asia ex japan equity small cap - hsbc · 2016-02-23 · investment opportunities auto components...

Presentation only intended for professional investors as defined by MIFID.

February 2016Elina Fung

Portfolio manager,

HSBC GIF Asia ex Japan Equity Smaller Companies

Big ideas for 2016

Asia ex Japan Equity Small Cap:

2

Asia ex-Japan small caps outperform the broad index over time…

Small caps tend to outperform in Asia over the long term

Asset class can underperform the broad index significantly in periods of extreme crisis

– Eg 1997 Asian financial crisis, 2000 bursting technology bubble, 2008 Global financial crisis

However, small caps are not just a bull market investment

Source: Bloomberg, data as at end-January 2016. For illustrative purposes only and does not constitute any investment recommendation. Past performance is not indicative of future performance

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Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16

MSCI Asia ex Japan MSCI Asia ex Japan Small Cap

Performance of small cap index vs broad index since the technology bubble, indexed at 100

Non contractual document

3

In 2015, Asia ex Japan small caps outperformed their large cap peers, despite the challenging investmentenvironment

The outperformance also highlights the diversification benefits of including Asia ex Japan small caps in aninvestor's broader portfolio

…and periodically amidst heightened volatility

Source: Bloomberg, data as of December 2015. For illustrative purposes only and does not constitute any investment recommendation. Past performance is not indicative of future performance

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Dec-14 Jan-15 Feb-15 Mar-15 Apr-15 May-15 Jun-15 Jul-15 Aug-15 Sep-15 Oct-15 Nov-15 Dec-15

MSCI Asia ex Japan Small Cap MSCI Asia ex Japan

Small caps beat out large caps in 2015


4

Small cap market is much more diversified than large caps, where financials account for 30% of holdings

Structural opportunities emerging for sectors that used to be small – better access via small caps

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MSCI AC Asia ex Japan Small Cap Index MSCI AC Asia ex Japan Index

Outperformance is led by greater diversificationSmall cap investing is all about stock selection

Source: HSBC Global Asset Management, data as of end-December 2015. For illustrative purposes only and does not constitute any investment recommendation in the above-mentioned sectors or countries

Small cap has greater exposure to “New Asia” sectors


5

Small cap investing is all about stock selectionGreat inefficiency = great opportunity

Notes: Small caps are defined as stocks with market cap>$100 million but <$2 billion1. Stock with 3 or more analysts covering it.Any forecast, projection or target contained in this presentation is for information purposes only and is not guaranteed in any way. HSBC accepts no liability for any failure to meet such forecasts, projections or targets. For illustrativepurpose onlySource: Macquarie Research, data as of July 2015. For illustrative purposes only and does not constitute any investment recommendation. Past performance is not indicative of future performance

Activecoverage =

73.6%

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

Asia ex Japan Europe USA

Total no. small cap stocks Active sell-side coverage*

Activecoverage =

54.2%

Activecoverage =

34.6%

No. of stocks

Brokerage firms often emphasise large cap over small cap research

This lack of coverage is particularly stark in Asia and this creates inefficiencies – and opportunities

Fundamental research by experienced analysts is crucial

Small cap investing is about identifying and investing early in attractive companies

Lack of sell-side analyst coverage on Asia ex Japan small caps

1


6

Investment opportunitiesTextiles: China

Note: ASEAN= Association of Southeast Asian NationsSource: CIMB, CEIC, Jentro, data as at May 2013. For illustrative purposes only and does not constitute any investment recommendation in the above-mentioned countries or sectors

US recovery fuelling textile demand

Sector has undergone upheaval

– ASEAN emerging as competitor to China on cost

– Key customers diversifying supplier base

Winners now emerging from sector consolidation

Trans-Pacific Partnership agreement could see further opportunities for ASEAN-sourced products

Attractive Chinese companies have diversified production base to South-East Asia

One third of Chinese textile companies exited since 2008… … partly due to competition from South East Asia


7

Indian labour costs are very competitive when compared with wages in China and certain other ASEANcountries

Moreover, India has ample supply of cotton

Export outlook looks robust

Investment opportunitiesTextiles: India

Notes:1. Cost for semi-skilled labour; includes all benefits2. Water cost is based on the average tariff of the water supply companies of specific countries. For illustrative purposes only and does not constitute any investment recommendation in the above-mentioned countries or sectorsSource: Texprocil benchmarking report May 2014

India’s cost advantage

Cost element Unit India Bangladesh China Vietnam Cambodia Ethiopia Kenya

Labour cost1 USD/month 140-160 100 500-550 180 190 50-60 125-150

Power cost USD/kwh 0.10-0.12 0.09-0.12 0.15-0.16 0.08 0.22 0.04 0.09

Lending rate % 12-14% 13% 5-6% 6-7% 15% 8.5-9.5% 16-18%

Water cost2 US cents/m3 18 20.5 57 50-80 70-90 30-40 150-180


8

Outlook for automotive semiconductor revenue remains positive as semiconductor content per automobile is ona rising trend

Driven by increasing customer focus on safety, advanced driver assistance system (ADAS) products will helpdrive a structural growth story for the sector within the region

Stricter Corporate Average Fuel Economy (CAFE) in the US, reaching 35.5mg by 2016 and 54.5mg by 2025,should create incremental demand for greener and fuel-efficient vehicles

Investment opportunitiesAuto components

Source: Edmunds .com, data as at September 2014. For illustrative purposes only and does not constituteinvestment advice

Source: KPMG, Infineon, JP Morgan estimates, data as at July 2014. For illustrative purposes only and does notconstitute investment advice. Any forecast, projection or target contained in this presentation is for informationpurposes only and is not guaranteed in any way. HSBC accepts no liability for any failure to meet such forecasts,projections or targets

Rising trend for semiconductor content per automobile CAFE timeline

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Conventional Electric Autonomous Car

2011 2020

Semis content in Evs is 3.0x worth of that in ICE-cars


9

Even as China’s exports have cooled amid rising labour costs, countries like Vietnam, which benefit from amuch lower cost base, have expanded their share of apparel, footwear, textiles imports to the US

Vietnam will benefit from the Trans Pacific Partnership (TPP), with the US being a main drawcard in themultilateral agreement

Moreover Vietnam also has free trade agreements with Japan and the EU which provide a competitiveadvantage

Investment opportunitiesGlobal manufacturing hub: Vietnam

Source: International Trade Administration data as of October 2015. For illustrative purposes only and does notconstitute investment advice

Source: International Trade Administration data as of December 2015. For illustrative purposes only and does notconstitute investment advice.

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Share of US imports of apparel and textile

China (%) Vietnam (%)

66% 68% 69%71% 72% 73% 74%

76% 76%74%

72%69%

66%64%

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Share of US imports of footwear

China (%) Vietnam (%)

Vietnam’s increasing foothold in apparel and footwear imports


10

Increased focus on environment – greater transparency on pollution at a provincial level

To meet PM2.5 reduction target by 2020

– Clean energies should rise to 27% of total consumption by 2020 (2012-13%)

– Annual coal consumption growth needs to be cut to 0.9%

UK experience: halved coal consumption and halved air pollution from 1950s-70s

Favorable policies to encourage faster capacity installation for solar (solar farm, BIPV) and wind farm operators

Investment opportunityAlternative energy: China

Source: BofA Merrill Lynch Global Research, data as at December 2015. For illustrative purpose only and does not constitute any investment recommendation in the above-mentioned sectorsAny forecast, projection or target contained in this presentation is for information purpose only and is not guaranteed in any way. HSBC accepts no liability for any failure to meet such forecasts, projections or targets

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Thermal Hydro Nuclear Wind Solar Others/Biomass

China’s clean energy generation capacity on the rise


11

Indian government has announced massive capacity addition targets – Scale up to 100,000 MW solar powerand 60,000 MW wind energy capacity by 2022

If achieved, this will put India among the top two renewable energy markets in the world, alongside China

Government plans to implement large-scale and small-scale solar and wind energy projects throughout thecountry through competitive auctions

Investment opportunityAlternative energy: India

Source: Deutsche Bank data as at December 2015. For illustrative purpose only and does not constitute any investment recommendation in the above-mentioned sectorsAny forecast, projection or target contained in this presentation is for information purpose only and is not guaranteed in any way. HSBC accepts no liability for any failure to meet such forecasts, projections or targets

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Nov 15 2022 end

Wind Solar

CAGR – 14%

CAGR – 57%

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India to step up alternative energy generation

Mega Watts (MW)


12

Over the last two years the number of projects awarded has picked up in urban infrastructure segments suchas roads, buildings and metro projects

Given Modi government’s thrust on the infrastructure investment, we expect capex on urban infrastructureprojects to continue expanding

Investment opportunityUrban construction: India

Note:1. Y-o-y compares March-December 2015 with corresponding period of 2014Source: Emkay Research, data as at December 2015. For illustrative purpose only and does not constitute any investment recommendation in the above-mentioned sectorsAny forecast, projection or target contained in this presentation is for information purpose only and is not guaranteed in any way. HSBC accepts no liability for any failure to meet such forecasts, projections or targets.The commentary and analysis presented in this document reflect the opinion of HSBC Global Asset Management on the markets, according to the information available to date. They do not constitute any kind of commitment fromHSBC Global Asset Management (France). Consequently, HSBC Global Asset Management (France) will not be held responsible for any investment or disinvestment decision taken on the basis of the commentary and/or analysis inthis document.

Road projects awarded up 152.5% y-o-y1

Pick-up in National Highways Authority of India (NHAI)projects awarded

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Length awarded

(Km)


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Investment opportunityInfrastructure: Indonesia and Malaysia

Source: CEIC, Morgan Stanley as of December 2015

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GDP growth % Construction sector growth%

Source: CEIC, HSBC Global Asset Management as of December 2015

Construction sector in Malaysia continues to grow

Capex spend on the rise in Indonesia as government looks to modernise the infrastructure and pave the wayfor faster economic growth

Similarly Malaysia’s construction sector continued to grow over the past several quarters despite the sharpslowdown in GDP growth, as the government prioritised infrastructure spending amidst fiscal consolidation

Government capex spending on the rise in Indonesia


14

Sluggish global growth has led us towards stocks that offer good dividend yields

Earnings growth will be less predictable going forward, making dividends a more reliable source of returns

Dividend stocks backed by strong growth stories will likely trump pure growth stocks in the current environment

Note: The above highlights a current bias in the fund to higher dividend paying companies versus the benchmark, MSCI AC Asia Pacific ex Japan Small Cap. This is shown above through a statistical measure of 'factor tilts' defined byStyle Research. A factor reading above 1 is considered statistically significant, while a factor tilt above 2 is considered very significantSource: HSBC Global Asset Management, Style Research as of 31 December 2015.The commentary and analysis presented in this document reflect the opinion of HSBC Global Asset Management on the markets, according to the information available to date. They do not constitute any kind of commitment fromHSBC Global Asset Management (France). Consequently, HSBC Global Asset Management (France) will not be held responsible for any investment or disinvestment decision taken on the basis of the commentary and/or analysis inthis document. Past performance is not indicative of future performance.

Investment opportunitiesDividend yield

-2.0

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Dec 13 Jan 14 Feb 14 Mar 14 Apr 14 May 14 Jun 14 Jul 14 Aug 14 Sep 14 Oct 14 Nov 14 Dec 14 Jan 15 Feb 15 Mar 15 Apr 15 May 15 Jun 15 Jul 15 Aug 15 Sep 15 Oct 15 Nov 15

Dividend Yield

Portfolio has higher dividend paying profile than the index


15

Investment opportunityValuations represent good buying opportunities

Note: SD= standard deviationSource: Bloomberg, HSBC Global Asset Management, data as of February 2016. For illustrative purposes only and does not constitute any investment recommendation. Past performance is not indicative of future performance

MSCI Taiwan small cap price-to-bookMSCI Indonesia small cap price-to-book

MSCI Singapore small cap price-to-book

Current valuations of some small cap markets are close to or lower than their historical averages

+1SD = 1.8x

Mean = 1.5x

-1SD = 1.2x

+1SD = 1.5x

-1SD = 1.2x

Mean = 1.3x

+1SD = 1.3x

Mean = 1.1x

-1SD = 0.95x

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Investment opportunityCompelling valuations of HK/China equities

Source: Bloomberg. HSBC Global Asset Management . Data as of end January 2016. Past performance is not indicative of future performance.

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1.22

0.83

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0.87

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P/B Average +1SD -1SD

HK-listed Chinese and Hong Kong small caps are trading at very inexpensive valuations relative to their ownhistory and many of their larger cap counterparts (MSCI China – 1.2x P/B, MSCI Hong Kong – 1.05x P/B)

As small caps listed in Hong Kong form a very diversified universe of stocks, we can gain exposure tointeresting growth stories in China without buying into the A-share market

MSCI China Small Cap Price-to-book (x) MSCI Hong Kong Small Cap Price-to-book (x)


17

Equity volatility has been low relative to its 10-year history, however macro risk indicators show that riskaversion is now above average and rising

Volatility typically tends to scare off investors, but it is important to remember that it also creates great buyingopportunities

Investment opportunityVolatility creates opportunities

Source: Bloomberg, data as at January 2016. For illustrative purposes only and does not constitute any investment recommendation. Past performance is not indicative of future performance

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MSCI AC Asia ex Japan MSCI AC Asia ex Japan Small Cap

Historic volatility

Increased volatility creates good buying opportunities


18

Asia ex Japan small caps in the Year of the Monkey

We expect slowing global growth to weigh more heavily on investors’ minds in 2016

However, the companies we own remain healthy and will most likely stay on the growth trajectory

We can expect heightened volatility in most global markets in 2016

Recent market moves highlight the need to accept periods of volatility from time to time when investing in riskassets and also to take a long term perspective

While investors tend to be wary of volatility in general, these market vacillations often provide us withopportunities to buy good stocks at inexpensive valuations

Small caps are not just a bull market investment and they have the potential to surprise to the upside duringbouts of market volatility

We believe in staying true to our process while staying vigilant against volatility


The commentary and analysis presented in this document reflect the opinion of HSBC Global Asset Management on the markets, according to the information available to date. They do not constitute any kind of commitment fromHSBC Global Asset Management (France). Consequently, HSBC Global Asset Management (France) will not be held responsible for any investment or disinvestment decision taken on the basis of the commentary and/oranalysis in this document.

19

Elina Fung is an Investment Director in the Asia Pacific equity team and has been working in the industry since 1995. Prior to joiningHSBC in 2007, Elina worked as the Financial Controller and Company Secretary at Norstar Founders Group Limited, a main-boardlisted China auto-parts manufacturer. Previously, Elina worked in equity research for six years. She holds a Bachelor of BusinessAdministration from the Chinese University of Hong Kong. She is also a member of the American Institute of Certified PublicAccountants and a fellow member of the HK Institute of Certified Public Accountants.

Elina Fung

Investment Director, Equities

Biography


Key risks and disclosures

21

Investor sentiment may be susceptible to macro concerns

Investor should be reminded that investment in some of the developing Asian countries may involve specialconsiderations and risks. Below could affect adversely the economies of such countries or the value of theinvestment

– Political changes

– Government regulation

– Social instability

– Diplomatic development

– Global economic development etc

Emerging markets can be significantly more volatile than developed markets, so that the value of investmentsmay be subject to larger fluctuations

Currency movement and market condition may affect the value of investments

Key risks


22 Non contractual document

Important information

This presentation is distributed by HSBC Global Asset Management (France) and is only intended for professional investors as defined by MiFID. The information contained herein is subject to change without notice.All non-authorised reproduction or use of this commentary and analysis will be the responsibility of the user and will be likely to lead to legal proceedings. This document has no contractual value and is not by anymeans intended as a solicitation, nor an investment advice for the purchase or sale of any financial instrument in any jurisdiction in which such an offer is not lawful. The commentary and analysis presented in thisdocument reflect the opinion of HSBC Global Asset Management on the markets, according to the information available to date. They do not constitute any kind of commitment from HSBC Global Asset Management(France). Consequently, HSBC Global Asset Management (France) will not be held responsible for any investment or disinvestment decision taken on the basis of the commentary and/or analysis in this document. Alldata come from HSBC Global Asset Management unless otherwise specified. Any third party information has been obtained from sources we believe to be reliable, but which we have not independently verified.

The fund presented in this document may not be registered and/or authorised for sale in your country. The performance figures displayed in the document relate to the past and past performance should not be seenas an indication of future returns. It is important to remember that the value of investments and any income from them can go down as well as up and is not guaranteed. Capital is not guaranteed. Where overseasinvestments are held the rate of exchange may cause the value to go down as well as up. Investments in emerging markets are by their nature higher risk and potentially more volatile than those inherent inestablished markets. Funds that invest in securities listed on a stock exchange or market could be affected by general changes in the stock market. The value of investments can go down as well as up due to equitymarkets movements. Small and mid cap markets are occasionally affected by a temporary lack of liquidity; they may be subject to greater fluctuations than large cap markets and be more difficult for the fund managerto buy or sell.

HSBC GIF Asia ex-Japan Equity Smaller Companies is a sub fund of HSBC Global Investment Funds, a Luxemburg domiciled SICAV. Shares of the Company may not be offered or sold for sale or sold to any "U.S.Person within the meaning of the Articles of Incorporation, i.e. a citizen or resident of the United States of America (the "United States"), a partnership organised or existing under the laws of any state, territory orpossession of the United States, or a corporation organised or existing under the laws of the United States or of any state, territory or possession thereof, or any estate or trust, other than an estate or trust the incomeof which from sources outside the United States is not includible in gross income for purposes of computing United States income tax payable by it. All subscriptions in any fund presented in this document areaccepted only on the basis of the current prospectus, available on request from HSBC Global Asset Management (France), the centralisation agent, the financial department or the usual representative. Beforesubscription, investors should refer to the Key Investors Information Document (KIID) of the fund as well as its complete prospectus. For more detailed information on the risk associated with this fund, investors shouldrefer to the complete prospectus of the fund. Subscriptions are accepted only on the basis of the current prospectus accompanied by the latest annual or half-yearly report, available on request. Investors and potentialinvestors should read and note the risk warnings in the prospectus and relevant KIID. The fund presented in this document is a sub-fund of HSBC Global Investment Funds, an investment company constituted as asociété à capital variable domiciled in Luxemburg.

Source: MSCI. The MSCI information may only be used for your internal use, may not be reproduced or redisseminated in any form and may not be used to create any financial instruments or products or any indices.The MSCI information is provided on an 'as is' basis and the user of this information assumes the entire risk of any use it may make or permit to be made of this information. Neither MSCI, any of its affiliates or anyother person involved in or related to compiling, computing or creating the MSCI information (collectively, the 'MSCI Parties') makes any express or implied warranties or representations with respect to suchinformation or the results to be obtained by the use thereof, and the MSCI Parties hereby expressly disclaim all warranties (including, without limitation, all warranties of originality, accuracy, completeness, timeliness,non-infringement, merchantability and fitness for a particular purpose) with respect to this information. Without limiting any of the foregoing, in no event shall any MSCI Party have any liability for any direct, indirect,special, incidental, punitive, consequential or any other damages (including, without limitation, lost profits) even if notified of, or if it might otherwise have anticipated, the possibility of such damages.

Important information for Luxembourg investors: HSBC entities in Luxembourg are regulated and authorised by the Commission de Surveillance du Secteur Financier (CSSF).Important information for Swiss investors: This document may be distributed in Switzerland only to qualified investors according to Art. 10 para 3, 3bis and 3ter of the Federal Collective Investment Schemes Act(CISA).The presented fund is authorised for distribution in Switzerland in the meaning of Art. 120 of the Federal Collective Investment Schemes Act. (Potential) investors are kindly asked to consult the latest issued KeyInvestor Information Document (KIID), prospectus, articles of incorporation and the (semi-)annual report of the fund which may be obtained free of charge at the head office of the representative: HSBC Global AssetManagement (Switzerland) Ltd., Bederstrasse 49, P.O. Box, CH-8002 Zurich. Paying agent: HSBC Private Bank (Suisse) S.A., Quai des Bergues 9-17, P. O. Box 2888, CH-1211 Geneva 1.

The above document has been approved for distribution/issue by the following entities :

HSBC Global Asset Management (France)

421 345 489 RCS Nanterre. Portfolio management company authorised by the French regulatory authority AMF (no. GP99026) with capital of 8.050.320 euros. Postal address: 75419 Paris cedex 08,France.Offices: Immeuble Coeur Défense, 110, esplanade du Général Charles de Gaulle, 92400 Courbevoie - La Défense 4 . (Website: www.assetmanagement.hsbc.com/fr).

HSBC Global Asset Management (Switzerland) Limited

Bederstrasse 49, P.O. Box, CH-8027 Zurich, Switzerland (Website: www.assetmanagement.hsbc.com/ch)

Non contractual document, updated in February 2016 - AMFR_Ext_84_2016

Copyright © 2016. HSBC Global Asset Management (France). All rights reserved.

asia ex japan equity small cap - hsbc · 2016-02-23 · investment opportunities auto components...

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