hsbc nutshell-a global guide to equity · pdf filethe nutshell guides have been compiled by...

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 and

valuations

HSBC NutshellA global guide to equity sectors

Global Equity Research

Multi-sector

July 2012

Chris Georgs

Global Head of Equity Research

HSBC Bank plc

+44 20 7991 6781

[email protected]

Disclosures and Disclaimer This report must be read with the disclosures and analyst

certifications 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

http://www.hsbcnet.com/nutshell

http://www.hsbcnet.com/nutshell/latin-america.html

http://www.hsbcnet.com/nutshell/emea.html

http://www.hsbcnet.com/nutshell/asia-pacific.html

mailto:[email protected]

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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 HSBC’s 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)

0

100

200

300

400

500

88 90 92 94 96 98 00 02 04 06 08 10

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.

mailto:[email protected]

https://www.research.hsbc.com/midas/Res/RDV?p=pdf&key=XFjL7Bd0H7&n=336914.HTM

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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 Japan’s

market cap of USD3.3trn). As more emerging market companies list in the coming years, foreign access to

domestic markets such as China’s 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 Nestlé 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 Japan’s 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


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

0.0

0.2

0.4

0.6

0.8

1.0

90 92 94 96 98 00 02 04 06 08 10 12

Av erage

010203040506070

8090

07 08 09 10 11 12

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

0.6

0.8

1.0

1.2

1.4

1.6

88 90 92 94 96 98 00 02 04 06 08 10 12

12M Trail EPS (Log) Trend

0%

5%

10%

15%

20%

EMEA

LatA

m

EM

Asia

-ex-

JP

Japa

n

AC W

orld

DM

Euro

pe

USA

Euro

pe E

x U

K

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

-40

-20

0

20

40

04 05 06 07 08 09 10 11 12

-60

-40

-20

0

20

40

60

Momentum MSCI AC World Index YoY (RHS)

%%

-30

-20

-10

0

10

20

30

04 05 06 07 08 09 10 11 12

-60

-40

-20

0

20

40

60

MSCI ACWI EPS Gr MSCI ACWI YoY (RHS)

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

102030405060708090

04 05 06 07 08 09 10 11 12

-60

-40

-20

0

20

40

60

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 12

Recommendation consensus score (RCS)Av erage±2SD

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, Europe’s 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 11

EY 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

0

100

200

300

400

500

600

700

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 12

MSCI 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 -1.5

Source: 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

0

50

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

19


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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

80

90

100

110

120

130

140

150

00 02 04 06 08 10 12

Automobiles & 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 12

MSCI ACWI Automobiles & Components


Trailing EPS versus trend

-10

-5

0

5

10

15

20

00 02 04 06 08 10 12

Automobiles & Components T rend


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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%



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: HSBC, MSCI, Thomas Reuters Datastream


60

80

100

120

140

160

00 02 04 06 08 10 12

Banks rel. to MSCI ACWI


12-month-forward PE

5

10

15

20

25

30

00 02 04 06 08 10 12

MSCI ACWI Banks



2

4

6

8

10

12

14

16

00 02 04 06 08 10 12

Banks 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%








80

90

100

110

120

130

140

00 02 04 06 08 10 12

Capital Goods rel. to MSCI ACWI


12-month-forward PE

5

10

15

20

25

30

00 02 04 06 08 10 12

MSCI ACWI Capital Goods



2

4

6

8

10

12

14

00 02 04 06 08 10 12

Capital 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%








70

80

90

100

110

120

130

140

00 02 04 06 08 10 12

Comm. & prof. serv ices rel. to MSCI ACWI


12-month-forward PE

5

10

15

20

25

30

00 02 04 06 08 10 12

MSCI ACWI Comm. & prof. serv ices



2

3

4

5

6

7

00 02 04 06 08 10 12

Comm. & 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%



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%








60

70

80

90

100

110

00 02 04 06 08 10 12

Cons. Durables & Apparel rel. to MSCI ACWI


12-month-forward PE

5

10

15

20

25

30

35

00 02 04 06 08 10 12

MSCI ACWI Cons. Durables & Apparel



-2

0

2

4

6

8

10

00 02 04 06 08 10 12

Cons. 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%








80

100

120

140

160

180

200

00 02 04 06 08 10 12

Consumer Serv ices rel. to MSCI ACWI


12-month-forward PE

5

10

15

20

25

30

00 02 04 06 08 10 12

MSCI ACWI Consumer Serv ices



2

3

4

56

7

8

9

10

00 02 04 06 08 10 12

Consumer 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%








40

60

80

100

120

140

160

00 02 04 06 08 10 12

Div ersified Financials rel. to MSCI ACWI


12-month-forward PE

5

10

15

20

25

30

00 02 04 06 08 10 12

MSCI ACWI Div ersified Financials



-15

-10

-5

0

5

10

15

20

00 02 04 06 08 10 12

Div 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%








70

100130

160

190

220

250280

310

00 02 04 06 08 10 12

Energy rel. to MSCI ACWI


12-month-forward PE

5

10

15

20

25

30

00 02 04 06 08 10 12

MSCI ACWI Energy



0

5

10

15

20

25

30

35

00 02 04 06 08 10 12

Energy 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%








80

90

100

110

120

130

140

150

00 02 04 06 08 10 12

Food & Stap. Retailing rel. to MSCI ACWI


12-month-forward PE

5

10

15

20

25

30

00 02 04 06 08 10 12

MSCI ACWI Food & Stap. Retailing



0

1

2

3

4

5

6

7

00 02 04 06 08 10 12

Food & 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%








70

100130

160

190

220

250280

310

00 02 04 06 08 10 12

Food Bev . & Tobacco rel. to MSCI ACWI


12-month-forward PE

5

10

15

20

25

30

00 02 04 06 08 10 12

MSCI ACWI Food Bev . & T obacco



2

4

6

8

10

12

00 02 04 06 08 10 12

Food 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%








80

120

160

200

240

280

00 02 04 06 08 10 12

Health Care Equip. & Serv . rel. to MSCI ACWI


12-month-forward PE

0

5

10

15

20

25

30

00 02 04 06 08 10 12

MSCI ACWI Health C are Equip. & Serv .



0

2

4

6

8

10

12

14

00 02 04 06 08 10 12

Health 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%








60

80100

120

140

160

180200

220

00 02 04 06 08 10 12

Household & Personal Products rel. to MSCI ACWI


12-month-forward PE

5

10

15

20

25

30

35

00 02 04 06 08 10 12

MSCI ACWI Household & Personal Products



0

2

4

6

8

10

00 02 04 06 08 10 12

Household & 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%








60

80

100

120

140

160

00 02 04 06 08 10 12

Insurance rel. to MSCI ACWI


12-month-forward PE

5

10

15

20

25

30

00 02 04 06 08 10 12

MSCI ACWI Insurance



-2

02

4

6

810

12

14

00 02 04 06 08 10 12

Insurance 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%








70

100

130

160

190

220

250

280

00 02 04 06 08 10 12

Materials rel. to MSCI ACWI


12-month-forward PE

5

10

15

20

25

30

00 02 04 06 08 10 12

MSCI ACWI Materials



0

5

10

15

20

25

00 02 04 06 08 10 12

Materials 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%








40

60

80

100

120

140

00 02 04 06 08 10 12

Media rel. to MSCI ACWI


12-month-forward PE

5

15

25

35

45

55

65

75

00 02 04 06 08 10 12

MSCI ACWI Media



-4

-2

0

2

4

6

8

00 02 04 06 08 10 12

Media 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%





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%








80

100

120

140

160

180

00 02 04 06 08 10 12

Pharma biotech & life sci rel. to MSCI ACWI


12-month-forward PE

5

10

15

20

25

30

35

00 02 04 06 08 10 12

MSCI ACWI Pharma biotech & life sci



2

3

4

5

6

7

8

00 02 04 06 08 10 12

Pharma 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%








80

100

120

140

160

180

200

00 02 04 06 08 10 12

Real Estate rel. to MSCI ACWI


12-month-forward PE

5

10

15

20

25

30

00 02 04 06 08 10 12

MSCI ACWI Real Estate



2

4

6

8

10

12

00 02 04 06 08 10 12

Real 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%








60

80

100

120

140

00 02 04 06 08 10 12

Retailing rel. to MSC I ACWI


12-month-forward PE

5

10

15

20

25

30

35

40

00 02 04 06 08 10 12

MSCI ACWI Retailing



2

3

4

56

7

8

9

10

00 02 04 06 08 10 12

Retailing 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%




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%








40

60

80

100

120

140

160

00 02 04 06 08 10 12

Semi & Semi equip. rel. to MSCI ACWI


12-month-forward PE

0

10

20

30

40

50

00 02 04 06 08 10 12

MSCI ACWI Semi & Semi equip.

Source: MSCI, HSBC, IBES, Thomson Reuters Datastream


-2

0

2

46

8

10

12

14

00 02 04 06 08 10 12

Semi & 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%








20

40

60

80

100

120

00 02 04 06 08 10 12

Software & Serv ices rel. to MSCI ACWI


12-month-forward PE

5

15

25

35

45

55

65

75

00 02 04 06 08 10 12

MSCI ACWI Software & Serv ices



-1

0

1

23

4

5

6

7

00 02 04 06 08 10 12

Softw are & Serv ices Trend


40


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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%








20

40

60

80

100

120

140

00 02 04 06 08 10 12

Tech. Hardware & Equipment rel. to MSCI ACWI


12-month-forward PE

5

15

25

35

45

55

65

00 02 04 06 08 10 12

MSCI ACWI Tech. Hardw are & Equipment



-2

0

2

4

6

8

00 02 04 06 08 10 12

Tech. Hardw are & Equipment Trend


41


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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%








40

60

80

100

120

00 02 04 06 08 10 12

Telecom Serv ices rel. to MSCI ACWI


12-month-forward PE

5

15

25

35

45

55

00 02 04 06 08 10 12

MSCI ACWI Telecom Serv ices



-2-101234567

00 02 04 06 08 10 12

Telecom 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%








80

100

120

140

160

180

200

00 02 04 06 08 10 12

Transportation rel. to MSCI ACWI


12-month-forward PE

5

10

15

20

25

30

00 02 04 06 08 10 12

MSCI ACWI Transportation



0

2

4

6

8

10

12

14

00 02 04 06 08 10 12

Transportation 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%








80

100

120

140

160

180

200

220

00 02 04 06 08 10 12

Utilities rel. to MSCI ACWI


12-month-forward PE

5

10

15

20

25

30

00 02 04 06 08 10 12

MSCI ACWI Utilities



2

4

6

8

10

12

00 02 04 06 08 10 12

Utilities Trend


44


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Notes

45


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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 stock’s 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 Research businesses to ensure that any confidential and/or price sensitive information is handled in an appropriate manner.

MSCI Disclaimer The MSCI sourced information is the exclusive property of MSCI Inc. (MSCI). Without prior written permission of MSCI, this information and any other MSCI intellectual property may not be reproduced, redisseminated or used to create any financial products, including any indices. This information is provided on an “as is” basis. The user assumes the entire risk of any use made of this information. MSCI, its affiliates and any third party involved in, or related to, computing or compiling the information hereby expressly disclaim all warranties of originality, accuracy, completeness, merchantability or fitness for a particular purpose with respect to any of this information. Without limiting any of the foregoing, in no event shall MSCI, any of its affiliates or any third party involved in, or related to, computing or compiling the information have any liability for any damages of any kind. MSCI and MSCI indexes are service marks of MSCI and its affiliates.

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Disclaimer * Legal entities as at 12 June 2012 ‘UAE’ HSBC Bank Middle East Limited, Dubai; ‘HK’ The Hongkong and Shanghai Banking Corporation Limited, Hong Kong; ‘TW’ HSBC Securities (Taiwan) Corporation Limited; 'CA' HSBC Bank Canada, Toronto; HSBC Bank, Paris Branch; HSBC France; ‘DE’ HSBC Trinkaus & Burkhardt AG, Düsseldorf; 000 HSBC Bank (RR), Moscow; ‘IN’ HSBC Securities and Capital Markets (India) Private Limited, Mumbai; ‘JP’ HSBC Securities (Japan) Limited, Tokyo; ‘EG’ HSBC Securities Egypt SAE, Cairo; ‘CN’ HSBC Investment Bank Asia Limited, Beijing Representative Office; The Hongkong and Shanghai Banking Corporation Limited, Singapore Branch; The Hongkong and Shanghai Banking Corporation Limited, Seoul Securities Branch; The Hongkong and Shanghai Banking Corporation Limited, Seoul Branch; HSBC Securities (South Africa) (Pty) Ltd, Johannesburg; ‘GR’ HSBC Securities SA, Athens; HSBC Bank plc, London, Madrid, Milan, Stockholm, Tel Aviv; ‘US’ HSBC Securities (USA) Inc, New York; HSBC Yatirim Menkul Degerler AS, Istanbul; HSBC México, SA, Institución de Banca Múltiple, Grupo Financiero HSBC; HSBC Bank Brasil SA – Banco Múltiplo; HSBC Bank Australia Limited; HSBC Bank Argentina SA; HSBC Saudi Arabia Limited; The Hongkong and Shanghai Banking Corporation Limited, New Zealand Branch incorporated in Hong Kong SAR

Issuer of report HSBC Bank plc 8 Canada Square London, E14 5HQ, United Kingdom

Telephone: +44 20 7991 8888

Fax: +44 20 7992 4880 Website: www.research.hsbc.com

In the UK this document has been issued and approved by HSBC Bank plc (“HSBC”) for the information of its Clients (as defined in the Rules of FSA) and those of its affiliates only. It is not intended for Retail Clients in the UK. If this research is received by a customer of an affiliate of HSBC, its provision to the recipient is subject to the terms of business in place between the recipient and such affiliate. HSBC Securities (USA) Inc. accepts responsibility for the content of this research report prepared by its non-US foreign affiliate. All U.S. persons receiving and/or accessing this report and wishing to effect transactions in any security discussed herein should do so with HSBC Securities (USA) Inc. in the United States and not with its non-US foreign affiliate, the issuer of this report. In Singapore, this publication is distributed by The Hongkong and Shanghai Banking Corporation Limited, Singapore Branch for the general information of institutional investors or other persons specified in Sections 274 and 304 of the Securities and Futures Act (Chapter 289) (“SFA”) and accredited investors and other persons in accordance with the conditions specified in Sections 275 and 305 of the SFA. This publication is not a prospectus as defined in the SFA. It may not be further distributed in whole or in part for any purpose. The Hongkong and Shanghai Banking Corporation Limited Singapore Branch is regulated by the Monetary Authority of Singapore. Recipients in Singapore should contact a "Hongkong and Shanghai Banking Corporation Limited, Singapore Branch" representative in respect of any matters arising from, or in connection with this report. In Australia, this publication has been distributed by The Hongkong and Shanghai Banking Corporation Limited (ABN 65 117 925 970, AFSL 301737) for the general information of its “wholesale” customers (as defined in the Corporations Act 2001). Where distributed to retail customers, this research is distributed by HSBC Bank Australia Limited (AFSL No. 232595). These respective entities make no representations that the products or services mentioned in this document are available to persons in Australia or are necessarily suitable for any particular person or appropriate in accordance with local law. No consideration has been given to the particular investment objectives, financial situation or particular needs of any recipient. This publication has been distributed in Japan by HSBC Securities (Japan) Limited. It may not be further distributed, in whole or in part, for any purpose. In Hong Kong, this document has been distributed by The Hongkong and Shanghai Banking Corporation Limited in the conduct of its Hong Kong regulated business for the information of its institutional and professional customers; it is not intended for and should not be distributed to retail customers in Hong Kong. The Hongkong and Shanghai Banking Corporation Limited makes no representations that the products or services mentioned in this document are available to persons in Hong Kong or are necessarily suitable for any particular person or appropriate in accordance with local law. All inquiries by such recipients must be directed to The Hongkong and Shanghai Banking Corporation Limited. In Korea, this publication is distributed by The Hongkong and Shanghai Banking Corporation Limited, Seoul Securities Branch ("HBAP SLS") for the general information of professional investors specified in Article 9 of the Financial Investment Services and Capital Markets Act (“FSCMA”). This publication is not a prospectus as defined in the FSCMA. It may not be further distributed in whole or in part for any purpose. HBAP SLS is regulated by the Financial Services Commission and the Financial Supervisory Service of Korea. This publication is distributed in New Zealand by The Hongkong and Shanghai Banking Corporation Limited, New Zealand Branch incorporated in Hong Kong SAR. This document is not and should not be construed as an offer to sell or the solicitation of an offer to purchase or subscribe for any investment. HSBC has based this document on information obtained from sources it believes to be reliable but which it has not independently verified; HSBC makes no guarantee, representation or warranty and accepts no responsibility or liability as to its accuracy or completeness. The opinions contained within the report are based upon publicly available information at the time of publication and are subject to change without notice. Nothing herein excludes or restricts any duty or liability to a customer which HSBC has under the Financial Services and Markets Act 2000 or under the Rules of FSA. A recipient who chooses to deal with any person who is not a representative of HSBC in the UK will not enjoy the protections afforded by the UK regulatory regime. Past performance is not necessarily a guide to future performance. The value of any investment or income may go down as well as up and you may not get back the full amount invested. Where an investment is denominated in a currency other than the local currency of the recipient of the research report, changes in the exchange rates may have an adverse effect on the value, price or income of that investment. In case of investments for which there is no recognised market it may be difficult for investors to sell their investments or to obtain reliable information about its value or the extent of the risk to which it is exposed. HSBC Bank plc is registered in England No 14259, is authorised and regulated by the Financial Services Authority and is a member of the London Stock Exchange. © Copyright 2012, HSBC Bank plc, ALL RIGHTS RESERVED. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, on any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the prior written permission of HSBC Bank plc. MICA (P) 038/04/2012, MICA (P) 063/04/2012 and MICA (P) 206/01/2012

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 and

valuations

HSBC NutshellA global guide to equity sectors

Global Equity Research

Multi-sector

July 2012

Chris Georgs

Global Head of Equity Research

HSBC Bank plc

+44 20 7991 6781

[email protected]

Disclosures and Disclaimer This report must be read with the disclosures and analyst

certifications in the Disclosure appendix, and with the Disclaimer, which forms part of it

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