Monthly GEMs equity flows

 Global ‘value’ portfolios are underweight EMs...  ...and even in the Global ‘growth’ portfolios, EMs are no longer very popular  Very broadly, EMs continue to be under-owned by Global fund managers Intuitively, Global fund managers would own EM equities for their better growth prospects and less so for their value. Our analysis suggests that EM equities are currently out of favour in both the Global value and the Global growth portfolios. While EM equities have been a structural underweight in value portfolios, the lack of economic excitement in EMs in the recent years has also brought down the popularity of the asset class in the portfolios with growth style. In this note, as a special feature, we analyse holdings of 31 Global value funds (with a total AuM of USD109bn) and of 34 Global growth funds (AuM of USD70bn). The chart on the bottom left shows that on an average Global value funds have been underweight EMs structurally and the changes in allocations to EMs by these funds have been in line with the movement of the 12month forward PE for the asset class. The bottom right hand side chart shows the active weight of EMs in the global growth funds. As it can be seen clearly even coming out of the Global financial crisis of 2008, EMs were favoured largely by the growth funds, with active weights as high as 1400bps. However, subsequently, as the economic growth started to disappoint, EMs lost their sheen in the growth portfolios. While EMs still enjoy an overweight position in the Global growth portfolios, the active weight currently is only 403bps compared with an average overweight of 574bps since 2009. Looking ahead, we think as the economic growth gradually rebounds in EMs, allocations by the growth funds should rise. This trend, we think, will be supported further by the relative value in EM equities compared to DM equities. Equity Strategy Global Emerging markets Monthly GEMs equity flows EM equities and Global styles John Lomax* Head of Global Emerging Market Equity Strategy HSBC Bank plc (UK) +44 20 7992 3712 john.lomax@hsbcib.com Kishore Muktinutalapati* Equity Strategist HSBC Bank plc +91 80 3001 2983 kishoremuktinutalapati@hsbc.co.in Santoshkumar Chandrasekar* Associate Bangalore View HSBC Global Research at http://www.research.hsbc.com *Employed by a non-US affiliate of HSBC Securities (USA) Inc, and is not registered/qualified pursuant to FINRA regulations Issuer of report: HSBC Bank plc 29 June 2015 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 itActive weight of EMs in Global value funds (LHS) and Global growth funds (RHS) 8.09.010.011.012.013.014.0-6.0-5.0-4.0-3.0-2.0-1.00.0Jan-09Jan-10Jan-11Jan-12Jan-13Jan-14Jan-15Active weight of EM in Global value funds (ppt)MSCI EM 12M-forward PE (x, inverted, RHS) 40.444.448.452.456.40.04.08.012.016.0Jan-09Jan-10Jan-11Jan-12Jan-13Jan-14Jan-15Active weight of EM in Global growth funds (ppt)EM PMI manufacturing (RHS) Source: MSCI, EPFR Global, IBES, Thomson Reuters Datastream, HSBC calculations abc 2 Equity Strategy Global Emerging markets 29 June 2015 Allocation of GEM equity funds by country/sector Below, we present the dashboard on allocation of all the GEM equity funds in our database to identify consensus trends among EM fund managers. The dashboard presents the country and sector positioning of 237 GEMs funds which are benchmarked to MSCI/FTSE EM index, with Assets under Management (AuM) totalling USD481bn (page 2 and 3). In the table, AuM weighted allocation indicates the overall over/underweight position in GEM equity funds for a particular country or sector and our consensus indicator score (calculated as the absolute difference between the percentage of assets over/underweight the country or sector by more than 1% divided by the total AuM of these funds) identifies the consensus trends within the EM fund managers. The following are some of the key trends worth noting. India continues to be the most overweight market with an active weight of 4.9% (highest among EM peers) and also enjoys the strongest consensus among EM managers. This crowded positioning of the managers along with slower economic revival was the primary reason behind our underweight call on India (see Downgrading India, upgrading Philippines, 13 May 2015). Also, fund managers seem to be unanimous in their most underweight call on Korea. However, in other two Asian countries - China and Taiwan, consensus seems to be weak among EM managers in their underweight positioning. Also, the overweight positions in South Africa and Russia are based on weak consensus. At the sector level, EM managers largely agree on their underweight positioning in Energy sector with just 3% of the assets with sizeable overweight (by more than 1.0%), betting against the consensus. Elsewhere, the standard charts/tables can be found from page