Equity Strategy Asia ex Japan

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Global Research
We examine fund positions across Asia and equity market data on net flows following the sell-down in Sept/Oct Most Asian portfolios are underweight TW and KR. These markets have seen relatively low inflows in Oct/Nov and thus could see further inflows in the next months Conversely, TH and IN face the risk of a slowdown of inflows
A total of USD20bn left Asian markets in August and September. Most of this came from Taiwan and Korea, which combined accounted for 73% of the total sell-down. Only a third of this money has returned in October, again mostly in Taiwan and Korea. Current portfolio cash levels are elevated (c2%). Combining data on portfolio positions and recent equity flows, we examine markets which have seen inflows and where portfolios have high portfolio weights. We conclude that Thailand and India are the markets most at risk of a slowdown in further buying. Taiwan and Korea markets are now underweight in fund portfolios where little money has returned in October. They could see continued inflows in the coming months.

Asia Equity Insights

Equity flows: What did you buy?

Fund flows and fund weights EPFR data on Asian portfolios Funds vs MSCI (current weight vs long-term) Malaysia Korea Singapore Taiwan HK Indonesia China Thailand India Philippines -20% -7% -18% -5% -4% -15% 7% 6% 14% -3% Average position in EPFR Underweight Underweight Underweight Underweight Underweight Underweight Overweight Overweight Overweight Underweight Equity flows (USDbn) Aug/Sept (a) -0.5 -5.4 -0.3 -9.2 -0.5 -0.8 -2.1 -1.9 -2.4 -0.2 Oct/Nov (b) Na 1.5 Na 1.6 Na 0.5 Na 1.0 0.6 0.1 Return ratio (a)/(b) Na 27% Na 18% Na 62% Na 50% 24% 30%

Notes: 1. Fund weights at end-September. The column Funds vs MSCI shows the relative position of the current UW or OW position versus a long-term average OW or UW position. Fund flow data up to 3 November 2. Na indicates that data on foreign equity flows is not available for this market 3. EPFR = Emerging Portfolio Fund Research, Inc. Source: Bloomberg, EPFR, HSBC

11 November 2011
Herald van der Linde* Strategist The Hongkong and Shanghai Banking Corporation Limited + 852 2996 6575 heraldvanderlinde@hsbc.com.hk Devendra Joshi* Associate Bangalore

To establish our HSBC strategy view, we also examine factors such as valuations, yield, earnings risk and monetary policies. From a fundamental perspective, we are overweight Taiwan, Singapore and Hong Kong and underweight Korea and Thailand.

View HSBC Global Research at: http://www.research.hsbc.com *Employed by a non-US affiliate of HSBC Securities (USA) Inc, and is not registered/qualified pursuant to FINRA regulations Issuer of report: The Hongkong and Shanghai Banking Corporation Limited

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

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What have you been buying?

We examine fund positions across Asia and equity market data on

net flows following the sell-down in September and October

Taiwan and Korea are generally underweight in Asian portfolios,

and they saw relatively low inflows in October. They could see continued inflows in the coming months
Conversely, Thailand and India face risk of a slowdown of inflows

Stocks and flows

Portfolio positions and fund flows
Given the strong volatility in the markets in recent months, we have examined how funds have repositioned their investments in recent months. Recent conversations with investors in Asian equities suggest that many funds, especially those

located in Asia, are anticipating redemptions in October. For this, they have raised their cash positions. In the past, when redemptions have been much lower than initially anticipated, this cash needed to be redeployed in markets. The question is in how far money has returned and whether some markets are more at risk of fund outflows or inflows than other markets.

Foreign investors net investments in Asian equity markets (USDbn) Total 2005 Total 2006 Total 2007 Total 2008 Total 2009 Total 2010 Jan-11 Feb-11 Mar-11 Apr-11 May-11 Jun-11 Jul-11 Aug-11 Sep-11 Oct-11 Nov-11 2011 to date
Source: Bloomberg, HSBC

TW 22.2 17.4 2.1 -14.7 14.8 9.2 3.4 -3.3 -1.2 3.4 -0.6 -0.8 -2.1 -6.6 -2.6 1.7 -0.1 -8.8

KR -4.0 -12.1 -29.4 -33.3 24.8 19.0 0.3 -3.1 1.0 2.9 -2.3 -0.7 1.3 -4.3 -1.2 1.5 0.0 -4.5

TH 2.9 2.1 1.6 -4.8 1.1 2.7 -0.9 0.3 0.6 1.0 -0.6 -0.9 1.3 -1.4 -0.5 1.0 0.0 -0.2

ID 2.3 1.9 3.2 1.7 1.4 2.3 -0.3 0.1 -0.3 2.0 0.0 0.5 0.6 -1.0 0.2 0.3 0.2 2.4

PH 0.4 0.9 1.4 -1.1 0.4 1.2 -0.1 -0.1 0.1 0.4 0.1 0.0 0.2 -0.1 -0.1 0.0 0.0 0.5

IN 10.8 8.1 17.8 -12.9 17.6 29.3 -1.4 -0.8 1.6 1.6 -1.2 0.7 1.7 -2.1 -0.3 0.5 0.1 0.4

AEJ 34.7 18.3 -3.4 -65.1 60.1 63.8 1.0 -6.9 1.8 11.2 -4.6 -1.1 3.0 -15.5 -4.5 5.1 0.2 -10.3

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Asia ex-Japan funds Current fund weighting Malaysia Korea (South) Singapore Taiwan Hong Kong Indonesia China Thailand India Philippines
Source: HSBC

Current LT average MSCI fund weighting weighting 4.7 20.9 7.1 15.5 11.2 4.1 23.0 2.5 10.1 0.9 3.9 19.6 7.7 14.9 15.1 3.2 16.8 3.8 5.9 0.9

LT MSCI Current LT avg Current LT avg Current vs weighting over/under over/under over/under over/under LT position (ppt) (ppt) (%) (%) (%) 4.3 22.0 7.4 17.2 13.6 2.6 19.9 2.4 9.8 0.7 -1.8 -3.0 -1.0 -2.4 0.9 0.4 -2.0 1.6 -2.4 0.2 -0.5 -2.4 0.3 -2.3 1.5 0.6 -3.1 1.4 -3.9 0.2 -38.4 -14.2 -13.6 -15.6 7.7 10.8 -8.8 62.8 -24.1 19.8 -11 -11 4 -14 11 22 -15 57 -40 24 -27 -3 -18 -2 -4 -11 7 6 16 -4

2.9 17.9 6.1 13.0 12.1 4.5 20.9 4.1 7.7 1.1

In this report we compare two sets of data:

1

Equity flows in selected Asian equity markets for which data is available; and Portfolio positions derived from Emerging Portfolio Fund Research, Inc. (EPFR) data.

the equation indicates that current cash positions are elevated. It is also interesting to note that Indonesia and Thailand have seen continued inflows after August. Investors have been sticky in these markets. In India, investors have been selling equities and, although some of the outflows witnessed in August and September returned in subsequent weeks, flows into India are still below levels seen in the middle of the year. There is no readily available source of data for flows in China (H-shares) and Hong Kong. Therefore, we use EPFR data as a proxy.
China and Hong Kong flows

The table above looks at data from stock exchanges on flows in and out of equity markets. Note that this collection of data is not available for all markets. Year to date, it appears that most equity inflows have been towards Indonesia and most selling was done in Taiwan. The body of data also suggests that USD15.5bn left this group markets in August, followed by another USD4.5bn in September. The majority of this sale of USD20bn came from sales of equities in Taiwan and Korea these two markets accounted for 73% of the total sell-down. Only a third of this money has returned into the markets in October, again most of it in Taiwan and Korea. Indeed, Asia ex-Japan funds average cash level for last 12 months was 1.6%. Currently it is 2.1%. This 2.1% is also the long-term average cash position, but this would include 2008-09, when cash levels were elevated and reached as much as 4.3% of total funds. Removing that period from

30 25 20 USD bn 15 10 5 0 Jun-03 Jan-04 Aug-04 Mar-05 Oct-05 May-06 Dec-06 Jul-07 Feb-08 Sep-08 Apr-09 Nov-09 Jun-10 Jan-11 Aug-11
Source: EPFR, HSBC

As the chart indicates, China and Hong Kong have, meanwhile, also seen considerable outflows

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since early 2011, with little sign of a turnaround in September.

Portfolio positions
We have also examined portfolio positions in recent months. There are three broad sets of data (from EPFR) portfolio weights for funds that focus on global emerging markets, Asia ex-Japan funds, and Pacific funds. The last set of funds is rather small compared with the first two (it makes up only c5% of total funds) and we therefore excluded it from our analysis. The factor to consider is the current portfolio weight versus the benchmark compared with the long-term weight versus the benchmark. Here is why: Looking at current weightings versus the benchmark might give a misleading picture. As Taiwan investors have traditionally been underweight Taiwan equities, it is important to know whether investors are now more or less underweight than what they have been in the last few years. In Taiwan, it works out that they are currently more underweight than usual. On this measure, it works out that Malaysia and Indonesia show up as two markets where funds remain underweight. Asia ex-Japan funds are currently also underweight Singapore while GEM funds are underweight Taiwan and Korea. Markets where portfolios are currently overweight include China, India, and Thailand.

Also, because we use different sources of information in equity flows, the data sets are not always comparable. Still, they enable us to look at various trends. The table shows that there are markets that are currently overweight in GEM and Asia ex-Japan portfolios where a large part of the outflows witnessed in August and September have returned. Based on this analysis, we conclude that these markets are most likely to see a slowdown in further buying. Examples of these markets are Thailand and, to a lesser extent, India. There are also markets that are currently underweight in portfolios (compared with the long-term average weight of these markets in portfolios) and where little money has returned. These markets are, based on this analysis, more likely to see inflows. Examples of these markets are Taiwan and, to a lesser extent, Korea. For China and Hong Kong, there is little in the way of fund flow data available, but we have already noted that funds are overweight China.
Fund flows and fund weights Funds vs Weighting Aug/Sept Oct/Nov MSCI Malaysia Korea Singapore Taiwan HK Indonesia China Thailand India Philippines -20% -7% -18% -5% -4% -15% 7% 6% 14% -3% UW UW UW UW UW UW OW OW OW UW -0.5 -5.4 -0.3 -9.2 -0.5 -0.8 -2.1 -1.9 -2.4 -0.2 Na 1.5 Na 1.6 Na 0.5 Na 1.0 0.6 0.1 Return Na 27% Na 18% Na 62% Na 50% 24% 30%

Implications
It is now possible to compare fund weights with flow data in various markets. This is summarized in the table below. Note that there is no accurate flow data for all markets, explaining some of the gaps in this analysis.

Note: Na indicates that data on foreign equity flows is not available for this market Source: Bloomberg, EPFR, HSBC

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GEM funds Current fund weighting Malaysia Korea (South) Taiwan Thailand Indonesia China India Philippines
Source: HSBC

Current MSCI weighting 3.3 15.2 11.1 1.8 2.9 16.7 7.1 0.6

LT avg fund weighting 2.3 13.3 9.4 2.7 2.3 11.0 6.9 0.6

LT MSCI weighting 3.0 15.2 11.9 1.7 1.8 13.7 6.7 0.5

Current Over/under -1.2 -3.4 -3.2 1.1 0.3 -2.1 1.1 0.2

Average over/under -0.7 -1.9 -2.5 1.0 0.5 -2.7 0.2 0.1

Over/under to current -35.6% -22.3% -28.8% 62.4% 8.9% -12.7% 15.3% 28.1%

Over/under to average -24% -13% -21% 56% 27% -20% 3% 29%

Current vs LT position -12% -10% -7% 6% -18% 7% 13% -1%

2.1 11.8 7.9 2.9 3.2 14.6 8.2 0.8

HSBC Strategy view

Lastly, we would like to compare and contrast this with our overall view on markets. Fund flow and fund positioning is one factor on which we base our country selection, with factors such as valuations, yields, monetary policies and earnings risk taken into consideration as well. A scorecard that summarizes our views is presented below. This is our country selection as presented in our latest quarterly (Anaerobic growth and deflated equity valuations, 7 October): Taiwan. We are overweight this market given its low valuations, its high yields (highest in Asia), and the general underweight position of funds. Hong Kong. We are overweight this market given low valuations, low risk to earnings forecast and funds underweight positions.

Singapore. As with Hong Kong, we are overweight this market given low valuations, low risk to earnings forecasts, and funds underweight positions. Thailand. We are underweight this market. Its valuations are on a par with the rest of the region, and the recent floods are a risk to growth. Meanwhile, funds are generally already overweight this market. Korea. We are underweight this market. Valuations are now far from their historical low levels and there remains risk to analysts earnings forecasts, which have hardly changed in recent months. China. We are neutral on this market. Valuations are low, but funds are generally already overweight Chinese equities. India. We are neutral on India. Valuations are on a par with the rest of the region.

HSBC Strategy market scorecard Monetary policy Taiwan Singapore Hong Kong China Malaysia India Philippines Indonesia Thailand Korea 10% 0 0 2 0 0 -1 0 0 -1 0 Growth surprise 20% -2 1 -1 0 -1 -1 -1 0 0 -2 Loved/unloved 15% 2 1 1 -3 1 1 1 -2 -3 0 Newsflow/shocks 15% 1 0 -1 -1 -1 -2 0 -1 -1 -2 Valuation 10% 2 2 2 3 1 1 0 0 1 1 Dividend yield 10% 3 2 2 2 2 0 1 1 2 0 Long-term story 20% 2 1 1 2 1 3 1 2 1 1 Weighting Overweight Overweight Overweight Neutral Neutral Neutral Neutral Neutral Underweight Underweight

Note: for a full description of the score card, please refer to our latest Asia Equity Insights Quarterly, Anaerobic Growth and deflated equity valuations, published 7 October 2011. Scores fall between -3 (low) and +3 (high) Source: HSBC

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Indonesia. This market offers excellent growth prospects the highest in the region, but now sufficiently priced into market valuations, which are also the highest across the region. Philippines. Similar to Indonesia, this market offers good growth prospects, but these are now sufficiently priced into market valuations. Malaysia. This is a very defensive market given its high exposure to consumer staples and utilities within the market. We are neutral on Malaysia.

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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: Herald van der Linde

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 investors 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 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- to 3-month 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 investors decision to buy or sell a stock should depend on individual circumstances such as the investors 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 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.

Rating definitions for long-term investment opportunities

Stock ratings

HSBC assigns ratings to its stocks in this sector on the following basis: For each stock we set a required rate of return calculated from the cost of equity for that stocks domestic or, as appropriate, regional market established by our strategy team. The price target for a stock represents the value the analyst expects the stock to reach over our performance horizon. The performance horizon is 12 months. For a stock to be classified as Overweight, the potential return, which equals the percentage difference between the current share price and the target price, including the forecast dividend yield when indicated, must exceed the required return by at least 5ppt over the next 12 months (or 10ppt for a stock classified as Volatile*). For a stock to be classified as Underweight, the stock must be expected to underperform its required return by at least 5ppt over the next 12 months (or 10ppt for a stock classified as Volatile*). Stocks between these bands are classified as Neutral. Our ratings are re-calibrated against these bands at the time of any material change (initiation of coverage, change of volatility status or change in price target). Notwithstanding this, and although ratings are subject to ongoing management review, expected returns will be permitted to move outside the bands as a result of normal share price fluctuations without necessarily triggering a rating change. *A stock will be classified as volatile if its historical volatility has exceeded 40%, if the stock has been listed for less than 12 months (unless it is in an industry or sector where volatility is low) or if the analyst expects significant volatility. However, stocks which we do not consider volatile may in fact also behave in such a way. Historical volatility is defined as the past months average of the daily 365-day moving average volatilities. In order to avoid misleadingly frequent changes in rating, however, volatility has to move 2.5ppt past the 40% benchmark in either direction for a stocks status to change.

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Rating distribution for long-term investment opportunities

As of 9 November 2011, the distribution of all ratings published is as follows: Overweight (Buy) 54% (26% of these provided with Investment Banking Services) Neutral (Hold) Underweight (Sell) 35% 11% (22% of these provided with Investment Banking Services) (13% of these provided with Investment Banking Services)

Analysts, economists, and strategists are paid in part by reference to the profitability of HSBC* which includes investment banking revenue. 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 11 November 2011. All market data included in this report are dated as at close 8 November 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. HSBCs analysts and its other staff who are involved in the preparation and dissemination of Research operate and have a management reporting line independent of HSBCs 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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Disclaimer
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Global Equity Strategy Research Team

Global
Garry Evans Global Head of Equity Strategy +852 2996 6916 garryevans@hsbc.com.hk Daniel Grosvenor +852 2996 6592 daniel.grosvenor@hsbc.com.hk

Asia
Herald van der Linde Deputy Head of Research and Head of Equity Strategy, Asia-Pacific +852 2996 6575 heraldvanderlinde@hsbc.com.hk Steven Sun +852 2822 4298 Roger Xie +852 2822 4297 Vivek Misra +91 80 3001 3699 stevensun@hsbc.com.hk rogerpxie@hsbc.com.hk vivekmisra@hsbc.co.in

EU and US
Peter Sullivan Head of Equity Strategy, EU and US +44 20 7991 6702 peter.sullivan@hsbcib.com

Europe
Robert Parkes +44 20 7991 6716 robert.parkes@hsbcib.com

Taiwan
Jenny Lai Head of Taiwan Research +886 2 8725 6020 jennylai@hsbc.com.tw

CEEMEA
John Lomax +44 20 7992 3712 Wietse Nijenhuis +44 20 7992 3680 john.lomax@hsbcib.com wietse.nijenhuis@hsbcib.com

South East Asia

Neel Sinha Head of Equity Research, South East Asia +65 6239 0658 neelsinha@hsbc.com.sg