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

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. HSBC Asset Management

7. A cautiously positive outlook for the world

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

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

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

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

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

13. … 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

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

15. The reason to be optimistic

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

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

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

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

20. 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

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

22. … 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

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

24. 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

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

26. 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

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

28. 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

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

30. 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

31. (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

32. … 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

33. 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 ( ). 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

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

35. 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

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

37. 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)

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

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

40. The challenges in EM

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. … 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. 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

44. 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

45. 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

46. 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

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

48. EM Investments – Track record and perspectives

49. 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

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

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

52. 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 Internal consumption is composed of Financials, Consumer Staples and Consumer Discretionary. Commodities is Materials and Energy
Source: MSCI, HSBC

53. 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

54. 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 , , , , , , ,8
Index (%)
* Internal consumption is composed of Financials, Consumer Staples and Consumer Discretionary. Commodities is Materials and Energy
Source: MSCI, HSBC

55. 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

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

57. 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

58. Appendix: The reason to be sad

59. 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

60. Thank you – Muito Obrigado