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This document has been prepared by HSBC Global Asset Management Limited or HSBC Global Asset Management (Canada) Limited
and is being provided to you by HSBC Investment Funds (Canada) Inc. (HIFC). Please speak with your HIFC Mutual Fund Advisor to
discuss any questions you may have about your specific investment portfolios, goals and circumstances.
Emerging issues
IQ Investment Quarterly October 2015
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2
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Contents
Executive summary
Treasury supply and demand dynamics: Implications of the shifts ahead
Asia ex-Japan’s external fundamentals are in better shape than in the 1990s
Emerging market Asia will benefit overall from the current long-term commodity cycle
Macroeconomic charts
Financial market charts
Market data
Macro and Investment Strategy team
Important information
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Executive Summary
Overview
While the outlook for global growth has brightened in
the developed world, a shadow has been cast over
the outlook for the emerging world. In terms of
valuations, emerging markets are generally a lot
cheaper, and although many economies have
problems, we do not think these are on the same
scale as during the Asian financial crisis or the period
of emerging market hyperinflation in the 1980s, for
example. However, there are risks and investors will
likely need to be patient for value to be realized. In
particular, it may take time for investors to regain
confidence, with more aggressive policy action
potentially needed in the meantime. What’s more, not
all emerging markets are created equal or will be as
successful in stabilizing their situations, suggesting
careful discrimination by investors is critical. Overall,
this argues for a careful and selective approach, as
well as emphasizing the need now more than ever
for investors to diversify their investments by both
region and asset class.
The outlook for China – the largest emerging market
economy by far, with 15% of global domestic product
(GDP) at market exchange rates in 2015 (compared
to 3% for Brazil, 2.7% for India and 2% for Russia) –
is critical. We think China has plenty of policy options
still available to stabilize its economy, and although
growth is slowing, it is not as weak as some recent
financial press headlines suggest. Property prices
and credit growth are recovering and service sector
growth is accelerating; however, heavy industry and
fixed asset investment, especially related to the
property sector, remains weak.
Nevertheless, investor uncertainty over the outlook
for global, and in particular, emerging market growth
has led to poor performance in risk assets in recent
months. The MSCI All Country World Index is down
over 10% year to date (-12% so far in Q3) in US
dollar terms, after having been up year to date at the
end of Q2. Both developed and emerging markets
have suffered, but it is emerging market assets that
have borne the brunt of the sell-off, with the MSCI
Emerging Market Index down almost 19% year to
date in US dollar terms and 10% in local currency
terms. Credit spreads have also widened for US,
European and emerging market high yield and
investment grade debt in recent months. The
decision by the US Federal Reserve (Fed) not to
raise rates in September temporarily halted the
dollar’s rise but did little to boost risk appetite as it did
little to remove concern about the outlook for
emerging market growth (all figures are as at
September 29, 2015).
Core government bond yields have stabilized after
Q2’s “bund tantrum,” but, interestingly, have not
fallen much despite the increase in volatility in risk
assets that would normally have been expected to
support so-called “safe-haven” assets.
Overall, we think some of the fears about the outlook
for global growth are overdone, and, in particular,
comparisons to the Asian financial crisis of 1998 are
wide off the mark. In this quarterly, we examine three
related issues in detail: the outlook for US Treasury
markets and their supply and demand dynamics; a
comparison of the current macroeconomic state of
Asia ex-Japan to its situation in the run-up to the
Asian financial crisis in the late 1990s; and the
medium- to long-term outlook for commodities and
the implications for regions including Asia.
US Treasury supply and demand
dynamics
Since the Global Financial Crisis, the United States
Treasury (UST) market has significantly benefited
from strong structural demand globally. However, we
anticipate this support declining going forward, and,
importantly, at the same time we should see US
policy rates rise for the first time in almost a decade.
The Fed is unlikely to halt the reinvestment of US
Treasuries on its balance sheet before the end of
2016. But once its balance sheet begins to shrink,
the decline will likely persist into the medium term. At
the same time, China’s recent steps to increase two-
way volatility in the Chinese yuan market has led to a
rapid decline in foreign exchange reserves, although
they remain at very comfortable levels. This shift will
see China become a net UST seller between 2015-
2017, before beginning a more gentle reserve
accumulation path from 2018 onwards. Saudi Arabia
has seen the drop in oil prices move its budget from
a comfortable surplus to a net deficit. If half this
deficit is funded by the sale of USTs, this will not
result in a significant decrease in holdings, but will
remove a previously firm net accumulator.
Another negative factor on the demand side for US
Treasuries is the less favourable demographic trend
in the US that will mean the Federal Trust Funds
(e.g., US Social Security funds) will gradually lessen
their purchase levels going forward, although they
are not forecast to become net sellers for at least
another nine years. However, a positive demand
factor is the Basel III Accord, which is likely to see
increased demand from US commercial banks for
the remainder of the decade. However, this alone will
not be able to halt the marginal upward pressure
rates are likely to experience from an overall net
reduction in demand.
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4
Asia ex-Japan, compared to the 1990s
Asian financial crisis
Concerns about China’s economic slowdown, foreign
exchange policy uncertainty and the equity market
correction, as well as worries over the impact of a
Fed rate lift-off and further weakness in global
commodity prices, jolted Asian financial markets over
the last quarter. Recent economic data showed
continued weakness in the region and Asia faces
persistent headwinds in the form of sluggish global
trade, excess capacity, weak productivity of capital,
high leverage and demographic challenges.
In particular, China’s transition to slower-trend
growth will affect the rest of the region via trade and
financial linkages and could mean continued weaker
commodity prices and disinflationary pressures.
However, amid policy buffers we do not forecast a
sharp slowdown in China. Moreover, comparing Asia
today versus during the Asian financial crisis,
external fundamentals are in much better shape.
Most Asian countries have a flexible foreign
exchange policy and Asia is now collectively better
prepared, with improved financial backstops.
Although Fed policy tightening will present a
challenging transition for Asia, we believe the
adjustment since the “Taper Tantrum” has now
placed the region in a better position to withstand the
cycle of rising US interest rates and manage
external/market volatility. The US interest rate
trajectory, the Chinese and global growth outlooks
and Asian/emerging market currency volatility remain
key near-term risks to Asian financial markets, with
volatility also likely to remain high. However, we
remain constructive on Asian equities and credits in
the medium to long term, given the region’s overall
solid macro and corporate fundamentals, positive
reform agenda and long-term growth prospects, as
well as the potential structural support from a
growing local investor base.
The medium- to long-term outlook for
commodities and implications for
regions
Commodity prices follow a regular long-term trend
cycle, mainly due to the lag in the supply and
demand response to price signals. Over the past 100
years, this cycle has shown a regular pattern,
expanding for about 10 years and consolidating for
about 20 years. However, overall, relative to US
inflation, commodity prices have followed a
downward trend since the mid-19th century.
Net commodity-exporting countries with poor
productivity gains tend to catch up more slowly with
advanced economies on a GDP per capita basis
versus countries that are net commodity importers
and have experienced stronger productivity gains,
such as China and India.
In the current part of the long-term commodity cycle,
lower commodity prices provide an opportunity for
positive equity performance within Asia ex-Japan as
they help push profit margins higher. Bonds also
benefit through lower inflation, although higher credit
risk for issuers exposed to commodities reduces the
overall positive impact.
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Executive Summary
5
Treasury supply and demand dynamics Implications of the shifts ahead David Semmens, Senior Macro and Investment Strategist
Summary
Since the Global Financial Crisis, the United
States Treasury (UST) market has significantly
benefited from strong structural demand globally.
We anticipate this support declining going
forward, and, importantly, at the same time we
should see US rates rise for the first time in
almost a decade
Since 2007, the US Federal Reserve (Fed) has
purchased USD1.7 trillion of Treasuries,
outstripping even the USD1.5 trillion that we
estimate to be the increase in the level of China’s
Treasury holdings
The Fed is unlikely to halt the reinvestment of US
Treasuries on its balance sheet before the end of
2016. But once its balance sheet begins to shrink,
the decline will likely persist into the medium term
At the same time, China’s recent steps to
increase two-way volatility in the Chinese yuan
market has led to a rapid decline in foreign
exchange reserves, although they remain at very
comfortable levels. This shift is likely to see China
become a net UST seller between 2015-2017,
before beginning a more gentle reserve
accumulation path from 2018 onwards
Saudi Arabia has seen the drop in oil prices move
its budget from a comfortable surplus to a net
deficit. We anticipate that half this deficit will be
funded by the sale of USTs, which will not result
in a significant proportional decrease in holdings,
but will remove a previously firm net accumulator
The less favourable demographic outlook for the
US will mean that the Federal Trust Funds (FTFs)
(e.g., US Social Security funds) will gradually
lessen their purchase levels going forward,
although they are not forecast to become net
sellers for at least another nine years
The Basel III Accord is likely to see increased
demand from US commercial banks for the
remainder of the decade. However, this alone will
not be able to halt the marginal upward pressure
rates are likely to experience
What are the key structural drivers of
USTs?
Much has been made of a forthcoming rate hike from
the Fed, and whether it will happen this year.
Regardless of when this move occurs, the US
economic recovery indicates that rates will eventually
rise from emergency levels. The UST market is
closely linked to the Fed Funds Target Rate (FFTR),
with the short end of the curve driven by the FFTR
itself and the longer end influenced by the anticipated
terminal rate. In this article, we examine some of the
supply and demand dynamics likely to affect the UST
market over the next few years.
An aging population will drive persistent fiscal deficits
with UST issuance expected at USD7.8 trillion in the
coming decade (Figure 1), a similar amount to the
total outstanding public debt in 2005. With
investments of USD6.1 trillion, representing 46% of
publicly available USTs, foreign investors hold
significant amounts of US government debt. Although
foreign demand has been supportive for Treasuries,
this dynamic will alter in the coming years. China and
Saudi Arabia deserve particular attention, although
for different reasons.
Critical drivers will arise from within the US itself.
Firstly, we expect the Fed will halt the reinvestment
of USTs on its balance sheet at the end of 2016 at
the earliest. To begin with, the Fed will want the
market to focus on the forthcoming rate-hiking cycle.
Also, going forward, the various FTFs, whose assets
are earmarked for specific expenditures such as
Social Security Trust Funds (SSTF) and Medicare,
will face increasing demand on these assets as the
population ages. This process will lower – and
ultimately eliminate – their investment rates and see
a large purchaser of US government securities
become a seller. Importantly, growing demand will
come from commercial banks as regulatory
requirements increase the need for high-quality liquid
assets.
Figure 1: US federal debt outstanding (USD trn)
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Sources: Bloomberg, HSBC Global Asset Management, September 2015
6
Supply: Structural issues remain
unaddressed despite smaller deficits
Firstly, turning our attention to the supply of USTs,
we will discuss the outlook for total issuance in the
coming years. The U.S. Department of the Treasury
issues the national debt of the US government. The
primary purpose of this debt, at present, is to allow
the government to finance its deficit, which has been
running since 2002 and has seen the federal debt
held by the public rise from 31% of GDP in 2001 to
74% at the end of 2014. Critically, while the economy
has been improving, and therefore significantly
boosting government receipts, the rise in government
expenditure has been greater still. Interestingly, the
rise in government expenditure between 2015 and
2025 will, according to the Congressional Budget
Office (CBO), be driven primarily by the aging of the
US population, boosting mandatory spending such
as healthcare (+84% to USD1,900 billion) and Social
Security (+76% to USD1,550 billion). At the same
time, revenues are only expected to rise 54% to
USD5,000 billion, leading to a deficit of USD1,008
billion by 2025, up from USD426 billion in 2015 – an
increase of 137%. This means a further
approximately USD7,830 trillion worth of US
Treasuries will be issued in the coming decade,
which represents a similar amount to the total
outstanding public debt in 2008.
Demand: Facing testing times ahead
Focusing on demand in the Treasury market, we
shall address the position of five interesting and very
different participants in the market: namely the Fed,
China, Saudi Arabia, the FTFs and commercial
banks. It is important to note that the proportions
outstanding discussed in this article include those
held by the FTFs even though those securities held
by the FTFs are not available to the public and are
also excluded from net debt calculations by
institutions such as the International Monetary Fund
(IMF). However, the forthcoming decline in
purchases by the FTFs as shown in Figure 1 will see
a proportional decline in holdings, meaning an
increase in overall net excess supply, and therefore
should be included for consideration.
Federal Reserve: The reinvestment of Treasuries
will end, just not yet
The largest purchaser of US government debt since
2007 has been the Fed, which purchased USD1.7
trillion of Treasuries within its quantitative easing
program, outstripping even the USD1.5 trillion that
we estimate to be the true increase in the level of
China’s Treasury holdings in the same period. This
introduction of a new number – one buyer of
Treasuries brought yields to record low levels despite
the rapid rise in issuance previously discussed.
Therefore, the date at which the Fed decides to halt
reinvestment of its balance sheet holdings, which has
held USD2.5 trillion worth of UST since November
2014 when quantitative easing ended, will have a
significant impact on investors. For example,
assuming reinvestment were to end on December
31, 2015, this would see an additional USD216 billion
worth of Treasuries available for purchase during
2016, which represents 9% of the Fed’s UST
holdings or 1.1% of all USTs, including those held by
the FTFs (Figure 2), followed by 1.0% in 2017 and
1.8% in 2018. If reinvestment were to end at the end
of 2017, an estimated 1.8% of all UST holdings
would first impact the market in 2018. The continued
extension of reinvestment by the Fed could see
these holdings mature and require rolling over. We
expect the Fed will wish to maintain market focus
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Treasury supply and demand dynamics
Figure 2: Impact on marginal UST demand given various
end points of Fed balance sheet reinvestment
End of Fed reinvestment YE2015 YE2016 YE2017
Year Ending
Delta in
demand (USD
bn)
Delta in total
outstanding
USTs
Delta in
demand (USD
bn)
Delta in total
outstanding
USTs
Delta in
demand (USD
bn)
Delta in total
outstanding
USTs
2005 26 0.3% 26 0.3% 26 0.3%
2006 35 0.4% 35 0.4% 35 0.4%
2007 -24 -0.3% -24 -0.3% -24 -0.3%
2008 -279 -2.6% -279 -2.6% -279 -2.6%
2009 301 2.5% 301 2.5% 301 2.5%
2010 234 1.7% 234 1.7% 234 1.7%
2011 661 4.4% 661 4.4% 661 4.4%
2012 -15 -0.1% -15 -0.1% -15 -0.1%
2013 548 3.2% 548 3.2% 548 3.2%
2014 256 1.4% 256 1.4% 256 1.4%
2015 0 0.0% 0 0.0% 0 0.0%
2016 -216 -1.1% 0 0.0% 0 0.0%
2017 -194 -1.0% -194 -1.0% 0 0.0%
2018 -372 -1.8% -372 -1.8% -372 -1.8%
2019 -329 -1.5% -329 -1.5% -329 -1.5%
2020 -220 -1.0% -220 -1.0% -220 -1.0%
Sources: US Federal Reserve, Bloomberg, HSBC Global Asset Management, September 2015 Actual results may differ materially from projected results.
7
Treasury supply and demand dynamics
on forthcoming monetary policy changes in the Fed
policy rate rather than any balance sheet mechanics,
and therefore we assume reinvestment will continue
through to the end of 2016 at the earliest.
This could also allow the Fed to reduce market
uncertainty. If there is any risk to this view, it is that of
further reinvestment potentially to the end of 2017.
Either way, demand from the Fed will be neutral, not
offering the significant support seen in five of the
prior six years. From 2017 onwards, it is expected to
become a net subtracter of demand, peaking at
-1.8% of outstanding assets in 2018.
China: Declining foreign exchange
reserves will see a former major buyer
turn into a seller While we do not have an exact breakdown of the
maturities of USTs held by the various central banks
and within foreign countries, the most recent annual
US Treasury International Capital (TIC) report shows
that central banks typically hold treasuries with a
slightly shorter weighted average maturity of 3.6
years, compared to the maturity of foreign holdings
as a whole, which stands at 4.0 years. Importantly,
the average maturity of foreign holdings is almost
two years shorter than that of USTs as a universe
(Figure 3).
There are some doubts within the Treasury market
as to the real size of China’s UST holdings, officially
reported at USD1.2 trillion (or around 20% of total
foreign holdings). However, Bloomberg’s estimate of
China’s foreign exchange holdings is currently at
USD3.6 trillion. Given that we expect the reported
proportion of US dollars within China’s foreign
exchange reserves will be close to the reported
global average of around 65% as stated by the IMF,
this would indicate that China’s UST holdings could
be USD1.1 trillion higher than the TIC data shows.
While China’s reserve accumulation has been well
documented, it is anticipated that, going forward,
China will ultimately need to lessen the pace of
reserve accumulation and therefore purchase fewer
USTs, to allow greater two-way movement in the
exchange rate, with the ultimate aim of facilitating the
renminbi’s inclusion in the Special Drawing Rights.
We therefore anticipate that the recent decline in
China’s reserves will persist for the coming two years
as the government emphasizes the quality rather
than the quantity of growth, and as financial and
foreign exchange market liberalization continues. We
do not believe that China will make a snap change in
its foreign exchange policy; we rather assume a
gradual adaptation, with the eventual goal of a fully
convertible floating renminbi in the distant future. We
anticipate an initial two-year period during which
exchange reserves are allowed to decline by 10% for
the remainder of 2015 and through 2016 and then
decline 6.5% through 2017 to help lessen yuan
volatility before gradual reserve accumulation begins
once more. We expect this new phase of
accumulation to be conducted at a more modest rate
of 5% per annum, to maintain a strong import
coverage ratio, but without being as excessive – and
ultimately distortive for the Chinese and global
economy – as the previous accumulation period. The
biggest jolt will likely be felt in 2015 and 2016 (Figure
4) as markets adjust to the notion of China selling
rather than buying USTs in the short term.
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Figure 4: Marginal demand based on forecasts of
China’s foreign exchange reserves
Sources: Bloomberg, HSBC Global Asset Management, as of September 2015. Actual results may differ materially from projected results.
Figure 3: Key UST holders maturity profile
Sources: TIC report, US Department of the Treasury, Bloomberg, HSBC Global Asset Management, as of September 2015
Maturity
(years)
Foreign
holdings of
US debt
Foreign
official
holdings of
US debt
Federal
Reserve
balance
sheet
UST
issued
<1 17% 17% 4% 20%
1-2 19% 21% 8% 14%
2-3 17% 19% 12% 11%
3-4 10% 10% 14% 9%
4-5 8% 8% 11% 8%
5-6 7% 7% 8% 7%
6-7 7% 6% 7% 5%
7-8 3% 3% 5% 4%
8-9 3% 3% 2% 3%
9-10 4% 3% 1% 2%
10-15 2% 1% 4% 4%
15-20 0% 0% 0% 2%
20-25 1% 0% 9% 4%
25-30 3% 2% 12% 7%
Average
Maturity (yrs) 4.0 3.6 8.9 5.9
Marginal
change year-
end
China UST holdings
(USD bn)
China demand as % of
outstanding USTs
2005 136 1.7%
2006 161 1.9%
2007 300 3.3%
2008 272 2.6%
2009 295 2.4%
2010 291 2.1%
2011 217 1.4%
2012 85 0.5%
2013 331 1.9%
2014 14 0.1%
2015 -243 -1.3%
2016 -217 -1.1%
2017 -129 -0.7%
2018 97 0.5%
2019 102 0.5%
2020 107 0.5%
8
Saudi Arabia: Fiscal deficits from lower
oil prices will likely see UST holdings dip
The recent decline in oil prices has seen a sharp
drop in the rate of foreign exchange reserve
accumulation in the Middle East, particularly in Saudi
Arabia. Saudi Arabia’s reserves peaked in August
2014 at USD746 billion before tumbling to USD672
billion 10 months later, driven by the 55% decline in
oil prices to around USD40 per barrel during the
same period. Low oil prices present a significant
quandary, given that the IMF estimates that Saudi
Arabia’s fiscal breakeven level has risen to USD103
per barrel, up from USD37.6 in 2008, due to the rise
in government expenditure as a proportion of GDP
from 29% to 50% over the same period. Using the
IMF’s forecasts for expected government net
borrowing, Saudi Arabia can be expected to run a
government deficit of USD92 billion in 2015, followed
by USD57 billion the following year. While Saudi
Arabia is currently a net lender, these deficits are
likely to be financed in part by the issuance of
government debt, but also, more importantly, by
Saudi Arabia switching from being a net buyer of
USTs to being a net seller. We assume that half of
this deficit will be financed by the net selling of USTs,
although our alternative scenario allows for the
complete financing of this deficit with USTs, as
shown in Figure 5.
Importantly, while the US TIC report does not break
out the level of holdings specific to Saudi Arabia,
similarly to China, we assume that Saudi Arabia
holds around two-thirds of its foreign exchange
reserves in US dollars. It also has one of the largest
five foreign exchange reserve levels in the world.
Therefore, while the budget deficit will not cause a
significant drag on UST demand, the impact will be
on the change in net demand, which turned negative
in 2014 compared to prior average net demand of
1.0%. This indicates a further drag for the underlying
demand in the Treasury market.
Federal Trust Funds: Shifting from buyer
to seller will increase the free float
In the US, the structural path ahead is a fairly gradual
economic path driven by demographics. Between
2015 and 2025, the population in the 20-64 age
bracket – typically working but not eligible for benefits
– will rise by 6.3 million out of a total population
increase of 26.0 million, meaning their proportion in
the overall population will drop from 60% to 57% over
the period. Conversely, the proportion of the
population aged 65 and over will rise from 15% in
2015 to 19% in 2025 – an increase of 38%,
representing an additional 18.1 million people.
The largest holder of federal debt in the US is
essentially the US government itself. The FTFs are
earmarked for specific expenditure such as SSTF
and Medicare. The next decade will see a critical
change with the increasing requirement of mandatory
spending forcing the FTF to become an increasingly
marginal buyer USTs before finally turning into a
seller, although the exact timing of this remains
under debate.
For instance, purchases of total new issuance by the
FTF are forecast to drop from 45% in 2005 to 11% in
2020. The CBO forecasts that the FTF will actually
sell Treasuries in 2024, although the SSTF’s own
trustees forecast this occurring in the mid-2030s.
While they do not differ as much for the coming five
years, we will use the more cautious CBO forecasts.
Based on these, over the next five years we would
expect the FTF to annually purchase between half
and two-thirds as much as the annual USD195 billion
seen over the last decade, with the structural shift
from buyer to seller occurring in 2024. The coming
five years will see marginal demand of between 0.6
and 1.0 percentage points coming from the FTF, but
this is a drastic reduction from the 5% or greater net
demand that was standard prior to 2005, and the 3%
net demand of the last decade. This will have a
dramatic impact on overall net demand, as well as on
the free-float of treasuries available for purchase.
As previously outlined, without legislative change
surrounding entitlement spending, which appears
unlikely given the politically unpopular nature of any
alterations, the US will see mandatory spending
consistently rise going forward as detailed previously.
This will ultimately drive UST supply higher. A key
risk would be a slowdown in the economic recovery
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Treasury supply and demand dynamics
Figure 5: Scenarios assuming Saudi Arabia’s
anticipated budget deficits are funded by selling USTs
100% 50%
Year end
Delta in
demand
(USD bn)
Delta in
total
outstanding
USTs
Delta in
demand
(USD bn)
Delta in total
outstanding
USTs
2005 70 0.9% 70 0.9%
2006 92 1.1% 92 1.1%
2007 63 0.7% 63 0.7%
2008 164 1.6% 164 1.6%
2009 -18 -0.1% -18 -0.1%
2010 27 0.2% 27 0.2%
2011 80 0.5% 80 0.5%
2012 108 0.7% 108 0.7%
2013 65 0.4% 65 0.4%
2014 -3 0.0% -3 0.0%
2015 -92 -0.5% -46 -0.3%
2016 -57 -0.3% -29 -0.1%
2017 -41 -0.2% -21 -0.1%
2018 -42 -0.2% -21 -0.1%
2019 -39 -0.2% -20 -0.1%
2020 -40 -0.2% -20 -0.1%
Sources: IMF, Bloomberg, HSBC Global Asset Management, as of September 2015 Actual results may differ materially from projected results.
9
Treasury supply and demand dynamics
that would see revenues fall and expenditures rise
even further, driving down UST purchases sooner
while additionally boosting their supply.
Regulatory demand: Loan growth will be
good for UST demand
The agreement in 2010 of the Basel III Accord led to
a dramatic increase in regulatory capital
requirements, albeit phased in between 2013-2019.
Figure 8 models the resulting need for US
commercial banks to increase their UST and similar
holdings, which currently stand at USD645 billion, in
line with the amount of asset growth that can be
FOR USE ONLY
Figure 6: Expected evolution of US demographics
Source: CBO, as of September 2015. Actual results may differ materially from projected results.
expected given a nominal growth rate of US GDP at
4.5% between the second half of 2015 and 2020.
Since US commercial banks’ asset growth has been
around 1.5 times that of nominal GDP, we assume a
growth rate of 7% in assets annually over the same
time period. Finally, since the financial crisis and the
announcement of the introduction of Basel III,
holdings of high-quality liquid assets have been at
around 4% of total assets, although we estimate this
will rise to 6% by the end of 2020, in line with greater
capital requirements. Although unlikely, even if the
ratio of assets held were to remain at 4%, this would
see an increase of around USD40-50 billion going
forward (i.e., 0.3% additional marginal demand).
What is more likely is that additional demand is tilted
to the upside, with the ratio of assets held doubling to
8% by 2020, which would generate additional
marginal demand of USD103 billion (0.8% of
outstanding USTs) in 2015, rising rapidly to USD260
billion (1.6% of outstanding USTs) in 2020 (Figure 8).
While the risks are tipped to the upside, our
assumption of a 6% UST/asset ratio (Figure 9) would
lead to an additional marginal demand of USD74
billion in 2016 (0.6% of outstanding Treasuries held
by the public), accelerating steadily to reach USD153
billion in 2020 (0.9% of outstanding Treasuries held
by the public).
Figure 7: Forecast change in UST demand from
Federal Trust Funds
Year-end
Federal Trust Fund demand
(USD bn)
FTF demand
as % of
outstanding
USTs
2005 254 3.2%
2006 309 3.6%
2007 293 3.2%
2008 267 2.5%
2009 148 1.2%
2010 179 1.3%
2011 126 0.8%
2012 134 0.8%
2013 -33 -0.2%
2014 278 1.6%
2015 1 0.0%
2016 219 1.1%
2017 169 0.9%
2018 189 0.9%
2019 141 0.7%
2020 113 0.5%
Sources: CBO, Bloomberg, HSBC Global Asset Management, as of September 2015. Actual results may differ materially from projected results.
Figure 8: Expected annual marginal demand given
various terminal UST/asset ratio assumptions
Year End 4% 5% 6% 7% 8%
2015 45 59 74 88 103
2016 39 71 103 136 168
2017 41 77 114 151 188
2018 43 84 126 168 210
2019 45 92 139 186 233
2020 47 100 153 207 260
Figure 9: Expected annual marginal demand
assuming a 6% holding of high-quality liquid assets
Sources: Bloomberg, HSBC Global Asset Management, as of September 2015. Actual results may differ materially from projected results.
Marginal change in…
Commercial bank
marginal demand (USD
bn)
Commercial bank
marginal demand
as % of
outstanding USTs
2011 -87 -0.6%
2012 83 0.5%
2013 -46 -0.3%
2014 160 0.9%
2015 74 0.4%
2016 103 0.5%
2017 114 0.6%
2018 126 0.6%
2019 139 0.7%
2020 153 0.7%
Sources: Bloomberg, HSBC Global Asset Management, as of September 2015. Actual results may differ materially from projected results.
10
Treasury supply and demand dynamics
Conclusion
With net excess marginal Treasury supply jumping in
2015, we expect supply will step higher in 2016,
before drifting lower in the later part of the decade
(Figures 10 & 11). This is important, as the change in
marginal supply will come at a time when the Federal
Open Market Committee is likely to be embarking on
its first rate-hiking cycle in decade. However, the net
excess supply that we foresee in the coming years is
significantly lower than that seen between 2008 and
2010. Interestingly, 2015 was a year of exceptionally
low issuance, since the debt ceiling limit was reached
in March 2015 and had still not been raised as of
September 2015; it is estimated by the Treasury that
emergency measures can continue until the end of
October 2015. However, this situation is not
sustainable and we anticipate that normal issuance
will occur going forward.
The gradual downward drift in FTF demand from
1.1% of total outstanding UST issuance in 2016 to
0.5% in 2020 – compared to the 3% average seen
over the last decade – will be the key structural shift.
FOR USE ONLY
In the near to medium term, we anticipate the market
will also be impacted by the decline in Chinese
demand, which will cause a sharp swing from a peak
of 3.3% of outstanding issuance in 2007 to -1.2% in
2015/2016 and -0.7% in 2017, before resuming
additions of 0.5% from 2018 onwards. Similarly,
while we anticipate that the decline in Saudi Arabia’s
holdings will be minimal compared to the amount
outstanding, it is the shift from being a steady net
purchaser to a marginal net seller that is noteworthy.
However, the decline in the Fed’s holdings will be the
main evident drag, peaking in 2018 at -1.8% of
outstanding issuance. The marginal declines, at -
0.1%, also reflect the Fed’s switch from buyer to
seller, dropping from a prior average of 1%.
Overall, while regulatory changes from US banks
could see this source of marginal demand double to
more than US153 billion from USD74 billion, this
alone will be unable to halt the increase in net excess
marginal supply, which we expect should add to
upward pressure on US Treasury rates in the coming
years.
Figure 10: Combined anticipated marginal excessive UST supply (USD bn)
Figures in USD bn Delta in supply Delta in demand
Year-end Total federal debt issued
(A)
Debt owned
by the public
Fed balance
sheet (B)
China UST
holdings (C )
Saudi Arabia
UST holdings
(D)
Federal Trust
Funds (E ) US banks (F)
Excess marginal
supply
(A-(B+C+D+E+F)
2005 560 306 26 136 70 254 NA 74
2006 495 186 35 161 92 309 NA -101
2007 529 235 -24 300 63 293 NA -103
2008 1,500 1,233 -279 272 164 267 NA 1076
2009 1,590 1,442 301 295 -18 148 NA 864
2010 1,758 1,579 234 291 27 179 NA 1027
2011 1,184 1,058 661 217 80 126 -87 186
2012 1,268 1,134 -15 85 108 134 83 873
2013 740 773 548 331 65 -33 -46 -125
2014 703 425 256 14 -3 278 160 -2
2015 397 396 0 -243 -46 1 74 612
2016 865 646 0 -217 -29 219 103 788
2017 686 517 -194 -129 -21 169 114 747
2018 714 525 -372 97 -21 189 126 695
2019 805 664 -329 102 -20 141 139 772
2020 863 749 -220 107 -20 113 153 728
Sources: Bloomberg, IMF, CBO, HSBC Global Asset Management, as of September 2015. Actual results may differ materially from projected results.
11
Treasury supply and demand dynamics
FOR USE ONLY
Figure 10: Combined anticipated marginal excessive UST supply
(as a proportion of total outstanding UST issuance)
Sources: Bloomberg, IMF, CBO, HSBC Global Asset Management, as of September 2015.
Actual results may differ materially from projected results.
% outstanding Delta in supply Delta in demand
Year-end
Total federal
debt Issued
(A)
Debt Owned by
the Public Fed (B) China (C)
Saudi Arabia
(D)
Federal Trust
Funds (E)
US Banks
(F)
Total
Amount of
Treasuries
Outstanding
(USD bn)
Excess Marginal
Supply
(A-(B+C+D+E+F)
2005 7.0% 3.8% 0.3% 1.7% 0.9% 3.2% 8,028 0.9%
2006 5.8% 2.2% 0.4% 1.9% 1.1% 3.6% 8,523 -1.2%
2007 5.8% 2.6% -0.3% 3.3% 0.7% 3.2% 9,052 -1.1%
2008 14.2% 11.7% -2.6% 2.6% 1.6% 2.5% 10,552 10.2%
2009 13.1% 11.9% 2.5% 2.4% -0.1% 1.2% 12,142 7.1%
2010 12.6% 11.4% 1.7% 2.1% 0.2% 1.3% 13,900 7.4%
2011 7.9% 7.0% 4.4% 1.4% 0.5% 0.8% -0.6% 15,084 1.2%
2012 7.8% 6.9% -0.1% 0.5% 0.7% 0.8% 0.5% 16,352 5.3%
2013 4.3% 4.5% 3.2% 1.9% 0.4% -0.2% -0.3% 17,092 -0.7%
2014 3.9% 2.4% 1.4% 0.1% 0.0% 1.6% 0.9% 17,794 0.0%
2015 2.2% 2.2% 0.0% -1.3% -0.3% 0.0% 0.4% 18,191 3.4%
2016 4.5% 3.4% 0.0% -1.1% -0.1% 1.1% 0.5% 19,056 4.1%
2017 3.5% 2.6% -1.0% -0.7% -0.1% 0.9% 0.6% 19,742 3.8%
2018 3.5% 2.6% -1.8% 0.5% -0.1% 0.9% 0.6% 20,456 3.4%
2019 3.8% 3.1% -1.5% 0.5% -0.1% 0.7% 0.7% 21,261 3.6%
2020 3.9% 3.4% -1.0% 0.5% -0.1% 0.5% 0.7% 22,124 3.3%
12
Asia ex-Japan’s external fundamentals are in better shape than in the 1990s Renee Chen, Senior Macro and Investment Strategist
Summary
Concerns about China’s economic slowdown,
foreign exchange policy uncertainty and a
correction in A-shares, as well as worries over the
impact of a US Federal Reserve (Fed) lift-off and
further weakness in global commodity prices,
jolted Asian financial markets in July and August
Recent economic data has shown continued
weakness in the region, with uncertainties
remaining over the growth outlook. Asia faces
headwinds such as sluggish global trade, excess
capacity, weak productivity of capital, high
leverage and demographic challenges
Fed policy tightening will present a challenging
transition for Asia. However, the adjustment since
the “Taper Tantrum” has now placed the region in
a better position to withstand the cycle of rising
US interest rates and manage external/market
volatility
China’s transition to slower-trend growth will affect
the rest of the region via trade and financial
linkages and could mean weaker commodity
prices and disinflationary pressures. However,
amid policy buffers we do not forecast a sharp
slowdown in China
Comparing Asia today to during the Asian
financial crisis shows that external fundamentals
are in much better shape: most Asian countries
have a flexible foreign exchange policy, Asia is
now collectively better prepared (with improved
financial backstops) and many countries still have
the policy space and flexibility to implement
countercyclical measures
The trajectory of US interest rates, the outlook for
Chinese and global growth and Asian/emerging
market currency volatility remain key near-term
risks to Asian financial markets. Market volatility is
also likely to remain high in the near term
However, we remain constructive on Asian
equities and credit in the medium to long term,
given the region’s overall solid macro/corporate
fundamentals, positive reform and long-term
growth prospects, as well as the potential
structural support from a growing local investor
base
Heightened financial market volatility
Concerns about China’s economic slowdown, foreign
exchange policy uncertainty and a correction in A-
shares, as well as worries over the impact of the
coming Fed interest rate rise and further weakness in
global commodity prices, jolted Asian financial
markets in July and August in a global risk-off
environment. In particular, China’s surprise move to
a more market-based yuan-fixing mechanism on
August 11 and a one-off yuan devaluation had ripple
effects across the region and injected significant
volatility into Asian financial markets, affecting
equities, currencies and bonds. The MSCI AC Asia
ex Japan Index posted a negative total return in Q3.
Asian markets did receive some respite from the
Fed’s decision to hold off from raising interest rates
at its September 16-17 meeting, although the Fed’s
stance reflecting concerns over global growth also hit
risk appetite. Chinese policymakers continue to
remain supportive. The People’s Bank of China
(PBoC) cut policy rates by 25bps and the reserve
requirement ratio by 50bps on August 25, in order to
help stabilize both growth and financial markets.
Emerging Asian currencies weakened across the
board against the US dollar, euro and yen and on a
trade-weighted basis in July and August, particularly
following the yuan devaluation. This signalled more
general risk aversion toward emerging market assets
and, in some cases, concerns about domestic policy
credibility (China and Indonesia), political stability
(Malaysia) and/or reform prospects (India).
Nevertheless, most currencies pared some of their
losses in September on the back of a retreat in the
US dollar heading into the Fed policy meeting and
the subsequent decision not to hike rates.
Asian local-currency sovereign bond markets were
likewise hit in August, particularly Singapore,
Indonesia and Malaysia. Lower commodity and oil
prices also hurt Indonesian and Malaysian rates,
while Malaysia faced increased political risk. On the
other hand, government bond yields in China and
Korea fell and in India held relatively stable. Bond
yields in most countries (excluding Indonesia)
retreated in September as the foreign exchange sell-
off and risk aversion (toward emerging markets)
eased.
In the US dollar credit space, Asian spreads widened
against a range-bound trading of US Treasuries (10-
year Treasury yields ended the month roughly flat) in
August. High-beta Indonesian credits were bottom
FOR USE ONLY
13
Asia ex-Japan’s external fundamentals are in better shape than in the 1990s performers. Sovereign credit default swaps jumped in
countries such as Indonesia, Malaysia and Thailand.
However, the impact was modest relative to other
asset classes. The Fed rate decision and modestly
dovish comments provided some lift to the credit
market. The JACI Composite Index had a negative
total return of -0.5% in Q3 but still posted a positive
1.6% return year to date (September 30).
Macro challenges ahead for Asia…
Recent economic data from the region overall has
shown continued weakness, particularly in foreign
trade and industrial activity. Weak manufacturing
PMIs reflect contracting trade flows, sluggish
domestic demand, inventory adjustments and low
capacity utilization rates (Figure 3).
Trade contraction and sluggish domestic
demand
Sluggish Asian trade reflects both cyclical weakness
in global demand and a structural downshift in the
trade intensity of global growth. Falling prices, largely
driven by lower commodity prices, and currency
movements also weighed on trade growth in US
dollar terms. The structural decline in the elasticity of
trade to GDP (or economic growth being less import-
intensive), notably in the US and China, suggests
Asia is unlikely to get the same cyclical boost from
the global/US growth recovery as in the past.
The rebalancing of China’s economy towards
consumption and the services sector means less
import demand for commodities and capital goods,
affecting countries such as Indonesia, Malaysia and
Taiwan. The decline in commodity prices has also
reduced demand from commodity-producing
emerging market countries for Asian exports.
Meanwhile, China is increasing its production
capacity domestically and moving up the value chain,
thus increasingly competing with the regional higher-
value-added producers, such as Taiwan and Korea,
in the global market. China is also exporting goods in
which it has excess capacity, such as steel, posing
challenges to countries producing these goods.
Stronger currencies on a real effective exchange rate
(REER) basis over the past few years have been a
headwind for many countries’ exports and a policy
concern for some central banks in the region.
Despite lower energy prices boosting real incomes,
domestic demand has been lacklustre in most
countries. Policymakers in the region have also
eased monetary policy, increased fiscal stimulus,
accelerated infrastructure investment and relaxed
macro-prudential measures (e.g., China, Korea,
Indonesia and Taiwan have relaxed property-sector
measures), but so far these have had little impact
and more measures could be announced.
Cyclical and structural downshifts in growth
Asia’s generally slower economic growth rates
following the 2008-2009 Global Financial Crisis
(GFC) reflect not only cyclical headwinds but also a
structural downshift in growth rates. This is
compounded by the large overhang of private sector
leverage as the region’s response to a sharp
slowdown in external demand during the GFC was a
sharp increase in debt-fuelled domestic investment
and production capacity (Figure 2).
This caused excessive investment and misallocation
of capital and credit in many countries, keeping
unprofitable projects and inefficient companies afloat,
creating excess capacity and resulting in PPI
deflation. The trend in the productivity of capital,
measured by the Incremental Capital Output Ratio
(ICOR), which measures the additional capital
required to increase one unit of output, has
deteriorated in many countries. Lower ICOR has
contributed to slowing total factor productivity growth
(Figure 3).
Furthermore, there is an unfavourable demographic
shift in northeast Asian economies, Singapore and
Thailand, in the form of aging populations and
declining fertility rates. The UN forecasts that the size
of the working-age population will shrink over the
next five years in China, Hong Kong, Korea, Taiwan
and Thailand. Whether Asia can continue growing
strongly will crucially depend on reforms to clear
structural bottlenecks and boost productivity growth.
FOR USE ONLY
Figure 1: Manufacturing PMIs indicated weakness in
industrial activity (excluding India)
Sources: Bloomberg, HSBC Global Asset Management, as of
September 7, 2015
14
Asia ex-Japan’s external fundamentals are in better shape than in the 1990s
… compounded by Fed policy tightening
and a slowdown in Chinese growth
Going forward, Asian economies and financial
markets also face the key twin headwinds of Fed
policy tightening and China’s growth slowdown.
However, while these headwinds could increase
uncertainty over the region’s growth outlook and
volatility in financial markets, we believe the risks are
manageable and unlikely to lead to a significant
slowdown in Asia’s economic growth.
Fed policy tightening
Fed policy tightening will present a challenging
hurdle for Asia and could affect the region via
financial linkages, such as risks of capital outflows,
higher costs of capital (reflecting higher risk
premiums), a tightening of financial conditions,
increased financial market volatility and a correction
of asset prices.
Consequently, there could be a spill-over impact on
the real economy via downward currency effects
alongside upward pressure on (real) interest rates
and tighter liquidity conditions. Also, significant
currency volatility could constrain the ability to ease
policy in the face of tighter financial market
conditions. Vulnerability to this trend will be more
significant for countries with current account deficits,
a high reliance on foreign capital or sizable foreign
debt, and/or high domestic leverage.
However, the current situation differs from the 2013
“Taper Tantrum.” Taper talk was a surprise but a rate
hike will not be. Asian central banks and financial
institutions have been proactive in keeping leverage
in check. Post-GFC, Asian policymakers introduced
pre-emptive macro-prudential measures to address
the build-up of financial imbalances from rapid credit
growth, high private sector leverage, asset price
inflation (property prices in particular) and volatile
capital flows. Efforts have also been directed towards
strengthening macroeconomic fundamentals, with a
greater focus on current account and fiscal balances.
The region's current account balance in aggregate
today is in a much better position than prior to the
2013 “Taper Tantrum.”
Furthermore, currency mismatch risk looks
manageable at the sovereign level. In fact, much of
Asian corporate US dollar debt is in sectors with
natural hedges, such as US dollar revenues and
overseas business, and in many countries the rise in
external debt has come with an increase in foreign
assets held by residents. High domestic savings and
liquid domestic capital markets are also helping to
finance the debt. Furthermore, against a backdrop of
divergent business cycles, shifts in foreign exchange
rates could be a constructive force that could
promote rebalancing over time, if the pace of
adjustment is moderate and gradual. In fact, currency
depreciation in some countries is a deliberate policy
choice and should on balance be supportive of Asian
growth via export competitiveness.
Additionally, due to the data-dependent nature of the
Fed’s monetary policy, we believe US rate increases
would occur alongside an improving US economy,
which would be positive for Asian and global growth.
Overall, we expect orderly Fed tightening to have
little disruptive impact on Asian economies or
financial markets, but there will likely be increased
volatility in the near term.
Chinese growth slowdown
While we expect fiscal and monetary policy support
to help stabilize the Chinese economy, to roughly
meet the official target of “about 7%” for this year,
downside risks to the growth outlook remain.
Moreover, short-term stimulus measures will not help
FOR USE ONLY
Figure 2: Rapid build-up in Asian private sector debt
Sources: BIS, CEIC, HSBC Global Asset Management, September 2015
Figure 3: Slower total factor productivity growth post-
GFC
Sources: Conference Board Total Economy Database, HSBC Global Asset Management, September 2015
15
Asia ex-Japan’s external fundamentals are in better shape than in the 1990s address structural headwinds. We think the
government needs to push forward with structural
reforms and accept lower growth in the short term to
secure longer-term, sustainable, balanced and stable
growth. However, financial market volatility complicates
policymaking and risks weakening reform momentum
in the near term. We expect Chinese policymakers to
lower their growth target in the upcoming 13th Five-
Year Plan of National Development (2016-2020) to
about 6.5%.
China’s growth slowdown could also impact the region
via cross-border banking linkages or via foreign direct
investment. Hong Kong, Korea and Taiwan are
relatively more exposed to China in this respect.
Meanwhile, uncertainty over China’s foreign exchange
policy and the potential spill-over effects could pose
challenges for other countries in the region in
managing their exchange rates. Asian markets are
sensitive to yuan moves through trade, tourism and
financial linkages. Countries that compete more directly
with China on global markets (e.g., Taiwan, Korea, the
Philippines and Thailand) or rely on exports for
Chinese domestic demand (ASEAN) would be the
most affected. Tourists from China also account for a
relatively large share of total arrivals in Hong Kong,
Korea, Taiwan and Thailand. Countries with relatively
weaker external positions or companies with significant
US dollar debt exposure would also be vulnerable from
a competitive depreciation of regional currencies.
China’s growth slowdown, foreign exchange policy
uncertainty and the structural change in its trade could
therefore adversely impact almost all countries across
the region, given that China is their largest or second-
largest export market. Within Asia, India and the
Philippines are relatively more insulated, especially
India given its small exposure to China’s final demand
(Figure 4).
On the yuan front, we believe capital outflow pressures
could gradually slow. The government has tightened its
scrutiny of cross-border capital flows, using tools such
as the new derivative rule to discourage speculative
and arbitrage flows on yuan depreciation. There are
some fundamental supports for the yuan (e.g., solid
external balances) and the PBoC will maintain
control in the near term. Sharp or substantial yuan
depreciation looks unlikely amid economic/political
concerns. In the medium term, we believe the foreign
exchange reform objective remains intact, given the
importance of a market-driven, flexible foreign
exchange policy to address economic imbalances,
help the economy better cope with external shocks
and maintain monetary policy autonomy as China
opens up its capital account.
Asia is robust on macro risk metrics;
long-term growth prospects are solid
Recent financial market turbulence, coupled with
generally disappointing macro data coming out of the
region, have raised concerns about the risk of
another Asian financial crisis in the making.
Moreover, there are some similarities between the
current macro trends in the region and the pre-1997-
1998 Asian financial crisis (AFC) environment. These
include: (1) a period of low (real) interest rates, aided
by easy monetary policy in the US; (2) misallocation
of resources and capital into unproductive areas; (3)
the rapid build-up of corporate and household debt;
(4) a stronger US dollar and (5) falling commodity
prices. Nevertheless, there are also major
differences between the two periods.
External fundamentals are in much better shape
Most countries in the region are now running current
account surpluses, have large foreign exchange
reserves and lower external debt-to-GDP ratios
(Figures 5, 6, 7). In the run-up to the AFC, many
countries undertook unsustainable short-term foreign
exchange borrowing to finance large current account
deficits. In contrast, a large part of the debt build-up
in this period has been in domestic rather than
external debt, and Asia is now less reliant on short-
term external funding.
FOR USE ONLY
Figure 4: Direct export exposure by destinations
(share of total exports)
Sources: CEIC, HSBC Global Asset Management, September 2015
Figure 5: Most countries now run current account
surpluses versus deficits in AFC
Sources: CEIC, HSBC Global Asset Management, September 2015
16
Asia ex-Japan’s external fundamentals are in better shape than in the 1990s
Most Asian countries now have flexible foreign
exchange policies
Asian foreign exchange regimes prior to the AFC
were pegged to the US dollar or heavily managed,
encouraging significant foreign exchange borrowing.
As the US dollar began to appreciate with the Fed
starting its tightening cycle in 1994, many Asian
currencies appreciated sharply on an effective
exchange-rate basis, just as current account deficits
widened, resulting in significantly overvalued
exchange rates in the run-up to the AFC. Massive
capital outflows and insufficient foreign exchange
reserves to defend the currencies eventually led to a
collapse of Asian currency pegs and a substantial
depreciation of many Asian currencies.
With the notable exception of Hong Kong, foreign
exchange policies today are much more flexible,
even in the case of China since it ended the yuan’s
peg to the US dollar in 2005, gradually widened the
daily trading band and adjusted the daily fixing
FOR USE ONLY
Figure 6: External debt-to-GDP ratio is lower now than
in AFC in most countries
Sources: CEIC, HSBC Global Asset Management, September 2015
Figure 7: Foreign exchange reserve buffers versus
short-term external debt are more sufficient now than
during the AFC in most countries
Sources: CEIC, HSBC Global Asset Management, September 2015
mechanism. Although the REER has appreciated in
many currencies over the past few years, in most
countries we do not observe overvaluations,
especially against current-account positions. Based
on our long-term expected returns model, some
currencies look attractively valued or even
undervalued, particularly following the recent
depreciation.
Asia is now collectively better prepared with
improved financial backstops
Asian policymakers are much better prepared and
coordinated to pre-emptively address risks to
regional economic and financial stability, especially in
the areas of cross-border surveillance and crisis
management. In addition to the traditional
International Monetary Fund credit lines, Asia has
central bank bilateral swap lines and regional
financial safety nets (e.g. the USD240 billion Chiang
Mai Initiative for Multilateralization) to provide short-
term liquidity at times of liquidity crisis.
ASEAN+3 (China, Japan and Korea) policymakers
have worked to develop stronger bond markets
regionally through the Asia Bond Markets Initiative.
Moreover, Asia’s financial institutions and central
banks are better equipped and capitalized to deal
with the challenges ahead. Sources of financing are
also more diversified following efforts to develop and
deepen the domestic capital markets, with many
having established liquid bond markets.
Many countries still have the policy space and
flexibility to implement countercyclical measures
The 1997-1998 AFC was made worse by policy
interest rate hikes to defend overvalued currency
pegs and to keep high inflation in check. The sharp
rise in (real) interest rates led to a rise in non-
performing loans, a banking system crisis with a
significant tightening of financial conditions and,
eventually, an economic recession.
Today, despite the turbulence in financial markets,
there are no signs of unusual stress in short-term
funding markets or of a credit crunch in any major
Asian economy. We expect central banks in the
region to maintain an accommodative monetary
policy. In some cases they could even ease further
(e.g., China, India and Thailand).
CPI inflation is still running below central bank
targets in most countries and this is likely to continue,
while PPI deflation is observed across the region
(excluding Indonesia).
Asian governments today are far less dependent on
foreign exchange borrowing and the development of
a liquid domestic bond market provides another
source of financing. Therefore, there is space for
most countries to expand fiscal policy, given the
highly manageable levels of public debt, although the
fiscal space varies across the region.
17
Fed policy tightening is likely to be more gradual
this time around
The Fed surprised the markets by beginning to
tighten monetary policy aggressively in 1994. This
time around, a Fed lift-off should not be too much of
a surprise and the pace of increases in (real) interest
rates is likely to be more gradual than in the 1990s
with the magnitude of rate hikes smaller.
Investment implications
Equities
The US interest rate trajectory, Chinese and global
economic outlook, global equity market and currency
volatility remain key near-term risks to Asian equities,
while weak commodity prices could affect related
sectors.
However, the backdrop of a gradual Fed tightening
cycle should be supportive of equities, as long as US
growth also improves. Also, overall supportive macro
policies and the lagged growth impulse from lower
energy costs should help underpin a moderate
recovery in domestic demand and earnings
prospects. We believe policymakers in most
countries in the region remain committed to structural
reforms, which could prompt re-rating potential, while
China’s accelerated capital market liberalization and
further financial integration in the region could be
medium-term market catalysts.
Valuations metrics are also attractive. The MSCI
Asia ex-Japan Index has fallen by more than 20%
from the recent highs in late April (as of September
18) versus a 25% and 21% correction in the 1994
and 2004 tightening cycle, respectively. For this
index, the current trailing price-to-book ratio (P/B) of
1.3x is very close to the 2008-2009 lows (GFC) and
troughs seen in the SARS episode and 2001 global
recession. The P/B is especially low when set
against the potential for return on equity pickup in the
medium term on reforms. We think current valuations
have priced in a lot of fear factors and Asia ex-Japan
equities offer attractive risk-adjusted rewards based
on our long-term expected returns model.
Local currency bonds
Higher US interest rates and currency risks will likely
remain headwinds to Asian local-currency bonds in
the near term, while overall risk sentiment toward
emerging markets is another key driver. The Fed’s
delayed lift-off and slightly dovish tone reflects
concerns about global growth, which could weigh on
risk sentiment and be negative for Asian currencies.
Investors are also likely to continue watching
developments in China. The near-term inflation
outlook remains benign, with weakness in commodity
prices, while uncertainty over the growth outlook
Asia ex-Japan’s external fundamentals are in better shape than in the 1990s
FOR USE ONLY
remains high for a large part of the region, leaving
room for some countries to ease monetary policy
further. Higher US/developed market bond yields
could affect the countries that depend more on
external funding or where foreign holdings of local
debt are relatively high (e.g., Indonesia and
Malaysia). Markets with still accommodative
monetary policy or room for further easing, less
sensitivity to currency weakness, positive reform
prospects and more attractive valuations could do
relatively well. Domestic political risks (e.g., in
Malaysia) could also affect local-currency bonds
while supply is another technical factor to consider.
US dollar credit
The key driver/risk of Asian US dollar credit will be
fund flows amid concerns over Fed policy tightening
and China. A delayed Fed rate hike and slightly
dovish comments could be short-term positive for
Asian credit. However, beyond some short-term
adjustments, uncertainty over the Fed policy outlook
remains. High yield credit tends to be more sensitive
to shifts in market sentiment, while investment grade
credit remains susceptible to US Treasury volatility.
Fed policy tightening could put pressure on credit
markets. The risk of significant spread-widening
could result from increased redemption pressure
and/or negative credit events (e.g., rating
downgrades or defaults). The credit fundamentals of
some companies could deteriorate due to currency
volatility (those that have large unhedged
USD/foreign exchange exposure or face currency
mismatch risks), weaker top-line growth and
continued commodity-price weakness.
However, generally we do not expect a significant
rise in default rates, particularly given the limited
bond refinancing requirements over the next 6-12
months. Chinese corporates now also have cheaper
onshore funding alternatives. Near-term support for
Asian corporate credit should also come from
relatively solid credit fundamentals (versus other
emerging markets), still good carry in the high yield
space, a combination of tepid global and domestic
growth and low inflation, accommodative monetary
policy in most countries, and largely supportive
demand-supply dynamics. We have also seen
increasing demand from onshore investors for US
dollar credits, especially those names that have
strong connections to the onshore market, in a bid to
diversify their currency risk.
We think the recent market volatility has led to some
market dislocation and that in some spaces a much
more bearish macro/fundamental scenario has been
priced in, although we need to be selective given the
near-term challenging macro environment and
currency risks. In the medium to long term, we
remain constructive on Asian credit.
18
Emerging market Asia may benefit overall from the current long-term commodity cycle Herve Lievore, Senior Macro and Investment Strategist
Summary:
Commodity prices follow a highly cyclical trend,
mainly due to the lag in the supply and demand
response to price signals. Over the past 100
years, this cycle has showed a regular pattern,
expanding for about 10 years and consolidating
for around 20 years. Relative to US inflation,
commodities have followed a downward trend
since the mid-19th century
Net commodity-exporting countries with poor
productivity gains tend to catch up more slowly
with advanced economies on a GDP per capita
basis compared to countries like China and India,
which are net commodity importers and have
experienced stronger productivity gains
Lower commodity prices provide an opportunity
for positive equity performance as they help push
profit margins higher. Bonds also benefit through
lower inflation, although higher credit risk for
issuers exposed to commodities reduces the
overall positive impact
Introduction
The recent sharp correction in commodity prices has
mainly had a negative impact on other asset classes,
as it has heightened concerns about growth in key
markets for commodities, especially China. However,
going forward, this sharp drop also represents an
opportunity as it should strengthen profit margins
across non-commodity sectors and maintain inflation
at low levels. In this regard, given their strong
productivity gains during the last commodity cycle,
China and India and, to a lesser degree, Asia ex-
Japan in general, seem to be best positioned to
benefit from the current phase of the commodity
cycle.
The dynamics of commodity cycles
Over the past 10 to 15 years, commodities have
increasingly been included in diversified portfolios as
a hedge against inflation or as an indirect way to gain
exposure to the rapid development of large emerging
economies. However, from a long-term investment
perspective, understanding the cyclical behaviour of
commodities is crucial to avoid pitfalls.
Commodities are a peculiar asset class in many
ways. The most obvious difference with equities and
bonds, for example, is related to valuation. While
most other assets can (and should) be valued on a
discounted future cash-flow basis, pure commodities
(excluding stocks or bonds of commodity producers)
do not generate any cash flows and their prices are
determined by short-term supply and demand.
Economic theory tells us that the market price
reflects the marginal cost of production. This may
certainly hold true during the upward phase of the
commodity cycle, but not necessarily so during
downward phases, especially at the beginning. This
is because producers have to squeeze their profit
margins and set their price at the average cost of
production, which temporarily becomes the market
price, to preserve their market share.
Commodities are also cyclical by nature, for at least
two reasons. As inputs into the production process,
raw materials are impacted by broad industrial cycles
in leading economies such as China, Europe and the
US. During these cycles, inventories play a crucial
role as a key determinant of supply. In addition to
these relatively short-term cycles, commodities are
also influenced by their own, long-term cycle, which
is fundamentally driven by the supply and demand
response to price signals. Typically, during periods of
low prices, consumers’ purchasing power increases,
pushing commodity prices higher as the utilization
rate of productive capacity increases. Higher profits
provide an incentive for commodity producers to
invest in new production capacity that can become
productive more than 10 years later. By this time,
commodity prices have increased considerably,
weighing on demand by forcing consumers to find
alternatives or to reduce consumption. At the end of
this investment cycle, supply significantly exceeds
demand and, unless producers decide to voluntarily
limit their output, prices collapse. However, evidence
shows that prices don’t usually return to levels that
prevailed before the beginning of the investment
cycle (Figure 1). In the first half of the 1980s, to
prevent a sharp decline in prices, Saudi Arabia
agreed to play the role of “swing producer,” cutting its
production by 77% between August 1981 and August
1985. This policy failed, as new production capacity
was added in non-OPEC countries, particularly in the
Gulf of Mexico and the North Sea. Prices collapsed
when Saudi Arabia decided to resume production.
Interestingly, the Saudis have refused to act as a
swing producer in 2014 and 2015, letting market
forces determine prices.
FOR USE ONLY
19
Emerging market Asia may benefit overall from the current long-term commodity cycle
The consolidation phase of the cycle usually spans
many years as consumers’ purchasing power is
restored and production capacities are restructured,
which is typically a long process. For example,
although the decline in crude oil prices started in the
early 1980s, the restructuring of major US oil
companies continued until the end of the 1990s.
Since the beginning of the 20th century, three
commodity cycles have taken place and a fourth
cycle probably started in 2002. As shown in Figure 1,
the upward phase of the cycle (blue-shaded areas)
tends to last around 10 years. The consolidation
phase is longer, lasting on average 22 years. Given
the relatively small number of observations, definitive
conclusions cannot be drawn. However, there is an
undeniable regularity, with an overall cycle spanning
three decades, one-third of which is characterized by
rapid price increases. From past observations, it
seems that the consolidation phase of the current
cycle started in 2011 and the significant drop since
then is likely to continue for some time, although
temporary rebounds are likely to occur.
Commodity cycles from a historical
perspective
To get a better understanding of economic forces
involved in long-term commodity cycles, we have
built a price index made of 15 commodities, including
agricultural products, energy and industrial metals,
for which prices are available since at least the 19th
century (with the exception of natural gas). Some
series start as far back as 1700 (wheat, rice, sugar,
beef, coal and iron). This price index has obvious
technical limitations. For example, in the 18th century
and first-half of the 19th century, markets were less
internationally integrated than they are today, with
prices tending to reflect local conditions. We
addressed this issue by comparing prices in different
countries to isolate local distortions. Another
limitation comes from the fact that prices have not
always been determined by market forces. The
presence of cartels has often resulted in artificial
price stability, like crude oil before 1973. Bearing
these limitations in mind, some important lessons
can be drawn from the index and its sub-
components.
Figure 2 shows the evolution of agricultural product,
energy and industrial metal prices since the early 18th
century, measured by the 10-year moving average of
yearly fluctuations. The general pattern of the curve
has changed considerably over time. In the period
before the beginning of the Industrial Revolution, in
the second half of the 18th century, price volatility
was limited, generally hovering in a +/-3% range.
This mostly reflects low growth in income per capita
and the absence of a strong industrial base during
this period. The Industrial Revolution increased price
volatility substantially. The range of price fluctuations
widened to +/-7% as industrialization boosted
demand for raw materials and investments in new
production capacities. However, cycles remained
slow, with only two complete cycles between 1780
and 1880. The 20th century saw profound changes
and the strengthening of the cyclical dynamic of
commodities. The range of price fluctuations widened
further to +25%/-10% and the cycle length fell from
about 50 years in the 19th century to 30 years.
FOR USE ONLY
Figure 1: Commodity cycles since 1900
Source: HSBC Global Asset Management, September 2015
Figure 2: Annual commodity price fluctuations
(10-year average)
Source: HSBC Global Asset Management, September 2015
20
Emerging market Asia may benefit overall from the current long-term commodity cycle
Cycles in the 20th century were triggered by shocks:
the two world wars and the end of the link between
the US dollar and gold in August 1971 (the end of the
Bretton Woods system). In contrast, the current cycle
coincided with the rapid development of China in the
context of loose global monetary conditions.
It is also worth noting that agriculture, energy and
industrial metal cycles are synchronous. While the
magnitude of the cycle may diverge from one
category to another, and some differences may exist
in the short term, the overall trend is remarkably
similar. These similarities are not surprising given the
fact that the distinction between categories of
commodities is fading, with grains used as biofuel
for example.
One last notable characteristic of commodity prices
is that they have risen less rapidly than prices of
manufactured goods and services in the long run, at
least since the middle of the 19th century. Figure 3
shows the nominal commodity price series deflated
by the US consumer price index since 1800,
calculated by the Federal Reserve of Minneapolis,
as a proxy for non-commodity goods and services
prices. The curve shows a downward trend,
interrupted only temporarily during investment
cycles. From a long-term investment perspective,
this characteristic is important as it suggests that
commodities are a good hedge only against inflation
driven by commodities. Most of the time,
commodities are a poor hedge against inflation, even
when including precious metals.
This observation was previously made in 1949 by
Hans Singer and Raul Prebisch. Their thesis, which
triggered heated debates, was that commodity prices
decline relative to manufactured goods prices in the
long term. Singer and Prebisch limited their analysis
to tradable goods, as their focus was on the terms of
trade and their implications on the economic
development of commodity producers. This
framework is restrictive in the sense that it only
considers economic development through trade,
and not through the purchasing power of commodity
producers or the real return for investors. Due to
lower productivity gains, prices of services (which are
mostly non-tradable) rise more quickly than those of
manufactured goods and commodities.
Impact of commodity cycles on
countries
Since the commodity cycle peak of 2011, several
emerging economies have experienced episodes
of stagflation, a deterioration of their current account
balance or a sharp depreciation of their exchange
rate. Countries like Brazil, Venezuela and Russia are
the most representative of this trend, sharing one
common denominator: they are all net commodity
exporters.
Figure 4 shows the evolution of the nominal effective
exchange rate of emerging market currencies
between Q2 2014 and Q2 2015 and their commodity-
exporting status. Net commodity importers typically
experienced an appreciation of their currencies,
again on a trade-weighted basis, while net
commodity exporters saw their currencies
depreciate. In the short run, an appreciation of their
currency represents a hurdle for commodity
importers as it reduces their manufactured goods’
price-competitiveness. However, in the longer run,
lower input prices coupled with productivity gains
help mitigate the initial loss of price competitiveness.
The impact of exposure/dependence to commodities
on economic development can also be illustrated by
the convergence of a country’s GDP per capita
towards US standards, and by how this convergence
is achieved (i.e., productivity gains versus the
accumulation of capital and labour).
FOR USE ONLY
Sources: Bloomberg, HSBC Global Asset Management, September 2015
Figure 3: Declining trend of real commodity prices
Sources: BIS, WTO, HSBC Global Asset Management, September 2015
Figure 4: Relationship between exchange-rate
fluctuations and commodity-exporting status
21
Emerging market Asia may benefit overall from the current long-term commodity cycle
Figure 5 represents the evolution, between 1981 and
2011, of GDP per capita in the largest emerging
economies and total factor productivity gains in those
countries, relative to US GDP and productivity. The
period covered corresponds to the last complete
commodity cycle, thus neutralizing the impact of
commodity price increases on economic
performance.
The chart shows that net commodity exporters had
mixed results, in terms of catching up with US GDP
per capita, compared to net commodity importers.
More importantly, net commodity exporters saw their
total factor productivity decline relative to US
productivity, while countries like China and India
continued to converge towards US levels. This
suggests that the economic catch-up in net
commodity-exporting countries is slower than in
commodity-importing countries.
This conclusion is consistent with the “natural
resource curse” thesis, which is the seemingly
counterintuitive idea that a country with ample natural
resources tends to develop less rapidly than others
over the long term due to rent-seeking behaviours,
with a distortion in the allocation of capital (i.e., a
suppression of innovation) on the supply side and an
artificially high level of domestic consumption based
on generous but unsustainable fiscal transfers on the
demand side. In this regard, as a majority of
countries in Latin America, Eastern Europe, the
Middle East and Africa are net commodity exporters,
these regions seem to be more exposed to lower
growth than Asia during the consolidation phase of
the commodity cycle.
However, there are numerous counter-examples of
net commodity exporters that have successfully
caught up with more advanced economies, even
during commodity-consolidation periods. The main
lesson that can be learned from these countries, from
FOR USE ONLY
Chile to Norway (even though the latter is not an
emerging market), is that institutions must be put in
place to ensure a counter-cyclical use of natural
resources. In other words, it is essential to save
during periods of price increases in order to be able
to spend during market downturns. Pro-cyclical
policies such as subsidies or other forms of fiscal
redistributions become difficult to maintain when
commodity prices fall sharply. Assets can also be
accumulated in periods of price increases in order to
invest in new industries and to facilitate the
diversification of the economy. Chile offers a good
example of effective counter-cyclical policies with its
structural fiscal balance policy.
Ultimately, the economic outlook of commodity-
exporting countries depends on appropriate policies
as well as sound and transparent institutions
designed to avoid pro-cyclical behaviours. Measures
recently taken in Asia, particularly Indonesia, to
reduce fuel subsidies should, in our opinion, help
maintain the comparative advantage of the region in
terms of future economic development.
Impact of commodity cycles on asset
classes
Commodity cycles mostly affect other asset classes
through profit margins and inflation, both actual and
expected.
Commodities primarily constitute inputs for other
sectors of the economy, so a decline in nominal
prices relative to manufactured goods and services
prices will stimulate profit margins for the latter,
everything else being equal, and in turn support
price-to-earnings ratios and therefore equity prices
(apart from commodity producers, as a decline in raw
material prices is a major drag on their margins).
Sources: Penn World Tables, HSBC Global Asset Management, data between 1981 and 2011
Figure 5: Emerging market commodity exporters
have lower economic performance than
importers
Sources: Bloomberg, Robert Shiller data, HSBC Global Asset Management, September 2015
Figure 6: Long-term relationship of real
commodity prices and US price earnings
22
Emerging market Asia may benefit overall from the current long-term commodity cycle
Figure 6 shows the long-term relationship between
real commodity prices (i.e., prices of commodities
relative to manufactured goods and services) and the
S&P 500 price-to-earnings ratio since 1870. The two
curves are closely correlated, probably for two
reasons. Firstly, real commodity prices can be
interpreted as a proxy for broadly defined profit
margins: the lower the real commodity prices, the
higher the profit margins, everything else being
equal. Secondly, commodity prices are one of the
determinants of inflation, thereby influencing bond
yields and discount rates in discounted cash-flow
valuations. From a historical perspective, periods
of consolidation in commodity prices have been
characterized by rising, above-average price
earnings.
Historically, the consolidation phase of the
commodity cycle has also often been associated
with lower inflation. Since 2011, when commodities
reached their cyclical peak, most major countries
have seen their rate of inflation, both headline and
core, fall below their central bank target. By dragging
inflation expectations lower, as illustrated by US
breakevens in Figure 7, declining commodity prices
are supportive of high-quality bonds. However,
everything else being equal, falling commodity prices
tend to increase credit risk, especially among
commodity producers and commodity-exporting
countries.
Conclusion
The cyclical nature of commodities over the long run
provides valuable insights on the possible direction of
bonds and equities as well as on country risks and
opportunities going forward.
After almost 10 years of sharp price increases,
commodities entered a period of consolidation in
2011, with crude oil lagging, joining the bandwagon
in 2014. From past experience, this period of
consolidation will likely span at least one decade
during which prices may gradually fall to a new
equilibrium, with shorter-term volatility driven by
inventory cycles.
Everything else being equal, lower commodity prices
reinforce our view that equities can potentially offer
better expected returns than high-quality government
bonds. This note also illustrates that, when
considering investing in emerging countries, policies
and institutions matter, and capitalizing on the
potential of emerging markets requires careful
selection. Emerging market Asian countries,
considered as a group, present the distinctive
advantage of being net commodity importers, well
integrated in global trade and capital flows and with
strong industrial and service sectors. China and India
in particular have implemented a wide range of
structural reforms to accelerate the adaptation of
their economies to a changing global environment.
FOR USE ONLY
Figure 7: Inflation expectations are sensitive to
commodity prices
Sources: HSBC Global Asset Management, Bloomberg, as of September 3, 2015
23
1. The most recent activity data points to a continued
slowdown in global economic growth…
2. …while global inflation remains low, pegged down by
falling commodity prices
3. The US economy remains healthy and the labour
market continues to tighten...
4. …but concerns over EM growth and market volatility
have prevented the Fed from raising rates so far
5. The Fed has signalled that the pace of future
interest rate increases will be very gradual
6. The European economy is gradually healing,
supported by loose monetary policy and improving
credit conditions
7. The Chinese economy continued to slow in Q3, with
PMI surveys pointing to a sharp contraction in activity
8. China’s move to a more market-oriented exchange
rate mechanism induced volatility in financial markets in
August
Macroeconomic charts
FOR USE ONLY Sources: Bloomberg, HSBC Global Asset Management. Data as at close of business September 29, 2015.
Past performance is not an indication of future returns.
-200
0
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10 11 12 13 14 15
thousands
Change in Non-Farm Payrolls (mom) 6M Moving Average
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Eurozone manufacturing PMI, LHSEurozone M1 growth, RHS (advanced 6M)
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05 06 07 08 09 10 11 12 13 14 15
%
US Fed Funds Target Rate (Upper Bound)
US Treasury 2-year yield
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China Industr ial Production, LHS
Caixin China Manufacturing PMI, RHS
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Jun-15 Dec-15 Jun-16 Dec-16 Jun-17 Dec-17
%
Fed 'Dots Chart', Median projection, June 2015
Fed 'Dots Chart', Median projection, September 2015
Bloomberg consensus estimates, 29 September 2015
Market implied estimate on 29 Sep 2015
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Global GDP, qoq annualised (LHS)Global manufacturing PMI (RHS)
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yoy, %
OECD inflation US inflation Eurozone inflation
6.00
6.05
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Jan-12 Jul-12 Jan-13 Jul-13 Jan-14 Jul-14 Jan-15 Jul-15
CNY/USD
USD-CNY spot USD-CNY fixing
24
1. Financial market volatility spiked in August on
concerns about Chinese growth, among other factors
2. And this triggered a sell-off in risk assets, such as
global equities
3. The falls were led by Chinese equities as
policymakers limited their direct intervention in
markets
4. China-related concerns have also contributed to
further commodity price weakness…
5. …which has pushed down market-based measures
of medium-term inflation expectations
6. Developed market government bond yields have
remained range-bound over the quarter
7. The US dollar continued to appreciate in 2015
relative to a basket of currencies on widening relative
interest rate expectations
8. Over the long term, risk assets such as equities still
look attractive relative to perceived “safe-haven”
developed market government bonds in our view
Financial markets charts
FOR USE ONLY Sources: Bloomberg, HSBC Global Asset Management. Data as at close of business September 29, 2015.
Past performance is not an indication of future returns.
1.0
1.5
2.0
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3.0
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07 08 09 10 11 12 13 14 15
%
US Inflation Expectations (5Y5Y forward), LHS
EZ Inflation Expectations (5Y5Y forward), LHS
Fed and ECB Inflation Target
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DXY Index
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IndexIndex
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S&P 500 Implied Volatil ity (VIX Index), RHS
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Jan 13 Jul 13 Jan 14 Jul 14 Jan 15 Jul 15
Rebased Jan 2013 = 100
MSCI AC Wor ld MSCI World (DM) MSCI EM
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Jan 13 Jul 13 Jan 14 Jul 14 Jan 15 Jul 15
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Index
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US Treasury 10Y Yie ld, LHS UK Gilt 10Y Yield, LHS
German Bund 10Y Yield, RHS Japan JGB 10Y Yield, RHS
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MSCI World Forward Earnings Yie ld minus US TIPS 10-Year Yield
Average
25
FOR USE ONLY
Market data
*Indices expressed as total returns. All others are price returns.
All total return data quoted in US dollar terms. Data sourced from MSCI AC World Total Return Index, MSCI USA Total Return Index, MSCI AC
Europe Total Return Index, MSCI AC Asia Pacific ex Japan Total Return Index, MSCI Japan Total Return Index, MSCI EM Latin America Total
Return Index and MSCI Emerging Markets Total Return Index. Total return includes income from dividends and interest as well as appreciation or
depreciation in the price of an asset over the given period.
Sources: Bloomberg, HSBC Global Asset Management. Data as at close of business 29 September 2015.
Past performance is not an indication of future returns.
3-Month 1-Year YTD 52-Week 52-Week Fwd
Close Change Change Change High Low P/E
Equity Indices (%) (%) (%) (X)
World
MSCI AC World Index (USD) 374 -11.6 -10.5 -10.3 444 373 14.9
North America
US Dow Jones Industrial Average 16,049 -8.8 -6.0 -10.0 18,351 15,370 14.7
US S&P 500 Index 1,884 -8.4 -4.7 -8.5 2,135 1,821 16.0
US NASDAQ Composite Index 4,517 -8.9 0.3 -4.6 5,232 4,117 19.7
Canada S&P/TSX Composite Index 13,037 -10.0 -13.0 -10.9 15,525 12,705 16.4
Europe
MSCI AC Europe (USD) 395 -12.3 -13.9 -9.3 479 393 14.0
Euro STOXX 50 Index 3,030 -12.7 -4.9 -3.7 3,836 2,790 13.4
UK FTSE 100 Index 5,909 -10.7 -11.1 -10.0 7,123 5,768 15.0
Germany DAX Index* 9,450 -14.7 0.3 -3.6 12,391 8,355 11.8
France CAC-40 Index 4,344 -10.8 -0.3 1.7 5,284 3,789 14.4
Spain IBEX 35 Index 9,394 -13.5 -12.1 -8.6 11,885 9,231 14.3
Asia Pacific
MSCI AC Asia Pacific ex Japan (USD) 386 -18.0 -18.6 -17.4 525 383 11.9
Japan Nikkei-225 Stock Average 16,931 -15.8 3.8 -3.0 20,953 14,529 16.4
Australian Stock Exchange 200 4,918 -9.3 -6.6 -9.1 5,997 4,918 14.8
Hong Kong Hang Seng Index 20,557 -20.8 -11.5 -12.9 28,589 20,368 10.4
Shanghai Stock Exchange Composite Index 3,038 -25.0 28.9 -6.1 5,178 2,280 12.9
Hang Seng China Enterprises Index 9,231 -27.3 -11.6 -23.0 14,963 9,059 7.0
Taiwan TAIEX Index 8,132 -12.0 -9.2 -12.6 10,014 7,203 12.2
Korea KOSPI Index 1,943 -5.7 -4.1 1.4 2,190 1,801 12.1
India SENSEX 30 Index 25,779 -6.8 -3.1 -6.3 30,025 24,834 16.5
Indonesia Jakarta Stock Price Index 4,178 -14.4 -18.7 -20.1 5,524 4,034 13.9
Malaysia Kuala Lumpur Composite Index 1,603 -5.2 -13.2 -9.0 1,868 1,504 15.8
Philippines Stock Exchange PSE Index 6,859 -9.4 -5.6 -5.1 8,137 6,603 18.6
Singapore FTSE Straits Times Index 2,788 -15.0 -15.3 -17.2 3,550 2,740 12.0
Thailand SET Index 1,349 -10.7 -14.9 -9.9 1,620 1,292 14.5
Latam
Argentina Merval Index 9,660 -14.6 -23.3 12.6 12,611 7,276 11.2
Brazil Bovespa Index* 44,132 -16.8 -19.2 -11.7 58,897 42,749 12.5
Chile IPSA Index 3,657 -5.8 -7.3 -5.0 4,148 3,542 15.7
Colombia IGBC Index 9,142 -10.8 -33.4 -21.4 13,725 8,811 23.8
Mexico Index 42,122 -5.8 -6.2 -2.4 46,078 39,257 19.2
EEMEA
Russia MICEX Index 1,631 -0.3 15.8 16.7 1,848 1,310 5.8
South Africa JSE Index 49,384 -5.0 0.0 -0.8 55,355 46,068 16.4
Turkey ISE 100 Index* 74,258 -9.2 -0.5 -13.4 91,806 69,797 9.9
3-Month YTD 1-Year 3-Year 5-Year
Change Change Change Change Change
Equity Indices - Total Return (%) (%) (%) (%) (%)
Global equities -11.2 -8.9 -8.7 19.9 36.0
US equities -8.4 -7.4 -3.3 37.0 77.7
Europe equities -11.9 -7.2 -11.7 13.9 17.4
Asia Pacific ex Japan equities -17.2 -15.4 -16.2 -4.7 -0.5
Japan equities -13.8 -2.5 -6.0 25.9 21.3
Latam equities -26.2 -31.5 -40.9 -45.7 -51.2
Emerging Markets equities -18.4 -17.2 -21.2 -16.7 -17.9
26 FOR USE ONLY
Market Data (continued)
Sources: Bloomberg, HSBC Global Asset Management. Data as at close of business September 29, 2015.
Past performance is not an indication of future returns.
3-Month 1-Year YTD
Close Change Change Change
Bond Indices - Total Return (%) (%) (%)
BarCap GlobalAgg (Hedged in USD) 480.0 1.4 3.2 0.9
JPM EMBI Global 657.0 -2.4 -2.7 -0.8
BarCap US Corporate Index (USD) 2586.5 1.0 1.6 0.0
BarCap Euro Corporate Index (Eur) 226.9 -0.3 -0.4 -2.0
BarCap Global High Yield (USD) 374.3 -3.8 -2.0 -0.6
HSBC Asian Bond Index 377.19 -0.5 2.9 1.2
3 Months 1 Year Year-End
Bonds Close Ago Ago 2014
US Treasury yields (%)
3-Month -0.01 0.00 0.01 0.04
2-Year 0.65 0.63 0.57 0.66
5-Year 1.38 1.62 1.76 1.65
10-Year 2.05 2.32 2.48 2.17
30-Year 2.85 3.10 3.16 2.75
Developed market 10-year bond yields (%)
Japan 0.33 0.45 0.52 0.32
UK 1.76 2.07 2.44 1.76
Germany 0.58 0.79 0.96 0.54
France 0.99 1.24 1.30 0.82
Italy 1.71 2.39 2.40 1.88
Spain 1.89 2.34 2.22 1.60
3 Months 1 Year Year-End 52-Week 52-Week
Currencies (versus USD) Latest Ago Ago 2014 High Low
Developed markets
EUR/USD 1.12 1.12 1.27 1.21 1.29 1.05
GBP/USD 1.52 1.57 1.62 1.56 1.63 1.46
CHF/USD 1.03 1.08 1.05 1.01 1.19 0.98
CAD 1.34 1.24 1.12 1.16 1.35 1.11
JPY 119.74 122.54 109.50 119.78 125.86 105.23
AUD 1.43 1.30 1.15 1.22 1.45 1.12
NZD 1.58 1.46 1.29 1.28 1.60 1.24
Asia
HKD 7.75 7.75 7.77 7.76 7.77 7.75
CNY 6.36 6.21 6.15 6.21 6.45 6.11
INR 65.96 63.85 61.53 63.04 66.89 60.91
MYR 4.46 3.78 3.28 3.50 4.48 3.23
KRW 1,202.05 1,125.19 1,053.88 1,090.98 1,208.72 1,045.58
TWD 33.13 30.97 30.49 31.66 33.33 30.33
Latam
BRL 4.06 3.12 2.45 2.66 4.25 2.36
COP 3,110.82 2,590.40 2,025.99 2,376.51 3,266.52 2,012.53
MXN 17.02 15.69 13.50 14.75 17.34 13.28
EEMEA
RUB 65.93 55.75 39.45 60.74 79.17 39.36
ZAR 13.98 12.24 11.28 11.57 14.16 10.83
TRY 3.04 2.70 2.28 2.34 3.08 2.19
Latest 3-Month 1-Year YTD 52-Week 52-Week
Change Change Change High Low
Commodities (%) (%) (%)
Gold 1,127 -4.4 -7.3 -4.8 1,308 1,072
Brent Oil 48 -22.2 -50.4 -15.9 98 42
WTI Crude Oil 45 -22.5 -52.2 -15.1 95 38
R/J CRB Futures Index 194 -13.4 -31.6 -15.8 283 185
LME Copper 4,970 -14.2 -26.3 -21.1 6,836 4,855
27 FOR USE ONLY
Macro and Investment Strategy team
David Semmens
Senior Macro & Investment Strategist David Semmens is a Senior Macro and
Investment Strategist based in London. His
main areas of expertise are global
macroeconomics, monetary policy, financial
markets and labour economics. He was
previously head of macroeconomic and
country risk research for Euler Hermes in Paris
and the US economist within the research
department at Standard Chartered Bank in
both London and New York. He is a CFA
charterholder, with an Executive MBA from
Judge Business School, Cambridge, and
degrees in economics from the University of
Warwick.
Renee Chen
Senior Macro & Investment Strategist Renee Chen is a Senior Macro and Investment
Strategist at HSBC Global Asset Management.
Prior to this role, she held economist roles at
Macquarie Capital Securities, Nomura and
Citigroup and has over 15 years’ experience in
economic and policy research, focused on
Asia. Renee holds a master’s degree in
international affairs and economic policy
management from Columbia University, New
York and an MBA in finance and investment
from George Washington University,
Washington DC.
Marcus Sonntag
Macro & Investment Strategist Marcus Sonntag is a Macro and Investment
Strategist and provides analysis and research
on the key issues facing the global economy
and asset markets, with a particular focus on
economic forecasting. Marcus joined HSBC
Global Asset Management in 2015 and is
based in the UK. Previously, he worked as an
economist for Deutsche Bundesbank in
Germany, and for Bank of America Merrill
Lynch and Prudential Portfolio Management
Group in London. Marcus holds a PhD in
Economics from Bonn University (Germany)
and the CFA Charter.
Sam Pham
Junior Macro & Investment Strategist Prior to joining the team in London as a Junior
Macro and Investment Strategist, Sam spent
two years rotating within HSBC Securities
Services, focusing on global product, strategy,
project management and sales and business
development. This included six months in New
York as a project manager for the US Sub-
Custody project, an important initiative within
Global Banking and Markets. He holds a first-
class degree in economics from University
College London and an MPhil in finance and
economics from University of Cambridge,
where he specialized in modern portfolio
strategies.
Herve Lievore
Senior Macro & Investment Strategist Hervé Lievore is a Senior Macro and
Investment Strategist based in Hong Kong.
Before joining HSBC, he spent five years at
AXA Investment Managers in London and
Hong Kong as an economist and strategist,
covering Asia and commodities. He was
also involved in the firm’s tactical asset
allocation committees. He started his career
18 years ago at Natixis in Paris, where he
mostly covered Asian markets.
Rabia Bhopal
Macro & Investment Strategist Rabia Bhopal is a Macro and Investment
Strategist and provides analysis and
research on the key issues facing the global
economy and asset markets, with particular
focus on frontier markets. Rabia has been
working in the industry since 2003. Prior to
joining HSBC in 2012, Rabia held
economist roles at Standard & Poor’s,
Lloyds TSB Corporate Markets, Financial
Services Authority and the Economist
Intelligence Unit. She holds a degree in
economics from Brunel University in
London.
Shaan Raithatha
Macro & Investment Strategist Shaan is a Macro and Investment Strategist
and provides analysis and research on key
global macro and investment strategy
issues as well as building econometric
forecasting models. Prior to this role, he
spent 18 months on the HSBC Global Asset
Management Graduate Programme working
as an analyst on both the Global Emerging
Markets Equity and Equity Quantitative
Research teams. Shaan holds a bachelor of
arts degree in economics from the
University of Cambridge and has passed all
three levels of the CFA program.
28
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