abcGlobal Research
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.
Inflation concerns are easing because of a retracement in commodity prices, more-
aggressive interest-rate tightening, a reweighting toward more-conventional monetary
policy, and weaker economic data.
We extend our quantitative analysis offering in EM. We introduce a new rich/cheap
external debt model to value positioning across the different country curves. Also, our EM
Central Bank Monitor now is available on Bloomberg at HSER.
Local markets: Depricing of interest rate hikes is almost done; we recommend long
duration in Mexico, South Africa, and Indonesia.
External debt: We remain fully invested, as we see room for 15-25bps spread
tightening; we are overweight high-yielders Argentina, Venezuela, and Ukraine.
FX: We favour IDR, MYR, CNH, and SGD in Asia; BRL, MXN, and COP in Latam;
and RON in EMEA.
Equities: These are experiencing a drag from lower growth expectations, but benefiting
from easing inflations fears; we recommend good secular growth stories: Brazil,
China, Indonesia, Malaysia, and Turkey, over Korea, Mexico, Poland, and Thailand.
25 May 2011 Emerging Markets Cross-Asset Strategy
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
EM Fixed Income, Equity, and FX Strategy Teams
Pablo Goldberg Global Head of EM Research HSBC Securities (USA) Inc. +1 212 525 8729 [email protected]
View HSBC Global Research at: http://www.research.hsbc.com
Issuer of report: HSBC Securities (USA) Inc.
Disclaimer & Disclosures This report must be read with the disclosures and the analyst certifications in the Disclosure appendix, and with the Disclaimer, which forms part of it
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Emerging Markets Strategist Cross-Asset Strategy 25 May 2011
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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
Contents
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Emerging Markets Strategist Cross-Asset Strategy 25 May 2011
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Staying positive
Despite decreasing volatility of EM assets,
investors worldwide appear to be uneasy,
keeping cash on the sidelines. “Markets are
doing too well, given the number of shocks out
there; we must be due for a correction” is a typical
phrase that we hear a lot lately. Going over the
laundry list of headwinds facing the market, one
can understand why some investors feel a sense of
impending crisis: deteriorating growth
expectations in the developed world, large fiscal
deficits in the US and Japan, weakening debt
dynamics in the Eurozone periphery, and inflation
pressures in emerging markets.
We disagree. We believe those factors provide
underlying support for EM in the short term.
Indeed, we see a sort of repetition of the low-
grade Goldilocks scenario for EM presented
during a good part of 2010. This scenario is
formed by three elements:
Ample global liquidity.
The belief that such liquidity will remain in
spite of the end of QE2.
Strong fundamentals in EM.
Putting it more simply, a lot of money is
floating around and it has to go somewhere;
for now, this place continues to be the
emerging markets. Strong balance sheets in EM
continue to attract interest, and while risks from
abroad lead to some volatility, they do not derail
the appetite for the asset class.
True, this time around, EM might not see the
benefit of falling yields in the US. Nonetheless,
we believe growth in the US is not strong enough
to push rates significantly higher either, and we
consider a double-dip unlikely. Europe is a
concern, but we do not see an involuntary and
disruptive default as a likely outcome.
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
Chart A1: Decreasing volatility of EM fixed income and equity
0%
5%
10%
15%
20%
25%
30%
Jun-07 Mar-08 Dec-08 Sep-09 Jun-10 Mar-11
0%
25%
50%
75%
100%
125%
150%
EM EXD
EM Equities
Source: HSBC
Pablo Goldberg Global Head, EM Research HSBC Securities (USA) Inc. +1 212 525 8729 [email protected]
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In our inaugural edition of Emerging Markets
Strategist: Turning more positive on EM risk
(1 April 2011), we forecast an end of the reflow of
funds out of EM and into the developed markets.
Since then, we have seen a strong recovery of
inflows into EM-dedicated funds, both equity and
fixed income (see page 27). This reflow was the
result of better growth prospects for the US and
Germany, and increasing inflation concerns in EM.
As the growth outlook in developed markets
softened and EM central banks increased their focus
on inflation, we foresaw the flow of funds favoring
EM one more time. We believe that these dynamics
are likely to remain in place.
Different from the situation in 2010, we are
witnessing a rotation of themes that dominated
investors’ perception of EM year-to-date: the
inflation theme is being deflated, and concerns
are shifting toward weakening economic activity.
This rotation has important consequences in terms of
asset allocation. Softer growth expectations are not
good for equities, while an easing of inflation
pressures provide 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 selectiveness in FX.
Valuations have corrected in many of these
asset classes, and while our long-term view of
EM remains bullish, we maintain that a more
selective approach is warranted in the short
term. In most places, value has been squeezed;
thus, long EM positions should be seen more as a
carry play than a capital appreciation story. This is
what our low-grade Goldilocks scenario is about.
It’s the economy, stupid!
We expect global interest rates to remain low
and to continue to support crossover flows into
EM. What brings money into EM is not only
strong fundamentals but also the low level of
yields in the developed world. After almost
touching 3.75% in January, 10yr US Treasury
yields dropped to about 3.13% at the time of this
writing. We disagree with those who believe there
is a bubble in EM valuations; rather, we see a very
generous pricing of risk worldwide brought about
by very low funding rates in the developed
markets.
HSBC Economics believes the level of US
Treasury yields depends on economic data, and
that the end of QE2 should not, per se, lead to
higher yields in the US. Chart A2 shows that the
announcement of QE2 marked the lows of US
Treasury rates, which moved higher in
anticipation of higher economic growth. Because
we expect that economic activity will stay
subdued and core inflation will be relatively tame,
we anticipate that yields will stay range-bound
and that the US Federal Reserve will stick with an
accommodative policy into 2012. So far,
economic data support our assessment, which in
turn is positive for EM fixed income and FX.
The most challenging headwind to inflows into
EM is a potential correction in risk-free rates, in
our view. We got a clear glimpse of that during 4Q
2010. Therefore, we expect that things will likely
change when developed-market yield curves and
policy rates begin a consistent process of
normalization, but we are not there yet. Furthermore,
Chart A2: UST10y yields driven by expectations on growth (%)
2.0
2.2
2.4
2.6
2.8
3.0
3.2
3.4
3.6
3.8
4.0
May-10 Jul-10 Sep-10 Nov-10 Jan-11 Mar-11
2.0
2.2
2.4
2.6
2.8
3.0
3.2
3.4
UST10yr Bloomberg median 2011 GDP Fcst
QE2 announcement
2.0
2.2
2.4
2.6
2.8
3.0
3.2
3.4
3.6
3.8
4.0
May-10 Jul-10 Sep-10 Nov-10 Jan-11 Mar-11
2.0
2.2
2.4
2.6
2.8
3.0
3.2
3.4
UST10yr Bloomberg median 2011 GDP Fcst
QE2 announcement
Source: Bloomberg
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Emerging Markets Strategist Cross-Asset Strategy 25 May 2011
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we do not see the end of QE2, scheduled for 30 June
2011, as the day of reckoning.
Deflating inflation fears
The structural case in favor of EM remains
intact, we believe. Ultimately, the value of the
emerging markets comes from an absolute
structural improvement in their fundamentals, and
also its relative performance against developed
markets. These movements are so profound that
they are shaping geopolitics in a significant way.
Who would have thought that EM was going to be
in such position as to claim its right to chair the
International Monetary Fund, an institution that
made its name by advising EM countries on how
to run their economies.
However, the short-term outlook for growth and
inflation is likely to dominate asset and sector
allocation. Inflation concerns about EM are easing,
as shown by the HSBC PMI indices for April that
plot a continuation of the deceleration of inflation
expectations that started in March. Our flash China
PMI for May shows further softening in economic
activity and price pressures.
We see these factors behind the deflation of
inflation fears: a retracement in commodity prices
and its current stability, an acceleration in the pace of
policy tightening in EM, a shift toward more
conventional rather than unconventional measures,
and incipient signs of economic deceleration. To gauge the deflationary impact provided by the
changes in the international prices of food and
energy s from the end of the first quarter, we ran a
regression on each country’s headline inflation
rate against the domestic output gap, currency
changes, and international prices for food and
energy. We then used the resulting estimates to
simulate the relief in inflation pressure provided
by the occurred change in commodity prices since
the end of Q1 – a 9.5% drop in WTI crude oil
prices and a consolidation in agricultural prices.
Though we acknowledge important buffers
between domestic and international prices –
subsidies, taxes, trade restrictions – the analysis
gives us an approximation of how changes in
commodity prices could have affected inflation
and expectations.
Chart A3: HSBC Manufacturing PMIs show easing inflation expectations
Apr 11 Mar 11 Feb 11 Jan 11 Apr 11 Mar 11 Feb 11 Jan 11Brazil 53.4 55.1 53.4 50.7 57.5 58.3 57.5 54.3Russia 58.8 60.8 59.3 61.6 67.3 71.1 76.4 78.0India 56.2 59.7 56.3 56.7 66.3 68.7 68.4 66.1China 55.2 56.1 60.7 58.8 62.4 67.5 74.6 71.0Czech Republic 57.5 57.5 55.7 56.0 69.4 73.9 73.3 70.4Israel 81.3 81.0 75.0 54.3Poland 59.2 60.8 60.7 58.9 74.9 75.1 76.4 78.0Turkey 57.6 60.6 64.1 62.0 67.9 77.4 79.5 79.1South Africa Singapore 53.1 54.0 54.7 52.6South Korea 52.5 53.0 53.9 54.0 59.3 61.7 66.2 65.2Taiwan 57.0 60.8 60.6 56.0 77.1 82.4 87.1 84.8
Notes:
Output prices Input prices
above 50 + rising above 50 + falling below 50 + falling below 50 + risingsame above 50 Same below 50
Source: Markit, HSBC
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Table A1: Deflationary impact of commodity contraction (bps)
Brazil (26) Chile (26) Colombia (16) Mexico (13) Peru (11) Czech Republic (11) Hungary 10 Poland (15) Russia (54) Turkey (39) China (41) India (78) Indonesia (48) Malaysia (17) Philippines (39) S. Korea (17) Singapore (18) S. Africa (43)
Source: HSBC
Table A1 shows that other things being equal, the
recent consolidation in food and the sell-off in
crude had a deflationary effect between 25-50bps
across EM. Notable exceptions are Russia, India,
Indonesia, South Africa, and China, where the
impact appears to be the highest.
Grabbing the bull by the horns
EM central banks have finally turned more
hawkish; a key move to contain inflation
expectations. Chart A5 shows how Latin
American central banks over the past three
months have increased the pace of interest rate
hikes, Asia kept hiking relentlessness, and now
EMEA is joining the club. Note that only two
central banks disappointed market expectations
for a an interest rate hike during April and May,
while five – Malaysia, Poland, Russia, Israel, and
Chile – surprised the market with stronger hikes
than expected adjustments (see Chart A5). Also important, the weighting given to
conventional monetary tightening has increased
vis-à-vis unconventional policy. While China and
Brazil continued with a mixed approach of raising
rates and reserve requirement ratios, Russia has
only tightened conventionally this time, having
done quantitative tightening (QT) in the past, and
so did all those central banks that increased rates
in the May round.
Why this change? We see two reasons behind a
reweighting of the strategy that central banks
followed during recent quarters. First, inflation
expectations appear to have been less sensitive to
quantitative tightening than to pure interest-rate
Chart A5: EM central banks become more hawkish than expectations; increases vs. survey averages
-40
-30
-20
-10
0
10
20
30
Jun-10 Sep-10 Dec-10 Mar-11
BRL CLP MXN COP PEN
bps
-25
-20
-15
-10
-5
0
5
10
15
20
Jun-10 Sep-10 Dec-10 Mar-11
KRW IND THB PHP TWD MYR
bps
-30
-20
-10
0
10
20
30
Jun-10 Sep-10 Dec-10 Mar-11
TRY ZAR CZK HUF PLN ILS
bps
Source: HSBC
Chart A4: Monetary policy is being tightened in EM
10
20
30
40
50
60
70
80
90
100
Jul-07 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11
Latam
EmeaEM Asia
Developed
100 = (2007-09) peak
Source: Bloomberg, HSBC
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Emerging Markets Strategist Cross-Asset Strategy 25 May 2011
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increases. Second, there is little evidence so far
that quantitative tightening has achieved its
objective of decelerating the pace of credit
creation.
Chart A6 shows the cases of Brazil and Turkey. In
the latter, we see no deceleration in the pace of
credit creation, while in Brazil we see it only for
auto lending, a segment that was the target of
specific administrative measures.
Shifting worries from inflation to growth
We expect a migration of worries from
inflation into growth. Though these are incipient,
the most recent data show that while inflation
expectations are decelerating, those on growth are
as well. Exports from EM countries might be hurt
by deceleration of developed economies, while
domestic tightening, particularly if accelerated,
could become a drag on economic activity. To be
clear, we do not expect a hard landing in EM, but
HSBC Economics senses that a temporary
slowdown is increasingly likely.
HSBC’s co-chief economist on Asia, Frederic
Neumann, has been warning about a deterioration
of the new orders-to-inventory ratios in Asia,
while the Brazilian central bank’s expectations
survey is showing a significant downward
revision to growth. Chart A7 shows that we might
see a repetition of what happened in the third
quarter of 2010, when inventories rose too fast,
compared to economic activity in the developed
world, and a temporary slowdown in Asia
followed as a result.
How to play these themes?
The global macroeconomic scenario we foresee
for the coming months appears particularly
benign for investments in EM fixed income.
Thus, we retain our bias for rates over equity
for the time being. The reasoning is simple: First,
expectations of modest growth in the developed
world, particularly the US, should keep risk-free
rates low, thus benefiting carry trades. Second, the
deflation of the commodity rally and weaker
growth data in EM, reinforced by more-active
central banks, led to a reduction of inflation risk
premium. And third, equity markets experience
Chart A6: Quantitative tightening is yet to significantly reduce the pace of credit creation (3mo. growth rates)
Brazil
0%
1%
2%
3%
4%
5%
6%
7%
Jan-09 May-09 Sep-09 Jan-10 May-10 Sep-10 Jan-11
-30%
-20%
-10%
0%
10%
20%
30%
40%
50%
M2 Credit Auto (2y)
Turkey
0%
1%
2%
3%
4%
5%
6%
7%
8%
Jan-09 May-09 Sep-09 Jan-10 May-10 Sep-10 Jan-11
-2%
0%
2%
4%
6%
8%
10%
12%
14%M2 Credit (2y)
Source: HSBC
Chart A7: Developed markets growth and Asian inventories
20
30
40
50
60
70
80
2006 2007 2008 2009 2010
42
44
46
48
50
52
54
Eurozone US Output PMI Asia inventories (2Y)
Source: Markit, HSBC
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Emerging Markets Strategist Cross-Asset Strategy 25 May 2011
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the drag of weaker economic activity and lower
commodity prices, but the benefit of weaker
inflation pressures. Where does EM FX stand in
this conundrum? The long-term trend of real
exchange rates appreciation of EM currencies
remains unchanged; however, in the short term,
we expect more range trading in line with the
gyrations of the USD.
Stay long EXD on the back of strong EM balance sheets
We believe there is room for a further 15-
25bps spread tightening in EM external debt,
the major risk to our call coming from a
significant deterioration in the Eurozone
periphery. In recent weeks, EM EXD yields
rallied 25bps to 5.50%. However, most of the
movement was driven by a US Treasury rally,
while EM spreads are now at the top of their
recent 240-265bps range.
We expect limited contagion to EM debt
coming from the periphery for the time being.
HSBC Fixed Income Research head Steven Major
believes that Greece will avoid an involuntary
restructuring of its debt before June 2013. The
likelihood of a voluntary action, perhaps
extending the maturity on Greek debt (reprofiling)
is much higher than an involuntary restructuring.
Such a scenario would not represent a credit
event, if managed well, and thereby should avoid
a significant market disruption.
Continue long high-yielders in the hard
currency space. There is little or no premium in
the high-graders in EM to absorb any bad news
coming from Europe. Many of the investment-
grade EM countries are trading at levels that are
too tight to accommodate any deviation from our
benign scenario. As an example, 5Y CDS of the
Czech Republic is trading at levels similar to
those in France. Chart A9 shows that most high-
grade EM countries show spreads tighter to what
they were prior to the time when the market first
felt contagion from the euro-zone periphery (27
April 2010). True, this is also the case in
Chart A9: EM EXD Spread changes from various days until today
-150
-100
-50
0
50
100
150
EM
US
HY
US
HG
Arge
ntin
a
Bulg
aria
Braz
il
Col
ombi
a
Cos
ta R
ica
Dom
. Rep
.
Egyp
t
Gua
tem
ala
Indo
nesia Ira
q
Jam
aica
Leba
non
Mex
ico
Pana
ma
Peru
Philip
pine
s
Pakis
tan
Hun
gary
Rus
sia
Serb
ia
Sout
h Af
rica
Turk
ey
Ukr
aine
Uru
guay
Vene
zuel
a
Viet
nam
5-Nov-10 27-Apr-10285 232195
Source: Bloomberg
Chart A8: External debt yields and spreads
4.50
4.75
5.00
5.25
5.50
5.75
6.00
6.25
6.50
Jan-10 Apr-10 Jul-10 Oct-10 Jan-11 Apr-11
220
235
250
265
280
295
310
325
340
355
EM EXD Yields Spreads (rhs)
Yield (%) Spread (bps)
Source: Bloomberg
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Emerging Markets Strategist Cross-Asset Strategy 25 May 2011
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Argentina and Ukraine; however, we believe this
is supported by an improvement in fundamentals.
However, Argentina, Venezuela, and Ukraine
still provide extra value, yet not without
inherent volatility. These are our overweights
in external debt (see page 16). There, we believe,
repayment capacity is stronger than what the
market indicates and that current yields are
attractive enough to accommodate price volatility.
We retain a preference for Venezuela over
Argentina on the back of the proximity of the
elections and the pressures we are seeing on the
exchange rate in Argentina. On 5 May, we opened
a buy PDVSA ’17N-Venezuela CDS basis trade
with a target of 300bps.
In this issue of the EM Strategist, we introduce a
new feature: our EM EXD Rich/Cheap Model
(see page 38). This model calculates
cheapness/expensiveness across each sovereign
bond hard-currency curve by comparing a bond’s
market par-equivalent CDS spread (PECS) with its
fair PECS, derived by evaluating the bond’s cash
flows with a smooth issuer survival probability
function.. We use the model to recommend to
investors how to position best along a curve. This
time, we highlight three opportunities:
Brazil curve out to 10 years has richened,
’21s are cheap compared to ’17s.
Colombia ’24s are cheap, compared to
Colombia ’19s.
Philippines ’16s look attractive versus the
’15s, offer 28bp pickup.
Extend duration in local markets to profit from easing inflation fears
As inflation fears eased, EM local curves have
started to price out some of the previously
implied rate hikes. While this move has been
more pronounced in Latam and EMEA than in
Asia, it is a consistent theme across the EM local
markets. Chart A10 shows regional averages for
the change in the 12-month implied policy rate,
derived from a data set of historical implied
policy rates generated from our HSBC Emerging
Market Central Bank Monitor (for details of the
publication and its recent innovations, see Box 1).
In particular, there has been significant
repricing of the monetary policy path in
Mexico, Brazil, Chile, Turkey, Poland, South
Africa, and Malaysia (see Chart A11). In the EM
Central Bank Watcher section (see page 30), we
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
-25
0
25
50
75
100
Oct-10 Dec-10 Feb-11 Apr-11
Latam EMEA Asia
-125
-75
-25
25
75
Braz
il
Chi
le
Cze
ch
Hun
gary
Indi
a
Isra
el
Mal
aysi
a
Mex
ico
Pola
nd
S Ko
rea
Sout
h Af
rica
Taiw
an
Thai
land
Turk
ey
bp YE11 YE12
Change (in bp) in implied average policy rate for year-end 2011 since 15 April 2010. Source: HSBC
Source: HSBC
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Emerging Markets Strategist Cross-Asset Strategy 25 May 2011
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already run its course, with some notable
exceptions: Mexico, South Africa, Czech
Republic, and Poland.
Therefore, we continue to recommend long
positions in Israel, Mexico, and South Africa,
although in most of the cases, we extend duration
to longer tenors. We continue to see a flattening
bias in the local curves stemming from the
deceleration in world growth and the reduction of
risk premium brought on by more proactive
central banks. We recommend investors buy the
10-year sector in South Africa (R208), Mexico
(MBonos), and Indonesia (FR53).
Interesting to note is that local curve plays, in
particular flatteners in Asia and selective Latam
countries, could be a good hedge against a
deterioration of the situation in the euro-zone
periphery. At the end of the day, any disruptions
in Europe would be a deflationary shock.
A volatile backdrop leads to caution on EM FX
While we remain constructive overall about
EM FX for the medium term, we advise
greater discrimination between currencies
amidst heightened risk aversion. Rising risks of
global instability have understandably seen
investors turn more cautious. The period since our
first edition of EM Strategist saw two halves for
EM FX: one in April, and a completely different
one in May. April’s positive returns were mostly
driven by USD deterioration worldwide, and the
greenback recovery in May came on the back of
risk aversion.
If there is a positive factor to be found, it is that we
have not yet fallen off this tightrope (see EM FX
Roadmap). Equity and commodity markets have
softened, but fund flows to local currency EM funds
are holding up – moreso fixed income than equity –
amidst low rates in the West.
In Asia, we prefer currencies with lower exposure
to external growth and capital flows. Our top
picks for the region are IDR, MYR, CNH, and
SGD. In Latam, we find that the current
correction higher in USD provides good
opportunities to reinstate long trades in BRL,
MXN, and COP, where higher terms of trade and
long-term flows remain currency-supportive. In
EMEA, we like the RON on the back of high
inflation (read: higher FX tolerance and potential
hike) and the HUF on cheap valuations and
reduction of fiscal and MPC composition risks.
Play domestic over global cyclicality in EM equities
With inflation fears slowly moving away from
investors concerns, the HSBC equity strategy
team believes that the major call should
revolve around domestic cyclicality, especially
in good secular growth stories, outperforming
global cyclicality, particularly with regard to the
commodity segment.
The emphasis comes on Brazil, China, Indonesia,
Malaysia, and Turkey, over Korea, Mexico,
Poland, and Thailand. On industries, the preferred
ones are banks, real estate, and consumer, which
ought to receive a lift from reduced concerns
about inflation and enhanced prospects for an EM
soft landing.
Chart A12: USD-EM FX (1 April – 23 May)
-6% -4% -2% 0% 2%
BRLCLP
CNYCOPHUFINRIDR
KRWMYRMXNPHPPLNRUBZARTWDTHBTRY
Source: Bloomberg
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Emerging Markets Strategist Cross-Asset Strategy 25 May 2011
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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 1.6500Source: HSBC
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Emerging Markets Strategist Cross-Asset Strategy 25 May 2011
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Box 1 - HSBC Emerging Market Central Bank Monitor
Now on Bloomberg HSER <GO>
The EM Market Central Bank Monitor provides a
market-implied path of monetary policy rates for
key EM countries globally. Currently, we are
covering Brazil, Chile, Czech Republic, Hungary,
India, Israel, Korea, Malaysia, Mexico, Poland,
South Africa, Taiwan, Thailand, and Turkey.
The horizon covers the “monetary policy segment”
of the yield curve, ie the next 24 months.
We compute probabilities of a given move and
provide a history of implied policy moves (see
Table C2).
This report is available as a subscription on the
HSBC Global Research Web site. Our newest
offering on Bloomberg includes a summary of
what is currently priced in and how it has
changed, a detailed snapshot per country, as well
as an archive of recent reports. See HSBCnet on
Bloomberg page HSER <GO>.
The report is updated every business day at about
11am London time. It uses closing Asia prices,
opening London prices, and the previous day’s
closing price in New York.
We consider the report a useful tool in the process
of generating trade ideas in local markets. We use
consistent bootstrapping and interpolation
methodology to derive all curves, accommodating
specific market conventions and using the most
liquid instruments for each market.
Market-implied future central bank rates are
computed from implied forward rates, ie we
compute a strip of forward-starting short rates
with start date on the effective date following
each future central bank meeting. Forward rates
are derived from local interest rate curves where
available (and cross-currency swaps in a few
cases).
Our approach yields a meeting-by-meeting path of
implied rate moves, rather than cumulative
implied moves over a specific time horizon (eg
“hikes over the next three months”).
Charts A13 to A15 provide a glimpse of our new
Bloomberg pages for the Emerging Market
Central Bank Monitor. We hope you find them
useful.
Chart A13: HSBC EM Research page on Bloomberg - HSER <GO>
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Emerging Markets Strategist Cross-Asset Strategy 25 May 2011
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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
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Emerging Markets Strategist Cross-Asset Strategy 25 May 2011
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Local markets
As the balance of risks tilts toward growth over
inflation, local curves have de-priced interest
rate hikes.
We believe this process is mostly done; thus, we
recommend long duration in Mexico, South
Africa ,and Indonesia.
FX volatility remains a risk to local bonds’
performance.
Table B1: Local markets views
Country 5yr Yield Slope
Brazil Pay Steeper
Czech Republic Neutral Steeper
Chile Neutral Steeper
China Neutral Flatter
Colombia* Buy* Flatter
Hong Kong RECEIVE Flatter
Hungary Pay Steeper
India Neutral Flatter
Indonesia* Buy* Steeper
Israel RECEIVE Flatter
Korea Neutral Flatter
Malaysia Receive Flatter
Mexico RECEIVE Flatter
Peru* Neutral Flatter
Philippines* Neutral =
Poland Pay Steeper
Russia Pay Steeper
Singapore Receive Flatter
South Africa RECEIVE Flatter
Taiwan Pay Flatter
Thailand Pay Flatter
Turkey PAY Steeper
Uruguay Buy* Flatter
Level of conviction
HIGH low low HIGH
PAY RECEIVE Note: * View expressed via bonds Source: HSBC
Asia
We expect a flattening bias to prevail in Asia,
supported by “low for longer” themes in US rates
and continuation of more aggressive rate
tightening in countries such as China and India.
Moreover, recent concerns about a global
economic slowdown in the wake of the Greek
debt crisis and a decline in commodity prices
paved the way for flatter curves across some the
region. Chasing returns is, therefore, back on the agenda, as these factors act to mitigate rising
inflation expectations.
We advocate a receive position in 2-5-10 HKD IRS fly, as a flatter US curve drives the
outperformance of the belly. However, receiving
swap interest in India and China still remains
vulnerable to moderate bearish flattening
pressures due to central banks’ liquidity
sterilization. We recommend steepening positions in 5-2yr KRW CCS curve in anticipation of
reduced paying interest at the front end.
Elsewhere, a consolidation in commodity prices is
likely to spur the bullish flattening in the
Malaysian government securities (MGS) curve.
The FX-induced bond gains are likely to continue
to drive outperformance in Asia’s local bond
markets, we expect. Several central banks in the
region, eg Korea, Indonesia, and China, are
becoming explicitly more tolerant to currency
appreciation as part of combating inflation via de
facto monetary tightening. This should enhance
rather than replace key rate rises, and as long as
inflation expectations are not unhinged by a
further sharp rise in oil prices, this seems likely to
reinforce the virtuous circle of FX gains and local
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
André de Silva, CFA Head, Asia Rates Strategy The Hong Kong and Shanghai Banking Corporation Limited + 852 2822 2217 [email protected]
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Latin America
A repricing of the implied monetary policy
path has been a consistent theme in the region
over the past month and a half. Brazil, Chile, and
Mexico have all seen significant reductions in
implied monetary policy rates, albeit for different
reasons.
The market has effectively adjusted to the
gradualist approach – less tightening, more
macro-prudential measures – by Brazil’s central
bank, with only 50bp of further tightening
currently priced in. At the same time, inflation
expectations have moved down over the past four
weeks. Our view remains that there is too little
risk premium priced in, and that rates should
move higher and the curve steepen as inflationary
concerns reappear later this year.
Chile’s central bank has regained its inflation-
targeting credentials by rigorously front-loading
the tightening in the past few months. In our view,
rates have reached a bottom, with only about 50bp
of additional rate hikes priced in and also in terms
of flatness of the curve.
Receiving Mexico rates remains our top pick.
We recommend receiving rates in the
10-year sector of the curve; given that the curve is
steep, the peso has room to appreciate and local
pension funds are adding duration. The lack of
inflationary pressures has led the market to reduce
implied monetary policy tightening. Over the past
six weeks, the implied policy rate for the next 12
months shaved off 35bp. Our 1-year TIIE receiver
recently reached target and we took profit.
Colombia continues to have one of the steepest
curves in the asset class, and we see value in the
long end, as we expect it to flatten. For carry and
roll-down, we like Coltes 2024. In Peru, we see
value in the long end of the Soberanos curve, but
we remain very cautious ahead of the election.
EMEA
With commodity prices stabilizing and growth
indicators showing signs of weakness, the
curves have bull-flattened across the region. In
the front end, monetary tightening expectations
have been depriced significantly, reducing the
carry embedded. Further out in the curve, belly
and long end have outperformed due to (1) easing
inflation risk premium, resulting from more-
hawkish central banks and (2) renewed interest in
local debt by international investors. Particularly
in Central and Eastern Europe (CEE), foreign
participation in the treasury debt market has
reached historically high levels.
In South Africa, we recommend going long R208 bond after taking profits in receiving 1y1y IRS vs. 3y. The SARB delivered a slightly more
hawkish statement in its MPC, which caused the
1y and 2y sectors of the curve to price back some
hikes since April after the depricing occurred.
However, macro indicators continue to suggest
benign demand-driven inflation risks, and we
believe that the SARB’s rhetoric aims at
containing inflation expectations, rather than
signaling an early tightening cycle.
We recommend entering 2s5s X-CCY steepeners in Turkey as a positive carry trade, as we see
more room for the front end to deprice further the
chance of repo rate hikes – currently 104bp by year-
end vs 125bp previously post-election. In terms of
duration, we still find it unattractive because of the
lack of inflation risk premium embedded.
In Poland, the combination of finance ministry
intervention and hawkish surprise by the
National Bank of Poland led to a strong rally.
Foreign positioning has reached an all-time high,
particularly in the 5-year sector. With
uncertainties surrounding the 55% debt threshold
and a wider current account deficit, we view the
Polish paper as very rich, compared to its peers.
Gordian Kemen Chief Latam FI Strategist HSBC Securities (USA) Inc. + 1 212 525 2593 [email protected]
Hernan Yellati Latam FI Strategist HSBC Securities (USA) Inc. +1 212 525 3084 [email protected]
Alejandro Martinez-Cruz Latam FI Strategist HSBC Mexico SA +52 55 5721 2380 [email protected]
Di Luo EMEA FI Strategist HSBC Bank plc + 44 20 7991 6753 [email protected]
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Emerging Markets Strategist Cross-Asset Strategy 25 May 2011
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External debt
We are still fully invested in the market as we
see room for a further 15-25bps fall in yields.
A spike in 10yr UST yields is the main risk.
We remain overweight Argentina, Venezuela,
and Ukraine, and we continue to see relative
value opportunities in low-beta space.
We are underweight Egypt, Panama, Peru,
Philippines, Poland, Turkey, and Vietnam.
Table B2: EXD views
Country Call Best way to express view
Cash Neutral Stay fully invested
Argentina Overweight Long end (EUR and USD)
Brazil Neutral
Colombia Neutral
Egypt Underweight Sell Nilfin 15s
GCC Overweight Long sovereign, GREs
Hungary Neutral Switch into REPHUN 2041
Indonesia Neutral Long Indon 21 Sell ROP 21
Korea Neutral
Mexico Neutral Long UMS 2110 vs ’40
Panama Underweight Buy 5y CDS protection
Peru Underweight Buy 5y CDS protection
Philippines UNDERWEIGHT Sell USD bonds esp. 10yrs
Poland Underweight Buy protection via 5y CDS
Romania OVERWEIGHT Long Romania EUR2015
Russia Overweight Long Russia 2020 USD
South Africa Neutral Long SOAF 2041 USD
Turkey Underweight Buy protection
Ukraine OVERWEIGHT Long Ukraine 2021 USD
Uruguay Overweight Buy Global ’36
Venezuela OVERWEIGHT Long PDVSA 17N basis
Vietnam UNDERWEIGHT Sell Vietnam ’16 and ’20
Level of conviction
HIGH low low HIGH
UNDERWEIGHT OVERWEIGHTUNDERWEIGHT OVERWEIGHT Source: HSBC
Latin America
We remain constructive on Latam EXD, given
our view that a low-grade Goldilocks scenario
will continue to be supportive of EM FI. Flows
remain positive for Latam EXD. High- and low-
beta credits have been diverging during the recent
market correction, with the former seeing spreads
widening and underperforming the index in terms
of total return during the past month and a half.
This lag reinforces our view that upside offered
by low-beta credits is limited, and apart from a
few relative-value opportunities, we continue to
look to the high-beta names for value and carry.
We stay overweight high-yielders in Latam. We
see value in the long end of the Argentina curve,
in particular EUR and USD Discounts. Venezuela
remains by far the most attractive credit in terms
of carry. As a result of the recent windfall tax
increase, we have cut our bond supply forecast for
the year to USD12-15bn. In the recent rally,
PdVSA bonds lagged behind Venezuela. The
PdVSA ’17N bond is by far the cheapest bond on
the curve using par equivalent CDS spread
(PECS). We recommend buying the bond versus
buying a DV01-neutral amount of Venezuela 5y
CDS protection.
In the low-beta space, valuations are not as
compelling, in our view. Thus, we continue to
focus on relative value, such as buying the
“century” bond in Mexico vs. the UMS ’40. We
recently unwound our short Colombia relative
value position versus Brazil.
We stay on the sidelines regarding Peru’s EXD
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.
Gordian Kemen Chief Latam FI Strategist HSBC Securities (USA) Inc. + 1 212 525 2593 [email protected]
Hernan Yellati Latam FI Strategist HSBC Securities (USA) Inc. +1 212 525 3084 [email protected]
Alejandro Martinez-Cruz Latam FI Strategist HSBC Mexico SA +52 55 5721 2380 [email protected]
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EMEA
We still like Ukraine as the sole high-yielder in
EMEA due to more-generous credit risk
premium, but with caution. With US rates at
very rich levels, already tight credit spreads offer
less buffer for EMEA high-grade credit. As
currencies in the region resume appreciation, the
attractiveness of USD bonds has been reduced
compared to local currency debt.
We like extending duration for convexity benefit.
We expect SOAF 2041 and REPHUN 2041 to
continue to outperform other tenors. We are
overweight Romania due to steady improvement in
external liquidity, the firm anchor provided by the
International Monetary Fund, and limited contagion
risks to peripheral Europe, compared to other CEE
peers. Moreover, we keep a small overweight
position on Russia as the Ministry of Finance raised
forecasts of oil revenue to – USD105/bbl for 2011
and USD120/bbl for 2012.
We are underweight Turkey and Poland. The
widening current account deficit and over-reliance
on short-term financing are key risks in Turkey.
Moreover, a post-election rating upgrade has been
overly anticipated and might offer little boost for
the sovereign, we believe. In Poland, we are
skeptical about the fiscal dynamic and concerned
about potential current account deficit revision.
With spreads tight, Poland offers a cheap hedge
for the CEE contagion risk.
Gulf Cooperation Council (GCC) sovereign
and quasisovereign bonds continue to offer
value, as regional political tensions are moderate
and near-term deterioration appears remote. Key
issuers – Qatar and the UAE – are also the least
exposed to political upheavals and trade well wide
to similar credits in EMEA and Asia. GSEs and
state-owned banks offer an additional pickup on
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.
Asia
Following a successful USD2.5bn placement by
the Indonesian sovereign in the external
market in the past month, we believe the Asian
subinvestment-grade sovereign space should
perform reasonably well in the weeks ahead.
Concerns about additional supply, except possibly
from Sri Lanka, should be the dominant factor in
allowing Indonesia and Philippine sovereigns to
move in line with US Treasuries in the current
risk-off mode facing the Asian credit market.
We believe that Indonesia should outperform
the Philippines from a credit spread
perspective in the coming six months.
Specifically, the Indonesia ’21s should trade 10-
20bps inside of an equivalent Philippine sovereign
USD bond by 4Q’11. Indonesia’s economic
fundamentals warrant the sovereign to become an
investment-grade credit before the end of 2011,
and hence we believe that market participants will
anticipate the positive rating action, which should
be expected by 1Q’12 at the latest, in our opinion.
In other words, an Indonesia credit upgrade
should attract a broader investor base looking for
diversification.
We expect Moody’s to upgrade the Philippines,
and to bring the sovereign rating up and
aligned with Fitch and S&P at Ba2 before the
end of 2011. However, this rating action would
not have the same impact as Indonesia’s.
Potential supply and reluctance to tackle rising
inflation aggressively could induce Sri Lankan
sovereign USD bonds to underperform in the
weeks ahead. Vietnam sovereign bonds should be
avoided, in our opinion, based on a weakened
external profile and difficulties in containing
inflation at the moment.
For more on Asia credit, see our latest The View
Di Luo EMEA FI Strategist HSBC Bank plc + 44 20 7991 6753 [email protected]
Simon Williams Chief Economist, Gulf Markets HSBC Bank (Middle East) Ltd, Dubai+971 4 423 6925 [email protected]
Dilip Shahani Head of Asia-Pacific Research The Hong Kong and Shanghai Banking Corporation Limited + 852 2822 4520 [email protected]
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Emerging Markets Strategist Cross-Asset Strategy 25 May 2011
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FX
Heightened risk aversion has seen the USD
correct higher, leaving investors nervous.
Nevertheless, our medium-term outlook for
EM FX remains positive.
We like BRL, CNH, IDR, MYR, and RON.
Table B3: FX views on local currencies
Country Call
ARS Neutral
BRL Long vs. USD
CLP Neutral
COP Neutral
CNY Long vs. USD
CNH LONG vs USD
CZK Neutral
EGP Short vs. USD
HKD Neutral
HUF Long vs. EUR
IDR LONG vs. USD
INR Neutral
ILS Neutral
KRW Neutral
MYR LONG vs. USD
MXN Long vs. USD
PEN Neutral
PHP Long vs. USD
PLN Neutral
SGD LONG S$NEER
ZAR Short vs. USD
RUB Neutral
TWD Neutral
THB Neutral
TRY Short vs. USD
UAH Neutral
UYU Long vs. USD
VND Short vs. USD
Level of conviction
HIGH Low Low HIGH
DEPRECIATE APPRECIATEDEPRECIATE APPRECIATE Source: HSBC
Asia
Our top regional picks are IDR, MYR, CNH,
and SGD against the USD. On the flip side, we
are less constructive on KRW and INR, which
have a mixture of larger external exposure, greater
dependence on equity flows, and less favorable
policy. In relative value terms, we would also
look for opportunities to position short TWD
against IDR and MYR.
While our fundamental medium-term outlook
remains bullish for Asian currencies, we see
greater risks emerging in the near term. We expect
Asian growth to roll over somewhat in Q2, while
other regional asset classes appear to face
challenging valuations. This suggests becoming
more selective in our long Asian currency calls.
We outline a framework of three characteristics of
resilience, which should help certain currencies
outperform (see table at left) during the choppier
and more volatile times we see emerging:
Lower exposure to external growth and
markets.
Credible and suitable policy.
Sustainable capital flows.
With global growth slowing for the moment, we
prefer to position away from currencies for which
growth and external balances are more liable to be
hurt by any external headwinds. We also favor
currencies for which central banks have shown
commitment to managing inflation, and calming
FX volatility. We look to position in currencies
with lower exposure to equity flows, which we
believe are less likely to give as large a boost as
they did in 2010.
For more details, please see the latest EM FX Roadmap.
Daniel Hui Asia FX Strategist The Hong Kong and Shanghai Banking Corporation Limited +852 2822 4340 [email protected]
Perry Kojodjojo Asia FX Strategist The Hong Kong and Shanghai Banking Corporation Limited +852 2996 6568 [email protected]
Dominic Bunning Associate, FX Strategist The Hongkong and Shanghai Banking Corporation Limited +852 28 22 1672 [email protected]
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Emerging Markets Strategist Cross-Asset Strategy 25 May 2011
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Latin America
Our conviction levels in the current global
environment are low, and we would therefore
look to play ranges in the near term. We view the
recent USD rally as a short-term correction, rather
than a trend reversal. For a medium-term view, we
see this latest USD move higher as offering some
value, especially for the currencies on which we are
most bullish, namely BRL, MXN, and COP. The
recent drop in commodity prices is less supportive,
but we find still-elevated levels provide continuing
support for the region’s terms of trade.
We see Latam FX as still vulnerable to further
short-covering, should uncertainties persist. We
note, too, that positioning in Latam FX has been
reduced of late, but it still remains very heavy in
historical terms.
For the BRL, onshore USD rates have quickly
normalized, following their recent brief spike
higher, and this has restored the wide rate
differential and helped stem BRL weakness.
Exporters have also been using the USD’s recent
strength to reduce unremitted export receipts,
providing additional topside resistance to USD-BRL.
In the short term, the pair should remain beholden to
swings in risk appetite, but we expect the BRL to
remain firm through 2011.
We recently lowered our year-end USD-MXN
forecast to 11.30 from 11.80, as we expect the peso
to continue to benefit from the gradual economic
recovery in the US, foreign appetite for local debt,
cheap valuations, and a lower risk of intervention.
We remain bullish on the COP directionally, but
we prefer to wait for levels closer to 1,840-1,850
to re-enter short USD-COP trades. Meanwhile,
following the strong rally in April, the COP is giving
back some of its gains, as the treasury has joined the
central bank in buying dollars, while some investors
have been unwinding short USD-COP trades.
EMEA
We do not expect any significant appreciation
in the PLN, despite Poland’s decision to sell EU
funds in the FX market, which is an important
factor for the directional trend of the zloty. In
the near term, the current account is widening and
the capital flows dynamic is deteriorating.
We see more value in the RON and the HUF. In
Romania, rising inflation leaves no choice to the
central bank but to let the currency rise.
Moreover, an adjustment of monetary policy to
achieve the 2012 inflation target, which would be
RON-supportive, cannot be ruled out. We see
EUR-RON moving down to 3.95. In Hungary, the
HUF is still cheap. The strong increase in the
trade surplus is favorable, while the government
fiscal plan has reduced investors’ worries about
the fiscal sustainability. Uncertainties surrounding
the new MPC members have also eased, and
given the inflation trend, we do not expect any
reduction in interest rates.
We remain bearish on the Turkish lira, as the
premium offered is unattractive, compared to the
macro risks. Credit is still expanding at a very
strong pace, and the current account deficit is
spiraling out of control, reaching 8.0% of GDP. With
the central bank having no intention to hike the repo
rate, the TRY appears likely to stay weak, and a
larger depreciation cannot be ruled out.
We prefer to stay sidelined for now on the
RUB. The currency has posted substantial gains
since the start of the year, and we believe that the
upward momentum is not sustainable. It may run
out of steam, as trade dynamics appear likely to
deteriorate on stronger imports, and the central
bank is reluctant to tighten significantly.
See our FX forecasts on page 29 and charts with our
forecasts against forward curves on pages 45-46.
Clyde Wardle Latam FX Strategist HSBC Securities (USA) Inc. + 1 212 525 3345 [email protected]
Marjorie Hernandez Latam FX Strategist HSBC Securities (USA) Inc. + 1 212 525 4109 [email protected]
Murat Toprak EMEA FX Strategist HSBC Bank plc + 44 20 7991 5415 [email protected]
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Emerging Markets Strategist Cross-Asset Strategy 25 May 2011
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Equity
Easing inflation and USD stabilization are the
key catalysts for EM equity performance
Domestic cyclicality, especially in the solid
secular growth stories, still preferred over
commodity sector exposure
Flows to EM equity funds remain mixed
Table B4: Equity views
By country
Cash Neutral
Brazil OVERWEIGHT
China OVERWEIGHT
Czech Republic UNDERWEIGHT
Egypt OVERWEIGHT
GCC OVERWEIGHT
Hungary OVERWEIGHT
India Neutral
Indonesia OVERWEIGHT
Korea UNDERWEIGHT
Malaysia OVERWEIGHT
Mexico UNDERWEIGHT
Other Latam Neutral
Philippines Neutral
Poland UNDERWEIGHT
Russia Neutral
South Africa Neutral
Taiwan Neutral
Thailand UNDERWEIGHT
Turkey OVERWEIGHT
By sector
Cons. discretionary OVERWEIGHT
Cons. staples OVERWEIGHT
Energy Neutral
Financials OVERWEIGHT
Healthcare Neutral
Industrials Neutral
Materials Neutral
Technology UNDERWEIGHT
Telecoms UNDERWEIGHT
Utilities UNDERWEIGHT
Level of conviction
HIGH low low HIGH
UNDERWEIGHT OVERWEIGHTUNDERWEIGHT OVERWEIGHT
Source: HSBC
EM equity markets have again begun to
underperform developed markets recently. The
bigger impediments, in our view, relate to
growth weakness and currency dislocation. The
consensus view has been to relate this behavior to
renewed concern about inflation. We believe that
this is to some extent misplaced, because at the
margin, high-frequency data suggest that
inflationary concern is softening.
Looking ahead, we believe that the current
environment favors domestic cyclicality –
especially in markets with sound underlying
secular growth stories – over global cyclicality,
especially with regard to the commodity segment.
Further evidence of a reduction in overheating
pressures and USD stabilization are key catalysts, in
our view. Overall, longer-term we see the positive
EM equity story as remaining intact.
On the global growth inflation mix, we believe
that investors have worried sufficiently about
inflation and now have become overly
complacent about cyclical recovery. This is
increasingly clear in the latest high-frequency data
(PMI numbers and retail sales data). Generally,
growth is slowing and inflationary pressure is
moderating. We see this trend in Asia ex Japan
and also in a group of other large EM markets:
Brazil, Russia, and Turkey.
Several factors are responsible for the trends
mentioned above. First, central banks have
tightened monetary policy in EM in particular and
also in some developed countries through a
combination of higher interest rates, higher reserve
requirements, and exchange rate appreciation. For
EM, the market appears to be overly pessimistic
about the scope for macro-prudential policy (higher
reserve requirements) to slow lending expansion. In
the developed world, the European Central Bank has
increased rates, and we expect further tightening. Of
course, the US Federal Reserve has clearly been less
pre-emptive, but it has nevertheless committed to
John Lomax* GEMs Equity Strategist HSBC Bank plc +44 20 7992 3712 [email protected]
Wietse Nijenhuis* Equity Strategist HSBC Bank plc +44 20 7992 3680 [email protected]
*Employed by a non-US affiliate of HSBC Securities (USA) Inc, and is not registered/qualified pursuant to FINRA regulations
21
Emerging Markets Strategist Cross-Asset Strategy 25 May 2011
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ending the second round of its quantitative easing
program (QE2) at the end of the second quarter.
Second, still-high oil and commodity prices are
acting as a brake on growth. Growth below
potential in the developed world – and tighter
policy in EM – should restrain second-round
effects from higher commodity prices. Prices have
recently starting coming off highs, and it seems
plausible to expect that the worst part of the rise
in both oil and a food price is behind us. Should
oil and food prices now simply plateau, headline
inflation should gradually taper off.
Third, there is a continuing need to tighten fiscal
policy in the developed world, highlighted by the
resurfacing of concerns about European sovereign
debt. To the extent that the developed world’s
output gap is largely negative, that ought to allow
emerging markets to grow more quickly without
creating an inflation problem.
We believe that rather than worries about EM
inflation, currency dislocations may be playing
a significant role in driving relative EM
performance. It is noteworthy that over the past
month or so, the USD slumped before recovering
strongly. It may be the case that part of the reason
for EM equity underperformance is perceptions
relating to increased currency risk, rather than
worry about inflation. To the extent this view is
correct, USD stabilization could be an additional
catalyst for EM performance.
Of course, it matters where the USD stabilizes. If
it appreciates further first, EM equities could tend
to lag behind at least US equities in USD terms.
Stability is, however, the key.
Overall, for the near term, we believe that the
major call should revolve around domestic
cyclicality, especially in the good secular growth
stories, outperforming global cyclicality
particularly with regard to the commodity
segment. Domestic themes – banks, real estate,
and consumer – ought to receive a lift from
reduced concern about inflation and enhanced
prospects for an EM soft landing.
By contrast, we believe that a weaker cycle plus
potential further USD appreciation will remain
important headwinds for the commodity sector.
Nevertheless, we emphasize that we expect these
shifts to be tactical, rather than strategic. Slower
EM growth is also more durable growth, which
should end up ultimately being commodity-
friendly.
Yet overall, despite some near-term weakness in
commodity names, the reflation story in EM as a
whole should retain longer-term support from
underlying strong global fundamentals. In
particular, sustained easy monetary policy in the US
appears likely to fuel asset prices in EM, especially
now that EM macro policy has been tightened.
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cTable B5: Summary of HSBC fixed income, FX, and equity views
Country EXD LDM FX Equity
Argentina Overweight. Favor long end and EUR paper Underweight Neutral USD-ARS
We believe repayment capacity remains strong, supporting an overweight stance. We favor EUR over USD paper. We do not see significant value in the belly of the curve. Also, the EUR GDP warrants are cheap relative to the USD warrants. The presidential election in October is casting its shadow and has the potential to create volatility, even though a run by Cristina Kirchner run is widely expected.
We are cautious toward ARS paper. Pressures on the FX market due to government restrictions on FX moves and the uncertainty related to the elections might not be compensated by yields onshore. We continue to prefer Badlar paper over inflation linkers (CER).
Implied yields along the ARS NDF curve have continued to widen, with the 12-mo contract paying near 15%. At these levels, the carry trade is starting to look attractive again, and any normalization of external conditions would open the way to sell USD. We prefer levels closer to 4.18/USD on 3mo NDF, as we expect the rate of depreciation to slow in the 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 end and the long end of the bond curve, while the belly has lagged behind the move. As we had expected, cash bonds are rich versus CDS, as the Brazilian treasury continues to buy back bonds. As a benchmark, Brazilian EXD remains exposed to any risk-aversion episodes.
The DI curve has adjusted to two more 25bp hikes in the next meetings, and in the process removed about 50bp of previously implied rate hikes since early April. This was helped by declining inflation expectations and the market’s becoming more comfortable with the gradualist approach of the central bank. We believe that there is too little risk premium priced into the curve, and that rates should move higher as inflationary concerns reappear later this year.
A strong and diversified flow of FX should continue supporting a stronger BRL through 2011. Onshore dollar rates are normalizing quickly, reflecting increases FX supply, restoring the long BRL carry with the 1mo implied yield back above 8%. In the short term, the BRL remains beholden to swings in risk appetite, and while exporters should help cap the USD’s topside, investors’ large long BRL positions still pose some risk.
Although we expect some more policy tightening to take place, we believe this is already reflected in equity market valuations. Also, some of last year’s fiscal stimulus should drop away following the election. We believe policy settings now are sufficiently tight to allow investors to look over the inflationary hump, thus letting attractive valuations gain traction.
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 balance sheets among CEE, and should be favored as a low- beta credit in persistence of risk aversion. But with current spreads, we do not see compelling value in selling protection outright. We see room for Czech sovereign spreads to outperform core European names, especially countries with high exposure to the peripheral region.
The CNB has refrained from hiking its policy rate amidst elevated external uncertainties. Monetary conditions are being tightened through the CZK appreciation. We believe that the short end of the IRS curve is attractive to receive from carry-to-vol’s perspective.
We expect a modest appreciation in the medium term, as the currency appears fairly valued. The attractiveness of the CZK should remain low, as the central bank is not under pressure to hike its interest rates. Economic activity is constrained by a tight fiscal policy, and demand-pulled inflationary pressures are low. Given its low-yielding status, the CZK seems likely to underperform its regional peers.
The Czech economic position is reasonable. The market composition is defensive with a large share in utilities and telecoms, and appears likely to underperform during a global cyclical upswing. Having said that, valuations look reasonably attractive, but EPS growth is the lowest in the region.
Chile Neutral Long USD-CLP Neutral
Given its rigorous tightening over the past few months, the central bank has regained its inflation-targeting credentials, with curve-flattening and break-evens collapsing. We believe that the market has reached a bottom in terms of front-end yields, pricing in only about 50bp of further rate hikes.
Higher rates and a weak USD have supported the CLP year-to-date. However, copper’s double-digit percentage fall in the past month has acted as a drag, leaving USD-CLP in a 460-480 range. We expect intervention to remain at USD50m per day – barring a substantial appreciation of the CLP, which could see the amount increased – leaving 460 USD-CLP support likely intact.
Chile falls into the category of markets where we believe the monetary response has been appropriate, with the bulk of the necessary adjustment already done. This is also reflected in equity valuations, which, while still expensive in absolute terms, look more reasonable relative to where the Chilean equity market has traded historically. Prolonged 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 50bp hike in RRR on 12 May. This is likely to put modest upward pressure on short-dated CNY NDIRS as seven-day repo squeezes higher in near term, also due to relatively fewer PBOC bills maturing in the weeks ahead. However, heightened RMB appreciation expectations and likely return to ample liquidity are no longer conducive for paying CNY NDIRS.
FX policy should remain the focus, while rising domestic demand and the closed capital account keep China somewhat sheltered from developments abroad. The fight against inflation should keep an accelerated appreciation trend intact until inflation peaks, likely sometime in mid-year. We continue to flag the offshore RMB (CNH) as the preferred market for offshore long RMB exposure.
We have turned positive on China’s stock markets in anticipation of the tightening cycle’s coming to an end. China is one of the few markets where slower growth is good news for equities. Recent economic data indicate that growth is moderating, which suggests that a soft landing is possible.
Colombia Neutral Receive. We expect a flatter TES curve Neutral USD-COP Neutral
We believe that Colombia credit remains a solid story, especially if fiscal reform remains on track, and that a full investment-grade rating is likely in the near term. However, this is to a large extent already priced in, and like other low betas, valuations are not that compelling at the moment.
The local curve in Colombia remains one of the steepest in EM, making extending duration an attractive proposition, in our view. Better-than-expected CPI readings and a downward trend in inflation expectations should help flatten the curve, as well as the continuing policy normalization in the front end.
We remain COP-constructive on the back of higher production of key raw materials (oil), which should support trade inflows and FDI. We do not discard the possibility that the authorities may come up with more measures to stem COP appreciation, and thus we look for better levels around 1,850/USD to re-enter a short USD-COP trade.
Valuations look reasonable. The equity market has held up relatively well over the past month, rising 3% in USD in spite of falling oil prices. Inflation expectations are falling. However, the central bank tightened by 25bp at its most recent meeting, and this seems unlikely to be the last hike.
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cTable B5: Summary of HSBC fixed income, FX, and equity views
Country EXD LDM FX Equity
Egypt Underweight Overweight
Aggregate FX debt is low, its maturity profile undemanding, and chances of access to donor support are high, but external debt continues to trade too tight vs peers, given high political risk. A likely prolonged downturn in external account position and recent sharp fall in foreign currency reserves compound concerns and weigh on credit quality.
Aggregate valuations look attractive on our belief that the political and economic environment will progressively normalize. The political news flow since the uprising has been better than expected. The earnings base for 2011 may be too high; however, to the extent this is depressed, we expect a higher base in 2012.
GCC Overweight Overweight
Sovereigns are wide to similarly rated Asian peers. Political risk leads to volatility but strengthening budget and current account surpluses support the credit. Abu Dhabi and Qatar are a play on oil wealth; state-owned banks offer a higher carry, given strong state support. Bahrain is a play on political recovery after Saudi-led intervention.
Positive developments on the restructuring of Dubai World and Nakheel debt and potential upgrades for the UAE and Qatari exchanges from frontier to emerging market status by MSCI are catalysts. We recommend a small (1.5%) off-benchmark weighting in the region, and we prefer the UAE 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 outperform the 2- and 10-yr HKD IRS. Expectations of a prolonged period of low Hibor rates could drive 2yr rates lower. Our regression analysis suggests the 5yr IRS decreases by 21bp for a 10bp decline in 2yr rates, while the 10yr IRS is relatively less sensitive, only 16bp.
The launch of the RMB Fiduciary Account Service, designed to address issues with counterparty credit limits facing the clearing bank, BoC (HK), has taken off slowly. A recent HKMA circular clarifying the initial announcement should accelerate implementation of the program, which should see the CNH forward curve flatten out.
The HKD/USD peg imports a loose monetary policy to Hong Kong. Its long-term story continues to be attractive, given the backing from China. However, valuation has factored in most of the positive news, and thus we are maintaining a neutral stance.
Hungary Neutral. Extend duration to REPHUN 2041 Paying bias; weak technical position Short EUR-HUF Overweight
We recommend investors extend duration to the REPHUN 2041 for improved convexity. The inclusion into EMBI will remain a supportive factor for credit spreads. The valuation, however, appears stretched following a recent rally, particularly for the 10y bond- REPHUN 2021.
Foreign participation in HUF bonds is about 30%, up from 21% earlier this year, on the back of currency appreciation. There is now even less risk premium embedded in the HUF bonds – 2s5s IRS spread merely c20bp. We are biased to pay HUF 5y IRS due to risks coming from a potential currency reversal, contagion from the Euro-zone periphery, and deterioration in banking industry profitability
We stay directionally bullish on the HUF, although euro-zone sovereign risks may weigh on the HUF in the near term. Record trade surpluses remain robust as a result of strong export performance and will maintain the current account in comfortable surplus, offering support to the HUF. Rat cut risks are low, given the cautious stance of the central bank and signs of price pressures.
Hungary offers the greatest opportunity for macroeconomic surprise among the CE3 countries, we believe. At one level, the consensus seems to be exaggerating debt sustainability issues; on another, it appears too pessimistic about prospects for coordinating monetary and fiscal policy. The market has been one of the top performers in EM this year, +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 excessive probability of about 60bp hikes over the next 3months. Heightened inflation risks and continuation of RBI’s liquidity draining measures may keep O/N rates elevated. Recent increase in cash management and T-bill issuance indicate the RBI’s intention to keep liquidity well into a deficit zone. Moreover, a fuel price hike, about 8%, is likely to translate into higher inflation expectations.
INR’s narrow dependence on equity inflows and latent inflation risks makes it less attractive in next months, though we still warn against being too bearish. Equity inflows have been impressively sticky, but in choppy times it is hard to recommend a currency so narrowly dependent on a single flow. We believe the RBI is not behind the curve enough to spark a market reaction, but risks become more significant as the global situation turns.
We raised India to neutral following Q1 underperformance. Near-term risks such as inflation, corruption scandals, and global macro concerns have not dissipated, but valuation has corrected enough to make the risk-reward trade-off more balanced.
Indonesia Buy. Position toward 1-5yr IndoGBs Short USD-IDR Overweight
We see the 1-5yr GBs favored by (1) policy changes that shift foreign investor interest from short-term SBI bills to government bonds and (2) a June BI rate pause stance. BI seems likely to continue its FX appreciation policy to combat imported inflation. This could strengthen the interest at the front end of the curve, which has also been evident from recent auction results (e.g. 5yr IndoGB bid/cover ratio=3.91, 10yr IndoGB bid/cover ratio=1.28).
Despite high interest rates, IDR no longer trades as a high beta or pure carry currency. Proactive policy – via lengthening SBI holdings, capital controls, and symmetrical FX intervention – has helped to keep volatility low and improve the risk-adjusted return. The combination of policy and limited exposure to external risks make IDR one of our core longs.
Bank Indonesia has been slow to raise rates in the face of inflation, and we expect two more rate rises in the coming months. Still, domestic demand has remained strong, and companies have put capex plans back on track. Valuations are not excessive, and with little disturbing news on the political front, we are overweight.
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cTable B5: Summary of HSBC fixed income, FX, and equity views
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 macro play, as the former has a healthier BoP profile and the latter faces widening current account deficit challenges. External liquidity continues to improve as the BoI accumulates FX reserves further. With the current account comfortably in surplus, sovereign spreads have more room to tighten gradually as the dust in MENA settles.
With economic data showing signs of the effectiveness of the BoI’s aggressive tightening, and the fiscal profile being anchored by robust growth, Israel stands out as one of our favorite longs in the low-beta camp, given its healthier public profile. Receiving spread between Israel IRS vs USD presents an attractive hedge for a reverse of the UST.
ILS performance is likely to be less bright in the near term, as BoI may slow the pace of monetary policy tightening. ILS strength remains an issue for policymakers as the trade deficit widens. Parliament appears likely to approve a new capital gains tax on non-resident investment in the Makam market. Although we stay neutral for the near 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 BoK support a bear-steepening in the 5-2yr KRW CCS. Limited KRW appreciation and a resumption of liability swap appear likely to drive 5yr CCS higher. Moreover, a decline in arbitrage trades (ie long MSB, pay 2-1yr CCS) as indicated by Thai kimchi funds repatriation (KRW661bn in April) may relieve CCS paying pressure at the front end, supporting curve resteepening and swap basis widening.
Medium-term value in KRW remains very attractive, but we do not favor KRW in the coming months on a risk-reward basis. KRW is relatively more vulnerable to the slowdown that the HSBC economics team forecasts for coming months. This external exposure is also manifested in equity flows, which have accounted for 40% of overall net BoP inflows; with the global picture less stable, the potential for a rapid reversal of these inflows is a concern.
Korea is among the most oil-intensive Asian economies and is the most exposed to export sensitivity. Valuation is edging up, while earnings growth forecasts are becoming less conservative. We recommend investors reduce exposure to Korea until cyclical indicators bottom and inflation risks subside.
Malaysia Neutral Receive. Bullish flattening in MGS curve Sell USD-MYR Overweight
Recent decline in commodity prices suggests a modest bull-flattening of the Malaysian Government Securities (MGS) curve. We prefer the belly of the MGS curve, as the long end remains vulnerable to the heavy long-dated supply during Q2 2011. In swaps, the 3mth Klibor fixing of 3.24% implies a higher probability of a 25bp hike in the overnight policy rate (OPR) at the 7 July meeting.
Early May weakness in MYR was largely a position adjustment, providing good levels to buy MYR. Large domestic demand and the strong commodity surplus will help buffer the MYR from global weakness. Political issues are holding back reforms, but we see these being overcome later in the year, with further FDI and privatizations offering further support on a flow basis.
Valuations are still below their historical averages. Food inflation has never been as much of an issue in Malaysia as it is in neighboring Indonesia, and arguably the central bank has been more proactive when it comes to taming price increases. Hence, Malaysia is probably closer to the peak in rates than some of its Asean neighbors. Palm oil is 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 continued to outperform this year. The second tranche of the UMS warrant expired in the money, with the UMS ’12 the cheapest-to-deliver bond. Our Buy UMS 2110, sell the‘‘40s trade still has room to move. The spread recently tightened to 50bp from 56bp.
We closed our 1Y TIIE receiver as it reached our target. We now recommend extending duration on the MBonos curve by buying the ’24s with target at 7.05% and stop at 7.60 This trade is supported by a steep local curve, a benign inflation outlook, a not-overvalued currency, and Afores that still have room to add duration. We also hold a Pay 2 y BEI with target at 4.1% and stop at 3.4%.
The MXN is one of our preferred regional plays this year, based on an improving US outlook, cheap valuation, and a low risk of intervention. We recently raised our forecasts, and we now see the USD-MXN at 11.30 at year-end vs our previous 11.80 forecast. In this less-certain environment, it may be advisable to be long MXN positions as relative value against other EM currencies.
If we are right that investors now will tend to refocus on secular domestic demand stories in emerging markets at the expense of global cyclicals, Mexico – with its heavy dependence on the US – looks like somewhere to avoid. The domestic story seems unappealing, and valuations are elevated.
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. 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 presidential candidate Keiko Fujimori now is ahead in the polls, which show a technical tie. We see an asymmetric market reaction: limited upside in the case of a Fujimori victory, but significantly larger downside if Ollanta Humala wins. Global bonds have underperformed their peers throughout the year, 2.5% vs 4% for Brazil.
Local rates will remain very sensitive to political risk, at least until polls reflect that Fujimori could be a clear winner. The curve is very steep from 1- to 4-year local bonds and from 5- to 10-year bonds. The uncertainty regarding the presidential election has made investors to look for shorter-duration bonds. Levels in the long end look attractive, but local rates should remain very volatile.
The PEN has been performing better since Fujimori edged ahead in the polls, but it is still far too close to call. However, the central bank has shown its commitment to keep the USD-PEN below 2.83/USD, and any move close to this level should be seen as an opportunity to reinstate short USD-PEN trades with a target of 2.72/USD by year-end.
The market is down 21% this year on the back of falling commodity prices and political risk related to the election. The Ipsos-Apoyo poll shows that Humala and Fujimori remain technically tied. Uncertainty remains due to the high level of undecided voters ahead of the 5 June run-off.
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cTable B5: Summary of HSBC fixed income, FX, and equity views
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 lack of effort and political momentum to address weak government revenue generation. The government has been limiting much-needed development expenditures to contain the budget deficit. This strategy hurts overall economic activity by dissuading private investment.
Prospects of a rating upgrade and a recent respite in commodities suggest a potential decline in yields. Recent underperformance was spurred by the BSP rate tightening and an increase in inflation expectations after the CPI soared to 12mo high of 4.5% in April. Still, current inflation levels are well within the central bank's 3-5% target, and a consolidation in commodity prices may soften expectations.
PHP should show some resilience in the coming months, with the debt market growing and strong inflows from remittances continue to provide support. BSP has also largely normalized FX policy, becoming more active in the forward markets again. However, FX policy is unlikely to allow as much strength as elsewhere in the region.
Domestic demand is resilient, although there is some rise in risk to inward remittances from the Middle East. Rates appear likely to inch higher, and equity valuations are only a touch below the historical average.
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 threshold and the current account deficits widening, Poland has the least favorable credit metrics among CEE names. We recommend investors buy protection to hedge contagion risks from peripheral region; or switch into Romania EUR 2015 as a better credit to park cash.
MinFin FX intervention and an NBP surprise hike should tighten monetary conditions more effectively. We remain concerned about fiscal risks and a wider current account deficit. In the context of twin deficits, the long end of the curve does not offer sufficient risk premium. Strong foreign positioning in local bonds may cause weakness. We are biased for curve steepeners; expect cash bonds to outperform IRS on FX.
The government and the NBP look to appreciate the PLN: about EUR13bn in EU funds now may be sold directly to the market. A stronger PLN may help achieve NBP’s 2.5% inflation target, as it is mainly commodity-driven. Yet PLN upside potential appears limited in the near term. The widening of the current account deficit, the decline in FDI, and a heavy positioning may be an obstacle to FX gains.
The main issue in Poland is that economic recovery and the political environment are stable and on track, but it is difficult to see much upside surprise. Indeed, at the margin, it is easier to envisage disappointment. Poland seems to have inherited Hungary’s twin deficit problems, while inflation also is becoming more of an issue.
Russia Overweight. Pay/Neutral Hold RUB. Appreciation appears overdone Neutral
We maintain a small overweight in Russia bons. MinFin has raised oil break-even forecasts to USD105/bbl for 2011 and USD120/bbl for 2012, which should anchor sentiment in the near term. However, should oil prices fall substantially; the long-term fiscal risks may undermine spreads’ performance.
A liquidity shortage in the system has caused stress in RUB rates. More fundamentally, we believe that fiscal uncertainties are rising, especially should oil prices fall further. We stay sidelined at this stage.
The RUB rose 6%+ year-to-date on a REER basis and returned to its pre-crisis levels. We keep a bearish bias for the medium term as the current account surplus seems likely to narrow in coming quarters and monetary policy to be tightened only moderately. Coming elections might weigh on capital flows. A continuous increase in oil prices is the main risk to our central scenario.
Russian valuations are clearly low, but the key catalysts have lost momentum. It is difficult to see a repeat of the positive oil price support in Q1. With regard to the domestic cycle, Russia is among the countries that have been least pre-emptive in addressing inflationary pressure, so the potential for negative surprises on that count is relatively high.
Singapore Long SGD NEER/short USD-SGD Underweight
Appreciation should face fewer headwinds than elsewhere in Asia, given SGD’s safe-haven status, hawkish central bank, and credible policy regime. Amid uncertainty, portfolio flows should rise from repatriation and regional safe-haven flows. SGD’s correlation with the EUR has fallen. The NEER has room to move higher in the band.
While exposed to global demand trends, a vigilant government is keeping domestic asset price inflation at bay, so Singapore equities appear unlikely to outperform the region.
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 richened significantly of late; thus, we recommend investors stay in the very long end of the curve. The trade balance in South Africa printed in surplus territory again in March, implying few risks from external imbalances.
The front end has depriced tightening expectations over the last two months, benefiting 1y1y and 2y receivers. We have taken profit in receiving 1y1y and extended duration by going long the R208 bond, as the front end could see rising volatilities, and the long end of the curve offers more value from risk-premium perspective. We continue to like curve flatteners, as the slightly more hawkish SARB should keep inflation expectation well-contained.
Although the ZAR benefits from its commodity currency and high-yielding status, it remains vulnerable to changes in global market sentiment. The dependence on short-term capital inflows remains wide, and macro parameters still suggest the ZAR is too strong. The SARB is on the alert on inflation and second-round impacts of cost factors, but domestic economic activity is still soft, while a negative output gap does not warrant increases in rates.
The default position for most GEM funds is to be underweight South Africa; we believe its situation deserves better than that, and we recommend a neutral weighting. Domestic South Africa remains in the right part of the cycle for equities to perform. Inflation remains low, so the central bank should be able to continue to pursue a supportive monetary policy.
Taiwan Paying bias. Moderate bearish flattening expected Sell TWD-IDR Neutral
Despite subdued April inflation of 1.34%l, the strong GDP release on 19 May is likely to justify a potential hike at the 24 June meeting. Further upside potential in front-end IRS is expected as 1yr ND TWD IRS trades at a narrow spread of only 18bp over the 90day CP rate. HSBC Economics forecasts a 25bp hike in discount rates by 3Q11.
The TWD is unlikely to continue its strong performance year-to-date. The equity market and large trade surplus are both vulnerable to weakening global demand. With low implied rates and managed volatility, we would use the TWD as a regional funding currency.
Domestic sentiment should be buoyed by amicable cross-Strait politics. However, global macro headwinds continue to weigh on export-focused Taiwanese stocks. Valuation is attractive, coupled with reasonable earnings growth expectations. As a result, we stay bullish on Taiwan longer-term but turn neutral to reflect our cautious near-term view.
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cTable B5: Summary of HSBC fixed income, FX, and equity views
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 THB fix, currently 27bp above the repo rate. Bond-swap spreads should tighten (ie higher 10yr ThaiGB yield, lower 10yr THB IRS), as a rapid increase in the THB fix has widened bond swap spreads across the curve, chiefly the 10yr-point. Historical valuations suggest that the 10yr swap spread may encounter a resistance at around 60bp.
Large trade surplus and hawkish policy support the THB. However, FX policy remains the focus in protecting the downside in USD-THB rather than the topside. Also, a weaker global growth outlook and uncertain political backdrop make the trade balance vulnerable.
Politics remains the key concern. The general election on 3 July could reignite street demonstrations. The king’s health remains a concern. Fundamentals are generally positive, but investors can get exposure to similar growth elsewhere in the Asean region without the same degree of political risk.
Turkey Underweight Pay bias. Enter 2s5s X-CCY steepener Buy USD-TRY Overweight
We remain underweight Turkey USD bonds, and we like buying protection in CDS (against Israel). The BoP profile continued deteriorating as the CBRT remains reluctant to hike the policy rate. Should global liquidity tighten substantially, the financing of current account deficit – mainly short-term borrowing – could come under pressure.
There is room for the front end to deprice the policy rate hike expectation post-election. While there are no signs that credit growth is slowing, the CBRT has retained its commitment to quantitative tightening. We like the carry in the front end, and we are skeptical on the belly/long end of the curve due to insufficient risk premium.
Without rapid concrete results in slowing credit growth and narrowing the wide current account deficit, the TRY is facing the risk of further depreciation, as there is no risk premium offered in exchange for the macro risks. RRR is likely to remain the main policy tool, implying less need to increase the key repo rate. Delayed and small repo rate hikes should keep the TRY weak. Markets are tuned to the post-12 June election environment and expect decisive steps to mitigate current account deficit risks.
Turkey has been helped by reduced upward momentum in oil prices. At the same time, concern about domestic overheating is diminishing. Policy, having been behind the curve, now looks much more in tune with events, and there are some tentative indications that the economy is beginning to slow. The market no longer looks over-owned by GEM funds, and valuations do not look excessive.
Ukraine Overweight We continue to like the carry in VAT bonds Hold UAH
We remain overweight Ukraine as an HY sovereign credit, and on an improving relationship with Russia. Nonetheless, with valuation tightened significantly, we advise more cautiousness.
We continue to favor the VAT bonds for attractive carry, anchored by a stable currency.
Depreciation pressures have eased in 2Q, reducing the need for NBU’s FX interventions, while seasonal balance-of-payment improvements should start working in the 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 bond to capture carry. Yet for investors willing to reduce duration, we favor the Global 2017 and 2022, as the government appears likely to target those bonds in its strategy to reduce exposure to USD-denominated paper.
We consider the local curve increasingly attractive and favor the new treasury notes maturing in January 2014 (U1) and January 2016 (U2). As we expect inflation to peak at close to 9% y-o-y in 1H11, we consider locking into fixed-rate paper as the best strategy.
Inflation has continued to surprise to the upside, rising to 8.3% y-o-y. In the highly dollarized economy, the FX rate is one of the most important tools to tighten monetary conditions. As such, we believe FX policy is likely to be 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 supply expectations, we see relative more upside in PdVSA than in the sovereign. The PdVSA basis has also lagged behind the basis compression seen in the sovereign. The PdVSA ’17N continues to be the cheapest bond in the curve on PECS spread.
Higher oil prices reduce the chances of another devaluation short-term, particularly ahead of the December 2012 presidential election. A new oil windfall tax will channel more funds to the Fonden. If Fonden sells more of its USD via Sitme at VEF5.30/USD, expect more USDs for imports and other payments. But if Fonden sells USDs to the central bank at the official VEF4.30/USD rate, 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.
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EM Flows Watcher
Inflows into EM-dedicated funds have
recovered in the past weeks
A softening growth outlook could reduce
flows into equities in the coming weeks
Local fixed-income currency funds remain
strong
Reflows to developed markets reversed. In our
April EM Strategist piece, we highlighted that a
shift in the output-inflation trade-off had caused a
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.
USD4.75bn entered EM-dedicated fixed-
income funds between 30 March-18 May. This
was an increase of 3.7% of assets under
management (AUM). EM equity funds followed a
similar pattern, accumulating USD13.7bn, or
1.9% of AUM. However, EM equity funds saw
outflows in the same period, returning to negative
terrain as has been the case for most of 1Q11.
We believe that inflows into EM bond funds
will remain strong, outperforming EM equity
funds. The bigger drag, in our view, relates to
growth weakness and currency dislocation.
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
Chart B1: Fixed income fund flows Chart B2: Equity fund flows
-1,000
-500
0
500
1,000
Jan-11 Feb-11 Mar-11 Apr-11 May -11
-2,000
0
2,000
4,000
6,000
Blend LDM EXD Accumulated (2Y)
-8,000
-6,000
-4,000
-2,000
0
2,000
4,000
6,000
8,000
Jan-11 Feb-11 Mar-11 Apr-11 May -11
-40000
-20000
0
20000
40000
60000
80000
GEM EM EA Latam
Asia x-Jap GEM (2Y) DM (2Y)
USDmn
Source: EPFR data Source: EPFR data
Pablo Goldberg Global Head, EM Research HSBC Securities (USA) Inc. +1 212 525 8729 [email protected]
Hernan Yellati Latam FI Strategist HSBC Securities (USA) Inc. +1 212 525 3084 [email protected]
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Emerging Markets Strategist Cross-Asset Strategy 25 May 2011
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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 0.20Brazil 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 -2.80Chile 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 1.40China 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 -1.70Colombia 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 -3.30Czech 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 -4.10Egypt 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 -10.30Hong 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 3.10Hungary* 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 -3.50India 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 -4.20Indonesia 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 -1.70Israel 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 -3.40Korea 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 -1.80Lebanon 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 -7.80Malaysia 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 -2.00Mexico 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 -2.00Panama 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 -0.70Peru 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 -0.70Philippines 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 -2.50Poland* 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 -6.20Russia 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 -0.20Singapore 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 0.70South 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 -4.00Taiwan 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 -1.08Thailand 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 -0.60Turkey 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 -3.60UAE 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 10.40Ukraine 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 -3.00Uruguay 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 -1.00Venezuela -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 -5.90Vietnam 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 -7.00UK 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 6.20Eurozone 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 -4.20Japan 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 (%)
0
1
2
3
4
5
6
7
8
9
BRIC CIVETS EM DEVELOPED
201020112012
%
0 2 4 6 8 10
Egypt
Czchek Republic
Hungary
Venezuela
Lebanon
Indonesia
Panama
Vietnam
Peru
India
TOP 5
BO
TTOM
5
0 10 20 30
Venezuela
ArgentinaVietnam
EgyptIndia
MalaysiaUAEPeru
Taiwan
Czech Republic
TOP 5
BOTTO
M 5
Source: Bloomberg, HSBC Source: Bloomberg, HSBC Source: Bloomberg, HSBC
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Emerging Markets Strategist Cross-Asset Strategy 25 May 2011
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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
-2% -1% 0% 1% 2% 3% 4% 5%
BRL
CLP
CNY
COP
HUF
INR
IDR
KRW
MYR
MXN
PHP
PLN
RUB
ZAR
TWD
THB
TRY
-4% -2% 0% 2% 4% 6% 8% 10% 12%
BRLCLPCNYCOPHUFINRIDR
KRWMYRMXNPHPPLNRUBZARTWDTHBTRY
Source: Bloomberg, HSBC Source: Bloomberg, HSBC
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Emerging Markets Strategist Cross-Asset Strategy 25 May 2011
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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 Market implied* +24 +26 12.60 12.75
Despite more hikes and quantitative measures, overall tightening is likely to fall 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 Market implied* +16 +14 +9 +6 +5 +6 +10 5.65 5.55
After a surprise 50bp hike, May statement and officials’ rhetoric signal a slowdown in the pace of hikes.
China 6.31 +25 = = = = = = 6.56 6.56 Quantitative tightening is working. But taming inflation remains the PBoC’s top priority, requiring more rate and RRR hikes in the coming months.
Colombia 3.75 +25 = +25 = = = = 4.50 5.00 BanRep should stay data-dependent. Inflation has surprised to the downside. We expect further monetary normalization in coming meetings.
Czech Rep. 0.75 = -- +25 +25 -- = = 1.25 1.50 Market implied* +35 -20 +27 -2 +25 1.39 2.03
A more-hawkish ECB could prompt the CNB to tighten slightly earlier than expected in its base-case scenario; however, inflation still remains very benign.
Hungary 6.00 = = = = = = = 6.00 6.25 Market implied* +10 +3 +1 +1 +1 0 -1 6.15 6.24
MPC adopted a wait-and-see stance after three consecutive hikes in Nov-Jan, and it believes pre-emptive action to date should diffuse second-round effects.
India 7.25 +25 +25 -- = +25 -- = 8.00 8.25 Market implied* +11 +42 +18 -7 -10 7.79 8.28
RBI’s surprise hike in May anchored inflation expectations and tackle demand-led inflation pressures; still trailing the curve, it got a step closer.
Indonesia 6.75 = +25 +25 = = = = 7.25 7.25 BI is back in reluctant-to-hike mode, choosing to permit more FX appreciation instead to combat inflation.
Israel 3.25 = +25 = +25 = +25 = 4.00 4.50 Market implied* +16 +9 +11 +7 +6 +5 +5 3.61 4.11
Strong growth and inflation and a frothy housing market call for more tightening. Quantitative and macro-prudential measures may reduce the size of any hikes
Korea 3.00 +25 = +25 = -- +25 = 3.75 4.00 Market implied* +10 +8 +2 +2 +4 +12 +3 3.41 3.60
Despite a surprise pause in May, we expect the BoK to continue to hike through year-end to address inflation pressures and normalize its stance.
Malaysia 3.00 -- +25 -- = -- = -- 3.25 3.25 Market implied* +26 -1 +14 3.39 3.52
BNM has started tightening again and appears likely to bring in another 25bp hike in July.
Mexico 4.50 = = -- = = -- = 4.50 5.50 Market implied* 0 +2 +5 +13 4.74 5.81
Banxico has shown a neutral tone with a slight dovish bias in the most recent communiqué and minutes, supporting our view of no hikes until 1Q12.
Peru 4.25 = = = = = = = 4.25 4.75Our rate call has upside risks, but final rate hikes might end up being lower than consensus. BCRP strongly raised RRR to reduce the need of rate hikes.
Philippines 4.50 +25 +25 -- = = -- = 5.00 5.75 The BSP acknowledged that the inflation target for 2011 is at risk and that it remains cautious on second-round effects. The tone of officials is still hawkish.
Russia 8.25 +25 = = = = = = 8.5 7.75 The Russian central bank is well behind the curve but will have to tighten moderately using both RRR and policy rate hikes, in our view.
Poland 4.25 = = -- +25 = = = 4.50 4.50 Market implied* +3 +7 +16 +9 +11 6 4.77 5.19
BNP adopted a more-hawkish tone and now uses FX against inflation. With core inflation and service prices on the rise, another 25bps hike seems likely.
South Africa 5.50 -- = -- = -- = -- 5.50 7.00 Market implied* +6 +16 +35 6.07 7.78
MPC adopted a slightly hawkish tone due to rising food and fuel prices, but we 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 Market implied* +18 +17 -5 2.06 2.34
The CBC is likely ahead of the curve, and we expect further monetary normalization, with the next 12.5bp rate hike coming on 30 June.
Thailand 2.75 +25 -- = -- = -- = 3.00 30.0 Market implied* +11 +16 +8 -3 -4 3.02 3.64
BoT continues to present a very hawkish tone, as inflation may pick up soon following the expiration of price controls amidst strong growth.
Turkey 6.25 = +25 +25 +25 +25 = +25 7.50 7.50 Market implied* +5 +6 +12 +15 +18 +18 +13 7.21 7.75
Aggressive RRR hikes could push out and pare orthodox rate hike expectations, which we expect to begin in 2H 11. Fiscal policy matters, too.
Vietnam 9.00 +200 = = = = = -100 10.00 9.00 The SBV uses four benchmark rates. There have been six rounds of hikes in 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
0
25
50
75
100
125
150
Current 1m 2m 3m 4m 5m 6m 7m 8m 9m 10m 11m 12m
Impl
ied
chan
ges
(bp)
Brazil India Korea Mexico Poland South Africa
Source: HSBC
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Emerging Markets Strategist Cross-Asset Strategy 25 May 2011
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Surprise Indices Chart C8: Asian inflation surprises Chart C9: Asian economic activity surprises
-1.20
-1.00
-0.80
-0.60
-0.40
-0.20
0.00
0.20
0.40
0.60
0.80
Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11
-3.0
-2.0
-1.0
0.0
1.0
2.0
3.0
4.0
5.0
6.0
3mma Z score all (ex China) Inflation
all (ex China) Inflation - cumulativ e surprise (RHS)
Z-score
-1.00
-0.50
0.00
0.50
1.00
1.50
2.00
Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11
-16.0
-14.0
-12.0
-10.0
-8.0
-6.0
-4.0
-2.0
0.0
3mma Z score all (ex China) Ec. Activ ity
all (ex China) Ec. Activ ity - cumulativ e surprise (RHS)
Z-score
Source: HSBC FX Quant Strategy Source: HSBC FX Quant Strategy
Chart C10: Latin American inflation surprises Chart C11: Latin American economic activity surprises
-0.8
-0.6
-0.4
-0.2
0.0
0.2
0.4
0.6
0.8
1.0
Jan-06 Oct-06 Jul-07 Apr-08 Jan-09 Oct-09 Jul-10 Apr-11
Z-score
-2.0-1.00.01.02.03.04.05.06.07.08.0
3mma Z scoreaccumulated z-score RHS
-0.5
-0.4
-0.3
-0.2
-0.1
0.0
0.1
0.2
0.3
0.4
Jan-06 Oct-06 Jul-07 Apr-08 Jan-09 Oct-09 Jul-10
Z-score
-3.5
-3.0
-2.5
-2.0
-1.5
-1.0
-0.5
0.0
0.5
1.0
3mma Z score 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
-0.8
-0.6
-0.4
-0.2
0.0
0.2
0.4
0.6
0.8
1.0
Jan-06 Oct-06 Jul-07 Apr-08 Jan-09 Oct-09 Jul-10 Apr-11
Z-score
0
1
2
3
4
5
6
7
3mma Z score (EMEA)accumulated z-score (EMEA) RHS
-0.6
-0.4
-0.2
0.0
0.2
0.4
0.6
Jan-06 Oct-06 Jul-07 Apr-08 Jan-09 Oct-09 Jul-10 Apr-11
Z-score
-1
0
1
2
3
4
5
3mma Z score (EMEA)accumulated z-score (EMEA) RHS
Source: HSBC based on Bloomberg Source: HSBC based on Bloomberg
Note: The Surprise Indices are constructed using an average of normalized surprises based on the median from the Bloomberg survey of expectations of a variety of
inflation and economic activity indices.
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Emerging Markets Strategist Cross-Asset Strategy 25 May 2011
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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
33
Emerging Markets Strategist Cross-Asset Strategy 25 May 2011
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Local markets Chart C14: Brazil CDI curve Chart C15: Jan ’12 and Jan ’13 (%) Chart C16: Slope Jan ’13-Jan ’12
17-Jan
13-Jan
12-Jan
11.5
12.0
12.5
13.0
0 5 10Years
5/17/20114/14/2011
%
Jan-12
Jan-13
10
11
12
13
Apr-09 Oct-09 Apr-10 Oct-10 Apr-11
%
0
25
50
75
100
Apr-09 Oct-09 Apr-10 Oct-10 Apr-11
Spread Jan-13 - Jan-12
bps
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
5.0
5.5
6.0
6.5
0 2 4 6 8 10Years
5/18/20114/19/2011
%
2Y
5Y
0
2
4
6
8
Apr-09 Oct-09 Apr-10 Oct-10 Apr-11
%
0
100
200
300
400
Apr-09 Oct-09 Apr-10 Oct-10 Apr-11
Spread 5Y vs. 2Y
bps
Source: HSBC, Bloomberg Source: HSBC, Bloomberg Source: HSBC, Bloomberg
Chart C20: Mexico TIIE curve Chart C21: 65x1 & 130x1 Chart C22: Slope 26x1 & 130x1
26x1
130x1
4.0
5.0
6.0
7.0
8.0
0 2 4 6 8 10Years
5/18/20114/14/2011
%
65x1
130x1
5
6
7
8
9
Apr-09 Oct-09 Apr-10 Oct-10 Apr-11
%
100
150
200
250
Apr-09 Oct-09 Apr-10 Oct-10 Apr-11
Spread 130x1 - 26x1
bps
Source: HSBC, Bloomberg Source: HSBC, Bloomberg Source: HSBC, Bloomberg
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Emerging Markets Strategist Cross-Asset Strategy 25 May 2011
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Local markets (cont’d) Chart C23: Indonesia swap curve Chart C24: 2Y & 10Y Indo swap series (%) Chart C25: Slope 10Y - 2Y series
5
6
7
8
0 2 4 6 8 10Years
5/18/2011
4/15/2011
%
2Y
10Y
4
6
8
10
12
Apr-09 Oct-09 Apr-10 Oct-10 Apr-11
%
0
100
200
300
Apr-09 Oct-09 Apr-10 Oct-10 Apr-11
Spread 10Y vs. 2Y
bps
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
3.50
3.75
4.00
4.25
4.50
0 2 4 6 8 10Years
5/18/20114/19/2011
%
2Y
10Y
3
4
4
5
5
Apr-09 Oct-09 Apr-10 Oct-10 Apr-11
%
20
40
60
80
100
Apr-09 Oct-09 Apr-10 Oct-10 Apr-11
Spread 10Y vs. 2Y
bps
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
3.0
3.5
4.0
4.5
5.0
0 2 4 6 8 10Years
5/18/20114/19/2011
%
2Y
10Y
2
3
4
5
6
Apr-09 Oct-09 Apr-10 Oct-10 Apr-11
%
50
100
150
200
250
Apr-09 Oct-09 Apr-10 Oct-10 Apr-11
Spread 10Y vs. 2Y
bps
Source: HSBC, Bloomberg Source: HSBC, Bloomberg Source: HSBC, Bloomberg
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Emerging Markets Strategist Cross-Asset Strategy 25 May 2011
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Local markets (cont’d) Chart C32: Turkey swap curve Chart C33: 2Y & 10Y Turkey swap series Chart C34: Slope 10Y-2Y series
7.0
7.5
8.0
8.5
9.0
0 2 4 6 8 10Years
5/18/20114/19/2011
%
2Y
10Y
4
6
8
10
12
14
Apr-09 Oct-09 Apr-10 Oct-10 Apr-11
%
0
50
100
150
200
Apr-09 Oct-09 Apr-10 Oct-10 Apr-11
Spread 10Y vs. 2Y
bps
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
6.0
6.3
6.5
6.8
7.0
0 2 4 6 8 10Years
5/18/20114/19/2011
%
2Y
10Y
4
6
8
10
Apr-09 Oct-09 Apr-10 Oct-10 Apr-11
%
-100
-50
0
50
100
150
Apr-09 Oct-09 Apr-10 Oct-10 Apr-11
Spread 10Y vs. 2Y
bps
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
5.0
6.0
7.0
8.0
9.0
0 2 4 6 8 10Years
5/18/20114/19/2011
%
2Y
10Y
5
7
9
11
Apr-09 Oct-09 Apr-10 Oct-10 Apr-11
%
50
100
150
200
250
Apr-09 Oct-09 Apr-10 Oct-10 Apr-11
Spread 10Y vs. 2Y
bps
Source: HSBC, Bloomberg Source: HSBC, Bloomberg Source: HSBC, Bloomberg
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Emerging Markets Strategist Cross-Asset Strategy 25 May 2011
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EM Inflation linkers and break-evens Table C5. EM break-even inflation
Country
Inflation-linked bond
Yield (%)
Inflation break-even (%)
Inflation-linked swap
Rate (%)
Inflation 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 1 Y 0.25 5.72 ZAR REAL YIELD SWAP 2 Y 0.93 5.70 ZAR REAL YIELD SWAP 3 Y 1.15 5.99 ZAR REAL YIELD SWAP 5 Y 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
0
12
3456
78
IS CZ PL BZ CL CO ZA TH KO MX HU PE PH ID RO TK
Targeted band
%
Source: HSBC
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Emerging Markets Strategist Cross-Asset Strategy 25 May 2011
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EM Inflation linkers and break-evens (cont’d)
Chart C43: Brazil inflation break-evens Chart C44: Mexico inflation break-evens
4.5
4.7
4.9
5.1
5.3
5.5
5.7
5.9
6.1
6.3
6.5
Jun-10 Aug-10 Oct-10 Dec-10 Feb-11 Apr-11
BRA 2Y BEI
BRA 5Y BEI
%
3.0
3.5
4.0
4.5
5.0
5.5
Aug-09 Jan-10 Jun-10 Nov-10 Apr-11
MEX 2Y BEI
MEX 5Y BEI
%
Source: Bloomberg, HSBC Source: Bloomberg, HSBC
Chart C45: Chile inflation break-evens Chart C46: Colombia inflation break-evens
1.0
1.5
2.0
2.5
3.0
3.5
4.0
4.5
5.0
Aug-09 Jan-10 Jun-10 Nov-10 Apr-11
CHI 2Y BEI
CHI 5Y BEI
%
2.0
2.5
3.0
3.5
4.0
4.5
5.0
Apr-10 Jun-10 Aug-10 Oct-10 Dec-10 Feb-11 Apr-11
COL 2Y BEI
COL 5Y BEI
%
Source: Bloomberg, HSBC Source: Bloomberg, HSBC
Chart C47: Turkey inflation break-evens Chart C48: South Africa inflation break-evens
4.0
4.5
5.0
5.5
6.0
6.5
7.0
7.5
Jun-10 Sep-10 Dec-10 Mar-11
TURK 2Y BEITURK 5Y BEI
%
3.0
3.5
4.0
4.5
5.0
5.5
6.0
6.5
7.0
7.5
Jul-09 Dec-09 May-10 Oct-10 Mar-11
SOAF 2Y BEI
SOAF 5Y BEI
%
Source: Bloomberg, HSBC Source: Bloomberg, HSBC
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Emerging Markets Strategist Cross-Asset Strategy 25 May 2011
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External debt Rich/Cheap Model
Brazil curve has richened out to 10 years,
’21s cheap compared to ’17s.
Colombia ’24s cheap compared to
Colombia ’19s.
Philippines ’16s looks attractive versus the
’15s, offer 28bp pickup.
External debt market had a mixed performance
in spread terms over the past three months, with
the index and most low-beta credits nearly flat.
Argentina, Philippines, Egypt, and Russia saw
spread widening, while Ukraine and Venezuela
saw the biggest spread tightening moves. Year-
to-date, Venezuela and Vietnam remain the top
performers, both with 6.0% in terms of total
return, compared to an index return of 3.50%.
Argentina and Egypt remain the main
underperformers, with -2.6% and -3.4% total
return, respectively.
Switch from Brazil ’17s to ’21s offers a
pickup of 37bp in PECS spread. The Brazil
curve has become very rich in spread terms,
especially out to 10 years. This is in part due to
buyback activity of the Brazilian Treasury, which
continues to be in the market. Brazil ’17s have
become one of the most expensive bonds in that
sector of the curve, with a three-month PECS
rich/cheap Z-score of -2.9. Brazil ’21s, on the other
hand, are one of the most attractive bonds with a Z-
score of 1.9.
Colombia ’24s are cheap with a current Z-score
of 0.9, compared to a Z-score of -1.2 for
Colombia ’19s. The switch would allow an investor
to pick up 31bp in PECS terms (100bp in yield) for
an additional duration of 2.6.
Philippines ’16s PECS is very cheap in
comparison to other bonds in the 3–5-year sector.
The bond has widened by 60 bps over the past three
months and now is trading at a Z-score of 1.8,
compared to the Philippines ’15s, which saw a PECS
tightening of 12bp and trades at a Z-score of -2.4.
Investors can pick up almost 28bp in spread for one
year in additional duration risk.
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
Victor Fu FI Quantitative Strategist HSBC Securities (USA) Inc. +1 212 525 4219 [email protected]
Gordian Kemen Chief Latam FI Strategist HSBC Securities (USA) Inc. +1 212 525 2593 [email protected]
39
Emerging Markets Strategist Cross-Asset Strategy 25 May 2011
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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
38
3317
Bonar 17
Boden 15
Bonar 13
350
400
450
500
550
600
650
700
Jan-12 Jan-17 Jan-22 Jan-27 Jan-32
Average Life
PECSFair PECS
1314
15
40 to Call
1719 5.7519
2021
24 B242527
3034 37 41
(6)
44
94
144
194
Jun-13 Jun-19 Jun-25 Jun-31 Jun-37
Average Life
PECSFair PECS
4137
33
27
2420
1917
16
1413
50
100
150
200
250
Jan-13 Jan-18 Jan-23 Jan-28 Jan-33 Jan-38
Average Life
PECSFair PECS
Chart 52: Indonesia actual vs. fair PECS Chart C53: Mexico actual vs. fair PECS Chart C54: Panama actual vs. fair PECS
35
20
1716
1514
130
140
150
160
170
180
190
200
Mar-14 Mar-19 Mar-24 Mar-29 Mar-34
Average Life
PECSFair PECS
40343331
26
22
20
19
Mar-1917
1615Feb-141413
0
20
40
60
80100
120
140
160
180
200
Jan-13 Jan-19 Jan-25 Jan-31 Jan-37
Average Life
PECSFair PECS
3634292726
23
20
1512
(2)
48
98
148
198
248
Jul-12 Jul-17 Jul-22 Jul-27 Jul-32
Average Life
PECSFair PECS
Chart C55: Peru actual vs. fair PECS Chart C56: Philippines actual vs. fair PECS Chart C57: South Africa actual vs. fair PECS
37
33
25
191615
90
110
130
150
170
190
210
Jan-15 Jan-20 Jan-25 Jan-30 Jan-35
Average Life
PECSFair PECS
3130256
Jun-1919
12
1616
1514
1350
70
90
110
130
150
170
190
210
230
Feb-13 Feb-18 Feb-23 Feb-28
Average Life
PECSFair PECS
222019
17
14
90
100
110
120
130
140
150
Jun-14 Jun-17 Jun-20
Average Life
PECSFair PECS
Chart C58: Turkey actual vs. fair PECS Chart C59: Ukraine actual vs. Fair PECS Chart C60: Venezuela actual vs. fair PECS
3634
302520171615
14
1380
100
120
140
160
180
200
220
240
Jan-13 Jan-18 Jan-23 Jan-28 Jan-33
Average Life
PECSFair PECS
20
171615
13
12
270
290
310
330
350
370
390
410
Jun-12 Jun-14 Jun-16 Jun-18 Jun-20
Average Life
PECSFair PECS
383428
27
252423
2019
Dec-181816
1413
800
900
1,000
1,100
1,200
1,300
Sep-13 Sep-18 Sep-23 Sep-28 Sep-33
Average Life
PECSFair PECS
Source: Bloomberg, HSBC
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Emerging Markets Strategist Cross-Asset Strategy 25 May 2011
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External debt Chart C61: EM, IG, and HY CDS Chart C62: 90-day volatility
0
50
100
150
200
250
300
350
400
Chile
Kore
a
Mal
aysi
a
Sout
h Af
rica
Thai
land
Mex
ico
Rus
sia
Bulg
aria
Kaza
khst
an
Braz
il
Col
ombi
a
Peru
Pana
ma
Indo
nesi
a
Turk
ey
Philip
pine
s
Vene
zuel
a
Arge
ntin
a
Ukra
ine
400
600
800
1000
1200
1400
1600
3 mth range
3 mth ago
Current
0%
20%
40%
60%
80%
100%
120%
140%
Apr-07 Jan-08 Oct-08 Jul-09 Apr-10 Jan-11
High YieldHigh GradeEM EXDS&PEM Equities
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 0.0Brazil (Baa3/BBB-/BBB) 101 0 -1 -6 101 121 0.6 / 0.6 0.5 / 0.6 178 -4 -3.2 -2.9 -0.6Chile (Aa3/A+/A+) 64 2 4 5 58 83 0.3 / 0.4 0.3 / 0.4 186 -2 1.5 1.8 -0.4Colombia (Ba1/BBB-/BB+) 101 -1 -1 0 98 123 0.5 / 0.6 0.5 / 0.6 184 -5 -3.7 -3.5 -0.7El 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 0.2Panama (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 -0.2Belgium (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 -0.3Finland (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 0.5Hungary (Baa3/BBB-/BBB-) 246 0 7 1 235 314 2.0 / 0.4 1.6 / 2.0 125 1 0.0 0.6 -0.6Iceland (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 -0.6Kazakhstan (BBB/WR/BBB-) 143 0 -2 2 136 163 0.9 / 0.7 0.9 / 1.1 160 -2 1.5 1.4 0.3Lithuania (Baa1/BBB/BBB) 197 0 -5 -5 197 264 0.9 / 0.6 0.9 / 1.1 214 1 1.0 1.5 -0.9Netherlands (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 -0.1Poland (A2/A-/A-) 139 0 -6 -3 136 155 0.9 / 0.7 0.9 / 1.1 151 1 1.9 2.0 -0.2Portugal (Baa1 /*-/BBB-/BBB- /*-) 616 10 -49 8 456 694 2.5 / 0.4 2.1 / 2.7 250 7 2.1 3.2 -0.9Romania (Baa3/BB+/BB+) 228 1 3 7 215 296 1.7 / 0.6 1.5 / 1.7 136 0 -2.0 -2.1 0.5Russia (Baa1/BBB/BBB) 135 1 3 5 121 154 0.9 / 0.7 0.9 / 1.1 144 -1 -0.3 -0.7 0.8Spain (Aa2/AA/AA+) 234 10 -13 2 197 270 1.9 / 0.5 1.5 / 1.9 126 8 5.6 5.5 0.1Sweden (Aaa/AAA/AAA) 22 0 -2 -4 21 35 0.2 / 0.4 0.1 / 0.2 137 -4 -2.9 -2.5 -1.0Turkey (Ba2/BB/BB+) 159 1 7 9 141 178 0.9 / 0.7 0.9 / 1.0 179 -3 -2.1 -2.5 0.9Ukraine (B2/B+/B) 435 0 3 21 408 479 2.2 / 0.3 2.0 / 2.3 201 -1 0.1 0.2 -0.1Egypt (Ba3/BB/BB /*-) 350 0 -6 12 320 385 0.8 / 0.1 0.7 / 0.8 452 0 -0.2 0.8 -0.8Iraq (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 0.6Morocco (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 0.8Australia (Aaa/NR/AAA) 51 -1 0 -1 48 55 0.1 / 0.1 0.1 / 0.2 412 0 1 0.2 0.9China (Aa3/AA-/A+) 72 0 2 1 69 79 0.3 / 0.3 0.3 / 0.4 235 -1 7 7.0 -0.8Indonesia (Ba1/BB+/BB+) 136 0 2 -6 130 154 0.5 / 0.3 0.5 / 0.7 280 -4 -1 -0.6 0.1Korea (A1/A/A+) 98 0 1 -1 95 112 0.5 / 0.3 0.5 / 0.6 200 0 2 1.6 0.5Column 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 inSource: Keerthi Angammana, HSBC Fixed Income Research
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External debt (cont’d)
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 79Brazil 2s5s 43 1 1 0 41 46 43 43 35Colombia 2s5s 43 -1 0 -1 39 45 43 42 34Mexico 2s5s 44 0 1 1 41 46 43 44 35Venezuela 2s5s 107 1 6 8 48 109 95 103 17Russia 2s5s 64 1 0 1 56 65 62 64 52Turkey 2s5s 65 -1 0 0 62 66 65 64 52Ukraine 2s5s 110 -1 -1 18 59 117 110 109 73Argentina 5s10s 44 2 2 5 35 44 40 70 44Brazil 5s10s 44 -1 0 1 34 45 43 48 43Colombia 5s10s 41 0 0 1 31 42 39 45 40Mexico 5s10s 37 0 -1 0 32 38 37 42 38Venezuela 5s10s -7 -6 -4 -3 -39 3 -4 38 6Russia 5s10s 36 0 1 1 27 37 32 42 33Turkey 5s10s 42 4 4 7 31 42 35 49 35Ukraine 5s10s 41 -2 5 16 8 43 32 60 37Column 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
Chart C63: 5Y-10Y CDS slopes Chart C64: Bond curve slopes
RUS
PER
THA
SOA
TUR
COLBRA
PHI
-125
-100
-75
-50
-25
0
25
50
75
100 110 120 130 140 150 1605Y CDS
bps
CO
MEXBZ
PE
SA INDO
RUTU
PH
20
40
60
80
100
120
60 110 160 210
Shorter tenor bond (z-spread)
bps
Source: Bloomberg, HSBC Source: Bloomberg, HSBC
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Emerging Markets Strategist Cross-Asset Strategy 25 May 2011
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External yield curves Chart C65: Argentina Chart C66: Brazil Chart C67: Colombia
BVII
B15BX
G17
DIS
PAR
200
300
400
500
600
700
800
900
1000
0 5 10 15
Duration (years)
Bonds (z-spread) CDS
bps
'12'13
'14
'15 '17'19N'19
'20'21
'24'24B'25 '27
'30'34 '37
'40-15
'41
0
50
100
150
200
0 5 10 15
Duration (years)
Bonds (z-spread) CDS
bps
'13
'14'17 '19
'20 '24
'33
'37 '41
0
50
100
150
200
250
0 5 10 15
Duration (years)
Bonds (z-spread) CDS
bps
Chart C68: Indonesia Chart C69: Mexico Chart C70: Panama
'05/14'15
'16 '17'18
'19
'35
100
150
200
250
0 2 4 6 8 10 12
Duration (years)
Bonds (z-spread) CDS
bps
'13 '14'14N
'15'16
'17'19
'19N
'20
'22
'26
'31 '33'34 '40
0
50
100
150
200
0 2 4 6 8 10 12 14 16Duration (years)
Bonds (z-spread) CDS
bps
'12
'15
'20
'23
'26'27'29
'34
'36
0
50
100
150
200
250
0 2 4 6 8 10 12 14
Duration (years)
Bonds (z-spread) CDS
bps
Chart C71: Peru Chart C72: Philippines Chart C73: Russia
'12
'15 '16 '19
'25
'33'37
0
50
100
150
200
250
0 2 4 6 8 10 12 14
Duration (years)
Bonds (z-spread) CDS
bps
'13
'14
'15'16
'16
'17
'19'19 '20
'21
'10/24'09/24
'25 '30 '31'32
0
50
100
150
200
250
0 2 4 6 8 10 12
Duration (years)
Bonds (z-spread) CDS
bps
'15'18 '20
'28
'30
0
50
100
150
200
250
0 2 4 6 8 10 12
Duration (years)
Bonds (z-spread) CDS
bps
Chart C74: Ukraine Chart C75: Turkey Chart C74: Venezuela
'12
'13
'15 '16 '17
200
250
300
350
400
450
500
0 2 4 6 8 10 12
Duration (years)
Bonds (z-spread) CDS
bps
'12
'13
'14
'15'16'17 '18'11/19'7/19'20 '21
'25'30
'34
0
50
100
150
200
250
0 2 4 6 8 10 12
Duration (years)
Bonds (z-spread) CDS
bps
'13
'14
'16 '18
'19
'20
'23'24
'25
'27
'28'34
'38
700
800
900
1000
1100
1200
0 2 4 6 8 10
Duration (years)
Bonds (z-spread) CDS
bps
Source: Bloomberg, HSBC
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External debt bonds, CDS, and basis Chart C75: Argentina bonds Chart C76 CDS Chart C77: Basis
0
20
40
60
80
100
120
Oct-06 Oct-07 Oct-08 Oct-09 Oct-10
AR Disc NY priceBoden'15 price
$
0
1000
2000
3000
4000
5000
Jan-06 Jul-07 Jan-09 Jul-10
AR CDS 5Y
bps
-1200
-800
-400
0
400
800
1200
Jan-07 Jan-08 Jan-09 Jan-10 Jan-11
AR CDS 5Y - Boden'15bps
Chart C78: Brazil bonds Chart C79: CDS Chart C80: Basis
80
100
120
140
Nov-06 Nov-07 Nov-08 Nov-09 Nov-10
BRA'17BRA'37
$
0
200
400
600
Jan-06 Jul-07 Jan-09 Jul-10
BRA CDS 5Y
bps
-150
-100
-50
0
50
100
Nov-06 Nov-07 Nov-08 Nov-09 Nov-10
BRA CDS 5Y - BRA'17
bps
Chart C 81: Colombia bonds Chart C82: CDS Chart C83: Basis
60
80
100
120
140
Sep-06 Sep-07 Sep-08 Sep-09 Sep-10
COL'17COL'37
$
0
200
400
600
Sep-06 Sep-07 Sep-08 Sep-09 Sep-10
COL CDS 5Y
bps
-250
-200
-150
-100
-50
0
50
100
Sep-06 Sep-07 Sep-08 Sep-09 Sep-10
COL CDS 5Y - COL'17
bps
Chart C84: Indonesia bonds Chart C85: CDS Chart C86: Basis
40
60
80
100
120
140
Feb-07 Feb-08 Feb-09 Feb-10 Feb-11
INDO'16INDO'37
$
0
200
400
600
800
1000
1200
1400
Feb-07 Feb-08 Feb-09 Feb-10 Feb-11
INDO CDS
bps
-400
-300
-200
-100
0
100
200
Feb-07 Feb-08 Feb-09 Feb-10 Feb-11
INDO CDS 5Y - INDO'16
bps
Source: Bloomberg, HSBC
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Emerging Markets Strategist Cross-Asset Strategy 25 May 2011
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External debt bonds, CDS, and basis (cont’d) Chart C87: Mexico bonds Chart C88: CDS Chart C89: Basis
70
80
90
100
110
120
130
Jan-06 Jul-07 Jan-09 Jul-10
MEX'17MEX'34
$
0
200
400
600
Jan-06 Jul-07 Jan-09 Jul-10
MEX CDS 5Y
bps
-150
-100
-50
0
50
100
150
Sep-06 Sep-07 Sep-08 Sep-09 Sep-10
MEX CDS 5Y - MEX'17
bps
Chart C90: Russia bonds Chart C91: CDS Chart C92: Basis
100
120
140
160
180
200
Jan-06 Feb-07 Mar-08 Apr-09 May-10
RU'18RU'28
$
0
200
400
600
800
1000
1200
Jan-06 Feb-07 Mar-08 Apr-09 May-10
RUS CDS 5Y
bps
-200
-100
0
100
200
300
400
500
600
700
800
Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11
RU CDS 5Y - RU'18
bps
Chart C93: Philippines bonds Chart C94: CDS Chart C95: Basis
80
100
120
140
Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11
PH'16PH'31
$
0
200
400
600
800
1000
Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11
PH CDS 5Y
bps
-200
-150
-100
-50
0
50
100
150
Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11
PH CDS 5Y - PH'16bps
Chart C96: Venezuela bonds Chart C97: CDS Chart C98: Basis
30
50
70
90
110
130
Jan-06 Jul-07 Jan-09 Jul-10
VEN'16VEN'27
$
0
500
1000
1500
2000
2500
3000
3500
Jan-06 Jul-07 Jan-09 Jul-10
VEN CDS 5Y
bps
-400
-200
0
200
400
600
800
1000
1200
1400
Jan-06 Mar-07 May-08 Jul-09 Sep-10
VEN CDS 5Y - VEN'16bps
Source: Bloomberg, HSBC
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Emerging Markets Strategist Cross-Asset Strategy 25 May 2011
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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
3.8
3.9
4.0
4.1
4.2
4.3
4.4
4.5
4.6
Mar-10 Oct-10 May-11 Dec-11 Jun-12
USD
-ARS
USD-ARS NDFs HSBC fo
1.50
1.55
1.60
1.65
1.70
1.75
1.80
1.85
1.90
Mar-10 Oct-10 May-11 Dec-11 Jun-12
USD
-BR
L
USD-BRL NDFsHSBC forecast
450
475
500
525
550
Mar-10 Oct-10 May-11 Dec-11 Jun-12
USD
-CLP
USD-CLP NDFsHSBC forecast
Chart C102: Colombia NDFs & HSBC forecasts Chart C103: Mexico fwds & HSBC forecasts Chart C104: Peru NDFs &HSBC forecasts
1,700
1,750
1,800
1,850
1,900
1,950
2,000
2,050
2,100
Mar-10 Oct-10 May-11 Dec-11 Jun-12
USD
-CO
P
USD-COP NDFsHSBC forecast
11.5
12.0
12.5
13.0
13.5
14.0
Mar-10 Oct-10 May-11 Dec-11 Jun-12
US
D-M
XN
USD-MXN FwdsHSBC forecast
2.65
2.70
2.75
2.80
2.85
2.90
Mar-10 Oct-10 May-11 Dec-11 Jun-12US
D-P
EN
USD-PEN NDFsHSBC forecast
Chart C105: Czech fwds & HSBC forecasts Chart C106: Hungary fwds & HSBC forecasts Chart C107: Poland fwds & HSBC forecasts
23.5
24.0
24.5
25.0
25.5
26.0
26.5
Mar-10 Oct-10 May-11 Dec-11 Jun-12
EUR-
CZK
EUR-CZK Fwds HSBC fo
250
255
260
265
270
275
280
285
290
295
Mar-10 Oct-10 May-11 Dec-11 Jun-12
EU
R-HU
F
EUR-HUF FwdsHSBC forecast
3.5
3.6
3.7
3.8
3.9
4.0
4.1
4.2
4.3
Mar-10 Oct-10 May-11 Dec-11 Jun-12
EUR
-PLN
EUR-PLN FwdsHSBC forecast
Chart C108: Turkey fwds & HSBC forecasts Chart C109: Russia NDFs & HSBC forecasts Chart C110: S. Africa fwds & HSBC forecasts
1.35
1.40
1.45
1.50
1.55
1.60
1.65
1.70
1.75
Mar-10 Oct-10 May-11 Dec-11 Jun-12
USD
-TR
Y
USD-TRY FwdsHSBC forecast
27
28
29
30
31
32
33
Mar-10 Oct-10 May-11 Dec-11 Jun-12
US
D-R
UB
USD-RUB NDFsHSBC forecast
6.5
7.0
7.5
8.0
8.5
Mar-10 Oct-10 May-11 Dec-11 Jun-12
USD
-ZA
R
USD-ZAR FwdsHSBC forecast
Source: Bloomberg, HSBC
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Emerging Markets Strategist Cross-Asset Strategy 25 May 2011
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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
6.20
6.30
6.40
6.50
6.60
6.70
6.80
6.90
Mar-10 Oc t-10 May-11 Dec-11 Jun-12
USD-
CNY
U SD-CN Y NDFs HSBC fo
6.2
6.3
6.4
6.5
6.6
6.7
6.8
6.9
Aug-10 Jan-11 M ay-11 Oct-11 Feb-12 Jun-12U
SD-C
NH
USD-CNH CNH FwdsHSBC forecast
7.75
7.78
7.80
7.83
7.85
M ar -10 Oct-10 May-11 Dec-11 Jun-12
US
D-HK
D
USD -HKD FwdsHSBC forecast
Chart C114: India NDFs & HSBC forecasts Chart C115: Indonesia NDFs & HSBC forecasts Chart C116: Korea NDFs &HSBC forecasts
41.0
42.0
43.0
44.0
45.0
46.0
47.0
48.0
49.0
May-10 Nov-10 Jun-11 Dec-11 Jun-12
USD
-INR
USD-INR NDFsHSBC forecast
8,200
8,400
8,600
8,800
9,000
9,200
9,400
May-10 Nov-10 Jun-11 Dec-11 Jun-12
USD
-IDR
USD-IDR NDFsHSBC forecast
1,000
1,050
1,100
1,150
1,200
1,250
1,300
Mar-10 Oct-10 May-11 Dec-11 Jun-12
USD
-KR
WUSD-KRW NDFsHSBC forecast
Chart C117: Malaysia NDFs & HSBC forecasts Chart C118: Philippines NDFs & HSBC forecasts Chart C119: Singapore fwds & HSBC forecasts
2.80
2.90
3.00
3.10
3.20
3.30
3.40
Mar-10 Oct-10 May-11 Dec-11 Jun-12
USD
-MYR
USD-MYR NDFsHSBC forecast
36.0
38.0
40.0
42.0
44.0
46.0
48.0
Mar-10 Oct-10 May-11 Dec-11 Jun-12
USD-
PHP
USD-PHP NDFsHSBC forecast
1.20
1.25
1.30
1.35
1.40
1.45
Mar-10 Oct-10 May-11 Dec-11 Jun-12
USD
-SG
D
USD-SGD FwdsHSBC forecast
Chart C120: Taiwan NDFs & HSBC forecasts Chart C121: Thailand fwds & HSBC forecasts Chart C122: Vietnam NDFs & HSBC forecasts
26.0
27.0
28.0
29.0
30.0
31.0
32.0
33.0
M ar-10 Oct-10 M ay-11 Dec-11 Jun-12
USD
-TW
D
USD-T WD NDFsHSBC forecast
25.0
27.0
29.0
31.0
33.0
35.0
M ar-10 Oct-10 M ay-11 D ec-11 Jun-12
USD
-TH
B
USD-THB Offshore FwdsHSBC forecast
18,500
19,500
20,500
21,500
22,500
23,500
24,500
Mar-10 Oct-10 May-11 Dec-11 J un-12
USD
-VN
D
USD-VND NDFsHSBC forecast
Source: Bloomberg, HSBC
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Emerging Markets Strategist Cross-Asset Strategy 25 May 2011
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Equities Chart C 123: PE/EPS growth rate nexus by country Chart C 124: PE/EPS growth rate nexus by sector
Om an
Kuw ait
Qatar
Saudi Arabia
DubaiAbu Dhabi
Peru Mex ico
Brazil
T hailand
T aiw an
Philippines
Malay siaKorea
Indonesia
IndiaC hina
Egy pt
Poland
Hungary
Cz ech
T urkeyR ussia
South Afric a
0%
5%
10%
15%
20%
25%
30%
35%
6 8 10 12 14 16
PE (2011)
EPS
gro
wth
(201
2e)
Cons umer
Discretionary
Consumer
Staples
Energy
Financials
Healthcare
Industr ials
IT
M ater ials
T elecom s
Util ities
5%
7%
9%
11%
13%
15%
17%
19%
21%
23%
8 10 12 14 16 18 20
PE (2011)
EPS
grow
th (2
012e
)
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 51.2Colombia 1146 2.8 11.6 0.4 34.9 121.5Chile 2807 2.7 7.9 0.1 38.7 80.3Nigeria 402 2.3 4.2 3.0 2.0 9.9Indonesia 907 2.3 16.8 4.9 31.6 137.6Saudi Arabia* 6651 1.8 4.2 3.2 2.4 12.0Czech Republic 604 1.6 14.2 20.4 25.1 29.2Peru 1433 0.9 9.7 19.1 17.4 75.1Malaysia (EM) 463 0.0 2.0 5.0 23.2 75.2Qatar 785 0.4 1.6 9.9 22.8 39.0UAE 219 1.0 4.5 2.4 3.1 16.5Egypt 628 1.3 7.2 23.4 24.5 7.5Thailand 362 1.6 11.2 10.1 52.1 120.4Korea 437 1.7 8.7 17.9 35.7 84.0Philippines 341 1.7 5.8 0.9 19.7 64.4Kuwait 664 2.6 7.1 8.6 3.3 21.2South Africa 559 3.5 1.5 0.8 21.1 65.5China 67 4.8 2.3 0.0 14.8 35.4Poland 1109 4.8 10.5 10.5 37.4 90.8Argentina 2978 4.9 10.7 9.9 49.5 122.0Kenya 736 5.2 7.5 11.8 0.6 43.2Mexico 6068 6.9 4.9 0.5 17.6 66.1Hungary 794 7.4 7.5 14.1 16.6 85.9India 489 7.9 1.1 9.7 5.1 64.1Brazil 3504 7.9 5.2 2.9 10.1 50.6Turkey 584 9.1 2.6 18.8 8.9 76.5Russia 963 10.4 1.0 16.5 26.0 67.7
Developed markets 1329 -1 -2 9 19 44GCC ex Saudi 484 -2 -4 -4 5 22EM Asia 471 -2 5 6 23 60Emerging markets 1133 -4 2 4 21 60Latin America 4309 -6 -4 -2 14 58EMEA 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 66Cons discretionary 668 1 12 7 38 116Cons staples 448 0 9 6 29 92Healthcare 622 -2 5 -4 16 57Utilities 341 -2 5 2 10 38Industrials 250 -4 2 1 28 54Telecoms 239 -4 1 -1 13 28Financials 378 -5 2 -2 17 61Materials 656 -7 -3 3 23 76Energy 858 -9 0 9 20 40
Note: *Saudi Arabian Tadawul index Source: Thomson Reuters Datastream
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Emerging Markets Strategist Cross-Asset Strategy 25 May 2011
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Equities (cont’) - IBES EPS vs. peak and trend
Chart C125: Emerging markets Chart C126: EM Asia Chart C127: Latin America
0.6
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88 90 92 94 96 98 00 02 04 06 08 10 12
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Chart C128: EMEA Chart C129: Brazil Chart C130: China
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Chart C131: India Chart C132: Russia Chart C133: Korea
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88 90 92 94 96 98 00 02 04 06 08 10 12
12M trail Trend I/B/E/S fc ast
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Chart C134: Taiwan Chart C135: South Africa Chart C136: Mexico
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88 90 92 94 96 98 00 02 04 06 08 10 12
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88 90 92 94 96 98 00 02 04 06 08 10 12
12M trail T rend I/B/E/S fcast
Source: IBES, Thomson Reuters Datastream Source: IBES, Thomson Reuters Datastream Source: IBES, Thomson Reuters Datastream
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Emerging Markets Strategist Cross-Asset Strategy 25 May 2011
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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
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Emerging Markets Strategist Cross-Asset Strategy 25 May 2011
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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.
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Emerging Markets Strategist Cross-Asset Strategy 25 May 2011
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EM Fixed Income Research
Americas Gordian Kemen Chief Strategist, Latin America +1 212 525 2593 [email protected]
Alejandro Mártinez-Cruz +52 55 5721 2380 [email protected]
Hernan M Yellati +1 212 525 3084 [email protected]
Asia André de Silva, CFA Head of Rates Research, Asia-Pacific +852 2822 2217 [email protected]
Ki Yong Seong +852 2822 4277 [email protected]
Rajen Gokani +44 20 7991 6850 [email protected]
EMEA Di Luo +44 20 7991 6753 [email protected]
EM Currency Strategy
Asia Daniel Hui +852 2822 4340 [email protected]
Perry Kojodjojo +852 2996 6568 [email protected]
Americas Clyde Wardle +1 212 525 3345 [email protected]
Marjorie Hernandez +1 212 525 4109 [email protected]
Equity Strategy
Global Garry Evans +852 2996 6916 [email protected]
John Lomax +44 20 7992 3712 [email protected]
Wietse Nijenhuis +44 20 7992 3680 [email protected]
Economics
Latin America Javier Finkman Chief Economist, South America ex-Brazil +54 11 4344 8144 [email protected]
Andre Loes Chief Economist, Brazil +55 11 3371 8184 [email protected]
Sergio Martin Chief Economist, Mexico +52 55 5721 2164 [email protected]
Ramiro D Blazquez +54 11 4348 5759 [email protected]
Lorena Dominguez +52 55 5721 2172 [email protected]
Constantin Jancso +55 11 3371-8183 [email protected]
Jorge Morgenstern +54 11 4130 9229 [email protected]
Marcos Fernandes +55 11 6847 9787 [email protected]
Emerging Europe, Middle East and Africa Murat Ulgen Chief Economist, Central & Eastern Europe, and sub-Saharan Africa +90 212 376 4619 [email protected]
Simon Williams Chief Economist, Middle East and North Africa +971 4 507 7614 [email protected]
Liz Martins +971 4 423 6928 [email protected]
Alexander Morozov +7 495 783 8855 [email protected]
Asia Pacific Qu Hongbin Managing Director, Co-head Asian Economics Research and Chief Economist Greater China +852 2822 2025 [email protected]
Frederic Neumann Managing Director, Co-head Asian Economics Research +852 2822 4556 [email protected]
Leif Eskesen Chief Economist, India & ASEAN +65 6239 0840 [email protected]
Paul Bloxham Chief Economist, Australia and New Zealand +61 2925 52635 [email protected]
Donna Kwok +852 2996 6621 [email protected]
Sherman Chan +852 2996 6975 [email protected]
Wellian Wiranto +65 6230 2879 [email protected]
GEMs Research Team Pablo Goldberg Head of Global Emerging Markets Research +1 212 525 8729 [email protected]
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