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.  EM equity funds reverse three weeks of redemptions Some relaxation in global conditions lately, such as some retracement in UST yields, stable USD and softer US inflation expectations, is reducing stress on appetite for EM risk. Yet, we are of the view that the global setting will likely remain fluid and volatile in the coming months (USD 10 yr yield range 2.2-2.6% and rising Eurozone yields – see our 12 January report Fixed Income Asset Allocation: Hard Realities – as well as further USD strength ahead, and lack of policy clarity in the US), therefore, we continue to sponsor a selective approach to EM, looking for net commodity exporters or less open economies with endogenous drivers – macroeconomic policy flexibility and prospects for reforms. EM and DM funds registered net inflows, in the week ended 11 January. Among EM funds, strong inflows to Thailand, Colombia and Poland bond funds as well as into Russia, Taiwan and Brazil equity funds led the recovery. In DM, most of the inflows went to US and Global bonds and into Japan equity funds. US equities posted marginal withdrawals. HSBC’s early signalling system indicates some improvement in appetite for EM risk driven by EXD and equities (pg 14). HSBC’s EM fund flows momentum (p. 5), dispersion indicators (p. 8) and retail rather than institutional demand (p. 13) highlight rising appetite for EM EXD and equities. Similarly, EXD non-ETF and ETF bond fund as well as equity ETF attracted most of the flows. Finally, daily financial account portfolio flows to equities (eight countries) shows inflows mostly to S. Korea, Thailand and Brazil, and to bonds (seven countries), mainly S. Korea and Indonesia (p. 15). On benchmark performance, EM equities added 1.8% w/w (2.8% y-t-d) led by Philippines, China and Brazil. RXD added 0.6% w/w (1.2% y-t-d) supported by Philippines, Peru and Colombia. EM Corporate debt advanced 0.4% w/w (0.6% y-t-d) lifted mainly by HY (0.6% w/w, 1.1% y-t-d). LCD declined 0.9% w/w (-1.1% y-t-d) on the back of EM FX (-1.1% w/w; -1.4% y-t-d). 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 HSBC Securities & Capital Markets India (Pvt). Ltd. kishoremuktinutalapati@hsbc.co.in +91 80 4555 2756 Head of Global Emerging Markets Equity Strategy HSBC Bank plc john.lomax@hsbcib.com +44 20 7992 3712 Issuer of report: HSBC Securities (USA) Inc. Published: 13 January 2017 *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 -2.0-1.00.01.02.0EM to talGEMsAxJ tota lLat-Am tota lEMEA totalUSDbn-0.5-0.30.00.30.5% AuM0.01.02.0CEEMEALat-AmAxJGEMsBy RegionBlendedHardLocalBy CurrencyEM totalUSDbn0.01.02.0% AUMInflows to EM bonds skewed to EXD funds MULTI-ASSET ● GLOBAL EMERGING MARKETS 13 January 2017 2  Bond fund flows Inflows to EM bond funds continue for the second consecutive week, led by EXD as well as CEEMEA and LatAm, in AUM terms. So far this year net inflows into bond funds amount to USD3.2bn, driven by LCD (USD2bn) and GEM (USD2.3bn). EM corporate bond funds posted net outflows after two consecutive weeks of gains, driven by withdrawals from IG and LCD (charts 27&28). Investments in EM corporate bond funds amount to USD1.3bn y-t-d. Japanese institutional investors purchased foreign bonds worth USD1.76bn during the week ended January 7, 2017, according to the latest data released by the Ministry of Finance. Foreign bonds worth USD16.9bn were sold in the last three weeks of December 2016. Separately Bank of Japan released data on geographical allocation of bond flows for the month of November. Increased bond flows into LatAm were evident while outflows were seen in Korea, Indonesia and Malaysia. During the week ended January 11, Uridashi bond (retail bond in Japan) issuances was triggered by issuances in BRL (USD74.4mn), MXN (USD18.4mn) and ZAR (USD14.5mn). YTD, BRL was the favourite currency in EM space with total issuance of USD74.4mn. BRL is followed by MXN (USD18.4mn) and ZAR (USD14.5mn) respectively.Equity fund flows Inflows returned to the EM equity funds after three weeks of outflows. GEM equity funds (those that have a broad mandate to invest across asset class) saw inflows over the last week, after suffering redemptions for nine weeks. This to some extent can be seen as an indication of return of interest into EM equities as an asset class. Following the US presidential elections, EM equities came under severe pressu