Disclaimer & Disclosures Disclaimer & Disclosures This report must be read with the disclosures and the analyst certifications in the Disclosure appendix, and with the Disclaimer, which forms part of it.  Yet, we maintain a constructive view on EM for 2H16 The UK’s referendum decision to leave the EU should exert pressure on EM financial assets and capital flows in the near term as a result of a broad-based risk-off environment and heightened global volatility. Yet, we maintain our constructive view on EM for 2016 given low for longer G3 rates and improving EM macroeconomic conditions (Emerging Markets, Still constructive on EM: Our multi-asset views, 2 June 2016). Clearly, any change in this view would require a reassessment of the EM panorama but our global macro-strategy view does not foresee a drastic turn, at least not at this stage. EM policymaker action to manage the UK’s exit process smoothly is key, so the element of uncertainty will be there for a while. Selective opportunities will exist within the EM space depending on the economic and financial exposures of individual countries to the UK and Europe, in our view. While CEEMEA is the most exposed, Asia and LatAm are less so. We reckon that EM FX rather than rates are more sensitive to current risk-off conditions (Emerging Markets: Fallout from Brexit, 24 June 2016). Net inflows into EM and DM bond funds but redemptions from equity funds, in the week ended 22 June. Among EM funds, net bond inflows were skewed to China bonds while equity redemptions concentrated in China and Taiwan. Within DM funds, major net outflows from US and European (Germany and UK) equity funds but strong deposits into US bond funds. HSBC’s early signalling system suggests cautiousness for EM funds (pg 14). Daily financial account portfolio flows to seven countries shows gains in bonds (S. Korea, S. Africa and Thailand) and equities (S. Africa and Brazil) (p. 15). HSBC’s EM fund flows momentum (p. 5), dispersion indicators (p. 8) and institutional and retail demand (p. 13) also show stable appetite for EM risk. Next week, investors will focus on global manufacturing indicators from the US, EU and China/EM to get a sense of the growth differentials between EM and DM. ; Last week’s equity flows Source: EPFR Global, HSBC Last week’s bond flows Source: EPFR Global, HSBC Bertrand Delgado Director, Senior EM Strategist HSBC Securities (USA) Inc. bertrand.j.delgado@us.hsbc.com +212 525 0745 Kishore Muktinutalapati* Equity Strategist, Frontier & Emerging Markets HSBC Securities & Capital Markets (India) Pvt Ltd kishoremuktinutalapati@hsbc.co.in +91 80 4555 2756 John Lomax* Head of Global Emerging Market Equity Strategy HSBC Bank plc john.lomax@hsbcib.com +44 20 7992 3712 Issuer of report: HSBC Securities (USA) Inc. Published: 24 June 2016 *Employed by a non-US affiliate of HSBC Securities (USA) Inc, and is not registered/ qualified pursuant to FINRA regulations View HSBC Global Research at: https://www.research.hsbc.com GEMs funds flows MULTI-ASSET GLOBAL EMERGING MARKETS -1.0-0.50.00.51.0EM totalGEMsAxJ totalLat-Am totalEMEA totalUSDbn-0.3-0.2-0.10.00.10.20.3% AuM-0.50.00.5CEEMEALat-AmAxJGEMsBy RegionBlendedHardLocalBy CurrencyEM totalUSDbn-0.50.00.51.0% AUMBrexit to hurt EM flows and performance near term MULTI-ASSET  GLOBAL EMERGING MARKETS 24 June 2016 2  Bond fund flows EM bond funds reversed last week’s redemptions, led by inflow into EXD. LCD and BCD saw outflows. Year-to-date net inflows into bond funds amount to USD4.2bn, mainly into EXD funds (USD5.2bn) and Asia ex-Japan funds (USD4.2bn). Inflows into EM corporate bond fund came back after a week of withdrawals, driven by EXD and IG funds (charts 27&28). Investments into EM corporate bond funds amount to USD2.7bn y-t-d. In May, investors in EXD increased allocations mainly in Colombia, Argentina and Peru, compared to April, at the expense of Turkey, Indonesia and Hungary. On LCD, Mexico, Indonesia and Russia gained the most, while positioning in S. Africa, Colombia and Brazil dropped (p.18). Japanese institutional investors sold foreign bonds worth USD4.4bn in the week ended 18 June 2016 (charts 55-56, p16). Meanwhile, on Uridashi bond issuance (retail bond in Japan), during the week ended 22 June 2016, bond issuance surged in MXN by USD20.2m, while bond issuance on INR and BRL increased by USD4.7m and USD2.1m respectively (charts 58, p16). Equity fund flows Rise in protectionism globally, for example as seen in the case of UK voting to leave EU, is a significant threat to EM equity story. While EM equities could come under significant pressure in the near-term following the Brexit, we are not convinced that EM equities would be relative losers in the medium term. Our bull case for EM equities is centred on the stabilization of the cycle (both in terms of the macro situation and the corporate earnings), synchronization between the US and Chinese cycles leading to a more EM-friendly moneta