asian fixed income outlook - larrainvial · source: imf world economic outlook, bloomberg, july...
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February 2016
Rare value in an uncertain world
Asian fixed income
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Content
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Asian fixed income returns in context
Macro situation in Asia
Market overview
Key considerations in Asian fixed income
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Asian fixed income returns in context
Source: BoA Indices: US Treasury, US Corporates, US High Yield, Euro Govts, Euro Corporates, Euro High Yield; JPMorgan Asia Credit Corporate Index: Asian Corporates, Asian High Yield; HSBC Asian Local Bond Index: Asian
Local Currency Bonds, offshore RMB bonds; ChinaBond indices: onshore RMB bonds. Data as of 22 February 2016
Data shown is for illustrative purposes only and does not constitute to investment recommendation to buy or sell in the above-mentioned asset classes
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2014 2015 2016 (to 22 Feb) Yield
US Treasury 6.0% 0.8% 2.2% 1.7%
US Corporates 7.5% -0.6% 0.4% 3.6%
US High Yield 2.5% -4.6% -1.6% 9.4%
Euro Govts 13.2% 1.6% 2.0% 0.5%
Euro Corporates 8.3% -0.4% 0.6% 1.3%
Euro High Yield 5.5% 0.8% -1.1% 5.7%
Asian Corporates 8.0% 2.8% 0.9% 5.2%
Asian High Yield 6.1% 5.2% -0.4% 8.3%
Asian Local Currency Bonds (in USD) 4.4% -3.2% 1.2% 3.7%
Offshore RMB Bonds (in USD) 0.4% -2.3% -1.4% 5.6%
Onshore RMB Bonds (in USD) 7.6% 3.5% 0.0% 3.2%
Indian bonds (in USD) 13.9% 3.4% -3.2% 8.1%
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Macro situation in Asia
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Asia is in a better position to withstand capital outflows
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Foreign holding of local government bonds is relatively high
in Indonesia and Malaysia
Basic balance (current account balance + net FDI inflows) has
improved or remained in surplus in most countries
Signs of stabilising FX reserves (ex China) as central banks
scaled back FX intervention
Source: CEIC, HSBC Global Asset Management, data as of January 2016
Asia will likely continue to see increased capital-flow
volatility on the back of a Fed rate hiking cycle and FX
volatility/RMB risks
Improved basic balance provide some buffers against the
risk of capital outflows
However, countries with heavy reliance on foreign funding
and low FX reserves buffers could be more vulnerable
0
10
20
30
40
50
60
01-2007 01-2008 01-2009 01-2010 01-2011 01-2012 01-2013 01-2014 01-2015
KR TH MY (MGS and MTBs) MY (MGS, MTBs & GIIs) ID
USDbn USDtrn
% of GDP (4qtr-avg) %
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
4.5
0
50
100
150
200
250
300
350
400
450
01-2003 01-2006 01-2009 01-2012 01-2015
HK IN ID KR MY
PH SG TW TH CN, rhs
-5
0
5
10
15
20
1Q07 1Q08 1Q09 1Q10 1Q11 1Q12 1Q13 1Q14 1Q15
CH IN ID KR MY PH TW TH
Q1 07 Q1 08 Q1 09 Q1 10 Q1 11 Q1 12 Q1 13 Q1 14 Q1 15
6
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-15
-10
-5
0
5
10
15
CN HK IN ID KR MY PH TW TH VN
1994 1995 1996 2012 2013 2014
0
5
10
15
20
25
CN IN ID KR MY PH SG TW TH
1995 1996 1997 2012 2013 2014 2015*
External fundamentals generally healthy
Note:
1. January-July average for 2015
Source: CEIC, HSBC Global Asset Management, data as of September 2015
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Most countries now run current account surpluses vs mostly
in deficits prior to the Asian financial crisis (AFC) FX reserves import cover improved from their AFC levels
% of GDP Months
1
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For all the concerns about Chinese growth, China and India seem to have more solid foundations than other large economies
Note:
1. Countries included are those that are included in the GBI-EM Broad Index as of 31 October 2014
Source: JP Morgan Morgan Markets, IMF, World Economic Outlook Database October 2014. Table Bloomberg 11.1.16
BRICS et al GDP 2015 GDP 2016 Unemployment CPI
Budget
balance C/A balance 10 yr bonds 12mo USD
Brazil -2.8% -1.2% 7.6% 8.9% -6.0% -3.8% 16.2% -34.6%
Russia -3.9% -0.4% 5.2% 15.0% -2.8% 5.5% 9.6% -17.9%
India 7.3% 7.6% 4.9% 5.0% -3.8% -1.1% 7.7% -6.7%
China 6.9% 6.4% 4.1% 1.6% -2.7% 3.1% 2.8% -5.6%
South Africa 1.5% 1.8% 25.5% 4.7% -3.8% -4.3% 9.5% -31.2%
Malaysia 5.4% 6.1% 3.2% 2.5% -4.0% 2.5% 4.2% -19.1%
Indonesia 4.7% 5.0% 6.2% 6.4% -2.0% -2.5% 8.7% -9.7%
Turkey 2.9% 3.0% 9.8% 7.5% -1.6% -4.9% 10.9% -24.3%
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Asian currencies have been appreciating against global currencies
80
85
90
95
100
105
110
115
120
12-2013
01-2014
02-2014
03-2014
04-2014
05-2014
06-2014
07-2014
08-2014
09-2014
10-2014
11-2014
12-2014
01-2015
02-2015
03-2015
04-2015
05-2015
06-2015
07-2015
08-2015
09-2015
10-2015
11-2015
China Taiwan Hong Kong India Indonesia Korea Malaysia Philippines Singapore Thailand United States
Source: BIS, HSBC Global Asset Management, data as of December 2015
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Asian currencies in REER terms (rebased to 100 on 31 Dec 2013)
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RMB expected to remain stable against trade weighted index
USD/CNY (26%)
EUR/CNY (21%)
JPY/CNY (15%)
HKD/CNY (7%)
AUD/CNY (6%)
CNY/MYR (5%)
CNY/RUB (4%)
GBP/CNY (4%)
SGD/CNY (4%)
CNY/THB (3%)
CAD/CNY (3%)
CHF/CNY (2%)
NZD/CNY (1%)
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RMB strengthens versus EM currencies Currency weighting in TWI
China has pledged to monitor newly adopted Trade Weighted Index (TWI) as reference for daily currency fixing rate
USD/CNY could see greater volatility, while the RMB against TWI is expected to remain relatively stable
Rebased, Aug 2015 = 100
85
90
95
100
105
110
115
Aug-15 Sep-15 Oct-15 Nov-15 Dec-15 Jan-16
vs USD vs EUR
vs JPY CNY (CFETS weightings)
vs a basket of EM currencies
Appreciation
Depreciation
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Market overview
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Overview of Asian fixed income Size and yields of the Asian credit and currency bond markets
Notes:
1. Source: JPMorgan Asia Credit Index, as of 31 December 2015.
2. Source: AsiaBondsOnline; market sizes as of September 2015; Yield numbers as of 27 January 2016
Data shown is for illustrative purposes only and does not constitute any investment recommendation to buy or sell in the above-mentioned countries and asset classes.
0
1
2
3
4
5
6
7
8
9
0
1,000
2,000
3,000
4,000
5,000
6,000
7,000
Chin
a
Ko
rea
India
Ma
laysia
Th
aila
nd
Sin
ga
pore
Hong K
on
g
Indonesia
Ph
ilippin
es
% (USDbn)
Size of Asian local currency bond market (LHS) 10-year Government Yields (RHS)
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Asian USD credit markets1 Asian local currency bond markets2
The market can be broadly split in two
USD Asian credit market of approx USD623 billion
Local currency bond market of approx USD10 trillion
Including China, South Korea, India, Hong Kong, Thailand, Malaysia, Singapore, Indonesia, Philippines and some other frontier
markets
0
1
2
3
4
5
6
7
8
0
50
100
150
200
250
300
Chin
a
Ko
rea
Hong K
on
g
Indonesia
India
Ph
ilippin
es
Sin
ga
pore
Ma
laysia
Th
aila
nd
Sri L
anka
Pa
kis
tan
(%) (USDbn)
Size of Asian USD credit market (LHS) Yield (RHS)
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Key considerations in Asian fixed income
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Key considerations in Asian fixed income
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Quality
Price
Underrepresentation
Diversification
Future developments
Resilience
Capturing the theme
Single market opportunities
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Quality
Source: IMF World Economic Outlook, Bloomberg, July 2015. Any 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. For illustrative purpose only
0
1
2
3
4
5
6
Asia ex-Japan North America Latin America European Union
2014 2015e 2016e 2017e
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Government debt to GDP Asian GDP growth vs rest of the World
0
50
100
150
200
250
300
Jap
an
Italy
US
Sin
ga
pore
Sp
ain
Fra
nce
UK
Germ
any
India
Ma
laysia
Th
aila
nd
Chin
a
Ta
iwan
Ko
rea
Ph
ilippin
es
Indonesia
Hong K
on
g
Asia (ex-Japan) Non-Asia
% %
Asian (ex Japan) institutions are less indebted than those in other parts of the world
Participating in generally higher growth economies should enable Asian institutions to service their debts more easily, all other
things being equal
15
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0
1
2
3
4
5
6
7
8
9
Indo
nesia
India
Ph
ilipp
ines
Ma
laysia
Chin
a
Th
aila
nd
Sin
ga
pore
Ko
rea
US
UK
Sp
ain
Hon
g K
on
g
Italy
Fra
nce
Ge
rma
ny
Jap
an
Price
Source: Bloomberg, 27 January 2016
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Selected 10-year government bond yields
Spreads Yield (%)
Yields in Asia tend to be higher than in US, Japanese and European markets
Global investment grade bond spread
0
50
100
150
200
250
300
Dec-1
3
Jan
-14
Fe
b-1
4
Ma
r-14
Ap
r-14
Ma
y-1
4
Jun
-14
Jul-1
4
Au
g-1
4
Se
p-1
4
Oct-
14
Nov-1
4
Dec-1
4
Jan
-15
Fe
b-1
5
Ma
r-15
Ap
r-15
Ma
y-1
5
Jun
-15
Jul-1
5
Au
g-1
5
Se
p-1
5
Oct-
15
Nov-1
5
Dec-1
5
US IG Corp Asia IG Corp EU IG Corp
16
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Asia is underrepresented in Global Bond Indices
Rest of the World Asia
Note:
1. Citigroup World Government Bond Index
Source: IMF, Citigroup, data as of October 2015
Asia accounts for about 50% of the
world’s population
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Asia accounts for about 35% of the
world’s GDP
Asia accounts for less than 1% of
Global Bond Indices1
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Diversification
Note:
1. The effects of taxes have not been adjusted in this analysis
Source: Bloomberg, June 2015
Index 1 = 10% HSBC ALBI + 10% HSBC ADBI + 80% BGA
Index 2 = 15% HSBC ALBI + 15% HSBC ADBI + 70% BGA
Risk and
return 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
H1
2015
Cum
return
10-year
average Volatity
Index 1 -3.5% 7.0% 9.1% 3.8% 8.1% 6.3% 5.6% 5.2% -2.8% 1.5% -2.5% 43.6% 4.0% 4.7%
Index 2 -2.9% 7.3% 8.9% 3.2% 8.7% 6.7% 5.6% 5.7% -2.9% 2.0% -2.2% 46.9% 4.2% 4.5%
BGA -4.5% 6.6% 9.5% 4.8% 6.9% 5.5% 5.6% 4.3% -2.6% 0.6% -3.1% 38.0% 3.7% 5.3%
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Cumulative return (in USD)¹
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Return characteristics of bond markets Stress scenarios
Asset class Duration Yield
Current
quality
Simulated
return if +1%
govt yields
Simulated
return if +2%
govt yields
Simulated
return if 100bp
spread widening
Simulated
return if 200bp
spread widening
US Treasury 6.24 1.53% AA+ -2.66% -7.90% 2.58% 2.58%
Euro Government 7.16 0.65% AA+ -4.89% -11.05% 1.27% 1.27%
US Corporate 6.71 3.59% BBB -0.98% -6.69% -0.98% -6.69%
Euro Corporate 4.94 1.45% BBB -2.10% -6.04% -2.10% -6.04%
Onshore RMB Bond 3.83 3.10% BBB+ 0.84% -1.99% 3.10% 2.53%
Offshore RMB Bond 2.58 5.32% A-1 3.74% 2.16% 4.06% 2.79%
Asia Corporate (USD) 4.07 4.47% BBB 2.01% -1.06% 2.01% -1.06%
India Government 6.02 7.55%2 BBB- 2.53% -2.49% 7.55% 7.55%
Notes: 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
illustrative purpose only. Simulations are not indicative of future performance. Actual events, conditions and performance may differ materially from assumptions and simulations
1. Based on HSBC Global Asset Management Internal Ratings where bonds are unrated by major rating agencies
2. Including estimate for withholding tax on coupons for foreign investors
3. For illustrative purpose only and does not constitute investment advice
Source: Bloomberg; HSBC Global Asset Management, 19 January 2015
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Simulated scenario returns (in local currency) over next 12 months
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Future developments
Source: HSBC Global Asset Management, July 2015. Forecasts in the first table are based on 5 year historical growth rate and IMF forecast for nominal GDP growth, assuming broadly stable exchange rates. ‘China 2014 Investable’
based on sum of QFII and RQFII quotas available for bond investment and an estimate of CIBM quotas for Central Banks and Insurance (not publically available). ‘India 2014 Investible’ based on FPI domestic bond market quota.
Current market sizes taken from Asian Development Bank except India taken from HSBC research. Forecasts in the second table are based on JPMorgan Asian Credit Index and 5 year historical growth rates and IMF forecast for
nominal GDP growth, except China. Smaller countries excluded. The forecasts are provided for illustrative purpose only and are not guaranteed in any way. HSBC accepts no liability for any failure to meet such forecasts
USDbn 2014
2014
investable 2020f
% change 2014
investable to 2020f
China 5,192 250 10,100 3,940%
Indonesia 123 123 172 39%
Korea 1,703 1,703 2,802 65%
Malaysia 316 316 573 82%
Philippines 104 104 190 83%
Hong Kong 194 194 310 60%
Singapore 241 241 386 60%
Thailand 281 281 444 58%
Vietnam 41 41 122 199%
India 1,086 81 2,112 2,508%
Total 9,281 3,334 17,211 416%
USDbn 2014 2020f % change
China 195.8 381.0 95%
Hong Kong 69.5 145.2 109%
India 49.5 219.8 344%
Indonesia 55.4 118.0 113%
Malaysia 17.6 25.1 43%
Pakistan 3.6 12.6 246%
Philippines 42.0 70.7 68%
Singapore 24.7 32.5 31%
South Korea 78.3 118.1 51%
Sri Lanka 7.1 45.6 545%
Taiwan 2.9 8.8 201%
Thailand 15.6 65.7 322%
Vietnam 2.4 8.2 247%
Total 564.5 1,251.2 122%
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Forecast of local currency bond market size using GDP
forecast and historical 5-yr avg growth rate
Forecast of USD Asian bond market size using GDP forecast
and historical 5-yr avg growth rate
20
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Capturing the theme
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Asian fixed income universe is made up of the countries which are set to contribute to the shift of focus in the world economy from
west to east
The financial markets will provide new and valuable opportunities for investors in the coming years
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Core yields in China are high compared to international markets
Source: Bloomberg, HSBC, data as of 14 January 2016
0
0.5
1
1.5
2
2.5
3
3.5
4
4.5
China(onshore)
China(offshore)
Italy Spain UK US Belgium France Holland0
0.5
1
1.5
2
2.5
3
3.5
4
4.5
Belgium China(onshore)
China(offshore)
Chile CzechRepublic
Japan SouthKorea
Taiwan
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10 year government bond yields of world’s largest
bond markets
10 year government bond yields of selected markets which
are rated AA- or Aa3
Compared to the 10 year bonds in the top 10 largest bond markets, China’s is highest
Amongst peers with same credit rating (AA- or Aa3), China’s yield is high
Yield (%) Yield (%)
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Limited ratings and pricing differentiation in the onshore RMB credit market
Note:
1. The rating mentioned above refers to the local credit rating in China. The rating criteria and methodology used by Chinese local rating agencies may be different from those adapted by most of the established international credit
rating agencies. Therefore, the Chinese local credit rating system may not provide an equivalent standard for comparison with securities rated by international credit rating agencies
Source: ChinaBond, LHS credit quality breakdown as of 31 December 2015, RHS spreads as of 13 January 2016
0
50
100
150
200
250
300
Ma
y-1
4
Jun
-14
Jul-1
4
Au
g-1
4
Se
p-1
4
Oct-
14
Nov-1
4
Dec-1
4
Jan
-15
Fe
b-1
5
Ma
r-15
Ap
r-15
Ma
y-1
5
Jun
-15
Jul-1
5
Au
g-1
5
Se
p-1
5
Oct-
15
Nov-1
5
Dec-1
5
3Y AA Corporate Bond Yields - 3Y AAA Corporate Bond Yields
Spreads between low and high
quality bonds start to widen as
credit event cases increase
AAA (61.9%)
AA+ (19.0%)
AA (17.9%)
AA- (1.0%)
A+ (0.2%)
A & Below (0.1%)
Over 98% of the market is rated AA or above by local credit agencies, less than 2% is rated AA- or below
Published credit ratings are not useful for differentiating between different quality bonds
An increasing number of credit default events should continue to drive improved pricing differentiation in the market
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Onshore corporate bond spreads Credit quality breakdown1
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Mapping local credit ratings to international equivalents (Unofficial mapping for reference only)
Note:
1. The table is provided for discussion purposes only. There is no official mapping to convert local rating into international rating. The rating criteria and methodology used by Chinese local rating agencies may differ from those
adopted by established international credit rating agencies. Therefore, the Chinese local credit rating system may not provide an equivalent standard for comparison with securities rated by international credit rating agencies
Source: HSBC Global Asset Management, December 2015
Local rating International rating (S&P)
AAA
AA+
AA
AA-
A+
A
A-
BBB+
BBB
BBB-
BB+
BB
BB-
B+
B
B-
CCC
A
A
A A
A
+ A
A A
A
- A+ and
below
China onshore bonds are mainly rated by local
rating agencies, which have difference standards to
international ones
Local rating agencies eg China Lianhe Credit
Rating, Dagong Global Credit Rating, Peng Yuan
Credit Rating, etc
If we try to map the local ratings to international one
by using China’s sovereign rating:
– S&P assigned AA- vs Local rating agencies rated AAA to
Chinese government
Reference rating conversion table¹
Sovereign rating
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Offshore RMB bonds are on average yielding 5.5%, while average duration is only 2.6 years
Bonds denominated in CNH tend to have higher yields, compared to bonds in other major currencies such as USD and EUR, even
when comparing the same issuer with very similar tenor
Offshore RMB bond market often offers higher yields
Same bond in different currencies Yield (%) on 25 Jan 2016
Total 3.75% 09/24/2018 (CNH) 4.95
Total 2.125% 08/10/2018 (USD) 2.18
Total 4.875% 01/28/2019 (EUR) 0.22
Same bond in different currencies Yield (%) on 25 Jan 2016
BPLN 3.95% 10/08/2018 (CNH) 5.50
BPLN 2.241% 09/26/2018 (USD) 2.36
BPLN 2.994% 02/18/2019 (EUR) 0.52
Source: HSBC Global Asset Management; Bloomberg, data as at 25 January 2016. The data presented is for information and illustration purposes only and is not intended as an offer or solicitation for the purchase or sale of any
financial instrument or investment strategy
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Company 1: Total (bond issued on 12 Sep 2013)
Company 2: BPLN (bond issued on 2 Oct 2013)
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Yield comparison – Asian hard currency bond vs offshore RMB bond
Historical yield (duration adjusted)
Yields in the offshore market are attractive on a risk adjusted basis
Source: HSBC Global Asset Management; Bloomberg, data as of 29 December 2015
0.0
1.0
2.0
3.0
4.0
5.0
6.0
Dec-10 Jun-11 Dec-11 Jun-12 Dec-12 Jun-13 Dec-13 Jun-14 Dec-14 Jun-15
HSBC Asian US Dollar Bond Index BofA Merrill Lynch Euro Corporate Index BofA Merrill Lynch US Corporate Index HSBC Offshore RMB Bond Index
0.0
0.5
1.0
1.5
2.0
Dec-10 Jun-11 Dec-11 Jun-12 Dec-12 Jun-13 Dec-13 Jun-14 Dec-14 Jun-15
HSBC Asian US Dollar Bond Index BofA Merrill Lynch Euro Corporate Index BofA Merrill Lynch US Corporate Index HSBC Offshore RMB Bond Index
%
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Duration of the market is only around 2.6 years
Therefore the duration-adjusted yield is attractive
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Indian bonds
5.2 5.5
6.0 5.7
4.3 3.9 4.0
3.3
2.5
6.0 6.5
4.8
5.7
4.8 4.5
4.1 3.9 3.5
3.0
0.0
1.0
2.0
3.0
4.0
5.0
6.0
7.0
FY
00
FY
01
FY
02
FY
03
FY
04
FY
05
FY
06
FY
07
FY
08
FY
09
FY
10
FY
11
FY
12
FY
13
FY
14
FY
15
FY
16
FY
17
FY
18
Fiscal deficit (as per new consolidation path) Old fiscal consolidation path
Govt’s fiscal
consolidation path
-6
-5
-4
-3
-2
-1
0
2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
0123456789
10
So
uth
Afr
ica
Indonesia
India
Me
xic
o
Ph
ilippin
es
Ma
laysia
Hungary
Chin
a
Th
aila
nd
US
UK
Sp
ain
Germ
any
7.8%
Note: Any forecasts, projections or targets 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. For
illustrative purpose only
Source: Budget documents, CEIC, HSBC, as of 28 January 2016
Expected
INTERNAL
High yield
Improving budget
Oil boost
Improving current account
Improved currency performance
Central government fiscal deficit
Selected 10 year government bond yields Current account deficit
Yield (%)
% of GDP
% of GDP
27
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Conclusions
INTERNAL
Asian fixed income has provided decent returns during the latest bout of risk aversion
Asian currencies generally have good fundamentals, but progress of USD is key
Asian fixed income has enduring qualities with the potential to outperform
Interesting niche opportunities are worth consideration
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Important Information
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Key risks
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Investor should be reminded that investment in some of the developing Asian countries may involve special considerations and
risks. Political changes, government regulation, social instability or diplomatic development, etc could affect adversely the
economies of such countries or the value of the investment
Change of interest rate may affect the value of the investments. Bonds and other fixed income securities are more susceptible to
fluctuation in interest rate and may fall in value if interest rates change
The assets and liabilities of the investments may be denominated in Asian currencies which is different from the base currency of
the investments. Therefore, the investments maybe affected favourably or unfavourably by exchange control regulation or
changes in the exchange rates between the base currency and other currencies
The investments may have exposure in credit risk whereby investments in non-investment grade debt obligations involves a high
amount of risk. An issuer suffering an adverse change in its financial condition could lower the credit quality of a security, leading
to greater price volatility of the security
Investments made may have exposure in financial derivative instruments, such as futures, forwards and swaps, etc. Investments
in financial derivative instruments may involve a greater degree of risk than in case with conventional securities and may subject
to liquidity and counterparty risks
Currency movement and market condition may affect the value of investments
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Explanatory notes and disclaimers
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investment advisory and fund management activities, which are ultimately owned by HSBC Holdings Plc. HSBC Global Asset
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This material has been prepared or is distributed for informational purposes only and is not a solicitation or an offer to buy or sell any
security or instrument or to participate in any trading or investment strategy. All opinions and assumptions included in this presentation
are based upon current market conditions as of the date of this presentation and are subject to change. All investments involve risk
including the loss of principal.
This information has been prepared for informational purposes only, and is not intended to provide and should not be relied
on for accounting, legal or tax advice. You should consult your tax or legal advisor regarding such matters.
This presentation contains data compiled from third party sources believed to be reliable, but the accuracy of such data has not been
verified.
Forecasts, projections or targets where provided are indicative only and are not guaranteed in any way. HSBC Global Asset
Management accepts no liability for any failure to meet such forecasts, projections or targets.
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form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the prior written permission of HSBC
Global Asset Management.
20160223-120312 / 16-02-103
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