Developed thinking in an emerging worldEmerging Markets DebtFor professional clients only

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Despite high volatility from a series of financial and economic crises, returns for emerging markets debt have generally outpaced those of traditional asset classes over the last ten years. An improving outlook and investors gaining increasing comfort has led to strong performance from many emerging market bond markets, contributing to higher long-term average annualized returns. Typically, low correlations between emerging markets debt indices and traditional asset classes highlight the potential diversification benefits of adding emerging markets bonds to fixed income portfolios.

Significant evolution in emerging markets (EM) over the past 15 years

– Structural improvements in fiscal and monetary policy resulting in improved sovereign credit ratings in many emerging

market countries

Emerging markets debt is gradually assuming more importance in investors’ asset allocations

– The higher spread typically associated with emerging market bonds and relatively low default rates continue to attract

a growing and diversified investor base

Emerging markets carry, on balance, more risk than some traditional developed market investments

– Additional risk historically reflected in price volatility

– Regulatory, legal and governance practices are often less rigorous than their developed market counterparts

Global emerging markets remained resilient during the recent crisis in the developed world

– Generally stable debt metrics and higher growth rates

– Many emerging market countries have very strong foreign currency reserve position

The views and opinions herein are those of HSBC Global Asset Management, are subject to change without notice, and are based on current market

conditions. The material is provided for informational purposes only, does not constitute advice or a recommendation to buy or sell investments, and is

not intended as an offer or solicitation of a purchase or sale of any financial instrument or strategy. Any forecast, projection or target contained in this

document is subject to change, is for informational purposes only and is not guaranteed in any way. HSBC accepts no liability for failure to meet such

forecasts, projections or targets. Past performance is not an indication of future returns.

All investments involve risks, including the possible loss of principal. Equity securities are more volatile than bonds and are subject to greater risks. Bonds

are subject to interest-rate, price and credit risks. Prices tend to be inversely affected by changes in interest rates. Investments in high yield (commonly

known as “junk bonds”) are often considered speculative investments and have significantly higher credit risk than investment-grade securities.

Investments in foreign markets entail special risks such as currency, political, economic, and market risks. The risks of investing in emerging-market

countries are greater than the risks generally associated with foreign investments.

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Sound long-term story

We believe there is a strong long-term case for emerging

markets, especially when compared to the weaker growth

opportunities presently offered by many developed nations.

Emerging market fundamentals, such as the debt / GDP

ratio and current account balance, are significantly stronger

than in many developed markets as shown in Chart 1.

Chart 1. Gross public debt (EM vs DM)

0

20

40

60

80

100

120

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012F 2013F

% o

f G

DP

E m erging E conom ies A dvanced E conom ies US A

Source: IMF World Economic Outlook as of 30 April 2012.

Many emerging market countries experienced financial

crises in the 1990’s and early 2000’s stemming, in large

part, from fixed exchange rates pegged to the US dollar. In

response to these crises, most emerging market countries

implemented monetary policies that abandoned the

currency pegs and allowed their currencies to float, adjusting

to economic and market developments. This allowed them

to accumulate substantial foreign currency reserves, and by

2008, the international reserves in many emerging market

countries exceeded their foreign debt, thus positioning them

as net creditors for the first time.

In April 2012 emerging market foreign exchange (FX)

reserves were eight times larger than they were a decade

ago as noted in Chart 2 and are nearly double the foreign

exchange reserves of developed economies in general. Their

strong positions allowed many emerging market countries

to implement countercyclical policies during the 2008 global

financial crisis. Consequently, during the past three years as

many areas of the world found themselves in the throes of

a recession, most emerging market economies continued to

grow and increase their share of the global economy as seen

in Chart 3.

Chart 2. Emerging markets foreign currency reserves

0

1000

2000

3000

4000

5000

6000

7000

8000

9000

1980 1985 1990 1995 2000 2005 2010

US

$ B

illio

ns

E m erging M arkets International Reserves

Source: IMF World Economic Outlook as of 30 April 2012.

Chart 3. Shifting centre of gravity of the world economy

0%

20%

40%

60%

80%

100%

1980 1984 1988 1992 1996 2000 2004 2008 2012 F 2016 F

Pe

rce

nta

ge

of

Wo

rld

A dvanced E conom ies (GDP) A dvanced E conom ies (P P P )

E m erging E conom ies (P P P ) E m erging E conom ies (GDP )

Source: IMF World Economic Outlook as of 30 April 2012.

The Case for Emerging Markets Debt

There has been a significant evolution of emerging markets debt over the past fifteen years, with the asset class benefitting

from structural improvements and an expanding investor base. The move away from fixed exchange rates coupled with

increased foreign exchange reserves and more disciplined fiscal and monetary policies have improved fundamentals among

many emerging market countries across Latin America, Eastern Europe and Asia. As a result of these improving fundamentals,

many country’s credit ratings have been upgraded and over half of emerging markets are now investment grade issuers (as

seen in Chart 4). Because of the shifting risk profile and stronger fundamentals than most developed markets, emerging

markets debt is gradually assuming a more important place in investors’ asset allocations.

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Strategic allocation for international fixed income investors

Global emerging markets have continued to prove their

resilience during the recent periods of stress in the

developed world. Many emerging markets have experienced

increased decoupling and have become less dependent

on developed economies translating in much higher overall

expected growth than for developed markets in general. For

these reasons, we feel emerging markets will likely continue

to outperform most developed markets on a structural

basis as long as policy makers continue to employ sound

macroeconomic policies. With the current low interest

rate environment, we continue to see investors increasing

their strategic allocation to emerging market debt given the

potentially attractive yields and improving fundamentals of

the asset class. These improving fundamentals as well as

low financing needs generally provide emerging market

countries more policy flexibility than developed markets,

thus increasing the potential for their economies to continue

growing at a faster rate.

Quality at the right price

While many developed market ratings have steadily fallen

since 2009, most emerging markets ratings continued to

rise. The relative change in credit ratings as seen in Chart

4 reflects the improving fundamentals of emerging market

countries in general, namely stable debt levels, current

account surpluses, controlled inflation, and tighter monetary

policies. We believe these factors will likely promote faster

economic growth and better return potential for investors

over the long-term.

Recently, while many European countries have been

downgraded, the investment world has witnessed a

significant number of credit rating upgrades in emerging

market sovereigns and corporates, including those of Brazil,

Peru, and Panama as highlighted in Chart 5. We expect

emerging market sovereign upgrades to continue to exceed

downgrades in 2012. Over 45 emerging market countries

are now rated investment grade, equating to over 60% of

the universe as can be seen in the chart on page 5. The

better credit quality that many emerging market sovereigns

have been able to achieve should provide some level of

comfort to investors.

Chart 4. EMBI Global credit quality

0%

20%

40%

60%

80%

100%

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Investment Grade B B B Res idual

Source: JP Morgan, Bloomberg, HSBC Global Asset Management as of

31 July 2012.

Expanding debt universe*

The emerging market debt universe continues to grow.

Global inflows to dedicated emerging markets fixed income

funds have surpassed US$50 billion in July 2012. We expect

continued expansion of the emerging markets debt universe

as emerging markets GDP growth is forecasted at 4.6%

growth for 2012 compared to 1.1% growth for developed

economies. Compared to previous years, the majority of

this new issuance in 2012 will likely come from investment

grade issuers, rather than high yield issuers. For example,

so far in 2012, approximately 80% of new emerging markets

sovereign and corporate bond issuance has been rated

investment grade.

*Source: JP Morgan, as of 11 August 2012.

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Chart 5. Trends in credit ratings: Emerging Markets versus Developed Markets 2000 – 2012

While emerging markets ratings have improved across the board, those in many of their developed counterparts fell over the

period. All emerging markets nations below are now more highly rated than Greece, with only Venezuela ranked below Portugal.

Many countries, such as Brazil, India, Mexico and Russia, now have an investment grade credit rating.

Non-investment grade Investment grade

CC CC+ CCC- CCC CCC+ B- B B+ BB- BB BB+ BBB- BBB BBB+ A- A A+ AA- AA AA+ AAA

Em

erg

ing

Mar

kets

Brazil □ ●Chile □ ●China □ ●Colombia □ ●Czech Rep. □ ●India □ ●Israel □ ●Malaysia □ ●Mexico □ ●Panama □ ●Peru □ ●Poland □ ●Russia □ ●Singapore □ ●South Africa □ ●Thailand □ ●Turkey □ ●Venezuela □ ●

CC CC+ CCC- CCC CCC+ B- B B+ BB- BB BB+ BBB- BBB BBB+ A- A A+ AA- AA AA+ AAA

Dev

elo

ped

Mar

kets

Belgium ● □France ● □Germany □ ●Greece ● □Ireland ● □Italy ● □Japan ● □Netherlands □ ●Norway □●Portugal ● □Spain ● □Sweden □●Switzerland □●UK □●United States ● □

2000 □    July 2012 ●Source: S&P as of 31 July 2012. For illustrative purposes only. Ratings are those of S&P and may differ from other rating agencies.

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Understanding external (hard) currency and local currency indices

Hard Currency (USD)JPM EMBI Global Div Index

Local CurrencyJPM GBI-EM Global Div Index

Duration (years) 6.82 4.56

Yield (%) 5.14 5.22

Number of countries in Index 48 14

% of sovereign 80 100

% of quasi-sovereign 20 0

% corporate 0 0Source: HSBC Global Asset Management, JP Morgan as of 30 June 2012. The level of yield is not guaranteed and may rise or fall in the future.

External (hard) currency market

The idea of owning an emerging market country’s debt, but

denominated in a global currency such as the US dollar, yen

and euro, was founded on the notion that these currencies

could prove to be a reliable hedge if an issuing country were

to come under pressure.

Over the past two decades, hard currency denominated

emerging markets debt has earned a place in the core of

many investors’ portfolios based on its improving credit

quality and lower volatility.

When allocating to the hard currency broad universe

investment set, investors have access to over 70 countries in

Latin America, Asia, Eastern Europe, Africa and the

Middle East.

Local currency markets

The local currency market has grown steadily over the

past decade as both sovereign and corporate issuers have

been motivated to borrow locally allowing them to reduce

the volatility of their debt service given their more flexible

exchange rate regimes. This shift is particularly true for

government bond issuers. In recent years, local-currency

bond markets have expanded considerably in several

countries. Growing interest from local investors, particularly

from pension funds, has played a key role in the development

of domestic debt markets in emerging markets.

When allocating to the local currency investment universe,

investors have access to over 45 countries in Latin America,

Asia, Eastern Europe, Africa and the Middle East.

Mainly USD issuance

Brady bonds and Eurobonds follow international law (low legislation risk)

Borrower (issuer) generally pays a lower spread than in their own currency

Longer duration

Advantages

High exposure to exchange rate risk (eg USD volatility)

Historically lower yields for investor compared to local currency bonds in general

Disadvantages

Generally higher yields for investors compared to hard currency

Real yields in local currency EM likely to continue trading at a premium as EM inflation is historically higher than in developed markets overall

Shorter duration

Historically higher protection against a rise in US Treasury yields

Hedge against potential US dollar weakness

Improving credit ratings of many local currency markets. Majority now rated investment grade

Advantages

Higher exposure to exchange rate risk

Interest rate risk

Regulatory risk

Liquidity risk

Higher volatility

Disadvantages

External (hard) currency Local currency

Advantages and disadvantages

Benchmark characteristics

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Competitive advantages

HSBC’s global footprint

Extensive knowledge and insights from one of the world’s largest emerging

markets investment platforms. HSBC Global Asset Management employs

approximately 200 emerging markets investment professionals across more than

15 emerging markets.* Coupled with HSBC’s broader global banking network and

HSBC Global Asset Management’s global credit research platform, our emerging

market debt team has unparalleled access to information and insights. We feel that

this is a definitive advantage that cannot be easily replicated by competitors.

Dedicated emerging markets debt resources

The Emerging Markets Debt team is 100% dedicated to managing global

emerging markets debt assets and is not encumbered with crossover mandates

from non-emerging market strategies. The team works within a strong global

investment and research platform that supports a consistent process and

communication while empowering local decisions and the ability to tactically

adjust portfolio exposures in the best interest of our clients.

Risk adjusted focus

The team has a historical track record of delivering strong investment performance

in a variety of market environments. This is due in large part to our stress testing

discipline which requires a constant recalibration of portfolios to ensure that

positions are properly sized in an effort to achieve alpha and information ratio

targets. We believe this differentiates our emerging markets capability from that

of our competitors. It is also what has enabled our team to deliver stable tracking

error in a variety of market conditions and has resulted in strong risk adjusted

performance.

Deep, innovative capabilities

The team has demonstrated multi-strategy skill set and process using external

debt, local currency and corporate debt, along with derivative instruments. The

team continually aims to exploit the full universe of evolving opportunities in a

strong risk management framework. *Source: HSBC Global Asset Management, as of 30 June 2012. Past performance is not an indication of future returns.

Investment approach

Our approach to investing in

emerging markets fixed income

is built to profit from market

inefficiencies. We employ a

diversified, multi-strategy approach

across the full opportunity set in

emerging market debt including

hard and local debt, corporate debt

and currencies.

Available strategies (inception date)

Emerging Markets Debt –

Core (Hard Currency)

October 1998

Emerging Markets Debt –

Total Return (Absolute Return)

November 1999

Emerging Markets Local Debt

August 2007

Emerging Markets Corporate

Debt

December 2010

Emerging Markets Investment

Grade Debt

December 2010

Emerging Markets Inflation-

Linked Bond

June 2008†

† Management of the strategy moved from Paris to New York in August 2012

HSBC has been active in emerging markets for over 140

years and today is one of the world’s largest managers of

emerging markets assets with more than US$134 billion of

client assets invested in local, regional and global emerging

markets funds including approximately US$87 billion in

emerging markets fixed income.* HSBC traces its roots

back to its founding member, the Hong Kong and Shanghai

Banking Corporation Limited, which was established in 1865

to finance the growing trade between China and Europe.

In this respect, HSBC Group as a whole has been actively

involved in emerging markets since the late 19th century.

HSBC foundations are built on financing commerce in

emerging market countries - this unique history has given us

the heritage, expertise and investment acumen to achieve

success for our business and more importantly our clients.

Today, emerging markets debt is a core product offering for

HSBC Global Asset Management and has been managed

as a distinct asset class for over a decade. The creation

and evolution of our emerging markets debt capability is

highlighted below. We employ strategies and techniques

that allow creative alpha creation and the potential for

outperformance, all within the context of client specific

goals, objectives and characteristics.

Why HSBC Global Asset Management for Emerging Markets Debt?

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Goal

– Achieve strong, consistent risk-adjusted returns

Investment philosophy

– We believe fixed income markets are inefficient

– We believe inefficiencies result from

misunderstanding and mispricing risk

– We believe that fundamental research provides us the

best opportunity to actively add value in fixed income

portfolios

Approach

– Active fundamental

– Strong risk management framework

Using macro variables to build a ranking of country credits,

currencies, rates based on their relative attractiveness

– Identify global themes / risks at the asset class level

(leveraging global HSBC networks)

– Output: target beta, emerging markets asset class

allocation

Valuation analysis determines whether asset prices reflect

our views on relative attractiveness

Model portfolio construction attempts to maximize the

opportunity between our fundamental views and market

prices

Stress testing contributes to portfolios seeking to meet

their risk and return targets

Philosophy and process

Emerging Markets Debt – Core

– Seeks to capture improving credit quality of emerging

economies while reducing foreign currency risk

– Invests predominantly in emerging market sovereign

and quasi-sovereign bonds denominated in hard

currency (USD)

– Spread compression and yield are key drivers of

performance

– Tactical use of emerging market corporate bonds and

local currencies

Emerging Markets Local Debt

– Invests in local currency sovereign bonds and

emerging market FX

– Flexible approach allows for optimal asset allocation

between bonds and currencies

– Price, currency appreciation and yield are the key

drivers of performance

Emerging Markets Debt – Total Return

– Seeks positive absolute returns while reducing

volatility normally associated with emerging markets

– Flexible access to the full emerging markets debt

opportunity set, both hard and local currency

– Asset allocation decision is a key driver of returns

– No benchmark constraint allows flexibility to express

short, medium, and long-term views

Emerging Markets Debt – Corporate

– Seeks to capture rapid growth and improving credit of

corporate bond issuers in emerging economies

– Asset class has demonstrated generally higher yield

and lower default rates vs. comparable developed

market corporate bonds

– Team is able to leverage HSBC’s extensive global

emerging markets credit platform

Emerging Markets Debt – Investment Grade

– Seeks to capture the growth and relative strength of

investment grade rated emerging market debt assets

– Invests in debt issued by sovereigns, quasi-

sovereigns and corporates in both hard and local

currency

– Blended benchmark widens the investment universe

and allows for optimal asset allocation between hard

and local currency

Emerging Markets Inflation-Linked Bond

– Only asset class offering a pure inflation-hedge;

principal and coupon payments are indexed to

inflation

– Low historical correlation with traditional emerging

markets debt, helping to improve the overall risk-

adjusted return of an emerging markets debt

allocation

General strategy characteristics

* Representative overview of the investment process which may differ by product, client mandate or market conditions.

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Balancing the risk/reward premium

Investing in emerging markets carries a heightened level of risk. Despite structural fundamental improvements and an

expanding investor base, investment risks remain at a premium to developed markets. As many emerging markets are smaller

than their developed market counterparts, relatively large inflows or outflows of capital can distort emerging market economies

through more volatile asset prices, potential inflationary pressures, currency and interest rate volatility. In addition, political and

economic instability, less publicly available information, potential for currency and capital market restrictions and changes to

momentary policy are risks that are likely to be greater for emerging markets than in developed markets.

Conclusion

Emerging market nations are benefiting from a relatively strong economic backdrop and vastly improved fiscal and monetary

circumstances which, in investment terms, has seen them move from a specialist choice for those with a healthy appetite for

risk to a mainstream investment category that has a place in many types of portfolio. Emerging Market debt has proved itself

an asset class that is capable of giving investors access to the potential growth in the region coupled with an attractive risk and

return dynamic. These characteristics can mean that an investment in this category can contribute to diversification while at the

same time potentially enhancing the expected return profile of a broad portfolio.

As detailed, we have, over the last few years witnessed the continued merging of developed and emerging market sovereign

ratings - demonstrated by the clear divide into the net creditor nations of emerging markets and net debtor nations of the

developed world. This deep structural change in the global economic landscape we expect to continue and we are convinced

that emerging nations will also continue to provide a clear investment opportunity - with emerging market debt providing a

potentially attractive way to access the long term potential returns in this vibrant category.

In order to access these opportunities investors need an institution with a deep understanding of the emerging markets terrain

and a clear track record in dealing with the businesses, institutions and the changing superstructure of evolving nations. At

HSBC Global Asset Management we bring to bear a team of highly experienced, dedicated emerging market professionals,

many located in emerging countries, which have over time developed and honed their investment methodology, providing a

degree of expertise that we believe is among the best available in the industry.

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Important information

This brochure is intended for Professional Clients only and should not be distributed or relied upon by Retail Clients.

Risk considerations. There is no assurance that a portfolio will achieve its investment objective. In addition, there is no guarantee that any investment strategy will work under all market conditions, and each investor should evaluate their ability to invest for the long-term, especially during periods of downturn in the market. Portfolios are subject to market risk, which is the possibility that the market values of securities owned by the portfolio will decline. Accordingly, you can lose money investing in any of these strategies. Please be aware that these strategies may be subject to certain additional risks, which should be considered carefully along with the strategy’s investment objectives and fees before investing. Equity. In general equity securities’ values also fluctuate in response to activities specific to a company. Foreign and emerging markets. Investments in foreign markets entail special risks such as currency, political, economic, and market risks. The risks of investing in emerging-market countries are greater than the risks generally associated with foreign investments. Fixed income securities. Subject to credit and interest-rate risk. Credit risk refers to the ability of an issuer to make timely payments of interest and principal. Interest-rate risk refers to fluctuations in the value of a fixed-income security resulting from changes in the general level of interest rates. In a declining interest-rate environment, the portfolio may generate less income. In a rising interest-rate environment, bond prices may fall. Credit quality. Investments in high-yield securities (commonly referred to as “junk bonds”) are often considered speculative investments and have significantly higher credit risk than investment-grade securities. The prices of high-yield securities, which may be less liquid than higher rated securities, may be more vulnerable to adverse market, economic or political conditions. Convertibles. Subject to the risks of equity securities when the underlying stock price is high relative to the conversion price (because more of the security’s value resides in the conversion feature) and debt instruments when the underlying stock price is low relative to the conversion price (because the conversion feature is less valuable). A convertible bond is not as sensitive to interest rate changes as a similar non-convertible debt instrument, and generally has less potential for gain or loss than the underlying equity security. Derivative instruments. Derivatives can be illiquid, may disproportionately increase losses and may have a potentially large negative impact on performance. Non-diversification. Focusing investments in a small number of issuers, industries, foreign currencies or particular countries or regions increases the risks associated with a single economic, political or regulatory occurrence.

Issued by HSBC Global Asset Management MENA, a unit that markets HSBC products in a sub-distributing capacity on a principal-to-principal basis, and is part of HSBC Bank Middle East Limited, PO Box 502601, Dubai, UAE, which is incorporated and regulated by the Jersey Financial Services Commission. HSBC Bank Middle East Limited is a member of the HSBC Group. © Copyright. HSBC Global Asset Management 2012. All Rights Reserved. 22949/0912/FP12-1492

All decisions regarding the tax implications of your investment(s) should be made in connection with your independent tax advisor.

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