Perspectives for the Emerging World June 2010 Perspectives for the Emerging World Pedro Bastos, CEO HSBC Global Asset Management - Brazil Global Asset Management

Perspectives for the Emerging World HSBC Asset Management A cautiously positive outlook for the world The reason to be optimistic The challenges in EM EM Investments – Track record and perspectives Appendix: The reason to be sad Chapter 1 Chapter 2 Chapter 3 Chapter 4 Chapter 5 Chapter 6

HSBC Asset Management

A cautiously positive outlook for the world

We expect a healthy economic growth… Global GDP (%) Source: HSBC (PPP weight)

… even considering the challenges ahead of the developed world… Developed world GDP (%) Unemployment (%) Source: Bloomberg, HSBC

Nominal Interest rates … which face limits to the use of their economic policy… Nominal Interest rates (%) US Real Interest Rates (%) Source: Bloomberg; HSBC

… in fact, fiscal policy is a real threat to the economic scenario… Public Debt (% GDP) Fiscal Balance (% GDP) Source: IMF, OECD, HSBC

… if contained to Europe, crisis spillover tends to be limited… Share in Global GDP (% in 2009) Share in Global GDP Source: IMF; HSBC

… as the region has not been playing a key role in global performance… Contribution to Global GDP (bps) Global GDP growth - Effective and forecast (based on different weights) Source: IMF; HSBC

… the main risk is an episode similar to that of 2008 Libor (%) PMI Source: Bloomberg; HSBC

The reason to be optimistic

A solid economic scenario for the emerging world… GDP Growth (%; Average 2010-2011) Source: HSBC

Fiscal Balance (% GDP; + = deficit) …which has gone through important advances… Inflation (%) Fiscal Balance (% GDP; + = deficit) Source: Bloomberg; HSBC

… and has further room for economic policy maneuver in case of a crisis… Interest rates (%) Public Debt (% GDP) Source: Bloomberg; HSBC

… with both banking and housing sectors on a better position… ROE 2010 (%) Mortgage to GDP (selected countries) Source: HSBC Research

GDP vs Population growth rate In this context, EM tend to grow faster given their development stage GDP vs Population growth rate (selected countries) GDP vs GDP per capita (selected countries) Source: IMF, HSBC

A very large consumption market … Population size (Billion) Urbanization (% of Total) Source: UN, HSBC

… in a context of economic and social development GDP per capita PPP (USD thousand; % represents period from 2010 to 2015) Calorie consumption (calorie supply per capita per day) Life expectancy (years) Source: IMF; UN, World Bank; HSBC

(% of total population) … a trend already clear in Brazil… Income groups (% of total population) Income groups (% ; 2008 vs 2003) Source: FGV; HSBC

Mobile telephone subscribers There is a relevant pent up demand Mobile telephone subscribers (per 100 pop.) Computers (per 100 pop.) Source: Pocket World in Figures 2009 Edition; HSBC

In Brazil, rising credit level has been key for growth (% GDP) Source: Brazilian Central Bank

In contrast to G7, aging population is not a threat for the EM world now Older population dependency ratio (population aged 65 or over compared to that at working age) Increase in age-related expenditures until 2020 (% GDP) Source: UN; OECD; HSBC

In all, household consumption perspectives are very positive in EM (%) Source: HSBC

Brazil Housing Deficit (in million Household) In Brazil, youth and housing deficits point to a dynamic construction sector Brazil Housing Deficit (in million Household) Source: BNDES/SAE, IBGE

Urbanization is also a key driver for investments… Urban population (% of total) Source: UN; HSBC

Electric power consumption Logistic Performance Index .. being an additional source of infrastructure need Electric power consumption (kWh per capita) Logistic Performance Index (1 = low to 5 = high) Source: UN; World Bank; HSBC

(Estimative in USD billion) In Brazil, key sport events will be important in the coming years… Investments costs (Estimative in USD billion) What type Stadiums Airports Metro Light Rail Vehicle construction Port improvement Highway expansion Hotel construction Bridges Urban mobility works Downtown revitalization Training and Marketing in tourism Drainage works and sanitation Source: “Valor Especial” Magazine based on Federal and Regional Governments

… with projects boosting productivity in the key economic regions… São Paulo and Rio de Janeiro (metro regions) respond for around 30% of Brazilian GDP… … are the location of the biggest companies in Brazil… These events will result in investments in key areas (e.g. transport) and in interesting business opportunities Some numbers: - In São Paulo, forecast points to around USD 18 billion in investments related to transport (USD 2.7 billion for airports) - In Rio de Janeiro, a similar amount is expected to be spend between 2010 and 2016; - Expenditures directly related to the Olympic Games event amounts USD 3.3 billion Source: “Valor Especial” Magazine based on Federal and Regional Governments

Multi billion barrel reserves potential … at the same time, investments in pre-salt oil reserves will be huge Multi billion barrel reserves potential The big gray area represents the expected pre-salt location, with great potential for oil presence Potential pre-salt recoverable volumes (9.5 to 14bn boe* estimated) could double Petrobras’ reserves (current proven reserves of 14bn boe); Good quality oil + natural gas; Several production systems programmed through 2020, with planned capex of US$111.4bn (2009-2020). First wells star-up in 2013/2014; Pre-salt economics – oil price above US$50-60/barrel should cover required cost of capital returns (source: Goldman Sachs). Long-term oil price consensus now at US$70-80/bbl, i.e., pre-salt economically attractive; *boe = barrels of oil equivalent Source: Petrobras

We expect a solid performance for investments in the coming years (%) Source: HSBC

This context is positive for many Latin America countries Brazilian Commodities Exports (Exports directly or indirectly related to commodities) Latam Commodities Exports (Selected countries and goods) Argentina Soy and related products: 19% Chile Cooper: 47% Colombia Oil, coffee, coal: 53% Mexico Oil: 11% Peru Commodities: 77% Source: MDIC, Funcex, Brazilian Central Bank, Latin America figures by Citibank

With all of these issues, the resilience in 2009 was not a surprise GDP (% average 2008 - 2010) Source: HSBC

The long term perspective of a “new” G7 group… GDP in PPP (USD trillion) US China India Japan Germany Russia Brazil Source: IMF (including forecasts)

… or a return to the past? Share in total GDP (% of Total) Source: The World Economy: A millennial perspective by Angus Maddison

(population in cities 10 000 and over as % of Total) The lost opportunity phase in Asia Urbanization ratio (population in cities 10 000 and over as % of Total) GDP Growth (%; average by period) Source: The World Economy: A millennial perspective by Angus Maddison

The challenges in EM

Continuous effort to improve institutional backdrop… Time required to start a business (days) Ease of doing business index (1 = most business-friendly regulations) Source: UN; HSBC

… and the civil society framework Degree of Freedom (Average between political rights and civil liberties; 1 = highest to 7 = the lowest) Source: Freedom House 2010

Health expenditure per capita (current USD; in thousand) Increase the public investments for social development, like health… Health expenditure per capita (current USD; in thousand) Doctors (per 1000 pop.) Source: UN; Pocket World in Figures 2009 Edition; HSBC

School enrolment, tertiary … and education Pupil-teacher ratio (Primary school) School enrolment, tertiary (% gross) According to the UN, “Tertiary education, whether or not to an advanced research qualification, normally requires, as a minimum condition of admission, the successful completion of education at the secondary level” Source: UN; HSBC

Older population dependency ratio Some day aging will play its role in the emerging world Older population dependency ratio (population aged 65 or over compared to that at working age aged 15-64) Source: UN; HSBC

Research and development expenditure In the long term, productivity is the key for any economy Research and development expenditure (% of GDP) Researchers in R&D (per thousand people) Source: UN; HSBC

EM countries should be aware of development costs CO² Emissions (kt; in million) Source: UN; HSBC

EM Investments – Track record and perspectives

Historical performance for Equities Indexes Emerging markets equities have outperformed developed markets Historical performance for Equities Indexes 15.1% p.a. 7.4% p.a. -1.1% p.a. Source: Bloomberg, HSBC

Historical Credit Risk (bps) Outperformance was a result of better sovereign fundamentals … Historical Credit Risk (bps) Argentine crisis and Lula election Source: Bloomberg, HSBC

… and strong earnings growth Earnings Per Share 16.4% p.a. 11.3% p.a. 3.7% p.a. Source: Bloomberg, HSBC

Annualized EPS growth* Internal consumption was responsible for the largest share of EPS growth differential between emerging and developed markets Annualized EPS growth* * Jun-2003 to April-2010. Internal consumption is composed of Financials, Consumer Staples and Consumer Discretionary. Commodities is Materials and Energy Source: MSCI, HSBC

Success brought awareness and liquidity to EM Emerging Markets as a percentage of MSCI All Country Index Total Market Capitalization (US$ tri) 13,2% 4,9% Source: MSCI Source: WFE, Stock Exchanges, HSBC

Expected Earnings Per Share Growth EM equities will benefit from both the recovery in commodities prices and a strong internal consumption Expected Earnings Per Share Growth Share in 14,5 13,7 24,4 12,2 13,5 8,8 12,8 Index (%) * Internal consumption is composed of Financials, Consumer Staples and Consumer Discretionary. Commodities is Materials and Energy Source: MSCI, HSBC

Change in Ibovespa P/E as a function of economic growth Brazilian equities: multiples expand during times of strong economic growth Change in Ibovespa P/E as a function of economic growth -5.5% -5.0% 1.3% 13.3% -34.9% -40% -30% -20% -10% 0% 10% 20% < -1% -1% a 1% 1% a 3% 3% a 5% > 5% GDP growth Change in normalized P/E Source: HSBC, IBGE

Brazilian equities: EPS growth and valuation underline attractiveness Ibovespa Price Target Price 68.500 = 17,6 x EPS 2009 = 14,7 x EPS normalized 2009 Earnings EPS 2010 = EPS 2009 + 38% Normalized P/E increase due to strong economic growth 13,3% Normalized EPS growth 4,1% Target 2010: 80.000 = 29% upside Source: HSBC

Expected Short Term Interest Rates (YE 2010) In fixed income, Brazil leads the emerging markets that should benefit from carry Expected Short Term Interest Rates (YE 2010) Source: HSBC

Appendix: The reason to be sad

Brazil: The hubris effect… (or why the quants think we will lose the Cup!) Negative correlation between the Copa América and World Cup Performance Source: HSBC

Thank you – Muito Obrigado