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25 May 2011 Emerging Markets

Cross-Asset Strategy abc


Global Research

Emerging Markets Strategist


Better than it seems
 A not-too-hot not-too-cold global economy supports
investments in EM

 Concerns shift from inflation to growth in EM

 We recommend staying long hard-currency bonds and


extending duration in local markets, and favoring EM Asian FX
and secular growth stories in equity

We remain positive on EM, despite global headwinds. Investors show concern about
the impact on EM of a deteriorating global environment. We disagree: a not-too-hot not-
too-cold global economic backdrop supports investments in EM. Low US Treasury yields
should remain supportive to carry trades due to a softer US economy and in spite of the
second round of quantitative easing (QE2) coming to an end on 30 June.

We see concerns shifting from inflation to growth in EM, which has important
implications in terms of asset allocation. Weaker growth is not good for equities, while an
easing of inflation pressures provides a solid base for fixed income. EM currencies might be
trapped in the middle of USD gyrations. Thus, we maintain a preference for emerging markets
hard-currency debt, and we call for a more cautious approach in FX and equities.
EM Fixed Income, Equity,
and FX Strategy Teams Inflation concerns are easing because of a retracement in commodity prices, more-
aggressive interest-rate tightening, a reweighting toward more-conventional monetary
Pablo Goldberg policy, and weaker economic data.
Global Head of EM Research
HSBC Securities (USA) Inc.
We extend our quantitative analysis offering in EM. We introduce a new rich/cheap
+1 212 525 8729
pablo.a.goldberg@us.hsbc.com external debt model to value positioning across the different country curves. Also, our EM
Central Bank Monitor now is available on Bloomberg at HSER.
View HSBC Global Research at:
http://www.research.hsbc.com  Local markets: Depricing of interest rate hikes is almost done; we recommend long
duration in Mexico, South Africa, and Indonesia.
Issuer of report: HSBC Securities
(USA) Inc.  External debt: We remain fully invested, as we see room for 15-25bps spread
tightening; we are overweight high-yielders Argentina, Venezuela, and Ukraine.
Disclaimer &
Disclosures  FX: We favour IDR, MYR, CNH, and SGD in Asia; BRL, MXN, and COP in Latam;
This report must be and RON in EMEA.
read with the
disclosures and the  Equities: These are experiencing a drag from lower growth expectations, but benefiting
analyst certifications in from easing inflations fears; we recommend good secular growth stories: Brazil,
the Disclosure China, Indonesia, Malaysia, and Turkey, over Korea, Mexico, Poland, and Thailand.
appendix, and with the
Disclaimer, which
forms part of it
Emerging Markets Strategist
Cross-Asset Strategy abc
25 May 2011

Contents

Better than it seems 3

Local markets 14

External debt 16

FX 18

Equity 20

EM Flows Watcher 27
Macroeconomic forecasts 28
EM FX forecasts 29
EM Central Bank Watcher 30
Surprise Indices 31
Trade ideas 32

Tables and charts 33


Local markets 33
EM Inflation linkers and break-evens 36
External debt Rich/Cheap Model 38
External debt 40
External yield curves 42
External debt bonds, CDS, and basis 43
FX: Spot, HSBC forecasts, and forward curves 45
Equities 47

Disclosure appendix 49

Disclaimer 51

2
Emerging Markets Strategist
Cross-Asset Strategy abc
25 May 2011

Better than it seems


 A not-too-hot not-too-cold global economy supports investments
in EM
 Concerns shift from inflation to growth in EM
 We recommend staying long hard-currency bonds and extending
duration in local markets, and favoring EM Asian FX and secular
growth stories in equity

Staying positive We disagree. We believe those factors provide Pablo Goldberg


Global Head, EM Research
underlying support for EM in the short term. HSBC Securities (USA) Inc.
Despite decreasing volatility of EM assets, +1 212 525 8729
Indeed, we see a sort of repetition of the low-
investors worldwide appear to be uneasy, pablo.a.goldberg@us.hsbc.com
grade Goldilocks scenario for EM presented
keeping cash on the sidelines. “Markets are
during a good part of 2010. This scenario is
doing too well, given the number of shocks out
formed by three elements:
there; we must be due for a correction” is a typical
phrase that we hear a lot lately. Going over the  Ample global liquidity.
laundry list of headwinds facing the market, one
 The belief that such liquidity will remain in
can understand why some investors feel a sense of
spite of the end of QE2.
impending crisis: deteriorating growth
expectations in the developed world, large fiscal  Strong fundamentals in EM.
deficits in the US and Japan, weakening debt
Putting it more simply, a lot of money is
dynamics in the Eurozone periphery, and inflation
floating around and it has to go somewhere;
pressures in emerging markets.
for now, this place continues to be the
Chart A1: Decreasing volatility of EM fixed income and emerging markets. Strong balance sheets in EM
equity
continue to attract interest, and while risks from
30% 150%
abroad lead to some volatility, they do not derail
25% EM EXD 125% the appetite for the asset class.
EM Equities
20% 100%
True, this time around, EM might not see the
15% 75%
benefit of falling yields in the US. Nonetheless,
10% 50% we believe growth in the US is not strong enough
5% 25% to push rates significantly higher either, and we
consider a double-dip unlikely. Europe is a
0% 0%
Jun-07 Mar-08 Dec-08 Sep-09 Jun-10 Mar-11 concern, but we do not see an involuntary and
disruptive default as a likely outcome.
Source: HSBC

3
Emerging Markets Strategist
Cross-Asset Strategy abc
25 May 2011

In our inaugural edition of Emerging Markets touching 3.75% in January, 10yr US Treasury
Strategist: Turning more positive on EM risk yields dropped to about 3.13% at the time of this
(1 April 2011), we forecast an end of the reflow of writing. We disagree with those who believe there
funds out of EM and into the developed markets. is a bubble in EM valuations; rather, we see a very
Since then, we have seen a strong recovery of generous pricing of risk worldwide brought about
inflows into EM-dedicated funds, both equity and by very low funding rates in the developed
fixed income (see page 27). This reflow was the markets.
result of better growth prospects for the US and
HSBC Economics believes the level of US
Germany, and increasing inflation concerns in EM.
Treasury yields depends on economic data, and
As the growth outlook in developed markets
that the end of QE2 should not, per se, lead to
softened and EM central banks increased their focus
higher yields in the US. Chart A2 shows that the
on inflation, we foresaw the flow of funds favoring
announcement of QE2 marked the lows of US
EM one more time. We believe that these dynamics
Treasury rates, which moved higher in
are likely to remain in place.
anticipation of higher economic growth. Because
Different from the situation in 2010, we are we expect that economic activity will stay
witnessing a rotation of themes that dominated subdued and core inflation will be relatively tame,
investors’ perception of EM year-to-date: the we anticipate that yields will stay range-bound
inflation theme is being deflated, and concerns and that the US Federal Reserve will stick with an
are shifting toward weakening economic activity. accommodative policy into 2012. So far,
This rotation has important consequences in terms of economic data support our assessment, which in
asset allocation. Softer growth expectations are not turn is positive for EM fixed income and FX.
good for equities, while an easing of inflation
pressures provide a solid base for fixed income. EM Chart A2: UST10y yields driven by expectations on growth (%)
currencies might be trapped in the middle of USD 4.0 3.4
3.8
gyrations; thus, we maintain a preference for QE2 announcement 3.2
3.6
emerging markets hard-currency debt, and we call 3.4 3.0

for selectiveness in FX. 3.2


2.8
3.0
2.6
Valuations have corrected in many of these 2.8
2.6 2.4
asset classes, and while our long-term view of 2.4
2.2
EM remains bullish, we maintain that a more 2.2 UST10yr Bloomberg median 2011 GDP Fcst
2.0 2.0
selective approach is warranted in the short
May-10 Jul-10 Sep-10 Nov-10 Jan-11 Mar-11
term. In most places, value has been squeezed;
Source: Bloomberg
thus, long EM positions should be seen more as a
carry play than a capital appreciation story. This is The most challenging headwind to inflows into
what our low-grade Goldilocks scenario is about. EM is a potential correction in risk-free rates, in
It’s the economy, stupid! our view. We got a clear glimpse of that during 4Q
2010. Therefore, we expect that things will likely
We expect global interest rates to remain low
change when developed-market yield curves and
and to continue to support crossover flows into
policy rates begin a consistent process of
EM. What brings money into EM is not only
normalization, but we are not there yet. Furthermore,
strong fundamentals but also the low level of
yields in the developed world. After almost

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Emerging Markets Strategist
Cross-Asset Strategy abc
25 May 2011

we do not see the end of QE2, scheduled for 30 June We see these factors behind the deflation of
2011, as the day of reckoning. inflation fears: a retracement in commodity prices
and its current stability, an acceleration in the pace of
Deflating inflation fears
policy tightening in EM, a shift toward more
The structural case in favor of EM remains conventional rather than unconventional measures,
intact, we believe. Ultimately, the value of the and incipient signs of economic deceleration.
emerging markets comes from an absolute
To gauge the deflationary impact provided by the
structural improvement in their fundamentals, and
changes in the international prices of food and
also its relative performance against developed
energy s from the end of the first quarter, we ran a
markets. These movements are so profound that
regression on each country’s headline inflation
they are shaping geopolitics in a significant way.
rate against the domestic output gap, currency
Who would have thought that EM was going to be
changes, and international prices for food and
in such position as to claim its right to chair the
energy. We then used the resulting estimates to
International Monetary Fund, an institution that
simulate the relief in inflation pressure provided
made its name by advising EM countries on how
by the occurred change in commodity prices since
to run their economies.
the end of Q1 – a 9.5% drop in WTI crude oil
However, the short-term outlook for growth and prices and a consolidation in agricultural prices.
inflation is likely to dominate asset and sector Though we acknowledge important buffers
allocation. Inflation concerns about EM are easing, between domestic and international prices –
as shown by the HSBC PMI indices for April that subsidies, taxes, trade restrictions – the analysis
plot a continuation of the deceleration of inflation gives us an approximation of how changes in
expectations that started in March. Our flash China commodity prices could have affected inflation
PMI for May shows further softening in economic and expectations.
activity and price pressures.

Chart A3: HSBC Manufacturing PMIs show easing inflation expectations


Output prices Input prices
Apr 11 Mar 11 Feb 11 Jan 11 Apr 11 Mar 11 Feb 11 Jan 11
Brazil 53.4 55.1 53.4 50.7 57.5 58.3 57.5 54.3
Russia 58.8 60.8 59.3 61.6 67.3 71.1 76.4 78.0
India 56.2 59.7 56.3 56.7 66.3 68.7 68.4 66.1
China 55.2 56.1 60.7 58.8 62.4 67.5 74.6 71.0
Czech Republic 57.5 57.5 55.7 56.0 69.4 73.9 73.3 70.4
Israel 81.3 81.0 75.0 54.3
Poland 59.2 60.8 60.7 58.9 74.9 75.1 76.4 78.0
Turkey 57.6 60.6 64.1 62.0 67.9 77.4 79.5 79.1
South Africa
Singapore 53.1 54.0 54.7 52.6
South Korea 52.5 53.0 53.9 54.0 59.3 61.7 66.2 65.2
Taiwan 57.0 60.8 60.6 56.0 77.1 82.4 87.1 84.8
Notes: above 50 + rising above 50 + falling below 50 + falling below 50 + rising
same above 50 Same below 50
Source: Markit, HSBC

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Emerging Markets Strategist
Cross-Asset Strategy abc
25 May 2011

Table A1: Deflationary impact of commodity contraction (bps) Chart A4: Monetary policy is being tightened in EM

Brazil (26) 100 = (2007-09) peak


100
Chile (26)
Colombia (16) 90
Mexico (13) 80
Peru (11)
70
Czech Republic (11)
Hungary 10 60
Poland (15) 50 Latam
Russia (54)
40 Emea
Turkey (39)
China (41) 30 EM Asia
India (78) Developed
20
Indonesia (48)
Malaysia (17) 10
Philippines (39) Jul-07 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11
S. Korea (17)
Singapore (18) Source: Bloomberg, HSBC
S. Africa (43)
Source: HSBC
while five – Malaysia, Poland, Russia, Israel, and
Table A1 shows that other things being equal, the Chile – surprised the market with stronger hikes
recent consolidation in food and the sell-off in than expected adjustments (see Chart A5).
crude had a deflationary effect between 25-50bps Also important, the weighting given to
across EM. Notable exceptions are Russia, India, conventional monetary tightening has increased
Indonesia, South Africa, and China, where the vis-à-vis unconventional policy. While China and
impact appears to be the highest. Brazil continued with a mixed approach of raising
Grabbing the bull by the horns rates and reserve requirement ratios, Russia has
only tightened conventionally this time, having
EM central banks have finally turned more
done quantitative tightening (QT) in the past, and
hawkish; a key move to contain inflation
so did all those central banks that increased rates
expectations. Chart A5 shows how Latin
in the May round.
American central banks over the past three
months have increased the pace of interest rate Why this change? We see two reasons behind a
hikes, Asia kept hiking relentlessness, and now reweighting of the strategy that central banks
EMEA is joining the club. Note that only two followed during recent quarters. First, inflation
central banks disappointed market expectations expectations appear to have been less sensitive to
for a an interest rate hike during April and May, quantitative tightening than to pure interest-rate

Chart A5: EM central banks become more hawkish than expectations; increases vs. survey averages
bps bps
bps
30 30
20
20 15 20
10 10
5 10
0
0
0
-10 -5
-10 -10
-20
-15
-20
-30 -20
-40 -25 -30
Jun-10 Sep-10 Dec-10 Mar-11 Jun-10 Sep-10 Dec-10 Mar-11 Jun-10 Sep-10 Dec-10 Mar-11

BRL CLP MXN COP PEN KRW IND THB PHP TWD MYR TRY ZAR CZK HUF PLN ILS

Source: HSBC

6
Emerging Markets Strategist
Cross-Asset Strategy abc
25 May 2011

Chart A6: Quantitative tightening is yet to significantly reduce the pace of credit creation (3mo. growth rates)
7% 50% 8% 14%
Brazil M2 Credit Auto (2y) Turkey M2 Credit (2y)
6% 40% 7% 12%
30% 6% 10%
5%
20% 5% 8%
4%
10% 4% 6%
3%
0% 3% 4%
2%
-10% 2% 2%
1% -20% 1% 0%

0% -30% 0% -2%
Jan-09 May-09 Sep-09 Jan-10 May-10 Sep-10 Jan-11 Jan-09 May-09 Sep-09 Jan-10 May-10 Sep-10 Jan-11

Source: HSBC

increases. Second, there is little evidence so far domestic tightening, particularly if accelerated,
that quantitative tightening has achieved its could become a drag on economic activity. To be
objective of decelerating the pace of credit clear, we do not expect a hard landing in EM, but
creation. HSBC Economics senses that a temporary
slowdown is increasingly likely.
Chart A6 shows the cases of Brazil and Turkey. In
the latter, we see no deceleration in the pace of HSBC’s co-chief economist on Asia, Frederic
credit creation, while in Brazil we see it only for Neumann, has been warning about a deterioration
auto lending, a segment that was the target of of the new orders-to-inventory ratios in Asia,
specific administrative measures. while the Brazilian central bank’s expectations
survey is showing a significant downward
Shifting worries from inflation
revision to growth. Chart A7 shows that we might
to growth see a repetition of what happened in the third
We expect a migration of worries from quarter of 2010, when inventories rose too fast,
inflation into growth. Though these are incipient, compared to economic activity in the developed
the most recent data show that while inflation world, and a temporary slowdown in Asia
expectations are decelerating, those on growth are followed as a result.
as well. Exports from EM countries might be hurt
by deceleration of developed economies, while
How to play these themes?
The global macroeconomic scenario we foresee
Chart A7: Developed markets growth and Asian inventories for the coming months appears particularly
80 54 benign for investments in EM fixed income.
Eurozone US Output PMI Asia inventories (2Y)
70 52
Thus, we retain our bias for rates over equity
for the time being. The reasoning is simple: First,
60 50
expectations of modest growth in the developed
50 48
world, particularly the US, should keep risk-free
40 46 rates low, thus benefiting carry trades. Second, the
30 44
deflation of the commodity rally and weaker
growth data in EM, reinforced by more-active
20 42
2006 2007 2008 2009 2010
central banks, led to a reduction of inflation risk
premium. And third, equity markets experience
Source: Markit, HSBC

7
Emerging Markets Strategist
Cross-Asset Strategy abc
25 May 2011

the drag of weaker economic activity and lower Chart A8: External debt yields and spreads
Yield (%) Spread (bps)
commodity prices, but the benefit of weaker 6.50 355
inflation pressures. Where does EM FX stand in 6.25 340
6.00 325
this conundrum? The long-term trend of real
5.75 310
exchange rates appreciation of EM currencies 5.50
295
280
remains unchanged; however, in the short term, 5.25
265
we expect more range trading in line with the 5.00 250
4.75 235
gyrations of the USD.
4.50 220
Jan-10 Apr-10 Jul-10 Oct-10 Jan-11 Apr-11
Stay long EXD on the back of strong EM EXD Yields Spreads (rhs)
EM balance sheets
Source: Bloomberg
We believe there is room for a further 15-
25bps spread tightening in EM external debt, Such a scenario would not represent a credit
the major risk to our call coming from a event, if managed well, and thereby should avoid
significant deterioration in the Eurozone a significant market disruption.
periphery. In recent weeks, EM EXD yields
Continue long high-yielders in the hard
rallied 25bps to 5.50%. However, most of the
currency space. There is little or no premium in
movement was driven by a US Treasury rally,
the high-graders in EM to absorb any bad news
while EM spreads are now at the top of their
coming from Europe. Many of the investment-
recent 240-265bps range.
grade EM countries are trading at levels that are
We expect limited contagion to EM debt too tight to accommodate any deviation from our
coming from the periphery for the time being. benign scenario. As an example, 5Y CDS of the
HSBC Fixed Income Research head Steven Major Czech Republic is trading at levels similar to
believes that Greece will avoid an involuntary those in France. Chart A9 shows that most high-
restructuring of its debt before June 2013. The grade EM countries show spreads tighter to what
likelihood of a voluntary action, perhaps they were prior to the time when the market first
extending the maturity on Greek debt (reprofiling) felt contagion from the euro-zone periphery (27
is much higher than an involuntary restructuring. April 2010). True, this is also the case in

Chart A9: EM EXD Spread changes from various days until today
150 195 285 232
5-Nov-10 27-Apr-10
100

50

-50

-100

-150
Vietnam
Guatemala

South Africa
Argentina

Colombia

Jamaica

Panama

Pakistan
Dom. Rep.
Costa Rica

Philippines
Brazil
US HG
US HY

Bulgaria

Indonesia
Iraq

Lebanon

Peru

Russia
Serbia

Ukraine

Venezuela
Egypt
EM

Hungary

Turkey

Uruguay
Mexico

Source: Bloomberg

8
Emerging Markets Strategist
Cross-Asset Strategy abc
25 May 2011

Argentina and Ukraine; however, we believe this  Brazil curve out to 10 years has richened,
is supported by an improvement in fundamentals. ’21s are cheap compared to ’17s.

However, Argentina, Venezuela, and Ukraine  Colombia ’24s are cheap, compared to
still provide extra value, yet not without Colombia ’19s.
inherent volatility. These are our overweights
 Philippines ’16s look attractive versus the
in external debt (see page 16). There, we believe,
’15s, offer 28bp pickup.
repayment capacity is stronger than what the
market indicates and that current yields are Extend duration in local markets to
attractive enough to accommodate price volatility. profit from easing inflation fears
We retain a preference for Venezuela over As inflation fears eased, EM local curves have
Argentina on the back of the proximity of the started to price out some of the previously
elections and the pressures we are seeing on the implied rate hikes. While this move has been
exchange rate in Argentina. On 5 May, we opened more pronounced in Latam and EMEA than in
a buy PDVSA ’17N-Venezuela CDS basis trade Asia, it is a consistent theme across the EM local
with a target of 300bps. markets. Chart A10 shows regional averages for
In this issue of the EM Strategist, we introduce a the change in the 12-month implied policy rate,
new feature: our EM EXD Rich/Cheap Model derived from a data set of historical implied
(see page 38). This model calculates policy rates generated from our HSBC Emerging
cheapness/expensiveness across each sovereign Market Central Bank Monitor (for details of the
bond hard-currency curve by comparing a bond’s publication and its recent innovations, see Box 1).
market par-equivalent CDS spread (PECS) with its In particular, there has been significant
fair PECS, derived by evaluating the bond’s cash repricing of the monetary policy path in
flows with a smooth issuer survival probability Mexico, Brazil, Chile, Turkey, Poland, South
function.. We use the model to recommend to Africa, and Malaysia (see Chart A11). In the EM
investors how to position best along a curve. This Central Bank Watcher section (see page 30), we
time, we highlight three opportunities: show that unless the Street starts to assume there
is room for rate cuts in 2012, the depricing of
hikes in the front end of the local curves has

Chart A10: Change in implied average policy rate per region Chart A11: Implied rate hikes removed since 1 April 2011

100 bp YE11 YE12


Latam EMEA Asia 75
75
25
50
-25

25 -75

0 -125
South Africa
India
Israel
Brazil
Chile
Czech

S Korea
Poland

Thailand
Taiwan
Malaysia
Mexico

Turkey
Hungary

-25
Oct-10 Dec-10 Feb-11 Apr-11

Change (in bp) in implied average policy rate for year-end 2011 since 15 April 2010. Source: HSBC
Source: HSBC

9
Emerging Markets Strategist
Cross-Asset Strategy abc
25 May 2011

already run its course, with some notable EM FX: one in April, and a completely different
exceptions: Mexico, South Africa, Czech one in May. April’s positive returns were mostly
Republic, and Poland. driven by USD deterioration worldwide, and the
greenback recovery in May came on the back of
Therefore, we continue to recommend long
risk aversion.
positions in Israel, Mexico, and South Africa,
although in most of the cases, we extend duration If there is a positive factor to be found, it is that we
to longer tenors. We continue to see a flattening have not yet fallen off this tightrope (see EM FX
bias in the local curves stemming from the Roadmap). Equity and commodity markets have
deceleration in world growth and the reduction of softened, but fund flows to local currency EM funds
risk premium brought on by more proactive are holding up – moreso fixed income than equity –
central banks. We recommend investors buy the amidst low rates in the West.
10-year sector in South Africa (R208), Mexico
In Asia, we prefer currencies with lower exposure
(MBonos), and Indonesia (FR53).
to external growth and capital flows. Our top
Interesting to note is that local curve plays, in picks for the region are IDR, MYR, CNH, and
particular flatteners in Asia and selective Latam SGD. In Latam, we find that the current
countries, could be a good hedge against a correction higher in USD provides good
deterioration of the situation in the euro-zone opportunities to reinstate long trades in BRL,
periphery. At the end of the day, any disruptions MXN, and COP, where higher terms of trade and
in Europe would be a deflationary shock. long-term flows remain currency-supportive. In
EMEA, we like the RON on the back of high
A volatile backdrop leads to caution
inflation (read: higher FX tolerance and potential
on EM FX
hike) and the HUF on cheap valuations and
While we remain constructive overall about reduction of fiscal and MPC composition risks.
EM FX for the medium term, we advise
greater discrimination between currencies Play domestic over global cyclicality
amidst heightened risk aversion. Rising risks of in EM equities
global instability have understandably seen With inflation fears slowly moving away from
investors turn more cautious. The period since our investors concerns, the HSBC equity strategy
first edition of EM Strategist saw two halves for team believes that the major call should
revolve around domestic cyclicality, especially
Chart A12: USD-EM FX (1 April – 23 May)
in good secular growth stories, outperforming
BRL global cyclicality, particularly with regard to the
CLP
CNY commodity segment.
COP
HUF
INR The emphasis comes on Brazil, China, Indonesia,
IDR
KRW Malaysia, and Turkey, over Korea, Mexico,
MYR
MXN Poland, and Thailand. On industries, the preferred
PHP
PLN
ones are banks, real estate, and consumer, which
RUB ought to receive a lift from reduced concerns
ZAR
TWD about inflation and enhanced prospects for an EM
THB
TRY soft landing.
-6% -4% -2% 0% 2%

Source: Bloomberg

10
Emerging Markets Strategist
Cross-Asset Strategy abc
25 May 2011

Table A2: Recommended trade ideas


Country Trade idea Entry date Entry price Last Target Stop

Credit
Venezuela Buy PdVSA '17N – Venezuela 5Y CDS basis 05/05/11 428bp 411bp 300bp 480bp
Mexico 100y/30y UMS flattener 10/06/10 64bp 517bp 35bp 80bp
Rates
Mexico Buy 2y BEI 02/24/11 3.72% 3.65% 4.10% 3.40%
South Africa 1s5s IRS flattener 16/02/11 198bp 170bp 150bp 198bp
Turkey 2s5s X-CCY steepener 06/04/11 53bp 55bp 95bp 35bp
South Africa Long R208 10/05/11 8.36% 8.34% 7.85% 8.60%
Mexico Buy MBonos 2024 05/11/11 7.39% 7.22% 7.05% 7.60%
India I2-1yr, 1yr forward INR OIS steepeners 5/19/2011 -22bp -20bp 5bp -40bp
Hong Kong Receive 2s5s10s HKD IRS fly 5/4/2011 33bp 21bp Revised 12bp Revised 32bp
Korea 5-2yr KRW CCS steepener 5/4/2011 48bp 47bp 70bp 35bp
Malaysia Buy 5yr MGS; Pay 5yr MYR IRS 4/19/2011 49bp 45bp 60bp 38bp
Thailand Sell 10yr ThaiGB; Receive 10yr THB IRS 4/19/2011 47bp 36bp 32bp 54bp
Indonesia 10yr IndoGB (FR53) 5/23/2011 7.42% 7.47% 7.10% 7.65%
FX
China Sell USD-CNH spot 03/22/11 6.5530 6.4975 6.4500 6.6070
Uruguay Sell USD-UYU via 3 mo. NDF 04/06/11 19.27 18.84 18.50 19.50
Romania Sell EUR-RON 05/09/11 4.100 4.134 3.950 4.180
Closed since last EM Strategist publication on 1 April 2011
South Africa Receive 1y1y IRS vs. paying 3y 17/03/11 29bp 17bp 0bp 40bp
Mexico Receive 1yr TIIE 03/31/11 5.26% 5.10% 5.10% 5.40%
Colombia/Brazil Buy Colombia - Sell Brazil 5Y CDS 07/01/10 11bp -11bp 25bp 0bp
Colombia Sell USD-COP via 2 month forwards 03/31/11 1861 1780 1780 1890
Brazil Sell USD-BRL via 1 mo. NDF 05/06/11 1.6235 1.6500 1.5500 1.6500
Source: HSBC

11
Emerging Markets Strategist
Cross-Asset Strategy abc
25 May 2011

Box 1 - HSBC Emerging opening London prices, and the previous day’s
Market Central Bank Monitor closing price in New York.

Now on Bloomberg HSER <GO> We consider the report a useful tool in the process
The EM Market Central Bank Monitor provides a of generating trade ideas in local markets. We use
market-implied path of monetary policy rates for consistent bootstrapping and interpolation
key EM countries globally. Currently, we are methodology to derive all curves, accommodating
covering Brazil, Chile, Czech Republic, Hungary, specific market conventions and using the most
India, Israel, Korea, Malaysia, Mexico, Poland, liquid instruments for each market.
South Africa, Taiwan, Thailand, and Turkey.
Market-implied future central bank rates are
The horizon covers the “monetary policy segment” computed from implied forward rates, ie we
of the yield curve, ie the next 24 months. compute a strip of forward-starting short rates
with start date on the effective date following
We compute probabilities of a given move and
each future central bank meeting. Forward rates
provide a history of implied policy moves (see
are derived from local interest rate curves where
Table C2).
available (and cross-currency swaps in a few
This report is available as a subscription on the cases).
HSBC Global Research Web site. Our newest
Our approach yields a meeting-by-meeting path of
offering on Bloomberg includes a summary of
implied rate moves, rather than cumulative
what is currently priced in and how it has
implied moves over a specific time horizon (eg
changed, a detailed snapshot per country, as well
“hikes over the next three months”).
as an archive of recent reports. See HSBCnet on
Bloomberg page HSER <GO>. Charts A13 to A15 provide a glimpse of our new
Bloomberg pages for the Emerging Market
The report is updated every business day at about
Central Bank Monitor. We hope you find them
11am London time. It uses closing Asia prices,
useful.

Chart A13: HSBC EM Research page on Bloomberg - HSER <GO>

12
Emerging Markets Strategist
Cross-Asset Strategy abc
25 May 2011

Chart A14: See the implied policy rates country by country for YE2011, YE2012, and 12mo forward at – HSER7 <Go> Pg 2

Chart A15: See the implied policy rates meeting by meeting at HSER7 <GO> Pg 3

13
Emerging Markets Strategist
Cross-Asset Strategy abc
25 May 2011

Local markets Asia André de Silva, CFA


Head, Asia Rates Strategy
 As the balance of risks tilts toward growth over We expect a flattening bias to prevail in Asia, The Hong Kong and Shanghai
Banking Corporation Limited
inflation, local curves have de-priced interest supported by “low for longer” themes in US rates + 852 2822 2217
and continuation of more aggressive rate andre.de.silva@hsbcib.com
rate hikes.
tightening in countries such as China and India.
 We believe this process is mostly done; thus, we Moreover, recent concerns about a global
recommend long duration in Mexico, South economic slowdown in the wake of the Greek
Africa ,and Indonesia. debt crisis and a decline in commodity prices
 FX volatility remains a risk to local bonds’ paved the way for flatter curves across some the
performance. region. Chasing returns is, therefore, back on the
agenda, as these factors act to mitigate rising
Table B1: Local markets views
inflation expectations.
Country 5yr Yield Slope

Brazil Pay Steeper


We advocate a receive position in 2-5-10 HKD
Czech Republic Neutral Steeper IRS fly, as a flatter US curve drives the
Chile Neutral Steeper outperformance of the belly. However, receiving
China Neutral Flatter
swap interest in India and China still remains
Colombia* Buy* Flatter
vulnerable to moderate bearish flattening
Hong Kong RECEIVE Flatter
Hungary Pay Steeper pressures due to central banks’ liquidity
India Neutral Flatter sterilization. We recommend steepening positions
Indonesia* Buy* Steeper in 5-2yr KRW CCS curve in anticipation of
Israel RECEIVE Flatter
reduced paying interest at the front end.
Korea Neutral Flatter
Malaysia Receive Flatter Elsewhere, a consolidation in commodity prices is
Mexico RECEIVE Flatter likely to spur the bullish flattening in the
Peru* Neutral Flatter Malaysian government securities (MGS) curve.
Philippines* Neutral =
Poland Pay Steeper The FX-induced bond gains are likely to continue
Russia Pay Steeper to drive outperformance in Asia’s local bond
Singapore Receive Flatter
markets, we expect. Several central banks in the
South Africa RECEIVE Flatter
Taiwan Pay Flatter region, eg Korea, Indonesia, and China, are
Thailand Pay Flatter becoming explicitly more tolerant to currency
Turkey PAY Steeper appreciation as part of combating inflation via de
Uruguay Buy* Flatter
facto monetary tightening. This should enhance
Level of conviction rather than replace key rate rises, and as long as
HIGH low low HIGH inflation expectations are not unhinged by a
PAY RECEIVE further sharp rise in oil prices, this seems likely to
Note: * View expressed via bonds reinforce the virtuous circle of FX gains and local
Source: HSBC
bond returns. As such, a greater reliance on FX
appreciation versus rate tightening in Indonesia
moves us to recommend initiating long positions
in FR53 (IndoGB 8.25 7/21) with a yield target of
7.10%..

For more on Asia rates see our latest Asia-Pac RV

14
Emerging Markets Strategist
Cross-Asset Strategy abc
25 May 2011

Latin America EMEA Gordian Kemen


Chief Latam FI Strategist
A repricing of the implied monetary policy With commodity prices stabilizing and growth HSBC Securities (USA) Inc.
+ 1 212 525 2593
path has been a consistent theme in the region indicators showing signs of weakness, the gordian.x.kemen@us.hsbc.com
over the past month and a half. Brazil, Chile, and curves have bull-flattened across the region. In Hernan Yellati
Mexico have all seen significant reductions in the front end, monetary tightening expectations Latam FI Strategist
HSBC Securities (USA) Inc.
implied monetary policy rates, albeit for different have been depriced significantly, reducing the +1 212 525 3084
hernan.m.yellati@us.hsbc.com
reasons. carry embedded. Further out in the curve, belly
Alejandro Martinez-Cruz
and long end have outperformed due to (1) easing Latam FI Strategist
The market has effectively adjusted to the
inflation risk premium, resulting from more- HSBC Mexico SA
gradualist approach – less tightening, more +52 55 5721 2380
hawkish central banks and (2) renewed interest in alejandro.martinezcr@hsbc.com.mx
macro-prudential measures – by Brazil’s central
local debt by international investors. Particularly Di Luo
bank, with only 50bp of further tightening EMEA FI Strategist
in Central and Eastern Europe (CEE), foreign
currently priced in. At the same time, inflation HSBC Bank plc
participation in the treasury debt market has + 44 20 7991 6753
expectations have moved down over the past four di.luo@hsbcib.com
reached historically high levels.
weeks. Our view remains that there is too little
risk premium priced in, and that rates should In South Africa, we recommend going long
move higher and the curve steepen as inflationary R208 bond after taking profits in receiving 1y1y
concerns reappear later this year. IRS vs. 3y. The SARB delivered a slightly more
hawkish statement in its MPC, which caused the
Chile’s central bank has regained its inflation-
1y and 2y sectors of the curve to price back some
targeting credentials by rigorously front-loading
hikes since April after the depricing occurred.
the tightening in the past few months. In our view,
However, macro indicators continue to suggest
rates have reached a bottom, with only about 50bp
benign demand-driven inflation risks, and we
of additional rate hikes priced in and also in terms
believe that the SARB’s rhetoric aims at
of flatness of the curve.
containing inflation expectations, rather than
Receiving Mexico rates remains our top pick. signaling an early tightening cycle.
We recommend receiving rates in the
We recommend entering 2s5s X-CCY steepeners
10-year sector of the curve; given that the curve is
in Turkey as a positive carry trade, as we see
steep, the peso has room to appreciate and local
more room for the front end to deprice further the
pension funds are adding duration. The lack of
chance of repo rate hikes – currently 104bp by year-
inflationary pressures has led the market to reduce
end vs 125bp previously post-election. In terms of
implied monetary policy tightening. Over the past
duration, we still find it unattractive because of the
six weeks, the implied policy rate for the next 12
lack of inflation risk premium embedded.
months shaved off 35bp. Our 1-year TIIE receiver
recently reached target and we took profit. In Poland, the combination of finance ministry
intervention and hawkish surprise by the
Colombia continues to have one of the steepest
National Bank of Poland led to a strong rally.
curves in the asset class, and we see value in the
Foreign positioning has reached an all-time high,
long end, as we expect it to flatten. For carry and
particularly in the 5-year sector. With
roll-down, we like Coltes 2024. In Peru, we see
uncertainties surrounding the 55% debt threshold
value in the long end of the Soberanos curve, but
and a wider current account deficit, we view the
we remain very cautious ahead of the election.
Polish paper as very rich, compared to its peers.

15
Emerging Markets Strategist
Cross-Asset Strategy abc
25 May 2011

External debt Latin America Gordian Kemen


Chief Latam FI Strategist
 We are still fully invested in the market as we We remain constructive on Latam EXD, given HSBC Securities (USA) Inc.
+ 1 212 525 2593
see room for a further 15-25bps fall in yields. our view that a low-grade Goldilocks scenario gordian.x.kemen@us.hsbc.com
A spike in 10yr UST yields is the main risk. will continue to be supportive of EM FI. Flows Hernan Yellati
remain positive for Latam EXD. High- and low- Latam FI Strategist
HSBC Securities (USA) Inc.
 We remain overweight Argentina, Venezuela, beta credits have been diverging during the recent +1 212 525 3084
and Ukraine, and we continue to see relative market correction, with the former seeing spreads
hernan.m.yellati@us.hsbc.com

value opportunities in low-beta space. widening and underperforming the index in terms
Alejandro Martinez-Cruz
Latam FI Strategist
of total return during the past month and a half. HSBC Mexico SA
 We are underweight Egypt, Panama, Peru, +52 55 5721 2380
Philippines, Poland, Turkey, and Vietnam. This lag reinforces our view that upside offered alejandro.martinezcr@hsbc.com.mx
by low-beta credits is limited, and apart from a
Table B2: EXD views
few relative-value opportunities, we continue to
Country Call Best way to express view
look to the high-beta names for value and carry.
Cash Neutral Stay fully invested
Argentina Overweight Long end (EUR and USD) We stay overweight high-yielders in Latam. We
Brazil Neutral see value in the long end of the Argentina curve,
Colombia Neutral in particular EUR and USD Discounts. Venezuela
Egypt Underweight Sell Nilfin 15s
remains by far the most attractive credit in terms
GCC Overweight Long sovereign, GREs
Hungary Neutral Switch into REPHUN 2041 of carry. As a result of the recent windfall tax
Indonesia Neutral Long Indon 21 Sell ROP 21 increase, we have cut our bond supply forecast for
Korea Neutral the year to USD12-15bn. In the recent rally,
Mexico Neutral Long UMS 2110 vs ’40
PdVSA bonds lagged behind Venezuela. The
Panama Underweight Buy 5y CDS protection
Peru Underweight Buy 5y CDS protection
PdVSA ’17N bond is by far the cheapest bond on
Philippines UNDERWEIGHT Sell USD bonds esp. 10yrs the curve using par equivalent CDS spread
Poland Underweight Buy protection via 5y CDS (PECS). We recommend buying the bond versus
Romania OVERWEIGHT Long Romania EUR2015
buying a DV01-neutral amount of Venezuela 5y
Russia Overweight Long Russia 2020 USD
CDS protection.
South Africa Neutral Long SOAF 2041 USD
Turkey Underweight Buy protection
In the low-beta space, valuations are not as
Ukraine OVERWEIGHT Long Ukraine 2021 USD
Uruguay Overweight Buy Global ’36
compelling, in our view. Thus, we continue to
Venezuela OVERWEIGHT Long PDVSA 17N basis focus on relative value, such as buying the
Vietnam UNDERWEIGHT Sell Vietnam ’16 and ’20 “century” bond in Mexico vs. the UMS ’40. We
Level of conviction recently unwound our short Colombia relative
HIGH low low HIGH value position versus Brazil.

UNDERWEIGHT OVERWEIGHT We stay on the sidelines regarding Peru’s EXD


Source: HSBC ahead of the second round of the presidential
election. However, given the recent rally and
what we perceive to be asymmetric election
outcomes for the market, we see value in buying
CDS protection, as a victory by left-wing
nationalist Ollanta Humala is still possible but
hardly priced into current valuations.

16
Emerging Markets Strategist
Cross-Asset Strategy abc
25 May 2011

EMEA Asia Di Luo


EMEA FI Strategist
We still like Ukraine as the sole high-yielder in Following a successful USD2.5bn placement by HSBC Bank plc
+ 44 20 7991 6753
EMEA due to more-generous credit risk the Indonesian sovereign in the external di.luo@hsbcib.com
premium, but with caution. With US rates at market in the past month, we believe the Asian Simon Williams
Chief Economist, Gulf Markets
very rich levels, already tight credit spreads offer subinvestment-grade sovereign space should HSBC Bank (Middle East) Ltd, Dubai
less buffer for EMEA high-grade credit. As perform reasonably well in the weeks ahead. +971 4 423 6925
simon.williams@hsbc.com
currencies in the region resume appreciation, the Concerns about additional supply, except possibly
Dilip Shahani
attractiveness of USD bonds has been reduced from Sri Lanka, should be the dominant factor in Head of Asia-Pacific Research
compared to local currency debt. allowing Indonesia and Philippine sovereigns to The Hong Kong and Shanghai
Banking Corporation Limited
move in line with US Treasuries in the current + 852 2822 4520
We like extending duration for convexity benefit. dilipshahani@hsbc.com.hk
risk-off mode facing the Asian credit market.
We expect SOAF 2041 and REPHUN 2041 to
continue to outperform other tenors. We are We believe that Indonesia should outperform
overweight Romania due to steady improvement in the Philippines from a credit spread
external liquidity, the firm anchor provided by the perspective in the coming six months.
International Monetary Fund, and limited contagion Specifically, the Indonesia ’21s should trade 10-
risks to peripheral Europe, compared to other CEE 20bps inside of an equivalent Philippine sovereign
peers. Moreover, we keep a small overweight USD bond by 4Q’11. Indonesia’s economic
position on Russia as the Ministry of Finance raised fundamentals warrant the sovereign to become an
forecasts of oil revenue to – USD105/bbl for 2011 investment-grade credit before the end of 2011,
and USD120/bbl for 2012. and hence we believe that market participants will
anticipate the positive rating action, which should
We are underweight Turkey and Poland. The
be expected by 1Q’12 at the latest, in our opinion.
widening current account deficit and over-reliance
In other words, an Indonesia credit upgrade
on short-term financing are key risks in Turkey.
should attract a broader investor base looking for
Moreover, a post-election rating upgrade has been
diversification.
overly anticipated and might offer little boost for
the sovereign, we believe. In Poland, we are We expect Moody’s to upgrade the Philippines,
skeptical about the fiscal dynamic and concerned and to bring the sovereign rating up and
about potential current account deficit revision. aligned with Fitch and S&P at Ba2 before the
With spreads tight, Poland offers a cheap hedge end of 2011. However, this rating action would
for the CEE contagion risk. not have the same impact as Indonesia’s.

Gulf Cooperation Council (GCC) sovereign Potential supply and reluctance to tackle rising
and quasisovereign bonds continue to offer inflation aggressively could induce Sri Lankan
value, as regional political tensions are moderate sovereign USD bonds to underperform in the
and near-term deterioration appears remote. Key weeks ahead. Vietnam sovereign bonds should be
issuers – Qatar and the UAE – are also the least avoided, in our opinion, based on a weakened
exposed to political upheavals and trade well wide external profile and difficulties in containing
to similar credits in EMEA and Asia. GSEs and inflation at the moment.
state-owned banks offer an additional pickup on For more on Asia credit, see our latest The View
the sovereign and offer value, provided that the
likelihood of government funding support is
critically assessed. An expected uptick in new
GCC issuance may create some headwind.

17
Emerging Markets Strategist
Cross-Asset Strategy abc
25 May 2011

FX Asia Daniel Hui


Asia FX Strategist
 Heightened risk aversion has seen the USD Our top regional picks are IDR, MYR, CNH, The Hong Kong and Shanghai
Banking Corporation Limited
correct higher, leaving investors nervous. and SGD against the USD. On the flip side, we +852 2822 4340
are less constructive on KRW and INR, which danielpyhui@hsbc.com.hk
 Nevertheless, our medium-term outlook for have a mixture of larger external exposure, greater Perry Kojodjojo
Asia FX Strategist
EM FX remains positive. dependence on equity flows, and less favorable The Hong Kong and Shanghai
Banking Corporation Limited
 We like BRL, CNH, IDR, MYR, and RON. policy. In relative value terms, we would also +852 2996 6568
look for opportunities to position short TWD perrykojodjojo@hsbc.com.hk
Table B3: FX views on local currencies Dominic Bunning
against IDR and MYR.
Country Call Associate, FX Strategist
The Hongkong and Shanghai
ARS Neutral
While our fundamental medium-term outlook Banking Corporation Limited
remains bullish for Asian currencies, we see +852 28 22 1672
BRL Long vs. USD
dominic.bunning@hsbc.com
CLP Neutral greater risks emerging in the near term. We expect
COP Neutral
Asian growth to roll over somewhat in Q2, while
CNY Long vs. USD
other regional asset classes appear to face
CNH LONG vs USD
CZK Neutral challenging valuations. This suggests becoming
EGP Short vs. USD more selective in our long Asian currency calls.
HKD Neutral
HUF Long vs. EUR We outline a framework of three characteristics of
IDR LONG vs. USD resilience, which should help certain currencies
INR Neutral
outperform (see table at left) during the choppier
ILS Neutral
and more volatile times we see emerging:
KRW Neutral
MYR LONG vs. USD
 Lower exposure to external growth and
MXN Long vs. USD
PEN Neutral
markets.
PHP Long vs. USD
 Credible and suitable policy.
PLN Neutral
SGD LONG S$NEER
 Sustainable capital flows.
ZAR Short vs. USD
RUB Neutral With global growth slowing for the moment, we
TWD Neutral
prefer to position away from currencies for which
THB Neutral
TRY Short vs. USD
growth and external balances are more liable to be
UAH Neutral hurt by any external headwinds. We also favor
UYU Long vs. USD currencies for which central banks have shown
VND Short vs. USD
commitment to managing inflation, and calming
Level of conviction FX volatility. We look to position in currencies
HIGH Low Low HIGH with lower exposure to equity flows, which we
DEPRECIATE APPRECIATE believe are less likely to give as large a boost as
Source: HSBC
they did in 2010.

For more details, please see the latest EM FX Roadmap.

18
Emerging Markets Strategist
Cross-Asset Strategy abc
25 May 2011

Clyde Wardle
Latin America EMEA Latam FX Strategist
Our conviction levels in the current global We do not expect any significant appreciation HSBC Securities (USA) Inc.
+ 1 212 525 3345
environment are low, and we would therefore in the PLN, despite Poland’s decision to sell EU clyde.wardle@us.hsbc.com
look to play ranges in the near term. We view the funds in the FX market, which is an important Marjorie Hernandez
Latam FX Strategist
recent USD rally as a short-term correction, rather factor for the directional trend of the zloty. In HSBC Securities (USA) Inc.
than a trend reversal. For a medium-term view, we the near term, the current account is widening and + 1 212 525 4109
marjorie.hernandez@us.hsbc.com
see this latest USD move higher as offering some the capital flows dynamic is deteriorating.
Murat Toprak
value, especially for the currencies on which we are EMEA FX Strategist
We see more value in the RON and the HUF. In HSBC Bank plc
most bullish, namely BRL, MXN, and COP. The + 44 20 7991 5415
Romania, rising inflation leaves no choice to the
recent drop in commodity prices is less supportive, murat.toprak@hsbcib.com
central bank but to let the currency rise.
but we find still-elevated levels provide continuing
Moreover, an adjustment of monetary policy to
support for the region’s terms of trade.
achieve the 2012 inflation target, which would be
We see Latam FX as still vulnerable to further RON-supportive, cannot be ruled out. We see
short-covering, should uncertainties persist. We EUR-RON moving down to 3.95. In Hungary, the
note, too, that positioning in Latam FX has been HUF is still cheap. The strong increase in the
reduced of late, but it still remains very heavy in trade surplus is favorable, while the government
historical terms. fiscal plan has reduced investors’ worries about
the fiscal sustainability. Uncertainties surrounding
For the BRL, onshore USD rates have quickly
the new MPC members have also eased, and
normalized, following their recent brief spike
given the inflation trend, we do not expect any
higher, and this has restored the wide rate
reduction in interest rates.
differential and helped stem BRL weakness.
Exporters have also been using the USD’s recent We remain bearish on the Turkish lira, as the
strength to reduce unremitted export receipts, premium offered is unattractive, compared to the
providing additional topside resistance to USD-BRL. macro risks. Credit is still expanding at a very
In the short term, the pair should remain beholden to strong pace, and the current account deficit is
swings in risk appetite, but we expect the BRL to spiraling out of control, reaching 8.0% of GDP. With
remain firm through 2011. the central bank having no intention to hike the repo
rate, the TRY appears likely to stay weak, and a
We recently lowered our year-end USD-MXN
larger depreciation cannot be ruled out.
forecast to 11.30 from 11.80, as we expect the peso
to continue to benefit from the gradual economic We prefer to stay sidelined for now on the
recovery in the US, foreign appetite for local debt, RUB. The currency has posted substantial gains
cheap valuations, and a lower risk of intervention. since the start of the year, and we believe that the
upward momentum is not sustainable. It may run
We remain bullish on the COP directionally, but
out of steam, as trade dynamics appear likely to
we prefer to wait for levels closer to 1,840-1,850
deteriorate on stronger imports, and the central
to re-enter short USD-COP trades. Meanwhile,
bank is reluctant to tighten significantly.
following the strong rally in April, the COP is giving
back some of its gains, as the treasury has joined the See our FX forecasts on page 29 and charts with our
central bank in buying dollars, while some investors forecasts against forward curves on pages 45-46.
have been unwinding short USD-COP trades.

19
Emerging Markets Strategist
Cross-Asset Strategy abc
25 May 2011

Equity EM equity markets have again begun to John Lomax*


GEMs Equity Strategist
underperform developed markets recently. The HSBC Bank plc
 Easing inflation and USD stabilization are the
bigger impediments, in our view, relate to +44 20 7992 3712
key catalysts for EM equity performance john.lomax@hsbcib.com
growth weakness and currency dislocation. The
Wietse Nijenhuis*
 Domestic cyclicality, especially in the solid consensus view has been to relate this behavior to Equity Strategist
HSBC Bank plc
secular growth stories, still preferred over renewed concern about inflation. We believe that +44 20 7992 3680
commodity sector exposure this is to some extent misplaced, because at the wietse.nijenhuis@hsbcib.com

margin, high-frequency data suggest that *Employed by a non-US affiliate of


 Flows to EM equity funds remain mixed HSBC Securities (USA) Inc, and is
inflationary concern is softening. not registered/qualified pursuant to
Table B4: Equity views FINRA regulations
Looking ahead, we believe that the current
By country
environment favors domestic cyclicality –
Cash Neutral
Brazil OVERWEIGHT
especially in markets with sound underlying
China OVERWEIGHT secular growth stories – over global cyclicality,
Czech Republic UNDERWEIGHT especially with regard to the commodity segment.
Egypt OVERWEIGHT Further evidence of a reduction in overheating
GCC OVERWEIGHT
pressures and USD stabilization are key catalysts, in
Hungary OVERWEIGHT
India Neutral our view. Overall, longer-term we see the positive
Indonesia OVERWEIGHT EM equity story as remaining intact.
Korea UNDERWEIGHT
Malaysia OVERWEIGHT On the global growth inflation mix, we believe
Mexico UNDERWEIGHT that investors have worried sufficiently about
Other Latam Neutral inflation and now have become overly
Philippines Neutral
complacent about cyclical recovery. This is
Poland UNDERWEIGHT
Russia Neutral increasingly clear in the latest high-frequency data
South Africa Neutral (PMI numbers and retail sales data). Generally,
Taiwan Neutral growth is slowing and inflationary pressure is
Thailand UNDERWEIGHT
moderating. We see this trend in Asia ex Japan
Turkey OVERWEIGHT
and also in a group of other large EM markets:
By sector
Brazil, Russia, and Turkey.
Cons. discretionary OVERWEIGHT
Cons. staples OVERWEIGHT Several factors are responsible for the trends
Energy Neutral mentioned above. First, central banks have
Financials OVERWEIGHT
tightened monetary policy in EM in particular and
Healthcare Neutral
Industrials Neutral also in some developed countries through a
Materials Neutral combination of higher interest rates, higher reserve
Technology UNDERWEIGHT requirements, and exchange rate appreciation. For
Telecoms UNDERWEIGHT
EM, the market appears to be overly pessimistic
Utilities UNDERWEIGHT
about the scope for macro-prudential policy (higher
Level of conviction
reserve requirements) to slow lending expansion. In
HIGH low low HIGH
the developed world, the European Central Bank has
UNDERWEIGHT OVERWEIGHT
increased rates, and we expect further tightening. Of
Source: HSBC
course, the US Federal Reserve has clearly been less
pre-emptive, but it has nevertheless committed to

20
Emerging Markets Strategist
Cross-Asset Strategy abc
25 May 2011

ending the second round of its quantitative easing Of course, it matters where the USD stabilizes. If
program (QE2) at the end of the second quarter. it appreciates further first, EM equities could tend
to lag behind at least US equities in USD terms.
Second, still-high oil and commodity prices are
Stability is, however, the key.
acting as a brake on growth. Growth below
potential in the developed world – and tighter Overall, for the near term, we believe that the
policy in EM – should restrain second-round major call should revolve around domestic
effects from higher commodity prices. Prices have cyclicality, especially in the good secular growth
recently starting coming off highs, and it seems stories, outperforming global cyclicality
plausible to expect that the worst part of the rise particularly with regard to the commodity
in both oil and a food price is behind us. Should segment. Domestic themes – banks, real estate,
oil and food prices now simply plateau, headline and consumer – ought to receive a lift from
inflation should gradually taper off. reduced concern about inflation and enhanced
prospects for an EM soft landing.
Third, there is a continuing need to tighten fiscal
policy in the developed world, highlighted by the By contrast, we believe that a weaker cycle plus
resurfacing of concerns about European sovereign potential further USD appreciation will remain
debt. To the extent that the developed world’s important headwinds for the commodity sector.
output gap is largely negative, that ought to allow Nevertheless, we emphasize that we expect these
emerging markets to grow more quickly without shifts to be tactical, rather than strategic. Slower
creating an inflation problem. EM growth is also more durable growth, which
should end up ultimately being commodity-
We believe that rather than worries about EM
friendly.
inflation, currency dislocations may be playing
a significant role in driving relative EM Yet overall, despite some near-term weakness in
performance. It is noteworthy that over the past commodity names, the reflation story in EM as a
month or so, the USD slumped before recovering whole should retain longer-term support from
strongly. It may be the case that part of the reason underlying strong global fundamentals. In
for EM equity underperformance is perceptions particular, sustained easy monetary policy in the US
relating to increased currency risk, rather than appears likely to fuel asset prices in EM, especially
worry about inflation. To the extent this view is now that EM macro policy has been tightened.
correct, USD stabilization could be an additional
catalyst for EM performance.

21
22

Table B5: Summary of HSBC fixed income, FX, and equity views

25 May 2011
Cross-Asset Strategy
Emerging Markets Strategist
Country EXD LDM FX Equity
Argentina Overweight. Favor long end and EUR paper Underweight Neutral USD-ARS
We believe repayment capacity remains strong, supporting We are cautious toward ARS paper. Pressures on the FX Implied yields along the ARS NDF curve have continued to
an overweight stance. We favor EUR over USD paper. We market due to government restrictions on FX moves and the widen, with the 12-mo contract paying near 15%. At these
do not see significant value in the belly of the curve. Also, uncertainty related to the elections might not be levels, the carry trade is starting to look attractive again, and
the EUR GDP warrants are cheap relative to the USD compensated by yields onshore. We continue to prefer any normalization of external conditions would open the way
warrants. The presidential election in October is casting its Badlar paper over inflation linkers (CER). to sell USD. We prefer levels closer to 4.18/USD on 3mo
shadow and has the potential to create volatility, even NDF, as we expect the rate of depreciation to slow in the
though a run by Cristina Kirchner run is widely expected. summer and ahead of October’s presidential election.
Brazil Neutral, belly looks more attractive than wings Biased to pay Short USD-BRL Overweight
Valuations have become very tight, especially in the short The DI curve has adjusted to two more 25bp hikes in the A strong and diversified flow of FX should continue Although we expect some more policy tightening to take
end and the long end of the bond curve, while the belly has next meetings, and in the process removed about 50bp of supporting a stronger BRL through 2011. Onshore dollar place, we believe this is already reflected in equity market
lagged behind the move. As we had expected, cash bonds previously implied rate hikes since early April. This was rates are normalizing quickly, reflecting increases FX valuations. Also, some of last year’s fiscal stimulus should
are rich versus CDS, as the Brazilian treasury continues to helped by declining inflation expectations and the market’s supply, restoring the long BRL carry with the 1mo implied drop away following the election. We believe policy settings
buy back bonds. As a benchmark, Brazilian EXD remains becoming more comfortable with the gradualist approach of yield back above 8%. In the short term, the BRL remains now are sufficiently tight to allow investors to look over the
exposed to any risk-aversion episodes. the central bank. We believe that there is too little risk beholden to swings in risk appetite, and while exporters inflationary hump, thus letting attractive valuations gain
premium priced into the curve, and that rates should move should help cap the USD’s topside, investors’ large long traction.
higher as inflationary concerns reappear later this year. BRL positions still pose some risk.
Czech Rep. Neutral. We see room to outperform core European names Neutral: We like receiving 2y IRS Hold EUR-CZK Underweight
The Czech republic has one of the most solid sovereign The CNB has refrained from hiking its policy rate amidst We expect a modest appreciation in the medium term, as The Czech economic position is reasonable. The market
balance sheets among CEE, and should be favored as a elevated external uncertainties. Monetary conditions are the currency appears fairly valued. The attractiveness of the composition is defensive with a large share in utilities and
low- beta credit in persistence of risk aversion. But with being tightened through the CZK appreciation. We believe CZK should remain low, as the central bank is not under telecoms, and appears likely to underperform during a global
current spreads, we do not see compelling value in selling that the short end of the IRS curve is attractive to receive pressure to hike its interest rates. Economic activity is cyclical upswing. Having said that, valuations look
protection outright. We see room for Czech sovereign from carry-to-vol’s perspective. constrained by a tight fiscal policy, and demand-pulled reasonably attractive, but EPS growth is the lowest in the
spreads to outperform core European names, especially inflationary pressures are low. Given its low-yielding status, region.
countries with high exposure to the peripheral region. the CZK seems likely to underperform its regional peers.
Chile Neutral Long USD-CLP Neutral
Given its rigorous tightening over the past few months, the Higher rates and a weak USD have supported the CLP Chile falls into the category of markets where we believe the
central bank has regained its inflation-targeting credentials, year-to-date. However, copper’s double-digit percentage fall monetary response has been appropriate, with the bulk of
with curve-flattening and break-evens collapsing. We believe in the past month has acted as a drag, leaving USD-CLP in the necessary adjustment already done. This is also
that the market has reached a bottom in terms of front-end a 460-480 range. We expect intervention to remain at reflected in equity valuations, which, while still expensive in
yields, pricing in only about 50bp of further rate hikes. USD50m per day – barring a substantial appreciation of the absolute terms, look more reasonable relative to where the
CLP, which could see the amount increased – leaving 460 Chilean equity market has traded historically. Prolonged
USD-CLP support likely intact. copper price weakness poses a risk to our neutral call.
China Neutral. Moderate bearish flattening Short USD-CNH Overweight
The PBOC continued its course of tightening, delivering a FX policy should remain the focus, while rising domestic We have turned positive on China’s stock markets in
50bp hike in RRR on 12 May. This is likely to put modest demand and the closed capital account keep China anticipation of the tightening cycle’s coming to an end.
upward pressure on short-dated CNY NDIRS as seven-day somewhat sheltered from developments abroad. The fight China is one of the few markets where slower growth is
repo squeezes higher in near term, also due to relatively against inflation should keep an accelerated appreciation good news for equities. Recent economic data indicate that
fewer PBOC bills maturing in the weeks ahead. However, trend intact until inflation peaks, likely sometime in mid-year. growth is moderating, which suggests that a soft landing is
heightened RMB appreciation expectations and likely return We continue to flag the offshore RMB (CNH) as the possible.

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to ample liquidity are no longer conducive for paying CNY preferred market for offshore long RMB exposure.
NDIRS.
Colombia Neutral Receive. We expect a flatter TES curve Neutral USD-COP Neutral
We believe that Colombia credit remains a solid story, The local curve in Colombia remains one of the steepest in We remain COP-constructive on the back of higher Valuations look reasonable. The equity market has held up
especially if fiscal reform remains on track, and that a full EM, making extending duration an attractive proposition, in production of key raw materials (oil), which should support relatively well over the past month, rising 3% in USD in spite
investment-grade rating is likely in the near term. However, our view. Better-than-expected CPI readings and a trade inflows and FDI. We do not discard the possibility that of falling oil prices. Inflation expectations are falling.
this is to a large extent already priced in, and like other low downward trend in inflation expectations should help flatten the authorities may come up with more measures to stem However, the central bank tightened by 25bp at its most
betas, valuations are not that compelling at the moment. the curve, as well as the continuing policy normalization in COP appreciation, and thus we look for better levels around recent meeting, and this seems unlikely to be the last hike.
the front end. 1,850/USD to re-enter a short USD-COP trade.
Table B5: Summary of HSBC fixed income, FX, and equity views

25 May 2011
Cross-Asset Strategy
Emerging Markets Strategist
Country EXD LDM FX Equity

Egypt Underweight Overweight


Aggregate FX debt is low, its maturity profile undemanding, Aggregate valuations look attractive on our belief that the
and chances of access to donor support are high, but political and economic environment will progressively
external debt continues to trade too tight vs peers, given normalize. The political news flow since the uprising has
high political risk. A likely prolonged downturn in external been better than expected. The earnings base for 2011 may
account position and recent sharp fall in foreign currency be too high; however, to the extent this is depressed, we
reserves compound concerns and weigh on credit quality. expect a higher base in 2012.

GCC Overweight Overweight


Sovereigns are wide to similarly rated Asian peers. Positive developments on the restructuring of Dubai World
Political risk leads to volatility but strengthening budget and and Nakheel debt and potential upgrades for the UAE and
current account surpluses support the credit. Abu Dhabi Qatari exchanges from frontier to emerging market status by
and Qatar are a play on oil wealth; state-owned banks offer MSCI are catalysts. We recommend a small (1.5%) off-
a higher carry, given strong state support. Bahrain is a play benchmark weighting in the region, and we prefer the UAE
on political recovery after Saudi-led intervention. and Qatar on MSCI EM inclusion hopes.

Hong Kong Flattening: Receive HKD2-5-10yr butterfly Neutral Neutral


A US curve flattening may lead the 5yr HKD IRS to The launch of the RMB Fiduciary Account Service, The HKD/USD peg imports a loose monetary policy to Hong
outperform the 2- and 10-yr HKD IRS. Expectations of a designed to address issues with counterparty credit limits Kong. Its long-term story continues to be attractive, given
prolonged period of low Hibor rates could drive 2yr rates facing the clearing bank, BoC (HK), has taken off slowly. the backing from China. However, valuation has factored in
lower. Our regression analysis suggests the 5yr IRS A recent HKMA circular clarifying the initial announcement most of the positive news, and thus we are maintaining a
decreases by 21bp for a 10bp decline in 2yr rates, while should accelerate implementation of the program, which neutral stance.
the 10yr IRS is relatively less sensitive, only 16bp. should see the CNH forward curve flatten out.

Hungary Neutral. Extend duration to REPHUN 2041 Paying bias; weak technical position Short EUR-HUF Overweight
We recommend investors extend duration to the REPHUN Foreign participation in HUF bonds is about 30%, up from We stay directionally bullish on the HUF, although euro- Hungary offers the greatest opportunity for macroeconomic
2041 for improved convexity. The inclusion into EMBI will 21% earlier this year, on the back of currency appreciation. zone sovereign risks may weigh on the HUF in the near surprise among the CE3 countries, we believe. At one level,
remain a supportive factor for credit spreads. The There is now even less risk premium embedded in the term. Record trade surpluses remain robust as a result of the consensus seems to be exaggerating debt sustainability
valuation, however, appears stretched following a recent HUF bonds – 2s5s IRS spread merely c20bp. We are strong export performance and will maintain the current issues; on another, it appears too pessimistic about
rally, particularly for the 10y bond- REPHUN 2021. biased to pay HUF 5y IRS due to risks coming from a account in comfortable surplus, offering support to the prospects for coordinating monetary and fiscal policy. The
potential currency reversal, contagion from the Euro-zone HUF. Rat cut risks are low, given the cautious stance of market has been one of the top performers in EM this year,
periphery, and deterioration in banking industry profitability the central bank and signs of price pressures. +20%, after having been the single worst performer in 2010.

India Neutral. Rec 1y1y – Pay 2y1y fwd INR OIS Neutral Neutral
Front end of the INR OIS appears cheap, implying an INR’s narrow dependence on equity inflows and latent We raised India to neutral following Q1 underperformance.
excessive probability of about 60bp hikes over the next inflation risks makes it less attractive in next months, Near-term risks such as inflation, corruption scandals, and
3months. Heightened inflation risks and continuation of though we still warn against being too bearish. Equity global macro concerns have not dissipated, but valuation
RBI’s liquidity draining measures may keep O/N rates inflows have been impressively sticky, but in choppy times has corrected enough to make the risk-reward trade-off
elevated. Recent increase in cash management and T-bill it is hard to recommend a currency so narrowly dependent more balanced.
issuance indicate the RBI’s intention to keep liquidity well on a single flow. We believe the RBI is not behind the
into a deficit zone. Moreover, a fuel price hike, about 8%, curve enough to spark a market reaction, but risks
is likely to translate into higher inflation expectations. become more significant as the global situation turns.

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Indonesia Buy. Position toward 1-5yr IndoGBs Short USD-IDR Overweight
We see the 1-5yr GBs favored by (1) policy changes that Despite high interest rates, IDR no longer trades as a high Bank Indonesia has been slow to raise rates in the face of
shift foreign investor interest from short-term SBI bills to beta or pure carry currency. Proactive policy – via inflation, and we expect two more rate rises in the coming
government bonds and (2) a June BI rate pause stance. BI lengthening SBI holdings, capital controls, and months. Still, domestic demand has remained strong, and
seems likely to continue its FX appreciation policy to symmetrical FX intervention – has helped to keep volatility companies have put capex plans back on track. Valuations
combat imported inflation. This could strengthen the low and improve the risk-adjusted return. The combination are not excessive, and with little disturbing news on the
interest at the front end of the curve, which has also been of policy and limited exposure to external risks make IDR political front, we are overweight.
evident from recent auction results (e.g. 5yr IndoGB one of our core longs.
23

bid/cover ratio=3.91, 10yr IndoGB bid/cover ratio=1.28).


24

Table B5: Summary of HSBC fixed income, FX, and equity views

25 May 2011
Cross-Asset Strategy
Emerging Markets Strategist
Country EXD LDM FX Equity

Israel Expect spreads to compress on solid credit metrics We like ILGOV2022 bond Hold USD-ILS
We like selling protection in Israel vs Turkey as a pure With economic data showing signs of the effectiveness of ILS performance is likely to be less bright in the near term,
macro play, as the former has a healthier BoP profile and the BoI’s aggressive tightening, and the fiscal profile being as BoI may slow the pace of monetary policy tightening.
the latter faces widening current account deficit challenges. anchored by robust growth, Israel stands out as one of our ILS strength remains an issue for policymakers as the
External liquidity continues to improve as the BoI favorite longs in the low-beta camp, given its healthier trade deficit widens. Parliament appears likely to approve
accumulates FX reserves further. With the current account public profile. Receiving spread between Israel IRS vs a new capital gains tax on non-resident investment in the
comfortably in surplus, sovereign spreads have more room USD presents an attractive hedge for a reverse of the Makam market. Although we stay neutral for the near
to tighten gradually as the dust in MENA settles. UST. term, we continue to see USD-ILS at 3.40 at year-end.
Korea Neutral Neutral. Maintain 5-2yr KRW CCS steepener Neutral Underweight
A paying interest at the long end and a pause in rates by Medium-term value in KRW remains very attractive, but Korea is among the most oil-intensive Asian economies and
BoK support a bear-steepening in the 5-2yr KRW CCS. we do not favor KRW in the coming months on a risk- is the most exposed to export sensitivity. Valuation is edging
Limited KRW appreciation and a resumption of liability reward basis. KRW is relatively more vulnerable to the up, while earnings growth forecasts are becoming less
swap appear likely to drive 5yr CCS higher. Moreover, a slowdown that the HSBC economics team forecasts for conservative. We recommend investors reduce exposure to
decline in arbitrage trades (ie long MSB, pay 2-1yr CCS) coming months. This external exposure is also manifested Korea until cyclical indicators bottom and inflation risks
as indicated by Thai kimchi funds repatriation (KRW661bn in equity flows, which have accounted for 40% of overall subside.
in April) may relieve CCS paying pressure at the front end, net BoP inflows; with the global picture less stable, the
supporting curve resteepening and swap basis widening. potential for a rapid reversal of these inflows is a concern.

Malaysia Neutral Receive. Bullish flattening in MGS curve Sell USD-MYR Overweight
Recent decline in commodity prices suggests a modest Early May weakness in MYR was largely a position Valuations are still below their historical averages. Food
bull-flattening of the Malaysian Government Securities adjustment, providing good levels to buy MYR. Large inflation has never been as much of an issue in Malaysia as
(MGS) curve. We prefer the belly of the MGS curve, as the domestic demand and the strong commodity surplus will it is in neighboring Indonesia, and arguably the central bank
long end remains vulnerable to the heavy long-dated help buffer the MYR from global weakness. Political has been more proactive when it comes to taming price
supply during Q2 2011. In swaps, the 3mth Klibor fixing of issues are holding back reforms, but we see these being increases. Hence, Malaysia is probably closer to the peak in
3.24% implies a higher probability of a 25bp hike in the overcome later in the year, with further FDI and rates than some of its Asean neighbors. Palm oil is
overnight policy rate (OPR) at the 7 July meeting. privatizations offering further support on a flow basis. supporting exports and rural income growth.

Mexico Neutral. Buy UMS 2110, sell 2040 Receive: Buy MBono ‘24s (target: 7.05%; stop: 7.60%) Short USD-MXN Underweight
The belly of the UMS curve (5- to 10-year bonds) has We closed our 1Y TIIE receiver as it reached our target. The MXN is one of our preferred regional plays this year, If we are right that investors now will tend to refocus on
continued to outperform this year. The second tranche of We now recommend extending duration on the MBonos based on an improving US outlook, cheap valuation, and secular domestic demand stories in emerging markets at the
the UMS warrant expired in the money, with the UMS ’12 curve by buying the ’24s with target at 7.05% and stop at a low risk of intervention. We recently raised our expense of global cyclicals, Mexico – with its heavy
the cheapest-to-deliver bond. Our Buy UMS 2110, sell 7.60 This trade is supported by a steep local curve, a forecasts, and we now see the USD-MXN at 11.30 at dependence on the US – looks like somewhere to avoid.
the‘‘40s trade still has room to move. The spread recently benign inflation outlook, a not-overvalued currency, and year-end vs our previous 11.80 forecast. In this less- The domestic story seems unappealing, and valuations are
tightened to 50bp from 56bp. Afores that still have room to add duration. We also hold a certain environment, it may be advisable to be long MXN elevated.
Pay 2 y BEI with target at 4.1% and stop at 3.4%. positions as relative value against other EM currencies.

Panama Neutral. 5Y CDS looks expensive vs Latam peers


Strong economic growth and higher fiscal revenues,
alongside abundant global liquidity, have fueled the rally in
Panamanian credit and global bonds. The 5Y CDS looks
expensive, as it trades c20bp through its Latam peers
Brazil, Mexico, and Colombia and just 20bp above Chile.

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The curve is steep.

Peru Underweight. Asymmetric risk weighs on EXD Neutral. Rates look attractive, but political risk is still high Neutral USD-PEN Neutral
5y CDS has rallied more than 40bp from its recent peak as Local rates will remain very sensitive to political risk, at The PEN has been performing better since Fujimori edged The market is down 21% this year on the back of falling
presidential candidate Keiko Fujimori now is ahead in the least until polls reflect that Fujimori could be a clear ahead in the polls, but it is still far too close to call. commodity prices and political risk related to the election.
polls, which show a technical tie. We see an asymmetric winner. The curve is very steep from 1- to 4-year local However, the central bank has shown its commitment to The Ipsos-Apoyo poll shows that Humala and Fujimori
market reaction: limited upside in the case of a Fujimori bonds and from 5- to 10-year bonds. The uncertainty keep the USD-PEN below 2.83/USD, and any move close remain technically tied. Uncertainty remains due to the high
victory, but significantly larger downside if Ollanta Humala regarding the presidential election has made investors to to this level should be seen as an opportunity to reinstate level of undecided voters ahead of the 5 June run-off.
wins. Global bonds have underperformed their peers look for shorter-duration bonds. Levels in the long end look short USD-PEN trades with a target of 2.72/USD by year-
throughout the year, 2.5% vs 4% for Brazil. attractive, but local rates should remain very volatile. end.
Table B5: Summary of HSBC fixed income, FX, and equity views

25 May 2011
Cross-Asset Strategy
Emerging Markets Strategist
Country EXD LDM FX Equity
Philippines Underweight. Sell ROP ’21 and ’26 Neutral. Long RPGBs on signs of a recovery in FX gains Neutral USD-PHP Neutral
We have a sell recommendation due to rich valuation and Prospects of a rating upgrade and a recent respite in PHP should show some resilience in the coming months, Domestic demand is resilient, although there is some rise in
lack of effort and political momentum to address weak commodities suggest a potential decline in yields. Recent with the debt market growing and strong inflows from risk to inward remittances from the Middle East. Rates
government revenue generation. The government has underperformance was spurred by the BSP rate tightening remittances continue to provide support. BSP has also appear likely to inch higher, and equity valuations are only a
been limiting much-needed development expenditures to and an increase in inflation expectations after the CPI largely normalized FX policy, becoming more active in the touch below the historical average.
contain the budget deficit. This strategy hurts overall soared to 12mo high of 4.5% in April. Still, current inflation forward markets again. However, FX policy is unlikely to
economic activity by dissuading private investment. levels are well within the central bank's 3-5% target, and a allow as much strength as elsewhere in the region.
consolidation in commodity prices may soften
expectations.
Poland Underweight. Buy protection Biased to pay. Expect the ASW to tighten Hold EUR-PLN Underweight
With the public debt approaching the 55% of GDP MinFin FX intervention and an NBP surprise hike should The government and the NBP look to appreciate the PLN: The main issue in Poland is that economic recovery and the
threshold and the current account deficits widening, Poland tighten monetary conditions more effectively. We remain about EUR13bn in EU funds now may be sold directly to political environment are stable and on track, but it is difficult
has the least favorable credit metrics among CEE names. concerned about fiscal risks and a wider current account the market. A stronger PLN may help achieve NBP’s 2.5% to see much upside surprise. Indeed, at the margin, it is
We recommend investors buy protection to hedge deficit. In the context of twin deficits, the long end of the inflation target, as it is mainly commodity-driven. Yet PLN easier to envisage disappointment. Poland seems to have
contagion risks from peripheral region; or switch into curve does not offer sufficient risk premium. Strong foreign upside potential appears limited in the near term. The inherited Hungary’s twin deficit problems, while inflation also
Romania EUR 2015 as a better credit to park cash. positioning in local bonds may cause weakness. We are widening of the current account deficit, the decline in FDI, is becoming more of an issue.
biased for curve steepeners; expect cash bonds to and a heavy positioning may be an obstacle to FX gains.
outperform IRS on FX.
Russia Overweight. Pay/Neutral Hold RUB. Appreciation appears overdone Neutral
We maintain a small overweight in Russia bons. MinFin A liquidity shortage in the system has caused stress in The RUB rose 6%+ year-to-date on a REER basis and Russian valuations are clearly low, but the key catalysts
has raised oil break-even forecasts to USD105/bbl for 2011 RUB rates. More fundamentally, we believe that fiscal returned to its pre-crisis levels. We keep a bearish bias for have lost momentum. It is difficult to see a repeat of the
and USD120/bbl for 2012, which should anchor sentiment uncertainties are rising, especially should oil prices fall the medium term as the current account surplus seems positive oil price support in Q1. With regard to the domestic
in the near term. However, should oil prices fall further. We stay sidelined at this stage. likely to narrow in coming quarters and monetary policy to cycle, Russia is among the countries that have been least
substantially; the long-term fiscal risks may undermine be tightened only moderately. Coming elections might pre-emptive in addressing inflationary pressure, so the
spreads’ performance. weigh on capital flows. A continuous increase in oil prices potential for negative surprises on that count is relatively
is the main risk to our central scenario. high.
Singapore Long SGD NEER/short USD-SGD Underweight
Appreciation should face fewer headwinds than elsewhere While exposed to global demand trends, a vigilant
in Asia, given SGD’s safe-haven status, hawkish central government is keeping domestic asset price inflation at bay,
bank, and credible policy regime. Amid uncertainty, so Singapore equities appear unlikely to outperform the
portfolio flows should rise from repatriation and regional region.
safe-haven flows. SGD’s correlation with the EUR has
fallen. The NEER has room to move higher in the band.
South Africa Neutral. Long SOAF 2041 Receive. Buy R208; hold 1s5s IRS flattener Buy USD-ZAR Neutral
We continue to like the SOAF2041. The valuation has The front end has depriced tightening expectations over Although the ZAR benefits from its commodity currency The default position for most GEM funds is to be
richened significantly of late; thus, we recommend the last two months, benefiting 1y1y and 2y receivers. We and high-yielding status, it remains vulnerable to changes underweight South Africa; we believe its situation deserves
investors stay in the very long end of the curve. The trade have taken profit in receiving 1y1y and extended duration in global market sentiment. The dependence on short- better than that, and we recommend a neutral weighting.
balance in South Africa printed in surplus territory again in by going long the R208 bond, as the front end could see term capital inflows remains wide, and macro parameters Domestic South Africa remains in the right part of the cycle
March, implying few risks from external imbalances. rising volatilities, and the long end of the curve offers more still suggest the ZAR is too strong. The SARB is on the for equities to perform. Inflation remains low, so the central
value from risk-premium perspective. We continue to like alert on inflation and second-round impacts of cost bank should be able to continue to pursue a supportive
curve flatteners, as the slightly more hawkish SARB should factors, but domestic economic activity is still soft, while a monetary policy.

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keep inflation expectation well-contained. negative output gap does not warrant increases in rates.
Taiwan Paying bias. Moderate bearish flattening expected Sell TWD-IDR Neutral
Despite subdued April inflation of 1.34%l, the strong GDP The TWD is unlikely to continue its strong performance Domestic sentiment should be buoyed by amicable cross-
release on 19 May is likely to justify a potential hike at the year-to-date. The equity market and large trade surplus Strait politics. However, global macro headwinds continue to
24 June meeting. Further upside potential in front-end IRS are both vulnerable to weakening global demand. With weigh on export-focused Taiwanese stocks. Valuation is
is expected as 1yr ND TWD IRS trades at a narrow spread low implied rates and managed volatility, we would use attractive, coupled with reasonable earnings growth
of only 18bp over the 90day CP rate. HSBC Economics the TWD as a regional funding currency. expectations. As a result, we stay bullish on Taiwan longer-
25

forecasts a 25bp hike in discount rates by 3Q11. term but turn neutral to reflect our cautious near-term view.
26

Table B5: Summary of HSBC fixed income, FX, and equity views

25 May 2011
Cross-Asset Strategy
Emerging Markets Strategist
Country EXD LDM FX Equity
Thailand Pay/Neutral. Sell 10yr ThaiGB, Receive 10yr THB IRS Neutral Underweight
Receive swaps based on limited upside pressure in the Large trade surplus and hawkish policy support the THB. Politics remains the key concern. The general election on 3
THB fix, currently 27bp above the repo rate. Bond-swap However, FX policy remains the focus in protecting the July could reignite street demonstrations. The king’s health
spreads should tighten (ie higher 10yr ThaiGB yield, lower downside in USD-THB rather than the topside. Also, a remains a concern. Fundamentals are generally positive, but
10yr THB IRS), as a rapid increase in the THB fix has weaker global growth outlook and uncertain political investors can get exposure to similar growth elsewhere in
widened bond swap spreads across the curve, chiefly the backdrop make the trade balance vulnerable. the Asean region without the same degree of political risk.
10yr-point. Historical valuations suggest that the 10yr swap
spread may encounter a resistance at around 60bp.
Turkey Underweight Pay bias. Enter 2s5s X-CCY steepener Buy USD-TRY Overweight
We remain underweight Turkey USD bonds, and we like There is room for the front end to deprice the policy rate Without rapid concrete results in slowing credit growth and Turkey has been helped by reduced upward momentum in
buying protection in CDS (against Israel). The BoP profile hike expectation post-election. While there are no signs narrowing the wide current account deficit, the TRY is oil prices. At the same time, concern about domestic
continued deteriorating as the CBRT remains reluctant to that credit growth is slowing, the CBRT has retained its facing the risk of further depreciation, as there is no risk overheating is diminishing. Policy, having been behind the
hike the policy rate. Should global liquidity tighten commitment to quantitative tightening. We like the carry in premium offered in exchange for the macro risks. RRR is curve, now looks much more in tune with events, and there
substantially, the financing of current account deficit – the front end, and we are skeptical on the belly/long end of likely to remain the main policy tool, implying less need to are some tentative indications that the economy is beginning
mainly short-term borrowing – could come under pressure. the curve due to insufficient risk premium. increase the key repo rate. Delayed and small repo rate to slow. The market no longer looks over-owned by GEM
hikes should keep the TRY weak. Markets are tuned to funds, and valuations do not look excessive.
the post-12 June election environment and expect
decisive steps to mitigate current account deficit risks.
Ukraine Overweight We continue to like the carry in VAT bonds Hold UAH
We remain overweight Ukraine as an HY sovereign credit, We continue to favor the VAT bonds for attractive carry, Depreciation pressures have eased in 2Q, reducing the
and on an improving relationship with Russia. Nonetheless, anchored by a stable currency. need for NBU’s FX interventions, while seasonal balance-
with valuation tightened significantly, we advise more of-payment improvements should start working in the
cautiousness. UAH’s favor in the summer. Rapid weakening of the trade
balance, potential contagion from Belarus, and delays in
executing the IMF standby program are the main risks.
Uruguay Overweight Buy. We favor the front-end of the nominal curve Short USD-UYU
We continue to see the Global 2036 as the most attractive We consider the local curve increasingly attractive and Inflation has continued to surprise to the upside, rising to
bond to capture carry. Yet for investors willing to reduce favor the new treasury notes maturing in January 2014 8.3% y-o-y. In the highly dollarized economy, the FX rate
duration, we favor the Global 2017 and 2022, as the (U1) and January 2016 (U2). As we expect inflation to is one of the most important tools to tighten monetary
government appears likely to target those bonds in its peak at close to 9% y-o-y in 1H11, we consider locking into conditions. As such, we believe FX policy is likely to be
strategy to reduce exposure to USD-denominated paper. fixed-rate paper as the best strategy. more accommodative for the time being. A more
expensive BRL and strong prospects for FDI make us
bullish the UYU.
Venezuela Overweight. Buy PdVSA '17N - Venz 5Y CDS basis Neutral USD-VEF
Venezuela remains king in terms of carry. Based on lower Higher oil prices reduce the chances of another
supply expectations, we see relative more upside in PdVSA devaluation short-term, particularly ahead of the
than in the sovereign. The PdVSA basis has also lagged December 2012 presidential election. A new oil windfall
behind the basis compression seen in the sovereign. The tax will channel more funds to the Fonden. If Fonden sells
PdVSA ’17N continues to be the cheapest bond in the more of its USD via Sitme at VEF5.30/USD, expect more
curve on PECS spread. USDs for imports and other payments. But if Fonden sells
USDs to the central bank at the official VEF4.30/USD rate,

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expect more USDs for the private sector via Cadivi.
Vietnam Long USD-VND
The pace of recent policy tightening, repo rate now at
15%, is a positive development for VND. However,
double-digit inflation and a large trade deficit are still key
challenges. Further weakness in the short term remains,
given the low level of FX reserves.
Emerging Markets Strategist
Cross-Asset Strategy abc
25 May 2011

EM Flows Watcher USD4.75bn entered EM-dedicated fixed- Pablo Goldberg


Global Head, EM Research
income funds between 30 March-18 May. This HSBC Securities (USA) Inc.
 Inflows into EM-dedicated funds have
was an increase of 3.7% of assets under +1 212 525 8729
recovered in the past weeks pablo.a.goldberg@us.hsbc.com
management (AUM). EM equity funds followed a
Hernan Yellati
 A softening growth outlook could reduce similar pattern, accumulating USD13.7bn, or Latam FI Strategist
HSBC Securities (USA) Inc.
flows into equities in the coming weeks 1.9% of AUM. However, EM equity funds saw +1 212 525 3084
outflows in the same period, returning to negative hernan.m.yellati@us.hsbc.com
 Local fixed-income currency funds remain
terrain as has been the case for most of 1Q11.
strong
We believe that inflows into EM bond funds
Reflows to developed markets reversed. In our
will remain strong, outperforming EM equity
April EM Strategist piece, we highlighted that a
funds. The bigger drag, in our view, relates to
shift in the output-inflation trade-off had caused a
growth weakness and currency dislocation.
strong shift toward developed markets’ funds
since end-January 2011. By end-March, however,
lower-than-expected GDP growth and signals of
low-for-longer rates in the US initiated a
favorable change toward the EM spectrum.

Chart B1: Fixed income fund flows Chart B2: Equity fund flows

USDmn
1,000 6,000 8,000 80000
6,000
60000
500 4,000 4,000
40000
2,000
0 2,000 0 20000
-2,000
0
-500 0 -4,000
-20000
-6,000

-1,000 -2,000 -8,000 -40000

Jan-11 Feb-11 Mar-11 Apr-11 May -11 Jan-11 Feb-11 Mar-11 Apr-11 May -11
GEM EM EA Latam
Blend LDM EXD Accumulat ed (2Y) Asia x-Jap GEM (2Y) DM (2Y)

Source: EPFR data Source: EPFR data

Table B6: Fund flows (USDm)


_______________________________________________________ Equity ______________________________________________________
Developed US _______________________EM______________________
Total GEM EMEA Latam Asia x-JP
Last 4 weeks 7,204 5,586 1,711 1,784 -269 -92 289
YTD 58,648 29,958 (7,549) (3,307) 3,715 (2,044) (5,913)
__________________________________________________ Fixed income ___________________________________________________
_________________________________EM __________________________________ _________ US __________
Total Blend EXD LDM Global EMEA Latam Asia x-Jap HY TIPS Muni
Last 4 weeks 2,624 107 644 1,873 2,196 -29 133 324 790 510 -1,553
YTD 4,832 (96) 921 4,007 3,790 (38) 434 645 6,608 1,798 (18,076)
Source: EPFR data

27
Emerging Markets Strategist
Cross-Asset Strategy abc
25 May 2011

Macroeconomic forecasts
Table C1: Summary of HSBC macroeconomic forecasts
_______ GDP ______ _____ Inflation _____ _____ Policy rate ____ _________FX _______ ____Current account___ ____ Fiscal account ____
2010 2011f 2012f 2010 2011f 2012f 2010 2011f 2012f 2010 2011f 2012f 2010 2011f 2012f 2010 2011f 2012f
Argentina 9.00 5.80 5.00 25.00 25.00 21.00 9.00 9.00 9.00 4.00 4.10 4.50 0.90 0.10 0.30 0.20 -1.00 0.20
Brazil 7.50 4.70 4.60 5.91 6.40 5.40 10.75 12.50 12.50 1.67 1.52 1.60 -2.30 -2.50 -2.70 -2.60 -2.50 -2.80
Chile 5.20 6.00 5.00 3.00 4.30 3.50 3.25 6.00 6.00 468 510 510 1.90 -0.90 -1.80 -0.50 0.90 1.40
China 10.30 8.90 8.60 3.30 3.90 2.90 5.81 6.56 6.56 6.61 6.35 6.15 4.20 3.70 2.60 -2.60 -2.00 -1.70
Colombia 4.60 4.10 4.30 2.60 4.00 4.80 3.50 4.50 5.00 1750 1750 1900 -1.80 -1.60 -1.60 -3.00 -3.50 -3.30
Czech Republic* 2.20 1.70 2.70 2.30 2.56 1.31 0.75 1.25 1.50 18.70 17.00 23.70 -2.10 -1.90 -1.60 -5.30 -4.40 -4.10
Egypt 5.10 0.20 2.50 10.00 10.70 12.00 9.10 9.30 - 5.81 6.50 7.00 -2.00 -1.80 -2.30 -8.00 -9.80 -10.30
Hong Kong 7.00 5.50 4.90 2.40 4.70 4.80 0.50 0.50 1.00 7.80 7.80 7.80 9.70 7.50 9.40 4.20 2.30 3.10
Hungary* 1.20 2.50 3.10 4.70 4.62 3.08 5.25 6.00 6.25 207 182 260 1.90 -0.40 -0.70 -3.80 -1.00 -3.50
India 8.70 7.90 8.40 12.00 10.30 7.40 6.25 8.00 8.25 44.70 42.00 42.00 -3.00 -2.90 -2.50 -5.10 -5.00 -4.20
Indonesia 6.10 6.40 6.50 5.10 6.80 6.50 6.50 7.25 7.25 9010 8300 8300 0.90 0.60 0.60 -1.60 -1.90 -1.70
Israel 4.50 3.70 3.40 2.70 4.37 3.00 2.00 4.00 4.50 3.60 3.40 3.38 3.10 2.30 2.10 -3.70 -3.20 -3.40
Korea 6.00 4.70 5.20 3.00 4.40 3.40 2.50 3.75 4.00 1126 1070 1030 3.70 1.04 0.61 -2.74 -2.00 -1.80
Lebanon 7.10 3.20 3.60 4.50 5.00 5.00 10.00 10.00 10.00 1126 1070 1030 -20.70 -20.80 -17.30 -7.50 -8.10 -7.80
Malaysia 7.20 5.30 5.70 1.70 3.40 3.10 2.75 3.25 3.50 3.06 2.88 2.74 12.00 12.40 12.70 -4.40 -3.20 -2.00
Mexico 5.50 4.10 4.10 4.40 3.60 3.30 4.50 4.50 5.50 12.40 11.30 11.70 -0.50 -0.80 -1.30 -2.80 -2.50 -2.00
Panama 7.50 6.50 6.50 4.90 3.50 2.50 1.00 1.00 1.00 -11.00 -9.90 -4.50 -1.90 -1.50 -0.70
Peru 8.80 7.10 6.10 2.08 3.17 2.62 3.00 4.25 4.75 2.82 2.72 2.68 -1.50 -2.90 -3.50 -0.60 -0.80 -0.70
Philippines 7.30 5.40 5.90 3.80 5.40 4.50 4.00 5.00 5.75 43.80 41.00 40.00 4.50 6.30 5.40 -3.70 -3.00 -2.50
Poland* 3.80 4.00 4.20 3.10 5.83 2.22 3.50 4.50 4.50 2.95 2.68 2.68 -3.30 -3.40 -3.60 -7.90 -6.70 -6.20
Russia 4.00 5.50 4.00 6.90 9.70 8.50 7.75 8.50 7.75 30.50 31.30 31.30 5.10 4.70 3.10 -4.10 -0.50 -0.20
Singapore 14.50 5.80 6.20 2.80 4.20 3.10 0.40 1.10 1.20 1.29 1.23 1.19 22.20 21.90 24.20 -0.10 0.50 0.70
South Africa 2.80 3.50 3.10 3.50 5.92 4.86 5.50 5.50 7.00 6.62 6.90 6.80 -3.90 -4.20 -5.00 -5.20 -4.70 -4.00
Taiwan 10.82 5.05 5.48 0.96 2.26 2.24 1.625 2.125 2.625 29.30 28.00 26.80 9.43 7.32 6.29 -3.31 -2.72 -1.08
Thailand 7.80 4.90 5.70 3.30 4.00 3.70 2.00 3.00 3.50 30.00 28.60 27.50 4.64 5.15 5.80 -1.30 -1.00 -0.60
Turkey 8.00 4.20 4.30 6.40 7.39 6.37 6.50 7.50 7.50 1.54 1.45 1.40 -6.50 -7.00 -6.60 -3.50 -4.00 -3.60
UAE 1.70 3.40 4.10 1.50 2.70 3.80 N/A N/A N/A 10.00 11.80 8.20 5.20 10.60 10.40
Ukraine 3.80 4.00 5.10 9.40 8.70 8.00 0.00 0.00 0.00 -1.90 -4.90 -10.10 -5.60 -3.50 -3.00
Uruguay 8.50 5.50 5.00 6.62 6.96 6.90 6.75 8.00 8.00 19.89 18.70 18.70 -0.40 -0.42 0.27 -1.20 -1.00 -1.00
Venezuela -1.40 2.60 4.10 27.00 29.00 25.50 N/A N/A N/A 4.30 4.30 4.30 6.20 9.80 6.60 -4.30 -0.70 -5.90
Vietnam 6.80 6.80 7.40 9.20 14.30 8.90 9.00 10.00 9.00 19498 21500 21500 -8.30 -6.90 -5.70 -5.00 -4.80 -4.50

EM 6.20 4.80 5.00 6.00 6.60 6.10


Developed 2.50 1.60 2.20 1.50 2.40 1.40
US 2.90 2.80 3.10 1.60 3.00 1.70 0.25 0.25 0.50 N/A N/A N/A -3.20 -3.20 -3.00 -8.90 -9.10 -7.00
UK 1.30 1.20 1.60 3.30 4.20 2.10 0.50 0.50 2.00 1.57 1.61 1.61 -2.50 -2.60 -2.00 10.00 8.00 6.20
Eurozone 1.70 1.50 1.60 1.60 2.70 1.90 1.00 1.75 2.50 1.34 1.40 1.40 -0.60 -0.30 -0.10 -6.50 -5.00 -4.20
Japan 3.90 0.90 2.50 -0.70 -0.20 -0.30 0.10 0.10 0.10 81 80 80 3.60 2.00 2.90 -9.00 -9.00 -8.00
* FX forecasts vs EUR.
Source: HSBC

Chart C1: GDP growth Chart C2: GDP growth ranking (%) Chart C3: Inflation ranking (%)

% India
9 Czech Republic
2010 Peru Taiwan
BOTTOM 5

8
TOP 5

2011 Vietnam
7 2012
Peru
Panama UAE
6
Indonesia Malaysia
5
Lebanon India
BOTTOM 5

4
Venezuela Egypt
3 Vietnam
TOP 5

Hungary
2 Argentina
Czchek Republic
1 Egypt Venezuela
0
0 2 4 6 8 10 0 10 20 30
BRIC CIVETS EM DEVELOPED

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

28
Emerging Markets Strategist
Cross-Asset Strategy abc
25 May 2011

EM FX forecasts
Table C2: Summary of HSBC EM FX forecasts
2008 2009 2010 1Q11 2Q11f 3Q11f 4Q11f 1Q12f 2Q12f 3Q12f 4Q12f
USD-ARS 3.45 3.80 3.98 4.05 4.10 4.12 4.15 4.20 4.25 4.30 4.35
USD-BRL 2.31 1.74 1.66 1.63 1.56 1.54 1.52 1.52 1.52 1.56 1.60
USD-CLP 637 507 468 478 470 475 480 485 490 495 500
USD-CNY 6.83 6.83 6.61 6.56 6.48 6.40 6.35 6.30 6.25 6.20 6.15
USD-COP 2,248 2,043 1,920 1,871 1,800 1,750 1,750 1,750 1,750 1,750 1,750
EUR-CZK 26.5 26.4 24.5 24.5 24.2 24.0 23.8 23.7 23.7 23.6 23.6
USD-EGP 5.49 5.48 5.81 5.97 6.75 6.75 6.75 6.75 6.75 6.75 6.75
USD-HKD 7.75 7.76 7.80 7.78 7.80 7.80 7.80 7.80 7.80 7.80 7.80
EUR-HUF 267 270 278 268 260 255 255 255 260 260 260
USD-INR 48.7 46.5 44.7 44.6 44.5 43.5 42.0 42.0 42.0 42.0 42.0
USD-IDR 11120 9404 8996 8720 8500 8400 8300 8300 8300 8300 8300
USD-ILS 3.78 3.79 3.53 3.50 3.50 3.45 3.40 3.37 3.35 3.35 3.30
USD-KRW 1,295 1,164 1,126 1,102 1,090 1,080 1,070 1,060 1,050 1,040 1,030
USD-MYR 3.47 3.43 3.06 3.03 2.94 2.91 2.88 2.85 2.82 2.79 2.74
USD-MXN 13.69 13.10 12.36 11.91 11.55 11.45 11.30 11.30 11.30 11.50 11.70
USD-PEN 3.13 2.89 2.81 2.80 2.74 2.73 2.72 2.71 2.70 2.69 2.68
USD-PHP 47.5 46.2 43.8 43.4 42.6 41.8 41.0 40.5 40.0 40.0 40.0
EUR-PLN 4.11 4.10 3.96 4.00 3.90 3.80 3.75 3.70 3.60 3.55 3.55
USD-SGD 1.44 1.40 1.28 1.26 1.25 1.24 1.23 1.22 1.21 1.20 1.19
USD-ZAR 9.32 7.38 6.62 6.86 7.20 7.00 6.90 6.80 6.90 6.9 7.00
USD-THB 34.7 33.3 30.0 30.3 29.8 29.2 28.6 28.0 27.5 27.5 27.5
USD-TRY 1.54 1.49 1.54 1.56 1.55 1.50 1.45 1.45 1.40 1.40 1.40
EUR-RON 4.03 4.232 4.28 4.11 4.05 4.00 3.95 3.95 3.90 3.85 3.85
USD-RUB 29.4 30.1 30.5 28.4 30.3 31.0 31.3 28.8 31.3 31.3 31.3
USD-TWD 32.8 32.0 29.3 29.5 29.0 28.5 28.0 27.7 27.4 27.1 26.8
USD-UYU 24.40 19.55 19.90 19.20 18.90 18.65 18.50 18.50 18.50 18.50 18.50
USD-VEF 2.15 2.15 4.30 4.30 4.30 4.30 4.30 4.30 4.30 4.30 4.30
USD-VND 17,483 18,479 19,498 20,900 20,500 21,500 21,500 21,500 21,500 21,500 21,500

Select G10:
EUR-USD 1.39 1.43 1.34 1.42 1.35 1.35 1.40 1.40 1.40 1.40 1.40
USD-JPY 91 93 81 83 85 80 80 80 80 80 80
GBP-USD 1.44 1.61 1.57 1.61 1.57 1.6 1.61 1.61 1.61 1.61 1.61
Source: HSBC

Chart C4: Change over the last four weeks (%) vs USD Chart C5: Change year-to-date (%) vs USD

BRL
BRL
CLP CLP
CNY
CNY
COP COP
HUF HUF
INR INR
IDR IDR
KRW KRW
MYR MYR
MXN MXN
PHP PHP
PLN PLN
RUB RUB
ZAR ZAR
TWD TWD
THB THB
TRY TRY
-2% - 1% 0% 1% 2% 3% 4% 5%
-4% -2% 0% 2% 4% 6% 8% 10% 12%

Source: Bloomberg, HSBC Source: Bloomberg, HSBC

29
Emerging Markets Strategist
Cross-Asset Strategy abc
25 May 2011

EM Central Bank Watcher


Table C3: HSBC forecasts (in italics) and market implied policy rates
Country Last Jun Jul Aug Sep Oct Nov Dec 2011 2012 Risks
Brazil 12.00 +25 +25 = -- = = -- 12.50 12.50 Despite more hikes and quantitative measures, overall tightening is likely to fall
Market implied*  +24 +26 12.60 12.75 short of that needed to converge to the mid-point of the targeted band by 2012.
Chile 5.00 +25 +25 +25 +25 = = = 6.00 6.00 After a surprise 50bp hike, May statement and officials’ rhetoric signal a
Market implied*  +16 +14 +9 +6 +5 +6 +10 5.65 5.55 slowdown in the pace of hikes.
Quantitative tightening is working. But taming inflation remains the PBoC’s top
China 6.31 +25 = = = = = = 6.56 6.56
priority, requiring more rate and RRR hikes in the coming months.
BanRep should stay data-dependent. Inflation has surprised to the downside.
Colombia 3.75 +25 = +25 = = = = 4.50 5.00
We expect further monetary normalization in coming meetings.
Czech Rep. 0.75 = -- +25 +25 -- = = 1.25 1.50 A more-hawkish ECB could prompt the CNB to tighten slightly earlier than
Market implied*  +35 -20 +27 -2 +25 1.39 2.03 expected in its base-case scenario; however, inflation still remains very benign.
Hungary 6.00 = = = = = = = 6.00 6.25 MPC adopted a wait-and-see stance after three consecutive hikes in Nov-Jan,
Market implied*  +10 +3 +1 +1 +1 0 -1 6.15 6.24 and it believes pre-emptive action to date should diffuse second-round effects.
India 7.25 +25 +25 -- = +25 -- = 8.00 8.25 RBI’s surprise hike in May anchored inflation expectations and tackle demand-
Market implied*  +11 +42 +18 -7 -10 7.79 8.28 led inflation pressures; still trailing the curve, it got a step closer.
BI is back in reluctant-to-hike mode, choosing to permit more FX appreciation
Indonesia 6.75 = +25 +25 = = = = 7.25 7.25
instead to combat inflation.
Israel 3.25 = +25 = +25 = +25 = 4.00 4.50 Strong growth and inflation and a frothy housing market call for more
Market implied*  +16 +9 +11 +7 +6 +5 +5 3.61 4.11 tightening. Quantitative and macro-prudential measures may reduce the size of
any hikes
Korea 3.00 +25 = +25 = -- +25 = 3.75 4.00 Despite a surprise pause in May, we expect the BoK to continue to hike
Market implied*  +10 +8 +2 +2 +4 +12 +3 3.41 3.60 through year-end to address inflation pressures and normalize its stance.
Malaysia 3.00 -- +25 -- = -- = -- 3.25 3.25 BNM has started tightening again and appears likely to bring in another 25bp
Market implied*  +26 -1 +14 3.39 3.52 hike in July.
Mexico 4.50 = = -- = = -- = 4.50 5.50 Banxico has shown a neutral tone with a slight dovish bias in the most recent
Market implied*  0 +2 +5 +13 4.74 5.81 communiqué and minutes, supporting our view of no hikes until 1Q12.
Our rate call has upside risks, but final rate hikes might end up being lower
Peru 4.25 = = = = = = = 4.25 4.75 than consensus. BCRP strongly raised RRR to reduce the need of rate hikes.

The BSP acknowledged that the inflation target for 2011 is at risk and that it
Philippines 4.50 +25 +25 -- = = -- = 5.00 5.75
remains cautious on second-round effects. The tone of officials is still hawkish.
The Russian central bank is well behind the curve but will have to tighten
Russia 8.25 +25 = = = = = = 8.5 7.75
moderately using both RRR and policy rate hikes, in our view.
Poland 4.25 = = -- +25 = = = 4.50 4.50 BNP adopted a more-hawkish tone and now uses FX against inflation. With
Market implied*  +3 +7 +16 +9 +11 6 4.77 5.19 core inflation and service prices on the rise, another 25bps hike seems likely.
South Africa 5.50 -- = -- = -- = -- 5.50 7.00 MPC adopted a slightly hawkish tone due to rising food and fuel prices, but we
Market implied*  +6 +16 +35 6.07 7.78 believe a hold in 2011 is warranted due to limited demand-side price
pressures
Taiwan 1.750 +12.5 -- -- +12.5- -- -- +12.5 2.125 2.625 The CBC is likely ahead of the curve, and we expect further monetary
Market implied*  +18 +17 -5 2.06 2.34 normalization, with the next 12.5bp rate hike coming on 30 June.
Thailand 2.75 +25 -- = -- = -- = 3.00 30.0 BoT continues to present a very hawkish tone, as inflation may pick up soon
Market implied*  +11 +16 +8 -3 -4 3.02 3.64 following the expiration of price controls amidst strong growth.
Turkey 6.25 = +25 +25 +25 +25 = +25 7.50 7.50 Aggressive RRR hikes could push out and pare orthodox rate hike
Market implied*  +5 +6 +12 +15 +18 +18 +13 7.21 7.75 expectations, which we expect to begin in 2H 11. Fiscal policy matters, too.
The SBV uses four benchmark rates. There have been six rounds of hikes in
Vietnam 9.00 +200 = = = = = -100 10.00 9.00
the current cycle. The base rate we track is the only one yet to be raised.

Note: * See our daily Emerging Markets Central Bank Monitor.


Source: HSBC
Chart C6: Emerging Markets Central Bank Monitor – 12-month implied interest rate moves

150
Brazil India Korea Mexico Poland South Africa
125
Implied changes (bp)

100

75

50

25

0
Current 1m 2m 3m 4m 5m 6m 7m 8m 9m 10m 11m 12m

Source: HSBC

30
Emerging Markets Strategist
Cross-Asset Strategy abc
25 May 2011

Surprise Indices
Chart C8: Asian inflation surprises Chart C9: Asian economic activity surprises
Z-sco re Z-sco re

0.80 6.0 2.00 0.0


0.60 5.0 -2.0
1.50
0.40 4.0 -4.0
0.20 1.00
3.0
-6.0
0.00
2.0
-0.20 0.50 -8.0
1.0
-0.40 -10.0
0.0 0.00
-0.60
-12.0
-0.80 -1.0
-0.50
-2.0 -14.0
-1.00
-1.20 -3.0 -1.00 -16.0
Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11
3mma Z score all (ex China) Ec. Activ ity
3mma Z score all (ex China) Inflation
all (ex China) Ec. Activ ity - cumulativ e surprise (RHS)
all (ex China) Inflation - cumulativ e surprise (RHS)

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

Chart C10: Latin American inflation surprises Chart C11: Latin American economic activity surprises

Z-score Z-score
1.0 8.0 0.4 1.0

0.8 7.0 0.3 0.5

0.6 6.0 0.2 0.0

0.4 5.0 0.1 -0.5


4.0 0.0 -1.0
0.2
3.0 -0.1 -1.5
0.0
2.0 -0.2 -2.0
-0.2 1.0
-0.4 -0.3 -2.5
0.0
-0.6 -1.0 -0.4 -3.0
-0.8 -2.0 -0.5 -3.5
Jan-06 Oct-06 Jul-07 Apr-08 Jan-09 Oct-09 Jul-10 Apr-11 Jan-06 Oct-06 Jul-07 Apr-08 Jan-09 Oct-09 Jul-10

3mma Z score 3mma Z score


accumulated z-score RHS accumulated z-score RHS

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

Chart C12: EMEA inflation surprises Chart C13: EMEA economic activity surprises

Z-score Z-score
1.0 7 0.6 5
0.8 6 0.4 4
0.6
5 0.2 3
0.4
0.2 4 0.0 2
0.0 3 -0.2 1
-0.2
2
-0.4 -0.4 0
-0.6 1
-0.6 -1
-0.8 0
Jan-06 Oct-06 Jul-07 Apr-08 Jan-09 Oct-09 Jul-10 Apr-11
Jan-06 Oct-06 Jul-07 Apr-08 Jan-09 Oct-09 Jul-10 Apr-11 3mma Z score (EMEA)
3mma Z score (EMEA) accumulated z-score (EMEA) RHS
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.

31
Emerging Markets Strategist
Cross-Asset Strategy abc
25 May 2011

Trade ideas
Table C4: Recommended trade ideas
Country Trade idea Entry date Entry price Last Target Stop

Credit
Venezuela Buy PdVSA '17N – Venezuela 5Y CDS basis 05/05/11 428bp 411bp 300bp 480bp
Mexico 100y/30y UMS flattener 10/06/10 64bp 517bp 35bp 80bp
Rates
Mexico Buy 2y BEI 02/24/11 3.72% 3.65% 4.10% 3.40%
South Africa 1s5s IRS flattener 16/02/11 198bp 170bp 150bp 198bp
Turkey 2s5s X-CCY steepener 06/04/11 53bp 55bp 95bp 35bp
South Africa Long R208 10/05/11 8.36% 8.34% 7.85% 8.60%
Mexico Buy MBonos 2024 05/11/11 7.39% 7.22% 7.05% 7.60%
India I2-1yr, 1yr forward INR OIS steepeners 5/19/2011 -22bp -20bp 5bp -40bp
Hong Kong Receive 2s5s10s HKD IRS fly 5/4/2011 33bp 21bp Revised 12bp Revised 32bp
Korea 5-2yr KRW CCS steepener 5/4/2011 48bp 47bp 70bp 35bp
Malaysia Buy 5yr MGS; Pay 5yr MYR IRS 4/19/2011 49bp 45bp 60bp 38bp
Thailand Sell 10yr ThaiGB; Receive 10yr THB IRS 4/19/2011 47bp 36bp 32bp 54bp
Indonesia 10yr IndoGB (FR53) 5/23/2011 7.42% 7.47% 7.10% 7.65%
FX
China Sell USD-CNH spot 03/22/11 6.5530 6.4975 6.4500 6.6070
Uruguay Sell USD-UYU via 3 mo. NDF 04/06/11 19.27 18.84 18.50 19.50
Romania Sell EUR-RON 05/09/11 4.100 4.134 3.950 4.180
Closed since last EM Strategist publication on 1 April 2011
South Africa Receive 1y1y IRS vs. paying 3y 17/03/11 29bp 17bp 0bp 40bp
Mexico Receive 1yr TIIE 03/31/11 5.26% 5.10% 5.10% 5.40%
Colombia/Brazil Buy Colombia - Sell Brazil 5Y CDS 07/01/10 11bp -11bp 25bp 0bp
Colombia Sell USD-COP via 2 month forwards 03/31/11 1861 1780 1780 1890
Brazil Sell USD-BRL via 1 mo. NDF 05/06/11 1.6235 1.6500 1.5500 1.6500
Source: HSBC

32
Emerging Markets Strategist
Cross-Asset Strategy abc
25 May 2011

Local markets
Chart C14: Brazil CDI curve Chart C15: Jan ’12 and Jan ’13 (%) Chart C16: Slope Jan ’13-Jan ’12
% % bps
13.0 13 100
Jan-13 Spread Jan-13 - Jan-12

Jan-12 75
12.5 13-Jan 12
12-Jan 17-Jan
50
12.0
5/17/2011 11
4/14/2011 25

11.5
0 5 10 10 0
Years
Apr-09 Oct-09 Apr-10 Oct-10 Apr-11 Apr-09 Oct-09 Apr-10 Oct-10 Apr-11

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
% 8
6.5 400

6 5Y
300
6.0
2Y
4 200

5.5
5/18/2011
4/19/2011 2 100
Spread 5Y vs. 2Y
5.0
0 0
0 2 4 6 8 10
Years Apr-09 Oct-09 Apr-10 Oct-10 Apr-11 Apr-09 Oct-09 Apr-10 Oct-10 Apr-11

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

Chart C20: Mexico TIIE curve Chart C21: 65x1 & 130x1 Chart C22: Slope 26x1 & 130x1
% bps
% 9 250
8.0
Spread 130x1 - 26x1

7.0 8
130x1
130x1 200

6.0 7
65x1
26x1
150
5.0 5/18/2011 6
4/14/2011
4.0
5 100
0 2 4 6 8 10
Years Apr-09 Oct-09 Apr-10 Oct-10 Apr-11 Apr-09 Oct-09 Apr-10 Oct-10 Apr-11

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

33
Emerging Markets Strategist
Cross-Asset Strategy abc
25 May 2011

Local markets (cont’d)


Chart C23: Indonesia swap curve Chart C24: 2Y & 10Y Indo swap series (%) Chart C25: Slope 10Y - 2Y series
% bps
% 12
8 300

10
7 200

8 10Y

6 100
5/18/2011
6
4/15/2011 2Y
Spread 10Y vs. 2Y
5
4 0
0 2 4 6 8 10
Years Apr-09 Oct-09 Apr-10 Oct-10 Apr-11 Apr-09 Oct-09 Apr-10 Oct-10 Apr-11

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
% 5
4.50 100

4.25 5 80
10Y

4.00 4 60

2Y
3.75 5/18/2011 40
4
4/19/2011 Spread 10Y vs. 2Y
3.50
3 20
0 2 4 6 8 10
Years Apr-09 Oct-09 Apr-10 Oct-10 Apr-11 Apr-09 Oct-09 Apr-10 Oct-10 Apr-11

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
% 6
5.0 250

Spread 10Y vs. 2Y


5 10Y
4.5 200

4.0 4 150
2Y

3.5 5/18/2011 100


3
4/19/2011
3.0
2 50
0 2 4 6 8 10
Years Apr-09 Oct-09 Apr-10 Oct-10 Apr-11 Apr-09 Oct-09 Apr-10 Oct-10 Apr-11

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

34
Emerging Markets Strategist
Cross-Asset Strategy abc
25 May 2011

Local markets (cont’d)


Chart C32: Turkey swap curve Chart C33: 2Y & 10Y Turkey swap series Chart C34: Slope 10Y-2Y series
% bps
% 14
9.0 200

12
8.5 150

10
8.0 10Y 100
8
7.5 2Y
5/18/2011 50
6
4/19/2011 Spread 10Y vs. 2Y
7.0
4 0
0 2 4 6 8 10
Years Apr-09 Oct-09 Apr-10 Oct-10 Apr-11 Apr-09 Oct-09 Apr-10 Oct-10 Apr-11

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

Chart C35: Hungary swap curve Chart C36: 2Y & 10Y Hungary swap series Chart C37: Slope 10Y-2Y series
% bps
% 10
7.0 150

100
6.8
8
50
6.5 10Y
0
6 2Y
6.3 5/18/2011
-50
4/19/2011 Spread 10Y vs. 2Y
6.0
4 -100
0 2 4 6 8 10
Years Apr-09 Oct-09 Apr-10 Oct-10 Apr-11 Apr-09 Oct-09 Apr-10 Oct-10 Apr-11

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
% 11
9.0 250

8.0 200
9
10Y
7.0 150

7
6.0 5/18/2011 100
2Y
4/19/2011 Spread 10Y vs. 2Y
5.0
5 50
0 2 4 6 8 10
Years Apr-09 Oct-09 Apr-10 Oct-10 Apr-11 Apr-09 Oct-09 Apr-10 Oct-10 Apr-11

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

35
Emerging Markets Strategist
Cross-Asset Strategy abc
25 May 2011

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 11/11 7.13 4.83


BNTNB 6 08/12 6.80 5.39
BNTNB 6 05/13 6.71 5.51
BNTNB 6 11/13 6.71 5.48
BNTNB 6 08/14 6.70 5.45
BNTNB 6 05/15 6.64 5.50
BNTNB 6 08/24 6.15 5.95
BNTNB 6 08/30 6.10 6.00
BNTNB 6 05/45 5.75 6.35
Chile BCU 5.00 09/11 1.88 3.70 UF v CAMARA SWAP 1Y 2.19 3.38
BCU 5.00 09/12 2.20 3.72 UF v CAMARA SWAP 2Y 2.10 3.47
BCU 3.00 07/13 2.46 3.56 UF v CAMARA SWAP 3Y 2.12 3.50
BCU 3.00 04/14 2.57 3.55 UF v CAMARA SWAP 5Y 2.23 3.41
BCU 3.00 10/15 2.67 3.48 UF v CAMARA SWAP 10Y 2.49 3.37
BCU 3.00 07/18 2.82 3.40
BCU 3.00 02/21 2.90 3.31
Colombia COLTES5 1/4 03/13 UVR 2.75 3.53
COLTES7 02/25/15 UVR 3.56 3.50
COLTES4 1/4 05/17 UVR 3.74 3.97
Mexico MUDI 3.25 06/12 1.08 3.82 MXN SWAP UDI-TIIE 1YR 1.38 3.67
MUDI 5.50 12/12 1.58 3.54 MXN SWAP UDI-TIIE 2YR 1.80 3.73
MUDI 3.50 12/13 2.01 3.51 MXN SWAP UDI-TIIE 3YR 2.22 3.65
MUDI 4.50 12/14 2.32 3.61 MXN SWAP UDI-TIIE 5YR 2.72 3.76
MUDI 5.00 06/16 2.62 3.64 MXN SWAP UDI-TIIE 10YR 3.20 4.05
MUDI 3.50 12/17 2.82 3.66
MUDI 4.50 12/25 3.25 3.91
Peru PERUGB 5.79+VAC 12/13 1.85 2.64
PERUGB 5.8+VAC 01/14 2.34 2.30
PERUGB 5.9+VAC 04/16 2.58 3.70
PERUGB 6.84+VAC 06/16 2.56 3.73
PERUGB 6.84+VAC 07/19 2.89 3.56
PERUGB 6.84+VAC 10/24 3.46 3.51
PERUGB 7.39+VAC 01/35 3.54 3.64
Israel ILCPI 0.5% 06/13 0.84 3.10
ILCPI 1.5% 06/14 1.25 2.97
ILCPI 3.5% 04/18 2.17 2.70
ILCPI 3% 10/19 2.36 2.65
ILCPI 4% 05/36 3.08 2.33
ILCPI 2.75% 08/41 3.19 2.22
South Africa ZAR REAL YIELD SWAP 1Y 0.25 5.72
ZAR REAL YIELD SWAP 2Y 0.93 5.70
ZAR REAL YIELD SWAP 3Y 1.15 5.99
ZAR REAL YIELD SWAP 5Y 1.35 6.32
ZAR REAL YIELD SWAP 10Y 1.68 6.42
Turkey TURKGB CPI 10% 02/12 1.26 7.29
TURKGB CPI 12% 08/13 1.95 6.77
TURKGB CPI 9% 05/14 2.15 6.73
TURKGB CPI 7% 10/14 1.96 6.98
TURKGB CPI 4.5% 02/15 2.38 6.59
TURKGB CPI 4% 04/20 2.67 6.45
Source: HSBC

Chart C41: EM inflation targeters

8
7 Targeted band
6
5
% 4
3
2
1
0
IS CZ PL BZ CL CO ZA TH KO MX HU PE PH ID RO TK

Source: HSBC

36
Emerging Markets Strategist
Cross-Asset Strategy abc
25 May 2011

EM Inflation linkers and break-evens (cont’d)


Chart C43: Brazil inflation break-evens Chart C44: Mexico inflation break-evens
%
% 5.5
6.5

6.3
5.0
6.1

5.9
4.5
5.7

5.5
4.0
5.3

5.1
BRA 2Y BEI
3.5
4.9 BRA 5Y BEI MEX 2Y BEI
MEX 5Y BEI
4.7
3.0
4.5
Aug-09 Jan-10 Jun-10 Nov-10 Apr-11
Jun-10 Aug-10 Oct-10 Dec-10 Feb-11 Apr-11

Source: Bloomberg, HSBC Source: Bloomberg, HSBC

Chart C45: Chile inflation break-evens Chart C46: Colombia inflation break-evens
%
% 5.0
5.0

4.5 4.5
COL 2Y BEI
4.0 COL 5Y BEI
4.0
3.5

3.0 3.5

2.5 3.0

2.0 CHI 2Y BEI


CHI 5Y BEI 2.5
1.5

2.0
1.0
Apr-10 Jun-10 Aug-10 Oct-10 Dec-10 Feb-11 Apr-11
Aug-09 Jan-10 Jun-10 Nov-10 Apr-11

Source: Bloomberg, HSBC Source: Bloomberg, HSBC

Chart C47: Turkey inflation break-evens Chart C48: South Africa inflation break-evens
%
% 7.5
7.5
7.0
7.0
6.5

6.5 6.0

6.0 5.5

5.0
5.5
4.5
5.0
4.0
TURK 2Y BEI SOAF 2Y BEI
4.5 TURK 5Y BEI 3.5 SOAF 5Y BEI
3.0
4.0
Jul-09 D ec-09 May-10 Oct-10 Mar-11
Jun-10 Sep-10 Dec-10 Mar-11

Source: Bloomberg, HSBC Source: Bloomberg, HSBC

37
Emerging Markets Strategist
Cross-Asset Strategy abc
25 May 2011

External debt Rich/Cheap curve has become very rich in spread terms, Victor Fu
FI Quantitative Strategist
Model especially out to 10 years. This is in part due to HSBC Securities (USA) Inc.
buyback activity of the Brazilian Treasury, which +1 212 525 4219
 Brazil curve has richened out to 10 years, victor.w.fu@us.hsbc.com
continues to be in the market. Brazil ’17s have
’21s cheap compared to ’17s. Gordian Kemen
become one of the most expensive bonds in that Chief Latam FI Strategist
HSBC Securities (USA) Inc.
 Colombia ’24s cheap compared to sector of the curve, with a three-month PECS +1 212 525 2593
Colombia ’19s. rich/cheap Z-score of -2.9. Brazil ’21s, on the other gordian.x.kemen@us.hsbc.com

hand, are one of the most attractive bonds with a Z-


 Philippines ’16s looks attractive versus the
score of 1.9.
’15s, offer 28bp pickup.
Colombia ’24s are cheap with a current Z-score
External debt market had a mixed performance
of 0.9, compared to a Z-score of -1.2 for
in spread terms over the past three months, with
Colombia ’19s. The switch would allow an investor
the index and most low-beta credits nearly flat.
to pick up 31bp in PECS terms (100bp in yield) for
Argentina, Philippines, Egypt, and Russia saw
an additional duration of 2.6.
spread widening, while Ukraine and Venezuela
saw the biggest spread tightening moves. Year- Philippines ’16s PECS is very cheap in
to-date, Venezuela and Vietnam remain the top comparison to other bonds in the 3–5-year sector.
performers, both with 6.0% in terms of total The bond has widened by 60 bps over the past three
return, compared to an index return of 3.50%. months and now is trading at a Z-score of 1.8,
Argentina and Egypt remain the main compared to the Philippines ’15s, which saw a PECS
underperformers, with -2.6% and -3.4% total tightening of 12bp and trades at a Z-score of -2.4.
return, respectively. Investors can pick up almost 28bp in spread for one
year in additional duration risk.
Switch from Brazil ’17s to ’21s offers a
pickup of 37bp in PECS spread. The Brazil

Table C7. External debt top 10 richest and top 10 cheapest bonds
_______ Market mid levels ___________________Fair value ____________Rich/Cheap(-/+) 3M Change 3M Z-score
Bond Price PECS PECS Basis Price PECS PECS Basis PECS PECS PECS
TURK 2020 115.19 190 18 114.67 196.01 11 (6) (14) (3.33)
BRA 2017 115.68 76 38 115.33 81.83 32 (6) (30) (2.85)
BRA 2034 137.50 150 8 136.05 158.43 (0) (9) (10) (2.80)
BRA A BOND 120.10 (31) 112 117.73 52.32 29 (83) (89) (2.63)
COL 2014 120.04 95 (13) 119.45 110.24 (28) (15) (27) (2.36)
PHI 2015 124.44 68 36 122.94 101.87 2 (34) (12) (2.36)
PAN 2015 117.80 83 (3) 115.66 134.59 (54) (51) (22) (2.24)
COL 2017 120.93 109 0 119.76 128.34 (19) (19) (14) (2.24)
INDO 2017 116.09 150 (9) 115.96 152.64 (11) (2) (22) (1.96)
BRA 2019N 114.43 95 40 114.08 100.20 35 (5) (15) (1.77)
PHI 2025 149.75 196 1 151.55 182.37 14 13 22 1.00
INDO 2016 117.47 153 (29) 117.75 147.78 (23) 6 (10) 1.00
TURK 2015 114.01 176 (28) 114.37 166.72 (18) 9 (20) 1.03
BRA 2013 119.00 18 45 118.53 38.84 25 (21) (23) 1.26
MEX 2013 108.44 57 (7) 109.36 1.25 49 56 16 1.28
PHI 2024 137.50 203 (7) 139.94 183.56 13 20 37 1.57
COL 2020 153.13 151 (14) 153.76 144.65 (8) 6 (8) 1.72
PHI 2016 128.18 96 45 126.48 123.87 17 (28) 59 1.81
BRA 2030 181.25 158 (1) 185.07 139.45 18 19 7 1.91
BRA 2021 104.83 113 36 104.49 116.81 32 (4) (5) 1.94
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

38
Emerging Markets Strategist
Cross-Asset Strategy abc
25 May 2011

External debt Rich/Cheap Model


Chart C49: Argentina actual vs. fair PECS Chart C50: Brazil actual vs. fair PECS Chart C51: Colombia actual vs. Fair PECS

700 194 250


27
650 Bonar 17
38 30 200
Boden 15 144 34 37 41 33
600 33 27 16
550 17 20 2425B 37 41
19 21 150 20 24
Bonar 13 94 19 5.75
500 17
PECS 17 19
450 15 100 14
PECS 44 Fair PECS PECS
14 13
400 Fair PECS Fair PECS
13 40 to Call
350 50
(6)
Jan-12 Jan-17 Jan-22 Jan-27 Jan-32 Jan-13 Jan-18 Jan-23 Jan-28 Jan-33 Jan-38
Jun-13 Jun-19 Jun-25 Jun-31 Jun-37
Average Life Average Life
Average Life

Chart 52: Indonesia actual vs. fair PECS Chart C53: Mexico actual vs. fair PECS Chart C54: Panama actual vs. fair PECS

200 200 248


35 180
190
160 40 198
33 34 23
180 31
140
148 3436
170 120 26 27 29
20
100 Mar-19 20
160 20 17 98
80 15 PECS
16 Feb-14 16 22 15
150 17 PECS 60 12 Fair PECS
15 13 14
Fair PECS 19 26 48
14 40
140 PECS
20 Fair PECS (2)
130
0
Jul-12 Jul-17 Jul-22 Jul-27 Jul-32
Mar-14 Mar-19 Mar-24 Mar-29 Mar-34
Jan-13 Jan-19 Jan-25 Jan-31 Jan-37
Average Life
Average Life Average Life

Chart C55: Peru actual vs. fair PECS Chart C56: Philippines actual vs. fair PECS Chart C57: South Africa actual vs. fair PECS

210 230 150


17
33 210
190 6 25 140
190 30 31
37
170 170 130
19 20 22
25 150 Jun-19 19
150 12 120
130
130 110 PECS
16 PECS 16 110
19 14 16 Fair PECS PECS
15 Fair PECS 90
110 14
70 15 100 Fair PECS
13
90 50
90
Jan-15 Jan-20 Jan-25 Jan-30 Jan-35 Feb-13 Feb-18 Feb-23 Feb-28
Jun-14 Jun-17 Jun-20
Average Life Average Life
Average Life

Chart C58: Turkey actual vs. fair PECS Chart C59: Ukraine actual vs. Fair PECS Chart C60: Venezuela actual vs. fair PECS

240 410 1,300


36 20
220 34 390
1,200 23 2425 28
200 30 19 34 38
20 25 370 17 20
180 16 17 15 16
15 350 1,100 18Dec-18
160 27
16
14 330 13
140 1,000 PECS
PECS
120 310 PECS Fair PECS
Fair PECS
Fair PECS 900 14
100 290
13 12 13
80 800
270
Jan-13 Jan-18 Jan-23 Jan-28 Jan-33 Sep-13 Sep-18 Sep-23 Sep-28 Sep-33
Jun-12 Jun-14 Jun-16 Jun-18 Jun-20
Average Life Average Life Average Life

Source: Bloomberg, HSBC

39
Emerging Markets Strategist
Cross-Asset Strategy abc
25 May 2011

External debt
Chart C61: EM, IG, and HY CDS Chart C62: 90-day volatility
400 1600 140%
3 mth range High Yield
350
3 mth ago 1400 120% High Grade
300 Current EM EXD
100% S&P
1200 EM Equities
250

200 1000
80%

150 60%
800
100
40%
600
50
20%
0 400
Brazil
Malaysia
South Africa
Thailand
Mexico

Bulgaria

Colombia
Peru

Venezuela
Argentina
Turkey
Philippines
Chile
Korea

Russia

Kazakhstan

Panama
Indonesia

Ukraine
0%
Apr-07 Jan-08 Oct-08 Jul-09 Apr-10 Jan-11

Source: Bloomberg, HSBC Source: Bloomberg, HSBC

Table C7: CDS Monitor (bp)


Name Level 1D 1W 1M Min Max Beta/Rsq Min/Max Sprd/Beta Impl Rchp FAR Rchp Mean NSTD
Argentina (NR/Bu/B) 601 10 6 44 543 677 3.3 / 0.5 3.3 / 4.1 180 1 2.0 2.0 0.0
Brazil (Baa3/BBB-/BBB) 101 0 -1 -6 101 121 0.6 / 0.6 0.5 / 0.6 178 -4 -3.2 -2.9 -0.6
Chile (Aa3/A+/A+) 64 2 4 5 58 83 0.3 / 0.4 0.3 / 0.4 186 -2 1.5 1.8 -0.4
Colombia (Ba1/BBB-/BB+) 101 -1 -1 0 98 123 0.5 / 0.6 0.5 / 0.6 184 -5 -3.7 -3.5 -0.7
El Salvador (Ba2/BB-/BB) 324 -3 26 -3 297 337 0.4 / 0.0 0.4 / 0.6 733 0 - - -
Mexico (Baa1/BBB/BBB) 99 0 1 0 97 118 0.6 / 0.5 0.5 / 0.6 170 -3 -2.1 -2.1 0.2
Panama (Baa3/BBB-/BBB-) 82 1 0 -3 81 107 0.5 / 0.6 0.5 / 0.5 155 -6 - - -
Peru (Baa3/BBB-/BBB-) 133 0 -4 -19 109 175 0.6 / 0.3 0.5 / 0.6 237 -3 - - -
Uruguay (Ba1/BB+/BB) 146 11 0 -2 133 172 0.5 / 0.1 0.2 / 0.5 270 -4 - - -
Venezuela (B2/BB-/B+) 1023 1 1 58 934 1152 5.5 / 0.6 3.6 / 5.5 185 5 - - -
Austria (Aaa/AAA/AAA) 61 0 -6 0 50 87 0.6 / 0.5 0.4 / 0.6 97 2 0.8 0.9 -0.2
Belgium (Aa1/NR/AA+) 132 5 -13 -4 115 180 1.0 / 0.4 0.6 / 1.0 131 - - - -
Bulgaria (Baa3 /*+/BBB/BBB-) 200 -1 3 -4 194 264 1.4 / 0.5 1.4 / 1.4 139 0 -0.5 -0.4 -0.3
Finland (Aaa/AAA/AAA) 27 0 -2 1 24 39 0.2 / 0.5 0.1 / 0.2 150 - - - -
Greece (B1 /*-/B /*-/BB+) 1458 40 -65 175 959 1584 4.0 / 0.3 3.5 / 5.0 363 8 0.9 0.5 0.5
Hungary (Baa3/BBB-/BBB-) 246 0 7 1 235 314 2.0 / 0.4 1.6 / 2.0 125 1 0.0 0.6 -0.6
Iceland (Baa3/BBB-/BB+) 236 -7 -7 -28 236 294 0.4 / 0.1 0.3 / 0.5 617 0 - - -
Ireland (Baa3/BBB+/BBB+) 638 11 -65 48 525 705 2.1 / 0.3 1.6 / 2.1 299 8 5.3 6.0 -0.6
Kazakhstan (BBB/WR/BBB-) 143 0 -2 2 136 163 0.9 / 0.7 0.9 / 1.1 160 -2 1.5 1.4 0.3
Lithuania (Baa1/BBB/BBB) 197 0 -5 -5 197 264 0.9 / 0.6 0.9 / 1.1 214 1 1.0 1.5 -0.9
Netherlands (Aaa/NR/AAA) 29 -1 -5 -8 29 54 0.2 / 0.4 0.2 / 0.2 120 - - - -
Norway (NR/AAA/AAA) 15 0 -2 -1 14 22 0.1 / 0.2 0.0 / 0.1 179 -6 -6.0 -6.0 -0.1
Poland (A2/A-/A-) 139 0 -6 -3 136 155 0.9 / 0.7 0.9 / 1.1 151 1 1.9 2.0 -0.2
Portugal (Baa1 /*-/BBB-/BBB- /*-) 616 10 -49 8 456 694 2.5 / 0.4 2.1 / 2.7 250 7 2.1 3.2 -0.9
Romania (Baa3/BB+/BB+) 228 1 3 7 215 296 1.7 / 0.6 1.5 / 1.7 136 0 -2.0 -2.1 0.5
Russia (Baa1/BBB/BBB) 135 1 3 5 121 154 0.9 / 0.7 0.9 / 1.1 144 -1 -0.3 -0.7 0.8
Spain (Aa2/AA/AA+) 234 10 -13 2 197 270 1.9 / 0.5 1.5 / 1.9 126 8 5.6 5.5 0.1
Sweden (Aaa/AAA/AAA) 22 0 -2 -4 21 35 0.2 / 0.4 0.1 / 0.2 137 -4 -2.9 -2.5 -1.0
Turkey (Ba2/BB/BB+) 159 1 7 9 141 178 0.9 / 0.7 0.9 / 1.0 179 -3 -2.1 -2.5 0.9
Ukraine (B2/B+/B) 435 0 3 21 408 479 2.2 / 0.3 2.0 / 2.3 201 -1 0.1 0.2 -0.1
Egypt (Ba3/BB/BB /*-) 350 0 -6 12 320 385 0.8 / 0.1 0.7 / 0.8 452 0 -0.2 0.8 -0.8
Iraq (NR/NR/NR) 304 3 3 -2 300 343 -/- -/- - - - - -
Israel (A1/A/A) 144 0 2 2 140 175 0.3 / 0.2 0.3 / 0.4 412 2 3.1 2.6 0.6
Morocco (Ba1/BBB-/BBB-) 169 2 2 4 163 194 0.2 / 0.0 0.2 / 0.3 750 -2 - - -
Soaf (A3/BBB+/BBB+) 120 1 1 0 115 140 0.8 / 0.7 0.8 / 0.9 158 -1 -0.6 -0.8 0.8
Australia (Aaa/NR/AAA) 51 -1 0 -1 48 55 0.1 / 0.1 0.1 / 0.2 412 0 1 0.2 0.9
China (Aa3/AA-/A+) 72 0 2 1 69 79 0.3 / 0.3 0.3 / 0.4 235 -1 7 7.0 -0.8
Indonesia (Ba1/BB+/BB+) 136 0 2 -6 130 154 0.5 / 0.3 0.5 / 0.7 280 -4 -1 -0.6 0.1
Korea (A1/A/A+) 98 0 1 -1 95 112 0.5 / 0.3 0.5 / 0.6 200 0 2 1.6 0.5
Column descriptions
Min/Max-Last 3 months
Beta/Rsq-Calculated by regressing daily spread changes in the security, against daily changes in a simple average of most of the listed securities. Rsq is the goodness of the fit; a high RSq indicates that the Beta can be trusted more
Sprd/Beta – Shows the efficiency of the name as a short on the market. It indicates the cost of carry for shorting the market using this security
Sprd/Notch- Spread corresponding to a single rating notch
Notch/Gov– (World bank government Effectiveness index)*2.97. This formula, based on “A quantitative model for foreign currency government bond ratings”, Moody’s, Feb 2004, allows you to judge how much of a rating is due to
“hard” numbers such as debt/exports, and how much is due to fuzzier concepts. The full formula is: R 12.78 2.97 *GOV 0.205*GDP 0.304*GROWTH 0.749* DEBT
BetaModel – This is the amount of spread that is not explained by the broad market beta. This gives you the amount of idiosyncratic risk that is being priced into the security. A positive number indicates how much a seller of protection
is getting paid for bad news associated with the security, and a negative number indicates how much a seller of protection is giving up for the good news that is priced in.
RtgModel – This is the amount of spread that is not explained by the rating. We fit an exponential function linking spreads and average ratings from Moody’s and S&P, and this column shows the amount of spread that is not explained
by the rating. Positive numbers indicate how much a seller of protection is being paid for bad news associated with the security. Negative numbers indicate how much a seller of protection is giving up for the good news that is priced in
Source: Keerthi Angammana, HSBC Fixed Income Research

40
Emerging Markets Strategist
Cross-Asset Strategy abc
25 May 2011

External debt (cont’d)


Chart C63: 5Y-10Y CDS slopes Chart C64: Bond curve slopes

bps bps
75 120

50 BRA
COL
100 PH
25

0 THA PHI
80 BZ MEX
-25
CO
-50 60

-75 PER PE TU
SOA RUS RU
-100 40
TUR INDO
-125 SA
100 110 120 130 140 150 160 20
5Y CDS 60 110 160 210
Shorter tenor bond (z-spread)
Source: Bloomberg, HSBC Source: Bloomberg, HSBC

Table C8: Curve and bonds slope (bp)


Curve slope Level 1D 1W 1M L.Min L.Max L.Med Rchp R.Med
Argentina 2s5s 144 5 5 14 92 144 129 142 79
Brazil 2s5s 43 1 1 0 41 46 43 43 35
Colombia 2s5s 43 -1 0 -1 39 45 43 42 34
Mexico 2s5s 44 0 1 1 41 46 43 44 35
Venezuela 2s5s 107 1 6 8 48 109 95 103 17
Russia 2s5s 64 1 0 1 56 65 62 64 52
Turkey 2s5s 65 -1 0 0 62 66 65 64 52
Ukraine 2s5s 110 -1 -1 18 59 117 110 109 73
Argentina 5s10s 44 2 2 5 35 44 40 70 44
Brazil 5s10s 44 -1 0 1 34 45 43 48 43
Colombia 5s10s 41 0 0 1 31 42 39 45 40
Mexico 5s10s 37 0 -1 0 32 38 37 42 38
Venezuela 5s10s -7 -6 -4 -3 -39 3 -4 38 6
Russia 5s10s 36 0 1 1 27 37 32 42 33
Turkey 5s10s 42 4 4 7 31 42 35 49 35
Ukraine 5s10s 41 -2 5 16 8 43 32 60 37
Column Descriptions (Curve Slope table)
Level – CDS spread curve slope (2s/5s or 5s/10s), calculated as (Spread at longer maturity) – (Spread at shorter maturity.)
1D, 1W, 1M – Change in 1-Day, 1-Month, and 1Week.
L.Min, L.Max, L.Med – Minimum, Maximum, and Median levels over the last 3 months.
Rchp – Curve slopes are explained very strongly by the level of the 5yr CDS (R-squared in 0.5-0.9 range). This allows you to calculate if the curve is too flat (negative numbers), or too steep (positive numbers) relative to what the 5yr
spread would predict. If a number is lower than its median over the last 3 months, it is shown in green, otherwise it is in red.
R.Min, R.Max, R.Med – Minimum, Maximum, and Median values of Rchp over the last 3 months.
Carry – Carry of a dv01-neutral Steepener over 3 months, taking into account the rolldown. If a number is lower than its median over the last 3 months, it is shown in green, otherwise it is in red.
C.Min, C,Max, C.Med – Minimum, Maximum, and Median of the carry over the last 3 months.
Column Descriptions (Bond spread table)
Spread – Bond spread over duration-interpolated swap curve (comparable to D-Spread on Bloomberg).
1D, 1W, 1M – Change in 1-Day, 1-Month, and 1Week.
S.Min, S.Max, S.Med – Minimum, Maximum, and Median levels over the last 3 months.
Basis – Yield difference between a hypothetical duration-matched bond created using CDS spreads, and the swap curve. If a number is lower than its median over the last 3 months, it is shown in green, otherwise in red.
B.Min, B.Max, B.Med – Minimum, Maximum, and Median values of Basis over the last 3 months.
5yrBasis – Difference between 5yr CDS spread, and Spread. If a number is lower than its median over the last 3 months, it is shown in green, otherwise it is in red.
5.Min, 5.Max, 5.Med – Minimum, Maximum, and Median of 5yrBasis over the last 3 months.
Source: Keerthi Angammana, HSBC Fixed Income Research

41
Emerging Markets Strategist
Cross-Asset Strategy abc
25 May 2011

External yield curves


Chart C65: Argentina Chart C66: Brazil Chart C67: Colombia

bps
bps bps
200 250
1000
'30
900 DIS '34 '37 '33
'41 200
800 150 '25 '27
'24B
'24 '37 '41

700 BX '20 150 '20 '24


B15 '19 '21
600 G17 100 '19N '19
'17
BVII '15 '17 100 '14
500 PAR
'13
400 50
Bonds (z-spread) CDS 50
'14
300 '40-15 Bonds (z-spread) CDS Bonds (z-spread) CDS
'12
200 '13 0
0
0 5 10 15 0 5 10 15
0 5 10 15
Duration (years) Duration (years)
Duration (years)

Chart C68: Indonesia Chart C69: Mexico Chart C70: Panama


bps bps bps
250 200 250
'23
'34 '40
'35 '31 '33 200 '34
150
200 '36
150 '27'29
'19 '26
'19'20
100 '17 '20
'18 100
'16 '17 '15 '22
'15 '16 '15
150 '14N
'05/14 '13 '14 '26
50
50 '19N Bonds (z-spread) CDS
'12
Bonds (z-spread) CDS
Bonds (z-spread) CDS
0
100 0 0 2 4 6 8 10 12 14
0 2 4 6 8 10 12 0 2 4 6 8 10 12 14 16 Duration (years)
Duration (years)
Duration (years)

Chart C71: Peru Chart C72: Philippines Chart C73: Russia

bps bps bps


250 250 250

'33 '25
'10/24 '30 '31 '28
200 200 200
'37 '09/24 '32
'25 '18'30 '20
'19'19 '15
150 150 '20 150
'15 '16 '19 '17
'21
100 100 '16 100
'14 '16
'13 '15
50 50 50
'12 Bonds (z-spread) CDS
Bonds (z-spread) CDS Bonds (z-spread) CDS
0 0 0
0 2 4 6 8 10 12 14 0 2 4 6 8 10 12 0 2 4 6 8 10 12
Duration (years) Duration (years) Duration (years)

Chart C74: Ukraine Chart C75: Turkey Chart C74: Venezuela


bps bps
500 250
bps
'34 1200
450 '30
200 '25
'16'17 '18
'20 '21
'11/19
'7/19 '19 '23
1100 '24'28
400 '15 '25
'16 '34
'15 '16 '17 150 '14 '18 '20
1000 '27
350 '13
100 '13 '14
300 '12 900 '38
'13
'12
50 Bonds (z-spread) CDS
250
800
Bonds (z-spread) CDS Bonds (z-spread) CDS
200 0
700
0 2 4 6 8 10 12 0 2 4 6 8 10 12
0 2 4 6 8 10
Duration (years) Duration (years)
Duration (years)

Source: Bloomberg, HSBC

42
Emerging Markets Strategist
Cross-Asset Strategy abc
25 May 2011

External debt bonds, CDS, and basis


Chart C75: Argentina bonds Chart C76 CDS Chart C77: Basis

$ bps bps AR CDS 5Y - Boden'15


120 5000 1200
AR Disc NY price
100 Boden'15 price 800
4000
AR CDS 5Y 400
80
3000
60 0
2000
40 -400

1000 -800
20

0 0 -1200
Oct-06 Oct-07 Oct-08 Oct-09 Oct-10 Jan-06 Jul-07 Jan-09 Jul-10 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11

Chart C78: Brazil bonds Chart C79: CDS Chart C80: Basis

$ bps bps
140 600 100

BRA'17 BRA CDS 5Y


BRA'37 50

120 400
0

-50
100 200
-100
BRA CDS 5Y - BRA'17
80 0 -150
Nov-06 Nov-07 Nov-08 Nov-09 Nov-10 Jan-06 Jul-07 Jan-09 Jul-10 Nov-06 Nov-07 Nov-08 Nov-09 Nov-10

Chart C 81: Colombia bonds Chart C82: CDS Chart C83: Basis

$ bps bps
140 600 100
COL CDS 5Y - COL'17
50

120 0
400
-50
100
COL'17 -100
COL'37 200
-150
80
COL CDS 5Y -200

60 0 -250
Sep-06 Sep-07 Sep-08 Sep-09 Sep-10 Sep-06 Sep-07 Sep-08 Sep-09 Sep-10 Sep-06 Sep-07 Sep-08 Sep-09 Sep-10

Chart C84: Indonesia bonds Chart C85: CDS Chart C86: Basis

$ bps bps
140 1400 200
INDO CDS
1200 100
120
1000
0
100 800
-100
80 600
-200
INDO'16 400
60 INDO'37
200 -300
INDO CDS 5Y - INDO'16
40 0 -400
Feb-07 Feb-08 Feb-09 Feb-10 Feb-11 Feb-07 Feb-08 Feb-09 Feb-10 Feb-11 Feb-07 Feb-08 Feb-09 Feb-10 Feb-11

Source: Bloomberg, HSBC

43
Emerging Markets Strategist
Cross-Asset Strategy abc
25 May 2011

External debt bonds, CDS, and basis (cont’d)


Chart C87: Mexico bonds Chart C88: CDS Chart C89: Basis

$ bps bps
130 600 150
MEX CDS 5Y
120 100

110 400 50

100 0

90 200 -50

80 MEX'17 -100
MEX'34 MEX CDS 5Y - MEX'17
70 0 -150
Jan-06 Jul-07 Jan-09 Jul-10 Jan-06 Jul-07 Jan-09 Jul-10 Sep-06 Sep-07 Sep-08 Sep-09 Sep-10

Chart C90: Russia bonds Chart C91: CDS Chart C92: Basis

$ bps bps
200 1200 800
RUS CDS 5Y 700
1000 600
180
500
800
160 400
600 300
140 200
400 100
RU'18
120 RU'28 0
200
-100 RU CDS 5Y - RU'18
100 0 -200
Jan-06 Feb-07 Mar-08 Apr-09 May-10 Jan-06 Feb-07 Mar-08 Apr-09 May-10 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11

Chart C93: Philippines bonds Chart C94: CDS Chart C95: Basis

$ bps bps PH CDS 5Y - PH'16


140 1000 150
PH'16 PH CDS 5Y
PH'31 100
800
50
120
600 0

-50
400
100
-100
200
-150

80 0 -200
Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11

Chart C96: Venezuela bonds Chart C97: CDS Chart C98: Basis

$ bps bps VEN CDS 5Y - VEN'16


130 3500 1400

VEN CDS 5Y 1200


3000
110 1000
2500 800
90
2000 600
400
70 1500
VEN'16 200
VEN'27 1000
0
50
500 -200
30 0 -400
Jan-06 Jul-07 Jan-09 Jul-10 Jan-06 Jul-07 Jan-09 Jul-10 Jan-06 Mar-07 May-08 Jul-09 Sep-10

Source: Bloomberg, HSBC

44
Emerging Markets Strategist
Cross-Asset Strategy abc
25 May 2011

FX: Spot, HSBC forecasts, and forward curves


Chart C99: Argentina NDFs & HSBC forecasts Chart C100: Brazil NDFs & HSBC forecasts Chart C101: Chile NDFs & HSBC forecasts
4.6 1.90 550

4.5 1.85

4.4 1.80 525

4.3 1.75
USD-ARS

USD-CLP
USD-BRL
4.2 1.70 500

4.1 1.65
4.0 1.60 475

3.9 1.55
3.8 450
1.50
Mar-10 Oct-10 May-11 Dec-11 Jun-12 Mar-10 Oct-10 May-11 Dec-11 Jun-12
Mar-10 Oct-10 May-11 Dec-11 Jun-12
USD-BRL NDFs USD-CLP NDFs
USD-ARS NDFs HSBC fo
HSBC forecast HSBC forecast

Chart C102: Colombia NDFs & HSBC forecasts Chart C103: Mexico fwds & HSBC forecasts Chart C104: Peru NDFs &HSBC forecasts
2,100 14.0 2.90

2,050
13.5 2.85
2,000

1,950 13.0 2.80

USD-PEN
USD-MXN
USD-COP

1,900
12.5 2.75
1,850

1,800 12.0 2.70

1,750
11.5 2.65
1,700 Mar-10 Oct-10 May-11 Dec-11 Jun-12
Mar-10 Oct-10 May-11 Dec-11 Jun-12
Mar-10 Oct-10 May-11 Dec-11 Jun-12
USD-COP NDFs USD-MXN Fwds USD-PEN NDFs
HSBC forecast HSBC forecast HSBC forecast

Chart C105: Czech fwds & HSBC forecasts Chart C106: Hungary fwds & HSBC forecasts Chart C107: Poland fwds & HSBC forecasts
26.5 295 4.3
290 4.2
26.0
285 4.1
25.5 280
4.0
EUR-PLN
EUR-HUF
EUR-CZK

275
25.0 3.9
270
3.8
24.5 265
3.7
260
24.0
255 3.6

23.5 250 3.5


Mar-10 Oct-10 May-11 Dec-11 Jun-12 Mar-10 Oct-10 May-11 Dec-11 Jun-12 Mar-10 Oct-10 May-11 Dec-11 Jun-12

EUR-HUF Fwds EUR-PLN Fwds


EUR-CZK Fwds HSBC fo
HSBC forecast HSBC forecast

Chart C108: Turkey fwds & HSBC forecasts Chart C109: Russia NDFs & HSBC forecasts Chart C110: S. Africa fwds & HSBC forecasts
1.75 33 8.5

1.70
32
1.65 8.0
31
1.60
USD-RUB

USD-ZAR
USD-TRY

1.55 30 7.5

1.50 29
7.0
1.45
28
1.40
27 6.5
1.35
Mar-10 Oct-10 May-11 Dec-11 Jun-12 Mar-10 Oct-10 May-11 Dec-11 Jun-12
Mar-10 Oct-10 May-11 Dec-11 Jun-12
USD-TRY Fwds USD-RUB NDFs USD-ZAR Fwds
HSBC forecast HSBC forecast HSBC forecast

Source: Bloomberg, HSBC

45
Emerging Markets Strategist
Cross-Asset Strategy abc
25 May 2011

FX: Spot, HSBC forecasts, and forward curves (cont’d)


Chart C111: China NDFs & HSBC forecasts Chart C112: CNH fwds & HSBC forecasts Chart C113: HKD fwds & HSBC forecasts
6.90 6.9 7.85

6.80 6.8

6.7 7.83
6.70

USD-CNH
USD-CNY

USD-HKD
6.60 6.6
7.80
6.50 6.5

6.40 6.4
7.78
6.30 6.3

6.20 6.2
7.75
Mar-10 Oc t-10 May-11 Dec-11 Jun-12 Aug-10 Jan-11 M ay-11 Oct-11 Feb-12 Jun-12
M ar -10 Oct-10 May-11 Dec-11 Jun-12

U SD-CN Y N DFs HSBC fo USD -C NH CN H Fw ds USD -H KD Fwds


HSBC forecast HSBC forecast

Chart C114: India NDFs & HSBC forecasts Chart C115: Indonesia NDFs & HSBC forecasts Chart C116: Korea NDFs &HSBC forecasts
49.0 1,300
9,400
48.0
1,250
47.0 9,200
1,200
46.0 9,000

USD-KRW
USD-INR

USD-IDR

45.0 1,150
8,800
44.0
1,100
8,600
43.0
1,050
42.0 8,400

41.0 1,000
8,200
May-10 Nov-10 Jun-11 Dec-11 Jun-12 May-10 Nov-10 Jun-11 Dec-11 Jun-12
Mar-10 Oct-10 May-11 Dec-11 Jun-12

USD-INR NDFs USD-IDR NDFs USD-KRW NDFs


HSBC forecast HSBC forecast HSBC forecast

Chart C117: Malaysia NDFs & HSBC forecasts Chart C118: Philippines NDFs & HSBC forecasts Chart C119: Singapore fwds & HSBC forecasts
3.40 48.0 1.45

3.30 46.0
1.40

3.20 44.0
USD-SGD

1.35
USD-MYR

USD-PHP

3.10 42.0
1.30
3.00 40.0
1.25
2.90 38.0

36.0 1.20
2.80
Mar-10 Oct-10 May-11 Dec-11 Jun-12 Mar-10 Oct-10 May-11 Dec-11 Jun-12 Mar-10 Oct-10 May-11 Dec-11 Jun-12

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


HSBC forecast HSBC forecast HSBC forecast

Chart C120: Taiwan NDFs & HSBC forecasts Chart C121: Thailand fwds & HSBC forecasts Chart C122: Vietnam NDFs & HSBC forecasts
33.0
35.0 24,500
32.0
23,500
33.0
31.0
22,500
USD-TWD

30.0 31.0
USD-THB

USD-VND

29.0
21,500
29.0
28.0 20,500

27.0 27.0
19,500

26.0
25.0 18,500
M ar-10 Oct-10 M ay-11 Dec-11 Jun-12
M ar-10 Oct-10 M ay-11 D ec-11 Jun-12 Mar-10 Oct-10 May-11 Dec-11 J un-12
USD-T WD ND Fs
USD-THB Offshore Fwds USD-VND NDFs
HSBC forecast
HSBC forecast HSBC forecast

Source: Bloomberg, HSBC

46
Emerging Markets Strategist
Cross-Asset Strategy abc
25 May 2011

Equities
Chart C 123: PE/EPS growth rate nexus by country Chart C 124: PE/EPS growth rate nexus by sector

35%
Qatar 23%
30% IT
21% Consumer
Saudi Arabia Kuw ait
25% Egy pt Utilities
19% Staples
Financials
EPS growth (2012e)

South Afric a T aiw an 17%

EPS gr owth (2012e)


C ons umer
20% Hungary India 15% Discretionary
Abu Dhabi C hina Industrials
15% Dubai T hailand Indonesia 13%
Peru Mex ico Malay sia M aterials
Korea
10% T urkey 11% Healthcare
Brazil Om an
R ussia Philippines 9%
Cz ech Energy T elecom s
5% Poland 7%

0% 5%

6 8 10 12 14 16 8 10 12 14 16 18 20
PE (2011)
PE (2011)

Source: IBES, Thomson Reuters Datastream Source: IBES, Thomson Reuters Datastream

Table C9: MSCI country, region, and sector performance (USD, %) – ranked by one-month performance
Countries/Regions Current level - USD 1 month 3 months 6 months 12 months 24 months
Taiwan 312 2.8 3.9 13.2 28.5 51.2
Colombia 1146 2.8 11.6 0.4 34.9 121.5
Chile 2807 2.7 7.9 0.1 38.7 80.3
Nigeria 402 2.3 4.2 3.0 2.0 9.9
Indonesia 907 2.3 16.8 4.9 31.6 137.6
Saudi Arabia* 6651 1.8 4.2 3.2 2.4 12.0
Czech Republic 604 1.6 14.2 20.4 25.1 29.2
Peru 1433 0.9 9.7 19.1 17.4 75.1
Malaysia (EM) 463 0.0 2.0 5.0 23.2 75.2
Qatar 785 0.4 1.6 9.9 22.8 39.0
UAE 219 1.0 4.5 2.4 3.1 16.5
Egypt 628 1.3 7.2 23.4 24.5 7.5
Thailand 362 1.6 11.2 10.1 52.1 120.4
Korea 437 1.7 8.7 17.9 35.7 84.0
Philippines 341 1.7 5.8 0.9 19.7 64.4
Kuwait 664 2.6 7.1 8.6 3.3 21.2
South Africa 559 3.5 1.5 0.8 21.1 65.5
China 67 4.8 2.3 0.0 14.8 35.4
Poland 1109 4.8 10.5 10.5 37.4 90.8
Argentina 2978 4.9 10.7 9.9 49.5 122.0
Kenya 736 5.2 7.5 11.8 0.6 43.2
Mexico 6068 6.9 4.9 0.5 17.6 66.1
Hungary 794 7.4 7.5 14.1 16.6 85.9
India 489 7.9 1.1 9.7 5.1 64.1
Brazil 3504 7.9 5.2 2.9 10.1 50.6
Turkey 584 9.1 2.6 18.8 8.9 76.5
Russia 963 10.4 1.0 16.5 26.0 67.7

Developed markets 1329 -1 -2 9 19 44


GCC ex Saudi 484 -2 -4 -4 5 22
EM Asia 471 -2 5 6 23 60
Emerging markets 1133 -4 2 4 21 60
Latin America 4309 -6 -4 -2 14 58
EMEA 383 -7 1 4 22 64

EM sectors Current level - USD 1 month 3 months 6 months 12 months 24 months


IT 257 1 0 11 18 66
Cons discretionary 668 1 12 7 38 116
Cons staples 448 0 9 6 29 92
Healthcare 622 -2 5 -4 16 57
Utilities 341 -2 5 2 10 38
Industrials 250 -4 2 1 28 54
Telecoms 239 -4 1 -1 13 28
Financials 378 -5 2 -2 17 61
Materials 656 -7 -3 3 23 76
Energy 858 -9 0 9 20 40
Note: *Saudi Arabian Tadawul index
Source: Thomson Reuters Datastream

47
Emerging Markets Strategist
Cross-Asset Strategy abc
25 May 2011

Equities (cont’) - IBES EPS vs. peak and trend


Chart C125: Emerging markets Chart C126: EM Asia Chart C127: Latin America

2.6 2.0 2.9


2.7
2.1 1.5 2.5
2.3
1.6 1.0
2.1
1.1 0.5 1.9
1.7
0.6 0.0 1.5
88 90 92 94 96 98 00 02 04 06 08 10 12 88 90 92 94 96 98 00 02 04 06 08 10 12 88 90 92 94 96 98 00 02 04 06 08 10 12
12M trail Trend I/B/E/S fc ast 12M trail Trend I/B/E/S fc ast 12M trail Trend I/B/E/S fc ast

Chart C128: EMEA Chart C129: Brazil Chart C130: China

2.0 10.6 1.0


10.4 0.8
1.5
10.2 0.6
1.0 10.0 0.4
9.8 0.2
0.5
9.6 0.0
0.0 9.4 -0.2
88 90 92 94 96 98 00 02 04 06 08 10 12 88 90 92 94 96 98 00 02 04 06 08 10 12 88 90 92 94 96 98 00 02 04 06 08 10 12

12M trail T rend I/B/E/S fcast 12M trail Trend I/B/E/S fc ast 12M trail Trend I/B/E/S fc ast

Chart C131: India Chart C132: Russia Chart C133: Korea

2.0 3.0 2.0


2.5
1.5 1.5
2.0
1.0 1.5 1.0
1.0
0.5 0.5
0.5
0.0 0.0 0.0

88 90 92 94 96 98 00 02 04 06 08 10 12 88 90 92 94 96 98 00 02 04 06 08 10 12 88 90 92 94 96 98 00 02 04 06 08 10 12

12M trail Trend I/B/E/S fc ast 12M trail Trend I/B/E/S fc ast 12M trail Trend I/B/E/S fc ast

Chart C134: Taiwan Chart C135: South Africa Chart C136: Mexico

2.0 2.5 4.0

2.0 3.5
1.5
3.0
1.5
1.0 2.5
1.0
2.0
0.5
0.5 1.5
0.0 0.0 1.0
88 90 92 94 96 98 00 02 04 06 08 10 12 88 90 92 94 96 98 00 02 04 06 08 10 12 88 90 92 94 96 98 00 02 04 06 08 10 12

12M trail Trend I/B/E/S fc ast 12M trail T rend I/B/E/S fcast 12M trail T rend I/B/E/S fcast

Source: IBES, Thomson Reuters Datastream Source: IBES, Thomson Reuters Datastream Source: IBES, Thomson Reuters Datastream

48
Emerging Markets Strategist
Cross-Asset Strategy abc
25 May 2011

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,
Hernan Yellati, Garry Evans, Marjorie Hernandez, Dilip Shahani, Murat Toprak, Di Luo, Wietse Nijenhuis, Alejandro
Martinez-Cruz, Victor Fu, Ki Yong Seong, Gordian Kemen, Dominic Bunning, Perry Kojodjojo and Daniel Hui

Each analyst whose name appears as author of an individual section or individual sections of this report certifies that the views
about the subject security(ies) or issuer(s) or any other views or forecasts expressed in the section(s) of which (s)he is author
accurately reflect his/her personal views and that no part of his/her compensation was, is or will be directly or indirectly related
to the specific recommendation(s) or view(s) contained therein.

Important disclosures
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.

Certain investment products mentioned in this document may not be eligible for sale in some states or countries, and they may
not be suitable for all types of investors. Investors should consult with their HSBC representative regarding the suitability of
the investment products mentioned in this document and take into account their specific investment objectives, financial
situation or particular needs before making a commitment to purchase investment products. The value of and the income
produced by the investment products mentioned in this document may fluctuate, so that an investor may get back less than
originally invested. Certain high-volatility investments can be subject to sudden and large falls in value that could equal or
exceed the amount invested. Value and income from investment products may be adversely affected by exchange rates, interest
rates, or other factors. Past performance of a particular investment product is not indicative of future results.

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
www.hsbcnet.com/research. Details of these short-term investment opportunities can be found under the Reports section of this
website.

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

49
Emerging Markets Strategist
Cross-Asset Strategy abc
25 May 2011

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.

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

For disclosures in respect of any company mentioned in this report, please see the most recently published report on that
company available at www.hsbcnet.com/research.

* HSBC Legal Entities are listed in the Disclaimer below.

Additional disclosures
1 This report is dated as at 25 May 2011.
2 All market data included in this report are dated as at close 24 May 2011, 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.

50
Emerging Markets Strategist
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25 May 2011

Disclaimer
* Legal entities as at 04 March 2011 Issuer of report
‘UAE’ HSBC Bank Middle East Limited, Dubai; ‘HK’ The Hongkong and Shanghai Banking HSBC Securities (USA) Inc.
Corporation Limited, Hong Kong; ‘TW’ HSBC Securities (Taiwan) Corporation Limited; ‘CA’
HSBC Securities (Canada) Inc, Toronto; HSBC Bank, Paris Branch; HSBC France; ‘DE’ HSBC 452 Fifth Avenue
Trinkaus & Burkhardt AG, Düsseldorf; 000 HSBC Bank (RR), Moscow; ‘IN’ HSBC Securities HSBC Tower
and Capital Markets (India) Private Limited, Mumbai; ‘JP’ HSBC Securities (Japan) Limited, New York, NY 10018, USA
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permission of HSBC Securities (USA) Inc. MICA (P) 208/04/2011 and MICA (P) 040/04/2011

51
abc

GEMs Research Team


Pablo Goldberg
Head of Global Emerging Markets Research
+1 212 525 8729 pablo.a.goldberg@us.hsbc.com
EM Fixed Income Research Economics
Americas Latin America
Gordian Kemen Javier Finkman
Chief Strategist, Latin America Chief Economist, South America ex-Brazil
+1 212 525 2593 gordian.x.kemen@us.hsbc.com +54 11 4344 8144 javier.finkman@hsbc.com.ar
Alejandro Mártinez-Cruz Andre Loes
+52 55 5721 2380 alejandro.martinezcr@hsbc.com.mx Chief Economist, Brazil
+55 11 3371 8184 andre.a.loes@hsbc.com.br
Hernan M Yellati
+1 212 525 3084 hernan.m.yellati@us.hsbc.com Sergio Martin
Chief Economist, Mexico
Asia +52 55 5721 2164 sergio.martinm@hsbc.com.mx
André de Silva, CFA
Head of Rates Research, Asia-Pacific Ramiro D Blazquez
+852 2822 2217 andre.de.silva@hsbcib.com +54 11 4348 5759 ramiro.blazquez@hsbc.com.ar
Ki Yong Seong Lorena Dominguez
+852 2822 4277 kiyongseong@hsbc.com.hk +52 55 5721 2172 lorena.dominguez@hsbc.com.mx
Rajen Gokani Constantin Jancso
+44 20 7991 6850 rajen.gokani@hsbc.com.hk +55 11 3371-8183 constantin.c.jancso@hsbc.com.br
EMEA Jorge Morgenstern
Di Luo +54 11 4130 9229 jorge.morgenstern@hsbc.com.ar
+44 20 7991 6753 di.luo@hsbcib.com
Marcos Fernandes
EM Currency Strategy +55 11 6847 9787 marcos.r.fernandes@hsbc.com.br

Asia Emerging Europe, Middle East and Africa


Daniel Hui Murat Ulgen
+852 2822 4340 danielpyhui@hsbc.com.hk Chief Economist, Central & Eastern Europe, and sub-Saharan
Africa
Perry Kojodjojo +90 212 376 4619 muratulgen@hsbc.com.tr
+852 2996 6568 perrykojodjojo@hsbc.com.hk
Simon Williams
Americas Chief Economist, Middle East and North Africa
Clyde Wardle +971 4 507 7614 simon.williams@hsbc.com
+1 212 525 3345 clyde.wardle@us.hsbc.com
Liz Martins
Marjorie Hernandez +971 4 423 6928 liz.martins@hsbc.com
+1 212 525 4109 marjorie.hernandez@us.hsbc.com
Alexander Morozov
Equity Strategy +7 495 783 8855 alexander.morozov@hsbc.com
Global Asia Pacific
Garry Evans Qu Hongbin
+852 2996 6916 garryevans@hsbc.com.hk Managing Director, Co-head Asian Economics Research and
Chief Economist Greater China
John Lomax
+852 2822 2025 hongbinqu@hsbc.com.hk
+44 20 7992 3712 john.lomax@hsbcib.com
Frederic Neumann
Wietse Nijenhuis
Managing Director, Co-head Asian Economics Research
+44 20 7992 3680 wietse.nijenhuis@hsbcib.com
+852 2822 4556 fredericneumann@hsbc.com.hk
Leif Eskesen
Chief Economist, India & ASEAN
+65 6239 0840 leifeskesen@hsbc.com.sg
Paul Bloxham
Chief Economist, Australia and New Zealand
+61 2925 52635 paulbloxham@hsbc.com.au
Donna Kwok
+852 2996 6621 donnahjkwok@hsbc.com.hk
Sherman Chan
+852 2996 6975 shermanwkchan@hsbc.com.hk
Wellian Wiranto
+65 6230 2879 wellianwiranto@hsbc.com.sg