EMERGING_MARKETS_STRATEGIST：2013_OUTLOOK：LOOSEN_YOUR_SEATBELTS-2013-01-16.ppt

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 ows 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 ination-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 certications 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 hsbcs 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. 1,2,global emerging markets multi-asset strategy 15 january 2013,this page has been left blank intentionally,abc,4,1,42,42,4,42,5,43,14,44,17,44,23,19,48,47,48,25,51,26,26,27,54,54,33,28,29,30,32,34,35,34,60,60,60,38,62,62,64,38,39,65,40,40,global emerging markets multi-asset strategy 15 january 2013 contents emerging markets in 2013 loosen your seatbelts 2013: another year of strong returns expected our investment strategy: interplay of risk and growth more two-way ratings dynamics in 2013 flows to em to stay strong but rotating toward equities total return expectations 2013 asset class outlooks exd still offering good risk-,abc em corporates: value remains em corporates offer attractive spread to sovereigns balance sheet strength varies significantly across regions issuance should remain strong but below record high secondary trading volumes increasing importance of the financials sector 2013 economic outlooks asia in 2013 back in orbit, china picks up,reward how much tighter? total return scenarios for 2013 exd superior sharpe ratio supply-and-demand dynamics strategies and top trades local rates: decent carry and some alpha outlook and drivers for 2013 risks and scenarios strategies to begin the year supply in the local markets bond supply summary table em fx: stay long but selectively so fewer pitfalls in sight asia: improving, but selectively em equities: we expect a strong year gems equity are cheap msci em returns between 13-28% in 2013e em consumption should remain the main catalyst strategies to begin the year,24 24 28,growth: local, not global inflation: on the rise policy: responding to inflation latin america in 2013 runners versus walkers growth: a shrinking gap inflation: a mixed picture policy: limited rates action ceemea in 2013 no obvious drivers of growth growth: monetary stimulus may offer some help inflation: abating pressures policy: more monetary easing middle east and north africa in 2013 the haves and have-nots growth: oil or nothing inflation: risks to the upside policy: fx unchanged, fiscal tightening for oil importers emerging markets elections calendar multi-asset strategy summary disclosure appendix disclaimer,48 50 52 52 52 56 56 58 58 59 92 96,3,global emerging markets multi-asset strategy 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,abc,2013: another year of strong returns expected it is time to loosen your seatbelts and further increase exposure to the emerging markets. we retain our constructive bias going into 2013 (see emerging markets strategist: lets risk again, 14 september 2012), and we believe that 2013 could mark another year of strong returns. our expectations of global appetite for risk and em economic growth suggest that while markets are unlikely to completely shrug off the “risk-on/risk- off” dynamics of the past, these will be less sharp than in the past 18 months, thus encouraging risk-taking. the risks confronting the global economy have not disappeared; yet, things do not have to be perfect for em economies and assets to perform well once again. just enough of a reduction of the most significant tail risks is what is necessary for em to have another year of strong performance.,the combination of an expected “calmer” external front and accelerated economic growth should lead to positive credit rating momentum and attract inflows into em, despite valuations being more stretched than at the beginning of 2012. in a less-risky environment, the force of quantitative easing (qe) should be felt in an even stronger fashion than before, especially for the riskier portion of the em asset class: fx and equities. em equities are the only asset class, in our view, with the option to produce higher returns in 2013 than last year. with global allocations to equities at a low secular point, this asset class finds itself in a very good technical position for a sustained rally. further revaluing of em equities does not need a significant improvement in growth expectations but rather a reduction of perceived risks. the upside for bonds is more limited than in 2012, yet positive demand/supply dynamics,pablo goldberg global head, em research hsbc securities (usa) inc. +1 212 525 8729 bertrand delgado em strategist hsbc securities (usa) inc. +1 212 525 0745 aaron gifford em research analyst hsbc securities (usa) inc. +1 212 525 3277 ,appear likely to drive positive returns. em hard-currency bonds have matured and became a 4,riskappetite,global emerging markets multi-asset strategy 15 january 2013 destination for not only those searching for yield but also for safety. contained global risks translate into lower em fx volatility and encourage carry trades into em local markets. we might see foreign participation resume an upward trend. our investment strategy: interplay of risk and growth since 2011, we have been basing our cross- asset allocation selection process on our expectations for two variables: 1. appetite for risk and 2. economic growth prospects. chart a1 shows how we rank the different assets according to these two parameters and our view on how sensitive each group is to changes in these conditions (steeper vs flatter arrows). this selection process was extremely effective in picking winners and losers among the em asset classes during the last two years of alternating risk on-risk off dynamics. chart a2 shows the performance of high-grade and high- yield hard-currency bonds, short-term local rates, usd-denominated returns of local-currency bonds, em fx, and em equities during different periods of risk-on/risk-off (eg second half of 2011 a potential greek exit from the eurozone, and chart a1. last year was about risk-on/ risk-off growth,the ltro-driven rally of 1q12), the risk-off period brought by concerns about spain (2q12), the relief rally that followed european central bank president mario draghis “whatever it takes to save the euro” phrase on 26 july 2012, and the market uncertainties that prevailed around the us presidential elections. given the dominant role of external over domestic factors, our asset allocation preference in emerging markets had been until late 3q12 to maximize risk-adjusted returns. note how volatile em equities and currencies have been during the past quarters and their strong performance when adjusted by volatility as evidenced by hard-currency bonds (especially the high-grade sector) and front-end local rates. these were our preferred asset classes in 2012. following recent actions to reduce tail risks, we have adopted a more-risky stance in our asset allocation recommendation, aiming to maximize overall performance. we have been of the view (see emerging markets strategist: lets risk again, 14 september 2012) that policymakers actions in the us and europe have reduced the chances of a financial calamity (and a subsequent strong risk-aversion shock) and together with the stimulus in china, put a floor chart a2. various em asset classes: total return,abc,+ -,+,-,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 5,riskappetite,global emerging markets multi-asset strategy 15 january 2013 8nder global growth. in terms of our asset selection process, these developments are cutting the bottom and right areas of our chart a3, suggesting a more risk-on stance: the center of gravity for returns moving toward less- conservative investments. we recommend investors: add overall exposure to emerging markets. cut longstanding underweight positions in em equities (see page 38). stay invested in em hard currency debt due to its superior sharpe ratio (see page 24). extend duration in some key local markets (see page 28). increase exposure to inflation-linked bonds (see page 31). remain long em fx, although being selective is recommended (see page 34).,reduced tail risks are key the macroeconomic backdrop confronting emerging markets this year is likely to be very similar to that of 2012, we believe. economic growth in developed markets should remain subpar, to say the least. we forecast an expansion of 0.9% for developed markets vs 1.2% for 2012. a heavy debt load should keep developed markets consumers on the defensive, while governments will remain embarked on a process of fiscal consolidation that still has many years to run its course (see global economics quarterly, the great rotation, by stephen king, 20 december 20120). however, the outlook for investing in the emerging markets has improved for several reasons. low growth in developed markets means that core central banks will stay in full-reflation mode, yet the money printed there will find its way to emerging markets (see rolling in the money: tracking the shift in flows in global bond,abc,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 growth,+,+,-,china,stimulus fiscal cliff/debt ceiling resolution? - omt / qe3 source: hsbc 6,months.,global emerging markets multi-asset strategy 15 january 2013 and companies, while credit in the south continues to expand at a good pace. second, policymakers resolution to prevent a repetition of the great financial crisis has been tested and proven by markets. the result is likely to continue to be one of action (by the markets) and reaction (by authorities), but in a way in which risks will remain contained. debt dynamics in the developed markets are such that the tension between the need for fiscal consolidation and the need for growth will persist for some time, generating gyrations that appear,likely to affect markets from time to time. in this sense, monetary authorities are somewhat setting a ceiling both for rates in the us and in europe, reducing tail risks and encouraging risk taking. in a less risky environment, the force of liquidity injections due to qe should be felt in an even stronger fashion than before, especially for the more risky portion of the em asset class: fx and equities. we see ust 10-year potentially touching 2.2% in q1, but only to come back closer to 1.5% by year-end.,abc,table a1. global risks update _ us _ _eurozone _ latest developments,the congressional resolution on the “fiscal cliff” on 1 january prevented an economic disaster, but it did little to solve the nations long-term fiscal problems. consequently, contentious negotiations between the two political parties in washington over longer-run problems are likely to continue for the next several - mid-feb/early march: treasurys debt ceiling approval deadline - march 1: automatic across-the-board spending cuts (“sequestration”) kick in - march 27: expiration of the current continuing budget resolution,in 2012, eurozone leaders set out the beginnings of a roadmap for integration of economic and monetary union, a widely feared greek exit from the eurozone was avoided, and most important, european central bank head mario draghi promised to do “whatever it takes” to preserve the euro, a commitment that has seen peripheral 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. calendar - february 24-25: italian parliamentary elections - june 27 28: european council meeting where the next set of decisions on the 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 sequestration deadline on 1 march may be highly unlikely, as the two parties are too far apart on too many issues. a series of start-and-stop negotiations could chip away at underlying problems without making much headway on a substantive solution to long-term fiscal imbalances.,partly because of the german elections in september, when an angela merkel-led “grand coalition” is considered likely to be elected, 2013 is set to be a year when the 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. deleveraging, austerity, and rising unemployment mean growth will depend on external demand, particularly in the periphery. an upturn in the world trade cycle 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 the scheduled sequestration starting 1 march. this would involve usd86bn in spending cuts compressed into the remaining seven months of the fiscal year. the cuts would amount to roughly 1.0% of gdp and would come on top of the roughly usd100bn increase in the payroll tax put in place on 1 january. ratings downgrade: the major credit rating agencies have the us sovereign rating on negative wa