Allocating to Asia

Key considerations for including Asia in a global

portfolio under current market conditions

June 2017

2

Strategic themes in 2017

Global economic growth is picking up

Since the end of 2016, global economic momentum has

picked up

The global economy is now expected to grow at 3.3% for 2017

However, there is still limited evidence of sustained core

inflationary pressure

Interest rates are rising, but remain low

With US raising interest rates, global government bond yields

have started rising gradually

Bond yields still remain low and we believe we are not being

rewarded for taking duration risk with developed market

government bonds

Interest rates elsewhere remain at near-zero levels

Higher valuations across asset classes

Strong performance of risk assets means that valuations have

risen to relatively high levels across equity markets

Still-low bond yields means that bond valuations are similarly

expensive

Asset price volatility from ongoing uncertainties

Trump’s election did not have a lasting negative impact on asset

prices. Although uncertainties remain, the new US

administration’s approach to trade policy has been more benign

than it seemed during the presidential campaign

We may see increased market volatility, as various economic and

political market events come into focus. However macro noise

could create stock picking opportunities

With these investment themes in mind, how could investors benefit from

an allocation to Asia?

Growth

Risks

Interest

Rates

$Valuations

3

Asia continues to drive the global economy

Global economic activity is picking up, with 3-3.5% growth tracked in the US and Eurozone. Asia

continues to deliver a higher GDP growth when compared with other regions in the world

Asia’s economic development has given rise to a sizeable middle class population, which in turn is

contributing to growth in “new economy” sectors such as consumption, healthcare and

technology

Fiscal stimulus and spending on infrastructure in Asia is picking up, adding to another source of

growth in the region. In particular, we are optimistic about the reform agendas in:

– China: Rebalancing of the economy should lead to sustainable growth

– India: Structural reforms to bolster long-term growth prospects

– Indonesia: Expansion in capital spending to sustain economic growth rates

– Korea: Corporate governance reforms paving way for better shareholder returns

Asia: The world’s growth engine

-2

0

2

4

6

8

Asia ex-Japan North America Latin America EuropeanUnion

2015 2016 2017e 2018eSource: Brookings. “Old” refers to estimates from 2010; “New” refers to

latest estimates, updated as of 2017.

Any forecast, projection or target where provided is indicative only and is not

guaranteed in any way. HSBC accepts no liability for any failure to meet

such forecasts, projections or targets.

Source: Bloomberg, data as of May 2017

Asian equities for growth

Structural reforms in Asia should lead to

more effective allocation of resources, more

efficient markets, and improved profitability at

the company level

Representation of Asian equities in global

major indices is likely to rise as markets such

as China continue to open their doors to

investment, which should encourage higher

allocation from international investors

Earnings outlook for Asia ex Japan equities

has been steadily improving, while valuations

are trading at a discount to developed markets

Source: Bloomberg, HSBC Global Research, HSBC Global Asset

Management, data as of May 2017

13.4

15.2

16.6

18.0

8

10

12

14

16

18

20

Asia Pacific exJapan

Europe DM US

Equity valuations – Asia still much

cheaper than US and Europe

Size of global middle class (billion

people)

High GDP growth in Asia compared to

the rest of the world

6%

Price-to-earnings ratio (x)

e

4

Asia: The search for yields

(%, yields)

-50%

0%

50%

100%

150%

200%

250%

300%

350%

Australia Asia Pacific ex Japan

UnitedStates

Europe Japan

Price return Dividend return

Source: Bloomberg, data as of March 2017

Source: MSCI, Citi Research, HSBC Global Asset Management, data as of

31 January 2017. Returns are based on MSCI indices, since 2000.

Investment involves risk. Past performance is not indicative of future performance. For illustrative purposes only and does not constitute any investment

recommendation in the above mentioned asset classes, indices or currencies. Any forecast, projection or target where provided is indicative only and is not

guaranteed in any way. HSBC accepts no liability for any failure to meet such forecasts, projections or targets.

How an allocation to Asia can boost yields, in spite of a rising rate environment

Although the US has started hiking rates, the projected ‘dot-plot’ is still very shallow, and we are still seeing

zero bond yields in parts of Europe and Japan

Asia continues to offer attractive relative value compared with the rest of the world, and investors can

benefit from a pick-up in yields

Asian bonds are less vulnerable to US interest rate hikes given their short maturity profile, while strong

corporate fundamentals means that tighter credit spreads can help partially offset the rise in yields

Dividends are a key driver of long-term

total shareholder return in Asia

Asian bonds offer higher yields vs.

global counterparts

Asian Equities for income Good source of income, with dividends

accounting for a significant portion (two-thirds

over the past decade) of long term

shareholder return for Asian equities

Home to quality companies that boast

strong balance sheets, generate good cash

flows and offer attractive dividend yields

Rising dividend yields and payout ratios in

recent years, thanks to improving corporate

governance, led by government regulations

and shareholder activism in key economies

such as Korea

Resilient in the recent rate hike cycle that

began in December 2015 (regional high

dividend stocks). Even as rates continue to

climb higher, a number of Asian companies

are seen offering sustainable dividends,

making a strong case for bottom-up stock

selection

Asian Fixed Income for yields Home-bias, sticky money: Local Asian

investors have become a larger proportion of

the investor base and are less likely to pull

their money out of Asia in a risk-off scenario

Benefit from EM inflows: Strong EM inflows

are supportive of Asian credit which is

increasingly perceived as a less volatile asset

class within the global EM context

Short maturity, greater resilience: The

greater resilience in Asian credit compared to

global peers is primarily attributed to their

short maturity profile, which makes them less

vulnerable to US Treasury movements

Attractive yields: With the significant amount

of negative yielding bonds outstanding

globally, Asian fixed income still offers

attractive and higher yields compared to other

markets such as Europe and US

3.99

6.45

3.37

6.21

0.99

3.81

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

9.0

10.0

Asia IG Asia HY US IG US HY Euro IG Euro HY

10Y Average Now

5

Asia: Diversified and to diversify

Correlation of Asia vs. the rest of the world

Asia complements a global portfolio

Asia as a region is heterogeneous in nature, and

hence, has inherent diversification within the

region itself

Asia also exhibits imperfect correlation with the

rest of the world and can therefore provide

diversification benefits to a global portfolio

Asian Multi-Asset for diversification

No single asset class can outperform

consistently in the long term. A concentrated

portfolio is exposed to large downside risk at

some point

Unlike developed markets, by investing in

Asia, investors are investing in a basket of

currencies and countries with different

economic factors and business dynamics

Asian markets are a combination of

developing and developed economies, and

therefore are generally less volatile than

emerging market assets and could potentially

serve as a better diversifier

Source: IMF, Bloomberg, latest available as of April 2017. Indices used for correlation data: Global HY, Global IG, EM debt, Asia IG and Asia HY: BofA Merril

Lynch indices; US: S&P 500 index; Europe: Euro STOXX 50 index; World, Asia ex Japan and China: MSCI indices. Correlation data calculated over 3 years.

For illustrative purposes only and does not constitute any investment recommendation in the above mentioned asset classes, indices or currencies. Any

forecast, projection or target where provided is indicative only and is not guaranteed in any way. HSBC accepts no liability for any failure to meet such

forecasts, projections or targets.

Japan (A1/A+)

GDP per Capita:

$37,304

GDP Growth: +1.0%

CPI: -0.1%

10yr Rate: 0.05%

Korea (Aa2/AA)

GDP per Capita:

$27,633

GDP Growth: +2.8%

CPI: +1.3%

10yr Rate: 2.09%

India (Baa3/BBB-)

GDP per Capita: $1,719

GDP Growth: +7.9%

CPI: +5.0%

10yr Rate: 6.51%

Singapore (Aaa/AAA)

GDP per Capita:

$53,053

GDP Growth: +2.0%

CPI: -0.5%

10yr Rate: 2.46%

Sri Lanka (B1/B+)

GDP per Capita: $3,870

GDP Growth: +5.0%

CPI: +4.1%

10yr Rate: 12.07%

Malaysia (A3/A-)

GDP per Capita: $9,546

GDP Growth: +4.2%

CPI: +2.1%

10yr Rate: 4.23%

Indonesia (Baa3/BB+)

GDP per Capita: $3,636

GDP Growth: +5.0%

CPI: +3.5%

10yr Rate: 7.97%

Thailand (Baa1/A-)

GDP per Capita: $5,662

GDP Growth: +3.2%

CPI: +0.2%

10yr Rate: 2.65%

Philippines (Baa2/BBB)

GDP per Capita: $2,991

GDP Growth: +6.8%

CPI: +1.8%

10yr Rate: 4.37%

One Asia, 48 countries and countless differencesAsian countries are very diverse in their characteristics, which means different markets

tend to perform differently. The offsetting nature of their performances means that

returns of the region as a whole is generally more steady.

China (Aa3/AA-)

GDP per Capita: $8,261

GDP Growth: +6.7%

CPI: +2.0%

10yr Rate: 3.06%

Equities World US Europe

Asia ex

Japan China

World 1

US 0.93 1

Europe 0.778 0.692 1

Asia ex Japan 0.406 0.279 0.49 1

China 0.392 0.281 0.429 0.904 1

Bonds

Global

HY Global IG EM debt Asia IG Asia HY

Global HY 1

Global IG 0.337 1

EM debt 0.752 0.592 1

Asia IG 0.026 0.354 0.446 1

Asia HY 0.489 0.103 0.558 0.256 1

6

Rising importance of RMB

19% 18%

China

China accounts for 19% of the

world’s population

China accounts for 18% of the

world’s GDP

China accounts for 0% of GBI-EM,

Citi WGBI and a tiny portion of

Barclays Global Aggregate Index

Source: HSBC Global Asset Management, IMF, Asian Development Bank, as of October 2016. Any forecast, projection or target where provided is indicative

only and is not guaranteed in any way. HSBC accepts no liability for any failure to meet such forecasts, projections or targets.

Source: IMF, data as of May 2017

Positioning for RMB bonds’ next chapter

Full index inclusion on the horizon:

China has the world’s third largest bond

market, yet it is not represented in global

bond indices. Global index providers,

such as Bloomberg-Barclays and Citi, are

moving fast to include onshore Chinese

bonds into new global bond indices. These

are positives steps towards an eventual full

index inclusion of Chinese bonds

Entry opportunity, ahead of potential

increase in investor demand: When

Chinese bonds are included in such

indices, we expect to see significant

investor demand in this market. Investors

can take advantage of current entry

opportunities as valuations are attractive

The IMF’s SDR currency basket

RMB assets are underrepresented in global indices

42%

31%

11%

8%

8%

USD EUR GBPJPYRMB

Why is the RMB important in a global

portfolio? China is the second largest economy in

the world, after the US. Both its equity and

fixed income markets also rank highly in

terms of their size. But because it has been

difficult to access the market until recently,

foreign investors have not allocated much of

their investments to this country. But this is

quickly set to change

RMB is now part of the IMF’s Special

Drawing Rights (SDR) basket, since 1

October 2016, with a weighting of 10.92%.

Over the long term, we are likely to see much

greater use of the RMB in both trade and

financial transactions globally, and an

increase in global asset diversification into

RMB assets

China is opening up its capital markets at

a rapid pace – Onshore bonds are now available to almost all

foreign institutional investors through the China

Interbank bond Market (CIBM). The government

has further announced ‘Bond Connect’ to be

launched in 2017, which is essentially a complete

opening up of the domestic bond market

– Onshore equity markets are also more easily

accessible now, with the launch of the Shanghai

and Shenzhen Stock Connect programs. MSCI

has also announced its decision to include a

subset of A-shares into its standard benchmark

indices. An eventual full inclusion could lead to

material capital flows into China over the long term

China A-shares are estimated to

make up only 0.1% of MSCI AC

World Index with the initial 5%

‘inclusion factor’

7

HSBC Global Asset ManagementExperience in Managing Asian Assets

USD427.9 billion AUM

USD429.0 billion AUDTotal

Notes:

1. Asia-Pacific includes employees and assets of Hang Seng Bank, in which HSBC has a majority holding

2. HSBC Jintrust Fund Management company is a joint venture between HSBC Global Asset Management and Shanxi Trust Corporation Limited

Source: HSBC Global Asset Management as at 31 March 2017. Any differences are due to rounding. Cross-border and domestic assets by Legal Entity.

USD123.6 billion AUM

USD153.9 billion AUD

Asia-

Pacific1

Canada

USA

Mexico

Argentina

Bermuda

UK

SwedenLuxembourg

JerseyFrance

Spain

Switzerland

Malta

AustriaGermany

Turkey

Saudi Arabia UAEIndia

Singapore

Hong KongTaiwan

Japan

Australia

China2

HSBC Global Asset

Management offices

78Americas

investment

professionals 356EMEA

investment

professionals 174Asia-Pacific1

investment

professionals

Experienced investment

teams with a strong track

record dating back to

1992 for Asian equities,

and 1996 for Asian bonds

Strong global investment

platform across

geographies

A unique and robust

investment process built

on solid proprietary

research

Embedded into the

strong compliance and

governance framework of

the HSBC group

Italy

Strong global investment platform and operations supports local investment teams

A well resourced, stable

and award winning team

8

HSBC Global Asset ManagementAsian Investment Capabilities

Asian Equities

Regional

Asia ex Japan Equity

ASEAN Equity

Asia Pacific ex Japan Volatility

Focused

Asia Pacific ex Japan Equity High

Dividend

Asia ex Japan Equity Smaller

Companies

Single country

Chinese equity

Indian equity

Hong Kong equity

Taiwan equity

Thailand equity

Asian Fixed Income

Pan Asian fixed income

Asian credit

Asian high yield

Asian currencies

Single currency fixed income

Offshore RMB bonds

Onshore RMB bonds

Indian fixed income

Indonesian fixed income

HKD bonds

SGD bonds

Asian Multi-Asset

Regional

Asia Focused Conservative

Asia Focused Income

Asia Focused Growth

Single country

China Multi-Asset Income

Asian Liquidity

Single country

China

Hong Kong

India

Taiwan

9

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