HSBC Emerging Markets Rationale
Introduction to new “Emerging Markets” pages –
A BETTER VIEW OF EMERGING MARKETS
Emerging markets are rapidly outperforming developed economies and
redefining global economics as we know it.
HSBC is a pioneer in the emerging markets. Founded in Hong Kong and
Shanghai, China in 1865, we have always believed in the potential of these
dynamic new markets and have backed this belief with our investment in their
future.
HSBC continues to break new ground in penetrating the emerging markets. For
example, HSBC was the first international bank given permission by the China
Banking Regulatory Commission (CBRC) to establish a bank in rural China.
HSBC gives you a better view of the emerging markets — whether in Asia,
Africa, South America or the younger republics of Eastern Europe — because we
aren’t just studying these economies from a distance. The world's local bank is
there.
Emerging Markets and Opportunities
Emerging markets and opportunities
Published: 03 July 2010
Emerging markets are at the heart of HSBC's corporate identity. Throughout its history, the HSBC Group
has maintained a strong presence in global trade, particularly in India and China, the world's most dynamic
emerging markets.
HSBC has been a participant in and a witness to the development of emerging markets for more than a
century and a half. It has established branches even in countries that were considered closed, restricted or
highly centralised. Over the years, HSBC rose to the status of a respected institution as it worked actively in
these markets.
Sensitive to the unique cultures in emerging markets, HSBC has often been the first foreign bank to work in
partnership with local businesses. HSBC Amanah was among the first to offer Islamic banking products and
has the largest Islamic banking team of any international bank.
In the Group's 2009 Annual Results HSBC Chairman Stephen Green said, "HSBC has reported a pre-tax
profit in all three years since the onset of the [global financial] crisis." For 2009, HSBC's underlying
performance, excluding the goodwill impairment in 2008, placed pre-tax profit at USD13.3 billion or 56 per
cent higher than 2008 figures.
The Bank attributed its resilient performance for 2009 first to its diversified business model, covering
different businesses and geographies with a strong foothold in the emerging markets; and secondly to a
successful rights issue, demonstrating continued investor confidence.
The Bank is proud of maintaining a record of long-term commitment to host countries, particularly those in
the emerging markets. "In Argentina, which was in the midst of the peso crisis 10 years ago, we did not
abandon our customers and have remained committed to the market ever since," the Chairman said. "In
2009, our operations there reported their best-ever underlying performance... In mainland China, we are
proud of our position as the leading international bank... In Indonesia, we nearly doubled our network to
support the growing financial needs of personal and business banking customers... and we launched our
SME fund in the United Arab Emirates in January 2010."
In the post-2008 global economy, the regional mix of profits tells the story: Asia was the big money-maker.
Europe struggled but benefited from HSBC's strong Global Banking and Markets revenues while Latin
America and the Middle East were profitable, despite tougher conditions. US operations continued to be at a
loss.
Source: From 2009 Annual Results
HSBC believes its current position of prominence is the result of its commitment to emerging markets since
it was founded in Hong Kong and Shanghai in 1865.
The outstanding performance of emerging markets is corroborated by business unit statistics, showing the
'emerging markets-led, financing-focused' Global Banking and Markets unit to be the most profitable among
the Bank's operations - with over half of its underlying profits being homegrown in emerging markets.
Source: From 2009 Annual Results
Emerging Markets Profile and Potential
Profile and potential
Published: 13 January 2010
HSBC has established branches even in countries that have been considered closed, restricted or highly
centralised. Working actively in these markets, the Bank has been a respected institution in these markets
for many years.
Over the years, emerging markets have increasingly outstripped developed economies in terms of growth
and other key economic indicators.
Export volume growth (GDP basis)
% Year
2002
2003
2004
2005
2006
2007
2008
2009f
2010f
2011f
World
3.0
5.3
10.8
8.3
10.1
8.3
4.0
-13.1
5.5
6.4
1.4
7.4
1.7
14.1
7.6
18.0
5.5
14.0
8.1
13.9
5.6
13.1
1.7
7.7
-13.7
-12.3
4.9
6.4
5.1
8.3
Developed
Emerging
Source: 'The tipping point', HSBC Global Research Macro Global Economics Q4 2009
Industiral production
% Year
2002
2003
2004
2005
2006
2007
2008
2009f
2010f
2011f
World
2.7
4.6
6.3
5.3
6.3
5.8
1.5
-7.2
6.0
5.5
-0.4
6.9
1.0
9.2
2.6
10.9
1.9
9.2
2.9
10.2
2.2
10.1
-2.2
5.8
-13.2
-0.1
3.4
9.1
3.2
8.1
Developed
Emerging
Source: 'The tipping point', HSBC Global Research Macro Global Economics Q4 2009
HSBC's investment of time, capital and resources in emerging markets has been well-rewarded as the Bank
now enjoys rapid growth in these economies.
Risks and rewards
Many investors look to diversify their portfolios across different economies, thereby distributing risk, while
others seek out new, more affordable opportunities that may not be available in the leading industrialised
nations.
In today's global economy, emerging markets have become a staple of many investor portfolios because of
the high future rewards associated with being the first to put money into companies and economies with
good growth potential. And, as recent economic indicators have shown, it is possible for emerging markets
to accelerate their growth while more developed economies slow down.
HSBC Group Chairman Stephen Green was co-chairman of the Capital Markets Consultative Group of the
International Monetary Fund (IMF) which authored the 2003 Foreign Direct Investment in Emerging Market
Countries report. The group observed that foreign direct investment (FDI) flows started streaming towards
emerging markets in the 1990s. These were made possible primarily by mergers and acquisitions,
particularly of state-owned assets. Since the writing of the IMF report, net foreign investments in the
emerging markets have surged upwards.
Aside from good growth prospects, productivity-adjusted labour costs (labour efficiency rather than the cost
of labour per se), physical and personal security, and good governance are among the country
characteristics investors examine when considering investment in an emerging market.
The global financial crisis has only served to highlight the advantages and the promise of emerging markets.
Local financial institutions in many of these economies were relatively unscathed by the financial meltdown
that paralysed the West. HSBC's Emerging Markets Index reports that manufacturing exports show the
largest gain in emerging markets for nearly five years. HSBC Chief Economist Stephen King noted,
"Emerging nations are going from strength to strength and a global recovery is likely to be emerging
markets-led."
A New, Evolving Economic Stage
A new, evolving economic stage
Published: 22 February 2010
All indications point to a shifting of the global economic fulcrum now in
progress – from the developed world to emerging economies.
As the new driving force for development in a region and even in the global economy, major changes in an
emerging market are likely to reverberate throughout neighbouring economies.
As the world tries to find its way out of the global financial crisis, economists are talking about emerging
markets-led recovery. The global financial crisis has only served to confirm that the falling of the dominoes in
the west does not necessarily cause the dominoes in the east to fall.
In fact, data coming to the fore show that the relationship appears to be the other way around. The events in
the rest of the world, with emerging markets as primary movers, are having a clear impact on the recovery of
the US market which was hardest hit by the crisis.
From: "The Tipping Point," HSBC Global Research
What drives emerging markets?
Emerging markets represent approximately 80 per cent of the world's population and 20 per cent of
the world's economy
Many emerging economies are in transition from centralised political and economic systems to
more open market models:
Relaxation of controls on foreign exchange
Greater autonomy for financial institutions
Transparency in the capital markets
Removal of trade barriers
Political reforms that in turn facilitate more change
Momentum for reform is driven by the need to raise living standards, increase opportunities for the
local population and attract foreign investment
Although many emerging markets continue to receive overseas aid, the most successful have broken that
dependency by raising their capital markets to international financial and governance standards, thereby
becoming more attractive to foreign investors.
An 'emerging markets' approach to global economics
HSBC Global Research analysts are redefining the relationships between economic events in developed
economies, particularly the US, and the effect of these on the rest of the world. Even before the unfolding of
the latest global economic drama, HSBC Group Chief Economist Stephen King had been asserting,
"Tradition is wrong."
The performance of emerging markets in the years leading up to 2005 and since shows that the impact has
gone in the opposite direction. When the USA struggled from a softening housing sector in 2005, analysts
expected the rest of the world to follow suit and perform poorly. This didn't happen.
It appears that the dramatic performance of emerging markets and their continued demand for goods helped
keep the US economy from slipping any further. Among the top three US export partners that year, two were
emerging markets (China and Mexico). Other emerging market economies that made strong contributions to
the US' export income were: Korea, Brazil, the United Arab Emirates (UAE), India, Chile, Turkey, Saudi
Arabia, Taiwan, Russia, Argentina and South Africa.
Since US GDP represented roughly 30 per cent of global GDP in 2006, conventional analysis dictated that a
weakness in the US market would lead to a dip in economic performance elsewhere. Weaker US investment
demand, in particular, and domestic demand, in general, did exert a depressing influence on US imports
from its trading partners. But the actual performance of emerging economies debunked conventional
analysis.
For instance, forecasts for 2006 placed capital spending growth in China at 14 per cent. Actual performance,
however, was almost double at 27 per cent. Mexico's GDP growth also surpassed expectations, driven by
consumption and investments. The story was the same in the United Arab Emirates (UAE), another major
emerging market. So despite lower domestic demand in the USA for goods from emerging markets, these
economies continued to grow.
2006 forecasts versus performance
US
China
Mexico
Growth rates (% per year)
Forecast
2006Q1
Actual
31/1/07
Forecast
2006Q1
Actual
31/1/07
Forecast
2006Q1
Actual
31/1/07
GDP growth
3.3
3.4
8.9
10.6
3.4
4.8
Consumption growth
2.7
3.2
8.0
8.7
3.5
5.4
Investment growth
6.8
3.0
14.1
27.0
5.7
8.8
2006 forecasts versus performance
US
China
Mexico
Growth rates (% per year)
Government spending
Forecast
2006Q1
Actual
31/1/07
Forecast
2006Q1
2.5
2.1
5.0
Actual
31/1/07
Forecast
2006Q1
Actual
31/1/07
6.0
2.5
4.0
Export growth
5.6
8.9
25.0
25.0
7.7
15.8
Import growth
6.9
5.8
20.0
20.0
7.1
16.3
Source: "A shifting centre of gravity," HSBC Global Research
More dominant role of trade, new preferred partners
This, in part, can be explained by the fact that emerging markets are creating a demand for their goods –
among themselves – and among other developed markets, drastically redefining traditional trade
relationships.
China, the strongest emerging market economy, is now India's top trading partner (India being the
second fastest-growing emerging market), effectively breaking US domination
US now top buyer of India's exports, followed by the UAE
India now the leading trade partner of the UAE, in close competition with China, edging out the US
which used to dominate the market
China is now Japan's top trading partner, overtaking the USA for the first time since the end of
World War II
China replaced Japan as Australia's biggest trading partner – a status Japan held for 36 years
China now supplies most of the EU's imports, a role previously played by the USA
China is now the USA's number two trading partner after steadily inching up from the number four
position
In the new global, emerging markets-led economy, it isn't 'trade as usual'. Although emerging markets,
particularly China, still deal heavily with the larger, advanced economies, there have been skyrocketing
increases in intra-emerging nations trade.
From "Primal Knowledge: Still on Fire?," HSBC Global Research
New Economic Models for New Realities
New economic models for new realities
Published: 03 July 2010
Given the complex relationships now driving today's global economy, analysts can no longer look to the
United States as a predictor of market movements. Emerging markets need to be given a heavier weighting
in the global economic equation.
Emerging market giants such as China seem to have the upper hand over the established economic
powers. The US and the European Union have been experiencing trade deficits in their bilateral trade with
the Asian giant for many years.
Although foreign direct investments are still flowing from developed economies towards emerging markets,
there is also an increasing counter-flow taking place. Cash-rich businesses from emerging market
economies are becoming familiar investors in established companies in the west. As China, the leading
emerging market, generates excess liquidity and savings, the cash-strapped developed world is hoping to
receive some of these by way of investments or loans.
These complex, non-linear, and well-distributed trade relationships dilute the effect that economic upheavals
in the United States may have on the rest of the world, or what economists are referring to as a 'fundamental
decoupling' of these economies.
All these point to the fact that the world economy is no longer US-centric, or primarily determined by events
in developed nations.
Emerging markets are showing a strong resistance to the downward pull of floundering western economies.
On the other hand, these fast-growing developing markets have shown through these turbulent times that
they are capable of boosting themselves up by their own power.
From "Still on Fire?", Global Research
In consideration of these new relationships and consistent with its century-long leadership in emerging
markets, HSBC economists are developing new analytical tools and framework that capture these new
economic realities, giving clients a better view of emerging opportunities not only in their part of the world,
but from a truly global perspective. HSBC's Global Research economists are well-placed to build new,
practicable models that better represent the new economic order where emerging markets now play a
determining role.
Expert emerging markets advice
As emerging markets continue to evolve, the global investor faces unique risks and opportunities. For this
reason, progressive and pioneering investors value the advice of financial experts in these emerging
markets who know the local conditions and can guide them through the territory.
Hongkong and Shanghai Banking Corporation Limited, the founding member of the HSBC Group, was
established over a century ago to finance the trade between Europe, India and China. As early as 1865, the
Bank saw promise in the economies of Asia and invested when many others preferred caution. This
experience and expertise in emerging markets has benefited HSBC clients for well over 140 years. The
knowledge built on that global experience will help the Bank and its customers benefit from the growth of
emerging markets in the 21st century.