Monthly GEMs equity flows：Of the cyclical and defensive EMs

 Global fund managers reduced exposure to cyclical EMs...  ...and increased allocation to defensive EMs to the highest level in six years  GEM fund managers follow similar trend on OW defensives and UW cyclicals In the last edition of our Monthly GEMs equity flows, we highlighted how global fund managers are underweight Emerging Market (EM) equities in their portfolios and also showed the differentiated positioning between growth and value funds. As an extension, in this note, we analyse the holdings of all the Global equity funds in our database (with a total AuM of USD713bn) to see how the global managers are positioned with respect to cyclical and defensive countries within EMs. It can be seen that average allocations of defensive EM markets are positive relative to benchmark and have reached the highest levels over the last few months (bottom-left chart). In contrary, cyclical EMs remain under owned by global fund managers with Russia and Poland being the most underweight markets. Perhaps, as the world economy continues to languish on weaker economic growth, fund managers see merit in being underweight cyclicals while gaining exposure to EM through defensive countries. Looking at the current positioning of GEM equity funds, we found a similar trend – of fund managers being underweight on cyclical markets and prefer to stick with defensive countries with EMs (bottom-right chart). Average allocation to cyclical markets within EM has fallen drastically since Q4 2012 and managers gained exposure to defensive markets. Despite the recent pick-up in cyclical allocations since May last year, the allocation relative to defensive markets still looks very low and no-where close to the levels seen in 2012. Looking ahead, as the global economy gradually rebounds, we might see enough opportunities for both global and GEM fund managers to improve allocation to cyclical markets within EMs. Equity Strategy Global Emerging markets Monthly GEMs equity flows Of the cyclical and defensive EMs 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: Issuer of report: 3 August 2015Disclaimer & 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 Active allocation of Global equity funds (LHS) and GEM equity funds(RHS) to cyclical and defensive emerging markets* -2.5-2.0-1.5-1.0-0.50.00.51.0Jan-09Jan-10Jan-11Jan-12Jan-13Jan-14Jan-15Act ive w eight of cyc licalsActive weight of defensives -8.0-6.0-4.0-2.00.02.0Jan-09Jan-10Jan-11Jan-12Jan-13Jan-14Jan-15Act ive w eight of cyc licalsActive weight of defensives Note: Brazil, Greece, Hungary, Poland and Korea are classified as cyclical countries; Chile. Colombia, Egypt, Malaysia, Mexico, Philippines, South Africa and Thailand are classified as defensive countries. Countries like China, India, Turkey etc are taken as market and hence active weight of cyclical and defensive countries do not add up to 0 in GEM equity funds. Source: MSCI, EPFR Global, Thomson Reuters Datastream, HSBC calculations abc 2 Equity Strategy Global Emerging markets 3 August 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 243 GEMs funds which are benchmarked to MSCI/FTSE EM index, with Assets under Management (AuM) totalling USD466bn (page 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 positioning within the EM fund managers. Following are some of the key trends worth noting.  Korea remains the most underweight market with an active weight of -7.3% (lowest among EM peers) and also enjoys strong consensus among EM managers.  Fund managers have reduced their overweight position in India considerably over the last few months. From an equity strategy standpoint, we are more constructive on Indian cyclical strength given the opportunities of reform momentum to increase. Hence, we raise our weight on India to neutral (from underweight) and downgraded Brazil to neutral (from overweight) ahead of the expected US monetary tightening cycle (see