1. 1 June 2010 Perspectives for the Emerging World Pedro Bastos, CEO HSBC Global Asset Management - Brazil Global Asset Management

2. 2 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

3. 3 HSBC Asset Management

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7. 7 A cautiously positive outlook for the world

8. 8 We expect a healthy economic growth… Source: HSBC (PPP weight) Global GDP (%)

9. 9 … even considering the challenges ahead of the developed world… Source: Bloomberg, HSBC Developed world GDP (%) Unemployment (%)

10. 10 … which face limits to the use of their economic policy… Source: Bloomberg; HSBC US Real Interest Rates (%) Nominal Interest rates (%)

11. 11 … in fact, fiscal policy is a real threat to the economic scenario… Source: IMF, OECD, HSBC Fiscal Balance (% GDP) Public Debt (% GDP)

12. 12 … if contained to Europe, crisis spillover tends to be limited… Source: IMF; HSBC Share in Global GDP (% in 2009)

13. 13 … as the region has not been playing a key role in global performance… Global GDP growth - Effective and forecast (based on different weights) Contribution to Global GDP (bps) Source: IMF; HSBC

14. 14 … the main risk is an episode similar to that of 2008 Source: Bloomberg; HSBC PMILibor (%)

15. 15 The reason to be optimistic

16. 16 A solid economic scenario for the emerging world… Source: HSBC GDP Growth (%; Average 2010-2011)

17. 17 …which has gone through important advances… Source: Bloomberg; HSBC Inflation (%) Fiscal Balance (% GDP; + = deficit)

18. 18 … and has further room for economic policy maneuver in case of a crisis… Public Debt (% GDP) Interest rates (%) Source: Bloomberg; HSBC

19. 19 … with both banking and housing sectors on a better position… Source: HSBC Research ROE 2010 (%) Mortgage to GDP (selected countries)

20. 20 In this context, EM tend to grow faster given their development stage GDP vs GDP per capita (selected countries) GDP vs Population growth rate (selected countries) Source: IMF, HSBC

21. 21 A very large consumption market … Source: UN, HSBC Urbanization (% of Total) Population size (Billion)

22. 22 … in a context of economic and social development Calorie consumption (calorie supply per capita per day) Life expectancy (years) GDP per capita PPP (USD thousand; % represents period from 2010 to 2015) Source: IMF; UN, World Bank; HSBC

23. 23 … a trend already clear in Brazil… Source: FGV; HSBC Income groups (% ; 2008 vs 2003) Income groups (% of total population)

24. 24 There is a relevant pent up demand Source: Pocket World in Figures 2009 Edition; HSBC Mobile telephone subscribers (per 100 pop.) Computers (per 100 pop.)

25. 25 In Brazil, rising credit level has been key for growth Source: Brazilian Central Bank Credit (% GDP)

26. 26 In contrast to G7, aging population is not a threat for the EM world now Source: UN; OECD; HSBC Older population dependency ratio (population aged 65 or over compared to that at working age) Increase in age-related expenditures until 2020 (% GDP)

27. 27 In all, household consumption perspectives are very positive in EM Source: HSBC Consumption (%)

28. 28 In Brazil, youth and housing deficits point to a dynamic construction sector Brazil Housing Deficit (in million Household) Source: BNDES/SAE, IBGE

29. 29 Urbanization is also a key driver for investments… Urban population (% of total) Source: UN; HSBC

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

31. 31 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

32. 32 … with projects boosting productivity in the key economic regions… Source: “Valor Especial” Magazine based on Federal and Regional Governments 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

33. 33 Multi billion barrel reserves potential Source: Petrobras 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 … at the same time, investments in pre-salt oil reserves will be huge

34. 34 We expect a solid performance for investments in the coming years Source: HSBC Investments (%)

35. 35 Source: MDIC, Funcex, Brazilian Central Bank, Latin America figures by Citibank This context is positive for many Latin America countries Brazilian Commodities Exports (Exports directly or indirectly related to commodities) Argentina Soy and related products: 19% Chile Cooper: 47% Colombia Oil, coffee, coal: 53% Mexico Oil: 11% Peru Commodities: 77% Latam Commodities Exports (Selected countries and goods)

36. 36 With all of these issues, the resilience in 2009 was not a surprise GDP (% average 2008 - 2010) Source: HSBC

37. 37 The long term perspective of a “new” G7 group… Source: IMF (including forecasts) GDP in PPP (USD trillion) US China India Japan Germany Russia Brazil

38. 38 … or a return to the past? Source: The World Economy: A millennial perspective by Angus Maddison Share in total GDP (% of Total) Share in total GDP (% of Total)

39. 39 The lost opportunity phase in Asia Source: The World Economy: A millennial perspective by Angus Maddison Urbanization ratio (population in cities 10 000 and over as % of Total) GDP Growth (%; average by period)

40. 40 The challenges in EM

41. 41 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

42. 42 … 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

43. 43 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

44. 44 Pupil-teacher ratio (Primary school) School enrolment, tertiary (% gross) … and education Source: UN; HSBC 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”

45. 45 Some day aging will play its role in the emerging world Source: UN; HSBC Older population dependency ratio (population aged 65 or over compared to that at working age aged 15-64)

46. 46 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

47. 47 EM countries should be aware of development costs CO² Emissions (kt; in million) Source: UN; HSBC

48. 48 EM Investments – Track record and perspectives

49. 49 Emerging markets equities have outperformed developed markets Historical performance for Equities Indexes Source: Bloomberg, HSBC 15.1% p.a. 7.4% p.a. -1.1% p.a.

50. 50 Outperformance was a result of better sovereign fundamentals … Argentine crisis and Lula election Historical Credit Risk (bps) Source: Bloomberg, HSBC

51. 51 … and strong earnings growth Earnings Per Share Source: Bloomberg, HSBC 16.4% p.a. 11.3% p.a. 3.7% p.a.

52. 52 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

53. 53 Success brought awareness and liquidity to EM Total Market Capitalization (US$ tri) Source: MSCI Emerging Markets as a percentage of MSCI All Country Index 4,9% 13,2% Source: WFE, Stock Exchanges, HSBC

54. 54 * Internal consumption is composed of Financials, Consumer Staples and Consumer Discretionary. Commodities is Materials and Energy Source: MSCI, HSBC EM equities will benefit from both the recovery in commodities prices and a strong internal consumption Share in 14,5 13,7 24,4 12,2 13,5 8,8 12,8 Index (%) Expected Earnings Per Share Growth

55. 55 Brazilian equities: multiples expand during times of strong economic growth Source: HSBC, IBGE 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

56. 56 Source: HSBC Price 68.500 = 17,6 x EPS 2009 = 14,7 x EPS normalized 2009 Earnings EPS 2010 = EPS 2009 + 38% Target 2010: 80.000 = 29% upside Normalized EPS growth 4,1% Normalized P/E increase due to strong economic growth 13,3% Brazilian equities: EPS growth and valuation underline attractiveness Ibovespa Price Target

57. 57 In fixed income, Brazil leads the emerging markets that should benefit from carry Source: HSBC Expected Short Term Interest Rates (YE 2010)

58. 58 Appendix: The reason to be sad

59. 59 Brazil: The hubris effect… (or why the quants think we will lose the Cup!) Source: HSBC Negative correlation between the Copa América and World Cup Performance

60. 60 Thank you – Muito Obrigado