August 2009Sovereign & Supranational Update
What’s inside
1. Update from Cynthia Sweeney Barnes
2. Client events
3. Our new website
4. HSBC Global Currency Fund launch
5. Market outlook
6. Our contact details
1. Update – from the desk of Cynthia Sweeney Barnes
2009 continues to be a challenging year for our sovereign and supranational clients. While some considerable comfort has been derived from a stabilisation in the pace of the economic slowdown and commensurate uptick in some financial markets, selective investment continues to be essential.
Our central view is that major economies will continue to contract sharply in 2009 with generally anaemic growth in 2010. Emerging markets are not immune from the slow-down, but their growth outlook, especially for the Asian region, remains stronger overall than for major developed markets both in 2009 and 2010. Uncertainty will help ensure that volatility is likely to remain at higher than historic levels. However, uncertainty has helped to create mis-pricing opportunities of historic proportions which canny investors have started to snap up. In short, prudent risk taking is likely to be well rewarded.
At HSBC Global Asset Management, inflows from our government sector clients have continued at pace in 2009 perhaps most particularly from the pension and sovereign wealth fund segments. We have been working closely with our clients to provide advice and support as some have sought to re-balance their investment portfolios in line with original risk budgets, changing risk appetite or to capture specific tactical market opportunities.
Cynthia Sweeney Barnes Global Head, Sovereigns & Supranationals
2. Client events
Zurich: Emerging Markets: Realities and Opportunities in 2009 and Beyond
Over 8-9 September 2009, HSBC will be hosting, “Emerging Markets: Realities and Opportunities in 2009 and Beyond”, in
Zurich.
Panellists are expected to include:
Ewald Nowotny, Governor of the Austrian Central Bank
Julio Velarde, Governor of the Republic of Peru’s Central Bank
Durmus Yilmaz, Governor of the Central Bank of Turkey
Other contributors will include prominent academics, policymakers and CEOs of multinational corporations.
Topics for debate will include:
2009 – a time of upheaval in emerging markets
Recent experiences with financial stress in emerging economies
The stake of emerging economies in the international financial system
The future of globalisation and global finance
There will also be a half day workshop, analysing various aspects of Emerging Markets investing.
For more information regarding this event, please see the contact details at the end of this Update document.
London: HSBC Global Asset Management Sovereign Symposium 2009
Preparations are underway for the HSBC Global Asset Management Sovereign Symposium 2009, ‘Building Best Practices’ to
be held in London over 12-15 October.
Invited attendees will hear from industry specialists who will share their expertise on a broad range of investment topics.
With presentations and interactive workshops, participants will have the opportunity to develop and expand their skill sets in a
variety of subjects including delving into the root causes and ongoing market developments associated with the financial crisis,
building the optimal efficient frontier and trends in FX strategy.
Expected speakers include:
Prof. Gordon Clark, Oxford University
David Bloom, Global Head of FX Strategy, HSBC Global Research
Pierre Cailleteau, Managing Director, Global Sovereign and Supranational, Moody’s Investor Services
Arjan Berkelaar, Principal Investment Officer, Asset Allocation and Investment Strategies, World Bank Treasury
The event will be held at the Churchill Hyatt Regency Hotel, which is conveniently located in central London. After each daily
session our guests will have time for networking and exploring the many sights of London.
For more information regarding this event, please see the contact details at the end of this Update document.
Dubai: HSBC AAA Issuer and Investor Summit 2009
Over 17-20 March 2009, HSBC hosted the fourth annual HSBC AAA Issuer and Investor Summit at the JW Marriot Hotel,
Dubai.
The summit provided a focused forum for key global investors to meet AAA issuers and discuss the dramatic developments
which have re-shaped the AAA market.
Presentations and panel discussions explored the forces driving AAA spreads, the expansion in the AAA issuer universe,
portfolio and liquidity management strategies, as well as rate derivatives and their uses.
HSBC Global Asset Management’s Head of Business Development Middle East & Africa, Munir Dean, presented a Global
Fixed Income Outlook and Strategy Overview.
3. Launch of our new websiteHSBC Global Asset Management has recently launched a new website specifically for our Sovereign and Supranational
clients. Available at www.assetmanagement.hsbc.com/sovereigns, it is a useful resource for market commentary, product
and service information and other updates from our business.
4. New product launch: HSBC Global Currency FundHSBC Global Asset Management has launched the HSBC Global Currency Fund, an absolute return fund that seeks to
exploit inefficiencies and imbalances in foreign exchange markets.
The Fund employs an integrated process that combines a systematically driven approach with active fundamental
management. The investment vehicle is a UCITS III Registered Fund which looks to target a LIBOR+500 bps return and a
annualised volatility range of 5%-10% offered with daily liquidity.
Since 2006, the Currency Investments Team has successfully operated a similar foreign exchange strategy within the HSBC Investment
Bank’s Global Markets Division. The HSBC Global Currency Fund may also be available with a principal protected wrapper.
5. Market outlookLooking forward in 2009 and 2010, the outlook for growth remains weak for 2009 and generally subdued for 2010.
Sentiment and the selective improvements in economic readings around the world have clearly contributed to reduce the
risk of a very prolonged global recession and threat of a further meltdown in the financial sector. Nevertheless, the overall
economic picture remains weak given that all major economies are still expected to contract sharply in 2009 and that growth
is likely to be subdued in 2010. We believe that the contraction in developed countries will remain sharp, with the Eurozone,
US and Japanese economies expected to decline by 4.2%, 2.8% and 6.6% respectively in 2009. Emerging markets will also
see a slowdown in economic activity, but should display more divergence between regions. Indeed, Asia’s macroeconomic
outlook remains positive overall, while Eastern Europe displays more weakness with growing unemployment, deteriorating
consumption and worrying government fiscal positions. Looking towards 2010, we believe that growth will continue to look
anaemic, particularly in developed markets, as illustrated in Figure 1.
Figure 1: Real GDP growth Consensus estimates for 2009 and 2010
Source: Consensus Economics, June 2009
-2.8
-4.2-3.7
-6.6
7.5
5.8
-5
-0.9
1.9
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US Euro Zone UK JP China India Russia Brazil
Rea
l GD
P G
row
th F
ore
cast
s (%
)
2009 Consensus Real GDP growth 2010 Consensus Real GDP growth
One of our key concerns is the rising levels of unemployment in both developed and emerging markets, which will add further
pressure on consumer spending and thus future economic growth. Retail sales remain at extremely weak levels overall. For
example, year over year May retail sales in the Eurozone are down by 3.3% while in emerging markets, Russian retail sales
dropped 5.6% year over year in May. Looking at the US economy, unemployment reached 9.5% in June, almost the highest
level in five decades after the 10.8% peak in December 1982.
We expect unemployment levels to increase further from current levels. Meanwhile, US household leverage remains at
extremely high levels compared to history (128% in March 2009 versus levels of around 65% in the mid-1980s) but is likely to
decrease as the household savings rate improves. Both declining household leverage and rising unemployment are likely to
place pressure on future consumption.
Turning to inflation, we have seen consumer price indicators easing in 2009 for both developed and emerging countries.
Inflation should remain positive but at a moderate level in 2010, as illustrated in Figure 2, which on the whole, is supportive for
markets and will allow Central Banks to maintain the low interest rate environment for longer.
Figure 2: Consensus inflation estimates for 2009 and 2010
Source: Consensus Economics, June 2009
Market participants are likely to remain in a spirited debate regarding the future path of inflation because there are several
counter-balancing forces which could shift the outlook if expectations change. On the one hand, there is still ongoing de-
leveraging in many sectors, as well as significant excess capacity worldwide, both of which are disinflationary factors. On the
other hand, quantitative easing and loose fiscal policies are potentially inflationary over the longer term. The overall uncertainty
over the inflation outlook could fuel market volatility in the coming months.
-0.6
0.4
1.7
-1.2
-0.3
5.5
11.3
4.1
1.71.2
1.8
-0.6
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4.2
-2.0
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US Euro Zone UK JP China India Russia Brazil
Rea
l GD
P G
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ore
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s (%
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2009 Consensus inflation 2010 Consensus inflation
6. Contact details
For more information, please contact the Sovereign & Supranationals Team
Munir Dean, Regional Head,
Middle East Sovereigns & Supranationals
+44 (0) 20 7024 0107
Stéphane Huber, Regional Head,
Europe Sovereigns & Supranationals
+ 33 (0) 1 41 02 65 62
Cynthia Sweeney Barnes,
Global Head, Sovereigns & Supranationals
+ 44 (0) 20 7991 3433
Wayne Shum, Regional Head,
Asia Sovereigns & Supranationals
+ (852) 2284 1230
Regional Heads
Martin Arthur
EMEA
+44 (0) 20 7024 0316
Alan Yau
EMEA
+44 (0) 20 7024 0798
Client Service Directors
Lois Gallagher
Americas
+1 (1) 212 525 7402
Winnie Hau
Asia Pacific
+852 2284 1386
The material contained in this document is for information only and does not constitute investment advice or a recommendation to any reader of this material to buy or sell investments. It is intended for investment professionals only and not for distribution to Retail Clients. This document is issued in the UK by HSBC Global Asset Management (UK) Limited authorised and regulated by the Financial Services Authority. 16656/0809/FP09-0620.www.assetmanagement.hsbc.com/uk
