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Cautious yet engaged
Dr. Murat Ulgen, Global Head of Emerging Markets Research
Investors turn more bearish on emerging markets.
Major investors have become more cautious about the outlook for emerging markets (EM) against a backdrop of slowing growth, rising inflation and the prospect of Federal Reserve tightening, according to the latest HSBC EM Sentiment Survey.
The poll found that 27% of investors feel ‘bearish’, a sharp rise from just 9% in the July edition of the survey, while the proportion feeling ‘bullish’ dropped to 27% from 40%.
The global economy has faced a series of negative supply-side shocks that are causing downside risks to growth and upside risks to inflation. Emerging markets are a lot more susceptible to these shocks, hence their financial markets have markedly underperformed those of developed markets, and it seems like this ‘stagflationary’ backdrop is still keeping EM investors at bay.
The survey – the sixth of its kind in a series first launched in June 2020 – was conducted between 28 September 2021 and 17 November 2021 among 120 investors from 115 institutions representing USD572 billion of EM assets under management.
It shows that investors have pared back their expectation for EM economic activity, with just 37% of those surveyed expecting EM growth to accelerate over the next 12 months, down from 60% in July. They see tightening in the US and other developed markets as the single biggest risk to the EM outlook, with a large majority (81%) viewing Federal Reserve tapering as ‘slightly negative’ or ‘negative’ for EM.
At the same time, however, investors are more willing to deploy cash, with the number planning to cut their cash levels rising to 30%, up from 21% in July. Their risk appetite (measured on a scale from 0 to 10 where 10 means the greatest willingness to take risk) also rose to 6.59 from 6.17.
This suggests the valuations of some emerging markets assets have dropped to levels which have started to make them compelling to investors. Indeed, while the EM fundamentals look challenging, the technical picture is a lot more favourable. There has been a significant reduction in foreign holdings of local market debt and EM equities are trading at the deepest discount to developed markets since 2004. The modest pick-up in risk appetite supports the argument that investors are still looking out for opportunities where valuations are attractive.
Asia remains a favoured destination or EM investors, with 58% of those surveyed having an “overweight” position in the region. When it comes to individual asset classes, however, enthusiasm about the region has waned, with overall net sentiment scores – the difference between the share of survey respondents that see a region as having a more or less favourable outlook – now negative for Asian hard currency and local currency debt.
By contrast, Central and Eastern Europe (CEE) has a positive net sentiment score across all asset classes. Investors are particularly positive on FX and local currency debt in CEE. This may be down to the fact that this region is facing more overheating risk than stagflation, with good growth prospects and expectations that policymakers will deliver further tightening on top of already aggressive rate hikes.
Looking more generally at attitudes towards different asset classes, investors are downbeat on FX (aside from in CEE), with the proportion expecting a depreciation in EM FX at 51%, compared with 23% in July. In fixed income, investors increasingly prefer the relative safety of hard currency debt. Sentiment on EM equities has also deteriorated, with the proportion expecting EM equities to outperform developed world equities over the next three months at 35%, down from 46% in July.
The survey also polled investors on their attitudes to ESG investing against the backdrop of COP26 climate negotiations. Half of those surveyed said they plan to boost their investment in climate solutions in response to the discussions leading up to and during the Glasgow summit. Given the recent awareness of climate change issues via COP26 coverage, we are not surprised by this development.
First published 24 November 2021.Would you like to find out more? Click here to read the full report (you must be a subscriber to HSBC Global Research).
The following analyst(s), economist(s), or strategist(s) who is(are) primarily responsible for this report, including any analyst(s) whose name(s) appear(s) as author of an individual section or sections of the report and any analyst(s) named as the covering analyst(s) of a subsidiary company in a sum-of-the-parts valuation certifies(y) that the opinion(s) on the subject security(ies) or issuer(s), any views or forecasts expressed in the section(s) of which such individual(s) is(are) named as author(s), and any other views or forecasts expressed herein, including any views expressed on the back page of the research report, accurately reflect their personal view(s) and that no part of their compensation was, is or will be directly or indirectly related to the specific recommendation(s) or views contained in this research report: Dr. Murat Ulgen
Foreign exchange: Basis for financial analysis
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Definitions for currency trades on DFs and NDFs
Buy: refers to buying the first currency in the named pair in exchange for the second currency in the named pair.
Sell: refers to selling the first currency in the named pair in exchange for the second currency in the named pair.
The tenor of the instrument will be denoted and will refer to a settlement date relative to the opening date of the trade idea e.g. 1m refers to a settlement date 1 month forward from the open date of the trade idea. NDF trades normally fix two working days prior to the settlement date.
Distribution of currency trades
The nature of foreign exchange forward trade ideas is such that there will always be an equal number of buy and sell trades (buying one currency in exchange for selling another), both outstanding and historically.
Equities: Stock ratings and basis for financial analysis
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From 23rd March 2015 HSBC has assigned ratings on the following basis:
The target price is based on the analyst’s assessment of the stock’s actual current value, although we expect it to take six to 12 months for the market price to reflect this. When the target price is more than 20% above the current share price, the stock will be classified as a Buy; when it is between 5% and 20% above the current share price, the stock may be classified as a Buy or a Hold; when it is between 5% below and 5% above the current share price, the stock will be classified as a Hold; when it is between 5% and 20% below the current share price, the stock may be classified as a Hold or a Reduce; and when it is more than 20% below the current share price, the stock will be classified as a Reduce.
Our ratings are re-calibrated against these bands at the time of any 'material change' (initiation or resumption of coverage, change in target price or estimates).
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Prior to this date, HSBC’s rating structure was applied on the following basis: For each stock we set a required rate of return calculated from the cost of equity for that stock’s domestic or, as appropriate, regional market established by our strategy team. The target price for a stock represented the value the analyst expected the stock to reach over our performance horizon. The performance horizon was 12 months. For a stock to be classified as Overweight, the potential return, which equals the percentage difference between the current share price and the target price, including the forecast dividend yield when indicated, had to exceed the required return by at least 5 percentage points over the succeeding 12 months (or 10 percentage points for a stock classified as Volatile*). For a stock to be classified as Underweight, the stock was expected to underperform its required return by at least 5 percentage points over the succeeding 12 months (or 10 percentage points for a stock classified as Volatile*). Stocks between these bands were classified as Neutral.
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Rating distribution for long-term investment opportunities
As of 30 September 2021, the distribution of all independent ratings published by HSBC is as follows:
Buy 60% (31% of these provided with Investment Banking Services in the past 12 months)
Hold 33% (30% of these provided with Investment Banking Services in the past 12 months)
Sell 7% (28% of these provided with Investment Banking Services in the past 12 months)
For the purposes of the distribution above the following mapping structure is used during the transition from the previous to current rating models: under our previous model, Overweight = Buy, Neutral = Hold and Underweight = Sell; under our current model Buy = Buy, Hold = Hold and Reduce = Sell. For rating definitions under both models, please see “Stock ratings and basis for financial analysis” above.
Fixed income: Basis for financial analysis
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Definitions for fundamental credit and covered bond recommendations
Overweight: For corporate credit, the issuer’s fundamental credit profile is expected to improve within the next six months. For covered bonds, the bonds issued in this country are expected to outperform those of the other countries in our coverage over the next six months.
Neutral: For corporate credit, the issuer’s fundamental credit profile is expected to remain stable for up to six months. For covered bonds, the bonds issued in this country are expected to perform in line with those of the other countries in our coverage over the next six months.
Underweight: For corporate credit, the issuer’s fundamental credit profile is expected to deteriorate within the next six months. For covered bonds, the bonds issued in this country are expected to underperform those of other countries in our coverage over the next six months.
Definitions for trades (Rates & Credit)
Buy and Sell refer to a trade call to buy or sell a bond, option on an interest rate swap (""swaption""), interest rate cap or floor, inflation cap or floor, or Total Return Swap (""TRS""). The buyer/seller of a TRS receives/pays the total return of the underlying instrument or index at the end of the period and pays/receives the funding leg.
Buy protection and Sell protection refer to a credit default swap (CDS): the protection buyer/seller is effectively selling/buying the reference entity's credit risk.
Pay and receive refer to a trade call to pay or receive the fixed leg of an interest rate swap (IRS), a non-deliverable IRS, the first-named leg of a basis swap, the realised inflation leg of an inflation swap, or a forward rate agreement (FRA). An investor that executes a pay or receive trade is said to be ""paid"" or ""received.""
Payer and receiver refer to inflation caps or floors and to swaptions: a payer is an option giving the right but not the obligation to enter a paid position in an interest rate or inflation swap, and a receiver is an option giving the right but not the obligation to enter a received position in an interest rate or inflation swap.
ASW (also asset-swap, Buy on asset swap, Buy on an asset-swapped basis): Buy a bond packaged with a swap that is tailored to eliminate the bond’s interest rate risk, effectively transforming the bond to a floating rate instrument whilst preserving the credit exposure to the bond issuer.
RASW (also reverse asset-swap, Sell on asset swap, Sell on an asset swapped basis): Sell a bond packaged with a swap that is tailored to eliminate the bond’s interest rate risk, effectively transforming the bond to a floating rate instrument whilst preserving the credit exposure to the bond issuer.
Distribution of fundamental credit and covered bond recommendations
As of 30 September 2021, the distribution of all independent fundamental credit recommendations published by HSBC is as follows:
Overweight 25% (56% of these provided with Investment Banking Services in the past 12 months)
Neutral 49% (39% of these provided with Investment Banking Services in the past 12 months)
Underweight 25% (35% of these provided with Investment Banking Services in the past 12 months)
For the purposes of the distribution above the following mapping structure is used: Overweight = Buy, Neutral = Hold and Underweight = Sell. For rating definitions under both models, please see ""Definitions for fundamental credit and covered bond recommendations"" above.
Distribution of trades
As of 30 September 2021, the distribution of all trades published by HSBC is as follows:
Buy 79% (65% of these provided with Investment Banking Services in the past 12 months)
Sell 21% (50% of these provided with Investment Banking Services in the past 12 months)
For the purposes of the distribution above the following mapping structure is used: Buy/Sell protection/Receive/Buy Receiver/Sell Payer = Buy; and Sell/Buy protection/Pay/Buy Payer/Sell Receiver = Sell. ASW is counted as a buy of the bond and a paid swap, and RASW as a sell of the bond and a received swap. For rating definitions under both models, please see ""Definitions for trades (Rates and Credit)"" above.
For the distribution of non-independent ratings published by HSBC, please see the disclosure page available at http://www.hsbcnet.com/gbm/financial-regulation/investment-recommendations-disclosures.
Recommendation changes for long-term investment opportunities
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