global nutshell

A product of the Global Equity Research Team

This guide will help you gain an overall understanding of the structure of global equity markets,earnings trends, and funds flows

We provide a snapshot for each major sector including information on performance andvaluations

HSBC NutshellA global guide to equity sectors

Global Equity ResearchMulti-sector

July 2012

Chris GeorgsGlobal Head of Equity ResearchHSBC Bank plc+44 20 7991 [email protected]

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

Global

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Global Equity Research Multi-sector July 2012

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Dear Client,

We are pleased to present HSBC Nutshell: A guide to equity sectors and countries, our inaugural suite of multi-regional and global primers. The Nutshell guides have been compiled by our global equity research team to help new and seasoned professionals gain a quick, but thorough, understanding of markets in Latin America, EMEA, and Asia. For investors looking to invest globally and especially in emerging markets, the guides provide a broad, top-down perspective on these markets and the sectors related to them.

We have assumed that our readers will have some basic working knowledge of the world economy, equity markets, financial terminology and ratios, although the Nutshell guides are designed to be used by anyone wanting to gain a deeper understanding of countries or industries with which they are not familiar.

The Nutshell guides are designed to provide consistency and comparability. For each sector, our analysts explain how they value companies, and assess the key drivers affecting the sector, as well as the macro issues and trends impacting the sector on a regional and global basis. We then build on the sector framework to include regional macro overviews and country sections that provide a broader perspective on the sectors and geographies that we cover, addressing topics such as market composition, liquidity, fund flows, and political and regulatory structures.

We look forward to making our analysts available to you on a one-on-one or group basis to help you build on your country, sector, industry or stock knowledge from the nuts and bolts of the industry dynamics through to individual company valuation and recommendations. The front page of each industry or country section within these guides includes the names and contact details of our sector analysts and, where relevant, their specialist salesperson/people. Please get in touch with your HSBC representative to organise this, contact us directly, or email [email protected].

We hope you find these guides useful, and we look forward to continuing to work with you in the future.

Regards,

Chris Georgs Global Head of Equity Research

Patrick Boucher Head of Product Management, Equity Research

David May Head of Equity Research, Asia Pacific

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Global summary 5

Industry group snapshots 19 MSCI ACWI Automobiles & components 20

MSCI ACWI Banks 21

MSCI ACWI Capital goods 22

MSCI ACWI Commercial & professional services 23

MSCI ACWI Consumer durables & apparel 24

MSCI ACWI Consumer services 25

MSCI ACWI Diversified financials 26

MSCI ACWI Energy 27

MSCI ACWI Food & staples retailing 28

MSCI ACWI Food, beverages & tobacco 29

MSCI ACWI Healthcare equipment & services 30

MSCI ACWI Household & personal products 31

MSCI ACWI Insurance 32

MSCI ACWI Materials 33

MSCI ACWI Media 34

MSCI ACWI Pharmaceuticals, biotechnology & life sciences 35

MSCI ACWI Real estate 36

MSCI ACWI Retailing 37

MSCI ACWI Semiconductors & semiconductor equipment 38

MSCI ACWI Software & services 39

MSCI ACWI Technology hardware & equipment 40

MSCI ACWI Telecommunication services 41

MSCI ACWI Transportation 42

MSCI ACWI Utilities 43

Disclosure appendix 46

Disclaimer 48

Contents

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Global summary

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MSCI All Country World Index regions

MSCI Indices Developed market Emerging market Europe Europe ex UK Asia ex Japan Latin America EMEA

Weight in MSCI AC World 85.38% 14.62% 22.42% 14.27% 10.28% 3.04% 2.96%

Key sub-sectors Financials (18%) Financials (25%) Financials (18%) Financials (19%) Financials (31%) Financials (24%) Energy (28%) IT (13%) Energy (13%) Cons Stap. (15%) Health Care (14%) IT (18%) Materials (20%) Financials (25%) Industrials (11%) IT (13%) Health Care (12%) Industrials (14%) Industrials (10%) Cons Stap. (16%) Materials (16%)

Three largest stocks Apple (2.3%) Samsung Electronics (3.8%) Nestle (3.2%) Nestle (5.1%) Samsung Electronics (5.4%) AMX (6.6%) Gazprom (7.4%) Exxon (1.7%) Taiwan Semicon (1.7%) HSBC Holdings (2.7%) Novatis (3.9%) Taiwan Semicon (2.4%) Vale (5.0%) Lukoil (4.6%) Microsoft (1.1%) Gazprom (1.5%) Novatis (2.5%) Roche Holding (3.1%) China Mobile (2.0%) Petrobras (4.7%) Novatek (4.1%) Trading data Market cap. (USDbn) 22938 3929 6024 3834 2762 816 796 Average daily trading value (past 12 months, USDbn)

398 95 146 119 68 17 19

Performance in past 10 years (USD) Absolute 33% 175% 24% 25% 118% 345% 184% Relative to MSCI AC World -5% 96% -11% -10% 56% 218% 103% *Correlation MSCI Index returns (5yr) with MSCI ACWI 1.00 0.93 0.98 0.97 0.91 0.90 0.93 US ISM 0.36 0.32 0.34 0.30 0.28 0.38 0.36 *Beta MSCI Index returns (1yr) with MSCI ACWI 0.95 1.36 1.19 1.28 1.28 1.52 1.44 Key country stats 12M-forward EPS growth 13% 12% 8% 10% 15% 9% 0% Long-term average 12M-forward PE 16.1x 13.4x 14.0x 14.2x 12.0x 10.6x 9.8x 12-month-forward PE 11.1x 9.5x 9.6x 9.7x 10.5x 10.3x 7.3x Long-term average PB 2.2x 1.8x 2.0x 1.9x 1.8x 1.8x 2.1x Current PB 1.6x 1.5x 1.3x 1.2x 1.5x 1.6x 1.2x Long-term average 12M-forward ROE 14% 14% 16% 15% 14% 19% 15% 12-month-forward ROE 13% 14% 13% 12% 13% 14% 14% Note: All the above calculations are on MSCI USD indices. * calculated on monthly changes Source: HSBC, MSCI, IBES, Bloomberg, Thomson Reuters Datastream

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MSCI All Country World Index Top 8 countries

MSCI Indices US Japan United Kingdom Canada Australia Switzerland Germany China

Weight in MSCI AC World 45.14% 8.50% 8.15% 4.26% 3.15% 3.06% 2.77% 2.19%

Key sub-sectors IT (20%) Industrials (21%) Energy (20%) Financials (33%) Financials (45%) Health care (34%) Cons disc. (17%) Financials (39%) Financials (14%) Cons Disc. (20%) Financials (18%) Energy (26%) Materials (23%) Cons stap. (25%) Materials (16%) Energy (17%) Health care (12%) Financials (17%) Cons stap. (17%) Materials (20%) Cons stap. (8%) Financials (17%) Financials (16%) Telecom (12%)

Three largest stocks Apple (4.3%) Toyota Motors (5.4%) Royal Dutch Shell (9.5%) Royal Bank Canada (6.6%)

BHP Billiton (12.5%) Nestle (23.7%) Siemens (9.8%) China Mobile (9.4%)

Exxon (3.3%) Mitsubishi UFJ (2.8%) HSBC Holdings (7.3%) Toronto Dominio Bank (5.8%)

Commonwealth BK. Of Australia (9.9%)

Novatis (18.2%) BAFS (8.5%) China Construction BK. (9.2%)

Microsoft (2.0%) Honda Motors (2.6%) Vodafone (6.8%) Bk of Nova Scotia (4.8%)

Westpac Banking (7.6%)

Roche Holding (14.6%) SAP (7.1%) Ind. & Coml. BK. Of China (6.7%)

Trading data Market cap. (USDbn) 12127 2284 2189 1144 847 821 743 588 Average daily trading value (past 12 months, USDbn)

146 58 27 18 19 13 26 17

Performance in past 10 years Absolute 35% 7% 23% 143% 123% 65% 41% 221% Relative to MSCI AC World -3% -24% -12% 74% 59% 18% 1% 129% *Correlation MSCI Index returns (5-year) with MSCI ACWI 0.97 0.82 0.96 0.90 0.94 0.88 0.94 0.77 US ISM 0.36 0.30 0.41 0.38 0.35 0.22 0.24 0.17 *Beta MSCI Index returns (1-yr) with MSCI ACWI 0.84 0.52 1.03 1.02 1.36 0.96 1.61 1.47 Key country stats 12M-forward EPS growth 11% 57% 6% 9% 10% 11% 14% 11% Long-term average 12M-forward PE 15.4x 30.5x 13.7x 14.7x 13.5x 14.3x 15.6x 12.7x 12M-forward PE 12.0x 11.2x 9.4x 11.4x 11.1x 11.7x 9.1x 8.6x Long-term average PB 2.6x 2.2x 2.1x 1.9x 1.8x 2.3x 2.0x 2.0x Current PB 2.1x 0.9x 1.5x 1.7x 1.6x 2.0x 1.2x 1.5x Long-term average 12M-forward ROE 16% 8% 16% 14% 16% 17% 12% 16% 12M-forward ROE 15% 8% 15% 13% 13% 16% 13% 15% Note: All the above calculations are on MSCI USD indices. * calculated on monthly changes Source: HSBC, MSCI, IBES, Bloomberg, Thomson Reuters Datastream.

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MSCI All Country World Index Sectors

MSCI Indices Energy Materials Industrials Consumer discretionary

Consumer staples Health Care Financials Information technology

Telecom services Utilities

Weight in MSCI AC World 11.13% 7.85% 10.51% 10.16% 10.47% 9.03% 19.33% 12.72% 5.02% 3.79%

Key sub-sectors Oil Gas & Consumable Fuels

(89%) Metals & mining

(50%)Industrial conglom

(19%)Media (22%) Food products

(25%) Pharmaceuticals

(64%)Diversified banks

(45%)Computers &

peripherals (22%)Diversified

telecoms (62%)Electric utilities

(53%) Energy equip &

services (11%) Chemicals (40%) Industrial

machinery (19%)Automobiles (18%) Beverages (22%) Health care

services (13%)Multi-line

insurance (19%)Semiconductors

(18%)Wireless telecoms

(38%)Multi utilities

(30%) Construction

materials (5%)Aerospace &

defense (14%)Specialty retail

(14%)Food & staples retailing (22%)

Health care equipment (12%)

Diversified capital markets (10%)

Software (17%) Gas utilities (7%)

Three largest stocks Exxon Mobil (13.2%) BHP Billiton (8.0%) General Electric (7.5%)

Toyota Motor (4.5%)

Nestle (6.9%) Johnson & Johnson (7.2%)

Wells Fargo (3.1%)

Apple (15.3%) AT&T (15.4) Southern (4.1%) Royal Dutch Shell

(7.0%) BASF (3.0%) Siemens (2.6%) McDonalds (3.2%) P&G (6.1%) Pfizer (7.0%) HSBC Holding

(3.1%)Microsoft (7.1%) Vodafone Gr.

(10.2%)E ON (XET)

(3.7%) Chevron (6.5%) Rio Tinto (2.6%) United

Technologies (2.2%)

Walt Disney (2.9%)

Coca Cola (5.5%) Novartis (6.2%) JP Morgan Chase (2.6%)

IBM (6.0%) Verizon Communications

(9.2%)National Grid

(3.3%) Trading data Market cap. (USDbn) 2990 2108 2824 2729 2814 2425 5194 3417 1349 1017 Average daily traded value (past 12 months, USDbn)

48 52 55 60 33 28 107 66 23 18

Performance in last 10 years Absolute 102% 111% 50% 47% 80% 42% -16% 59% 46% 47% Relative to MSCI AC World 44% 50% 7% 5% 28% 2% -40% 14% 4% 5% *Correlation MSCI Index returns (5 year) with

MSCI ACWI 0.88 0.93 0.98 0.94 0.89 0.82 0.95 0.94 0.89 0.88 US ISM 0.28 0.35 0.36 0.37 0.22 0.21 0.40 0.38 0.22 0.31 *Beta MSCI Index returns (1yr) with MSCI ACWI 1.32 1.44 1.12 1.04 0.49 0.52 1.29 0.96 0.52 0.42 Key country stats 12M-forward EPS growth 4% 11% 15% 34% 10% 5% 13% 17% 5% 23% Long-term average 12M-forward PE 14.0x 13.6x 16.2x 18.0x 17.3x 18.6x 13.3x 22.3x 19.8x 14.1x 12M-forward PE 8.6x 9.5x 11.3x 12.2x 15.0x 11.9x 9.3x 11.6x 11.7x 14.0x Long-term average PB 2.5x 2.0x 2.5x 2.3x 3.9x 4.8x 1.9x 4.1x 2.4x 1.7x Current PB 1.4x 1.5x 1.8x 2.0x 3.1x 2.5x 0.9x 2.6x 1.6x 1.2x Long-term average 12M-forward ROE 17% 17% 14% 12% 19% 19% 12% 17% 13% 11% 12M-forward ROE 14% 14% 15% 15% 19% 19% 9% 19% 13% 8% Note: All the above calculations are on MSCI USD indices. * calculated on monthly changes Source: HSBC, MSCI, IBES, Bloomberg, Thomson Reuters Datastream.

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Introduction This section analyses the characteristics of the global equity market, its composition, recent history and key drivers, and describes some of the tools that HSBCs strategy team uses to call turns in the market and to make allocation decisions between different countries and sectors. We focus on the overall world market (using the MSCI All Country World Index, or ACWI, as our benchmark) and provide detailed information on the regional breakdown (developed versus emerging markets, Europe, Asia ex Japan, for example) as well as the eight largest countries (US, Japan, UK, Canada, Australia, Switzerland, Germany and China). Readers interested in more details on smaller country markets should refer to the overviews in the companion Nutshells on Europe, Asia and Latin America, where the information is presented in a similar format to here.

The past 15 years have been a volatile period for global equities (Chart 1). After a steady run-up in equity prices that began in 1982, the period since 2000 has, in the view of many investors, been a structural bear market, with stock prices rising and falling cyclically but showing no trend appreciation. The TMT (technology, media and telecoms) bubble of 1998-2000 took valuations to very high levels (with the forward PE for MSCI ACWI peaking at 23x). Stocks have been derated since, and the PE fell to around 10x over the following decade. The rally of 2003-07, driven by strong growth in emerging markets and by a housing boom in the US and parts of Europe, took the ACWI Index to a new high, but was derailed by the global financial crisis of 2008-09. Global equities rebounded in 2009, helped by unprecedented monetary easing around the world, but have struggled to make further progress since then.

Global summary

Garry Evans* Strategist The Hongkong and Shanghai Banking Corporation limited +852 2996 6916 [email protected]

Raj Purswani* Associate, Bangalore

*Employed by a non-US affiliate of HSBC Securities (USA) Inc, and is not registered/ qualified pursuant to FINRA regulations

1. MSCI AC World price index (in USD terms)

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MSCI AC World

Source: HSBC, MSCI, Thomson Reuters Datastream.

2. Largest stocks in MSCI ACWI

Stock rank Stock name Index weight

1 Apple 1.9% 2 Exxon Mobil 1.5% 3 Microsoft 0.9% 4 General Electric 0.8% 5 AT&T 0.8% 6 IBM 0.8% 7 Chevron 0.7% 8 Nestle 0.7% 9 Johnson & Johnson 0.6% 10 Procter & Gamble 0.6% Top 10 9.4% Top 25 17.3% Top 50 26.0% Source: HSBC, MSCI, Thomson Reuters Datastream.

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Market structure The US remains by far the largest stock market in the world, with a 45% weight in the ACWI Index. It is followed by Europe (22%) and Japan (9%). Eurozone markets, individually, are not that important: the largest, Germany, comprises less than 3% of world market capitalisation. The weight of emerging markets has increased substantially over the past decade, to 14.6% from 4.8% in 2000. Within Global Emerging Markets (GEMS), China is the largest country, with 18.0%, followed by Korea (15.5%), Brazil (13.1%) and Taiwan (11.2%). Asian markets comprise 60.2% of GEMS.

The US is very over-represented in the ACWI Index relative to the size of its economy, which makes up only 24% of global GDP (in purchasing power parity, PPP, terms). Europe, at 29% of global GDP (larger than the US), is somewhat under-represented, mainly because of its valuation discount to the US (the forward price/earnings ratio for Europe is 9.6x versus 12.0x for the US). Emerging markets, however, account for 39% of the world economy but less than 15% of the index. This is mainly because the free float of many emerging markets (on which the MSCI indexes are calculated) is small for example, 54% in Brazil and 33% in India (compared with 95% for the US and 76% for Japan). Moreover, MSCI China does not include the Chinese domestic A-share market, which has total market cap of USD3trn (close to Japans market cap of USD3.3trn). As more emerging market companies list in the coming years, foreign access to domestic markets such as Chinas increases and governments and founders float more shares, the weight of EM is likely to rise further.

The US also has nine of the top 10 stocks globally (Table 2), the only exception being Nestl of Switzerland. The US is also one of the most diversified markets, with the top 10 stocks comprising only 21% of the index (Table 3), and the largest sector, financials, only 20%. By contrast, Switzerland has 80% of its index weight in just 10 stocks, and Australia is heavily skewed to just two sectors, financials and materials, which comprise 68% of the index between them.

Trading volumes globally have fallen since the global financial crisis, down 22% compared with the five-year average (Table 4). The US represents 31% of total global stock market trading, implying that it has less rapid turnover than, for example, emerging markets (16% of global turnover).

3. MSCI ACWI: Region/country weights of top-10/top-25 stocks

Top 10 Top 25

Developed markets 11.0% 20.2%Emerging markets 15.2% 26.7%Europe 22.1% 37.6%Europe ex UK 25.2% 41.2%Asia ex Japan 19.3% 30.4%Latin America 39.8% 60.3%EMEA 36.0% 57.8%US 20.6% 35.6%Japan 22.9% 38.2%United Kingdom 48.6% 72.4%Canada 39.0% 63.2%Australia 61.4% 82.2%Switzerland 80.0% 95.4%Germany 59.9% 87.2%China 53.4% 70.7%MSCI ACWI 9.4% 17.3%Source: HSBC, MSCI, Thomson Reuters Datastream

4. MSCI ACWI: Indices average daily traded value (USDbn) Current 5Y Average

Developed markets 401 512 Emerging markets 77 95 Europe 167 209 Europe ex UK 128 163 Asia ex Japan 53 72 Latin America 17 15 EMEA 14 18 US 148 184 Japan 48 72 United Kingdom 40 46 Canada 19 20 Australia 11 19 Switzerland 17 17 Germany 25 33 China 13 20 MSCI ACWI 475 607 Source: HSBC, MSCI, Bloomberg, Thomson Reuters Datastream

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5. Earnings and index volatility

MSCI Indices ______ Trailing earnings volatility*_______ ______ Market returns volatility* _______ 10 years 5 years 10 years 5 years

Developed markets 75% 64% 17% 21% Emerging markets 72% 47% 25% 30% Europe 121% 99% 21% 26% Europe ex UK 145% 118% 23% 27% Asia ex Japan 31% 24% 24% 29% Latin America 322% 152% 29% 32% EMEA 32% 20% 27% 32% USA 56% 54% 16% 19% Japan 252% 269% 17% 18% United Kingdom 86% 79% 19% 23% Canada 97% 51% 22% 27% Australia 52% 39% 24% 31% Switzerland 249% 252% 17% 21% Germany 176% 147% 27% 31% China 5% 3% 29% 34% MSCI ACWI 19% 16% 18% 22% Source: HSBC, MSCI, Thomson Reuters Datastream; Note: *calculated as the annualised standard deviation of monthly changes

The US is also the most defensive of the major markets. This was most clearly demonstrated by the way it outperformed in 2008, although the roots of the global financial crisis were in the US. The US has a beta to ACWI of 0.84x, compared with 1.28x for Europe ex UK and 1.36x for emerging markets. The annualised volatility of the US has been 16% over the past 10 years and 19% over the past five years, compared with 23% and 27%, respectively, for Europe ex UK (Table 5). Switzerland and the UK are also relatively defensive, partly because of their sector composition (in the case of Switzerland, heavy weightings in health care and consumer staples), and Japans beta has also fallen in recent years, after two decades of low economic growth.

Among sectors, the financials sector remains the largest globally, despite its problems over recent years. It comprises 19% of the ACWI Index and is among the top-three sectors in each of the eight biggest countries. It is especially large in emerging markets, where it represents 25% of the index, led by China where it accounts for as much as 39%. Information technology is not as significant as at the height of the TMT bubble in 2000, but it still represents 13% of the global index and is particularly important in the US (where it is the largest sector, with 20%) and in Asia ex Japan (18%). Cyclical sectors (IT, industrials, consumer discretionary and materials), comprising 41% of the index, have a much bigger share than defensives (consumer staples, health care, telecoms and utilities) at 28%, which helps to explain why equities in general have a tendency to move pro-cyclically.

Correlations Correlations between markets, and between stocks within a market, have risen considerably in recent years. The average correlation between each of the 49 countries in MSCI ACWI and the overall index has risen to 70-80% from about 40% over the past 10 years (Chart 7). The correlation between stocks in the US S&P500 Index (as indicated by the implied correlation contract traded on the Chicago Board Options Exchange) has similarly risen to about 80% (Chart 8). The main reasons for this are the increasing popularity of exchange-traded funds (ETFs), which enable investors to take a view on a market without buying the individual stocks, and the phenomenon of risk-on/risk-off, whereby investor sentiment has oscillated between extremes over the past few years.

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6. MSCI AC World: Market correlations

_______Economic factors ________ __________________ Global index __________________ US ISM (5Yr US ISM (10Yr) MSCI ACWI (1yr) MSCI ACWI (5yr) MSCI ACWI (10yr) Developed markets 0.36 0.31 1.00 1.00 1.00 Emerging markets 0.32 0.30 0.97 0.93 0.92 Europe 0.34 0.30 0.99 0.98 0.97 Europe ex UK 0.30 0.27 0.99 0.97 0.96 Asia ex Japan 0.28 0.26 0.96 0.91 0.88 Latin America 0.38 0.31 0.96 0.90 0.87 EMEA 0.36 0.33 0.93 0.93 0.89 USA 0.36 0.28 0.98 0.97 0.97 Japan 0.30 0.31 0.69 0.82 0.70 United Kingdom 0.41 0.34 0.97 0.96 0.94 Canada 0.38 0.35 0.94 0.90 0.87 Australia 0.35 0.31 0.94 0.94 0.91 Switzerland 0.22 0.24 0.96 0.88 0.87 Germany 0.24 0.23 0.95 0.94 0.93 China 0.17 0.20 0.93 0.77 0.74 Source: HSBC, MSCI, Thomson Reuters Datastream

Of the largest markets, China (77%) and Japan (82%) have the lowest correlations with the world index, but these numbers still imply that both markets move closely in line with global stocks. To find relatively uncorrelated markets, one has to go down to small emerging countries such as Thailand (54%) or Sri Lanka (15%).

7. Average country correlation to MSCI ACWI 8. Implied correlation of S&P500 index stocks

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Implied correlation

Source: HSBC, MSCI, Bloomberg Source: HSBC, Bloomberg

Earnings and ratings Earnings have grown fairly steadily over the past 20 years, albeit with cyclical ups and downs (Chart 9). This contrasts with market returns which, as we saw above, were good in the 1990s but have been volatile and poor since 2000. Since 2000, for example, earnings per share (EPS) for ACWI have grown at a compound rate (CAGR) of 7%, compared with the total return from the index of -0.9%. The lesson here is that, over the long term, equity markets are driven less by earnings growth than by valuation, ie, the multiple applied to the earnings.

Since 2000, emerging markets have experienced the strongest earnings growth, at 14%, led by China (22% CAGR) and the commodities-heavy markets of Latin America (15%). Europe has seen the weakest growth, at 5% for Europe ex UK and 7% for the UK.

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How useful are earnings trends for forecasting the direction of equities? Historical earnings are not so relevant when thinking about the future, since markets tend to discount in advance. But analysts forecasts can be helpful, as long as they are used with care.

Analysts tend to be over-optimistic about earnings (Chart 12). They typically miss earnings recessions: in mid-2008, for example, consensus was still forecasting 14% EPS growth for the year ahead, whereas in reality earnings were about to slump. In expansions such as 2004-07, for example, analysts estimates tend to be fairly accurate. But this is not so useful when markets are derating: In the past three years, for example, analysts have been correct in predicting solid earnings growth, but this has not helped stock markets, where performance has generally been disappointing.

More sensitive indicators of the change in analysts estimates are, however, often a good guide to the direction of the stock market. Both earnings momentum (ie, the change in 12-month forward EPS forecast over the past six months Chart 11) and the revisions ratio (analysts upward earnings revisions as a percentage of all forecast changes Chart 12) merit watching carefully. Turning points in these second derivative indicators often signal a switch in market direction. In late 2007, for example, the revision ratio turned sharply negative, even though analysts still expected earnings growth, presaging the market slump. Conversely, both momentum and the revisions ratio turned up sharply in early 2009 ahead of the rebound in stocks.

9. MSCI AC World: Actual EPS versus trend 10. MSCI AC World: EPS growth CAGR since 2000

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12M Trail EPS (Log) Trend

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Annualised grow th rate

Source: HSBC, MSCI, Thomson Reuters Datastream Source: HSBC, MSCI, Thomson Reuters Datastream

11. MSCI ACWI: Earnings momentum* versus y-o-y returns 12. MSCI ACWI: 12-month forward EPS growth versus returns

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Momentum MSCI AC World Index YoY (RHS)

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Note: *Earnings momentum is defined as the 6 month % change in 12M-forward EPS forecast Source: HSBC, MSCI, IBES Thomson Reuters Datastream

Source: HSBC, MSCI, IBES, Thomson Reuters Datastream

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13. MSCI ACWI: EPS revisions ratio* versus y-o-y return 14. MSCI ACWI recommendation consensus score

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ACWI earning rev isions MSCI ACWI YoY (RHS)

% %

2.02.12.22.32.42.52.62.72.8

94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12Recommendation consensus score (RCS)Av erage2SD

more bearish

more bullish

Note:- *Number of EPS estimates up as a % of total number of revisions in estimates Source: HSBC, IBES, MSCI, Thomson Reuters Datastream

Source: HSBC, IBES, MSCI, Thomson Reuters Datastream

We also use analysts recommendations as a useful (contrarian) indicator. Analysts tend to be most bullish at market tops, and most bearish at bottoms. Chart 14 shows the recommendation consensus score, the average rating on stocks globally (where a Strong Buy scores 1, Neutral 3 and Strong Sell 5). Analysts were at their most bullish in early 2000, at the peak of the TMT bubble. They have become generally more cautious since then, partly because of regulatory changes. But the two occasions when their recommendations have been two standard deviations more bearish than the long-run average, mid-2003 and early 2009, would have been good times to buy stocks.

Currently, neither the sensitive earnings indicators, nor the recommendation consensus score give a strong signal in either direction.

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Valuations Global equity valuations have steadily derated over the past 12 years. ACWI currently trades at around 11x 12-month forward earnings, compared with an average of 14.4x since 2001 and 16x since 1993. Every major market and every region is currently cheaper than the historical average over both these periods with the one exception of Latin America, which is slightly above its post-2001 average, pulled up by Mexico (on 15x).

A simple comparison of valuation relative to history is dangerous, however. The period since 1982 is unusual in financial history, since it contained a 20-year structural bull market. Current valuations are the cheapest they have been at any time since the mid-1980s, with the exception of a few months around the market bottom in early 2009. But in the 1970s (and the 1950s and 1910s), US stocks often traded on single-digit PEs, compared with 12x now and a low of just below 10x in 2009. If the current global economic malaise continues, a further derating of global valuations cannot be ruled out.

At the country level (Table 15), too, historical comparisons may not be meaningful if they indicate merely a change in prospective growth. No one, for example, believes that Japan should trade anywhere close to its 20-year average PE of 29x, but many cite its big discount to history as a reason to buy this market. We prefer to compare Japan with Europe, with similarly depressed growth: Japan still trades at a 17% premium to Europe and therefore, in our view, is not particularly cheap. Likewise, Europes 20% discount to the US is not that significant, being similar to the average discount over the past 10 years.

15. MSCI ACWI: 12M-forward PE

PE Now

Avg 2001-12

Diff Avg 1993-12

Diff

Developed markets 11.1x 14.8x -25% 16.6x -33%Emerging markets 9.5x 10.7x -12% 12.7x -26%Europe 9.6x 13.3x -28% 14.9x -36%Europe ex UK 9.7x 13.1x -26% 15.1x -36%Asia ex Japan 10.5x 12.2x -14% 12.2x -14%Latin America 10.3x 10.1x 2% 10.7x -4%EMEA 7.3x 9.6x -24% 9.9x -27%US 12.0x 15.4x -22% 16.3x -27%Japan 11.2x 18.2x -38% 28.8x -61%United Kingdom 9.4x 13.9x -33% 14.7x -36%Canada 11.4x 14.2x -20% 15.4x -26%Australia 11.1x 13.9x -20% 14.5x -23%Switzerland 11.7x 14.1x -17% 15.3x -24%Germany 9.1x 13.2x -31% 16.3x -44%China 8.6x 12.4x -31% 12.8x -33%MSCI ACWI 10.9x 14.4x -25% 16.3x -33%Source: HSBC, IBES, MSCI, Thomson Reuters Datastream.

16. MSCI ACWI: Earnings yield (EY) versus US 10Y bond yield (BY)

0%

2%

4%

6%

8%

10%

12%

01 03 05 07 09 11EY BY

Source: HSBC, MSCI, Bloomberg, Thomson Reuters Datastream, Bloomberg

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17. MSCI ACWI: 12M-forward PE bands 18. MSCI ACWI: Price to book

0100200300400500600700

02 04 06 08 10 12MSCI PI 5x 10x15x 20x

1.0x

1.5x

2.0x

2.5x

3.0x

3.5x

4.0x

00 02 04 06 08 10 12MSCI AC World

Source: HSBC, MSCI, IBES, Thomson Reuters Datastream. Source: HSBC, MSCI, Thomson Reuters Datastream.

This is not to argue, however, that valuations are anything other than attractive currently. In particular, the long-run decline in the risk-free bond rate (for which we use the 10-year US Treasury yield) should arguably justify a higher PE than history, not a lower one. The earnings yield on equities (the reciprocal of the PE) is currently almost 6pp higher than the risk-free rate (Chart 16), something that has rarely happened in history. Even the dividend yield on global equities, currently 3.4%, is well above the bond yield something than has not happened for a sustained period since the 1950s. As we argued above, while valuations may not help short-term market movements, they are a significant factor in determining long-run equity returns. The current level suggests, in our view, that returns from equities should be significantly better than those from government bonds over the next 10 years.

19. MSCI ACWI :12M-forward PE versus 10-year average and standard deviations from average

Current PE

Rolling 10Yr Avg

Rolling 10Yr SD

# ST Dev from avg.

Cons. disc. 12.2x 15.8x 2.4 -1.5Cons stap. 15.0x 15.8x 1.6 -0.5Energy 8.6x 11.5x 1.9 -1.5Financials 9.3x 11.5x 1.5 -1.5Health care 11.9x 15.0x 3.0 -1.0Industrials 11.3x 14.7x 2.2 -1.6IT 11.6x 17.8x 4.4 -1.4Materials 9.5x 12.5x 2.3 -1.3Telecom 11.7x 17.4x 8.5 -0.7Utilities 14.0x 13.4x 1.5 0.4MSCI ACWI 10.9x 13.7x 1.9 -1.5Source: HSBC, MSCI, IBES, Thomson Reuters Datastream.

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Fund flows/holdings The poor performance of equities since 2000 has hurt investor sentiment towards the asset class. In the 2003-07 stock market rally, individual investors did put more of their savings into stocks: in the US, for example, they invested over USD700bn in equity mutual funds (Chart 17). But, after the global financial crisis, they lost all confidence. Even during the rebound in stocks in 2009, they hesitated to buy equity funds, and over the past three-and-a-half years they have withdrawn a total of USD200bn. Where has the money gone? Not to money market funds (unsurprising, since cash yields zero) but to bond funds, which have seen net inflows of USD900bn since the end of 2008.

Some types of investment vehicles have fared a little better. Emerging market equity funds saw a big sell-off during the global financial crisis, as US and European retail investors (as often happens) panicked and pulled their money home (Chart 18). But they saw a renewed bout of buying in 2009 (with investors hoping that emerging markets would see better growth and less risk than developed ones). But, after EM returns turned out to be poor in 2010 and 2011, this fad faded and these funds, too, have seen outflows over the past two years (although not as big as the sell-off in DM funds). Currently, the only funds with strong inflows are income or dividend funds, as investors search for yield in the low interest rate environment. This trend may have some way to go since only 3% of US equity mutual funds, for example, are income funds (compared with 45% for growth funds).

20. Cumulative net flows into US mutual funds (USDtrn) 21. Cumulative net flows into global equity mutual funds (USDbn)

0.0

0.5

1.0

1.5

2.0

2.5

98 99 00 01 02 03 04 05 06 07 08 09 10 11 12

Equity fundsBond fundsMMFs

-150

-100

-50

050

100

150

200

250

04 05 06 07 08 09 10 11 12

EM DM

Source: Investment Company Institute, HSBC Source: EPFR

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Notes

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Industry group snapshots

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MSCI ACWI Automobiles & componentsIndustry group key statistics

Market capitalisation (USDbn) 699 % of MSCI ACWI 2.6% % of consumer discretionary 25.6%

Absolute performance past 10 yr 51.2% Relative performance to MSCI ACWI past 10 years 7.7%

Correlation with MSCI ACWI (5yr) 0.85 Beta to MSCI ACWI (1yr, x) 1.30 Correlation with US ISM (5yr) 0.38 Current 12M-forward EPS growth forecast (y-o-y) 33% Current 12M-forward PE 8.1x Current PB 1.4x Current 12M-forward forecast ROE 13.2% Source: HSBC, IBES, MSCI, Thomas Reuters Datastream.

Largest 10 stocks

Rank Stock Weight in index

1 Toyota Motor 17.7% 2 Honda Motor 8.4% 3 Ford Motor 5.7% 4 Hyundai Motor 5.3% 5 Daimler (XET) 4.9% 6 Volkswagen 4.7% 7 BMW 3.7% 8 Nissan Motor 3.5% 9 Johnson Controls 2.6% 10 Denso 2.5% Source: MSCI, HSBC, Thomas Reuters Datastream

Region/country weightings

Region/country Industry group weight in index

MSCI ACWI 2.6% MSCI Developed Market 2.5% MSCI Emerging Market 3.4% MSCI Europe 2.3% MSCI Europe ex UK 3.6% MSCI Asia ex JP 4.7% MSCI LatAm 0.0% MSCI EMEA 0.4% MSCI USA 0.9% MSCI Japan 13.3% MSCI UK 0.2% MSCI Canada 0.8% MSCI Australia 0.0% MSCI Switzerland 0.0% MSCI Germany 13.8% MSCI China 2.1% Source: HSBC, MSCI, Thomas Reuters Datastream.

Performance relative to MSCI ACWI

8090

100110120130140150

00 02 04 06 08 10 12Automobiles & Components rel. to MSCI ACWI

Source: Thomas Reuters Datastream, MSCI, HSBC

12-month-forward PE

5

15

25

35

45

55

00 02 04 06 08 10 12MSCI ACWI Automobiles & Components


Trailing EPS versus trend

-10

-5

0

5

10

15

20

00 02 04 06 08 10 12Automobiles & Components T rend

Source: HSBC, MSCI, Thomson Reuters Datastream

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MSCI ACWI BanksIndustry group key statistics

Market capitalisation (USDbn) 2487 % of MSCI ACWI 9.3% % of Financials 47.9%

Absolute performance past 10 years -15.5% Relative performance to MSCI ACWI past 10 years -39.8%

Correlation with MSCI ACWI (5yr) 0.94 Beta to MSCI ACWI (1yr, x) 1.23 Correlation with US ISM (5yr) 0.42 Current 12M-forward EPS growth forecast (y-o-y) 5% Current 12M-forward PE 8.5x Current PB 1.0x Current 12M-forward forecast ROE 10.7% Source: HSBC, IBES, MSCI, Thomas Reuters Datastream

Largest 10 stocks


1 Wells Fargo & Co 6.5%2 HSBC Holdings (Ord USD0.50) 6.4%3 Commonwealth Bank of Australia 3.4%4 Royal Bank Canada 3.0%5 Toronto-Dominion Bank 2.7%6 Westpac Banking 2.6%7 Mitsubishi Ufj Financial Group 2.6%8 US Bancorp 2.4%9 Australia and NZ Banking Group. 2.4%10 Banco Santander 2.3%Source: MSCI, HSBC, Thomas Reuters Datastream



MSCI ACWI 9.3% MSCI Developed Market 7.6% MSCI Emerging Market 18.7% MSCI Europe 9.4% MSCI Europe ex UK 7.9% MSCI Asia ex JP 18.6% MSCI LatAm 19.7% MSCI EMEA 17.7% MSCI USA 2.9% MSCI Japan 9.3% MSCI UK 12.1% MSCI Canada 23.3% MSCI Australia 31.0% MSCI Switzerland 0.2% MSCI Germany 1.0% MSCI China 25.5% Source: HSBC, MSCI, Thomas Reuters Datastream


60

80

100

120

140

160

00 02 04 06 08 10 12Banks rel. to MSCI ACWI

Source: HSBC, MSCI, Thomas Reuters Datastream

12-month-forward PE

5

10

15

20

25

30

00 02 04 06 08 10 12MSCI ACWI Banks



2468

10121416

00 02 04 06 08 10 12Banks Trend


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MSCI ACWI Capital goodsIndustry group key statistics

Market capitalisation (USDbn) 2065 % of MSCI ACWI 7.7% % of Industrials 73.1%

Absolute performance past 10 years 49.0% Relative performance to MSCI ACWI past 10 years 6.2%


Largest 10 stocks


1 General Electric 10.3%2 Siemens (XET) 3.5%3 United Technologies 3.0%4 3M 2.7%5 Caterpillar 2.5%6 Boeing 2.5%7 Fanuc 1.9%8 Honeywell International 1.9%9 ABB 'R' 1.7%10 Emerson Electric 1.7%Source: MSCI, HSBC, Thomas Reuters Datastream





80

90

100

110

120

130

140

00 02 04 06 08 10 12Capital Goods rel. to MSCI ACWI


12-month-forward PE

5

10

15

20

25

30

00 02 04 06 08 10 12MSCI ACWI Capital Goods



2

4

6

8

10

12

14

00 02 04 06 08 10 12Capital Goods Trend


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MSCI ACWI Commercial & professional servicesIndustry group key statistics


Absolute performance past 10 years 8.4% Relative performance to MSCI ACWI past 10 years -22.7%


Largest 10 stocks


1 Experian 7.5%2 Waste Man. 6.8%3 SGS 'N' 5.5%4 Secom 5.3%5 Brambles 4.9%6 Republic SVS. 'A' 4.2%7 Aggreko 4.1%8 Verisk Analytics CL.A 3.7%9 Capita 3.6%10 Intertek Group 3.5%Source: MSCI, HSBC, Thomas Reuters Datastream





708090

100110120130140

00 02 04 06 08 10 12Comm. & prof. serv ices rel. to MSCI ACWI


12-month-forward PE

5

10

15

20

25

30

00 02 04 06 08 10 12MSCI ACWI Comm. & prof. serv ices



2

3

4

5

6

7

00 02 04 06 08 10 12Comm. & prof. serv ices Trend


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MSCI ACWI Consumer durables & apparelIndustry group key statistics

Market capitalisation (USDbn) 365 % of MSCI ACWI 1.4% % of Consumer Discretionary 13.4%


Correlation with MSCI ACWI (5yr) 0.94 Beta to MSCI ACWI (1yr, x) 1.32 Correlation with US ISM (5yr) 0.36 Current 12M-forward EPS growth forecast (y-o-y) NA Current 12M-forward PE 14.2x Current PB 1.9x Current 12M-forward forecast ROE 12.0% Source: HSBC, MSCI, IBES, Thomas Reuters Datastream

Largest 10 stocks


1 LVMH 11.6%2 Nike 'B' 9.7%3 Richemont 7.8%4 Panasonic 5.0%5 Coach 4.9%6 Adidas (XET) 4.1%7 Sony 3.7%8 V F 3.1%9 The Swatch Group 2.9%10 Nikon 2.8%Source: MSCI, HSBC, Thomas Reuters Datastream





60

70

80

90

100

110

00 02 04 06 08 10 12Cons. Durables & Apparel rel. to MSCI ACWI


12-month-forward PE

5

10

15

20

25

30

35

00 02 04 06 08 10 12MSCI ACWI Cons. Durables & Apparel



-2

0

2

4

6

8

10

00 02 04 06 08 10 12Cons. Durables & Apparel Trend


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MSCI ACWI Consumer servicesIndustry group key statistics




Largest 10 stocks


1 McDonalds 22.5%2 Starbucks 10.1%3 Yum! Brands 7.6%4 Compass Group 4.9%5 Las Vegas Sands 3.9%6 Genting 2.9%7 Carnival 2.7%8 Marriott International 'A' 2.7%9 Starwood Hotels and Resorts

Worldwide 2.4%

10 Chipotle Mexican Grill 2.3%Source: MSCI, HSBC, Thomas Reuters Datastream





80

100

120

140

160

180

200

00 02 04 06 08 10 12Consumer Serv ices rel. to MSCI ACWI


12-month-forward PE

5

10

15

20

25

30

00 02 04 06 08 10 12MSCI ACWI Consumer Serv ices



23456789

10

00 02 04 06 08 10 12Consumer Serv ices Trend


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MSCI ACWI Diversified financialsIndustry group key statistics




Largest 10 stocks


1 JP Morgan Chase & Co. 12.9%2 Bank of America 8.3%3 Citigroup 8.0%4 American Express 5.1%5 UBS 'R' 4.1%6 Goldman Sachs Group 4.0%7 Deutsche Bank (XET) 3.2%8 Capital One Financial 2.5%9 ING Groep 2.3%10 Bank Of New York Mellon 2.3%Source: MSCI, HSBC, Thomas Reuters Datastream





40

60

80

100

120

140

160

00 02 04 06 08 10 12Div ersified Financials rel. to MSCI ACWI


12-month-forward PE

5

10

15

20

25

30

00 02 04 06 08 10 12MSCI ACWI Div ersified Financials



-15-10-505

101520

00 02 04 06 08 10 12Div ersified Financials Trend


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MSCI ACWI EnergyIndustry group key statistics

Market capitalisation (USDbn) 2990 % of MSCI ACWI 11.1% % of Energy 100%



Largest 10 stocks


1 Exxon Mobil 13.2%2 Royal Dutch Shell 7.0%3 Chevron 6.5%4 BP 4.3%5 Total 3.5%6 Schlumberger 3.0%7 Petrobras 2.4%8 Conocophillips 2.4%9 BG Group 2.3%10 ENI 2.1%Source: MSCI, HSBC, Thomas Reuters Datastream





70100130160190220250280310

00 02 04 06 08 10 12Energy rel. to MSCI ACWI


12-month-forward PE

5

10

15

20

25

30

00 02 04 06 08 10 12MSCI ACWI Energy



05

1015

20253035

00 02 04 06 08 10 12Energy Trend


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MSCI ACWI Food & staples retailingIndustry group key statistics

Market capitalisation (USDbn) 596 % of MSCI ACWI 2.2% % of Consumer Staples 21.2%



Largest 10 stocks


1 Wal Mart Stores 19.2%2 CVS Caremark 9.9%3 Tesco 6.2%4 Costco Wholesale 6.2%5 Woolworths 5.6%6 Wesfarmers 4.8%7 Walgreen 4.4%8 Seven & I Holdings 3.9%9 Sysco 2.9%10 Walmex 'V' 2.5%Source: MSCI, HSBC, Thomas Reuters Datastream





8090

100110120130140150

00 02 04 06 08 10 12Food & Stap. Retailing rel. to MSCI ACWI


12-month-forward PE

5

10

15

20

25

30

00 02 04 06 08 10 12MSCI ACWI Food & Stap. Retailing



01234567

00 02 04 06 08 10 12Food & Stap. Retailing Trend


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MSCI ACWI Food, beverages & tobaccoIndustry group key statistics




Largest 10 stocks


1 Nestle 'R' 11.0%2 Coca Cola 8.8%3 Philip Morris Intl. 7.9%4 PepsiCo 6.1%5 British American Tobacco 5.5%6 Unilever 4.9%7 Altria Group 3.6%8 Diageo 3.5%9 Kraft Foods 3.5%10 Anheuser-Busch InBev 2.7%Source: MSCI, HSBC, Thomas Reuters Datastream





70100130160190220250280310

00 02 04 06 08 10 12Food Bev . & Tobacco rel. to MSCI ACWI


12-month-forward PE

5

10

15

20

25

30

00 02 04 06 08 10 12MSCI ACWI Food Bev . & T obacco



2

4

6

8

10

12

00 02 04 06 08 10 12Food Bev . & Tobacco Trend


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MSCI ACWI Healthcare equipment & servicesIndustry group key statistics

Market capitalisation (USDbn) 603 % of MSCI ACWI 2.2% % of Health Care 24.9%



Largest 10 stocks


1 UnitedHealth Group 9.6%2 Express Scripts Holding 7.2%3 Medtronic 6.6%4 Covidien 4.3%5 Fresenius Med Care 4.2%6 Baxter International 4.2%7 Wellpoint 3.9%8 McKesson 3.4%9 Stryker 3.1%10 Intuitive Surgical 3.1%Source: MSCI, HSBC, Thomas Reuters Datastream





80

120

160

200

240

280

00 02 04 06 08 10 12Health Care Equip. & Serv . rel. to MSCI ACWI


12-month-forward PE

0

5

10

15

20

25

30

00 02 04 06 08 10 12MSCI ACWI Health C are Equip. & Serv .



02468

101214

00 02 04 06 08 10 12Health Care Equip. & Serv . Trend


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MSCI ACWI Household & personal productsIndustry group key statistics




Largest 10 stocks


1 Procter & Gamble 38.5%2 Colgate-Palm. 9.5%3 Reckitt Benckiser Group 7.7%4 Kimberly-Clark 7.3%5 L'Oreal 6.1%6 Henkel (XET) 4.2%7 KAO 2.9%8 Estee Lauder Cos .'A' 2.6%9 Uni Charm 2.1%10 Beiersdorf (XET) 1.9%Source: MSCI, HSBC, Thomas Reuters Datastream





6080

100120140160180200220

00 02 04 06 08 10 12Household & Personal Products rel. to MSCI ACWI


12-month-forward PE

5

10

15

20

25

30

35

00 02 04 06 08 10 12MSCI ACWI Household & Personal Products



0

2

4

6

8

10

00 02 04 06 08 10 12Household & Personal Products Trend


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MSCI ACWI InsuranceIndustry group key statistics




Largest 10 stocks


1 Berkshire Hathaway 'B' 7.7%2 Allianz (XET) 4.4%3 AIA Group 3.6%4 Zurich Insurance Group 3.5%5 Metlife 2.8%6 Prudential 2.6%7 AXA 2.5%8 ACE 2.5%9 Prudential Financial 2.4%10 Travelers Cos. 2.3%Source: MSCI, HSBC, Thomas Reuters Datastream





60

80

100

120

140

160

00 02 04 06 08 10 12Insurance rel. to MSCI ACWI


12-month-forward PE

5

10

15

20

25

30

00 02 04 06 08 10 12MSCI ACWI Insurance



-202468

101214

00 02 04 06 08 10 12Insurance Trend


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MSCI ACWI MaterialsIndustry group key statistics

Market capitalisation (USDbn) 2108 % of MSCI ACWI 7.8% % of Materials 100%



Largest 10 stocks


1 BHP Billiton (Australia) 8.0%2 BASF (XET) 3.0%3 Rio Tinto 2.6%4 E I Du Pont De Nemours 2.3%5 Anglo American 2.1%6 Monsanto 2.0%7 Vale PNA 1.9%8 Barrick Gold 1.9%9 Potash Corporation Of Saskatchewan 1.7%10 Air Liquide 1.7%Source: MSCI, HSBC, Thomas Reuters Datastream





70100130160190220250280

00 02 04 06 08 10 12Materials rel. to MSCI ACWI


12-month-forward PE

5

10

15

20

25

30

00 02 04 06 08 10 12MSCI ACWI Materials



0

5

10

15

20

25

00 02 04 06 08 10 12Materials Trend


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MSCI ACWI MediaIndustry group key statistics




Largest 10 stocks


1 Walt Disney 13.7%2 Comcast 'A' 10.7%3 Time Warner 5.9%4 DirecTV 'A' 4.8%5 News Corp. 'A' 4.6%6 Viacom 'B' 4.0%7 Time Warner Cable 3.7%8 Naspers 3.2%9 CBS 'B' 3.1%10 Pearson 2.7%Source: MSCI, HSBC, Thomas Reuters Datastream





40

60

80

100

120

140

00 02 04 06 08 10 12Media rel. to MSCI ACWI


12-month-forward PE

515

25354555

6575

00 02 04 06 08 10 12MSCI ACWI Media



-4

-2

0

2

4

6

8

00 02 04 06 08 10 12Media Trend


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MSCI ACWI Pharmaceuticals, biotechnology & life sciencesIndustry group key statistics

Market capitalisation (USDbn) 1822 % of MSCI ACWI 6.8% % of Health Care 75.1%


Correlation with MSCI ACWI (5yr) 0.76 Beta to MSCI ACWI (1yr, x) 0.47 Correlation with US ISM (5yr) 0.15 Current 12M-forward EPS growth forecast (y-o-y) 3% Current 12M-forward PE 11.7x Current PB 2.8x Current 12M-forward forecast ROE 20.6% Source: HSBC, MSCI, IBES, Thomas Reuters Datastream

Largest 10 stocks


1 Johnson & Johnson 9.6%2 Pfizer 9.3%3 Novartis 'R' 8.2%4 Roche Holding 6.6%5 GlaxoSmithKline 6.3%6 Merck & Co. 6.1%7 Abbott Laboratories 5.4%8 Sanofi 4.8%9 AstraZeneca 3.0%10 Bristol Myers Squibb 3.0%Source: HSBC, MSCI, Thomas Reuters Datastream





80

100

120

140

160

180

00 02 04 06 08 10 12Pharma biotech & life sci rel. to MSCI ACWI


12-month-forward PE

5

10

15

20

25

30

35

00 02 04 06 08 10 12MSCI ACWI Pharma biotech & life sci



2

3

4

5

6

7

8

00 02 04 06 08 10 12Pharma biotech & life sci Trend


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MSCI ACWI Real estateIndustry group key statistics




Largest 10 stocks


1 Simon Property Group 5.4%2 American Tower 3.6%3 Mitsubishi Estate 3.1%4 Westfield Group 2.4%5 Sun Hung Kai Properties 2.4%6 Brookfield Asset Management Ltd. 2.4%7 Public Storage 2.3%8 Annaly Capital Management 2.3%9 Cheung Kong Holdings 2.2%10 Mitsui Fudosan 2.1%Source: HSBC, MSCI, Thomas Reuters Datastream





80

100

120

140

160

180

200

00 02 04 06 08 10 12Real Estate rel. to MSCI ACWI


12-month-forward PE

5

10

15

20

25

30

00 02 04 06 08 10 12MSCI ACWI Real Estate



2

4

6

8

10

12

00 02 04 06 08 10 12Real Estate Trend


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MSCI ACWI RetailingIndustry group key statistics




Largest 10 stocks


1 Amazon.com 10.7%2 Home Depot 9.3%3 Target 5.0%4 Priceline.com 4.5%5 Lowe's Companies 4.5%6 Hennes & Mauritz 'B' 4.4%7 TJX Cos. 4.0%8 Inditex 3.0%9 Macy's 2.2%10 Bed Bath & Beyond 2.2%Source: HSBC, MSCI, Thomas Reuters Datastream





60

80

100

120

140

00 02 04 06 08 10 12Retailing rel. to MSC I ACWI


12-month-forward PE

510152025303540

00 02 04 06 08 10 12MSCI ACWI Retailing



23456789

10

00 02 04 06 08 10 12Retailing Trend


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MSCI ACWI Semiconductors & semiconductor equipmentIndustry group key statistics

Market capitalisation (USDbn) 622 % of MSCI ACWI 2.3% % of Information Technology 18.2%


Correlation with MSCI ACWI (5yr) 0.85 Beta to MSCI ACWI (1yr, x) 1.07 Correlation with US ISM (5yr) 0.36 Current 12M-forward EPS growth forecast (y-o-y) 20% Current 12M-forward PE 11.3x Current PB 2.4x Current 12M-forward forecast ROE 17.4% Source: MSCI, HSBC, IBES, Thomas Reuters Datastream

Largest 10 stocks


1 Samsung Electronics 26.3%2 Intel 22.3%3 Taiwan Semiconductor Manufacturing 10.6%4 Texas Instruments 4.5%5 Broadcom 'A' 2.8%6 ASML Holding 2.6%7 Applied Materials 2.3%8 Analog Devices 1.7%9 Altera 1.7%10 ARM Holdings 1.7%Source: MSCI, HSBC, Thomas Reuters Datastream



MSCI ACWI 2.3% MSCI Developed Market 1.5% MSCI Emerging Market 7.2% MSCI Europe 0.6% MSCI Europe ex UK 0.7% MSCI Asia ex JP 10.3% MSCI LatAm 0.0% MSCI EMEA 0.0% MSCI USA 2.3% MSCI Japan 0.7% MSCI UK 0.5% MSCI Canada 0.0% MSCI Australia 0.0% MSCI Switzerland 0.0% MSCI Germany 0.9% MSCI China 0.3% Source: MSCI, HSBC, Thomas Reuters Datastream


40

60

80

100

120

140

160

00 02 04 06 08 10 12Semi & Semi equip. rel. to MSCI ACWI

Source: MSCI, HSBC, Thomas Reuters Datastream

12-month-forward PE

0

10

20

30

40

50

00 02 04 06 08 10 12MSCI ACWI Semi & Semi equip.

Source: MSCI, HSBC, IBES, Thomson Reuters Datastream


-202468

101214

00 02 04 06 08 10 12Semi & Semi equip. Trend


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MSCI ACWI Software & servicesIndustry group key statistics




Largest 10 stocks


1 Microsoft 16.8%2 International Business Machines 14.2%3 Google 'A' 10.0%4 Oracle 7.5%5 Visa 'A' 4.4%6 SAP (XET) 3.7%7 eBay 3.5%8 Mastercard 3.0%9 Accenture 2.5%10 Tencent Holdings 2.2%Source: MSCI, HSBC, Thomas Reuters Datastream





20

40

60

80

100

120

00 02 04 06 08 10 12Software & Serv ices rel. to MSCI ACWI


12-month-forward PE

515

25354555

6575

00 02 04 06 08 10 12MSCI ACWI Software & Serv ices



-101234567

00 02 04 06 08 10 12Softw are & Serv ices Trend


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MSCI ACWI Technology hardware & equipmentIndustry group key statistics




Largest 10 stocks


1 Apple 38.6%2 Qualcomm 7.2%3 Cisco Systems 6.8%4 Canon 4.0%5 EMC 4.0%6 Hewlett-Packard 2.6%7 Ericsson 'B' 2.1%8 Hitachi 2.1%9 Hon Hai Precision Industry 2.0%10 Corning 1.5%Source: MSCI, HSBC, Thomas Reuters Datastream





20

40

60

80

100

120

140

00 02 04 06 08 10 12Tech. Hardware & Equipment rel. to MSCI ACWI


12-month-forward PE

5

15

25

35

45

55

65

00 02 04 06 08 10 12MSCI ACWI Tech. Hardw are & Equipment



-2

0

2

4

6

8

00 02 04 06 08 10 12Tech. Hardw are & Equipment Trend


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MSCI ACWI Telecommunication servicesIndustry group key statistics

Market capitalisation (USDbn) 1349 % of MSCI ACWI 5.0% % of Telecommunication Services 100%



Largest 10 stocks


1 AT&T 15.4%2 Vodafone Group 10.2%3 Verizon Communications 9.2%4 China Mobile 4.1%5 AMX 'L' 4.0%6 Telefonica 3.7%7 Telstra 3.4%8 Nippon Telegraph And Telephone 2.7%9 Deutsche Telekom (XET) 2.3%10 BCE 2.2%Source: MSCI, HSBC, Thomas Reuters Datastream





40

60

80

100

120

00 02 04 06 08 10 12Telecom Serv ices rel. to MSCI ACWI


12-month-forward PE

5

15

25

35

45

55

00 02 04 06 08 10 12MSCI ACWI Telecom Serv ices



-2-101234567

00 02 04 06 08 10 12Telecom Serv ices Trend


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MSCI ACWI TransportationIndustry group key statistics




Largest 10 stocks


1 United Parcel Service 9.9%2 Union Pacific 8.7%3 Canadian National RY. 5.8%4 East Japan Railway 4.2%5 FedEx 4.1%6 Norfolk Southern 3.9%7 CSX 3.7%8 Central Japan Railway 2.8%9 Deutsche Post (XET) 2.5%10 AP Moller - Maersk 2.4%Source: MSCI, HSBC, Thomas Reuters Datastream





80

100

120

140

160

180

200

00 02 04 06 08 10 12Transportation rel. to MSCI ACWI


12-month-forward PE

5

10

15

20

25

30

00 02 04 06 08 10 12MSCI ACWI Transportation



02468

101214

00 02 04 06 08 10 12Transportation Trend


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MSCI ACWI UtilitiesIndustry group key statistics

Market capitalisation (USDbn) 1017 % of MSCI ACWI 3.8% % of Utilities 100%



Largest 10 stocks


1 Southern 4.1%2 E On (XET) 3.7%3 National Grid 3.3%4 Exelon 3.1%5 Duke Energy 3.0%6 GDF Suez 3.0%7 Dominion Resources 2.9%8 Nextera Energy 2.8%9 Centrica 2.5%10 SSE 2.0%Source: MSCI, HSBC, Thomas Reuters Datastream





80100120140160180200220

00 02 04 06 08 10 12Utilities rel. to MSCI ACWI


12-month-forward PE

5

10

15

20

25

30

00 02 04 06 08 10 12MSCI ACWI Utilities



2

4

6

8

10

12

00 02 04 06 08 10 12Utilities Trend


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Notes

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Notes

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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: Chris Georgs, Garry Evans.

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.

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 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 5 percentage points over the next 12 months (or 10 percentage points 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 5 percentage points over the next 12 months (or 10 percentage points 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.

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*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 month's average of the daily 365-day moving average volatilities. In order to avoid misleadingly frequent changes in rating, however, volatility has to move 2.5 percentage points past the 40% benchmark in either direction for a stock's status to change.

Rating distribution for long-term investment opportunities As of 24 July 2012, the distribution of all ratings published is as follows: Overweight (Buy) 50% (27% of these provided with Investment Banking Services) Neutral (Hold) 37% (26% of these provided with Investment Banking Services) Underweight (Sell) 13% (18% 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 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 This report is dated as at 29 July 2012. 2 All market data included in this report are dated as at close 15 June 2012, unless otherwise indicated in the report. 3 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 Resear

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