               12/3/2012         44bp      43bp      80bp      30bp
  Thailand                  Thailand ThaiGBi 1.2 7/21                 12/3/2012        0.89%     0.91%    0.70%      1.00%
  Singapore                 Receive Singapore pay US 2y IRS           12/3/2012         15bp      11bp       0bp      25bp
  Brazil                    Receive Jan '15 DI                        12/3/2012        7.83%     7.69%    7.35%      8.05%
  Brazil                    Buy NTN-B '24                            10/18/2012        3.58%     3.35%    3.00%      3.90%
  Colombia                  Receive 5y IBR swap                      11/29/2012        4.88%     4.54%    4.40%      4.80%
  South Africa              2s5s IRS steepener                       10/17/2012       84.5bp      67bp    130bp       50bp
  Mexico                    Receive 10Y TIIE                          9/11/2012        5.95%     5.80%    5.60%      6.20%
  Peru                      Buy Soberanos '31s                        9/11/2012        5.23%     4.70%    4.50%      5.00%
  Israel                    IRS 5s10s flattener                        8/8/2012        100bp     118bp      60bp     120bp
  Singapore/Thailand        Short SGD-THB                              1/9/2012        24.76     24.66     24.00     25.08
  Russia                    Buy RUB vs USD & EUR basket                1/9/2012        34.62     35.85     33.30     35.30
  China                     Short USD-CNY                              1/4/2013       6.2975    6.2725      6.24      6.29
Closed since last Emerging Market Strategist publication
  Poland/Hungary            Short PLN-HUF                              1/9/2012         70.90    71.90     68.90     71.90
  Poland                    IRS 2s5s flattener                        9/11/2012          -4bp      4bp    -40bp      24bp
  Colombia                  Receive 1y IBR swap                      10/17/2012        4.61%    4.49%     4.40%     4.75%
  Czech                     Long GB 09/2021                            8/2/2012        2.22%    1.87%     1.60%     2.70%
  Turkey                    Buy GB 01/22 pay 5y XCCY                 10/23/2012        200bp    156bp     150bp     240bp
  China                     Receive CNY 1y NDIRS                     10/26/2012        3.16%    3.14%     2.90%     3.30%
  Malaysia                  Buy MGS 4.127 4/31                       10/31/2012        3.82%    3.89%     3.65%     3.95%
  Thailand                  Buy GB 4 10/13                           10/31/2012        2.80%    2.65%     2.65%     2.90%
  China                     Buy GB 0.6 8/14                          10/31/2012        2.62%    2.60%     2.20%     2.75%
  India                     Pay 1y OIS                               10/30/2012        7.69%    7.79%     7.90%     7.60%
  S. Korea/Malaysia         Pay KRW 5y NDIRS                         10/11/2012        -54bp    -52bp     -20bp     -70bp
                            Receive MYR 5y NDIRS                     10/11/2012
  Taiwan                    Short USD-TWD                            11/26/2012        29.01     29.05     28.50     29.25
  Singapore                 Short SGD-PHP                            11/23/2012        33.51     33.62     32.70     33.85
  Israel                    Short USD-ILS                             11/8/2012          3.90      3.75      3.75      3.98
  Turkey/Russia             Short TRY-RUB                             11/7/2012        17.65     17.00     17.00     17.98
  Czech                     Long EUR-CZK                              9/18/2012        24.65     25.15     25.80     24.05
  Indonesia                 Long USD-IDR                              9/19/2012         9615      9615      9900      9615
  Brazil/Chile              Long BRL-CLP                              9/19/2012        232.6     228.0     240.0     228.0
  India                     Short USD-INR                            10/23/2012        53.60     54.50     51.20     54.50
Note: * As of 14 Jan 2013
Source: HSBC

      Global Emerging Markets
      Multi-asset strategy                                                                                                                                              abc
      15 January 2013

Local Markets
 Chart C14. Brazil CDI curve                                                     Chart C15. Jan ’14 and Jan ’17 (%)                        Chart C16. Slope Jan ’17-Jan ’14

      %                                                                            %                                                         bps
     9.0                                                                         13                                                        200
                                                                                                                                                              Spre ad of Jan 17 - Jan 14
     8.5                                                                         12
                                                                                 11                                                        125
                                                                                 10                                                         75
     7.5                                                                                             Jan-14
                                                                                  9                  Jan-17                                 25
     7.0                                 1/14/2 013
                                         12/10/ 2012                                                                                         0
     6.5                                                                                                                                   -25
               Jul '10       1           2            3       4              5    7                                                        -50
                                         Years                                    Jan-11    Jun-11      Nov-11   Apr-12   Sep-12             Jan-11    Jun-11     Nov-11       Apr-12      Sep-12

 Source: HSBC, Bloomberg                                                         Source: HSBC, Bloomberg                                   Source: HSBC, Bloomberg

 Chart C17. Chile swap curve                                                     Chart C18. 2Y & 5Y Camara swap                            Chart C19. Slope 5Y-2Y

    %                                                                            %                                                          bps
 5.8                                                                             7
                                                                                                                                           130                                   Spre ad 5Y vs. 2 Y
 5.5                                                                                                                      5Y

                                                                                 4                                                          30

           0             2           4           6        8           10         3                                                         -20
                                     Years                                       Jan-11     Jun-11     Nov-11    Apr-12   Sep-12             Jan-11    Jun-11     Nov-11       Apr-12      Sep-12

 Source: HSBC, Bloomberg                                                         Source: HSBC, Bloomberg                                   Source: HSBC, Bloomberg

 Chart C20. Mexico TIIE curve                                                    Chart C21. 65x1 & 130x1                                   Chart C22. Slope 65x1 & 130x1

    %                                                                                %                                                       bps
 7.0                                                                             8                                                 26x1    260

                                                                                 7                                                         210

                                                                                 6                                                         160
                             26x 1
                                                                                 5                                                         110
                                                          12/17/ 2012
                                                                                                                                                                 Spread 130x1 - 26x1
           0             2           4           6        8             10       4                                                          60
                                                                                 Jan-11     Jun-11     Nov-11    Apr-12   Sep-12             Jan-11    Jun-11     Nov-11       Apr-12      Sep-12

 Source: HSBC, Bloomberg                                                         Source: HSBC, Bloomberg                                   Source: HSBC, Bloomberg

  Global Emerging Markets
  Multi-asset strategy                                                                                                                        abc
  15 January 2013

Local Markets (cont’d)
Chart C23. Indonesia swap curve                              Chart C24. 2Y & 10Y Indo swap series (%)               Chart C25. Slope 10Y - 2Y series

   %                                                          %                                                      bps
5.5                                                          10                                               2Y

5.0                                                           8                                                                                        Spre ad 10Y vs. 2Y

4.5                                                                                                                 130
                                          1/14/2 013
                                          12/17/ 2012
       0      2           4           6   8             10    4                                                      30
                                                              Jan-11    Jun-11     Nov-11   Apr-12   Sep-12           Jan-11    Jun-11    Nov-11    Apr-12      Sep-12

Source: HSBC, Bloomberg                                      Source: HSBC, Bloomberg                                Source: HSBC, Bloomberg

Chart C26. Korea swap curve                                  Chart C27. 2Y & 10Y Korea swap series                  Chart C28. Slope 10Y - 2Y series

   %                                                          %                                                      bps
3.25                                                         5.0                                                    100
                                                                                                                                                   Spre ad 10Y vs. 2Y
                                                             4.5                                                     80
3.00                                                                                                                 60
2.75                                                         3.5
                                              1/14/2013                                                              20
                                              12/17/ 2012    3.0
       0       2          4           6    8            10   2.5                                                    -20
                              Years                            Jan-11    Jun-11    Nov-11   Apr-12   Sep-12           Jan-11    Jun-11    Nov-11    Apr-12      Sep-12

Source: HSBC, Bloomberg                                      Source: HSBC, Bloomberg                                Source: HSBC, Bloomberg

Chart C29. Malaysia swap curve                               Chart C30. 2Y & 10Y Malaysian swap series              Chart C31. Slope 10Y - 2Y series

  %                                                           %                                                      bps
3.8                                                                                                   10Y                                                 Spread 10Y vs. 2Y
                                           1/14/2013                                                                 50
       0      2           4           6   8             10   3                                                       10
                              Years                          Jan-11     Jun-11    Nov-11    Apr-12   Sep-12           Jan-11    Jun-11    Nov-11    Apr-12      Sep-12

Source: HSBC, Bloomberg                                      Source: HSBC, Bloomberg                                Source: HSBC, Bloomberg

     Global Emerging Markets
     Multi-asset strategy                                                                                                                       abc
     15 January 2013

Local Markets (cont’d)
 Chart C32. Turkey swap curve                            Chart C33. 2Y & 10Y Turkey swap series                    Chart C34. Slope 10Y-2Y

    %                                                     %                                                         bps
 6.0                 1/14/2013                           11                                                        200
                                                                             2Y             10Y                    150
 5.5                                                      9                                                         50
                                                          7                                                        -100
                                                                                                                                        Spre ad 10Y vs. 2Y
 4.5                                                                                                               -200
         0     2           4           6   8        10    5                                                        -250
                               Years                      Jan-11    Jun-11        Nov-11         Apr-12   Sep-12      Jan-11    Jun-11       Nov-11    Apr-12      Sep-12

 Source: HSBC, Bloomberg                                 Source: HSBC, Bloomberg                                   Source: HSBC, Bloomberg

 Chart C35. Hungary swap curve                           Chart C36. 2Y & 10Y Hungary swap series                   Chart C37. Slope 5Y-2Y

    %                                                     %                                                         bps
 5.75                                                    9                                                         100
                           1/14/2013                                        2Y             10Y                                                           Spre ad 10Y vs. 2Y
 5.50                                                                                                               50
 5.25                                                                                                                0

                                                         6                                                         -25
         0      2          4           6   8        10   5                                                         -75
                               Years                     Jan-11     Jun-11        Nov-11      Apr-12      Sep-12     Jan-11       Jul-11        Jan-12         Jul-12

 Source: HSBC, Bloomberg                                 Source: HSBC, Bloomberg                                   Source: HSBC, Bloomberg

 Chart C38. South Africa swap curve                      Chart C39. 2Y & 10Y South Africa swap series              Chart C40. Slope 10Y - 2Y series

     %                                                    %                                                         bps
 7.5                                                     9

                                                         8                                                         200

 5.5                                                                                                               150
                                           12/17/ 2012                                                                                                   Spread 10Y vs. 2Y
 4.5                                                                   2Y             10Y
         0     2           4           6   8        10   5                                                         100
                               Years                     Jan-11     Jun-11        Nov-11      Apr-12      Sep-12     Jan-11    Jun-11      Nov-11      Apr-12      Sep-12

 Source: HSBC, Bloomberg                                 Source: HSBC, Bloomberg                                   Source: HSBC, Bloomberg

    Global Emerging Markets
    Multi-asset strategy                                                                                                                                               abc
    15 January 2013

EM Inflation Linkers and Break-evens
Table C5. EM break-even inflation
                                                                           Inflation                                                                       Inflation
Country               Inflation-linked bond        Yield (%)         break-even (%)               Inflation-linked swap              Rate (%)        break-even (%)
Brazil                BNTNB 6 08/14                      1.22                     6.11
                      BNTNB 6 05/15                      1.72                     5.90
                      BNTNB 6 08/16                      2.25                     5.93
                      BNTNB 6 05/17                      2.36                     6.02
                      BNTNB 6 08/20                      2.96                     5.82
                      BNTNB 6 08/22                      3.21                     5.81
                      BNTNB 6 08/24                      3.39                     5.67
                      BNTNB 6 08/30                      3.65                     5.40
                      BNTNB 6 05/35                      3.75                     5.30
Chile                 BCU 5.00 11/13                     3.00                     2.14            UF v CAMARA SWAP 1Y                   2.44                   2.75
                      BCU 3.00 04/14                     2.82                     2.59            UF v CAMARA SWAP 2Y                   2.39                   2.78
                      BCU 3.00 10/15                     2.80                     2.72            UF v CAMARA SWAP 3Y                   2.35                   2.86
                      BCU 3.00 05/17                     2.74                     2.77            UF v CAMARA SWAP 5Y                   2.37                   2.97
                      BCU 3.00 07/18                     2.73                     2.79            UF v CAMARA SWAP 10Y                  2.41                   3.06
                      BCU 3.00 02/21                     2.70                     2.81
Colombia              COLTES7 02/25/15 UVR               2.12                     2.34
                      COLTES4 1/4 05/17 UVR              2.28                     2.55
                      COLTES4 3/4 02/23 UVR              2.67                     2.53
Mexico                MUDI 3.50 12/13                    1.18                     3.31            MXN SWAP UDI-TIIE 1YR                 1.06                   3.80
                      MUDI 4.50 12/14                    1.26                     3.45            MXN SWAP UDI-TIIE 2YR                 1.13                   3.81
                      MUDI 5.00 06/16                    1.40                     3.52            MXN SWAP UDI-TIIE 3YR                 1.23                   3.80
                      MUDI 3.50 12/17                    1.44                     3.60            MXN SWAP UDI-TIIE 5YR                 1.30                   3.95
                      MUDI 4.00 06/19                    1.47                     3.66            MXN SWAP UDI-TIIE 10YR                1.57                   4.23
                      MUDI 2.50 12/20                    1.55                     3.66
                      MUDI 2.00 06/22                    1.69                     3.60
Peru                  PERUGB 5.79+VAC 12/13             -0.83                     3.27
                      PERUGB 5.8+VAC 01/14              -0.79                     3.23
                      PERUGB 5.9+VAC 04/16              -0.35                     3.02
                      PERUGB 6.84+VAC 06/16             -0.32                     3.03
                      PERUGB 6.84+VAC 07/19              0.40                     3.18
                      PERUGB 6.84+VAC 10/24              1.08                     3.00
                      PERUGB 7.39+VAC 01/35              1.94                     2.77
Israel                ILCPI 1.5% 06/14                  -0.33                     2.12
                      ILCPI 3.5% 04/18                   0.42                     2.31
                      ILCPI 3% 10/19                     0.83                     2.39
                      ILCPI 2.75% 09/22                  1.40                     2.30
                      ILCPI 4% 05/36                     2.23                     2.06
                      ILCPI 2.75% 08/41                  2.48                     1.81
South Africa                                                                                      ZAR REAL YIELD SWAP          1Y       -1.40                  6.47
                                                                                                  ZAR REAL YIELD SWAP          2Y       -1.01                  6.13
                                                                                                  ZAR REAL YIELD SWAP          3Y       -0.64                  5.93
                                                                                                  ZAR REAL YIELD SWAP          5Y       -0.25                  6.04
                                                                                                  ZAR REAL YIELD SWAP          10Y       0.49                  6.20
Turkey                TURKGB CPI 9% 05/14                0.13                     5.92
                      TURKGB CPI 7% 10/14                0.61                     5.43
                      TURKGB CPI 4.5% 02/15              0.17                     5.92
                      TURKGB CPI 2.5% 05/16              0.49                     5.68
                      TURKGB CPI 4% 04/20                1.20                     5.18
                      TURKGB CPI 3% 01/21                1.18                     5.26
Source: HSBC

  Chart C41. EM inflation targeters
                 IL        CZ      PO         BR   CL           CO       ZA          TH            KR     MX        HU        PE      PH        ID      RO       TR

                                                        T a rg e t       C P I He a d lin e La t e s t      20 11         2 0 12 F

  Source: HSBC

     Global Emerging Markets
     Multi-asset strategy                                                                                                                             abc
     15 January 2013

EM Inflation Linkers and Break-evens (cont’d)
 Chart C43. Brazil inflation break-evens                                 Chart C44. Mexico inflation break-evens

            %                                                              %
                                                                                                                            MEX 2Y BEI

                                                                                                                            MEX 5Y BEI

     6.0                                                                   4.2



                                                        BRA 2Y BEI
                                                        BRA 5Y BEI

     4.5                                                                   3.2
       Dec-11 Feb-12 Apr-12 Jun-12 Aug-12 Oct-12 Dec-12                      Jan-11      May-11       Oct-11       Mar-12        Jul-12      Dec-12

 Source: Bloomberg, HSBC                                                 Source: Bloomberg, HSBC

 Chart C45. Chile inflation break-evens                                  Chart C46. Colombia inflation break-evens

     %                                                                      %
                                                                                                               COL 2Y BEI
     4.3                                                                   5.3                                 COL 5Y BEI
                                      CHI 2Y BEI
                                      CHI 5Y BEI                           4.8

     3.3                                                                   3.8


     2.3                                                                   2.3

     1.8                                                                     Jan-11 May-11          Sep-11       Jan-12     May-12       Sep-12
       Jan-11    May-11     Oct-11    Mar-12       Jul-12       Dec-12

 Source: Bloomberg, HSBC                                                 Source: Bloomberg, HSBC

 Chart C47. Turkey inflation break-evens                                 Chart C48. South Africa inflation break-evens

      %                                                                    %
      8.5                                                                  7.5
                                               TURK 2Y BEI
      8.0                                                                                          SOAF 2Y BEI
                                               TURK 5Y BEI                 7.0
                                                                                                   SOAF 5Y BEI

      6.5                                                                  6.0
      5.0                                                                  5.0

        Feb-11   Jun-11    Oct-11    Feb-12    Jun-12       Oct-12         4.0
                                                                             Jan-11      Jun-11        Oct-11      Mar-12        Jul-12      Dec-12

 Source: Bloomberg, HSBC                                                 Source: Bloomberg, HSBC

     Global Emerging Markets
     Multi-asset strategy                                                                                                                                                                              abc
     15 January 2013

EM External Debt Rich-                                                                            The external debt market has witnessed a healthy                                                     Victor Fu
                                                                                                                                                                                                       EM Quantitative Strategist
Cheap Monitor                                                                                     performance since our last Emerging Markets                                                          HSBC Securities (USA) Inc.
                                                                                                  Strategist publication on 1 November 2012. The                                                       +1 212 525 4219
   Venezuela 24 attractive relative to 34 for a                                                                                                                                             
                                                                                                  spread of a representative EM hard-currency bond
    36bp PECS pickup                                                                                                                                                                                   Gordian Kemen
                                                                                                  index has tightened 21bp. High- beta credits                                                         Chief LatAm FI Strategist
                                                                                                                                                                                                       HSBC Securities (USA) Inc.
   Ukraine 21 to 17N to pick up 36bp in PECS                                                     Venezuela and Serbia led the spread move,                                                            +1 212 525 2593
    and cut duration by 2.2                                                                       tightening 165bp and 132bp, respectively.                                                  

                                                                                                  Argentina and Bulgaria took the last two seats,
   Philippines 26 to 19 to cut duration by 4.5
                                                                                                  widening 70bp and 27bp, respectively. In terms of
  1. Venezuela 2024 has value compared to                                                         total return, Venezuela, Serbia, and Iraq were the
  2034. The switch provides investors with a                                                      top performers, gaining 11.8%, 8.5%, and 3.9%,
  PECS pickup of 34bp for a duration reduction                                                    respectively. Argentina was the worst performer,
  of 2 years. The latter has richened historically                                                retreating 1.5%, followed by Panama (-1.2%), and
  with a Z-score of -2.20 vs 1.24 for the former.                                                 Peru (-0.6%).

  2. Switch from Ukraine 2021 to 2017N to                                                         Updates on the switches in our previous
  pick up 36bp in PECS and cut duration by 2.2                                                    Emerging Markets Strategist:
  years. 2021 is rich with a Z-score of                                                           Switch from Venezuela ’34s to ’26s for a 69bp
  -2.42 vs 1.92 for 2017N.                                                                        pickup in PECS. The PECS differential has
                                                                                                  tightened 3bp in our favor.
  3. Switch to Philippines 2019 from 2026 to
  reduce duration by 4.5 years. 2026 trades 29bp                                                  Philippines ’37s to ’32s switched at a 5bp PECS
  tighter than the fair curve with a Z-score of -                                                 pickup, which has widened 11bp adversely.
  3.91 while 2019 trades 4bp wider than the fair
                                                                                                  Switch from Turkey Mar-22 to 2018 at 2bp PECS
  curve with a Z-score of 2.67.
                                                                                                  pickup, which has moved 3bp favorably.

Table C6. External debt top 10 richest/cheapest bonds
                                    ____________ Market mid-level _____________                             _________ Fair value ______                    ______ Rich/cheap ________
Bond                                   Price    PECS 3M Change PECS basis                                    Price PECS PECS basis                         PECS (-/+bp) 3M Z-score˜
CO 7.375 01/17                        123.90               59                  (12)                 18      122.89           80                    (3)                  (22)                (2.34)
PDVSA 5.25 04/17                       88.00              775                 (344)                  8       85.82          844                  (60)                   (69)                (2.22)
VE 9.375 01/34                         99.40              700                 (209)               (30)       98.82          708                  (38)                    (8)                (2.20)
TR 7.25 03/15                         111.85              122                  (61)               (70)      111.39          141                  (90)                   (19)                (1.76)
PDVSA 5.375 04/27                      70.75              740                 (263)                 92       69.52          766                    66                   (26)                (1.72)
VE 7 12/18                             94.00              703                 (250)               (36)       92.79          731                  (64)                   (28)                (1.71)
UA 6.25 06/16 N                       100.60              529                 (135)                 22       99.79          555                    (4)                  (26)                (1.37)
MX 11.375 09/16                       137.65               32                  (23)                 39      135.89           70                      1                  (38)                (1.34)
PDVSA 8.5 11/17 N                      98.70              783                 (319)               (18)       98.22          798                  (33)                   (15)                (1.29)
AR PAR 12/38                           33.45            1,413                   288               287        33.40        1,418                   282                    (5)                (1.06)
VE 8.25 10/24                          92.20              736                 (249)               (66)       90.30          768                  (98)                   (32)                  1.24
VE 7 03/38                             80.00              700                 (177)               (30)       79.05          716                  (46)                   (16)                  1.26
CO 8.25 12/14                         114.00               54                    10               (13)      113.66           69                  (28)                   (15)                  1.31
VE 9.25 09/27                          99.75              699                 (199)               (29)       96.19          751                  (81)                   (52)                  1.31
PDVSA 12.75 02/22                     112.50              848                 (209)               (18)      115.05          806                    25                     42                  1.59
VE 8.5 10/14                          102.50              629                  (74)               (69)      101.90          665                 (105)                   (35)                  1.64
PDVSA 4.9 10/14                        95.15              724                 (215)               (97)       96.11          666                  (39)                     58                  1.74
BR 7.875 03/15                        114.40               66                    30                (7)      115.32           28                    31                     38                  1.88
UA 9.25 07/17 N                       109.21              578                 (108)                (6)      110.64          545                    28                     34                  1.92
MX 6.625 03/15                        111.50               73                    31               (29)      111.81           60                  (16)                     13                  2.71
HSBC external debt rich/cheap model uses a theoretically sound quantitative model that assumes a bond issuer’s survival probability term structure follows a smooth functional form. The fair price
of each bond of the issuer can be obtained by a calibrated survival probability function. The model is calibrated by minimizing sum of squared errors between the market and model prices of all the
bonds of the issuer. To calculate a market/fair PECS metric, a parallel shift is applied to the hazard rates implied by the issuer’s CDS curve to match a given market/fair bond price. The PECS is
the par CDS spread computed from the shifted CDS curve to the bond’s average life. The richness/cheapness of a bond is determined by how far the bond’s market PECS is below/above its fair
PECS. The Z-score measures the deviation of a bond’s current richness/cheapness from the historical average over a 3-month period.
Source: HSBC

      Global Emerging Markets
      Multi-asset strategy                                                                                                                                                                                                                            abc
      15 January 2013

EM External Debt Rich-Cheap Monitor
  Chart C48. Argentina actual vs fair PECS                                                           Chart C49. Brazil actual vs fair PECS                                                              Chart C50.: Colombia actual vs fair PECS
1,550                                                                                               160                                                                                                190
1,450                                                                                               140                                                                                                170                                                                  33
1,350                     17                                                                        120                                                                                 37             150
                                                                                                                                                                           34                41
                     Boden 15
1,250                   Bonar 17                                                                    100                                                                                                130                                                                              37    41
                                                              33                                                                         24 B             27
1,150                                                                                                80                        19            25                                                        110                            20
                                                                                                                    19N             20                                                                                                               24
                                                                                                                 40-C                       24
                                                                                                                   A bond             21 23                              PECS                                                    19
1,050                                 PECS                                                           60       15                                                                                        90
                                                                                                                      17                                                 Fair PECS
                                      Fair PECS                                                                                                                                                                                            21                               PECS
  950                                                                                                40                                                                                                 70                                                                  Fair PECS
  850                                                                                                                                                                                                   50        14

  750                                                                                                0                                                                                                  30
            2                  7             12         17                  22          27                0            5                 10          15        20                   25            30          0         5                  10            15       20               25         30
                                               Average Life                                                                                       Average Life                                                                                       Average Life

  Chart 51. Indonesia actual vs fair PECS                                                            Chart C52. Mexico actual vs fair PECS                                                              Chart C53. Panama actual vs fair PECS
190                                                                                                 170                                                                                                150

180                                                                                                                                                                                                    140
                                                           37                                       150                                                                                                                                                      27        29                36
170                                                 35          38                                                                                                                 40        44        130

                                                                       42                           130                                                   31        34                                 120
160                                                                                                                                                            33                                                                                            26
150                                                                                                 110
                                                                     PECS                                                                                                                              100
                         19                                          Fair PECS                                         20                                                                                                                                                    PECS
140                        20                                                                                                                                                                                                         20
                                                                                                     90                                                                                                                                                                      Fair PECS
                     17     21                                                                                                                                                                         90
130                     18                                                                                              19            22                                                                          15
                14                                                                                                                                                             PECS
                                                                                                                  15                                                                                   80
               16                                                                                    70                17                                                      Fair PECS
            May-14                                                                                                                                                                                     70
110          15                                                                                      50
        0                      10               20                   30               40             30             16                                                                                 50
                                                                                                          0         5               10            15      20             25             30        35          1              6                   11         16                    21           26
                                             Average Life                                                                                                                                                                                          Average Life
                                                                                                                                                  Average Life

  Chart C54. Peru actual vs fair PECS                                                                Chart C55. Philippines actual vs fair PECS                                                         Chart C56. South Africa actual vs fair PECS
150                                                                                                 150                                                                                                170

                                                                                                                                                                 31                                                                                                                           41
130                                                                                     50          130                                                                                                150
                                                                                                                                                                   32                                                             20
                                                      33                                                                                           25
                                                                                                                                                                              34                                                                     24                     PECS
                                                                37                                  110                                                                             37                 130
110                                                                                                                                                                                                                              19        22                               Fair PECS
                                        25                                                                                 19
 90                                                                                                  90                          20                  26                                                110
                           19                                                                                                         21
 70                                                                         PECS                     70                                                                                                90
                 15                                                         Fair PECS                                  17
 50                                                                                                  50           15                                                     Fair PECS                     70         14
 30                                                                                                  30                                                                                                50
        0                      10                 20                  30                40                0            5              10          15       20                      25         30              0         5                  10            15        20              25         30
                                              Average Life                                                                                    Average Life                                                                                            Average Life

  Chart C57. Turkey actual vs fair PECS                                                              Chart C58. Ukraine actual vs fair PECS                                                             Chart C59. Venezuela actual vs fair PECS
200                                                                                          So     590
                                                                            34               urc
                                                                                      36                                                                                                                800
180                                                                                          e      580
                                                     25                                                                              17N                                                                780
                                                                     30                      for                  15
                               Mar-19                                                                                                                                                                                                      22               26         31
160                       18      21          22N                                            all    570                                                                                                 760
                16                           22
                                     20                                                      ch                                                                                                                                                 23
                                                                                                                                                                                    22                  740                           19              24
                          17       Nov-19                                                    art                                                                                                                                        20
140                                                                                                 560
                                                                                             s                                                                                                          720                                            25
                     15                                                                                                                                                                                                                                       28
120                                                                                          on                                                                                                         700                       18                                         34         38
                                                                                                    550                                  17                                                                                                                  27
                                                                                                                                                               20                                       680
100                                                                   PECS                   pa                                                                     21
                                                                                                    540                                                                                                 660
                                                                      Fair PECS              ge:                                                                                                                        16
                                                                                                                               16                                        PECS
                                                                                             Blo                                                                         Fair PECS                      640
 80                                                                                                 530                                                                                                                                                    PECS
                                                                                             om                            16N                                                                                     14
                14                                                                                                                                                                                      620                                                Fair PECS
 60                                                                                                 520
                                                                                             g,                                                                                                         600
        0                 5              10         15                    20            25                2                4                  6             8                  10                 12
                                           Average Life                                      HS                                                                                                               0         5                  10            15       20              25          30
                                                                                                                                                  Average Life
                                                                                             BC                                                                                                                                                      Average Life
                                                                                                                                                  o rce
Source for all charts on this page: Bloomberg, HSBC

   Global Emerging Markets
   Multi-asset strategy                                                                                                                                 abc
   15 January 2013

External Debt
 Chart C49. EM CDS history                                                                 Chart C50. 90-day volatility
70 0                                                                                 1.2
                                                                                            30%                                        US H igh Yield                      80%
                                                      3 m th ra n g e
60 0                                                                                 1                                                 US H igh Grade                      70%
                                                      C u r re n t                          25%
                                                                                                                                       EM EXD
50 0                                                                                                                                                                       60%
                                                                                     0.8    20%                                        EM LD M
40 0                                                                                                                                                                       50%
                                                                                     0.6    15%                                                                            40%
30 0                                                                                                                                   EM Equities - RH S
                                                                                     0.4    10%                                                                            30%
20 0
10 0                                                                                 0.2     5%
   0                 …   …    … o       …   …   …         …          …   …       …   0       0%                                                                             0%
             e   a   a   t    l
                              i     a   g   n   z     l
                                                      i     u
                                                          o r        n   o   y   i
             i   e   l   u    a c   i   l   u   a     z   l          a   d   e                 Jul-08       Apr-09        Jan-10    Oct-10       Jul-11      Apr-12    Jan-13
             h   r   a   o    h i   s   u       K     a   o e            n   k   h
             C   o
                 K   M   S    T x
                                    u   B   H         r
                                                      B   C P        P   I   r
                                M   R                                        T
 Source: Bloomberg, HSBC                                                                   Source: Bloomberg, HSBC

 Chart C51. 5Y-10 CDS slopes                                                               Chart C52. Bond curve slopes

        bps                                                                                   bps
  50                                                                                       100

  25                                                BRA
                                        MEX      COL                                                                      PH
                                                    PHI                                     80                                          RU

 -50                                                                                                                      BZ
                                                PER                                         60
                                                           SOA                                                                      PE MEX
                                                          TUR                                                                                             INDO
                                                 RUS                                                                           SA
        50               70           90        110                      130         150    40
                                    5s10s CDS Slope                                               0                  50               100                   150            200
                                                                                                                          Shorter tenor bond (z-spread)
 Source: Bloomberg, HSBC                                                                   Source: Bloomberg, HSBC

       Global Emerging Markets
       Multi-asset strategy                                                                                                                                                                                                                         abc
       15 January 2013

External Yield Curves
  Chart C59. Argentina                                                                            Chart C60. Brazil                                                                                   Chart C61. Colombia

                                                                                                        bps                                                                                                 bps
                                                                                                  250                                                                                                 250
 2700                                           Bonds (z-spread)             CDS                                                                                        '27
                                                                                                  150                                                                                                                                                                '24
 2200                                                                                                                                                                              '30 '34            150                                                                         '33 '37
                                                                                                                                                          '24 '25
                                                                                                                                                          '21                                                                           '19          '20
 1700                                                                                                                          '17
                                                                                                                          '40-15            '19N
                                                                                                                                           '19 '20                                                    100                              '17
                         B15 G17
                             BX                                                                                                                        Bonds (z-spread)            CDS
 1200                                                                                                                                                                                                  50                '14
               BVII                                                                                 0         '13     '15                                                                                                                              Bonds (z-spread)                        CDS
                                                                             PAR                                                                                                                                  '13
  700                                                                                                                                                                                                   0
          0      2           4              6         8         10       12           14          -50
                                                                                                         0                           5                             10                           15           0                     5                      10                          15                       20
                                       Duration (y ears)                                                                                                                                                                                    Duration (y ears)
                                                                                                                                         Duration (y ears)

  Chart C62. Indonesia                                                                            Chart C63. Mexico                                                                                   Chart C64. Panama

         bps                                                                                        bps
 200                                                                                                                                                                                                        bps
                                                                                   '35'38                                                                                                                                                                                                   '29
 180                                                                                   '37                                                                                                            200

 160                                                                                              150                                                                          '33 '34
                                                                                                                                                             '22'26'31                                150                                                                                             '34
                                      '19                 Bonds (z-spread)           CDS                                                        '20                                                                                                                        '23
 140                                                                                              100                              '19                                                                100                                           '15
                                                                                                                                 '16 '19N                                                                                '12
                                                                                                               '13'14 '15
                                                                                                  50                                                                                                  50
 120            '05/14
                    '15                                                                                                   '14N                                                                                                                                      Bonds (z-spread)                CDS
                                                                                                                                                             Bonds (z-spread)            CDS
 100                                                                                                0                                                                                                       0      2               4            6              8           10              12             14
          0                       5                            10                            15         0                    5                    10                      15                    20
                                                                                                                                                                                                                                              Duration (y ears)
                                      Duration (y ears)                                                                                  Duration (y ears)

  Chart C65. Peru                                                                                 Chart C66. Philippines                                                                              Chart C67. Russia

    bps                                                                                                 bps                                                                                                 bps
 250                                                                                                                                                                                                  200
 150                                                                                                                                                                   '25'09/24                                                                          '30
                                                                                           '33                                                                                           '30 '31      100                                                          '20
                                                                               '25                                                                                       '10/24
                                                              '19                                 130                                                                                                                                            '18
 100                                                                                                                                                                                                                             '15
                                        '16                                                                                      '17           '19
                            '15                                                                                                                  '19'20
                      '12                                                                                                                                                                              50                                                          Bonds (z-spread)                  CDS
  50                                                                                               80                                                         '21
                                                          Bonds (z-spread)          CDS                             '14 '15 '16                              Bonds (z-spread)             CDS
     0                                                                                             30                                                                                                   0
          0                       5                            10                            15          0            2              4             6               8            10              12           0           2              4                 6                 8                  10              12
                                      Duration (y ears)                                                                                  Duration (y ears)                                                                                  Duration (y ears)

  Chart C68. Ukraine                                                                              Chart C69. Turkey                                                                                   Chart C70. Venezuela
         bps                                                                                            bps
 650                                                                                              250                                                                                                       bps
                                                                                                                            Bonds (z-spread)            CDS
 600                                                                                              200                                                                                           '30
                                                                                                                                                                          '21      '25                                                                                          '23
                                                                                                                                                  '7/19                                                                                                    '18           '20          '24 '28
                            '15         '17                                                                                                                  '20                                                                                                                        '2527
                                                                                                                                                                                                                                                                                          '                '34
 550                                              2021                                            150                             '16 '17'18                                                          700                               '16
                                  '16                                                                                                                                                                                        '14
                                                                                                                           '15                         '11/19
                                                                                                                                                                                                      600          '13
 500                                                                                              100

                                                                                                                    '14                                                                               500                                                                Bonds (z-spread)             CDS
                                                Bonds (z-spread)         CDS
 450                                                                                               50
          0          2            4               6             8            10              12          0            2              4             6               8            10              12    400
                                                                                                                                                                                                             0               2                  4                    6                     8                   10
                                      Duration (y ears)                                                                                  Duration (y ears)
                                                                                                                                                                                                                                              Duration (y ears)

Source for all charts on this page: Bloomberg, HSBC

     Global Emerging Markets
     Multi-asset strategy                                                                                                                             abc
     15 January 2013

External Debt Bonds, CDS, and Basis
  Chart C71. Argentina bonds                                        Chart C72. CDS                                          Chart C73. Basis

      $                                                                bps                                                     bps
                                                                    5000                                                    1200
  115                             AR Disc NY price
                                                                                                               AR CDS 5Y
                                  Boden'15 price                                                                             800                                AR CDS 5Y - Boden'15
    55                                                              2000

    35                                                              1000                                                     -800

    15                                                                    0                                                 -1200
     Jul-07       Nov-08        Mar-10       Jul-11        Nov-12         Aug-07    Dec-08   Apr-10   Aug-11       Dec-12       Aug-07    Dec-08      Apr-10      Aug-11      Dec-12

  Chart C74. Brazil bonds                                           Chart C75. CDS                                          Chart C76. Basis

          $                                                           bps                                                     bps
  170                                                               600                                                     100
                                                                                                        BRA CDS 5Y
  150                      BRA'37                                                                                            50

  130                                                                                                                          0

  110                                                                                                                        -50
    90                                                                                                                      -100

                                                                                                                                                   BRA CDS 5Y - BRA'17
    70                                                                0                                                     -150
     Aug-07       Dec-08         Apr-10     Aug-11         Dec-12     Aug-07       Dec-08    Apr-10   Aug-11       Dec-12      Aug-07    Dec-08      Apr-10       Aug-11     Dec-12

  Chart C77: Colombia bonds                                         Chart C78: CDS                                          Chart C79: Basis

          $                                                           bps                                                     bps
  180                                                                                                                       100
                       COL'17                                                                                                50
  160                  COL'37                                                                            COL CDS 5Y
                                                                    450                                                        0
    80                                                                                                                      -200                              COL CDS 5Y - COL'17

    60                                                               50                                                     -250
     Aug-07       Dec-08         Apr-10      Aug-11        Dec-12     Aug-07       Dec-08    Apr-10   Aug-11       Dec-12      Aug-07    Dec-08      Apr-10       Aug-11     Dec-12

  Chart C80. Indonesia bonds                                        Chart C81. CDS                                          Chart C82. Basis

         $                                                             bps                                                     bps
  160                                                               1200                                                    200
  140                                                                                                   INDO CDS 5Y
  120                                                                800
  100                                                                                                                       -200
   80                                           INDO'16              400
                                                INDO'37                                                                     -400
                                                                                                                            -500                        INDO CDS 5Y - INDO'16
   40                                                                  0                                                    -600
    Sep-07       Dec-08         Mar-10     Jun-11         Sep-12       Sep-07      Dec-08    Mar-10   Jun-11      Sep-12       Sep-07    Dec-08     Mar-10       Jun-11     Sep-12

Source for all charts on this page: Bloomberg, HSBC

      Global Emerging Markets
      Multi-asset strategy                                                                                                                      abc
      15 January 2013

External Debt Bonds, CDS, and Basis (cont’d)
  Chart C83. Mexico bonds                                           Chart C84. CDS                                       Chart C85. Basis

      $                                                               bps                                                  bps
  160                                                               600                                                  150
                                                                                                         MEX CDS 5Y
  130                                                               400                                                    50
  110                                                                                                                       0
                                                                    200                                                   -50
                                                      MEX'1 7
   80                                                 MEX'3 4                                                            -100
                                                                                                                                              MEX CDS 5Y - MEX'17
   60                                                                 0                                                  -150
    Aug-07        Dec-08        Apr-10       Aug-11        Dec-12     Aug-07        Dec-08   Apr-10   Aug-11    Dec-12      Aug-07   Dec-08    Apr-10       Aug-11     Dec-12

  Chart C86. Russia bonds                                           Chart C87. CDS                                       Chart C88. Basis

          $                                                            bps                                                  bps
  220                                                               1200                                                 800
                                                                                                           RUS CDS 5Y    700
  200                                                               1000
                                                                                                                         600                              RU CDS 5Y - RU'18
  180                                                                800                                                 500
  160                                                                600
  140                                                                400                                                 200
  120                                           RU'18                200
                                                RU'28                                                                       0
  100                                                                     0                                              -100
    Aug-07        Dec-08        Apr-10      Aug-11         Dec-12         Aug-07    Dec-08   Apr-10   Aug-11    Dec-12      Aug-07   Dec-08    Apr-10       Aug-11      Dec-12

  Chart C89. Philippines bonds                                      Chart C90. CDS                                       Chart C91. Basis

          $                                                            bps                                                   bps
  170                                                               1000                                                  150
                      PH'16                                                                                               100
  150                 PH'31                                          800                                                   50
                                                                                                        PH CDS 5Y           0
  130                                                                600                                                  -50
  110                                                                400                                                 -150
                                                                                                                         -250                             PH CDS 5Y - PH'16
     90                                                              200
     70                                                                   0                                              -350
      Aug-07      Dec-08        Apr-10       Aug-11        Dec-12         Aug-07    Dec-08   Apr-10   Aug-11    Dec-12      Aug-07   Dec-08    Apr-10       Aug-11      Dec-12

  Chart C92. Venezuela bonds                                        Chart C93. CDS                                       Chart C94. Basis

          $                                                                bps                                             bps
  130                                                               4000                                                 1400
                                                                                                                                                        VEN CDS 5Y - VEN'16
  110                                     VEN'16                                                                         1000
     90                                                                                                VEN CDS 5Y
                                                                    1000                                                    0
     30                                                                   0                                              -400
      Jul-07      Nov-08       Mar-10        Jul-11        Nov-12          Jul-07   Nov-08   Mar-10   Jul-11    Nov-12      Jul-07   Nov-08    Mar-10       Jul-11     Nov-12

Source for all charts on this page: Bloomberg, HSBC

       Global Emerging Markets
       Multi-asset strategy                                                                                                                                                                                    abc
       15 January 2013

FX: Spot, HSBC forecasts, and forward curves
  Chart C95. Argentina NDFs & HSBC forecasts                                       Chart C96. Brazil NDFs & HSBC forecasts                                         Chart C97. Chile NDFs & HSBC forecasts

                     6.50                                                                         2.40                                                                           525


                     5.50                                                                         2.10

                     5.00                                                                         2.00

                     4.00                                                                         1.70
                        Jan-12        Jul-12    Feb-13     Aug-13
                                                                                                  1.60                                                                           450
                                                                                                     Jan-12        Jul-12       Feb-13     Aug-13                                  Jan-12          Jul-12         Feb-13     Aug-13
                              USD-ARS                    NDFs

                              HSBC forecast                                                              USD-BRL                NDFs               HSBC forecast                         USD-CLP                  NDFs               HSBC forecast

  Chart C98. Colombia NDFs & HSBC forecasts                                        Chart C99: Mexico fwds & HSBC forecasts                                         Chart C100. Peru NDFs & HSBC forecasts
             1,900                                                                                   14.5                                                                         2.80

             1,850                                                                                                                                                                2.70



             1,800                                                                                   13.0

                                                                                                     12.5                                                                         2.55
                                                                                                     12.0                                                                         2.50
                                                                                                        Jan-12       Jul-12      Feb-13     Aug-13
             1,700                                                                                                                                                                   Jan-12          Jul-12        Feb-13    Aug-13
                 Jan-12          Jul-12        Feb-13      Aug-13
                                                                                                         USD-MXN                Fwds               HSBC forecast                                  USD-PEN                   NDFs
                            USD-COP              NDFs              HSBC forecast                                                                                                                  HSBC forecast

  Chart C101. Czech fwds & HSBC forecasts                                          Chart C102. Hungary fwds & HSBC forecasts                                       Chart C103. Poland fwds & HSBC forecasts

                     26.5                                                                            330                                                                               4.75

                     26.0                                                                            320


                     25.0                                                                                                                                                              4.25
                                                                                                     280                                                                               4.00
                        Jan-12     Jul-12      Feb-13    Aug-13      Feb-14                          260                                                                               3.75
                                                                                                       Jan-12       Jul-12      Feb-13    Aug-13      Feb-14                              Jan-12      Jul-12      Feb-13    Aug-13      Feb-14
                              EUR-CZK                    Fwds                                                   EUR-HUF                   Fwds
                              HSBC forecast                                                                     HSBC forecast                                                            EUR-PLN                  Fwds               HSBC forecast

  Chart C104. Turkey fwds & HSBC forecasts                                         Chart C105. Russia NDFs & HSBC forecasts                                        Chart C106. S. Africa fwds & HSBC forecasts

                     1.90                                                                            35.0                                                                              9.5

                     1.85                                                                            33.0

                                                                                                     32.0                                                                              8.5


                     1.80                                                                            31.0

                                                                                                     30.0                                                                              8.0

                     1.75                                                                            29.0

                                                                                                     27.0                                                                              7.0
                                                                                                        Jan-12       Jul-12     Feb-13    Aug-13      Feb-14                             Jan-12      Jul-12       Feb-13    Aug-13      Feb-14
                        Jan-12     Jul-12      Feb-13    Aug-13      Feb-14

                      USD-TRY                  Fwds               HSBC forecast                          USD-RUB                NDFs               HSBC forecast                         USD-ZAR                  Fwds               HSBC forecast

  S                                                                                S                                                                               S
Source for all charts on this page: Bloomberg, HSBC

       Global Emerging Markets
       Multi-asset strategy                                                                                                                                                                             abc
       15 January 2013

FX: Spot, HSBC forecasts, and forward curves (cont’d)
  Chart C107. China NDFs & HSBC forecasts                                                 Chart C108. CNH fwds & HSBC forecasts                                   Chart C109. HKD fwds & HSBC forecasts

                                                                                                       6.90                                                                       7.850

                            6.40                                                                       6.70                                                                       7.825

                                                                                                       6.50                                                                       7.800

                                                                                                       6.30                                                                       7.775

                               Jan-12        Jul-12     Feb-13    Aug-13     Feb-14                    5.90
                                                                                                          Jan-12        Jul-12      Feb-13    Aug-13     Feb-14
                                                                                                                                                                                      Jan-12     Jul-12      Feb-13   Aug-13   Feb-14
                                    USD-CNY                      NDFs                                               USD-CNH                   CNH Fwds                                      USD-HKD                   Fwds

                                    HSBC forecast                                                                   HSBC forecast                                                           HSBC forecast

  Chart C110. India NDFs & HSBC forecasts                                                 Chart C111. Indonesia NDFs & HSBC forecasts                             Chart C112. Korea NDFs & HSBC forecasts

                  60.0                                                                                                                                                           1,200



                  50.0                                                                                   9,400
                  45.0                                                                                                                                                           1,000
                     Jan-12            Jul-12         Feb-13     Aug-13     Feb-14                                                                                                   Jan-12      Jul-12      Feb-13   Aug-13   Feb-14
                                                                                                             Jan-12        Jul-12    Feb-13    Aug-13    Feb-14
                                                                                                                    USD-IDR                   NDFs                                          USD-KRW                   NDFs
                                   USD-INR               NDFs             HSBC forecast                             HSBC forecast                                                           HSBC forecast

  Chart C113. Malaysia NDFs & HSBC forecasts                                              Chart C114:.Philippines NDFs & HSBC forecasts                           Chart C115. Singapore fwds & HSBC forecasts

                         3.30                                                                                                                                                   1.35



                         3.10                                                                          42.0

                         2.80                                                                                                                                                   1.15
                                                                                                          Jan-12       Jul-12       Feb-13    Aug-13     Feb-14
                            Jan-12      Jul-12         Feb-13    Aug-13      Feb-14                                                                                                Jan-12      Jul-12       Feb-13    Aug-13   Feb-14

                                    USD-MYR                      NDFs                                               USD-PHP                   NDFs                                          USD-SGD                   Fwds

                                    HSBC forecast                                                                   HSBC forecast                                                           HSBC forecast

  Chart C116. Taiwan NDFs & HSBC forecasts                                                Chart C117. Thailand fwds & HSBC forecasts                              Chart C118. Vietnam NDFs & HSBC forecasts

                         32.0                                                                           33.0                                                                      25,000

                         31.0                                                                           32.0




                         29.0                                                                           30.0

                         28.0                                                                           29.0

                         27.0                                                                           28.0                                                                      19,000
                            Jan-12      Jul-12         Feb-13    Aug-13      Feb-14                        Jan-12       Jul-12      Feb-13    Aug-13     Feb-14                        Jan-12      Jul-12     Feb-13 Aug-13 Feb-14
                                                                                                                                                                                            USD-VND                   NDFs
                                                                                                                 USD-THB                       Offshore Fwds
                          USD-TWD                      NDFs               HSBC forecast
                                                                                                                 HSBC forecast                                                              HSBC forecast

Source for all charts on this page: Bloomberg, HSBC

               Global Emerging Markets
               Multi-asset strategy                                                                                                                                                                   abc
               15 January 2013

  PE / EPS growth rate nexus by country                                                                           PE / EPS growth rate nexus by sector

                       40%                                                                                                              27%                                       IT
                                                                               Dubai                                                    24%
                                                                                                                                                                          Materials                                   Healthcare
                                                                                 Kuwait                                                 21%

                                                                                                                   EPS growth (2013e)
                                                                  Brazil                         Chile                                  18%                                                                             Consumer
  EPS growth (2013e)

                       22%                           Korea        South Africa
                                                           Thailand                                                                                                                                                      Staples
                       16%                                                   India          Mex ico                                     15%
                                         Hungary                                                                                                                   Consumer
                                                   China Saudi Arabia                                                                   12%                       Discretionary
                       10%                                            Indonesia
                                                        Turkey      Peru            Colombia
                                                                        Malay sia                                                                 Energy
                        4%        Russia                                                                                                9%
                                                                                                                                                           Financials         Telecoms
                                                              Czech                                                                     6%
                       -2%          Egy pt      Oman
                                                                                                                                        3%                        Utilities
                       -8%                                    Poland
                                             Abu Dhabi
                                                                                                                                              6     8       10       12         14    16         18         20   22     24     26
                              4      6          8        10       12      14           16     18          20
                                                               PE (2012e)                                                                                                       PE (2012e)
  Source: MSCI, I/B/E/S, Thomson Reuters Datastream, HSBC estimates                                               Source: MSCI, I/B/E/S, Thomson Reuters Datastream

MSCI country, region and sector performance (USD, %) – ranked by 1 month performance
Countries/Regions                                   Current level - USD                     1 month            3 months                                 6 months                          12 months                     24 months
Argentina                                                         1335.1                           22.2            22.9                                          22.7                            -41.2                        -62.9
Egypt                                                              665.8                           12.6            -2.6                                           8.3                             51.0                        -23.2
Kenya                                                              902.7                            9.3            15.1                                          21.5                             63.4                          4.4
UAE                                                                235.9                            9.0             8.0                                          18.8                             34.0                          4.1
Chile                                                             2486.3                            7.4             1.5                                           3.0                              7.5                         -8.5
Russia                                                             833.1                            6.8             4.2                                          14.1                              9.1                        -10.0
South Africa                                                       580.9                            6.4            15.5                                          10.6                             14.0                         -1.8
Brazil                                                            2767.5                            6.2             2.3                                           7.0                             -4.8                        -26.0
Thailand                                                           426.5                            6.0             8.5                                          15.2                             33.2                         25.0
Poland                                                             882.7                            5.7             5.8                                          22.5                             32.2                        -10.2
Turkey                                                             652.7                            5.7            20.3                                          32.4                             67.5                          2.7
China                                                               64.3                            5.6            15.7                                          18.0                             21.3                         -5.3
Peru                                                              1611.0                            5.6             5.8                                           8.7                             16.4                         -6.1
Mexico                                                            7348.9                            4.7             6.6                                          17.1                             30.4                         12.1
Malaysia (Em)                                                      489.9                            4.7             2.4                                           6.7                             11.3                          4.0
Philippines                                                        508.4                            4.5            13.4                                          17.0                             47.1                         45.9
Saudi Arabia*                                                     1880.8                            4.0             3.6                                           2.9                              9.1                          4.9
Indonesia                                                          902.3                            3.8             1.3                                           7.0                              2.9                         12.0
Colombia                                                          1355.4                            3.8            10.6                                          12.3                             25.8                         20.7
Korea                                                              431.6                            3.5             6.4                                          15.2                             20.9                          2.3
Qatar                                                              785.7                            3.5             0.9                                           1.6                             -2.9                         -0.8
Hungary                                                            519.1                            3.2            -4.2                                          15.5                             29.6                        -23.2
Czech Republic                                                     416.7                            2.8           -11.4                                           3.8                             -1.3                        -19.5
India                                                              435.0                            0.8             1.4                                          15.1                             21.1                        -18.0
Taiwan                                                             272.4                            0.3             3.0                                           8.9                             12.4                        -10.2
Kuwait                                                             576.3                           -0.3             2.5                                           4.8                              0.3                        -24.0

EMEA                                                               361.4                            6.3              10.0                                        14.6                                17.8                      -6.2
Latin America                                                     3872.2                            5.8               3.9                                         9.3                                 5.1                     -15.4
Emerging Markets                                                  1069.9                            4.5               7.2                                        13.1                                15.4                      -6.7
EM Asia                                                            453.0                            3.5               7.6                                        14.0                                18.7                      -3.5
Developed Markets                                                 1362.2                            3.1               2.7                                        10.8                                14.3                       6.3
GCC Ex Saudi                                                       449.9                            2.5               3.0                                         6.1                                 3.8                     -15.0

EM Sectors                                          Current level - USD                     1 month            3 months                                 6 months                          12 months                     24 months
Materials                                                             519.7                         7.1               7.3                                         9.7                                 5.3                     -23.9
Financials                                                            365.2                         6.4              13.0                                        18.4                                24.6                      -6.1
Health Care                                                           680.8                         6.1               7.1                                        18.9                                33.5                       4.6
Industrials                                                           211.7                         5.9               8.4                                        10.0                                16.4                     -19.3
Energy                                                                711.0                         4.9               2.9                                        10.8                                 0.2                     -15.9
Telecoms                                                              248.9                         4.0               2.9                                         6.4                                11.6                       2.2
Cons Staples                                                          545.5                         2.9               6.7                                        14.7                                24.2                      23.1
Utilities                                                             290.2                         2.3              -0.3                                        -0.4                                 1.0                     -14.4
Cons Discretionary                                                    653.1                         2.2               5.1                                        13.0                                13.4                       1.6
IT                                                                    272.7                         0.7               6.1                                        16.2                                26.0                       6.2
Note: *Saudi Arabia Tadawul index
Source: MSCI, Thomson Reuters Datastream

     Global Emerging Markets
     Multi-asset strategy                                                                                                                                   abc
     15 January 2013

Equities (cont’) - IBES EPS vs. peak and trend
 Chart C107. Emerging markets                                   Chart C108. EM Asia                                            Chart C109. Latin America

 2.6                                                            2.0                                                            2.7
 2.1                                                            1.5
 1.6                                                            1.0                                                            2.1
 1.1                                                            0.5
 0.6                                                            0.0                                                            1.5
       88 90 92 94 96 98 00 02 04 06 08 10 12 14                       88 90 92 94 96 98 00 02 04 06 08 10 12 14                      88 90 92 94 96 98 00 02 04 06 08 10 12 14
           12M trail           Trend            I/B/E/S fcast              12M trail          Trend            I/B/E/S fcast              12M trail          Trend             I/B/E/S fcast

 Chart C110. EMEA                                               Chart C111. Brazil                                             Chart C112. China

 2.0                                                            10.8                                                            1.0
                                                                10.6                                                            0.8
 1.5                                                            10.4
 1.0                                                                                                                            0.4
                                                                 9.8                                                            0.2
                                                                 9.6                                                            0.0
 0.0                                                             9.4                                                           -0.2
       88 90 92 94 96 98 00 02 04 06 08 10 12 14                       88 90 92 94 96 98 00 02 04 06 08 10 12 14                      88 90 92 94 96 98 00 02 04 06 08 10 12 14
            12M trail          Trend            I/B/E/S fcast              12M trail          Trend            I/B/E/S fcast              12M trail          Trend             I/B/E/S fcast

 Chart C113. India                                              Chart C114. Russia                                             Chart C115. Korea

 2.0                                                            3.0                                                            2.0
 1.5                                                                                                                           1.5
 1.0                                                            1.5                                                            1.0
 0.5                                                                                                                           0.5
 0.0                                                            0.0                                                            0.0
       88 90 92 94 96 98 00 02 04 06 08 10 12 14                       88 90 92 94 96 98 00 02 04 06 08 10 12 14                      88 90 92 94 96 98 00 02 04 06 08 10 12 14

           12M trail           Trend            I/B/E/S fcast              12M trail          Trend            I/B/E/S fcast              12M trail          Trend             I/B/E/S fcast

 Chart C116. Taiwan                                             Chart C117. South Africa                                       Chart C118. Mexico

 1.5                                                            2.5                                                            4.0
                                                                2.0                                                            3.5
 1.0                                                                                                                           3.0
 0.5                                                                                                                           2.0
                                                                0.5                                                            1.5
 0.0                                                            0.0                                                            1.0
       88 90 92 94 96 98 00 02 04 06 08 10 12 14                      88 90 92 94 96 98 00 02 04 06 08 10 12 14                       88 90 92 94 96 98 00 02 04 06 08 10 12 14
           12M trail           Trend            I/B/E/S fcast               12M trail         Trend            I/B/E/S fcast               12M trail          Trend            I/B/E/S fcast

 Source: MSCI, I/B/E/S, Thomson Reuters Datastream, HSBC        Source: MSCI, I/B/E/S, Thomson Reuters Datastream, HSBC        Source: MSCI, I/B/E/S, Thomson Reuters Datastream, HSBC

Global Emerging Markets
Multi-asset strategy      abc
15 January 2013


     Global Emerging Markets
     Multi-asset strategy                                                                                      abc
     15 January 2013

Disclosure appendix
Analyst Certification
The following analyst(s), economist(s), and/or strategist(s) who is(are) primarily responsible for this report, certifies(y) that the
opinion(s) on the subject security(ies) or issuer(s) and/or any other views or forecasts expressed herein accurately reflect their
personal view(s) and that no part of their compensation was, is or will be directly or indirectly related to the specific
recommendation(s) or views contained in this research report: Pablo Goldberg, Andre de Silva, John Lomax, Clyde Wardle,
Gordian Kemen, Marjorie Hernandez, Dilip Shahani, Murat Toprak, Di Luo, Victor Fu, Bertrand Delgado, Wietse Nijenhuis,
Alejandro Martinez-Cruz, Paul Mackel, Andre Loes, Frederic Neumann, Murat Ulgen, Simon Williams, Hongbin Qu, Sarah
Leshner, Aaron Gifford, Devendran Mahendran, Philip Wickham, Keith Chan, Raffaele Semonella, Pavel Simacek and
Elizabeth Martins

Brazilian Securities Exchange Commission (CVM) Regulation No. 483
Pursuant to CVM Ruling No. 483 (July 2010), HSBC has obtained from the analyst(s) listed above under "Analyst
Certification" and disclosed (where applicable), the statements set forth in Article 17 and have rendered (where applicable) the
statements set forth in Article 18, under the sections titled "Analyst Certification" and "HSBC & Analyst Disclosures". The
analyst(s) furthermore certifies(y) that the recommendations contained in this report have been prepared independently, even in
relation to HSBC.

Additionally, for purposes of Article 16, the principal analyst responsible for compliance of the mentioned regulation is the
first name in the list under "Analyst Certification" that has local certification, where applicable.

Important disclosures
Equities: Stock ratings and basis for financial analysis
HSBC believes that investors utilise various disciplines and investment horizons when making investment decisions, which
depend largely on individual circumstances such as the investor's existing holdings, risk tolerance and other considerations.
Given these differences, HSBC has two principal aims in its equity research: 1) to identify long-term investment opportunities
based on particular themes or ideas that may affect the future earnings or cash flows of companies on a 12 month time horizon;
and 2) from time to time to identify short-term investment opportunities that are derived from fundamental, quantitative,
technical or event-driven techniques on a 0-3 month time horizon and which may differ from our long-term investment rating.
HSBC has assigned ratings for its long-term investment opportunities as described below.

This report addresses only the long-term investment opportunities of the companies referred to in the report. As and when
HSBC publishes a short-term trading idea the stocks to which these relate are identified on the website at Details of these short-term investment opportunities can be found under the Reports section of this

HSBC believes an investor's decision to buy or sell a stock should depend on individual circumstances such as the investor's
existing holdings and other considerations. Different securities firms use a variety of ratings terms as well as different rating
systems to describe their recommendations. Investors should carefully read the definitions of the ratings used in each research
report. In addition, because research reports contain more complete information concerning the analysts' views, investors
should carefully read the entire research report and should not infer its contents from the rating. In any case, ratings should not
be used or relied on in isolation as investment advice.

Credit: Basis for financial analysis
This report is designed for, and should only be utilised by, institutional investors. Furthermore, HSBC believes an investor's
decision to make an investment should depend on individual circumstances such as the investor's existing holdings and other

   Global Emerging Markets
   Multi-asset strategy                                                                                       abc
   15 January 2013

HSBC believes that investors utilise various disciplines and investment horizons when making investment decisions, which
depend largely on individual circumstances such as the investor's existing holdings, risk tolerance and other considerations.
Given these differences, HSBC has two principal aims in its credit research: 1) to identify long-term investment opportunities
based on particular themes or ideas that may affect the future earnings or cash flows of companies on a six-month time
horizon; and 2) from time to time to identify trade ideas on a time horizon of up to three months, relating to specific
instruments, which are predominantly derived from relative value considerations or driven by events and which may differ
from our long-term credit opinion on an issuer. HSBC has assigned a fundamental recommendation structure only for its long-
term investment opportunities, as described below.

HSBC believes an investor's decision to buy or sell a bond should depend on individual circumstances such as the investor's
existing holdings and other considerations. Different securities firms use a variety of terms as well as different systems to
describe their recommendations. Investors should carefully read the definitions of the recommendations used in each research
report. In addition, because research reports contain more complete information concerning the analysts' views, investors
should carefully read the entire research report and should not infer its contents from the recommendation. In any case,
recommendations should not be used or relied on in isolation as investment advice.

HSBC Global Research is not and does not hold itself out to be a Credit Rating Agency as defined under the Hong Kong
Securities and Futures Ordinance.

Rating definitions for long-term investment opportunities
Stock ratings
HSBC assigns ratings to its stocks in this sector on the following basis:

For each stock we set a required rate of return calculated from the cost of equity for that stock’s domestic or, as appropriate,
regional market established by our strategy team. The price target for a stock represents the value the analyst expects the stock
to reach over our performance horizon. The performance horizon is 12 months. For a stock to be classified as Overweight, the
potential return, which equals the percentage difference between the current share price and the target price, including the
forecast dividend yield when indicated, must exceed the required return by at least 5 percentage points over the next 12 months
(or 10 percentage points for a stock classified as Volatile*). For a stock to be classified as Underweight, the stock must be
expected to underperform its required return by at least 5 percentage points over the next 12 months (or 10 percentage points
for a stock classified as Volatile*). Stocks between these bands are classified as Neutral.

Our ratings are re-calibrated against these bands at the time of any 'material change' (initiation of coverage, change of volatility
status or change in price target). Notwithstanding this, and although ratings are subject to ongoing management review,
expected returns will be permitted to move outside the bands as a result of normal share price fluctuations without necessarily
triggering a rating change.

*A stock will be classified as volatile if its historical volatility has exceeded 40%, if the stock has been listed for less than 12
months (unless it is in an industry or sector where volatility is low) or if the analyst expects significant volatility. However,
stocks which we do not consider volatile may in fact also behave in such a way. Historical volatility is defined as the past
month's average of the daily 365-day moving average volatilities. In order to avoid misleadingly frequent changes in rating,
however, volatility has to move 2.5 percentage points past the 40% benchmark in either direction for a stock's status to change.

Rating distribution for long-term investment opportunities
As of 15 January 2013, the distribution of all ratings published is as follows:
Overweight (Buy)                46%      (29% of these provided with Investment Banking Services)
Neutral (Hold)                     37%      (26% of these provided with Investment Banking Services)
Underweight (Sell)                 17%      (22% of these provided with Investment Banking Services)

     Global Emerging Markets
     Multi-asset strategy                                                                                          abc
     15 January 2013

Definitions for fundamental credit recommendations
Overweight: The credits of the issuer are expected to outperform those of other issuers in the sector over the next six months

Neutral: The credits of the issuer are expected to perform in line with those of other issuers in the sector over the next six

Underweight: The credits of the issuer are expected to underperform those of other issuers in the sector over the next six

Prior to 1 July 2007, HSBC applied a recommendation structure in Europe that ranked euro- and sterling-denominated bonds
and CDS relative to the relevant iBoxx/iTraxx indices over a 3-month horizon.

Distribution of fundamental credit opinions
As of 14 January 2013, the distribution of all credit opinions published is as follows:

                                ___All Covered Companies___       Companies where HSBC has provided Investment Banking in the past 12 months
                                    Count        Percentage                                  Count                                Percentage
Overweight                            171               25                                      84                                           49
Neutral                               365               55                                     151                                           41
Underweight                           137               20                                      46                                           34
Source: HSBC

HSBC & Analyst disclosures
Disclosure checklist
Company                                             Ticker           Recent price              Price Date                         Disclosure
PETROLEOS DE VENEZUELA                                   -                      -                       -                                     11
PETROLEOS MEXICANOS                                      -                      -                       -                      1, 2, 5, 6, 7, 11
Source: HSBC

1      HSBC* has managed or co-managed a public offering of securities for this company within the past 12 months.
2      HSBC expects to receive or intends to seek compensation for investment banking services from this company in the next
       3 months.
3      At the time of publication of this report, HSBC Securities (USA) Inc. is a Market Maker in securities issued by this
4      As of 31 December 2012 HSBC beneficially owned 1% or more of a class of common equity securities of this company.
5      As of 30 November 2012, this company was a client of HSBC or had during the preceding 12 month period been a client
       of and/or paid compensation to HSBC in respect of investment banking services.
6      As of 30 November 2012, this company was a client of HSBC or had during the preceding 12 month period been a client
       of and/or paid compensation to HSBC in respect of non-investment banking securities-related services.
7      As of 30 November 2012, this company was a client of HSBC or had during the preceding 12 month period been a client
       of and/or paid compensation to HSBC in respect of non-securities services.
8      A covering analyst/s has received compensation from this company in the past 12 months.
9      A covering analyst/s or a member of his/her household has a financial interest in the securities of this company, as
       detailed below.
10     A covering analyst/s or a member of his/her household is an officer, director or supervisory board member of this
       company, as detailed below.
11     At the time of publication of this report, HSBC is a non-US Market Maker in securities issued by this company and/or in
       securities in respect of this company

Analysts, economists, and strategists are paid in part by reference to the profitability of HSBC which includes investment
banking revenues.

    Global Emerging Markets
    Multi-asset strategy                                                                                 abc
    15 January 2013

For disclosures in respect of any company mentioned in this report, please see the most recently published report on that
company available at

* HSBC Legal Entities are listed in the Disclaimer below.

Additional disclosures
1    This report is dated as at 15 January 2013.
2    All market data included in this report are dated as at close 14 January 2013, unless otherwise indicated in the report.
3    HSBC has procedures in place to identify and manage any potential conflicts of interest that arise in connection with its
     Research business. HSBC's analysts and its other staff who are involved in the preparation and dissemination of Research
     operate and have a management reporting line independent of HSBC's Investment Banking business. Information Barrier
     procedures are in place between the Investment Banking and Research businesses to ensure that any confidential and/or
     price sensitive information is handled in an appropriate manner.
4    As of 04 January 2013, HSBC owned a significant interest in the debt securities of the following company(ies):

     Global Emerging Markets
     Multi-asset strategy                                                                                                               abc
     15 January 2013

* Legal entities as at 8 August 2012                                                                                   Issuer of report
‘UAE’ HSBC Bank Middle East Limited, Dubai; ‘HK’ The Hongkong and Shanghai Banking Corporation
Limited, Hong Kong; ‘TW’ HSBC Securities (Taiwan) Corporation Limited; 'CA' HSBC Bank Canada,                          HSBC Securities (USA) Inc.
Toronto; HSBC Bank, Paris Branch; HSBC France; ‘DE’ HSBC Trinkaus & Burkhardt AG, Düsseldorf; 000                      452 Fifth Avenue
HSBC Bank (RR), Moscow; ‘IN’ HSBC Securities and Capital Markets (India) Private Limited, Mumbai; ‘JP’                 HSBC Tower
HSBC Securities (Japan) Limited, Tokyo; ‘EG’ HSBC Securities Egypt SAE, Cairo; ‘CN’ HSBC Investment
Bank Asia Limited, Beijing Representative Office; The Hongkong and Shanghai Banking Corporation Limited,               New York, NY 10018, USA
Singapore Branch; The Hongkong and Shanghai Banking Corporation Limited, Seoul Securities Branch; The                  Telephone: +1 212 525 5000
Hongkong and Shanghai Banking Corporation Limited, Seoul Branch; HSBC Securities (South Africa) (Pty)                  Fax: +1 212 525 0356
Ltd, Johannesburg; HSBC Bank plc, London, Madrid, Milan, Stockholm, Tel Aviv; ‘US’ HSBC Securities
(USA) Inc, New York; HSBC Yatirim Menkul Degerler AS, Istanbul; HSBC México, SA, Institución de Banca                  Website:
Múltiple, Grupo Financiero HSBC; HSBC Bank Brasil SA – Banco Múltiplo; HSBC Bank Australia Limited;
HSBC Bank Argentina SA; HSBC Saudi Arabia Limited; The Hongkong and Shanghai Banking Corporation
Limited, New Zealand Branch incorporated in Hong Kong SAR
This material was prepared and is being distributed by HSBC Securities (USA) Inc., ("HSI") a member of the HSBC Group, the NYSE and FINRA. This
material is for the information of clients of HSI and is not for publication to other persons, whether through the press or by other means. It is based on
information from sources, which HSI believes to be reliable but it is not guaranteed as to the accuracy or completeness. Expressions of opinion herein are
subject to change without notice. This material is not, and should not be construed as, an offer or the solicitation of an offer to buy or sell any securities. HSI
and its associated companies may make a market in, or may have been a manager or a co-manager of the most recent public offering of, any securities of the
recommended issuer herein. HSI, its associated companies and/or their directors and employees may own the securities, options or other financial instruments
of any of the issuers discussed herein and may sell them to or buy them from customers on a principal basis. In Singapore, this publication is distributed by The
Hongkong and Shanghai Banking Corporation Limited, Singapore Branch for the general information of institutional investors or other persons specified in
Sections 274 and 304 of the Securities and Futures Act (Chapter 289) (“SFA”) and accredited investors and other persons in accordance with the conditions
specified in Sections 275 and 305 of the SFA. This publication is not a prospectus as defined in the SFA. It may not be further distributed in whole or in part
for any purpose. The Hongkong and Shanghai Banking Corporation Limited Singapore Branch is regulated by the Monetary Authority of Singapore. Recipients
in Singapore should contact a "Hongkong and Shanghai Banking Corporation Limited, Singapore Branch" representative in respect of any matters arising from,
or in connection with this report. In Hong Kong, this document has been distributed by The Hongkong and Shanghai Banking Corporation Limited in the
conduct of its Hong Kong regulated business for the information of its institutional and professional customers; it is not intended for and should not be
distributed to retail customers in Hong Kong. The Hongkong and Shanghai Banking Corporation Limited makes no representations that the products or services
mentioned in this document are available to persons in Hong Kong or are necessarily suitable for any particular person or appropriate in accordance with local
law. All inquiries by such recipients must be directed to The Hongkong and Shanghai Banking Corporation Limited. In Korea, this publication is distributed by
either The Hongkong and Shanghai Banking Corporation Limited, Seoul Securities Branch ("HBAP SLS") or The Hongkong and Shanghai Banking
Corporation Limited, Seoul Branch ("HBAP SEL") for the general information of professional investors specified in Article 9 of the Financial Investment
Services and Capital Markets Act (“FSCMA”). This publication is not a prospectus as defined in the FSCMA. It may not be further distributed in whole or in
part for any purpose. Both HBAP SLS and HBAP SEL are regulated by the Financial Services Commission and the Financial Supervisory Service of Korea. In
the UK this report may only be distributed to persons of a kind described in Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion)
Order 2001. The protections afforded by the UK regulatory regime are available only to those dealing with a representative of HSBC Bank plc in the UK.
HSBC México, S.A., Institución de Banca Múltiple, Grupo Financiero HSBC is authorized and regulated by Secretaría de Hacienda y Crédito Público and
Comisión Nacional Bancaria y de Valores (CNBV). HSBC Bank (Panama) S.A. is regulated by Superintendencia de Bancos de Panama. Banco HSBC
Honduras S.A. is regulated by Comisión Nacional de Bancos y Seguros (CNBS). Banco HSBC Salvadoreño, S.A. is regulated by Superintendencia del Sistema
Financiero (SSF). HSBC Colombia S.A. is regulated by Superintendencia Financiera de Colombia. Banco HSBC Costa Rica S.A. is supervised by
Superintendencia General de Entidades Financieras (SUGEF). Banistmo Nicaragua, S.A. is authorized and regulated by Superintendencia de Bancos y de Otras
Instituciones Financieras (SIBOIF).
In Australia, this publication has been distributed by The Hongkong and Shanghai Banking Corporation Limited (ABN 65 117 925 970, AFSL 301737) for the
general information of its “wholesale” customers (as defined in the Corporations Act 2001). Where distributed to retail customers, this research is distributed
by HSBC Bank Australia Limited (AFSL No. 232595). These respective entities make no representations that the products or services mentioned in this
document are available to persons in Australia or are necessarily suitable for any particular person or appropriate in accordance with local law. No consideration
has been given to the particular investment objectives, financial situation or particular needs of any recipient. This publication is distributed in New Zealand by
The Hongkong and Shanghai Banking Corporation Limited, New Zealand Branch incorporated in Hong Kong SAR.
In Canada, this document has been distributed by HSBC Bank Canada and/or its affiliates. Where this document contains market updates/overviews, or similar
materials (collectively deemed “Commentary” in Canada although other affiliate jurisdictions may term “Commentary” as either “macro-research” or
“research”), the Commentary is not an offer to sell, or a solicitation of an offer to sell or subscribe for, any financial product or instrument (including, without
limitation, any currencies, securities, commodities or other financial instruments).
© Copyright 2013, HSBC Securities (USA) Inc, 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
Securities (USA) Inc. MICA (P) 038/04/2012, MICA (P) 063/04/2012 and MICA (P) 206/01/2012



GEMs Research Team
Pablo Goldberg
Head of Global Emerging Markets Research
+1 212 525 8729
Bertrand Delgado
EM Strategist
+1 212 525 0745
EM Fixed Income Research                                       Economics
Americas                                                       Latin America
Gordian Kemen                                                  Andre Loes
Chief Strategist, Latin America                                Chief Economist, Latin America
+1 212 525 2593             +55 11 3371 8184
Victor Fu                                                      Javier Finkman
EM Quantitative Strategist                                     Chief Economist, South America ex-Brazil
+1 212 525 4219                   +54 11 4344 8144
Alejandro Mártinez-Cruz                                        Sergio Martin
+52 55 5721 2380           Chief Economist, Mexico
                                                               +52 55 5721 2164
André de Silva, CFA                                            Ramiro D Blazquez
Head of Rates Research, Asia-Pacific                           +54 11 4348 5759
+852 2822 2217
                                                               Lorena Dominguez
Pin-ru Tan                                                     +52 55 5721 2172
+852 2822 4665
                                                               Constantin Jancso
EMEA                                                           +55 11 3371-8183
Di Luo
+44 20 7991 6753                          Jorge Morgenstern
                                                               +54 11 4130 9229
EM Currency Strategy
                                                               Claudia Navarrete
Asia                                                           +52 55 5721 2422
Perry Kojodjojo
                                                               Emerging Europe, Middle East and Africa
+852 2996 6568
                                                               Murat Ulgen
Paul Mackel                                                    Chief Economist, Central & Eastern Europe, and sub-Saharan
Head of Asia FX Strategy                                       Africa
+852 2996 6565                    + 44 20 7991 6782

Dominic Bunning                                                Simon Williams
+852 2822 1672                   Chief Economist, Middle East and North Africa
                                                               +971 4 507 7614
Ju Wang
+852 2822 4340                         Liz Martins
                                                               +971 4 423 6928
Clyde Wardle                                                   Alexander Morozov
+1 212 525 3345                   +7 495 783 8855

Marjorie Hernandez                                             Melis Metiner
+1 212 525 4109              +90 212 376 4618

CEEMEA                                                         Agata Urbanska
Murat Toprak                                                   +44 20 7992 2774
+44 20 7991 5415
                                                               Asia Pacific
EM Equity Strategy                                             Qu Hongbin
                                                               Managing Director, Co-head Asian Economics Research and
Alexandre Gartner                                              Chief Economist Greater China
Head of Equity Research, Brazil                                +852 2822 2025
+55 11 3371 8181
                                                               Frederic Neumann
Herald Van Der Linde                                           Managing Director, Co-head Asian Economics Research
Deputy of Equity Research and Head of Equity Strategy, Asia-   +852 2822 4556
+852 2996 6575             Leif Eskesen
                                                               Chief Economist, India & ASEAN
Devendra Joshi                                                 +65 6658 8962
+852 2996 6592
                                                               Paul Bloxham
John Lomax                                                     Chief Economist, Australia and New Zealand
+44 20 7992 3712                      +61 2925 52635
Wietse Nijenhuis                                               Donna Kwok
+44 20 7992 3680                +852 2996 6621
                                                               Trinh Nguyen
                                                               +852 2996 6975
                                                               Ronald Man
                                                               +852 2996 6743
                 Pablo Goldberg                                                                          Paul Mackel
                 Global Head of Emerging Markets Research                                                Head of Asian Currency Research
                 HSBC Securities (USA) Inc                                                               The Hongkong and Shanghai Banking Corporation Limited
                 +1 212 525 8729                                                                         +852 2966 6565

                 Bertrand Delgado                                                                        Murat Toprak
                 Strategist, Emerging Markets                                                            FX Strategist, EMEA
                 HSBC Securities (USA) Inc                                                               HSBC Bank plc
                 +1 212 525 0745                                                                         +44 20 7991 5415

                 Gordian Kemen                                                                           Clyde Wardle
                 Chief Strategist, LatAm Fixed Income                                                    Senior FX Strategist, Emerging Markets
                 HSBC Securities (USA) Inc                                                               HSBC Securities (USA) Inc
                 +1 212 525 2593                                                                         +1 212 525 3345

                 Alejandro Martinez-Cruz                                                                 Marjorie Hernandez
                 Fixed Income Strategist, LatAm                                                          FX Strategist, LatAm
                 HSBC México, SA, Institución de Banca Múltiple                                          HSBC Securities (USA) Inc
                 +52 55 5721 2380                                                                        +1 212 525 4109

                 Di Luo, CFA                                                                             Hongbin Qu
                 Fixed Income Strategist, EMEA                                                           Chief China Economist and Co-head, Asian Economics Research
                 HSBC Bank plc                                                                           The Hongkong and Shanghai Banking Corporation Limited
                 +44 20 7991 6753                                                                        +852 2822 2025

                 Dilip Shahani                                                                           Frederic Neumann
                 Head of Global Research, Asia-Pacific                                                   Co-Head of Asian Economic Research
                 The Hongkong and Shanghai Banking Corporation Limited                                   The Hongkong and Shanghai Banking Corporation Limited
                 +852 2822 4520                                                                          +852 2822 4556

                 Andre de Silva                                                                          Andre Loes
                 Deputy Head, Global Fixed income Strategy                                               Chief Economist, LatAm
                 The Hongkong and Shanghai Banking Corporation Limited                                   HSBC Bank Brasil SA
                 +852 2822 2217                                                                          +55 11 3371 8184

                 Sarah Leshner                                                                           Murat Ulgen
                 LatAm Corporate Credit Analyst                                                          Chief Economist, Central & Eastern Europe and Sub-Saharan Africa
                 HSBC Securities (USA) Inc                                                               HSBC Bank plc
                 +1 212 525 3132                                                                         +44 20 7991 6782

                 Victor Fu                                                                               Simon Williams
                 EM Quantitative Strategist                                                              Chief Economist, Middle East and North Africa
                 HSBC Securities (USA) Inc                                                               HSBC Bank Middle East Limited
                 +1 212 525 4219                                                                         +971 4 423 6925

                 John Lomax*                                                                             Aaron Gifford
                 GEMs Equity Strategist                                                                  EM Research Analyst
                 HSBC Bank plc                                                                           HSBC Securities (USA) Inc
                 +44 20 7992 3712                                                                        +1 212 525 3277

                 Wietse Nijenhuis*
                 GEMs Equity Strategist
                 HSBC Bank plc
                 +44 20 7992 3680

*Employed by a non-US affiliate of HSBC Securities (USA) Inc, and is not registered/qualified pursuant to FINRA regulations.

                                                                  Issuer of report: HSBC Securities (USA) Inc

Shared By:
Tags: HSBC
Description: 2013 outlook: Loosen your seatbelts