25 May 2011

Emerging Markets Cross-Asset Strategy

Global Research

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Emerging Markets Strategist
Better than it seems
 A not-too-hot not-too-cold global economy supports investments in EM  Concerns shift from inflation to growth in EM  We recommend staying long hard-currency bonds and extending duration in local markets, and favoring EM Asian FX and secular growth stories in equity

We remain positive on EM, despite global headwinds. Investors show concern about the impact on EM of a deteriorating global environment. We disagree: a not-too-hot nottoo-cold global economic backdrop supports investments in EM. Low US Treasury yields should remain supportive to carry trades due to a softer US economy and in spite of the second round of quantitative easing (QE2) coming to an end on 30 June. We see concerns shifting from inflation to growth in EM, which has important implications in terms of asset allocation. Weaker growth is not good for equities, while an easing of inflation pressures provides a solid base for fixed income. EM currencies might be trapped in the middle of USD gyrations. Thus, we maintain a preference for emerging markets hard-currency debt, and we call for a more cautious approach in FX and equities. Inflation concerns are easing because of a retracement in commodity prices, moreaggressive interest-rate tightening, a reweighting toward more-conventional monetary policy, and weaker economic data. We extend our quantitative analysis offering in EM. We introduce a new rich/cheap external debt model to value positioning across the different country curves. Also, our EM Central Bank Monitor now is available on Bloomberg at HSER.  Local markets: Depricing of interest rate hikes is almost done; we recommend long duration in Mexico, South Africa, and Indonesia.  External debt: We remain fully invested, as we see room for 15-25bps spread tightening; we are overweight high-yielders Argentina, Venezuela, and Ukraine.  FX: We favour IDR, MYR, CNH, and SGD in Asia; BRL, MXN, and COP in Latam; and RON in EMEA.  Equities: These are experiencing a drag from lower growth expectations, but benefiting from easing inflations fears; we recommend good secular growth stories: Brazil, China, Indonesia, Malaysia, and Turkey, over Korea, Mexico, Poland, and Thailand.

EM Fixed Income, Equity, and FX Strategy Teams
Pablo Goldberg Global Head of EM Research HSBC Securities (USA) Inc. +1 212 525 8729 pablo.a.goldberg@us.hsbc.com View HSBC Global Research at: http://www.research.hsbc.com

Issuer of report:

HSBC Securities (USA) Inc.

Disclaimer & Disclosures This report must be read with the disclosures and the analyst certifications in the Disclosure appendix, and with the Disclaimer, which forms part of it

Emerging Markets Strategist Cross-Asset Strategy 25 May 2011

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Contents
Better than it seems Local markets External debt FX Equity EM Flows Watcher
Macroeconomic forecasts EM FX forecasts EM Central Bank Watcher Surprise Indices Trade ideas

3 14 16 18 20 27
28 29 30 31 32

Tables and charts
Local markets EM Inflation linkers and break-evens External debt Rich/Cheap Model External debt External yield curves External debt bonds, CDS, and basis FX: Spot, HSBC forecasts, and forward curves Equities

33
33 36 38 40 42 43 45 47

Disclosure appendix Disclaimer

49 51

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Better than it seems
 A not-too-hot not-too-cold global economy supports investments

in EM
 Concerns shift from inflation to growth in EM  We recommend staying long hard-currency bonds and extending

duration in local markets, and favoring EM Asian FX and secular growth stories in equity

Staying positive
Despite decreasing volatility of EM assets, investors worldwide appear to be uneasy, keeping cash on the sidelines. “Markets are doing too well, given the number of shocks out there; we must be due for a correction” is a typical phrase that we hear a lot lately. Going over the laundry list of headwinds facing the market, one can understand why some investors feel a sense of impending crisis: deteriorating growth expectations in the developed world, large fiscal deficits in the US and Japan, weakening debt dynamics in the Eurozone periphery, and inflation pressures in emerging markets.
Chart A1: Decreasing volatility of EM fixed income and equity
30% 25% 20% 15% 10% 5% 0% Jun-07
Source: HSBC

We disagree. We believe those factors provide underlying support for EM in the short term. Indeed, we see a sort of repetition of the lowgrade Goldilocks scenario for EM presented during a good part of 2010. This scenario is formed by three elements:  Ample global liquidity.  The belief that such liquidity will remain in spite of the end of QE2.  Strong fundamentals in EM. Putting it more simply, a lot of money is floating around and it has to go somewhere; for now, this place continues to be the emerging markets. Strong balance sheets in EM continue to attract interest, and while risks from abroad lead to some volatility, they do not derail the appetite for the asset class. True, this time around, EM might not see the benefit of falling yields in the US. Nonetheless, we believe growth in the US is not strong enough to push rates significantly higher either, and we consider a double-dip unlikely. Europe is a concern, but we do not see an involuntary and disruptive default as a likely outcome.

Pablo Goldberg Global Head, EM Research HSBC Securities (USA) Inc. +1 212 525 8729 pablo.a.goldberg@us.hsbc.com

150% EM EXD EM Equities 125% 100% 75% 50% 25% 0% Mar-08 Dec-08 Sep-09 Jun-10 Mar-11

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In our inaugural edition of Emerging Markets Strategist: Turning more positive on EM risk (1 April 2011), we forecast an end of the reflow of funds out of EM and into the developed markets. Since then, we have seen a strong recovery of inflows into EM-dedicated funds, both equity and fixed income (see page 27). This reflow was the result of better growth prospects for the US and Germany, and increasing inflation concerns in EM. As the growth outlook in developed markets softened and EM central banks increased their focus on inflation, we foresaw the flow of funds favoring EM one more time. We believe that these dynamics are likely to remain in place. Different from the situation in 2010, we are witnessing a rotation of themes that dominated investors’ perception of EM year-to-date: the inflation theme is being deflated, and concerns are shifting toward weakening economic activity. This rotation has important consequences in terms of asset allocation. Softer growth expectations are not good for equities, while an easing of inflation pressures provide a solid base for fixed income. EM currencies might be trapped in the middle of USD gyrations; thus, we maintain a preference for emerging markets hard-currency debt, and we call for selectiveness in FX. Valuations have corrected in many of these asset classes, and while our long-term view of EM remains bullish, we maintain that a more selective approach is warranted in the short term. In most places, value has been squeezed; thus, long EM positions should be seen more as a carry play than a capital appreciation story. This is what our low-grade Goldilocks scenario is about.

touching 3.75% in January, 10yr US Treasury yields dropped to about 3.13% at the time of this writing. We disagree with those who believe there is a bubble in EM valuations; rather, we see a very generous pricing of risk worldwide brought about by very low funding rates in the developed markets. HSBC Economics believes the level of US Treasury yields depends on economic data, and that the end of QE2 should not, per se, lead to higher yields in the US. Chart A2 shows that the announcement of QE2 marked the lows of US Treasury rates, which moved higher in anticipation of higher economic growth. Because we expect that economic activity will stay subdued and core inflation will be relatively tame, we anticipate that yields will stay range-bound and that the US Federal Reserve will stick with an accommodative policy into 2012. So far, economic data support our assessment, which in turn is positive for EM fixed income and FX.
Chart A2: UST10y yields driven by expectations on growth (%)
4.0 3.8 3.6 3.4 3.2 3.0 2.8 2.6 2.4 2.2 2.0 May-10 Jul-10 Sep-10 Nov-10 Jan-11 Mar-11 UST10yr Bloomberg median 2011 GDP Fcst 2.6 2.4 2.2 2.0 QE2 announcement 3.4 3.2 3.0 2.8

Source: Bloomberg

It’s the economy, stupid!
We expect global interest rates to remain low and to continue to support crossover flows into EM. What brings money into EM is not only strong fundamentals but also the low level of yields in the developed world. After almost

The most challenging headwind to inflows into EM is a potential correction in risk-free rates, in our view. We got a clear glimpse of that during 4Q 2010. Therefore, we expect that things will likely change when developed-market yield curves and policy rates begin a consistent process of normalization, but we are not there yet. Furthermore,

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we do not see the end of QE2, scheduled for 30 June 2011, as the day of reckoning.

Deflating inflation fears
The structural case in favor of EM remains intact, we believe. Ultimately, the value of the emerging markets comes from an absolute structural improvement in their fundamentals, and also its relative performance against developed markets. These movements are so profound that they are shaping geopolitics in a significant way. Who would have thought that EM was going to be in such position as to claim its right to chair the International Monetary Fund, an institution that made its name by advising EM countries on how to run their economies. However, the short-term outlook for growth and inflation is likely to dominate asset and sector allocation. Inflation concerns about EM are easing, as shown by the HSBC PMI indices for April that plot a continuation of the deceleration of inflation expectations that started in March. Our flash China PMI for May shows further softening in economic activity and price pressures.

We see these factors behind the deflation of inflation fears: a retracement in commodity prices and its current stability, an acceleration in the pace of policy tightening in EM, a shift toward more conventional rather than unconventional measures, and incipient signs of economic deceleration. To gauge the deflationary impact provided by the changes in the international prices of food and energy s from the end of the first quarter, we ran a regression on each country’s headline inflation rate against the domestic output gap, currency changes, and international prices for food and energy. We then used the resulting estimates to simulate the relief in inflation pressure provided by the occurred change in commodity prices since the end of Q1 – a 9.5% drop in WTI crude oil prices and a consolidation in agricultural prices. Though we acknowledge important buffers between domestic and international prices – subsidies, taxes, trade restrictions – the analysis gives us an approximation of how changes in commodity prices could have affected inflation and expectations.

Chart A3: HSBC Manufacturing PMIs show easing inflation expectations

Output prices Input prices Apr 11 Mar 11 Feb 11 Jan 11 Apr 11 Mar 11 Feb 11 Jan 11
Brazil Russia India China Czech Republic Israel Poland Turkey South Africa Singapore South Korea Taiwan

53.4 58.8 56.2 55.2 57.5 59.2 57.6

55.1 60.8 59.7 56.1 57.5 60.8 60.6

53.4 59.3 56.3 60.7 55.7 60.7 64.1

50.7 61.6 56.7 58.8 56.0 58.9 62.0

57.5 67.3 66.3 62.4 69.4 81.3 74.9 67.9

58.3 71.1 68.7 67.5 73.9 81.0 75.1 77.4

57.5 76.4 68.4 74.6 73.3 75.0 76.4 79.5

54.3 78.0 66.1 71.0 70.4 54.3 78.0 79.1

52.5 53.0 57.0 60.8 Notes: above 50 + rising

53.9 54.0 60.6 56.0 above 50 + falling same above 50

53.1 54.0 59.3 61.7 77.1 82.4 below 50 + falling

54.7 52.6 66.2 65.2 87.1 84.8 below 50 + rising Same below 50

Source: Markit, HSBC

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Table A1: Deflationary impact of commodity contraction (bps) Brazil Chile Colombia Mexico Peru Czech Republic Hungary Poland Russia Turkey China India Indonesia Malaysia Philippines S. Korea Singapore S. Africa
Source: HSBC

Chart A4: Monetary policy is being tightened in EM
100 90 80 70 60 50 40 30 20 10 Jul-07 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11
Source: Bloomberg, HSBC

(26) (26) (16) (13) (11) (11) 10 (15) (54) (39) (41) (78) (48) (17) (39) (17) (18) (43)

100 = (2007-09) peak

Latam Emea EM Asia Developed

Table A1 shows that other things being equal, the recent consolidation in food and the sell-off in crude had a deflationary effect between 25-50bps across EM. Notable exceptions are Russia, India, Indonesia, South Africa, and China, where the impact appears to be the highest.

while five – Malaysia, Poland, Russia, Israel, and Chile – surprised the market with stronger hikes than expected adjustments (see Chart A5). Also important, the weighting given to conventional monetary tightening has increased vis-à-vis unconventional policy. While China and Brazil continued with a mixed approach of raising rates and reserve requirement ratios, Russia has only tightened conventionally this time, having done quantitative tightening (QT) in the past, and so did all those central banks that increased rates in the May round. Why this change? We see two reasons behind a reweighting of the strategy that central banks followed during recent quarters. First, inflation expectations appear to have been less sensitive to quantitative tightening than to pure interest-rate

Grabbing the bull by the horns
EM central banks have finally turned more hawkish; a key move to contain inflation expectations. Chart A5 shows how Latin American central banks over the past three months have increased the pace of interest rate hikes, Asia kept hiking relentlessness, and now EMEA is joining the club. Note that only two central banks disappointed market expectations for a an interest rate hike during April and May,

Chart A5: EM central banks become more hawkish than expectations; increases vs. survey averages
bps 30 20 10 0 -10 -20 -30 -40 Jun-10 BRL Sep-10 CLP Dec-10 MXN Mar-11 COP PEN

bps 20 15 10 5 0 -5 -10 -15 -20 -25 Jun-10 KRW Sep-10 IND THB Dec-10 PHP Mar-11 TWD MYR

bps 30 20 10 0 -10 -20 -30 Jun-10 TRY Sep-10 ZAR CZK Dec-10 HUF Mar-11 PLN ILS

Source: HSBC

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Chart A6: Quantitative tightening is yet to significantly reduce the pace of credit creation (3mo. growth rates)
7% 50%

Brazil
6% 5% 4% 3% 2% 1% 0%

M2

Credit

Auto (2y)

8% 7% 6% 5% 4% 3% 2% 1% 0%

40% 30% 20% 10% 0% -10% -20% -30%

Turkey

M2

Credit (2y)

14% 12% 10% 8% 6% 4% 2% 0% -2%

Jan-09 May-09 Sep-09 Jan-10 May-10 Sep-10 Jan-11
Source: HSBC

Jan-09 May-09 Sep-09 Jan-10 May-10 Sep-10 Jan-11

increases. Second, there is little evidence so far that quantitative tightening has achieved its objective of decelerating the pace of credit creation. Chart A6 shows the cases of Brazil and Turkey. In the latter, we see no deceleration in the pace of credit creation, while in Brazil we see it only for auto lending, a segment that was the target of specific administrative measures.

domestic tightening, particularly if accelerated, could become a drag on economic activity. To be clear, we do not expect a hard landing in EM, but HSBC Economics senses that a temporary slowdown is increasingly likely. HSBC’s co-chief economist on Asia, Frederic Neumann, has been warning about a deterioration of the new orders-to-inventory ratios in Asia, while the Brazilian central bank’s expectations survey is showing a significant downward revision to growth. Chart A7 shows that we might see a repetition of what happened in the third quarter of 2010, when inventories rose too fast, compared to economic activity in the developed world, and a temporary slowdown in Asia followed as a result.

Shifting worries from inflation to growth
We expect a migration of worries from inflation into growth. Though these are incipient, the most recent data show that while inflation expectations are decelerating, those on growth are as well. Exports from EM countries might be hurt by deceleration of developed economies, while
Chart A7: Developed markets growth and Asian inventories
80 Eurozone 70 60 50 40 30 20 2006 2007 2008 2009 2010 US Output PMI Asia inventories (2Y) 52 50 48 46 44 42 54

How to play these themes?
The global macroeconomic scenario we foresee for the coming months appears particularly benign for investments in EM fixed income. Thus, we retain our bias for rates over equity for the time being. The reasoning is simple: First, expectations of modest growth in the developed world, particularly the US, should keep risk-free rates low, thus benefiting carry trades. Second, the deflation of the commodity rally and weaker growth data in EM, reinforced by more-active central banks, led to a reduction of inflation risk premium. And third, equity markets experience

Source: Markit, HSBC

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the drag of weaker economic activity and lower commodity prices, but the benefit of weaker inflation pressures. Where does EM FX stand in this conundrum? The long-term trend of real exchange rates appreciation of EM currencies remains unchanged; however, in the short term, we expect more range trading in line with the gyrations of the USD.

Chart A8: External debt yields and spreads
6.50 6.25 6.00 5.75 5.50 5.25 5.00 4.75 4.50 Jan-10 Apr-10 Jul-10 Oct-10 Jan-11 Apr-11
Yield (%) Spread (bps)

355 340 325 310 295 280 265 250 235 220
EM EXD Yields Spreads (rhs)

Stay long EXD on the back of strong EM balance sheets
We believe there is room for a further 1525bps spread tightening in EM external debt, the major risk to our call coming from a significant deterioration in the Eurozone periphery. In recent weeks, EM EXD yields rallied 25bps to 5.50%. However, most of the movement was driven by a US Treasury rally, while EM spreads are now at the top of their recent 240-265bps range. We expect limited contagion to EM debt coming from the periphery for the time being. HSBC Fixed Income Research head Steven Major believes that Greece will avoid an involuntary restructuring of its debt before June 2013. The likelihood of a voluntary action, perhaps extending the maturity on Greek debt (reprofiling) is much higher than an involuntary restructuring.
Chart A9: EM EXD Spread changes from various days until today
150 5-Nov-10 100 50 0 -50 -100 -150 27-Apr-10 195

Source: Bloomberg

Such a scenario would not represent a credit event, if managed well, and thereby should avoid a significant market disruption. Continue long high-yielders in the hard currency space. There is little or no premium in the high-graders in EM to absorb any bad news coming from Europe. Many of the investmentgrade EM countries are trading at levels that are too tight to accommodate any deviation from our benign scenario. As an example, 5Y CDS of the Czech Republic is trading at levels similar to those in France. Chart A9 shows that most highgrade EM countries show spreads tighter to what they were prior to the time when the market first felt contagion from the euro-zone periphery (27 April 2010). True, this is also the case in

285

232

South Africa

Guatemala

Colombia

Panama

Argentina

Dom. Rep.

Costa Rica

Philippines

Pakistan

Jamaica

Lebanon

Bulgaria

Source: Bloomberg

8

Venezuela

Indonesia

Hungary

Uruguay

Vietnam

US HG

US HY

Brazil

Peru

Iraq

Ukraine

Russia

Serbia

Egypt

EM

Turkey

Mexico

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Argentina and Ukraine; however, we believe this is supported by an improvement in fundamentals. However, Argentina, Venezuela, and Ukraine still provide extra value, yet not without inherent volatility. These are our overweights in external debt (see page 16). There, we believe, repayment capacity is stronger than what the market indicates and that current yields are attractive enough to accommodate price volatility. We retain a preference for Venezuela over Argentina on the back of the proximity of the elections and the pressures we are seeing on the exchange rate in Argentina. On 5 May, we opened a buy PDVSA ’17N-Venezuela CDS basis trade with a target of 300bps. In this issue of the EM Strategist, we introduce a new feature: our EM EXD Rich/Cheap Model (see page 38). This model calculates cheapness/expensiveness across each sovereign bond hard-currency curve by comparing a bond’s market par-equivalent CDS spread (PECS) with its fair PECS, derived by evaluating the bond’s cash flows with a smooth issuer survival probability function.. We use the model to recommend to investors how to position best along a curve. This time, we highlight three opportunities:

 Brazil curve out to 10 years has richened, ’21s are cheap compared to ’17s.  Colombia ’24s are cheap, compared to Colombia ’19s.  Philippines ’16s look attractive versus the ’15s, offer 28bp pickup.

Extend duration in local markets to profit from easing inflation fears
As inflation fears eased, EM local curves have started to price out some of the previously implied rate hikes. While this move has been more pronounced in Latam and EMEA than in Asia, it is a consistent theme across the EM local markets. Chart A10 shows regional averages for the change in the 12-month implied policy rate, derived from a data set of historical implied policy rates generated from our HSBC Emerging Market Central Bank Monitor (for details of the publication and its recent innovations, see Box 1). In particular, there has been significant repricing of the monetary policy path in Mexico, Brazil, Chile, Turkey, Poland, South Africa, and Malaysia (see Chart A11). In the EM Central Bank Watcher section (see page 30), we show that unless the Street starts to assume there is room for rate cuts in 2012, the depricing of hikes in the front end of the local curves has

Chart A10: Change in implied average policy rate per region

Chart A11: Implied rate hikes removed since 1 April 2011

100 75 50 25 0 -25 Oct-10

Latam

EMEA

Asia

75 25 -25 -75 -125

bp

YE11

YE12

S Korea South Africa Taiwan

Czech Hungary India

Israel Malaysia Mexico Poland

Brazil Chile

Dec-10

Feb-11

Apr-11
Source: HSBC

Change (in bp) in implied average policy rate for year-end 2011 since 15 April 2010. Source: HSBC

Thailand Turkey

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already run its course, with some notable exceptions: Mexico, South Africa, Czech Republic, and Poland. Therefore, we continue to recommend long positions in Israel, Mexico, and South Africa, although in most of the cases, we extend duration to longer tenors. We continue to see a flattening bias in the local curves stemming from the deceleration in world growth and the reduction of risk premium brought on by more proactive central banks. We recommend investors buy the 10-year sector in South Africa (R208), Mexico (MBonos), and Indonesia (FR53). Interesting to note is that local curve plays, in particular flatteners in Asia and selective Latam countries, could be a good hedge against a deterioration of the situation in the euro-zone periphery. At the end of the day, any disruptions in Europe would be a deflationary shock.

EM FX: one in April, and a completely different one in May. April’s positive returns were mostly driven by USD deterioration worldwide, and the greenback recovery in May came on the back of risk aversion. If there is a positive factor to be found, it is that we have not yet fallen off this tightrope (see EM FX Roadmap). Equity and commodity markets have softened, but fund flows to local currency EM funds are holding up – moreso fixed income than equity – amidst low rates in the West. In Asia, we prefer currencies with lower exposure to external growth and capital flows. Our top picks for the region are IDR, MYR, CNH, and SGD. In Latam, we find that the current correction higher in USD provides good opportunities to reinstate long trades in BRL, MXN, and COP, where higher terms of trade and long-term flows remain currency-supportive. In EMEA, we like the RON on the back of high inflation (read: higher FX tolerance and potential hike) and the HUF on cheap valuations and reduction of fiscal and MPC composition risks.

A volatile backdrop leads to caution on EM FX
While we remain constructive overall about EM FX for the medium term, we advise greater discrimination between currencies amidst heightened risk aversion. Rising risks of global instability have understandably seen investors turn more cautious. The period since our first edition of EM Strategist saw two halves for
Chart A12: USD-EM FX (1 April – 23 May)
BRL CLP CNY COP HUF INR IDR KRW MYR MXN PHP PLN RUB ZAR TWD THB TRY -6% -4% -2% 0% 2%

Play domestic over global cyclicality in EM equities
With inflation fears slowly moving away from investors concerns, the HSBC equity strategy team believes that the major call should revolve around domestic cyclicality, especially in good secular growth stories, outperforming global cyclicality, particularly with regard to the commodity segment. The emphasis comes on Brazil, China, Indonesia, Malaysia, and Turkey, over Korea, Mexico, Poland, and Thailand. On industries, the preferred ones are banks, real estate, and consumer, which ought to receive a lift from reduced concerns about inflation and enhanced prospects for an EM soft landing.

Source: Bloomberg

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Table A2: Recommended trade ideas Country Trade idea Entry date Entry price Last Target Stop

Credit
Venezuela Mexico Buy PdVSA '17N – Venezuela 5Y CDS basis 100y/30y UMS flattener 05/05/11 10/06/10 428bp 64bp 411bp 517bp 300bp 35bp 480bp 80bp

Rates
Mexico South Africa Turkey South Africa Mexico India Hong Kong Korea Malaysia Thailand Indonesia Buy 2y BEI 1s5s IRS flattener 2s5s X-CCY steepener Long R208 Buy MBonos 2024 I2-1yr, 1yr forward INR OIS steepeners Receive 2s5s10s HKD IRS fly 5-2yr KRW CCS steepener Buy 5yr MGS; Pay 5yr MYR IRS Sell 10yr ThaiGB; Receive 10yr THB IRS 10yr IndoGB (FR53) 02/24/11 16/02/11 06/04/11 10/05/11 05/11/11 5/19/2011 5/4/2011 5/4/2011 4/19/2011 4/19/2011 5/23/2011 3.72% 198bp 53bp 8.36% 7.39% -22bp 33bp 48bp 49bp 47bp 7.42% 3.65% 170bp 55bp 8.34% 7.22% -20bp 21bp 47bp 45bp 36bp 7.47% 4.10% 150bp 95bp 7.85% 7.05% 5bp Revised 12bp 70bp 60bp 32bp 7.10% 3.40% 198bp 35bp 8.60% 7.60% -40bp Revised 32bp 35bp 38bp 54bp 7.65%

FX
China Uruguay Romania South Africa Mexico Colombia/Brazil Colombia Brazil
Source: HSBC

Sell USD-CNH spot Sell USD-UYU via 3 mo. NDF Sell EUR-RON Receive 1y1y IRS vs. paying 3y Receive 1yr TIIE Buy Colombia - Sell Brazil 5Y CDS Sell USD-COP via 2 month forwards Sell USD-BRL via 1 mo. NDF

03/22/11 04/06/11 05/09/11 17/03/11 03/31/11 07/01/10 03/31/11 05/06/11

6.5530 19.27 4.100 29bp 5.26% 11bp 1861 1.6235

6.4975 18.84 4.134 17bp 5.10% -11bp 1780 1.6500

6.4500 18.50 3.950 0bp 5.10% 25bp 1780 1.5500

6.6070 19.50 4.180 40bp 5.40% 0bp 1890 1.6500

Closed since last EM Strategist publication on 1 April 2011

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Box 1 - HSBC Emerging Market Central Bank Monitor
Now on Bloomberg HSER <GO>
The EM Market Central Bank Monitor provides a market-implied path of monetary policy rates for key EM countries globally. Currently, we are covering Brazil, Chile, Czech Republic, Hungary, India, Israel, Korea, Malaysia, Mexico, Poland, South Africa, Taiwan, Thailand, and Turkey. The horizon covers the “monetary policy segment” of the yield curve, ie the next 24 months. We compute probabilities of a given move and provide a history of implied policy moves (see Table C2). This report is available as a subscription on the HSBC Global Research Web site. Our newest offering on Bloomberg includes a summary of what is currently priced in and how it has changed, a detailed snapshot per country, as well as an archive of recent reports. See HSBCnet on Bloomberg page HSER <GO>. The report is updated every business day at about 11am London time. It uses closing Asia prices,

opening London prices, and the previous day’s closing price in New York. We consider the report a useful tool in the process of generating trade ideas in local markets. We use consistent bootstrapping and interpolation methodology to derive all curves, accommodating specific market conventions and using the most liquid instruments for each market. Market-implied future central bank rates are computed from implied forward rates, ie we compute a strip of forward-starting short rates with start date on the effective date following each future central bank meeting. Forward rates are derived from local interest rate curves where available (and cross-currency swaps in a few cases). Our approach yields a meeting-by-meeting path of implied rate moves, rather than cumulative implied moves over a specific time horizon (eg “hikes over the next three months”). Charts A13 to A15 provide a glimpse of our new Bloomberg pages for the Emerging Market Central Bank Monitor. We hope you find them useful.

Chart A13: HSBC EM Research page on Bloomberg - HSER <GO>

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Chart A14: See the implied policy rates country by country for YE2011, YE2012, and 12mo forward at – HSER7 <Go> Pg 2

Chart A15: See the implied policy rates meeting by meeting at HSER7 <GO> Pg 3

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Local markets
 As the balance of risks tilts toward growth over inflation, local curves have de-priced interest rate hikes.  We believe this process is mostly done; thus, we recommend long duration in Mexico, South Africa ,and Indonesia.  FX volatility remains a risk to local bonds’ performance.
Table B1: Local markets views Country Brazil Czech Republic Chile China Colombia* Hong Kong Hungary India Indonesia* Israel Korea Malaysia Mexico Peru* Philippines* Poland Russia Singapore South Africa Taiwan Thailand Turkey Uruguay Level of conviction HIGH low low HIGH 5yr Yield Pay Neutral Neutral Neutral Buy* RECEIVE Pay Neutral Buy* RECEIVE Neutral Receive RECEIVE Neutral Neutral Pay Pay Receive RECEIVE Pay Pay PAY Buy* Slope Steeper Steeper Steeper Flatter Flatter Flatter Steeper Flatter Steeper Flatter Flatter Flatter Flatter Flatter = Steeper Steeper Flatter Flatter Flatter Flatter Steeper Flatter

Asia
We expect a flattening bias to prevail in Asia, supported by “low for longer” themes in US rates and continuation of more aggressive rate tightening in countries such as China and India. Moreover, recent concerns about a global economic slowdown in the wake of the Greek debt crisis and a decline in commodity prices paved the way for flatter curves across some the region. Chasing returns is, therefore, back on the agenda, as these factors act to mitigate rising inflation expectations. We advocate a receive position in 2-5-10 HKD IRS fly, as a flatter US curve drives the outperformance of the belly. However, receiving swap interest in India and China still remains vulnerable to moderate bearish flattening pressures due to central banks’ liquidity sterilization. We recommend steepening positions in 5-2yr KRW CCS curve in anticipation of reduced paying interest at the front end. Elsewhere, a consolidation in commodity prices is likely to spur the bullish flattening in the Malaysian government securities (MGS) curve. The FX-induced bond gains are likely to continue to drive outperformance in Asia’s local bond markets, we expect. Several central banks in the region, eg Korea, Indonesia, and China, are becoming explicitly more tolerant to currency appreciation as part of combating inflation via de facto monetary tightening. This should enhance rather than replace key rate rises, and as long as inflation expectations are not unhinged by a further sharp rise in oil prices, this seems likely to reinforce the virtuous circle of FX gains and local bond returns. As such, a greater reliance on FX appreciation versus rate tightening in Indonesia moves us to recommend initiating long positions in FR53 (IndoGB 8.25 7/21) with a yield target of 7.10%..
For more on Asia rates see our latest Asia-Pac RV

André de Silva, CFA Head, Asia Rates Strategy The Hong Kong and Shanghai Banking Corporation Limited + 852 2822 2217 andre.de.silva@hsbcib.com

PAY
Note: * View expressed via bonds Source: HSBC

RECEIVE

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Latin America
A repricing of the implied monetary policy path has been a consistent theme in the region over the past month and a half. Brazil, Chile, and Mexico have all seen significant reductions in implied monetary policy rates, albeit for different reasons. The market has effectively adjusted to the gradualist approach – less tightening, more macro-prudential measures – by Brazil’s central bank, with only 50bp of further tightening currently priced in. At the same time, inflation expectations have moved down over the past four weeks. Our view remains that there is too little risk premium priced in, and that rates should move higher and the curve steepen as inflationary concerns reappear later this year. Chile’s central bank has regained its inflationtargeting credentials by rigorously front-loading the tightening in the past few months. In our view, rates have reached a bottom, with only about 50bp of additional rate hikes priced in and also in terms of flatness of the curve. Receiving Mexico rates remains our top pick. We recommend receiving rates in the 10-year sector of the curve; given that the curve is steep, the peso has room to appreciate and local pension funds are adding duration. The lack of inflationary pressures has led the market to reduce implied monetary policy tightening. Over the past six weeks, the implied policy rate for the next 12 months shaved off 35bp. Our 1-year TIIE receiver recently reached target and we took profit. Colombia continues to have one of the steepest curves in the asset class, and we see value in the long end, as we expect it to flatten. For carry and roll-down, we like Coltes 2024. In Peru, we see value in the long end of the Soberanos curve, but we remain very cautious ahead of the election.

EMEA
With commodity prices stabilizing and growth indicators showing signs of weakness, the curves have bull-flattened across the region. In the front end, monetary tightening expectations have been depriced significantly, reducing the carry embedded. Further out in the curve, belly and long end have outperformed due to (1) easing inflation risk premium, resulting from morehawkish central banks and (2) renewed interest in local debt by international investors. Particularly in Central and Eastern Europe (CEE), foreign participation in the treasury debt market has reached historically high levels. In South Africa, we recommend going long R208 bond after taking profits in receiving 1y1y IRS vs. 3y. The SARB delivered a slightly more hawkish statement in its MPC, which caused the 1y and 2y sectors of the curve to price back some hikes since April after the depricing occurred. However, macro indicators continue to suggest benign demand-driven inflation risks, and we believe that the SARB’s rhetoric aims at containing inflation expectations, rather than signaling an early tightening cycle. We recommend entering 2s5s X-CCY steepeners in Turkey as a positive carry trade, as we see more room for the front end to deprice further the chance of repo rate hikes – currently 104bp by yearend vs 125bp previously post-election. In terms of duration, we still find it unattractive because of the lack of inflation risk premium embedded. In Poland, the combination of finance ministry intervention and hawkish surprise by the National Bank of Poland led to a strong rally. Foreign positioning has reached an all-time high, particularly in the 5-year sector. With uncertainties surrounding the 55% debt threshold and a wider current account deficit, we view the Polish paper as very rich, compared to its peers.

Gordian Kemen Chief Latam FI Strategist HSBC Securities (USA) Inc. + 1 212 525 2593 gordian.x.kemen@us.hsbc.com Hernan Yellati Latam FI Strategist HSBC Securities (USA) Inc. +1 212 525 3084 hernan.m.yellati@us.hsbc.com Alejandro Martinez-Cruz Latam FI Strategist HSBC Mexico SA +52 55 5721 2380 alejandro.martinezcr@hsbc.com.mx Di Luo EMEA FI Strategist HSBC Bank plc + 44 20 7991 6753 di.luo@hsbcib.com

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External debt
 We are still fully invested in the market as we see room for a further 15-25bps fall in yields. A spike in 10yr UST yields is the main risk.  We remain overweight Argentina, Venezuela, and Ukraine, and we continue to see relative value opportunities in low-beta space.  We are underweight Egypt, Panama, Peru, Philippines, Poland, Turkey, and Vietnam.
Table B2: EXD views Country Cash Argentina Brazil Colombia Egypt GCC Hungary Indonesia Korea Mexico Panama Peru Philippines Poland Romania Russia South Africa Turkey Ukraine Uruguay Venezuela Vietnam Level of conviction HIGH low low HIGH Call Neutral Overweight Neutral Neutral Underweight Overweight Neutral Neutral Neutral Neutral Underweight Underweight UNDERWEIGHT Underweight OVERWEIGHT Overweight Neutral Underweight OVERWEIGHT Overweight OVERWEIGHT UNDERWEIGHT Long UMS 2110 vs ’40 Buy 5y CDS protection Buy 5y CDS protection Sell USD bonds esp. 10yrs Buy protection via 5y CDS Long Romania EUR2015 Long Russia 2020 USD Long SOAF 2041 USD Buy protection Long Ukraine 2021 USD Buy Global ’36 Long PDVSA 17N basis Sell Vietnam ’16 and ’20 Sell Nilfin 15s Long sovereign, GREs Switch into REPHUN 2041 Long Indon 21 Sell ROP 21 Best way to express view Stay fully invested Long end (EUR and USD)

Latin America
We remain constructive on Latam EXD, given our view that a low-grade Goldilocks scenario will continue to be supportive of EM FI. Flows remain positive for Latam EXD. High- and lowbeta credits have been diverging during the recent market correction, with the former seeing spreads widening and underperforming the index in terms of total return during the past month and a half. This lag reinforces our view that upside offered by low-beta credits is limited, and apart from a few relative-value opportunities, we continue to look to the high-beta names for value and carry. We stay overweight high-yielders in Latam. We see value in the long end of the Argentina curve, in particular EUR and USD Discounts. Venezuela remains by far the most attractive credit in terms of carry. As a result of the recent windfall tax increase, we have cut our bond supply forecast for the year to USD12-15bn. In the recent rally, PdVSA bonds lagged behind Venezuela. The PdVSA ’17N bond is by far the cheapest bond on the curve using par equivalent CDS spread (PECS). We recommend buying the bond versus buying a DV01-neutral amount of Venezuela 5y CDS protection. In the low-beta space, valuations are not as compelling, in our view. Thus, we continue to focus on relative value, such as buying the “century” bond in Mexico vs. the UMS ’40. We recently unwound our short Colombia relative value position versus Brazil. We stay on the sidelines regarding Peru’s EXD ahead of the second round of the presidential election. However, given the recent rally and what we perceive to be asymmetric election outcomes for the market, we see value in buying CDS protection, as a victory by left-wing nationalist Ollanta Humala is still possible but hardly priced into current valuations.

Gordian Kemen Chief Latam FI Strategist HSBC Securities (USA) Inc. + 1 212 525 2593 gordian.x.kemen@us.hsbc.com Hernan Yellati Latam FI Strategist HSBC Securities (USA) Inc. +1 212 525 3084 hernan.m.yellati@us.hsbc.com Alejandro Martinez-Cruz Latam FI Strategist HSBC Mexico SA +52 55 5721 2380 alejandro.martinezcr@hsbc.com.mx

UNDERWEIGHT
Source: HSBC

OVERWEIGHT

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EMEA
We still like Ukraine as the sole high-yielder in EMEA due to more-generous credit risk premium, but with caution. With US rates at very rich levels, already tight credit spreads offer less buffer for EMEA high-grade credit. As currencies in the region resume appreciation, the attractiveness of USD bonds has been reduced compared to local currency debt. We like extending duration for convexity benefit. We expect SOAF 2041 and REPHUN 2041 to continue to outperform other tenors. We are overweight Romania due to steady improvement in external liquidity, the firm anchor provided by the International Monetary Fund, and limited contagion risks to peripheral Europe, compared to other CEE peers. Moreover, we keep a small overweight position on Russia as the Ministry of Finance raised forecasts of oil revenue to – USD105/bbl for 2011 and USD120/bbl for 2012. We are underweight Turkey and Poland. The widening current account deficit and over-reliance on short-term financing are key risks in Turkey. Moreover, a post-election rating upgrade has been overly anticipated and might offer little boost for the sovereign, we believe. In Poland, we are skeptical about the fiscal dynamic and concerned about potential current account deficit revision. With spreads tight, Poland offers a cheap hedge for the CEE contagion risk. Gulf Cooperation Council (GCC) sovereign and quasisovereign bonds continue to offer value, as regional political tensions are moderate and near-term deterioration appears remote. Key issuers – Qatar and the UAE – are also the least exposed to political upheavals and trade well wide to similar credits in EMEA and Asia. GSEs and state-owned banks offer an additional pickup on the sovereign and offer value, provided that the likelihood of government funding support is critically assessed. An expected uptick in new GCC issuance may create some headwind.

Asia
Following a successful USD2.5bn placement by the Indonesian sovereign in the external market in the past month, we believe the Asian subinvestment-grade sovereign space should perform reasonably well in the weeks ahead. Concerns about additional supply, except possibly from Sri Lanka, should be the dominant factor in allowing Indonesia and Philippine sovereigns to move in line with US Treasuries in the current risk-off mode facing the Asian credit market. We believe that Indonesia should outperform the Philippines from a credit spread perspective in the coming six months. Specifically, the Indonesia ’21s should trade 1020bps inside of an equivalent Philippine sovereign USD bond by 4Q’11. Indonesia’s economic fundamentals warrant the sovereign to become an investment-grade credit before the end of 2011, and hence we believe that market participants will anticipate the positive rating action, which should be expected by 1Q’12 at the latest, in our opinion. In other words, an Indonesia credit upgrade should attract a broader investor base looking for diversification. We expect Moody’s to upgrade the Philippines, and to bring the sovereign rating up and aligned with Fitch and S&P at Ba2 before the end of 2011. However, this rating action would not have the same impact as Indonesia’s. Potential supply and reluctance to tackle rising inflation aggressively could induce Sri Lankan sovereign USD bonds to underperform in the weeks ahead. Vietnam sovereign bonds should be avoided, in our opinion, based on a weakened external profile and difficulties in containing inflation at the moment.
For more on Asia credit, see our latest The View

Di Luo EMEA FI Strategist HSBC Bank plc + 44 20 7991 6753 di.luo@hsbcib.com Simon Williams Chief Economist, Gulf Markets HSBC Bank (Middle East) Ltd, Dubai +971 4 423 6925 simon.williams@hsbc.com Dilip Shahani Head of Asia-Pacific Research The Hong Kong and Shanghai Banking Corporation Limited + 852 2822 4520 dilipshahani@hsbc.com.hk

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FX
 Heightened risk aversion has seen the USD correct higher, leaving investors nervous.  Nevertheless, our medium-term outlook for EM FX remains positive.  We like BRL, CNH, IDR, MYR, and RON.
Table B3: FX views on local currencies Country ARS BRL CLP COP CNY CNH CZK EGP HKD HUF IDR INR ILS KRW MYR MXN PEN PHP PLN SGD ZAR RUB TWD THB TRY UAH UYU VND Level of conviction HIGH Low Low HIGH Call Neutral Long vs. USD Neutral Neutral Long vs. USD LONG vs USD Neutral Short vs. USD Neutral Long vs. EUR LONG vs. USD Neutral Neutral Neutral LONG vs. USD Long vs. USD Neutral Long vs. USD Neutral LONG S$NEER Short vs. USD Neutral Neutral Neutral Short vs. USD Neutral Long vs. USD Short vs. USD

Asia
Our top regional picks are IDR, MYR, CNH, and SGD against the USD. On the flip side, we are less constructive on KRW and INR, which have a mixture of larger external exposure, greater dependence on equity flows, and less favorable policy. In relative value terms, we would also look for opportunities to position short TWD against IDR and MYR. While our fundamental medium-term outlook remains bullish for Asian currencies, we see greater risks emerging in the near term. We expect Asian growth to roll over somewhat in Q2, while other regional asset classes appear to face challenging valuations. This suggests becoming more selective in our long Asian currency calls. We outline a framework of three characteristics of resilience, which should help certain currencies outperform (see table at left) during the choppier and more volatile times we see emerging:  Lower exposure to external growth and markets.  Credible and suitable policy.  Sustainable capital flows. With global growth slowing for the moment, we prefer to position away from currencies for which growth and external balances are more liable to be hurt by any external headwinds. We also favor currencies for which central banks have shown commitment to managing inflation, and calming FX volatility. We look to position in currencies with lower exposure to equity flows, which we believe are less likely to give as large a boost as they did in 2010.
For more details, please see the latest EM FX Roadmap.

Daniel Hui Asia FX Strategist The Hong Kong and Shanghai Banking Corporation Limited +852 2822 4340 danielpyhui@hsbc.com.hk Perry Kojodjojo Asia FX Strategist The Hong Kong and Shanghai Banking Corporation Limited +852 2996 6568 perrykojodjojo@hsbc.com.hk Dominic Bunning Associate, FX Strategist The Hongkong and Shanghai Banking Corporation Limited +852 28 22 1672 dominic.bunning@hsbc.com

DEPRECIATE
Source: HSBC

APPRECIATE

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Latin America
Our conviction levels in the current global environment are low, and we would therefore look to play ranges in the near term. We view the recent USD rally as a short-term correction, rather than a trend reversal. For a medium-term view, we see this latest USD move higher as offering some value, especially for the currencies on which we are most bullish, namely BRL, MXN, and COP. The recent drop in commodity prices is less supportive, but we find still-elevated levels provide continuing support for the region’s terms of trade. We see Latam FX as still vulnerable to further short-covering, should uncertainties persist. We note, too, that positioning in Latam FX has been reduced of late, but it still remains very heavy in historical terms. For the BRL, onshore USD rates have quickly normalized, following their recent brief spike higher, and this has restored the wide rate differential and helped stem BRL weakness. Exporters have also been using the USD’s recent strength to reduce unremitted export receipts, providing additional topside resistance to USD-BRL. In the short term, the pair should remain beholden to swings in risk appetite, but we expect the BRL to remain firm through 2011. We recently lowered our year-end USD-MXN forecast to 11.30 from 11.80, as we expect the peso to continue to benefit from the gradual economic recovery in the US, foreign appetite for local debt, cheap valuations, and a lower risk of intervention. We remain bullish on the COP directionally, but we prefer to wait for levels closer to 1,840-1,850 to re-enter short USD-COP trades. Meanwhile, following the strong rally in April, the COP is giving back some of its gains, as the treasury has joined the central bank in buying dollars, while some investors have been unwinding short USD-COP trades.

EMEA
We do not expect any significant appreciation in the PLN, despite Poland’s decision to sell EU funds in the FX market, which is an important factor for the directional trend of the zloty. In the near term, the current account is widening and the capital flows dynamic is deteriorating. We see more value in the RON and the HUF. In Romania, rising inflation leaves no choice to the central bank but to let the currency rise. Moreover, an adjustment of monetary policy to achieve the 2012 inflation target, which would be RON-supportive, cannot be ruled out. We see EUR-RON moving down to 3.95. In Hungary, the HUF is still cheap. The strong increase in the trade surplus is favorable, while the government fiscal plan has reduced investors’ worries about the fiscal sustainability. Uncertainties surrounding the new MPC members have also eased, and given the inflation trend, we do not expect any reduction in interest rates. We remain bearish on the Turkish lira, as the premium offered is unattractive, compared to the macro risks. Credit is still expanding at a very strong pace, and the current account deficit is spiraling out of control, reaching 8.0% of GDP. With the central bank having no intention to hike the repo rate, the TRY appears likely to stay weak, and a larger depreciation cannot be ruled out. We prefer to stay sidelined for now on the RUB. The currency has posted substantial gains since the start of the year, and we believe that the upward momentum is not sustainable. It may run out of steam, as trade dynamics appear likely to deteriorate on stronger imports, and the central bank is reluctant to tighten significantly. See our FX forecasts on page 29 and charts with our forecasts against forward curves on pages 45-46.

Clyde Wardle Latam FX Strategist HSBC Securities (USA) Inc. + 1 212 525 3345 clyde.wardle@us.hsbc.com Marjorie Hernandez Latam FX Strategist HSBC Securities (USA) Inc. + 1 212 525 4109 marjorie.hernandez@us.hsbc.com Murat Toprak EMEA FX Strategist HSBC Bank plc + 44 20 7991 5415 murat.toprak@hsbcib.com

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Equity
 Easing inflation and USD stabilization are the key catalysts for EM equity performance  Domestic cyclicality, especially in the solid secular growth stories, still preferred over commodity sector exposure  Flows to EM equity funds remain mixed
Table B4: Equity views By country Cash Brazil China Czech Republic Egypt GCC Hungary India Indonesia Korea Malaysia Mexico Other Latam Philippines Poland Russia South Africa Taiwan Thailand Turkey By sector Cons. discretionary Cons. staples Energy Financials Healthcare Industrials Materials Technology Telecoms Utilities Level of conviction HIGH low low HIGH OVERWEIGHT OVERWEIGHT Neutral OVERWEIGHT Neutral Neutral Neutral UNDERWEIGHT UNDERWEIGHT UNDERWEIGHT Neutral OVERWEIGHT OVERWEIGHT UNDERWEIGHT OVERWEIGHT OVERWEIGHT OVERWEIGHT Neutral OVERWEIGHT UNDERWEIGHT OVERWEIGHT UNDERWEIGHT Neutral Neutral UNDERWEIGHT Neutral Neutral Neutral UNDERWEIGHT OVERWEIGHT

EM equity markets have again begun to underperform developed markets recently. The bigger impediments, in our view, relate to growth weakness and currency dislocation. The consensus view has been to relate this behavior to renewed concern about inflation. We believe that this is to some extent misplaced, because at the margin, high-frequency data suggest that inflationary concern is softening. Looking ahead, we believe that the current environment favors domestic cyclicality – especially in markets with sound underlying secular growth stories – over global cyclicality, especially with regard to the commodity segment. Further evidence of a reduction in overheating pressures and USD stabilization are key catalysts, in our view. Overall, longer-term we see the positive EM equity story as remaining intact. On the global growth inflation mix, we believe that investors have worried sufficiently about inflation and now have become overly complacent about cyclical recovery. This is increasingly clear in the latest high-frequency data (PMI numbers and retail sales data). Generally, growth is slowing and inflationary pressure is moderating. We see this trend in Asia ex Japan and also in a group of other large EM markets: Brazil, Russia, and Turkey. Several factors are responsible for the trends mentioned above. First, central banks have tightened monetary policy in EM in particular and also in some developed countries through a combination of higher interest rates, higher reserve requirements, and exchange rate appreciation. For EM, the market appears to be overly pessimistic about the scope for macro-prudential policy (higher reserve requirements) to slow lending expansion. In the developed world, the European Central Bank has increased rates, and we expect further tightening. Of course, the US Federal Reserve has clearly been less pre-emptive, but it has nevertheless committed to

John Lomax* GEMs Equity Strategist HSBC Bank plc +44 20 7992 3712 john.lomax@hsbcib.com Wietse Nijenhuis* Equity Strategist HSBC Bank plc +44 20 7992 3680 wietse.nijenhuis@hsbcib.com *Employed by a non-US affiliate of HSBC Securities (USA) Inc, and is not registered/qualified pursuant to FINRA regulations

UNDERWEIGHT
Source: HSBC

OVERWEIGHT

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ending the second round of its quantitative easing program (QE2) at the end of the second quarter. Second, still-high oil and commodity prices are acting as a brake on growth. Growth below potential in the developed world – and tighter policy in EM – should restrain second-round effects from higher commodity prices. Prices have recently starting coming off highs, and it seems plausible to expect that the worst part of the rise in both oil and a food price is behind us. Should oil and food prices now simply plateau, headline inflation should gradually taper off. Third, there is a continuing need to tighten fiscal policy in the developed world, highlighted by the resurfacing of concerns about European sovereign debt. To the extent that the developed world’s output gap is largely negative, that ought to allow emerging markets to grow more quickly without creating an inflation problem. We believe that rather than worries about EM inflation, currency dislocations may be playing a significant role in driving relative EM performance. It is noteworthy that over the past month or so, the USD slumped before recovering strongly. It may be the case that part of the reason for EM equity underperformance is perceptions relating to increased currency risk, rather than worry about inflation. To the extent this view is correct, USD stabilization could be an additional catalyst for EM performance.

Of course, it matters where the USD stabilizes. If it appreciates further first, EM equities could tend to lag behind at least US equities in USD terms. Stability is, however, the key. Overall, for the near term, we believe that the major call should revolve around domestic cyclicality, especially in the good secular growth stories, outperforming global cyclicality particularly with regard to the commodity segment. Domestic themes – banks, real estate, and consumer – ought to receive a lift from reduced concern about inflation and enhanced prospects for an EM soft landing. By contrast, we believe that a weaker cycle plus potential further USD appreciation will remain important headwinds for the commodity sector. Nevertheless, we emphasize that we expect these shifts to be tactical, rather than strategic. Slower EM growth is also more durable growth, which should end up ultimately being commodityfriendly. Yet overall, despite some near-term weakness in commodity names, the reflation story in EM as a whole should retain longer-term support from underlying strong global fundamentals. In particular, sustained easy monetary policy in the US appears likely to fuel asset prices in EM, especially now that EM macro policy has been tightened.

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Table B5: Summary of HSBC fixed income, FX, and equity views
Emerging Markets Strategist Cross-Asset Strategy 25 May 2011

Country Argentina

EXD Overweight. Favor long end and EUR paper We believe repayment capacity remains strong, supporting an overweight stance. We favor EUR over USD paper. We do not see significant value in the belly of the curve. Also, the EUR GDP warrants are cheap relative to the USD warrants. The presidential election in October is casting its shadow and has the potential to create volatility, even though a run by Cristina Kirchner run is widely expected.

LDM Underweight We are cautious toward ARS paper. Pressures on the FX market due to government restrictions on FX moves and the uncertainty related to the elections might not be compensated by yields onshore. We continue to prefer Badlar paper over inflation linkers (CER).

FX Neutral USD-ARS Implied yields along the ARS NDF curve have continued to widen, with the 12-mo contract paying near 15%. At these levels, the carry trade is starting to look attractive again, and any normalization of external conditions would open the way to sell USD. We prefer levels closer to 4.18/USD on 3mo NDF, as we expect the rate of depreciation to slow in the summer and ahead of October’s presidential election. Short USD-BRL A strong and diversified flow of FX should continue supporting a stronger BRL through 2011. Onshore dollar rates are normalizing quickly, reflecting increases FX supply, restoring the long BRL carry with the 1mo implied yield back above 8%. In the short term, the BRL remains beholden to swings in risk appetite, and while exporters should help cap the USD’s topside, investors’ large long BRL positions still pose some risk. Hold EUR-CZK We expect a modest appreciation in the medium term, as the currency appears fairly valued. The attractiveness of the CZK should remain low, as the central bank is not under pressure to hike its interest rates. Economic activity is constrained by a tight fiscal policy, and demand-pulled inflationary pressures are low. Given its low-yielding status, the CZK seems likely to underperform its regional peers. Long USD-CLP

Equity

Brazil

Neutral, belly looks more attractive than wings Valuations have become very tight, especially in the short end and the long end of the bond curve, while the belly has lagged behind the move. As we had expected, cash bonds are rich versus CDS, as the Brazilian treasury continues to buy back bonds. As a benchmark, Brazilian EXD remains exposed to any risk-aversion episodes.

Biased to pay The DI curve has adjusted to two more 25bp hikes in the next meetings, and in the process removed about 50bp of previously implied rate hikes since early April. This was helped by declining inflation expectations and the market’s becoming more comfortable with the gradualist approach of the central bank. We believe that there is too little risk premium priced into the curve, and that rates should move higher as inflationary concerns reappear later this year.

Overweight Although we expect some more policy tightening to take place, we believe this is already reflected in equity market valuations. Also, some of last year’s fiscal stimulus should drop away following the election. We believe policy settings now are sufficiently tight to allow investors to look over the inflationary hump, thus letting attractive valuations gain traction. Underweight The Czech economic position is reasonable. The market composition is defensive with a large share in utilities and telecoms, and appears likely to underperform during a global cyclical upswing. Having said that, valuations look reasonably attractive, but EPS growth is the lowest in the region. Neutral Chile falls into the category of markets where we believe the monetary response has been appropriate, with the bulk of the necessary adjustment already done. This is also reflected in equity valuations, which, while still expensive in absolute terms, look more reasonable relative to where the Chilean equity market has traded historically. Prolonged copper price weakness poses a risk to our neutral call. Overweight We have turned positive on China’s stock markets in anticipation of the tightening cycle’s coming to an end. China is one of the few markets where slower growth is good news for equities. Recent economic data indicate that growth is moderating, which suggests that a soft landing is possible.

Czech Rep.

Neutral. We see room to outperform core European names Neutral: We like receiving 2y IRS The Czech republic has one of the most solid sovereign balance sheets among CEE, and should be favored as a low- beta credit in persistence of risk aversion. But with current spreads, we do not see compelling value in selling protection outright. We see room for Czech sovereign spreads to outperform core European names, especially countries with high exposure to the peripheral region. The CNB has refrained from hiking its policy rate amidst elevated external uncertainties. Monetary conditions are being tightened through the CZK appreciation. We believe that the short end of the IRS curve is attractive to receive from carry-to-vol’s perspective.

Chile

Neutral

Given its rigorous tightening over the past few months, the Higher rates and a weak USD have supported the CLP central bank has regained its inflation-targeting credentials, year-to-date. However, copper’s double-digit percentage fall with curve-flattening and break-evens collapsing. We believe in the past month has acted as a drag, leaving USD-CLP in that the market has reached a bottom in terms of front-end a 460-480 range. We expect intervention to remain at yields, pricing in only about 50bp of further rate hikes. USD50m per day – barring a substantial appreciation of the CLP, which could see the amount increased – leaving 460 USD-CLP support likely intact. China Neutral. Moderate bearish flattening The PBOC continued its course of tightening, delivering a 50bp hike in RRR on 12 May. This is likely to put modest upward pressure on short-dated CNY NDIRS as seven-day repo squeezes higher in near term, also due to relatively fewer PBOC bills maturing in the weeks ahead. However, heightened RMB appreciation expectations and likely return to ample liquidity are no longer conducive for paying CNY NDIRS. Colombia Neutral We believe that Colombia credit remains a solid story, especially if fiscal reform remains on track, and that a full investment-grade rating is likely in the near term. However, this is to a large extent already priced in, and like other low betas, valuations are not that compelling at the moment. Receive. We expect a flatter TES curve The local curve in Colombia remains one of the steepest in EM, making extending duration an attractive proposition, in our view. Better-than-expected CPI readings and a downward trend in inflation expectations should help flatten the curve, as well as the continuing policy normalization in the front end. Short USD-CNH FX policy should remain the focus, while rising domestic demand and the closed capital account keep China somewhat sheltered from developments abroad. The fight against inflation should keep an accelerated appreciation trend intact until inflation peaks, likely sometime in mid-year. We continue to flag the offshore RMB (CNH) as the preferred market for offshore long RMB exposure. Neutral USD-COP We remain COP-constructive on the back of higher production of key raw materials (oil), which should support trade inflows and FDI. We do not discard the possibility that the authorities may come up with more measures to stem COP appreciation, and thus we look for better levels around 1,850/USD to re-enter a short USD-COP trade.

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Neutral Valuations look reasonable. The equity market has held up relatively well over the past month, rising 3% in USD in spite of falling oil prices. Inflation expectations are falling. However, the central bank tightened by 25bp at its most recent meeting, and this seems unlikely to be the last hike.

Table B5: Summary of HSBC fixed income, FX, and equity views
Emerging Markets Strategist Cross-Asset Strategy 25 May 2011

Country Egypt

EXD Underweight Aggregate FX debt is low, its maturity profile undemanding, and chances of access to donor support are high, but external debt continues to trade too tight vs peers, given high political risk. A likely prolonged downturn in external account position and recent sharp fall in foreign currency reserves compound concerns and weigh on credit quality.

LDM

FX

Equity Overweight Aggregate valuations look attractive on our belief that the political and economic environment will progressively normalize. The political news flow since the uprising has been better than expected. The earnings base for 2011 may be too high; however, to the extent this is depressed, we expect a higher base in 2012. Overweight Positive developments on the restructuring of Dubai World and Nakheel debt and potential upgrades for the UAE and Qatari exchanges from frontier to emerging market status by MSCI are catalysts. We recommend a small (1.5%) offbenchmark weighting in the region, and we prefer the UAE and Qatar on MSCI EM inclusion hopes.

GCC

Overweight Sovereigns are wide to similarly rated Asian peers. Political risk leads to volatility but strengthening budget and current account surpluses support the credit. Abu Dhabi and Qatar are a play on oil wealth; state-owned banks offer a higher carry, given strong state support. Bahrain is a play on political recovery after Saudi-led intervention.

Hong Kong

Flattening: Receive HKD2-5-10yr butterfly A US curve flattening may lead the 5yr HKD IRS to outperform the 2- and 10-yr HKD IRS. Expectations of a prolonged period of low Hibor rates could drive 2yr rates lower. Our regression analysis suggests the 5yr IRS decreases by 21bp for a 10bp decline in 2yr rates, while the 10yr IRS is relatively less sensitive, only 16bp.

Neutral The launch of the RMB Fiduciary Account Service, designed to address issues with counterparty credit limits facing the clearing bank, BoC (HK), has taken off slowly. A recent HKMA circular clarifying the initial announcement should accelerate implementation of the program, which should see the CNH forward curve flatten out. Short EUR-HUF We stay directionally bullish on the HUF, although eurozone sovereign risks may weigh on the HUF in the near term. Record trade surpluses remain robust as a result of strong export performance and will maintain the current account in comfortable surplus, offering support to the HUF. Rat cut risks are low, given the cautious stance of the central bank and signs of price pressures. Neutral INR’s narrow dependence on equity inflows and latent inflation risks makes it less attractive in next months, though we still warn against being too bearish. Equity inflows have been impressively sticky, but in choppy times it is hard to recommend a currency so narrowly dependent on a single flow. We believe the RBI is not behind the curve enough to spark a market reaction, but risks become more significant as the global situation turns. Short USD-IDR Despite high interest rates, IDR no longer trades as a high beta or pure carry currency. Proactive policy – via lengthening SBI holdings, capital controls, and symmetrical FX intervention – has helped to keep volatility low and improve the risk-adjusted return. The combination of policy and limited exposure to external risks make IDR one of our core longs.

Neutral The HKD/USD peg imports a loose monetary policy to Hong Kong. Its long-term story continues to be attractive, given the backing from China. However, valuation has factored in most of the positive news, and thus we are maintaining a neutral stance. Overweight Hungary offers the greatest opportunity for macroeconomic surprise among the CE3 countries, we believe. At one level, the consensus seems to be exaggerating debt sustainability issues; on another, it appears too pessimistic about prospects for coordinating monetary and fiscal policy. The market has been one of the top performers in EM this year, +20%, after having been the single worst performer in 2010. Neutral We raised India to neutral following Q1 underperformance. Near-term risks such as inflation, corruption scandals, and global macro concerns have not dissipated, but valuation has corrected enough to make the risk-reward trade-off more balanced.

Hungary

Neutral. Extend duration to REPHUN 2041 We recommend investors extend duration to the REPHUN 2041 for improved convexity. The inclusion into EMBI will remain a supportive factor for credit spreads. The valuation, however, appears stretched following a recent rally, particularly for the 10y bond- REPHUN 2021.

Paying bias; weak technical position Foreign participation in HUF bonds is about 30%, up from 21% earlier this year, on the back of currency appreciation. There is now even less risk premium embedded in the HUF bonds – 2s5s IRS spread merely c20bp. We are biased to pay HUF 5y IRS due to risks coming from a potential currency reversal, contagion from the Euro-zone periphery, and deterioration in banking industry profitability Neutral. Rec 1y1y – Pay 2y1y fwd INR OIS Front end of the INR OIS appears cheap, implying an excessive probability of about 60bp hikes over the next 3months. Heightened inflation risks and continuation of RBI’s liquidity draining measures may keep O/N rates elevated. Recent increase in cash management and T-bill issuance indicate the RBI’s intention to keep liquidity well into a deficit zone. Moreover, a fuel price hike, about 8%, is likely to translate into higher inflation expectations.

India

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Indonesia

Buy. Position toward 1-5yr IndoGBs We see the 1-5yr GBs favored by (1) policy changes that shift foreign investor interest from short-term SBI bills to government bonds and (2) a June BI rate pause stance. BI seems likely to continue its FX appreciation policy to combat imported inflation. This could strengthen the interest at the front end of the curve, which has also been evident from recent auction results (e.g. 5yr IndoGB bid/cover ratio=3.91, 10yr IndoGB bid/cover ratio=1.28).

Overweight Bank Indonesia has been slow to raise rates in the face of inflation, and we expect two more rate rises in the coming months. Still, domestic demand has remained strong, and companies have put capex plans back on track. Valuations are not excessive, and with little disturbing news on the political front, we are overweight.

23

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Table B5: Summary of HSBC fixed income, FX, and equity views
Emerging Markets Strategist Cross-Asset Strategy 25 May 2011

Country Israel

EXD Expect spreads to compress on solid credit metrics We like selling protection in Israel vs Turkey as a pure macro play, as the former has a healthier BoP profile and the latter faces widening current account deficit challenges. External liquidity continues to improve as the BoI accumulates FX reserves further. With the current account comfortably in surplus, sovereign spreads have more room to tighten gradually as the dust in MENA settles.

LDM We like ILGOV2022 bond With economic data showing signs of the effectiveness of the BoI’s aggressive tightening, and the fiscal profile being anchored by robust growth, Israel stands out as one of our favorite longs in the low-beta camp, given its healthier public profile. Receiving spread between Israel IRS vs USD presents an attractive hedge for a reverse of the UST. Neutral. Maintain 5-2yr KRW CCS steepener A paying interest at the long end and a pause in rates by BoK support a bear-steepening in the 5-2yr KRW CCS. Limited KRW appreciation and a resumption of liability swap appear likely to drive 5yr CCS higher. Moreover, a decline in arbitrage trades (ie long MSB, pay 2-1yr CCS) as indicated by Thai kimchi funds repatriation (KRW661bn in April) may relieve CCS paying pressure at the front end, supporting curve resteepening and swap basis widening.

FX Hold USD-ILS ILS performance is likely to be less bright in the near term, as BoI may slow the pace of monetary policy tightening. ILS strength remains an issue for policymakers as the trade deficit widens. Parliament appears likely to approve a new capital gains tax on non-resident investment in the Makam market. Although we stay neutral for the near term, we continue to see USD-ILS at 3.40 at year-end. Neutral Medium-term value in KRW remains very attractive, but we do not favor KRW in the coming months on a riskreward basis. KRW is relatively more vulnerable to the slowdown that the HSBC economics team forecasts for coming months. This external exposure is also manifested in equity flows, which have accounted for 40% of overall net BoP inflows; with the global picture less stable, the potential for a rapid reversal of these inflows is a concern. Sell USD-MYR Early May weakness in MYR was largely a position adjustment, providing good levels to buy MYR. Large domestic demand and the strong commodity surplus will help buffer the MYR from global weakness. Political issues are holding back reforms, but we see these being overcome later in the year, with further FDI and privatizations offering further support on a flow basis. Short USD-MXN The MXN is one of our preferred regional plays this year, based on an improving US outlook, cheap valuation, and a low risk of intervention. We recently raised our forecasts, and we now see the USD-MXN at 11.30 at year-end vs our previous 11.80 forecast. In this lesscertain environment, it may be advisable to be long MXN positions as relative value against other EM currencies.

Equity

Korea

Neutral

Underweight Korea is among the most oil-intensive Asian economies and is the most exposed to export sensitivity. Valuation is edging up, while earnings growth forecasts are becoming less conservative. We recommend investors reduce exposure to Korea until cyclical indicators bottom and inflation risks subside.

Malaysia

Neutral

Receive. Bullish flattening in MGS curve Recent decline in commodity prices suggests a modest bull-flattening of the Malaysian Government Securities (MGS) curve. We prefer the belly of the MGS curve, as the long end remains vulnerable to the heavy long-dated supply during Q2 2011. In swaps, the 3mth Klibor fixing of 3.24% implies a higher probability of a 25bp hike in the overnight policy rate (OPR) at the 7 July meeting.

Overweight Valuations are still below their historical averages. Food inflation has never been as much of an issue in Malaysia as it is in neighboring Indonesia, and arguably the central bank has been more proactive when it comes to taming price increases. Hence, Malaysia is probably closer to the peak in rates than some of its Asean neighbors. Palm oil is supporting exports and rural income growth. Underweight If we are right that investors now will tend to refocus on secular domestic demand stories in emerging markets at the expense of global cyclicals, Mexico – with its heavy dependence on the US – looks like somewhere to avoid. The domestic story seems unappealing, and valuations are elevated.

Mexico

Neutral. Buy UMS 2110, sell 2040 The belly of the UMS curve (5- to 10-year bonds) has continued to outperform this year. The second tranche of the UMS warrant expired in the money, with the UMS ’12 the cheapest-to-deliver bond. Our Buy UMS 2110, sell the‘‘40s trade still has room to move. The spread recently tightened to 50bp from 56bp.

Receive: Buy MBono ‘24s (target: 7.05%; stop: 7.60%) We closed our 1Y TIIE receiver as it reached our target. We now recommend extending duration on the MBonos curve by buying the ’24s with target at 7.05% and stop at 7.60 This trade is supported by a steep local curve, a benign inflation outlook, a not-overvalued currency, and Afores that still have room to add duration. We also hold a Pay 2 y BEI with target at 4.1% and stop at 3.4%.

Panama

Neutral. 5Y CDS looks expensive vs Latam peers Strong economic growth and higher fiscal revenues, alongside abundant global liquidity, have fueled the rally in Panamanian credit and global bonds. The 5Y CDS looks expensive, as it trades c20bp through its Latam peers Brazil, Mexico, and Colombia and just 20bp above Chile. The curve is steep.

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Peru

Underweight. Asymmetric risk weighs on EXD 5y CDS has rallied more than 40bp from its recent peak as presidential candidate Keiko Fujimori now is ahead in the polls, which show a technical tie. We see an asymmetric market reaction: limited upside in the case of a Fujimori victory, but significantly larger downside if Ollanta Humala wins. Global bonds have underperformed their peers throughout the year, 2.5% vs 4% for Brazil.

Neutral. Rates look attractive, but political risk is still high Local rates will remain very sensitive to political risk, at least until polls reflect that Fujimori could be a clear winner. The curve is very steep from 1- to 4-year local bonds and from 5- to 10-year bonds. The uncertainty regarding the presidential election has made investors to look for shorter-duration bonds. Levels in the long end look attractive, but local rates should remain very volatile.

Neutral USD-PEN The PEN has been performing better since Fujimori edged ahead in the polls, but it is still far too close to call. However, the central bank has shown its commitment to keep the USD-PEN below 2.83/USD, and any move close to this level should be seen as an opportunity to reinstate short USD-PEN trades with a target of 2.72/USD by yearend.

Neutral The market is down 21% this year on the back of falling commodity prices and political risk related to the election. The Ipsos-Apoyo poll shows that Humala and Fujimori remain technically tied. Uncertainty remains due to the high level of undecided voters ahead of the 5 June run-off.

Table B5: Summary of HSBC fixed income, FX, and equity views
Emerging Markets Strategist Cross-Asset Strategy 25 May 2011

Country Philippines

EXD Underweight. Sell ROP ’21 and ’26 We have a sell recommendation due to rich valuation and lack of effort and political momentum to address weak government revenue generation. The government has been limiting much-needed development expenditures to contain the budget deficit. This strategy hurts overall economic activity by dissuading private investment.

LDM Neutral. Long RPGBs on signs of a recovery in FX gains Prospects of a rating upgrade and a recent respite in commodities suggest a potential decline in yields. Recent underperformance was spurred by the BSP rate tightening and an increase in inflation expectations after the CPI soared to 12mo high of 4.5% in April. Still, current inflation levels are well within the central bank's 3-5% target, and a consolidation in commodity prices may soften expectations. Biased to pay. Expect the ASW to tighten MinFin FX intervention and an NBP surprise hike should tighten monetary conditions more effectively. We remain concerned about fiscal risks and a wider current account deficit. In the context of twin deficits, the long end of the curve does not offer sufficient risk premium. Strong foreign positioning in local bonds may cause weakness. We are biased for curve steepeners; expect cash bonds to outperform IRS on FX. Pay/Neutral A liquidity shortage in the system has caused stress in RUB rates. More fundamentally, we believe that fiscal uncertainties are rising, especially should oil prices fall further. We stay sidelined at this stage.

FX Neutral USD-PHP PHP should show some resilience in the coming months, with the debt market growing and strong inflows from remittances continue to provide support. BSP has also largely normalized FX policy, becoming more active in the forward markets again. However, FX policy is unlikely to allow as much strength as elsewhere in the region.

Equity Neutral Domestic demand is resilient, although there is some rise in risk to inward remittances from the Middle East. Rates appear likely to inch higher, and equity valuations are only a touch below the historical average.

Poland

Underweight. Buy protection With the public debt approaching the 55% of GDP threshold and the current account deficits widening, Poland has the least favorable credit metrics among CEE names. We recommend investors buy protection to hedge contagion risks from peripheral region; or switch into Romania EUR 2015 as a better credit to park cash.

Hold EUR-PLN The government and the NBP look to appreciate the PLN: about EUR13bn in EU funds now may be sold directly to the market. A stronger PLN may help achieve NBP’s 2.5% inflation target, as it is mainly commodity-driven. Yet PLN upside potential appears limited in the near term. The widening of the current account deficit, the decline in FDI, and a heavy positioning may be an obstacle to FX gains. Hold RUB. Appreciation appears overdone The RUB rose 6%+ year-to-date on a REER basis and returned to its pre-crisis levels. We keep a bearish bias for the medium term as the current account surplus seems likely to narrow in coming quarters and monetary policy to be tightened only moderately. Coming elections might weigh on capital flows. A continuous increase in oil prices is the main risk to our central scenario. Long SGD NEER/short USD-SGD Appreciation should face fewer headwinds than elsewhere in Asia, given SGD’s safe-haven status, hawkish central bank, and credible policy regime. Amid uncertainty, portfolio flows should rise from repatriation and regional safe-haven flows. SGD’s correlation with the EUR has fallen. The NEER has room to move higher in the band.

Underweight The main issue in Poland is that economic recovery and the political environment are stable and on track, but it is difficult to see much upside surprise. Indeed, at the margin, it is easier to envisage disappointment. Poland seems to have inherited Hungary’s twin deficit problems, while inflation also is becoming more of an issue.

Russia

Overweight. We maintain a small overweight in Russia bons. MinFin has raised oil break-even forecasts to USD105/bbl for 2011 and USD120/bbl for 2012, which should anchor sentiment in the near term. However, should oil prices fall substantially; the long-term fiscal risks may undermine spreads’ performance.

Neutral Russian valuations are clearly low, but the key catalysts have lost momentum. It is difficult to see a repeat of the positive oil price support in Q1. With regard to the domestic cycle, Russia is among the countries that have been least pre-emptive in addressing inflationary pressure, so the potential for negative surprises on that count is relatively high. Underweight While exposed to global demand trends, a vigilant government is keeping domestic asset price inflation at bay, so Singapore equities appear unlikely to outperform the region.

Singapore

South Africa Neutral. Long SOAF 2041 We continue to like the SOAF2041. The valuation has richened significantly of late; thus, we recommend investors stay in the very long end of the curve. The trade balance in South Africa printed in surplus territory again in March, implying few risks from external imbalances.

Receive. Buy R208; hold 1s5s IRS flattener The front end has depriced tightening expectations over the last two months, benefiting 1y1y and 2y receivers. We have taken profit in receiving 1y1y and extended duration by going long the R208 bond, as the front end could see rising volatilities, and the long end of the curve offers more value from risk-premium perspective. We continue to like curve flatteners, as the slightly more hawkish SARB should keep inflation expectation well-contained. Paying bias. Moderate bearish flattening expected Despite subdued April inflation of 1.34%l, the strong GDP release on 19 May is likely to justify a potential hike at the 24 June meeting. Further upside potential in front-end IRS is expected as 1yr ND TWD IRS trades at a narrow spread of only 18bp over the 90day CP rate. HSBC Economics forecasts a 25bp hike in discount rates by 3Q11.

Buy USD-ZAR Although the ZAR benefits from its commodity currency and high-yielding status, it remains vulnerable to changes in global market sentiment. The dependence on shortterm capital inflows remains wide, and macro parameters still suggest the ZAR is too strong. The SARB is on the alert on inflation and second-round impacts of cost factors, but domestic economic activity is still soft, while a negative output gap does not warrant increases in rates. Sell TWD-IDR The TWD is unlikely to continue its strong performance year-to-date. The equity market and large trade surplus are both vulnerable to weakening global demand. With low implied rates and managed volatility, we would use the TWD as a regional funding currency.

Neutral The default position for most GEM funds is to be underweight South Africa; we believe its situation deserves better than that, and we recommend a neutral weighting. Domestic South Africa remains in the right part of the cycle for equities to perform. Inflation remains low, so the central bank should be able to continue to pursue a supportive monetary policy. Neutral Domestic sentiment should be buoyed by amicable crossStrait politics. However, global macro headwinds continue to weigh on export-focused Taiwanese stocks. Valuation is attractive, coupled with reasonable earnings growth expectations. As a result, we stay bullish on Taiwan longerterm but turn neutral to reflect our cautious near-term view.

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Taiwan

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Table B5: Summary of HSBC fixed income, FX, and equity views
Emerging Markets Strategist Cross-Asset Strategy 25 May 2011

Country Thailand

EXD

LDM Pay/Neutral. Sell 10yr ThaiGB, Receive 10yr THB IRS Receive swaps based on limited upside pressure in the THB fix, currently 27bp above the repo rate. Bond-swap spreads should tighten (ie higher 10yr ThaiGB yield, lower 10yr THB IRS), as a rapid increase in the THB fix has widened bond swap spreads across the curve, chiefly the 10yr-point. Historical valuations suggest that the 10yr swap spread may encounter a resistance at around 60bp.

FX Neutral Large trade surplus and hawkish policy support the THB. However, FX policy remains the focus in protecting the downside in USD-THB rather than the topside. Also, a weaker global growth outlook and uncertain political backdrop make the trade balance vulnerable.

Equity Underweight Politics remains the key concern. The general election on 3 July could reignite street demonstrations. The king’s health remains a concern. Fundamentals are generally positive, but investors can get exposure to similar growth elsewhere in the Asean region without the same degree of political risk.

Turkey

Underweight We remain underweight Turkey USD bonds, and we like buying protection in CDS (against Israel). The BoP profile continued deteriorating as the CBRT remains reluctant to hike the policy rate. Should global liquidity tighten substantially, the financing of current account deficit – mainly short-term borrowing – could come under pressure.

Pay bias. Enter 2s5s X-CCY steepener There is room for the front end to deprice the policy rate hike expectation post-election. While there are no signs that credit growth is slowing, the CBRT has retained its commitment to quantitative tightening. We like the carry in the front end, and we are skeptical on the belly/long end of the curve due to insufficient risk premium.

Buy USD-TRY Without rapid concrete results in slowing credit growth and narrowing the wide current account deficit, the TRY is facing the risk of further depreciation, as there is no risk premium offered in exchange for the macro risks. RRR is likely to remain the main policy tool, implying less need to increase the key repo rate. Delayed and small repo rate hikes should keep the TRY weak. Markets are tuned to the post-12 June election environment and expect decisive steps to mitigate current account deficit risks. Hold UAH Depreciation pressures have eased in 2Q, reducing the need for NBU’s FX interventions, while seasonal balanceof-payment improvements should start working in the UAH’s favor in the summer. Rapid weakening of the trade balance, potential contagion from Belarus, and delays in executing the IMF standby program are the main risks. Short USD-UYU Inflation has continued to surprise to the upside, rising to 8.3% y-o-y. In the highly dollarized economy, the FX rate is one of the most important tools to tighten monetary conditions. As such, we believe FX policy is likely to be more accommodative for the time being. A more expensive BRL and strong prospects for FDI make us bullish the UYU. Neutral USD-VEF Higher oil prices reduce the chances of another devaluation short-term, particularly ahead of the December 2012 presidential election. A new oil windfall tax will channel more funds to the Fonden. If Fonden sells more of its USD via Sitme at VEF5.30/USD, expect more USDs for imports and other payments. But if Fonden sells USDs to the central bank at the official VEF4.30/USD rate, expect more USDs for the private sector via Cadivi. Long USD-VND The pace of recent policy tightening, repo rate now at 15%, is a positive development for VND. However, double-digit inflation and a large trade deficit are still key challenges. Further weakness in the short term remains, given the low level of FX reserves.

Overweight Turkey has been helped by reduced upward momentum in oil prices. At the same time, concern about domestic overheating is diminishing. Policy, having been behind the curve, now looks much more in tune with events, and there are some tentative indications that the economy is beginning to slow. The market no longer looks over-owned by GEM funds, and valuations do not look excessive.

Ukraine

Overweight

We continue to like the carry in VAT bonds

We remain overweight Ukraine as an HY sovereign credit, We continue to favor the VAT bonds for attractive carry, and on an improving relationship with Russia. Nonetheless, anchored by a stable currency. with valuation tightened significantly, we advise more cautiousness.

Uruguay

Overweight We continue to see the Global 2036 as the most attractive bond to capture carry. Yet for investors willing to reduce duration, we favor the Global 2017 and 2022, as the government appears likely to target those bonds in its strategy to reduce exposure to USD-denominated paper.

Buy. We favor the front-end of the nominal curve We consider the local curve increasingly attractive and favor the new treasury notes maturing in January 2014 (U1) and January 2016 (U2). As we expect inflation to peak at close to 9% y-o-y in 1H11, we consider locking into fixed-rate paper as the best strategy.

Venezuela

Overweight. Buy PdVSA '17N - Venz 5Y CDS basis Venezuela remains king in terms of carry. Based on lower supply expectations, we see relative more upside in PdVSA than in the sovereign. The PdVSA basis has also lagged behind the basis compression seen in the sovereign. The PdVSA ’17N continues to be the cheapest bond in the curve on PECS spread.

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Vietnam

Emerging Markets Strategist Cross-Asset Strategy 25 May 2011

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EM Flows Watcher
 Inflows into EM-dedicated funds have recovered in the past weeks  A softening growth outlook could reduce flows into equities in the coming weeks  Local fixed-income currency funds remain strong Reflows to developed markets reversed. In our April EM Strategist piece, we highlighted that a shift in the output-inflation trade-off had caused a strong shift toward developed markets’ funds since end-January 2011. By end-March, however, lower-than-expected GDP growth and signals of low-for-longer rates in the US initiated a favorable change toward the EM spectrum.

USD4.75bn entered EM-dedicated fixedincome funds between 30 March-18 May. This was an increase of 3.7% of assets under management (AUM). EM equity funds followed a similar pattern, accumulating USD13.7bn, or 1.9% of AUM. However, EM equity funds saw outflows in the same period, returning to negative terrain as has been the case for most of 1Q11. We believe that inflows into EM bond funds will remain strong, outperforming EM equity funds. The bigger drag, in our view, relates to growth weakness and currency dislocation.

Pablo Goldberg Global Head, EM Research HSBC Securities (USA) Inc. +1 212 525 8729 pablo.a.goldberg@us.hsbc.com Hernan Yellati Latam FI Strategist HSBC Securities (USA) Inc. +1 212 525 3084 hernan.m.yellati@us.hsbc.com

Chart B1: Fixed income fund flows
1,000 500 0 -500 -1,000 Jan-11
Blend

Chart B2: Equity fund flows
6,000 4,000 2,000 0 -2,000
USDmn 8,000 6,000 4,000 2,000 0 -2,000 -4,000 -6,000 -8,000 Jan-11
GEM Asia x-Jap

80000 60000 40000 20000 0 -20000 -40000 Feb-11 Mar-11
EM EA GEM (2Y)

Feb-11
LDM

Mar-11

Apr-11
EXD

May -11
Accumulat ed (2Y)

Apr-11

May -11
Latam DM (2Y)

Source: EPFR data

Source: EPFR data

Table B6: Fund flows (USDm) _______________________________________________________ Equity ______________________________________________________ Developed US _______________________EM______________________ Total GEM EMEA Latam Asia x-JP Last 4 weeks YTD 7,204 5,586 1,711 (7,549) 1,784 (3,307) -269 3,715 -92 (2,044) 289 (5,913) _________ US __________ HY TIPS Muni 790 6,608 510 -1,553 1,798 (18,076) 58,648 29,958

__________________________________________________ Fixed income ___________________________________________________ _________________________________EM __________________________________ Total Blend EXD LDM Global EMEA Latam Asia x-Jap Last 4 weeks YTD
Source: EPFR data

2,624 4,832

107 (96)

644 921

1,873 4,007

2,196 3,790

-29 (38)

133 434

324 645

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Emerging Markets Strategist Cross-Asset Strategy 25 May 2011

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Macroeconomic forecasts
Table C1: Summary of HSBC macroeconomic forecasts _______ GDP ______ _____ Inflation _____ _____ Policy rate ____ _________FX _______ ____Current account___ ____ Fiscal account ____ 2010 2011f 2012f 2010 2011f 2012f 2010 2011f 2012f 2010 2011f 2012f 2010 2011f 2012f 2010 2011f 2012f Argentina Brazil Chile China Colombia Czech Republic* Egypt Hong Kong Hungary* India Indonesia Israel Korea Lebanon Malaysia Mexico Panama Peru Philippines Poland* Russia Singapore South Africa Taiwan Thailand Turkey UAE Ukraine Uruguay Venezuela Vietnam EM Developed US UK Eurozone Japan
* FX forecasts vs EUR. Source: HSBC

9.00 7.50 5.20 10.30 4.60 2.20 5.10 7.00 1.20 8.70 6.10 4.50 6.00 7.10 7.20 5.50 7.50 8.80 7.30 3.80 4.00 14.50 2.80 10.82 7.80 8.00 1.70 3.80 8.50 -1.40 6.80 6.20 2.50 2.90 1.30 1.70 3.90

5.80 4.70 6.00 8.90 4.10 1.70 0.20 5.50 2.50 7.90 6.40 3.70 4.70 3.20 5.30 4.10 6.50 7.10 5.40 4.00 5.50 5.80 3.50 5.05 4.90 4.20 3.40 4.00 5.50 2.60 6.80 4.80 1.60 2.80 1.20 1.50 0.90

5.00 4.60 5.00 8.60 4.30 2.70 2.50 4.90 3.10 8.40 6.50 3.40 5.20 3.60 5.70 4.10 6.50 6.10 5.90 4.20 4.00 6.20 3.10 5.48 5.70 4.30 4.10 5.10 5.00 4.10 7.40 5.00 2.20 3.10 1.60 1.60 2.50

25.00 5.91 3.00 3.30 2.60 2.30 10.00 2.40 4.70 12.00 5.10 2.70 3.00 4.50 1.70 4.40 4.90 2.08 3.80 3.10 6.90 2.80 3.50 0.96 3.30 6.40 1.50 9.40 6.62 27.00 9.20 6.00 1.50 1.60 3.30 1.60 -0.70

25.00 21.00 9.00 9.00 9.00 4.00 6.40 5.40 10.75 12.50 12.50 1.67 4.30 3.50 3.25 6.00 6.00 468 3.90 2.90 5.81 6.56 6.56 6.61 4.00 4.80 3.50 4.50 5.00 1750 2.56 1.31 0.75 1.25 1.50 18.70 10.70 12.00 9.10 9.30 - 5.81 4.70 4.80 0.50 0.50 1.00 7.80 4.62 3.08 5.25 6.00 6.25 207 10.30 7.40 6.25 8.00 8.25 44.70 6.80 6.50 6.50 7.25 7.25 9010 4.37 3.00 2.00 4.00 4.50 3.60 4.40 3.40 2.50 3.75 4.00 1126 5.00 5.00 10.00 10.00 10.00 1126 3.40 3.10 2.75 3.25 3.50 3.06 3.60 3.30 4.50 4.50 5.50 12.40 3.50 2.50 1.00 3.17 2.62 3.00 4.25 4.75 2.82 5.40 4.50 4.00 5.00 5.75 43.80 5.83 2.22 3.50 4.50 4.50 2.95 9.70 8.50 7.75 8.50 7.75 30.50 4.20 3.10 0.40 1.10 1.20 1.29 5.92 4.86 5.50 5.50 7.00 6.62 2.26 2.24 1.625 2.125 2.625 29.30 4.00 3.70 2.00 3.00 3.50 30.00 7.39 6.37 6.50 7.50 7.50 1.54 2.70 3.80 N/A N/A N/A 8.70 8.00 0.00 0.00 0.00 6.96 6.90 6.75 8.00 8.00 19.89 29.00 25.50 N/A N/A N/A 4.30 14.30 8.90 9.00 10.00 9.00 19498 6.60 2.40 3.00 4.20 2.70 -0.20 6.10 1.40 1.70 2.10 1.90 -0.30

4.50 0.90 0.10 0.30 1.60 -2.30 -2.50 -2.70 510 1.90 -0.90 -1.80 6.15 4.20 3.70 2.60 1900 -1.80 -1.60 -1.60 23.70 -2.10 -1.90 -1.60 7.00 -2.00 -1.80 -2.30 7.80 9.70 7.50 9.40 260 1.90 -0.40 -0.70 42.00 -3.00 -2.90 -2.50 8300 0.90 0.60 0.60 3.38 3.10 2.30 2.10 1030 3.70 1.04 0.61 1030 -20.70 -20.80 -17.30 2.74 12.00 12.40 12.70 11.70 -0.50 -0.80 -1.30 1.00 -11.00 -9.90 -4.50 2.68 -1.50 -2.90 -3.50 40.00 4.50 6.30 5.40 2.68 -3.30 -3.40 -3.60 31.30 5.10 4.70 3.10 1.19 22.20 21.90 24.20 6.80 -3.90 -4.20 -5.00 26.80 9.43 7.32 6.29 27.50 4.64 5.15 5.80 1.40 -6.50 -7.00 -6.60 10.00 11.80 8.20 -1.90 -4.90 -10.10 18.70 18.70 -0.40 -0.42 0.27 4.30 4.30 6.20 9.80 6.60 21500 21500 -8.30 -6.90 -5.70

4.10 1.52 510 6.35 1750 17.00 6.50 7.80 182 42.00 8300 3.40 1070 1070 2.88 11.30 1.00 2.72 41.00 2.68 31.30 1.23 6.90 28.00 28.60 1.45

0.20 -2.60 -0.50 -2.60 -3.00 -5.30 -8.00 4.20 -3.80 -5.10 -1.60 -3.70 -2.74 -7.50 -4.40 -2.80 -1.90 -0.60 -3.70 -7.90 -4.10 -0.10 -5.20 -3.31 -1.30 -3.50 5.20 -5.60 -1.20 -4.30 -5.00

-1.00 0.20 -2.50 -2.80 0.90 1.40 -2.00 -1.70 -3.50 -3.30 -4.40 -4.10 -9.80 -10.30 2.30 3.10 -1.00 -3.50 -5.00 -4.20 -1.90 -1.70 -3.20 -3.40 -2.00 -1.80 -8.10 -7.80 -3.20 -2.00 -2.50 -2.00 -1.50 -0.70 -0.80 -0.70 -3.00 -2.50 -6.70 -6.20 -0.50 -0.20 0.50 0.70 -4.70 -4.00 -2.72 -1.08 -1.00 -0.60 -4.00 -3.60 10.60 10.40 -3.50 -3.00 -1.00 -1.00 -0.70 -5.90 -4.80 -4.50

0.25 0.50 1.00 0.10

0.25 0.50 1.75 0.10

0.50 2.00 2.50 0.10

N/A 1.57 1.34 81

N/A 1.61 1.40 80

N/A 1.61 1.40 80

-3.20 -2.50 -0.60 3.60

-3.20 -2.60 -0.30 2.00

-3.00 -2.00 -0.10 2.90

-8.90 10.00 -6.50 -9.00

-9.10 8.00 -5.00 -9.00

-7.00 6.20 -4.20 -8.00

Chart C1: GDP growth
9 8 7 6 5 4 3 2 1 0 BRIC CIVETS EM DEVELOPED % 2010 2011 2012

Chart C2: GDP growth ranking (%)
India Peru TOP 5 Vietnam Panama Indonesia Lebanon Venezuela Hungary Czchek Republic Egypt 0
Source: Bloomberg, HSBC

Chart C3: Inflation ranking (%)
Czech Republic Taiwan Peru UAE Malaysia India Egypt Vietnam Argentina Venezuela 0 10 20

BOTTOM 5

BOTTOM 5

TOP 5 30

2

4

6

8

10

Source: Bloomberg, HSBC

Source: Bloomberg, HSBC

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EM FX forecasts
Table C2: Summary of HSBC EM FX forecasts 2008 USD-ARS USD-BRL USD-CLP USD-CNY USD-COP EUR-CZK USD-EGP USD-HKD EUR-HUF USD-INR USD-IDR USD-ILS USD-KRW USD-MYR USD-MXN USD-PEN USD-PHP EUR-PLN USD-SGD USD-ZAR USD-THB USD-TRY EUR-RON USD-RUB USD-TWD USD-UYU USD-VEF USD-VND Select G10: EUR-USD USD-JPY GBP-USD
Source: HSBC

2009 3.80 1.74 507 6.83 2,043 26.4 5.48 7.76 270 46.5 9404 3.79 1,164 3.43 13.10 2.89 46.2 4.10 1.40 7.38 33.3 1.49 4.232 30.1 32.0 19.55 2.15 18,479

2010 3.98 1.66 468 6.61 1,920 24.5 5.81 7.80 278 44.7 8996 3.53 1,126 3.06 12.36 2.81 43.8 3.96 1.28 6.62 30.0 1.54 4.28 30.5 29.3 19.90 4.30 19,498

1Q11 4.05 1.63 478 6.56 1,871 24.5 5.97 7.78 268 44.6 8720 3.50 1,102 3.03 11.91 2.80 43.4 4.00 1.26 6.86 30.3 1.56 4.11 28.4 29.5 19.20 4.30 20,900

2Q11f 4.10 1.56 470 6.48 1,800 24.2 6.75 7.80 260 44.5 8500 3.50 1,090 2.94 11.55 2.74 42.6 3.90 1.25 7.20 29.8 1.55 4.05 30.3 29.0 18.90 4.30 20,500

3Q11f 4.12 1.54 475 6.40 1,750 24.0 6.75 7.80 255 43.5 8400 3.45 1,080 2.91 11.45 2.73 41.8 3.80 1.24 7.00 29.2 1.50 4.00 31.0 28.5 18.65 4.30 21,500

4Q11f 4.15 1.52 480 6.35 1,750 23.8 6.75 7.80 255 42.0 8300 3.40 1,070 2.88 11.30 2.72 41.0 3.75 1.23 6.90 28.6 1.45 3.95 31.3 28.0 18.50 4.30 21,500

1Q12f 4.20 1.52 485 6.30 1,750 23.7 6.75 7.80 255 42.0 8300 3.37 1,060 2.85 11.30 2.71 40.5 3.70 1.22 6.80 28.0 1.45 3.95 28.8 27.7 18.50 4.30 21,500

2Q12f 4.25 1.52 490 6.25 1,750 23.7 6.75 7.80 260 42.0 8300 3.35 1,050 2.82 11.30 2.70 40.0 3.60 1.21 6.90 27.5 1.40 3.90 31.3 27.4 18.50 4.30 21,500

3Q12f 4.30 1.56 495 6.20 1,750 23.6 6.75 7.80 260 42.0 8300 3.35 1,040 2.79 11.50 2.69 40.0 3.55 1.20 6.9 27.5 1.40 3.85 31.3 27.1 18.50 4.30 21,500

4Q12f 4.35 1.60 500 6.15 1,750 23.6 6.75 7.80 260 42.0 8300 3.30 1,030 2.74 11.70 2.68 40.0 3.55 1.19 7.00 27.5 1.40 3.85 31.3 26.8 18.50 4.30 21,500

3.45 2.31 637 6.83 2,248 26.5 5.49 7.75 267 48.7 11120 3.78 1,295 3.47 13.69 3.13 47.5 4.11 1.44 9.32 34.7 1.54 4.03 29.4 32.8 24.40 2.15 17,483

1.39 91 1.44

1.43 93 1.61

1.34 81 1.57

1.42 83 1.61

1.35 85 1.57

1.35 80 1.6

1.40 80 1.61

1.40 80 1.61

1.40 80 1.61

1.40 80 1.61

1.40 80 1.61

Chart C4: Change over the last four weeks (%) vs USD
BRL CLP CNY COP HUF INR IDR KRW MYR MXN PHP PLN RUB ZAR TWD THB TRY -2% - 1% 0% 1% 2% 3% 4% 5%

Chart C5: Change year-to-date (%) vs USD

BRL CLP CNY COP HUF INR IDR KRW MYR MXN PHP PLN RUB ZAR TWD THB TRY -4% -2% 0% 2% 4% 6% 8% 10% 12%

Source: Bloomberg, HSBC

Source: Bloomberg, HSBC

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EM Central Bank Watcher
Table C3: HSBC forecasts (in italics) and market implied policy rates Country
Brazil Chile China Colombia Czech Rep. Hungary India Indonesia Israel Korea Malaysia Mexico Peru Philippines Russia Poland South Africa Taiwan Thailand Turkey Vietnam

Last
12.00 Market implied*  5.00 Market implied*  6.31 3.75 0.75 Market implied*  6.00 Market implied*  7.25 Market implied*  6.75 3.25 Market implied*  3.00 Market implied*  3.00 Market implied*  4.50 Market implied*  4.25 4.50 8.25 4.25 Market implied*  5.50 Market implied*  1.750 Market implied*  2.75 Market implied*  6.25 Market implied*  9.00

Jun
+25 +24 +25 +16 +25 +25 = +35 = +10 +25 +11 = = +16 +25 +10 -=

Jul Aug Sep
+25 +26 +25 +14 = = -= +3 +25 +42 +25 +25 +9 = +8 +25 +26 = 0 = +25 = = +7 = +6 --+16 +25 +6 = = +25 +9 = +25 +25 -20 = +1 -+25 = +11 +25 +2 --+2 = -= --+25 +6 = = +25 +27 = +1 = +18 = +25 +7 = +2 = -1 =

Oct Nov Dec 2011 2012 Risks
= = +5 = = -= +1 +25 -7 = = +6 -+4 -= +5 = = = = +9 --= -3 +25 +18 = = = +6 = = = -2 = 0 -= +25 +5 +25 +12 = +14 --- 12.50 12.50 Despite more hikes and quantitative measures, overall tightening is likely to fall 12.60 12.75 short of that needed to converge to the mid-point of the targeted band by 2012. = 6.00 6.00 After a surprise 50bp hike, May statement and officials’ rhetoric signal a +10 5.65 5.55 slowdown in the pace of hikes. = = = +25 = -1 = -10 = = +5 = +3 -= +13 = = = 6.56 4.50 1.25 1.39 6.00 6.15 8.00 7.79 7.25 4.00 3.61 3.75 3.41 3.25 3.39 4.50 4.74 4.25 5.00 8.5 6.56 5.00 1.50 2.03 6.25 6.24 8.25 8.28 7.25 4.50 4.11 4.00 3.60 3.25 3.52 5.50 5.81 Quantitative tightening is working. But taming inflation remains the PBoC’s top priority, requiring more rate and RRR hikes in the coming months. BanRep should stay data-dependent. Inflation has surprised to the downside. We expect further monetary normalization in coming meetings. A more-hawkish ECB could prompt the CNB to tighten slightly earlier than expected in its base-case scenario; however, inflation still remains very benign. MPC adopted a wait-and-see stance after three consecutive hikes in Nov-Jan, and it believes pre-emptive action to date should diffuse second-round effects. RBI’s surprise hike in May anchored inflation expectations and tackle demandled inflation pressures; still trailing the curve, it got a step closer. BI is back in reluctant-to-hike mode, choosing to permit more FX appreciation instead to combat inflation. Strong growth and inflation and a frothy housing market call for more tightening. Quantitative and macro-prudential measures may reduce the size of any hikes Despite a surprise pause in May, we expect the BoK to continue to hike through year-end to address inflation pressures and normalize its stance. BNM has started tightening again and appears likely to bring in another 25bp hike in July. Banxico has shown a neutral tone with a slight dovish bias in the most recent communiqué and minutes, supporting our view of no hikes until 1Q12.

= +25 +25 = +3 -+12.5 +18 +25 +11 = +5 +200

= = =

= -=

Our rate call has upside risks, but final rate hikes might end up being lower 4.75 than consensus. BCRP strongly raised RRR to reduce the need of rate hikes. 5.75 7.75 The BSP acknowledged that the inflation target for 2011 is at risk and that it remains cautious on second-round effects. The tone of officials is still hawkish. The Russian central bank is well behind the curve but will have to tighten moderately using both RRR and policy rate hikes, in our view.

+25 +16 -= +16 -- +12.5+17 = -+8 +25 +25 +12 +15 = =

= = 4.50 4.50 BNP adopted a more-hawkish tone and now uses FX against inflation. With +11 6 4.77 5.19 core inflation and service prices on the rise, another 25bps hike seems likely. = -- 5.50 7.00 MPC adopted a slightly hawkish tone due to rising food and fuel prices, but we +35 6.07 7.78 believe a hold in 2011 is warranted due to limited demand-side price pressures -- +12.5 2.125 2.625 The CBC is likely ahead of the curve, and we expect further monetary -5 2.06 2.34 normalization, with the next 12.5bp rate hike coming on 30 June. -= 3.00 30.0 BoT continues to present a very hawkish tone, as inflation may pick up soon -4 3.02 3.64 following the expiration of price controls amidst strong growth. = +25 7.50 7.50 Aggressive RRR hikes could push out and pare orthodox rate hike +18 +13 7.21 7.75 expectations, which we expect to begin in 2H 11. Fiscal policy matters, too. = -100 10.00 9.00 The SBV uses four benchmark rates. There have been six rounds of hikes in the current cycle. The base rate we track is the only one yet to be raised.

Note: * See our daily Emerging Markets Central Bank Monitor. Source: HSBC

Chart C6: Emerging Markets Central Bank Monitor – 12-month implied interest rate moves
150 Brazil 125 Implied changes (bp) 100 75 50 25 0 Current
Source: HSBC

India

Korea

Mexico

Poland

South Africa

1m

2m

3m

4m

5m

6m

7m

8m

9m

10m

11m

12m

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Surprise Indices
Chart C8: Asian inflation surprises
Z-sco re

Chart C9: Asian economic activity surprises
Z-sco re

0.80 0.60 0.40 0.20 0.00 -0.20 -0.40 -0.60 -0.80 -1.00 -1.20 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11

6.0 5.0 4.0 3.0 2.0 1.0 0.0 -1.0 -2.0 -3.0

2.00 1.50 1.00 0.50 0.00 -0.50 -1.00 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11

0.0 -2.0 -4.0 -6.0 -8.0 -10.0 -12.0 -14.0 -16.0

3mma Z score all (ex China) Inflation all (ex China) Inflation - cumulativ e surprise (RHS)
Source: HSBC FX Quant Strategy

3mma Z score all (ex China) Ec. Activ ity all (ex China) Ec. Activ ity - cumulativ e surprise (RHS)
Source: HSBC FX Quant Strategy

Chart C10: Latin American inflation surprises

Chart C11: Latin American economic activity surprises
Z-score 0.4 0.3 0.2 0.1 0.0 -0.1 -0.2 -0.3 -0.4 -0.5 Jan-06 Oct-06 Jul-07 Apr-08 Jan-09 Oct-09 Jul-10 3mma Z score accumulated z-score RHS
Source: HSBC based on Bloomberg

Z-score 8.0 1.0 7.0 0.8 6.0 0.6 5.0 0.4 4.0 0.2 3.0 0.0 2.0 -0.2 1.0 -0.4 0.0 -0.6 -1.0 -0.8 -2.0 Jan-06 Oct-06 Jul-07 Apr-08 Jan-09 Oct-09 Jul-10 Apr-11 3mma Z score accumulated z-score RHS
Source: HSBC based on Bloomberg

1.0 0.5 0.0 -0.5 -1.0 -1.5 -2.0 -2.5 -3.0 -3.5

Chart C12: EMEA inflation surprises
Z-score 1.0 0.8 0.6 0.4 0.2 0.0 -0.2 -0.4 -0.6 -0.8

Chart C13: EMEA economic activity surprises

7 6 5 4 3 2 1 0

Z-score 0.6 0.4 0.2 0.0 -0.2 -0.4 -0.6

5 4 3 2 1 0 -1

Jan-06 Oct-06 Jul-07 Apr-08 Jan-09 Oct-09 Jul-10 Apr-11 3mma Z score (EMEA) accumulated z-score (EMEA) RHS
Source: HSBC based on Bloomberg

Jan-06 Oct-06 Jul-07 Apr-08 Jan-09 Oct-09 Jul-10 Apr-11 3mma Z score (EMEA) accumulated z-score (EMEA) RHS

Source: HSBC based on Bloomberg

Note: The Surprise Indices are constructed using an average of normalized surprises based on the median from the Bloomberg survey of expectations of a variety of inflation and economic activity indices. 31

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Trade ideas
Table C4: Recommended trade ideas Country Trade idea Entry date Entry price Last Target Stop

Credit
Venezuela Mexico Buy PdVSA '17N – Venezuela 5Y CDS basis 100y/30y UMS flattener 05/05/11 10/06/10 428bp 64bp 411bp 517bp 300bp 35bp 480bp 80bp

Rates
Mexico South Africa Turkey South Africa Mexico India Hong Kong Korea Malaysia Thailand Indonesia Buy 2y BEI 1s5s IRS flattener 2s5s X-CCY steepener Long R208 Buy MBonos 2024 I2-1yr, 1yr forward INR OIS steepeners Receive 2s5s10s HKD IRS fly 5-2yr KRW CCS steepener Buy 5yr MGS; Pay 5yr MYR IRS Sell 10yr ThaiGB; Receive 10yr THB IRS 10yr IndoGB (FR53) 02/24/11 16/02/11 06/04/11 10/05/11 05/11/11 5/19/2011 5/4/2011 5/4/2011 4/19/2011 4/19/2011 5/23/2011 3.72% 198bp 53bp 8.36% 7.39% -22bp 33bp 48bp 49bp 47bp 7.42% 3.65% 170bp 55bp 8.34% 7.22% -20bp 21bp 47bp 45bp 36bp 7.47% 4.10% 150bp 95bp 7.85% 7.05% 5bp Revised 12bp 70bp 60bp 32bp 7.10% 3.40% 198bp 35bp 8.60% 7.60% -40bp Revised 32bp 35bp 38bp 54bp 7.65%

FX
China Uruguay Romania South Africa Mexico Colombia/Brazil Colombia Brazil
Source: HSBC

Sell USD-CNH spot Sell USD-UYU via 3 mo. NDF Sell EUR-RON Receive 1y1y IRS vs. paying 3y Receive 1yr TIIE Buy Colombia - Sell Brazil 5Y CDS Sell USD-COP via 2 month forwards Sell USD-BRL via 1 mo. NDF

03/22/11 04/06/11 05/09/11 17/03/11 03/31/11 07/01/10 03/31/11 05/06/11

6.5530 19.27 4.100 29bp 5.26% 11bp 1861 1.6235

6.4975 18.84 4.134 17bp 5.10% -11bp 1780 1.6500

6.4500 18.50 3.950 0bp 5.10% 25bp 1780 1.5500

6.6070 19.50 4.180 40bp 5.40% 0bp 1890 1.6500

Closed since last EM Strategist publication on 1 April 2011

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Local markets
Chart C14: Brazil CDI curve
% 13.0

Chart C15: Jan ’12 and Jan ’13 (%)
% 13 Jan-13

Chart C16: Slope Jan ’13-Jan ’12
bps 100 Spread Jan-13 - Jan-12 75

12.5

Jan-12
13-Jan 12-Jan 17-Jan

12
50 5/17/2011 4/14/2011

12.0

11
25

11.5 0 5 Years 10

10 Apr-09 Oct-09 Apr-10 Oct-10 Apr-11

0 Apr-09

Oct-09

Apr-10

Oct-10

Apr-11

Source: HSBC, Bloomberg

Source: HSBC, Bloomberg

Source: HSBC, Bloomberg

Chart C17: Chile swap curve
% 6.5

Chart C18: 2Y & 5Y Camara swap
8 %

Chart C19: Slope 5Y-2Y
bps 400

6

5Y 2Y

300

6.0
4

200

5.5

5/18/2011 4/19/2011

2

100 Spread 5Y vs. 2Y

5.0 0 2 4 Years 6 8 10

0 Apr-09

0

Oct-09

Apr-10

Oct-10

Apr-11

Apr-09

Oct-09

Apr-10

Oct-10

Apr-11

Source: HSBC, Bloomberg

Source: HSBC, Bloomberg

Source: HSBC, Bloomberg

Chart C20: Mexico TIIE curve
% 8.0 7.0 6.0 26x1 5.0 4.0 0 2 4 Years 6 8 10 5/18/2011 4/14/2011

Chart C21: 65x1 & 130x1
9 %

Chart C22: Slope 26x1 & 130x1
bps 250 Spread 130x1 - 26x1

130x1

8 130x1 7 65x1
150 200

6

5 Apr-09

100

Oct-09

Apr-10

Oct-10

Apr-11

Apr-09

Oct-09

Apr-10

Oct-10

Apr-11

Source: HSBC, Bloomberg

Source: HSBC, Bloomberg

Source: HSBC, Bloomberg

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Local markets (cont’d)
Chart C23: Indonesia swap curve
% 8

Chart C24: 2Y & 10Y Indo swap series (%)
% 12

Chart C25: Slope 10Y - 2Y series
bps 300

10

7
8 10Y

200

6

5/18/2011 4/15/2011 0 2 4 6 8 10

100

6

2Y
0 Apr-09

Spread 10Y vs. 2Y Oct-09 Apr-10 Oct-10 Apr-11

5 Years

4 Apr-09

Oct-09

Apr-10

Oct-10

Apr-11

Source: HSBC, Bloomberg

Source: HSBC, Bloomberg

Source: HSBC, Bloomberg

Chart C26: Korea swap curve
% 4.50 4.25 4.00 3.75 3.50 0 2 4 Years 6 8 10

Chart C27: 2Y & 10Y Korea swap series
5 %

Chart C28: Slope 10Y - 2Y series
bps 100

5 10Y 4 2Y

80

60

5/18/2011 4/19/2011

4

40 Spread 10Y vs. 2Y

3 Apr-09

20

Oct-09

Apr-10

Oct-10

Apr-11

Apr-09

Oct-09

Apr-10

Oct-10

Apr-11

Source: HSBC, Bloomberg

Source: HSBC, Bloomberg

Source: HSBC, Bloomberg

Chart C29: Malaysia swap curve
% 5.0 4.5 4.0 3.5 3.0 0 2 4 Years 6 8 10

Chart C30: 2Y & 10Y Malaysian swap series
6 %

Chart C31: Slope 10Y - 2Y series
bps 250

5

10Y

Spread 10Y vs. 2Y 200

4

2Y

150

5/18/2011 4/19/2011

3

100

2 Apr-09

50

Oct-09

Apr-10

Oct-10

Apr-11

Apr-09

Oct-09

Apr-10

Oct-10

Apr-11

Source: HSBC, Bloomberg

Source: HSBC, Bloomberg

Source: HSBC, Bloomberg

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Local markets (cont’d)
Chart C32: Turkey swap curve
% 9.0 8.5
10

Chart C33: 2Y & 10Y Turkey swap series
% 14 12

Chart C34: Slope 10Y-2Y series
bps 200

150

8.0
8

10Y 2Y 6 4 Apr-09

100

7.5 7.0 0 2 4 Years 6 8

5/18/2011 4/19/2011 10

50 Spread 10Y vs. 2Y 0 Apr-09 Oct-09 Apr-10 Oct-10 Apr-11

Oct-09

Apr-10

Oct-10

Apr-11

Source: HSBC, Bloomberg

Source: HSBC, Bloomberg

Source: HSBC, Bloomberg

Chart C35: Hungary swap curve
% 7.0 6.8 6.5 6.3 6.0 0 2 4 Years 6 8 10

Chart C36: 2Y & 10Y Hungary swap series
% 10

Chart C37: Slope 10Y-2Y series
bps 150 100

8
50

10Y 6
0

5/18/2011 4/19/2011
4 Apr-09

2Y
-50 -100 Spread 10Y vs. 2Y

Oct-09

Apr-10

Oct-10

Apr-11

Apr-09

Oct-09

Apr-10

Oct-10

Apr-11

Source: HSBC, Bloomberg

Source: HSBC, Bloomberg

Source: HSBC, Bloomberg

Chart C38: South Africa swap curve
% 9.0 8.0 7.0 6.0 5.0 0 2 4 Years 6 8 10

Chart C39: 2Y & 10Y South Africa swap series
% 11

Chart C40: Slope 10Y - 2Y series
bps 250

9

200

10Y
150

7

5/18/2011 4/19/2011
5 Apr-09

2Y

100 Spread 10Y vs. 2Y 50

Oct-09

Apr-10

Oct-10

Apr-11

Apr-09

Oct-09

Apr-10

Oct-10

Apr-11

Source: HSBC, Bloomberg

Source: HSBC, Bloomberg

Source: HSBC, Bloomberg

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EM Inflation linkers and break-evens
Table C5. EM break-even inflation Country Inflation-linked bond Yield (%) Inflation break-even (%) Inflation-linked swap Rate (%) Inflation break-even (%)

Brazil

Chile

Colombia Mexico

Peru

Israel

BNTNB 6 11/11 BNTNB 6 08/12 BNTNB 6 05/13 BNTNB 6 11/13 BNTNB 6 08/14 BNTNB 6 05/15 BNTNB 6 08/24 BNTNB 6 08/30 BNTNB 6 05/45 BCU 5.00 09/11 BCU 5.00 09/12 BCU 3.00 07/13 BCU 3.00 04/14 BCU 3.00 10/15 BCU 3.00 07/18 BCU 3.00 02/21 COLTES5 1/4 03/13 UVR COLTES7 02/25/15 UVR COLTES4 1/4 05/17 UVR MUDI 3.25 06/12 MUDI 5.50 12/12 MUDI 3.50 12/13 MUDI 4.50 12/14 MUDI 5.00 06/16 MUDI 3.50 12/17 MUDI 4.50 12/25 PERUGB 5.79+VAC 12/13 PERUGB 5.8+VAC 01/14 PERUGB 5.9+VAC 04/16 PERUGB 6.84+VAC 06/16 PERUGB 6.84+VAC 07/19 PERUGB 6.84+VAC 10/24 PERUGB 7.39+VAC 01/35 ILCPI 0.5% 06/13 ILCPI 1.5% 06/14 ILCPI 3.5% 04/18 ILCPI 3% 10/19 ILCPI 4% 05/36 ILCPI 2.75% 08/41

7.13 6.80 6.71 6.71 6.70 6.64 6.15 6.10 5.75 1.88 2.20 2.46 2.57 2.67 2.82 2.90 2.75 3.56 3.74 1.08 1.58 2.01 2.32 2.62 2.82 3.25 1.85 2.34 2.58 2.56 2.89 3.46 3.54 0.84 1.25 2.17 2.36 3.08 3.19

4.83 5.39 5.51 5.48 5.45 5.50 5.95 6.00 6.35 3.70 3.72 3.56 3.55 3.48 3.40 3.31 3.53 3.50 3.97 3.82 3.54 3.51 3.61 3.64 3.66 3.91 2.64 2.30 3.70 3.73 3.56 3.51 3.64 3.10 2.97 2.70 2.65 2.33 2.22

UF v CAMARA SWAP 1Y UF v CAMARA SWAP 2Y UF v CAMARA SWAP 3Y UF v CAMARA SWAP 5Y UF v CAMARA SWAP 10Y

2.19 2.10 2.12 2.23 2.49

3.38 3.47 3.50 3.41 3.37

MXN SWAP UDI-TIIE 1YR MXN SWAP UDI-TIIE 2YR MXN SWAP UDI-TIIE 3YR MXN SWAP UDI-TIIE 5YR MXN SWAP UDI-TIIE 10YR

1.38 1.80 2.22 2.72 3.20

3.67 3.73 3.65 3.76 4.05

South Africa

ZAR REAL YIELD SWAP ZAR REAL YIELD SWAP ZAR REAL YIELD SWAP ZAR REAL YIELD SWAP ZAR REAL YIELD SWAP TURKGB CPI 10% 02/12 TURKGB CPI 12% 08/13 TURKGB CPI 9% 05/14 TURKGB CPI 7% 10/14 TURKGB CPI 4.5% 02/15 TURKGB CPI 4% 04/20 1.26 1.95 2.15 1.96 2.38 2.67 7.29 6.77 6.73 6.98 6.59 6.45

1Y 2Y 3Y 5Y 10Y

0.25 0.93 1.15 1.35 1.68

5.72 5.70 5.99 6.32 6.42

Turkey

Source: HSBC

Chart C41: EM inflation targeters
8 7 6 5 % 4 3 2 1 0 IS
Source: HSBC

Targeted band

CZ

PL

BZ

CL

CO

ZA

TH

KO

MX

HU

PE

PH

ID

RO

TK

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EM Inflation linkers and break-evens (cont’d)
Chart C43: Brazil inflation break-evens
6.5 6.3 6.1 5.9 5.7 5.5 5.3 5.1 4.9 4.7 4.5 Jun-10 Aug-10 Oct-10 Dec-10 Feb-11 Apr-11
3.0 Aug-09 Jan-10 Jun-10 Nov-10 Apr-11 4.0 4.5 5.0

Chart C44: Mexico inflation break-evens
% 5.5

%

BRA 2Y BEI BRA 5Y BEI

3.5

MEX 2Y BEI MEX 5Y BEI

Source: Bloomberg, HSBC

Source: Bloomberg, HSBC

Chart C45: Chile inflation break-evens
% 5.0 4.5 4.0

Chart C46: Colombia inflation break-evens
5.0 4.5 4.0 COL 2Y BEI COL 5Y BEI %

3.5 3.0 2.5 2.0 1.5 1.0 Aug-09 CHI 2Y BEI CHI 5Y BEI

3.5 3.0 2.5 2.0 Apr-10

Jan-10

Jun-10

Nov-10

Apr-11

Jun-10

Aug-10

Oct-10

Dec-10

Feb-11 Apr-11

Source: Bloomberg, HSBC

Source: Bloomberg, HSBC

Chart C47: Turkey inflation break-evens
7.5 7.0 6.5 6.0 5.5 5.0 4.5 4.0 Jun-10
Source: Bloomberg, HSBC

Chart C48: South Africa inflation break-evens
% 7.5 7.0 6.5 6.0 5.5 5.0 4.5

%

TURK 2Y BEI TURK 5Y BEI

4.0 3.5 3.0 SOAF 2Y BEI SOAF 5Y BEI D ec-09 May-10 Oct-10 Mar-11

Sep-10

Dec-10

Mar-11

Jul-09

Source: Bloomberg, HSBC

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Emerging Markets Strategist Cross-Asset Strategy 25 May 2011

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curve has become very rich in spread terms, especially out to 10 years. This is in part due to buyback activity of the Brazilian Treasury, which continues to be in the market. Brazil ’17s have become one of the most expensive bonds in that sector of the curve, with a three-month PECS rich/cheap Z-score of -2.9. Brazil ’21s, on the other hand, are one of the most attractive bonds with a Zscore of 1.9. Colombia ’24s are cheap with a current Z-score of 0.9, compared to a Z-score of -1.2 for Colombia ’19s. The switch would allow an investor to pick up 31bp in PECS terms (100bp in yield) for an additional duration of 2.6. Philippines ’16s PECS is very cheap in comparison to other bonds in the 3–5-year sector. The bond has widened by 60 bps over the past three months and now is trading at a Z-score of 1.8, compared to the Philippines ’15s, which saw a PECS tightening of 12bp and trades at a Z-score of -2.4. Investors can pick up almost 28bp in spread for one year in additional duration risk.
Victor Fu FI Quantitative Strategist HSBC Securities (USA) Inc. +1 212 525 4219 victor.w.fu@us.hsbc.com Gordian Kemen Chief Latam FI Strategist HSBC Securities (USA) Inc. +1 212 525 2593 gordian.x.kemen@us.hsbc.com

External debt Rich/Cheap Model
 Brazil curve has richened out to 10 years, ’21s cheap compared to ’17s.  Colombia ’24s cheap compared to Colombia ’19s.  Philippines ’16s looks attractive versus the ’15s, offer 28bp pickup. External debt market had a mixed performance in spread terms over the past three months, with the index and most low-beta credits nearly flat. Argentina, Philippines, Egypt, and Russia saw spread widening, while Ukraine and Venezuela saw the biggest spread tightening moves. Yearto-date, Venezuela and Vietnam remain the top performers, both with 6.0% in terms of total return, compared to an index return of 3.50%. Argentina and Egypt remain the main underperformers, with -2.6% and -3.4% total return, respectively. Switch from Brazil ’17s to ’21s offers a pickup of 37bp in PECS spread. The Brazil

Table C7. External debt top 10 richest and top 10 cheapest bonds Bond TURK 2020 BRA 2017 BRA 2034 BRA A BOND COL 2014 PHI 2015 PAN 2015 COL 2017 INDO 2017 BRA 2019N PHI 2025 INDO 2016 TURK 2015 BRA 2013 MEX 2013 PHI 2024 COL 2020 PHI 2016 BRA 2030 BRA 2021 _______ Market mid levels ___________________Fair value ____________Rich/Cheap(-/+) 3M Change Price PECS PECS Basis Price PECS PECS Basis PECS PECS 115.19 115.68 137.50 120.10 120.04 124.44 117.80 120.93 116.09 114.43 149.75 117.47 114.01 119.00 108.44 137.50 153.13 128.18 181.25 104.83 190 76 150 (31) 95 68 83 109 150 95 196 153 176 18 57 203 151 96 158 113 18 38 8 112 (13) 36 (3) 0 (9) 40 1 (29) (28) 45 (7) (7) (14) 45 (1) 36 114.67 115.33 136.05 117.73 119.45 122.94 115.66 119.76 115.96 114.08 151.55 117.75 114.37 118.53 109.36 139.94 153.76 126.48 185.07 104.49 196.01 81.83 158.43 52.32 110.24 101.87 134.59 128.34 152.64 100.20 182.37 147.78 166.72 38.84 1.25 183.56 144.65 123.87 139.45 116.81 11 32 (0) 29 (28) 2 (54) (19) (11) 35 14 (23) (18) 25 49 13 (8) 17 18 32 (6) (6) (9) (83) (15) (34) (51) (19) (2) (5) 13 6 9 (21) 56 20 6 (28) 19 (4) (14) (30) (10) (89) (27) (12) (22) (14) (22) (15) 22 (10) (20) (23) 16 37 (8) 59 7 (5) 3M Z-score PECS (3.33) (2.85) (2.80) (2.63) (2.36) (2.36) (2.24) (2.24) (1.96) (1.77) 1.00 1.00 1.03 1.26 1.28 1.57 1.72 1.81 1.91 1.94

HSBC external debt rich/cheap model uses a theoretically sound quantitative model that assumes a bond issuer’s survival probability term structure follows a smooth functional form. The fair price of each bond of the issuer can be obtained by a calibrated survival probability function. The model is calibrated by minimizing sum of squared errors between the market and model prices of all the bonds of the issuer. To calculate a market/fair PECS metric, a parallel shift is applied to the hazard rates implied by the issuer’s CDS curve to match a given market/fair bond price. The PECS is the par CDS spread computed from the shifted CDS curve to the bond’s average life. The richness/cheapness of a bond is determined by how far the bond’s market PECS is below/above its fair PECS. The Z-score measures the deviation of a bond’s current richness/cheapness from the historical average over a 3-month period.
Source: HSBC

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Emerging Markets Strategist Cross-Asset Strategy 25 May 2011

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External debt Rich/Cheap Model
Chart C49: Argentina actual vs. fair PECS
700 650 600 550 500 450 400 350 Jan-12 Jan-17 Jan-22 Average Life Jan-27 Jan-32 Bonar 13 PECS Fair PECS Bonar 17 Boden 15 17 38 33

Chart C50: Brazil actual vs. fair PECS
194 144 94 44 (6) Jun-13 Jun-19 Jun-25 Average Life Jun-31 Jun-37 20 19 21 19 5.75 2425 B 30 27 34 37 41

Chart C51: Colombia actual vs. Fair PECS
250 27 200 150 16 20 14 17 19 PECS Fair PECS Jan-18 Jan-23 Jan-28 Average Life Jan-33 Jan-38 24 33 37 41

17

15 14 13 40 to Call

PECS Fair PECS

100 50

13

Jan-13

Chart 52: Indonesia actual vs. fair PECS
200 190 180 170 160 150 140 130 Mar-14 Mar-19 Mar-24 Average Life Mar-29 Mar-34 14 16 15 17 20 PECS Fair PECS 35

Chart C53: Mexico actual vs. fair PECS
200 180 160 140 120 100 80 60 40 20 0

Chart C54: Panama actual vs. fair PECS
248

31 20 Mar-19 22 19 26

33 34

40

198 148

23 26 27 29 20 12 15 PECS Fair PECS 3436

17 15 Feb-14 16 13 14

98 48 (2) Jul-12

PECS Fair PECS Jan-31 Jan-37

Jan-13

Jan-19

Jan-25 Average Life

Jul-17

Jul-22 Average Life

Jul-27

Jul-32

Chart C55: Peru actual vs. fair PECS
210 190 170 150 130 110 90 Jan-15 Jan-20 Jan-25 Average Life Jan-30 Jan-35 15 16 19 25 PECS Fair PECS 33 37

Chart C56: Philippines actual vs. fair PECS
230 210 190 170 150 130 110 90 70 50 13 Feb-13 14 15 16 12 16 19 Jun-19 PECS Fair PECS

Chart C57: South Africa actual vs. fair PECS
150

17

6 25

30 31

140 130 120 110 100 14 19 20 22

PECS Fair PECS

Feb-18

Feb-23 Average Life

Feb-28

90 Jun-14 Jun-17 Average Life Jun-20

Chart C58: Turkey actual vs. fair PECS
240 220 200 180 160 140 120 100 80 13 Jan-13 Jan-18 Jan-23 Average Life Jan-28 Jan-33 14 15 16 17 20 25 30 34 36

Chart C59: Ukraine actual vs. Fair PECS
410 390 370 350 15 13 PECS Fair PECS 16 17 20

Chart C60: Venezuela actual vs. fair PECS
1,300 1,200 1,100 16 1,000 900 13 800 Sep-13 14 19 23 2425 28 27 PECS Fair PECS 34

20 Dec-18 18

38

PECS Fair PECS

330 310 290 270 Jun-12 12

Jun-14

Jun-16 Average Life

Jun-18

Jun-20

Sep-18

Sep-23

Sep-28

Sep-33

Average Life

Source: Bloomberg, HSBC

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Emerging Markets Strategist Cross-Asset Strategy 25 May 2011

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External debt
Chart C61: EM, IG, and HY CDS
400 350 300 250 200 150 100 50 0 Brazil South Africa Bulgaria Peru Venezuela Colombia Thailand Malaysia Mexico Kazakhstan Philippines Argentina Turkey Korea Panama Indonesia Ukraine Chile Russia 600 400 1600

Chart C62: 90-day volatility
140% 120% 100% 80% 60% 40% 20% 0% Apr-07 High Yield High Grade EM EXD S&P EM Equities
3 mth range 3 mth ago Current
1200 1000 800 1400

Jan-08

Oct-08

Jul-09

Apr-10

Jan-11

Source: Bloomberg, HSBC

Source: Bloomberg, HSBC

Table C7: CDS Monitor (bp) Name Argentina (NR/Bu/B) Brazil (Baa3/BBB-/BBB) Chile (Aa3/A+/A+) Colombia (Ba1/BBB-/BB+) El Salvador (Ba2/BB-/BB) Mexico (Baa1/BBB/BBB) Panama (Baa3/BBB-/BBB-) Peru (Baa3/BBB-/BBB-) Uruguay (Ba1/BB+/BB) Venezuela (B2/BB-/B+) Austria (Aaa/AAA/AAA) Belgium (Aa1/NR/AA+) Bulgaria (Baa3 /*+/BBB/BBB-) Finland (Aaa/AAA/AAA) Greece (B1 /*-/B /*-/BB+) Hungary (Baa3/BBB-/BBB-) Iceland (Baa3/BBB-/BB+) Ireland (Baa3/BBB+/BBB+) Kazakhstan (BBB/WR/BBB-) Lithuania (Baa1/BBB/BBB) Netherlands (Aaa/NR/AAA) Norway (NR/AAA/AAA) Poland (A2/A-/A-) Portugal (Baa1 /*-/BBB-/BBB- /*-) Romania (Baa3/BB+/BB+) Russia (Baa1/BBB/BBB) Spain (Aa2/AA/AA+) Sweden (Aaa/AAA/AAA) Turkey (Ba2/BB/BB+) Ukraine (B2/B+/B) Egypt (Ba3/BB/BB /*-) Iraq (NR/NR/NR) Israel (A1/A/A) Morocco (Ba1/BBB-/BBB-) Soaf (A3/BBB+/BBB+) Australia (Aaa/NR/AAA) China (Aa3/AA-/A+) Indonesia (Ba1/BB+/BB+) Korea (A1/A/A+) Level 601 101 64 101 324 99 82 133 146 1023 61 132 200 27 1458 246 236 638 143 197 29 15 139 616 228 135 234 22 159 435 350 304 144 169 120 51 72 136 98 1D 10 0 2 -1 -3 0 1 0 11 1 0 5 -1 0 40 0 -7 11 0 0 -1 0 0 10 1 1 10 0 1 0 0 3 0 2 1 -1 0 0 0 1W 6 -1 4 -1 26 1 0 -4 0 1 -6 -13 3 -2 -65 7 -7 -65 -2 -5 -5 -2 -6 -49 3 3 -13 -2 7 3 -6 3 2 2 1 0 2 2 1 1M 44 -6 5 0 -3 0 -3 -19 -2 58 0 -4 -4 1 175 1 -28 48 2 -5 -8 -1 -3 8 7 5 2 -4 9 21 12 -2 2 4 0 -1 1 -6 -1 Min 543 101 58 98 297 97 81 109 133 934 50 115 194 24 959 235 236 525 136 197 29 14 136 456 215 121 197 21 141 408 320 300 140 163 115 48 69 130 95 Max 677 121 83 123 337 118 107 175 172 1152 87 180 264 39 1584 314 294 705 163 264 54 22 155 694 296 154 270 35 178 479 385 343 175 194 140 55 79 154 112 Beta/Rsq 3.3 / 0.5 0.6 / 0.6 0.3 / 0.4 0.5 / 0.6 0.4 / 0.0 0.6 / 0.5 0.5 / 0.6 0.6 / 0.3 0.5 / 0.1 5.5 / 0.6 0.6 / 0.5 1.0 / 0.4 1.4 / 0.5 0.2 / 0.5 4.0 / 0.3 2.0 / 0.4 0.4 / 0.1 2.1 / 0.3 0.9 / 0.7 0.9 / 0.6 0.2 / 0.4 0.1 / 0.2 0.9 / 0.7 2.5 / 0.4 1.7 / 0.6 0.9 / 0.7 1.9 / 0.5 0.2 / 0.4 0.9 / 0.7 2.2 / 0.3 0.8 / 0.1 -/0.3 / 0.2 0.2 / 0.0 0.8 / 0.7 0.1 / 0.1 0.3 / 0.3 0.5 / 0.3 0.5 / 0.3 Min/Max 3.3 / 4.1 0.5 / 0.6 0.3 / 0.4 0.5 / 0.6 0.4 / 0.6 0.5 / 0.6 0.5 / 0.5 0.5 / 0.6 0.2 / 0.5 3.6 / 5.5 0.4 / 0.6 0.6 / 1.0 1.4 / 1.4 0.1 / 0.2 3.5 / 5.0 1.6 / 2.0 0.3 / 0.5 1.6 / 2.1 0.9 / 1.1 0.9 / 1.1 0.2 / 0.2 0.0 / 0.1 0.9 / 1.1 2.1 / 2.7 1.5 / 1.7 0.9 / 1.1 1.5 / 1.9 0.1 / 0.2 0.9 / 1.0 2.0 / 2.3 0.7 / 0.8 -/0.3 / 0.4 0.2 / 0.3 0.8 / 0.9 0.1 / 0.2 0.3 / 0.4 0.5 / 0.7 0.5 / 0.6 Sprd/Beta Impl Rchp FAR Rchp 180 178 186 184 733 170 155 237 270 185 97 131 139 150 363 125 617 299 160 214 120 179 151 250 136 144 126 137 179 201 452 412 750 158 412 235 280 200 1 -4 -2 -5 0 -3 -6 -3 -4 5 2 0 8 1 0 8 -2 1 -6 1 7 0 -1 8 -4 -3 -1 0 2 -2 -1 0 -1 -4 0 2.0 -3.2 1.5 -3.7 -2.1 0.8 -0.5 0.9 0.0 5.3 1.5 1.0 -6.0 1.9 2.1 -2.0 -0.3 5.6 -2.9 -2.1 0.1 -0.2 3.1 -0.6 1 7 -1 2 Mean 2.0 -2.9 1.8 -3.5 -2.1 0.9 -0.4 0.5 0.6 6.0 1.4 1.5 -6.0 2.0 3.2 -2.1 -0.7 5.5 -2.5 -2.5 0.2 0.8 2.6 -0.8 0.2 7.0 -0.6 1.6 NSTD 0.0 -0.6 -0.4 -0.7 0.2 -0.2 -0.3 0.5 -0.6 -0.6 0.3 -0.9 -0.1 -0.2 -0.9 0.5 0.8 0.1 -1.0 0.9 -0.1 -0.8 0.6 0.8 0.9 -0.8 0.1 0.5

Column descriptions Min/Max-Last 3 months Beta/Rsq-Calculated by regressing daily spread changes in the security, against daily changes in a simple average of most of the listed securities. Rsq is the goodness of the fit; a high RSq indicates that the Beta can be trusted more Sprd/Beta – Shows the efficiency of the name as a short on the market. It indicates the cost of carry for shorting the market using this security Sprd/Notch- Spread corresponding to a single rating notch Notch/Gov– (World bank government Effectiveness index)*2.97. This formula, based on “A quantitative model for foreign currency government bond ratings”, Moody’s, Feb 2004, allows you to judge how much of a rating is due to “hard” numbers such as debt/exports, and how much is due to fuzzier concepts. The full formula is: R 12.78 2.97 *GOV 0.205*GDP 0.304*GROWTH 0.749* DEBT BetaModel – This is the amount of spread that is not explained by the broad market beta. This gives you the amount of idiosyncratic risk that is being priced into the security. A positive number indicates how much a seller of protection is getting paid for bad news associated with the security, and a negative number indicates how much a seller of protection is giving up for the good news that is priced in. RtgModel – This is the amount of spread that is not explained by the rating. We fit an exponential function linking spreads and average ratings from Moody’s and S&P, and this column shows the amount of spread that is not explained by the rating. Positive numbers indicate how much a seller of protection is being paid for bad news associated with the security. Negative numbers indicate how much a seller of protection is giving up for the good news that is priced in Source: Keerthi Angammana, HSBC Fixed Income Research

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Emerging Markets Strategist Cross-Asset Strategy 25 May 2011

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External debt (cont’d)
Chart C63: 5Y-10Y CDS slopes Chart C64: Bond curve slopes

75 50 25 0 -25 -50 -75 -100 -125

bps BRA COL PHI

bps 120

100

PH BZ MEX CO

THA

80

60

PER SOA RUS TUR 100 110 120 130 5Y CDS 140 150 160
20 60 110 40 SA

PE

RU INDO 160

TU

210

Shorter tenor bond (z-spread)
Source: Bloomberg, HSBC Source: Bloomberg, HSBC

Table C8: Curve and bonds slope (bp) Curve slope Argentina 2s5s Brazil 2s5s Colombia 2s5s Mexico 2s5s Venezuela 2s5s Russia 2s5s Turkey 2s5s Ukraine 2s5s Argentina 5s10s Brazil 5s10s Colombia 5s10s Mexico 5s10s Venezuela 5s10s Russia 5s10s Turkey 5s10s Ukraine 5s10s Level 144 43 43 44 107 64 65 110 44 44 41 37 -7 36 42 41 1D 5 1 -1 0 1 1 -1 -1 2 -1 0 0 -6 0 4 -2 1W 5 1 0 1 6 0 0 -1 2 0 0 -1 -4 1 4 5 1M 14 0 -1 1 8 1 0 18 5 1 1 0 -3 1 7 16 L.Min 92 41 39 41 48 56 62 59 35 34 31 32 -39 27 31 8 L.Max 144 46 45 46 109 65 66 117 44 45 42 38 3 37 42 43 L.Med 129 43 43 43 95 62 65 110 40 43 39 37 -4 32 35 32 Rchp 142 43 42 44 103 64 64 109 70 48 45 42 38 42 49 60 R.Med 79 35 34 35 17 52 52 73 44 43 40 38 6 33 35 37

Column Descriptions (Curve Slope table) Level – CDS spread curve slope (2s/5s or 5s/10s), calculated as (Spread at longer maturity) – (Spread at shorter maturity.) 1D, 1W, 1M – Change in 1-Day, 1-Month, and 1Week. L.Min, L.Max, L.Med – Minimum, Maximum, and Median levels over the last 3 months. Rchp – Curve slopes are explained very strongly by the level of the 5yr CDS (R-squared in 0.5-0.9 range). This allows you to calculate if the curve is too flat (negative numbers), or too steep (positive numbers) relative to what the 5yr spread would predict. If a number is lower than its median over the last 3 months, it is shown in green, otherwise it is in red. R.Min, R.Max, R.Med – Minimum, Maximum, and Median values of Rchp over the last 3 months. Carry – Carry of a dv01-neutral Steepener over 3 months, taking into account the rolldown. If a number is lower than its median over the last 3 months, it is shown in green, otherwise it is in red. C.Min, C,Max, C.Med – Minimum, Maximum, and Median of the carry over the last 3 months. Column Descriptions (Bond spread table) Spread – Bond spread over duration-interpolated swap curve (comparable to D-Spread on Bloomberg). 1D, 1W, 1M – Change in 1-Day, 1-Month, and 1Week. S.Min, S.Max, S.Med – Minimum, Maximum, and Median levels over the last 3 months. Basis – Yield difference between a hypothetical duration-matched bond created using CDS spreads, and the swap curve. If a number is lower than its median over the last 3 months, it is shown in green, otherwise in red. B.Min, B.Max, B.Med – Minimum, Maximum, and Median values of Basis over the last 3 months. 5yrBasis – Difference between 5yr CDS spread, and Spread. If a number is lower than its median over the last 3 months, it is shown in green, otherwise it is in red. 5.Min, 5.Max, 5.Med – Minimum, Maximum, and Median of 5yrBasis over the last 3 months. Source: Keerthi Angammana, HSBC Fixed Income Research

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Emerging Markets Strategist Cross-Asset Strategy 25 May 2011

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External yield curves
Chart C65: Argentina
bps 1000 900 800 700 600 500 400 300 200 0 5 Duration (years) 10 15 BVII Bonds (z-spread) B15 G17 PAR CDS BX DIS

Chart C66: Brazil
bps 200 '30 150 '20 '19 '21 '19N '15 50 '12 0 0 '13 5 Duration (years) 10 15 '14 '40-15 Bonds (z-spread) CDS '17 '24B '27 '25 '24 '34 '37

Chart C67: Colombia
250 200 150 100 '13 50 Bonds (z-spread) 0 0 5 Duration (years) 10 15 CDS '14 '17 '20 '19 '24 bps '33
'41

'37 '41

100

Chart C68: Indonesia
bps 250

Chart C69: Mexico
bps 200 '34 '31 '33 '40

Chart C70: Panama
250 200 150 '29 '27 '26 '20 '15
'26

bps '23

'35 200 '19 '18 '16 '17 '15 '05/14 Bonds (z-spread) 100 0 2 4 6 Duration (years) 8 10 12 CDS

'34 '36

150

100 '15 50 '14N '13 '14

'17 '16

'19'20 '22 '19N

100 50 '12
CDS 14 16

150

Bonds (z-spread)

CDS

Bonds (z-spread) 0 0 2 4 6 8 10 Duration (years) 12

0 0 2 4 6 8 10 12 14 Duration (years)

Chart C71: Peru
bps 250 200 '25 150 100 50 0 0 2 4 6 8 10 12 14 Duration (years) '15 '16 '33 '37

Chart C72: Philippines
bps 250 200 150 '19 '19 '17 100 '13 50 Bonds (z-spread) 0 0 2 4 6 Duration (years) 8 10 12 CDS '14 '15 '16 '16 '25 '10/24 '30 '31 '09/24 '32 '20 '21

Chart C73: Russia
bps 250 200 150 '15 '30 '18 '20 '28

'19

100 50 Bonds (z-spread) 0 0 2 4 6 Duration (years) 8 10 12 CDS

'12

Bonds (z-spread)

CDS

Chart C74: Ukraine
bps 500 450 400 350 300 250 200 0 2 4 6 Duration (years) 8 10 12 '12 '13

Chart C75: Turkey
bps 250 200 '15 '30 '34

Chart C74: Venezuela
bps

1200

'20 '11/19 '21 '7/19 '16'17 '18

'25

1100 '16 1000

'15 '16 '17

150 '13

'14

'19 '23 '28 '24 '25 '34 '18 '20 '27

100 50 Bonds (z-spread) CDS 0 0 '12

900

'14 '13

'38
Bonds (z-spread) CDS

Bonds (z-spread) 2 4 6 Duration (years) 8

CDS 10 12

800

700 0 2 4 Duration (years) 6 8 10

Source: Bloomberg, HSBC

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Emerging Markets Strategist Cross-Asset Strategy 25 May 2011

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External debt bonds, CDS, and basis
Chart C75: Argentina bonds
$ 120 100 80 60 40 20 0 Oct-06 Oct-07 Oct-08 Oct-09 Oct-10 2000 1000 0 Jan-06 Jul-07 Jan-09 Jul-10 AR Disc NY price Boden'15 price

Chart C76 CDS
bps 5000 4000 AR CDS 5Y 3000

Chart C77: Basis
bps 1200 800 400 0 -400 -800 -1200 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 AR CDS 5Y - Boden'15

Chart C78: Brazil bonds
140 $ BRA'17 BRA'37 120

Chart C79: CDS
bps 600 BRA CDS 5Y

Chart C80: Basis
bps 100 50

400

0 -50

100

200
-100 BRA CDS 5Y - BRA'17

80 Nov-06

0
Nov-07 Nov-08 Nov-09 Nov-10

-150

Jan-06

Jul-07

Jan-09

Jul-10

Nov-06

Nov-07

Nov-08

Nov-09

Nov-10

Chart C 81: Colombia bonds
$ 140

Chart C82: CDS
bps 600

Chart C83: Basis
bps 100 50

COL CDS 5Y - COL'17

120

400
COL'17 COL'37

0 -50

100

-100

200 COL CDS 5Y

80

-150 -200 -250

60 Sep-06

Sep-07

Sep-08

Sep-09

Sep-10

0 Sep-06

Sep-07

Sep-08

Sep-09

Sep-10

Sep-06

Sep-07

Sep-08

Sep-09

Sep-10

Chart C84: Indonesia bonds
$ 140 120 100 80 60 40 Feb-07 INDO'16 INDO'37

Chart C85: CDS
bps 1400 1200 1000 800 600 400 200 INDO CDS

Chart C86: Basis
200 100 0 -100 -200 -300 -400 INDO CDS 5Y - INDO'16 Feb-08 Feb-09 Feb-10 Feb-11 bps

Feb-08

Feb-09

Feb-10

Feb-11

0 Feb-07

Feb-08

Feb-09

Feb-10

Feb-11

Feb-07

Source: Bloomberg, HSBC

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Emerging Markets Strategist Cross-Asset Strategy 25 May 2011

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External debt bonds, CDS, and basis (cont’d)
Chart C87: Mexico bonds
$ 130 120 110 100 90 80 70 Jan-06 MEX'17 MEX'34

Chart C88: CDS
bps 600 MEX CDS 5Y 400

Chart C89: Basis
bps 150 100 50 0

200

-50 -100 MEX CDS 5Y - MEX'17 Sep-07 Sep-08 Sep-09 Sep-10

0
Jul-07 Jan-09 Jul-10

-150

Jan-06

Jul-07

Jan-09

Jul-10

Sep-06

Chart C90: Russia bonds
$ 200 180 160 140 120 100 Jan-06 RU'18 RU'28

Chart C91: CDS
bps 1200 1000 800 600 400 200 0 Jan-06 RUS CDS 5Y

Chart C92: Basis
800 700 600 500 400 300 200 100 0 -100 bps

RU CDS 5Y - RU'18

Feb-07

Mar-08

Apr-09

May-10

Feb-07 Mar-08

Apr-09 May-10

-200 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11

Chart C93: Philippines bonds
$ 140 PH'16 PH'31 120

Chart C94: CDS
bps 1000 PH CDS 5Y 800 600 400 200

Chart C95: Basis
150 100 50 0 -50 -100 -150 -200 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 bps PH CDS 5Y - PH'16

100

80 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11

0 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11

Chart C96: Venezuela bonds
$ 130 110 90 70 50 30 Jan-06 VEN'16 VEN'27

Chart C97: CDS
bps 3500 3000 2500 2000 1500 1000 500 VEN CDS 5Y

Chart C98: Basis
bps 1400 1200 1000 800 600 400 200 0 -200 -400 VEN CDS 5Y - VEN'16

Jul-07

Jan-09

Jul-10

0 Jan-06

Jul-07

Jan-09

Jul-10

Jan-06

Mar-07

May-08

Jul-09

Sep-10

Source: Bloomberg, HSBC

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Emerging Markets Strategist Cross-Asset Strategy 25 May 2011

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FX: Spot, HSBC forecasts, and forward curves
Chart C99: Argentina NDFs & HSBC forecasts
4.6 4.5 4.4

Chart C100: Brazil NDFs & HSBC forecasts
1.90 1.85 1.80

Chart C101: Chile NDFs & HSBC forecasts
550

525

USD-ARS

USD-BRL

USD-CLP

4.3 4.2 4.1 4.0 3.9 3.8 Mar-10 Oct-10 May-11 Dec-11 Jun-12

1.75 1.70 1.65 1.60 1.55 1.50 Mar-10 Oct-10 May-11 Dec-11 Jun-12

500

475

450 Mar-10 Oct-10 May-11 Dec-11 Jun-12

USD-ARS

NDFs

HSBC fo

USD-BRL HSBC forecast

NDFs

USD-CLP HSBC forecast

NDFs

Chart C102: Colombia NDFs & HSBC forecasts
2,100 2,050 2,000

Chart C103: Mexico fwds & HSBC forecasts
14.0 13.5

Chart C104: Peru NDFs &HSBC forecasts
2.90 2.85

USD-COP

1,900 1,850 1,800 1,750 1,700 Mar-10

USD-MXN

USD-PEN

1,950

13.0 12.5 12.0 11.5

2.80 2.75 2.70 2.65

Oct-10

May-11

Dec-11

Jun-12

Mar-10

Oct-10

May-11

Dec-11

Jun-12

Mar-10

Oct-10

May-11

Dec-11

Jun-12

USD-COP HSBC forecast

NDFs

USD-MXN HSBC forecast

Fwds

USD-PEN HSBC forecast

NDFs

Chart C105: Czech fwds & HSBC forecasts
26.5 26.0 25.5

Chart C106: Hungary fwds & HSBC forecasts
295 290 285 280

Chart C107: Poland fwds & HSBC forecasts
4.3 4.2 4.1

EUR-HUF

EUR-CZK

25.0 24.5 24.0 23.5 Mar-10

275 270 265 260 255

EUR-PLN

4.0 3.9 3.8 3.7 3.6 3.5 Mar-10

Oct-10

May-11

Dec-11

Jun-12

250 Mar-10

Oct-10

May-11

Dec-11

Jun-12

Oct-10

May-11

Dec-11

Jun-12

EUR-CZK

Fwds

HSBC fo

EUR-HUF HSBC forecast

Fwds

EUR-PLN HSBC forecast

Fwds

Chart C108: Turkey fwds & HSBC forecasts
1.75 1.70 1.65

Chart C109: Russia NDFs & HSBC forecasts
33 32

Chart C110: S. Africa fwds & HSBC forecasts
8.5

8.0
31

USD-RUB

USD-TRY

1.55 1.50 1.45 1.40 1.35 Mar-10

30 29 28 27

USD-ZAR
Oct-10 May-11 Dec-11 Jun-12

1.60

7.5

7.0

6.5 Mar-10 Oct-10 May-11 Dec-11 Jun-12

Oct-10

May-11

Dec-11

Jun-12

Mar-10

USD-TRY HSBC forecast
Source: Bloomberg, HSBC

Fwds

USD-RUB HSBC forecast

NDFs

USD-ZAR HSBC forecast

Fwds

45

Emerging Markets Strategist Cross-Asset Strategy 25 May 2011

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FX: Spot, HSBC forecasts, and forward curves (cont’d)
Chart C111: China NDFs & HSBC forecasts
6.90 6.80 6.70

Chart C112: CNH fwds & HSBC forecasts
6.9 6.8 6.7

Chart C113: HKD fwds & HSBC forecasts
7.85

7.83

USD-CNH

USD-CNY

6.60 6.50 6.40 6.30 6.20 Mar-10

6.6 6.5 6.4 6.3 6.2

USD-HKD
Oct-11 Feb-12 Jun-12

7.80

7.78

Oc t-10

May-11

Dec-11

Jun-12

Aug-10 Jan-11 M ay-11

7.75 M ar -10

Oct-10

May-11

Dec-11

Jun-12

U SD-CN Y

N DFs

HSBC fo

USD -C NH HSBC forecast

CN H Fw ds

USD -H KD HSBC forecast

Fwds

Chart C114: India NDFs & HSBC forecasts
49.0 48.0 47.0 USD-INR 45.0 44.0 43.0 42.0 41.0 May-10 Nov-10 Jun-11 Dec-11 NDFs Jun-12 46.0

Chart C115: Indonesia NDFs & HSBC forecasts
9,400

Chart C116: Korea NDFs &HSBC forecasts
1,300 1,250

9,200

USD-IDR

USD-KRW

9,000 8,800 8,600 8,400 8,200 May-10 Nov-10 Jun-11 Dec-11 Jun-12

1,200 1,150 1,100 1,050 1,000 Mar-10 Oct-10 May-11 Dec-11 Jun-12

USD-INR HSBC forecast

USD-IDR HSBC forecast

NDFs

USD-KRW HSBC forecast

NDFs

Chart C117: Malaysia NDFs & HSBC forecasts
3.40 3.30 3.20

Chart C118: Philippines NDFs & HSBC forecasts
48.0 46.0

Chart C119: Singapore fwds & HSBC forecasts
1.45 1.40

USD-SGD

44.0

USD-MYR

USD-PHP

1.35 1.30 1.25 1.20 Mar-10

3.10 3.00 2.90 2.80 Mar-10

42.0 40.0 38.0 36.0 Mar-10

Oct-10

May-11

Dec-11

Jun-12

Oct-10

May-11

Dec-11

Jun-12

Oct-10

May-11

Dec-11

Jun-12

USD-MYR HSBC forecast

NDFs

USD-PHP HSBC forecast

NDFs

USD-SGD HSBC forecast

Fwds

Chart C120: Taiwan NDFs & HSBC forecasts
33.0 32.0 31.0

Chart C121: Thailand fwds & HSBC forecasts
35.0 33.0

Chart C122: Vietnam NDFs & HSBC forecasts
24,500 23,500 22,500

USD-TWD

USD-THB

USD-VND
Oct-10 M ay-11 D ec-11 Jun-12

30.0 29.0 28.0 27.0 26.0 M ar-10 Oct-10 M ay-11 Dec-11 Jun-12

31.0 29.0 27.0 25.0 M ar-10

21,500 20,500 19,500 18,500 Mar-10 Oct-10 May-11 Dec-11 J un-12

USD-T WD HSBC forecast

ND Fs

USD-THB HSBC forecast

Offshore Fwds

USD-VND HSBC forecast

NDFs

Source: Bloomberg, HSBC

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Emerging Markets Strategist Cross-Asset Strategy 25 May 2011

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Chart C 124: PE/EPS growth rate nexus by sector
23%
Saudi Arabia Kuw ait

Equities
Chart C 123: PE/EPS growth rate nexus by country
35% Qatar 30% EPS growth (2012e) 25% 20% 15% 10% R ussia 5% 0% 6 8 10 12 PE (2011)
Source: IBES, Thomson Reuters Datastream Source: IBES, Thomson Reuters Datastream

21% 19% EPS gr owth (2012e) 17% 15% 13% 11% 9% 7% 5% Utilities Financials Industrials M aterials

IT

Consumer Staples

Egy pt Hungary Abu Dhabi Dubai Korea Brazil Om an

South Afric a T aiw an T hailand Peru Mex ico T urkey Cz ech C hina India Indonesia Malay sia Philippines

C ons umer Discretionary

Healthcare Energy T elecom s

Poland

14

16

8

10

12

14 PE (2011)

16

18

20

Table C9: MSCI country, region, and sector performance (USD, %) – ranked by one-month performance Countries/Regions Taiwan Colombia Chile Nigeria Indonesia Saudi Arabia* Czech Republic Peru Malaysia (EM) Qatar UAE Egypt Thailand Korea Philippines Kuwait South Africa China Poland Argentina Kenya Mexico Hungary India Brazil Turkey Russia Developed markets GCC ex Saudi EM Asia Emerging markets Latin America EMEA EM sectors IT Cons discretionary Cons staples Healthcare Utilities Industrials Telecoms Financials Materials Energy
Note: *Saudi Arabian Tadawul index Source: Thomson Reuters Datastream

Current level - USD 312 1146 2807 402 907 6651 604 1433 463 785 219 628 362 437 341 664 559 67 1109 2978 736 6068 794 489 3504 584 963 1329 484 471 1133 4309 383 Current level - USD 257 668 448 622 341 250 239 378 656 858

1 month 2.8 2.8 2.7 2.3 2.3 1.8 1.6 0.9 0.0 0.4 1.0 1.3 1.6 1.7 1.7 2.6 3.5 4.8 4.8 4.9 5.2 6.9 7.4 7.9 7.9 9.1 10.4 -1 -2 -2 -4 -6 -7 1 month 1 1 0 -2 -2 -4 -4 -5 -7 -9

3 months 3.9 11.6 7.9 4.2 16.8 4.2 14.2 9.7 2.0 1.6 4.5 7.2 11.2 8.7 5.8 7.1 1.5 2.3 10.5 10.7 7.5 4.9 7.5 1.1 5.2 2.6 1.0 -2 -4 5 2 -4 1 3 months 0 12 9 5 5 2 1 2 -3 0

6 months 13.2 0.4 0.1 3.0 4.9 3.2 20.4 19.1 5.0 9.9 2.4 23.4 10.1 17.9 0.9 8.6 0.8 0.0 10.5 9.9 11.8 0.5 14.1 9.7 2.9 18.8 16.5 9 -4 6 4 -2 4 6 months 11 7 6 -4 2 1 -1 -2 3 9

12 months 28.5 34.9 38.7 2.0 31.6 2.4 25.1 17.4 23.2 22.8 3.1 24.5 52.1 35.7 19.7 3.3 21.1 14.8 37.4 49.5 0.6 17.6 16.6 5.1 10.1 8.9 26.0 19 5 23 21 14 22 12 months 18 38 29 16 10 28 13 17 23 20

24 months 51.2 121.5 80.3 9.9 137.6 12.0 29.2 75.1 75.2 39.0 16.5 7.5 120.4 84.0 64.4 21.2 65.5 35.4 90.8 122.0 43.2 66.1 85.9 64.1 50.6 76.5 67.7 44 22 60 60 58 64 24 months 66 116 92 57 38 54 28 61 76 40

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Emerging Markets Strategist Cross-Asset Strategy 25 May 2011

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Equities (cont’) - IBES EPS vs. peak and trend
Chart C125: Emerging markets Chart C126: EM Asia Chart C127: Latin America

2.6 2.1 1.6 1.1 0.6 88 90 92 94 96 98 00 02 04 06 08 10 12 12M trail Trend I/B/E/S fc ast

2.0 1.5 1.0 0.5 0.0 88 90 92 94 96 98 00 02 04 06 08 10 12 12M trail Trend I/B/E/S fc ast

2.9 2.7 2.5 2.3 2.1 1.9 1.7 1.5 88 90 92 94 96 98 00 02 04 06 08 10 12 12M trail Trend I/B/E/S fc ast

Chart C128: EMEA

Chart C129: Brazil

Chart C130: China

2.0 1.5 1.0 0.5 0.0 88 90 92 94 96 98 00 02 04 06 08 10 12 12M trail T rend I/B/E/S fcast

10.6 10.4 10.2 10.0 9.8 9.6 9.4 88 90 92 94 96 98 00 02 04 06 08 10 12 12M trail Trend I/B/E/S fc ast

1.0 0.8 0.6 0.4 0.2 0.0 -0.2 88 90 92 94 96 98 00 02 04 06 08 10 12 12M trail Trend I/B/E/S fc ast

Chart C131: India

Chart C132: Russia

Chart C133: Korea

2.0 1.5 1.0 0.5 0.0 88 90 92 94 96 98 00 02 04 06 08 10 12 12M trail Trend I/B/E/S fc ast

3.0 2.5 2.0 1.5 1.0 0.5 0.0 88 90 92 94 96 98 00 02 04 06 08 10 12 12M trail Trend I/B/E/S fc ast

2.0 1.5 1.0 0.5 0.0 88 90 92 94 96 98 00 02 04 06 08 10 12 12M trail Trend I/B/E/S fc ast

Chart C134: Taiwan

Chart C135: South Africa

Chart C136: Mexico

2.0 1.5 1.0 0.5 0.0 88 90 92 94 96 98 00 02 04 06 08 10 12 12M trail Trend I/B/E/S fc ast

2.5 2.0 1.5 1.0 0.5 0.0 88 90 92 94 96 98 00 02 04 06 08 10 12 12M trail T rend I/B/E/S fcast

4.0 3.5 3.0 2.5 2.0 1.5 1.0 88 90 92 94 96 98 00 02 04 06 08 10 12 12M trail T rend I/B/E/S fcast

Source: IBES, Thomson Reuters Datastream

Source: IBES, Thomson Reuters Datastream

Source: IBES, Thomson Reuters Datastream

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Emerging Markets Strategist Cross-Asset Strategy 25 May 2011

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Disclosure appendix
Analyst Certification
The following analyst(s), economist(s), and/or strategist(s) who is(are) primarily responsible for this report, certifies(y) that the opinion(s) on the subject security(ies) or issuer(s) and/or any other views or forecasts expressed herein accurately reflect their personal view(s) and that no part of their compensation was, is or will be directly or indirectly related to the specific recommendation(s) or views contained in this research report: Pablo Goldberg, Andre de Silva, John Lomax, Clyde Wardle, Hernan Yellati, Garry Evans, Marjorie Hernandez, Dilip Shahani, Murat Toprak, Di Luo, Wietse Nijenhuis, Alejandro Martinez-Cruz, Victor Fu, Ki Yong Seong, Gordian Kemen, Dominic Bunning, Perry Kojodjojo and Daniel Hui Each analyst whose name appears as author of an individual section or individual sections of this report certifies that the views about the subject security(ies) or issuer(s) or any other views or forecasts expressed in the section(s) of which (s)he is author accurately reflect his/her personal views and that no part of his/her compensation was, is or will be directly or indirectly related to the specific recommendation(s) or view(s) contained therein.

Important disclosures
Stock ratings and basis for financial analysis

HSBC believes that investors utilise various disciplines and investment horizons when making investment decisions, which depend largely on individual circumstances such as the investor's existing holdings, risk tolerance and other considerations. Given these differences, HSBC has two principal aims in its equity research: 1) to identify long-term investment opportunities based on particular themes or ideas that may affect the future earnings or cash flows of companies on a 12 month time horizon; and 2) from time to time to identify short-term investment opportunities that are derived from fundamental, quantitative, technical or event-driven techniques on a 0-3 month time horizon and which may differ from our long-term investment rating. HSBC has assigned ratings for its long-term investment opportunities as described below. Certain investment products mentioned in this document may not be eligible for sale in some states or countries, and they may not be suitable for all types of investors. Investors should consult with their HSBC representative regarding the suitability of the investment products mentioned in this document and take into account their specific investment objectives, financial situation or particular needs before making a commitment to purchase investment products. The value of and the income produced by the investment products mentioned in this document may fluctuate, so that an investor may get back less than originally invested. Certain high-volatility investments can be subject to sudden and large falls in value that could equal or exceed the amount invested. Value and income from investment products may be adversely affected by exchange rates, interest rates, or other factors. Past performance of a particular investment product is not indicative of future results. HSBC believes that investors utilise various disciplines and investment horizons when making investment decisions, which depend largely on individual circumstances such as the investor's existing holdings, risk tolerance and other considerations. Given these differences, HSBC has two principal aims in its equity research: 1) to identify long-term investment opportunities based on particular themes or ideas that may affect the future earnings or cash flows of companies on a 12 month time horizon; and 2) from time to time to identify short-term investment opportunities that are derived from fundamental, quantitative, technical or event-driven techniques on a 0-3 month time horizon and which may differ from our long-term investment rating. HSBC has assigned ratings for its long-term investment opportunities as described below. This report addresses only the long-term investment opportunities of the companies referred to in the report. As and when HSBC publishes a short-term trading idea the stocks to which these relate are identified on the website at www.hsbcnet.com/research. Details of these short-term investment opportunities can be found under the Reports section of this website. HSBC believes an investor's decision to buy or sell a stock should depend on individual circumstances such as the investor's existing holdings and other considerations. Different securities firms use a variety of ratings terms as well as different rating systems to describe their recommendations. Investors should carefully read the definitions of the ratings used in each research

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Emerging Markets Strategist Cross-Asset Strategy 25 May 2011

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report. In addition, because research reports contain more complete information concerning the analysts' views, investors should carefully read the entire research report and should not infer its contents from the rating. In any case, ratings should not be used or relied on in isolation as investment advice. Analysts, economists, and strategists are paid in part by reference to the profitability of HSBC which includes investment banking revenues. For disclosures in respect of any company mentioned in this report, please see the most recently published report on that company available at www.hsbcnet.com/research.
* HSBC Legal Entities are listed in the Disclaimer below.

Additional disclosures
1 2 3 This report is dated as at 25 May 2011. All market data included in this report are dated as at close 24 May 2011, unless otherwise indicated in the report. HSBC has procedures in place to identify and manage any potential conflicts of interest that arise in connection with its Research business. HSBC's analysts and its other staff who are involved in the preparation and dissemination of Research operate and have a management reporting line independent of HSBC's Investment Banking business. Information Barrier procedures are in place between the Investment Banking and Research businesses to ensure that any confidential and/or price sensitive information is handled in an appropriate manner.

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Emerging Markets Strategist Cross-Asset Strategy 25 May 2011

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Disclaimer
* Legal entities as at 04 March 2011 ‘UAE’ HSBC Bank Middle East Limited, Dubai; ‘HK’ The Hongkong and Shanghai Banking Corporation Limited, Hong Kong; ‘TW’ HSBC Securities (Taiwan) Corporation Limited; ‘CA’ HSBC Securities (Canada) Inc, Toronto; HSBC Bank, Paris Branch; HSBC France; ‘DE’ HSBC Trinkaus & Burkhardt AG, Düsseldorf; 000 HSBC Bank (RR), Moscow; ‘IN’ HSBC Securities and Capital Markets (India) Private Limited, Mumbai; ‘JP’ HSBC Securities (Japan) Limited, Tokyo; ‘EG’ HSBC Securities Egypt SAE, Cairo; ‘CN’ HSBC Investment Bank Asia Limited, Beijing Representative Office; The Hongkong and Shanghai Banking Corporation Limited, Singapore Branch; The Hongkong and Shanghai Banking Corporation Limited, Seoul Securities Branch; The Hongkong and Shanghai Banking Corporation Limited, Seoul Branch; HSBC Securities (South Africa) (Pty) Ltd, Johannesburg; ‘GR’ HSBC Securities SA, Athens; HSBC Bank plc, London, Madrid, Milan, Stockholm, Tel Aviv; ‘US’ HSBC Securities (USA) Inc, New York; HSBC Yatirim Menkul Degerler AS, Istanbul; HSBC México, SA, Institución de Banca Múltiple, Grupo Financiero HSBC; HSBC Bank Brasil SA – Banco Múltiplo; HSBC Bank Australia Limited; HSBC Bank Argentina SA; HSBC Saudi Arabia Limited; The Hongkong and Shanghai Banking Corporation Limited, New Zealand Branch Issuer of report HSBC Securities (USA) Inc. 452 Fifth Avenue HSBC Tower New York, NY 10018, USA Telephone: +1 212 525 5000 Fax: +1 212 525 0356 Website: www.research.hsbc.com

This material was prepared and is being distributed by HSBC Securities (USA) Inc., ("HSI") a member of the HSBC Group, the NYSE and FINRA. This material is for the information of clients of HSI and is not for publication to other persons, whether through the press or by other means. It is based on information from sources, which HSI believes to be reliable but it is not guaranteed as to the accuracy or completeness. Expressions of opinion herein are subject to change without notice. This material is not, and should not be construed as, an offer or the solicitation of an offer to buy or sell any securities. HSI and its associated companies may make a market in, or may have been a manager or a co-manager of the most recent public offering of, any securities of the recommended issuer herein. HSI, its associated companies and/or their directors and employees may own the securities, options or other financial instruments of any of the issuers discussed herein and may sell them to or buy them from customers on a principal basis. In Singapore, this publication is distributed by The Hongkong and Shanghai Banking Corporation Limited, Singapore Branch for the general information of institutional investors or other persons specified in Sections 274 and 304 of the Securities and Futures Act (Chapter 289) (“SFA”) and accredited investors and other persons in accordance with the conditions specified in Sections 275 and 305 of the SFA. This publication is not a prospectus as defined in the SFA. It may not be further distributed in whole or in part for any purpose. The Hongkong and Shanghai Banking Corporation Limited Singapore Branch is regulated by the Monetary Authority of Singapore. Recipients in Singapore should contact a "Hongkong and Shanghai Banking Corporation Limited, Singapore Branch" representative in respect of any matters arising from, or in connection with this report. In Hong Kong, this document has been distributed by The Hongkong and Shanghai Banking Corporation Limited in the conduct of its Hong Kong regulated business for the information of its institutional and professional customers; it is not intended for and should not be distributed to retail customers in Hong Kong. The Hongkong and Shanghai Banking Corporation Limited makes no representations that the products or services mentioned in this document are available to persons in Hong Kong or are necessarily suitable for any particular person or appropriate in accordance with local law. All inquiries by such recipients must be directed to The Hongkong and Shanghai Banking Corporation Limited. In Korea, this publication is distributed by either The Hongkong and Shanghai Banking Corporation Limited, Seoul Securities Branch ("HBAP SLS") or The Hongkong and Shanghai Banking Corporation Limited, Seoul Branch ("HBAP SEL") for the general information of professional investors specified in Article 9 of the Financial Investment Services and Capital Markets Act (“FSCMA”). This publication is not a prospectus as defined in the FSCMA. It may not be further distributed in whole or in part for any purpose. Both HBAP SLS and HBAP SEL are regulated by the Financial Services Commission and the Financial Supervisory Service of Korea. In the UK this report may only be distributed to persons of a kind described in Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2001. The protections afforded by the UK regulatory regime are available only to those dealing with a representative of HSBC Bank plc in the UK. HSBC México, S.A., Institución de Banca Múltiple, Grupo Financiero HSBC is authorized and regulated by Secretaría de Hacienda y Crédito Público and Comisión Nacional Bancaria y de Valores (CNBV). HSBC Bank (Panama) S.A. is regulated by Superintendencia de Bancos de Panama. Banco HSBC Honduras S.A. is regulated by Comisión Nacional de Bancos y Seguros (CNBS). Banco HSBC Salvadoreño, S.A. is regulated by Superintendencia del Sistema Financiero (SSF). HSBC Colombia S.A. is regulated by Superintendencia Financiera de Colombia. Banco HSBC Costa Rica S.A. is supervised by Superintendencia General de Entidades Financieras (SUGEF). Banistmo Nicaragua, S.A. is authorized and regulated by Superintendencia de Bancos y de Otras Instituciones Financieras (SIBOIF). In Australia, this publication has been distributed by The Hongkong and Shanghai Banking Corporation Limited (ABN 65 117 925 970, AFSL 301737) for the general information of its “wholesale” customers (as defined in the Corporations Act 2001). Where distributed to retail customers, this research is distributed by HSBC Bank Australia Limited (AFSL No. 232595). These respective entities make no representations that the products or services mentioned in this document are available to persons in Australia or are necessarily suitable for any particular person or appropriate in accordance with local law. No consideration has been given to the particular investment objectives, financial situation or particular needs of any recipient. This publication is distributed in New Zealand by The Hongkong and Shanghai Banking Corporation Limited, New Zealand Branch. © Copyright. HSBC Securities (USA) Inc 2011, ALL RIGHTS RESERVED. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, on any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the prior written permission of HSBC Securities (USA) Inc. MICA (P) 208/04/2011 and MICA (P) 040/04/2011

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GEMs Research Team
Pablo Goldberg Head of Global Emerging Markets Research +1 212 525 8729 pablo.a.goldberg@us.hsbc.com

EM Fixed Income Research
Americas Gordian Kemen Chief Strategist, Latin America +1 212 525 2593 gordian.x.kemen@us.hsbc.com Alejandro Mártinez-Cruz +52 55 5721 2380 alejandro.martinezcr@hsbc.com.mx Hernan M Yellati +1 212 525 3084 hernan.m.yellati@us.hsbc.com

Economics
Latin America Javier Finkman Chief Economist, South America ex-Brazil +54 11 4344 8144 javier.finkman@hsbc.com.ar Andre Loes Chief Economist, Brazil +55 11 3371 8184 andre.a.loes@hsbc.com.br Sergio Martin Chief Economist, Mexico +52 55 5721 2164 sergio.martinm@hsbc.com.mx Ramiro D Blazquez +54 11 4348 5759 Lorena Dominguez +52 55 5721 2172 Constantin Jancso +55 11 3371-8183 Jorge Morgenstern +54 11 4130 9229 ramiro.blazquez@hsbc.com.ar lorena.dominguez@hsbc.com.mx constantin.c.jancso@hsbc.com.br jorge.morgenstern@hsbc.com.ar marcos.r.fernandes@hsbc.com.br

Asia André de Silva, CFA Head of Rates Research, Asia-Pacific +852 2822 2217 andre.de.silva@hsbcib.com Ki Yong Seong +852 2822 4277 Rajen Gokani +44 20 7991 6850 EMEA Di Luo +44 20 7991 6753 kiyongseong@hsbc.com.hk rajen.gokani@hsbc.com.hk

di.luo@hsbcib.com

EM Currency Strategy
Asia Daniel Hui +852 2822 4340 Perry Kojodjojo +852 2996 6568 Americas Clyde Wardle +1 212 525 3345

Marcos Fernandes +55 11 6847 9787

danielpyhui@hsbc.com.hk perrykojodjojo@hsbc.com.hk

Emerging Europe, Middle East and Africa Murat Ulgen Chief Economist, Central & Eastern Europe, and sub-Saharan Africa +90 212 376 4619 muratulgen@hsbc.com.tr Simon Williams Chief Economist, Middle East and North Africa +971 4 507 7614 simon.williams@hsbc.com Liz Martins +971 4 423 6928 liz.martins@hsbc.com

clyde.wardle@us.hsbc.com

Marjorie Hernandez +1 212 525 4109 marjorie.hernandez@us.hsbc.com

Equity Strategy
Global Garry Evans +852 2996 6916 garryevans@hsbc.com.hk John Lomax +44 20 7992 3712 john.lomax@hsbcib.com Wietse Nijenhuis +44 20 7992 3680 wietse.nijenhuis@hsbcib.com

Alexander Morozov +7 495 783 8855 alexander.morozov@hsbc.com Asia Pacific Qu Hongbin Managing Director, Co-head Asian Economics Research and Chief Economist Greater China +852 2822 2025 hongbinqu@hsbc.com.hk Frederic Neumann Managing Director, Co-head Asian Economics Research +852 2822 4556 fredericneumann@hsbc.com.hk Leif Eskesen Chief Economist, India & ASEAN +65 6239 0840 leifeskesen@hsbc.com.sg Paul Bloxham Chief Economist, Australia and New Zealand +61 2925 52635 paulbloxham@hsbc.com.au Donna Kwok +852 2996 6621 Sherman Chan +852 2996 6975 Wellian Wiranto +65 6230 2879 donnahjkwok@hsbc.com.hk shermanwkchan@hsbc.com.hk wellianwiranto@hsbc.com.sg

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