Emerging Markets Access the growth potential of the world s emerging economies with HSBC

Transcription

1 Emerging Markets Access the growth potential of the world s emerging economies with HSBC Inside The new engine of global growth Why invest in emerging markets? Solid leadership from BRIC countries HSBC living and working in emerging markets Understanding and managing risk Issued by HSBC Investment Funds (Canada) Inc.

2 HSBC Investment Funds (Canada) Inc.

3 The new engine of global growth Home to over 80% of the world s population, emerging market countries are undergoing rapid economic growth and industrialization. Together, these emerging markets are a true powerhouse, representing approximately one-third of world trade and accounting for 90% of global growth in 2009.* More than 20 countries worldwide are officially considered emerging markets, including the BRIC countries (Brazil, Russia, India and China) and others in Southeast Asia, Eastern Europe, Latin America and Africa. Emerging Markets Growth in the first half of the 21 st century is likely to be driven by the inexorable rise of new growth poles in the emerging economies of the world; countries such as China and India, and other emerging economic powerhouses. Prospects for Development The World Bank March 2010 *Sources: International Monetary Fund and World Bank Report 2010 HSBC Investment Funds (Canada) Inc.

4 Why invest in emerging markets? Growth, innovation and diversification Spectacular growth Emerging markets have enjoyed phenomenal growth. A $10,000 investment in 1990 in the broad basket of stocks represented by the MSCI Emerging Markets Total Return Index would have grown to $67,443 by The emerging world s share of global gross domestic product increased from 36% in 1980 to 45% in And according to the International Monetary Fund, this share is forecast to grow to 51% by Growth of $10,000 over 20 years $90,000 Remarkable innovation Emerging market companies have moved far beyond simply emulating the innovative practices or products of their counterparts in more established economies. They are now innovation leaders in their own right. Every year, 75,000 students in China and 60,000 in India graduate with advanced degrees in engineering or computer science, 1 compared to only 16,000 in Canada. 2 Fortune 500 companies recognize the technical expertise in these countries, and have established close to 100 research facilities in China and more than 60 in India. 1 Unmatched diversification $80,000 $70,000 $60,000 $50,000 $40,000 $30,000 $20,000 $10,000 $0 Jan-90 Jan-92 Jan-94 Jan-96 Jan-98 Jan-00 Jan-02 Jan-04 Jan-06 Jan-08 Jan-10 $67, $28, MSCI World Total Return Index (C$) MSCI Emerging Markets Total Return Index (C$) Source: TD Newcrest and Bloomberg Incorporating emerging markets into your investment portfolio is an excellent strategy for diversification and long-term growth, enabling you to tap into companies and market sectors that are not represented in more established economies. The recent financial crisis is a case in point. Although no economy emerged unscathed, many emerging economies bounced back quickly, in large part because they were less exposed to some of the worst aspects of the crisis. Emerging market equities are also an increasingly important asset class as developing economies play an ever more central role in the global economy. The emerging market equities universe is now worth $2.4 trillion or around 12% of the MSCI Global Index. 3 It simply makes sense to include these equities in a diversified investment portfolio. The emerging world, long a source of cheap labour, now rivals the rich countries for business innovation. The Economist April 15, The Economist: A special report on innovation in emerging markets, April 15, Statistics Canada. Graduating in Canada: Profile, Labour Market Outcomes and Student Debt of the Class of Factset, MSCI as at December HSBC Investment Funds (Canada) Inc.

5 Confident consumers, rising middle class and leading companies Confident consumers Long-term growth in emerging markets is underpinned by youthful, increasingly well-educated and confident consumers. With over 50% of their populations younger than 25, emerging market countries will experience rising demand for products and services Real GDP Growth Emerging and developing economies Advanced economies Source: International Monetary Fund, World Economic Outlook, October Leading companies These dynamic populations in emerging countries aren t just consuming goods and services. They are also building and running some of the world s most successful companies. The United Nations World Investment Report estimates there are more than 21,000 multinational companies based in emerging markets. And the number of companies from Brazil, Russia, India and China on the Financial Times 500 list more than quadrupled between 2006 and 2008, from 15 to 62. Leaders include India s ArcelorMittal, the world s largest steel company and owner of Canada s Dofasco. Tata, an Indian conglomerate, now owns Jaguar Land Rover a business built around two iconic UK car brands. PetroChina has significant stakes in Alberta s oil sands. Brazil s Embraer is a top producer of jet aircraft, and its mining giant Vale now owns Canada s Inco. These and other companies based in emerging markets have evolved and grown, and now have strong management teams, healthy balance sheets and the increasing ability to generate value for investors. Legal and regulatory regimes have improved, and companies and governance practices are becoming more shareholder-friendly. Rising middle class The demand for domestic and imported goods in emerging markets is also fuelled by an expanding middle class. China s middle class is already as big as the population of the United States, and over half of Brazil s 192 million people are officially considered middle class. In the coming decades, hundreds of millions of people in both China and India will join the ranks of the middle class, giving them access to increased spending power and economic opportunities. HSBC Investment Funds (Canada) Inc. 5

6 Solid leadership from BRIC countries Brazil, Russia, India and China setting the pace in emerging markets, poised to lead the world By 2050, it s expected that the BRIC countries will represent four of the world s five largest economies. 1 Already, they are standouts in a remarkable field of emerging market growth stories. The BRIC countries represent more than 40% of the world s population, and their 2.8 billion consumers and burgeoning middle classes are spurring massive economic growth. BRIC countries are investing trillions of dollars in infrastructure development and creating enormous investment opportunities. HSBC s investment solutions give you access to these fast-growing and dynamic BRIC markets. Brazil BRIC at a glance Self-sufficient in oil; large offshore discoveries in 2007 are likely to make it a big oil exporter World s largest exporter of commercial jets World s fourth-largest steel exporter World s tenth-largest economy HSBC 2010 GDP growth forecast: 5.8% Investment solutions at HSBC HSBC BRIC Equity Fund Russia World s largest exporter of natural gas World s second-largest exporter of oil World s third-largest exporter of steel and aluminum World s eighth-largest economy HSBC 2010 GDP growth forecast: 4.7% HSBC BRIC Equity Fund India Strong, well-capitalized banks Low-cost and highly educated English-speaking labour force Global leader in IT and business-process outsourcing World s fifth-largest economy HSBC 2010 GDP growth forecast: 8.2% HSBC Indian Equity Fund HSBC BRIC Equity Fund China Economy has grown more than tenfold since 1978 Accounts for about 60% of foreign direct investment in emerging markets Significant presence in aerospace, shipbuilding and IT World s third-largest economy HSBC 2010 GDP growth forecast: 10.3% HSBC Chinese Equity Fund HSBC BRIC Equity Fund Sources: International Monetary Fund, World Bank, CIA World Factbook. All data are from Economic size is measured in purchasing power parity terms, which takes differences in exchange rates into account when quantifying GDP. HSBC forecasts for Brazil and Russia are as at April 2010; forecasts for China and India are as at May Goldman Sachs, March HSBC Investment Funds (Canada) Inc.

7 HSBC living and working in emerging markets Leveraging global knowledge and local insight HSBC is a recognized world leader in emerging market investment solutions, with C$94 billion of assets under management 1 in emerging markets globally. We manage some of the largest Indian, Chinese and Brazilian equity mutual funds in the world. 2 And in Canada, HSBC offers investors one of the broadest ranges of emerging market funds available, with access to the key fast-growth markets. Our expertise is based on first-hand knowledge: more than 200 dedicated emerging markets investment professionals are located in HSBC offices around the world. We use this local insight to uncover exciting investment opportunities and leverage the strength of our global resources to offer you access to these opportunities. Many of our investment professionals live and work in emerging markets, and our regional equity teams are some of the best in the world. Vancouver London Toronto New York Paris Dusseldorf Bermuda Istanbul Tokyo Shanghai Mexico City Riyadh Dubai Mumbai Hong Kong Taipei San Salvador San Jose Panama City Singapore Brunei Bogota Bogotá São Paolo Sydney Buenos Aires HSBC Global Asset Management 1 At April 30, Lipper, March 2010 HSBC Investment Funds (Canada) Inc. 7

8 Understanding and managing risk Tremendous opportunities demand a prudent approach Emerging markets are best suited for long-term investors willing to ride out market volatility. While past performance is no guarantee of future performance, the long-term track record of emerging markets suggests patience is rewarded. There are a number of specific risks to consider when investing in emerging markets. Governance the catch-all term that covers accounting, auditing, financial and other standards may be weak in some jurisdictions. Investments may be affected by foreign exchange controls, tax and other regulatory changes. In extreme cases, political unrest or war can also affect markets. Reducing risk through active management One risk associated with emerging markets is that information flow is not perfect and the securities of companies can be mispriced. This is why investment solutions such as exchange-traded funds (ETFs) which must invest in every company listed on an index can be higher risk and more volatile in the emerging market area than actively managed investment solutions like mutual funds. With our approach to active management, we minimize risk by choosing to invest only in well-managed and good quality emerging market companies that add value to your portfolio. 8 HSBC Investment Funds (Canada) Inc.

9 How to get started The first step is to work with your advisor to determine your risk tolerance level. Then consider adding a small amount of exposure to emerging markets in your portfolio. The chart below shows how allocating just 5% or 10% of your overall investment to emerging markets can boost returns with only a modest impact to volatility. As you become more comfortable with emerging markets, and as these economies grow in significance, you can work with your advisor to increase your holdings prudently and progressively. $18,000 $16,000 $14,000 Adding emerging markets to a diversified portfolio can potentially boost performance with modest incremental risk: $15, $15, $14, $12,000 $10,000 $8,000 Dec-00 Jun-01 Dec-01 Jun-02 Dec-02 Jun-03 Dec-03 Jun-04 Dec-04 Jun-05 Dec-05 Jun-06 Dec-06 Jun-07 Dec-07 Jun-08 Dec-08 Jun-09 Dec-09 0% Emerging Markets 5% Emerging Markets 10% Emerging Markets Asset Class Index (Total Return in C$) Weighting 0% EM Weighting 5% EM Weighting 10% EM Cash DEX 91 Day Treasury Bill 5% 5% 5% Canadian Bonds DEX Universe Bond 35% 35% 35% Canadian Equities S&P/TSX Composite 35% 32.5% 30% International Equities MSCI World 25% 22.5% 20% Emerging Market Equities MSCI Emerging Markets 0% 5% 10% 5-Year Annualized Standard Deviation (Volatility) 8.7% 8.9% 9.2% Returns are for illustrative purposes only and are not intended to reflect actual returns. These hypothetical returns track the performance of $10,000 invested from December 31, 2000 to April 30, 2010 based on the returns of the above indices. Sources: Bloomberg, PC Bond and TD Newcrest Contact your advisor today Learn more about the attractive long-term opportunities offered by emerging markets. Talk to your investment advisor today or visit us at hsbc.ca/emergingmarkets. HSBC Investment Funds (Canada) Inc. 9

10 We have reached a tipping point in global economic affairs. No longer is it possible to argue convincingly that the US or European nations determine the agenda for the world economy as a whole will surely go down as the year when we both uncovered the scale of the crisis in the developed world and celebrated the resilience of much of the emerging world in the face of what appeared to be a perfect economic storm. Stephen King, HSBC Group Chief Economist 10 HSBC Investment Funds (Canada) Inc.

11

12 HSBC Global Asset Management (Canada) Limited is a subsidiary of HSBC Bank Canada and provides services in all provinces of Canada except Prince Edward Island. HSBC Mutual Funds are distributed by HSBC Investment Funds (Canada) Inc. and authorized dealers. Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Please read the prospectus before investing. Mutual funds are not guaranteed or covered by the Canada Deposit Insurance Corporation, HSBC Bank Canada or any other deposit insurer. Their values change frequently and past performance may not be repeated. The unit value of money market funds may not remain constant. F.P.O. CA#M