Monthly GEMs Equity Flows: Fund flows, performance and valuations

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.   Performance of EM equities has been in line with the trend in fund flows over the past ten years  However, equity valuations have seen dislocation since mid-2013 amid a backdrop of falling earnings  Looking ahead, we think stabilisation in the earnings cycle should support flows and EM equity performance The performance of EM equities has been in line with the trend observed in fund flows over the past ten years (left hand side chart below). Even market valuations have moved in line with the liquidity trends until mid-2013, since when they have seen somewhat a dislocation (right hand side chart). Whilst to some extent the taper tantrum (of May 2013) might have impacted the liquidity flow to EM, we think the valuation dislocation is largely due to a sharp fall in earnings. For context, the 12m forward earnings level (estimated by IBES Global aggregates) of the MSCI EM has fallen by c31% since mid-2013. However, as we showed in our report GEMs Equity Strategy, 31 May 2016, there is some evidence that the earnings cycle in EM is stabilising – especially with downgrades to EM corporate earnings estimates abating sharply. Any recovery in earnings is likely to be supported by both an expansion in net income margins as well as a pick-up in sales growth thanks to a stabilisation in the macro cycle. This in turn is likely to be supportive of strong flows and performance of EM equities. Accommodative monetary policy from the Fed and a stable RMB offer further support for the asset class, we think. 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 Bank plc Published: 04 July 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 Monthly GEMs Equity Flows EQUITY STRATEGY GLOBAL EMERGING MARKETS EM fund flows and equity market performance EM fund flows and equity market valuations Source: MSCI, Thomson Reuters Datastream, EPFR Global, HSBC calculations Source: MSCI, IBES, Thomson Reuters Datastream, EPFR Global, HSBC calculations -60%-40%-20%0%20%40%60%80%100%-10%-5%0%5%10%15%20%25%Jan-06Jan-07Jan-08Jan-09Jan-10Jan-11Jan-12Jan-13Jan-14Jan-15Jan-16Rolling 12M flows - EM equity funds (% of AuM)12M return on MSCI EM index(%, RHS)6x7x8x9x10x11x12x13x14x15x-10%-5%0%5%10%15%20%25%Jan-06Jan-07Jan-08Jan-09Jan-10Jan-11Jan-12Jan-13Jan-14Jan-15Jan-16Rolling 12M flows - EM equity funds (% of AuM)12M fwd. PE ratio of MSCI EM index (RHS)Fund flows, performance and valuations EQUITY STRATEGY  GLOBAL EMERGING MARKETS 04 July 2016 2  Fund flows 3 Cross-sectional comparison of Flow of Funds (% of AuM) 4 Monthly Flow (% of AuM) 5 Cumulative flows to EM and DM equity funds (% of AuM) 6 Cumulative flows to EM and DM equity funds split by ETFs and non-ETFs (% of AuM) 6 Cumulative flows into EM regional equity funds (% of AuM) 7 Cumulative flows into EM regional equity funds split by ETFs and non-ETFs (% of AuM) 7 AuM of EM regional equity funds 8 AuM of EM regional equity funds split by ETFs and non-ETFs 8 GEM fund positioning 10 GEM Equity Fund Allocations 12 EEMEA 13 LatAm 19 EM Asia 23 GEM Sectors 28 Disclosure appendix 33 Disclaimer 36 In this monthly note, we analyse the liquidity flow trends and fund manager positioning around the Emerging market (EM) equities. Data was obtained from EPFR Global and latest data point pertains to May 2016. Contents EQUITY STRATEGY  GLOBAL EMERGING MARKETS 04 July 2016 3  Fund flows  EQUITY STRATEGY  GLOBAL EMERGING MARKETS 04 July 2016 4 Cross-sectional comparison of Flow of Funds (% of AuM) Flows into dedicated emerging country equity funds over the last month and 3 month average (% of AuM) Flows into dedicated emerging country equity funds over the last month and 12 month average (% of AuM) Source: EPFR Global, HSBC Source: EPFR Global, HSBC Flows into major regional equity funds over the last month and 3 month average (% of AuM) Flows into the EM sector equity funds over the last month and 3 month average (% of AUM) -2.0%-1.5%-1.0%-0.5%0.0%0.5%1.0%1.5%2.0%GlobalGEMJapanUSAAll EMAsia exJapanWesternEuropeEMEALat-AmLast Month Flow (% of AuM)3 Month Average -0.7%-0.6%-0.5%-0.4%-0.3%-0.2%-0.1%0.0%0.1%0.2%0.3%0.4%ITUtilitiesCons. StaplesHealthCareMaterialsEnergyFinancialsTelecomCons. Disc.IndustrialsLast Month Flow (% of Au M)3 Mon th Average (RHS) Source: EPFR Global, HSBC Source: EPFR Global, HSBC -10%-8%-6%-4%-2%0%2%4%6%8%ColombiaGr