Investors are more confident about emerging markets (EM) than they were three months ago, according to the latest HSBC Emerging Markets Investor Sentiment Survey.
Nearly half of the 211 investors surveyed are ‘bullish’ about EM prospects over the next three months, up from just a quarter in June.
The survey, the second of its kind, was conducted between 11 August and 15 September. Investors from 195 institutions representing around USD650 billion of assets under management in EM gave their views on the outlook for different markets.
As well as having a more positive view on EM in the short term, the majority (71 per cent) expect EM growth to improve over the next 12 months, compared with just 37 per cent in June.
They also expect accommodative EM policy rates – currently at record or near-record lows – to stay broadly the same.
Against this backdrop, investors’ risk appetite has grown modestly. The survey asked investors how much risk they are willing to take at the moment, where 0 is ‘no risk’ and 10 is ‘highest risk’. The average score is 6.46, a modest rise from 5.97 in June.
A growing appetite for risk is also reflected in attitudes towards cash. Many investors increased their cash holdings during the coronavirus pandemic as turbulence affected multiple asset classes.
While respondents to our survey have still relatively high cash holdings now, nearly one-third now expect to put more cash to work in the near term and invest in EM financial assets. Only 11 per cent expect to increase their cash holdings.
The survey also asked investors for their views on different asset classes and regions.
Investors said they see Asia as the region with the most favourable outlook across all asset classes – FX, rates, equity and credit – and with the best prospects for economic growth. They see Latin America as having the least favourable outlook overall.
Fewer investors think EM currencies will depreciate against the US dollar compared with the June survey, though the proportion of respondents expecting appreciation has increased only by 3 percentage points to 31 per cent. In fixed income, slightly more investors favour local markets now over hard currency debt.
In equities, there is a sharp turnaround in sentiment. The proportion of respondents expecting EM equity markets to improve has nearly doubled to 67 per cent compared with 36 per cent in the June survey.
And when assessing the outlook for EM and developed markets (DM), 55 per cent expect EM equities to outperform DM over the next three months. This contrasts with the results of the June survey, when 47 per cent expected EM to underperform.
ESG on the rise
The survey also shows the rising profile of environmental, social and governance (ESG) issues for EM investors. Nearly 40 per cent of respondents now say they run an ESG portfolio directly, partly or indirectly, up from 30 per cent in June.
Climate change, inequality, and minority shareholder protection are seen as the key ESG risks.
As our Global Research team sees a sustained uptick in demand for ESG advice from clients in EMs, we expect the numbers actively engaged in ESG investing to increase in the future.
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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
Brazilian Securities Exchange Commission (CVM) Regulation No. 598
Pursuant to CVM Ruling No. 598 (May 2018), HSBC has obtained from the analyst(s) listed above under "Analyst Certification" and disclosed (where applicable), the statements set forth in Article 21 and have rendered (where applicable) the statements set forth in Article 22, under the sections titled "Analyst Certification" and "HSBC & Analyst Disclosures". The analyst(s) furthermore certifies(y) that the recommendations contained in this report have been prepared independently, even in relation to HSBC. Additionally, for purposes of Article 20, the principal analyst responsible for compliance of the mentioned regulation is the first name in the list under "Analyst Certification" that has local certification, where applicable.
Foreign exchange: Basis for financial analysis
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HSBC believes an investor's decision to buy or sell an instrument should depend on individual circumstances such as the investor's existing holdings and other considerations. Different securities firms use a variety of terms as well as different systems to describe their recommendations. Investors should carefully read the definitions of the recommendations used in each research report. In addition, because research reports contain more complete information concerning the analysts' views, investors should carefully read the entire research report and should not infer its contents from the recommendation. In any case, recommendations should not be used or relied on in isolation as investment advice.
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
HSBC and its affiliates, including the issuer of this report (“HSBC”) believes an investor's decision to buy or sell a stock should depend on individual circumstances such as the investor's existing holdings, risk tolerance and other considerations and that investors utilise various disciplines and investment horizons when making investment decisions. Ratings should not be used or relied on in isolation as investment advice. Different securities firms use a variety of ratings terms as well as different rating systems to describe their recommendations and therefore investors should carefully read the definitions of the ratings used in each research report. Further, investors should carefully read the entire research report and not infer its contents from the rating because research reports contain more complete information concerning the analysts' views and the basis for the rating.
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).
Upside/Downside is the percentage difference between the target price and the share price.
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.
*A stock was classified as volatile if its historical volatility had exceeded 40%, if the stock had been listed for less than 12 months (unless it was in an industry or sector where volatility is low) or if the analyst expected significant volatility. However, stocks which we did not consider volatile may in fact also have behaved in such a way. Historical volatility was defined as the past month's average of the daily 365-day moving average volatilities. In order to avoid misleadingly frequent changes in rating, however, volatility had to move 2.5 percentage points past the 40% benchmark in either direction for a stock's status to change.
Rating distribution for long-term investment opportunities
As of 23 September 2020, the distribution of all independent ratings published by HSBC is as follows:
Buy 55% ( 33% of these provided with Investment Banking Services )
Hold 36% ( 32% of these provided with Investment Banking Services )
Sell 9% ( 24% of these provided with Investment Banking Services )
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
This report is designed for, and should only be utilised by, institutional investors. Furthermore, HSBC believes an investor's decision to make an investment should depend on individual circumstances such as the investor's existing holdings and other considerations.
HSBC believes that investors utilise various disciplines and investment horizons when making investment decisions, which depend largely on individual circumstances such as the investor's existing holdings, risk tolerance and other considerations. Given these differences, HSBC has two principal aims in its fixed income research: 1) to identify long-term investment opportunities based on particular themes or ideas that may affect the future earnings or cash flows of companies in corporate credit and based on country-specific ideas or themes that may affect the performance of these bonds in the case of covered bonds, in both cases on a six-month time horizon; 2) to identify trade ideas on a time horizon of up to four months, relating to specific instruments, which are predominantly derived from relative value considerations or driven by events and which, in the case of credit research, may differ from our long-term opinion on an issuer. Buy or Sell refer to a trade call to buy or sell that given instrument; HSBC has assigned a fundamental recommendation structure, as described below, only for its longer-term investment opportunities.
HSBC believes an investor's decision to buy or sell a bond should depend on individual circumstances such as the investor's existing holdings and other considerations. Different securities firms use a variety of terms as well as different systems to describe their recommendations. Investors should carefully read the definitions of the recommendations used in each research report. In addition, because research reports contain more complete information concerning the analysts' views, investors should carefully read the entire research report and should not infer its contents from the recommendation. In any case, recommendations should not be used or relied on in isolation as investment advice.
HSBC Global Research is not and does not hold itself out to be a Credit Rating Agency as defined under the Hong Kong Securities and Futures Ordinance.
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 22 September 2020, the distribution of all independent fundamental credit recommendations published by HSBC is as follows:
All Covered issuers
Issuers to whom HSBC has provided Investment Banking 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 June 2020, the distribution of all trades published by HSBC is as follows:
All Covered instruments
Issuers to whom HSBC has provided Investment Banking 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
To view a list of all the independent fundamental ratings/recommendations disseminated by HSBC during the preceding 12-month period, and the location where we publish our quarterly distribution of non-fundamental recommendations (applicable to Fixed Income and Currencies research only), please use the following links to access the disclosure page:
Clients of Global Research and Global Banking and Markets: www.research.hsbc.com/A/Disclosures
Clients of HSBC Private Banking: www.research.privatebank.hsbc.com/Disclosures
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- This report is dated as at 24 September 2020.
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