HSBC and Emerging Markets October 2010

For investment professionals only

Contents

Emerging markets – investment universe 3

Why consider investing in emerging markets? 5

Focus on BRIC 17

HSBC, a recognised leader in emerging markets investment solutions 18

1

2

Emerging markets – investment universe

The term “emerging markets” broadly encapsulates regions such as Eastern Europe, Asia, South Africa and Latin America.

For example, the Morgan Stanley Capital Index Emerging Markets (MSCI EM) includes:

Argentina, Brazil, Chile, China, Colombia, Czech Republic, Egypt, Hungary, India, Indonesia, Iran, Israel, Jordan, Malaysia, Mexico, Morocco, Pakistan, Peru, Philippines, Poland, Russia, South

Africa, South Korea, Taiwan, Thailand, Tunisia, Turkey, Vietnam.

Emerging Markets

3

Long-term growth in emerging markets

is underpinned by youthful, increasingly

well-educated and confident consumers.

With over 50% of their populations

younger than 25, emerging market

countries will experience rising demand

for products and servicesSource: World Bank, April 2010.

4

Why consider investing in emerging markets?

Over the last decade, the emerging markets investment universe has grown significantly. Key factors influencing this growth include:

High economic growth rates

Improving fundamentals through sound fiscal policies and responsible monetary policy

Strong demand for raw materials, goods and services

Positive long-term outlook

Development of domestic institutional investor base

As these economies expand, governments and corporations alike look to local and international markets to finance growth.

Cause Effect Possible Ramification

Rapid Economic Growth

Higher Family

Incomes

More Consumer Spending

Emerging Markets

Opportunity

High Saving Rates

in Asia

Low Household

Debt

Ready Supply of Domestic

Capital

Emerging Markets

Opportunity

Urbanisation Infrastructure Build-out

Demand for

Commodities

Emerging Markets

Opportunity

Natural Resources

Wealth

Exploration, Development

and Production

Revenue Stream for

Governments

Emerging Markets

Opportunity

Improved Corporate

Transparency

Attract Overseas

Investments Market

Liquidity Emerging Markets

Opportunity

5

High economic growth rates

In 2009, more than two-thirds of global growth is being contributed by emerging market countries. These countries also account for a rising share of world trade. Emerging markets have become key drivers of global growth, acting as stabilizers over the past year when advanced economies were hit by fallout from the crisis.

During 2009, emerging markets countries experienced a tremendous surge after a significant fall at the end of 2008. Another critical aspect of the year was the way the two most populous countries in the world, China and India, forged ahead with incredible Gross Domestic Product (GDP) growth of 8.5% and 5.5% (see below), respectively, in 2009 in the face of dire predictions regarding the global economy. The rapid developments in emerging markets should allow these markets to command even greater attention in the global investment universe. In fact, emerging markets such as China, Brazil, Russia and India are already some of the world’s most important and influential countries.

CountryGDP PPP ($bn) GDP Growth

2000 2009 2000 2009 2011 (F)

Brazil 1,230.9 2,024.0 2.7% -0.5% 4.0%

China 3,006.5 8,767.0 8.3% 8.5% 9.0%

India 1,800.5 3,561.0 5.0% 5.5% 8.0%

Russia 1,120.5 2,117.0 8.3% -7.5% 3.5%

Other EM countries 6,386.6 10,669.6 2.1% 4.0% 5.8%

Emerging Markets 13,545.0 27,138.6 2.4% 3.5% 6.0%

World 44,913.9 70,240.0 3.0% -2.2% 3.2%

Source: World Bank Global Economic Prospects, January 2010.

China is poised to become the world’s largest economy by 2020

While the Chinese and Indian economies grew 8.5% and 5.5%

respectively during 2009, developed countries posted a 0.8% decline

average economic growth the same yearSource: World Bank, April 2010.

6

Improving fundamentals of emerging markets countries

Sound monetary and fiscal policies

Some restraint has come to the historically undisciplined governments of developing countries. In contrast to many developed economies that have allowed their fundamentals to deteriorate in a disturbing manner, more governments within Emerging Markets have turned away from the inflationary monetary policies and irresponsible fiscal actions that had discouraged investors in the past. Emerging markets have continued to maintain sound economic polices and unlike during some previous booms, they did not throw fiscal caution to the wind.

Efforts to tame inflation and build foreign exchange (FX) reserves in these countries have instilled more confidence among investors. In 2009, the average annual inflation rate among emerging markets countries was around 5%, as compared to between 15-25% in the late 1990’s (IMF report 2009). In addition, companies based in emerging markets have also gone through a substantial evolution. They are now better managed, with stronger balance sheets and increasing ability to generate cash.

Source: World Bank, May 2010.

-2%

0%

2%

4%

6%

8%

10%

12%

14%

2009 2011 2015

USA Brazil Russia India China

Inflation

Many emerging market economies, especially the BRIC economies are now

net external creditors as their FX reserves comfortably exceed their foreign debtSource: World Bank, April 2010.

7

Commodities play an important role in emerging market economies

In 2008 , the rapid increase of commodity prices has also had a positive impact on Emerging Markets. Most emerging countries have significant natural resources and have benefited from these rising prices. This and substantial surpluses from manufactured goods exports and services in countries like China has allowed these countries to build significant foreign exchange (FX) reserves. Although some commodity prices are still low compared to beginning of 2008, many of these countries have maintained their large levels of FX reserves. These reserves reduce the probability of default on foreign debt payments in the event of a crisis and allow external stocks to be smoothed out.

Source: IMF report 2010.

0

1,000

2,000

3,000

4,000

5,000

6,000

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

Emerging Markets FX reserves (US$ billion)

The Emerging Markets sovereign credit quality has improved

with around 60% of the JP Morgan EMBI Global Index securities

now rated investment gradeSource: JP Morgan, June 2010.8

Increased credit quality

The increased credit quality of many developing countries is also evidence of their improving fundamentals. At the end of 2009, around 60% of the market value of the Emerging Market Bond Index (JP Morgan EMBI) was investment-grade debt, up from 30% in 2002 and close to 5% in the late 1990s.

Examples of this trend include Mexico, one of the countries that instigated the 1980s debt crisis, and Russia, the root of the market meltdown in 1998, have both achieved investment grade sovereign debt ratings as a result of their improved fundamentals. We expect emerging markets countries fundamentals to continue to improve, which will translate into further credit rating upgrades.

Country Local Currency – Long Term

Argentina B-

Brazil BBB+

Chile AA

China A+

Colombia BBB+

Czech Republic A+

Egypt BBB-

Hungary BBB-

India BBB-

Indonesia BB+

Israel AA-

Jordan BBB-

Malaysia A+

Mexico A

Morocco BBB+

Pakistan B-

Peru BBB+

Philippines BB+

Poland A

Russian Federation BBB+

South Africa A+

Taiwan AA-

Thailand A-

Tunisia A-

Turkey BB+

Vietnam BB+

Source: Standard & Poor’s June 2010.

As their economies advance, many governments in emerging countries

are spending billions of dollars on improving their infrastructure, which

leads to further growth and fuels a consumer economySource: World Bank, April 2010. 9

As exports have fallen

since the global crisis started,

domestic demand, driven by

increasing wealth and the rise of

a middle class, has re-emerged as

a key growth driver of emerging

markets economiesSource: World Bank, April 2010.

10

Strong demand for raw materials, goods and services

Although emerging markets export-oriented economies were affected by the abrupt global downturn, the outlook for these countries improved markedly during the first half of 2009.

Emerging nations realized their economies are vulnerable if they remain largely dependent on export demand. They learned this lesson from the difficulties of their best “customers” – the developed economies. For emerging countries with a high share of national output concentrated in exports, problems in the developed world ought to spark change at home. In order to maintain robust growth, these economies are now focusing on internal demand.

Recent developments point to a strengthening of domestic demand, suggesting the rebound can become a self-sustaining recovery. This would make emerging economies less dependent on developed countries for growth than they were a few years ago.

Strong demand from within their own economies, and trade with other growing emerging markets, make these economies much more self sufficient. Across the region, revenues from exports to other emerging markets have now overtaken exports to the industrial nations, and domestic demand in many countries is growing at a very fast pace. Emerging market countries with households that have low debt-to-GDP and labour markets that are flexible and growing modestly have an opportunity to drive earnings for companies that cater to domestic consumption demands. As we know from our own experience and prosperity the consumer is an engine of economic growth.

Consider that private consumption accounts for roughly 40% of GDP in Brazil, Russia, India and China. The US, meanwhile, has been averaging around 70% of its GDP from private consumption. Further, the combined population of China and India alone accounts for roughly 40% of the total world population, while their combined consumption equals about $2.4 trillion. By comparison, in the U.S. annual consumption totals around $10 trillion, with a population of about 4.5% of the world.

The demand for domestic and imported goods in emerging markets is also fuelled by an expanding middle class. China’s middle class is already as big as the population of the US and over half of Brazil’s 192 million people are officially considered middle class. In the coming decades, hundreds of millions of people in both China and India will join the ranks of the middle class, giving them access to increased spending power and economic opportunities.

The ballooning emerging market labour force, 1,500 million strong and growing, is spending their newly earned money, resulting in retail sales growth that could average double digits for the next several years.

Consumer Expenditure 2004 2005 2006 2007 2008 2009 % Growth

2004-2009

China 596.80 668.60 771.90 936.00 1,180.60 1,281.90 114.8%

Russia 1,951.00 2,528.80 3,246.10 4,310.30 5,575.40 4,618.50 136.7%

Brazil 2,159.80 2,858.10 3,491.60 4,318.70 5,163.60 5,116.40 136.9%

India 683.30 813.30 953.90 1,198.20 1,449.70 1,438.00 110.4%

USA 27,568.40 29,114.10 30,428.00 31,783.80 32,443.30 32,050.50 16.3%

Source: National statistical offices/OECD/Eurostat/Euromonitor International, July 2010.

CountryPopulation (million) Average Age Labor Force (million)

2000 2009 2000 2009 2009 % Change 2000-2009

Brazil 172.8 198.7 29.5 28.2 93.7 26.5%

China 1,261.0 1,338.6 33.1 32.7 807.3 15.3%

India 1,014.1 1,166.1 25.1 24.9 523.5 28.9%

Russia 146.0 140.0 36.3 38.4 75.7 14.5%

Other EM countries 1,157.6 1,306.4 29.0 29.3 508.8 21.8%

Emerging Markets 3,751.5 4,149.8 28.2 28.5 2,009.0 20.4%

Source: World Bank Global Economic Prospects, January 2010.

11

Government spending and Public Debt

Industrial and urban growth in the emerging markets over recent years has led to increased government spending to develop infrastructure in key territories, including China, India, Russia and Brazil, a trend which continued during the economic downturn in 2008/09.

The 2007-2009 financial crisis led to a dramatic increase in the public debt of many advanced economies, with many of them experiencing their highest levels of debt since World War II. This was in large part due to the huge stimulus programs in countries around the world, in addition to government bailouts, recapitalizations and takeovers of banks and other financial institutions. This can have a damaging impact on the long-term growth of a country with high debt, as the government has to commit a significant portion of its resources to paying the interest on debt, instead of investing in R&D, schools, healthcare, infrastructure and other areas that could facilitate longer-term growth.

Public debt as a percent of GDP in developed countries as a whole went from hovering around 70% throughout the 1990s to more than 95% in 2009 and is projected to grow to over 100% of GDP by 2011, possibly rising even higher in the following years. It could already be higher, as potential costs of aging populations may not be entirely reflected in the budget projections of some countries.

Some emerging market countries – particularly the BRIC economies (Brazil, Russia, India and China) – are currently not facing this situation. This is a change from the situation in the 1990s and early 2000s when Brazil, India and Russia suffered major debt crises. According to the World Bank, the public debt of these rich countries is forecast to rise to over 100% of GDP in 2010 compared with an average of 40% for Latin American economies.

Source: IMF, April 2010.

Public Debt (% of GDP) 2009

0%

50%

100%

150%

200%

250%

USA Japan G7 Brazil Russia India China

12

Russia is the world’s biggest gas producer, the second largest oil exporter

and one of the top producers of aluminium, steel, platinum and nickel

The Indian middle class is 330 million people strong

Over 2 million students graduate from India’s universities

every year out of which 350,000 are engineers

With a population of 1.3 billion people, China accounts

for one-fifth of the world’s population

China has overtaken the US as the world’s biggest internet market

with over 250 million Chinese using the Internet

Russia accounts for 38% of all natural resources in the world

Source: World Bank, April 2010.

13

Global growth in 2010,

projected to be around 3% by

the World Bank, should be led

by emerging market countries

especially China and IndiaSource: World Bank, April 2010.

14

Positive long term outlook

The sustained growth of emerging markets economies has been based on a combination of demographic factors, increased industrialisation and an abundance of natural resources. Longer term growth is underpinned by a youthful, increasingly well-educated workforce. Emerging markets have very favourable demographics; over 50% of their populations are under 25 years of age. Domestic demand is fuelled by a growing middle class. Emerging countries are also becoming increasingly urbanised. Financial systems have developed to serve an increasingly wealthy population.

The positive outlook for the emerging economies is further underpinned by macroeconomic stability and a combination of substantial reserves and low debt, along with high domestic savings rates. Even in the event of renewed global weakness, many of these countries are in a strong position to take countermeasures to support aggregate demand. The total external debt of these countries at 25% of GDP in 2010 compares favourably to the situation in the industrialised world which typically ran deficits throughout the boom and has since relied on aggressive government stimulus spending to support economic activity. The debt levels in these economies are generally modest and some emerging countries are net creditors. While emerging markets suffered in the short-term from the global liquidity squeeze, they do not fear the long and painful adjustments that developed countries need to implement. In fact, there is actually potential in emerging markets for household debt to rise further, which will support future growth in consumption.

Public sector debt in emerging markets is also low compared to developed markets. Debt conditions are much better in the major emerging markets (Q1 2010). In the G-7 economies, sovereign debt burdens are now at about 100% of GDP, while in the 20 most important emerging market countries, debt represents only about 40% of GDP. Other economic fundamentals are good compared to developed markets. Foreign reserves are at a record high and foreign debt has declined.

The pace of growth has seen their international significance increase rapidly, challenging the traditional economic dominance of developed markets. Recent growth has been driven by domestic rather than export demand, reducing emerging markets reliance on their developed markets trading partners.

IMF Forecast

GDP Growth (%) Inflation (%)

2011 2015 2011 2015

Brazil 4.0% 4.1% 4.6% 4.1%

Russia 3.5% 5.0% 5.5% 5.0%

India 8.0% 8.0% 5.5% 4.0%

China 9.0% 9.5% 2.3% 2.0%

US 2.5% 2.4% 1.7% 2.1%

Source: World Bank Global Economic Prospects, January 2010.

As shown in the graph, Emerging Markets Equities have outperformed traditional equities such as Global, European, North American and G7 Equities over the five year period to June 2010.

507090

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Emerging Markets Equity Europe Equity G7 Equity North America Equity World Equity

Source: MSCI end of July 2010.

15

Brazil has the world’s

largest commercial cattle herd

(50% larger than the US)

at 190 million headsSource: World Bank, April 2010.

16

Focus on BRIC

BRIC is an acronym that refers to the fast growing emerging economies of Brazil, Russia, India and China,

which are already having a significant impact on the global economy.

The BRIC economies have to varying degrees shown rapid economic growth, increasing market size across

all sectors and a burgeoning middle class in recent years. Each of the BRIC countries also has multiple and

different attributes and thus each is distinct.

Bright prospects for BRIC markets long-term growth potential

As a group, the expectation of long term growth in BRIC market economies is supported by a combination

of positive demographics, increased industrialisation and an abundance of natural resources.

Diversification benefits

BRIC markets can complement developed and western economies and also have individual strengths.

China is a leading global manufacturer across a wide range of industries, facilitated by its abundant labour

resources. The Indian economy benefits from specialisation in service, outsourcing, technology and

pharmaceuticals. Brazil’s focus is on agricultural commodities and energy resources, whilst Russia has a

large percentage of the world’s oil and gas reserves.

The BRIC economies have seen significant changes in the recent past in their socio-political-economic spheres.

Today, these economies must continue to outperform their competitors, as investors have an easy access to

different alternatives.

BRIC economies were hit by the financial crisis and global recession in 2008 and 2009 but they suffered

collateral not intrinsic damage. They are not left with the same aftermath issues to deal with that the

economies at the “epicentre” of the financial crisis are.

In 2009, output in Brazil and Russia fell by 0.5% and 7.5% respectively, while the Chinese and Indian

economies grew 8.5% and 5.5% respectively the same year. However, the World Bank’s forecast for the

BRIC countries in 2010 shows encouraging signs with 9% for China, 8% for India, 4% and 3.5% for Brazil and

Russia respectively.

Growth rates in the BRIC countries are widely expected to exceed those of western markets. Their stronger

outlook has been a key reason for the large investment inflows seen in recent years. Investors are increasingly

looking towards the BRIC economies to sustain global economic growth.

17

HSBC, a recognised leader in emerging markets investment solutions

Emerging markets are at the heart of HSBC’s corporate identity. Throughout its history, the HSBC Group

has maintained a strong presence in global trade, particularly in India and China, the world’s most dynamic

emerging markets.

HSBC’s long-standing presence in these markets also provides HSBC Global Asset Management’s investment

professionals with local access across the globe, creating exciting investment opportunities from within the

emerging markets universe.

HSBC has been a participant and a witness to the development of emerging markets for over a century. We

have established branches even in countries that were considered closed, restricted or highly centralised. Over

the years, HSBC rose to the status of a respected institution as it worked actively in these markets.

HSBC Global Asset Management has a long history of serving clients of the HSBC Group, tracing its roots back

to the foundation of the Hong Kong and Shanghai Banking Corporation in 1865. We have been managing assets

on behalf of our clients for more than 30 years. Over that time, our business has expanded into new markets

and developed new areas of expertise. Today, HSBC Global Asset Management combines the advantages of

worldwide presence and scale plus local knowledge and service – and is on the ground in many locations.

With US$97 billion (as at 30 April 2010) of assets under management in emerging markets and emerging

market strategies, we are a leader in the provision of emerging market funds worldwide. We are proud of our

status as manager of one of the most extensive ranges of emerging markets funds including some of the

world’s largest funds in their respective sectors.

From our award winning regional emerging market equity and fixed income strategies to our long established

single country equity strategies, we have funds that cover almost every part of the emerging markets

universe. We are able to offer access to some of the world’s fastest growing markets in addition to a choice of

investment styles and approaches to best suit our clients’ needs.

We have over 200 dedicated emerging markets investment professionals in 20 established HSBC Global Asset

Management offices around the world. Our investment teams are able to call on the research capabilities of

the wider HSBC Group which has presence in 88 countries and territories in Europe, the Asia-Pacific region,

the Americas, the Middle East and Africa and have access to the additional wider HSBC global emerging

markets expertise and knowledge.

We endeavour to uncover exciting investment opportunities from within the emerging markets and to provide

extensive access to these rapidly developing markets.

18

Number of investment professionals in location. Source: HBSC Global Asset Management as of June 2010.

New York (8)*

GEM Fixed Income

Mexico City (11)*

Fixed Income

Equity

Alternatives

Bogotá (5)*

Fixed Income

Equity

São Paolo (21)*

Fixed Income

Equity

Alternatives

Multimanager

Buenos Aires (5)*

Fixed Income

EquityLondon (13)*

GEM Equity

Alternatives

Multimanager

Paris (9)*

Fixed Income

Equity (including Amanah)

Istanbul (10)*

Fixed Income

Equity

Alternatives

Riyadh (18)*

Fixed Income (including Amanah)

Equity

Alternatives

Singapore (7)*

Equity

Mumbai (19)*

Fixed Income

Equity

Hong Kong (37)*

Fixed Income

Equity

Multimanager

Shanghai (17)*

Jintrust** Fixed Income

Jintrust** Equity

Multimanager

Taipei (23)*

Fixed Income

Equity

19

HSBC continues to receive widespread recognition from the financial

industry’s leading publications, reflecting the success of our strategy as

an emerging markets-led and financing-focused wholesale bank

20

This document is intended for investment professionals only and should not be distributed to or relied upon by Retail Clients. HSBC Global Asset Management (UK) Limited has based this document on

information obtained from sources it believes to be reliable but which it has not independently verified. HSBC Global Asset Management (UK) Limited and HSBC Group accept no responsibility as to its accuracy

or completeness. This document is intended for discussion only and shall not be capable of creating any contractual or other legal obligations on the part of HSBC Global Asset Management (UK) Limited or any

other HSBC Group company. Care has been taken to ensure the accuracy of this presentation but HSBC Global Asset Management (UK) Limited accepts no responsibility for any errors or omissions contained

therein. Any forecast, projection or target where provided is indicative only and is not guaranteed in any way. HSBC Global Asset Management (UK) Limited accepts no liability for any failure to meet such forecast,

projection or target. The value of investments and any income from them can go down as well as up and investors may not get back the amount originally invested. Where overseas investments are held the

rate of currency exchange may cause the value of such investments to go down as well as up. Investments in emerging markets are by their nature higher risk and potentially more volatile than those inherent in

established markets. Markets in some countries are described as ‘emerging markets’. Some of these may involve a higher risk than where investment is within a more established market. These risks include the

possibility of failed or delayed settlement, registration and custody of securities and the level of investor protection offered. Emerging markets are generally, but not exclusively, those that are not within the United

States, Canada, Switzerland and members of the European Economic area, Japan, Australia and New Zealand. Stockmarket investments should be viewed as a medium to long term investment and should be

held for at least five years. Any performance information shown refers to the past and should not be seen as an indication of future returns. This document is approved for issue in the UK by HSBC Global Asset

Management (UK) Limited, who are authorised and regulated by the Financial Services Authority. © HSBC Global Asset Management (UK) Limited 2010. All rights reserved.18649/1010 FP10-1687