April 2018

Asian Fixed Income Guide

1

Contents

Why invest in Asian bonds? 2

Asian fixed income markets 3

Reasons for considering Asian USD credit 4

Reasons for considering Asian currency bonds 5

Markets in focus

China 6

India 8

Indonesia 9

AMG’s Asian fixed income capability 10

HSBC Global Asset Management in Asian fixed income 11

Key risks 12

HSBC Global Asset Management’s Asian Fixed Income Capability

USD82 billion in Asian fixed income assets, managed by award-winning investment teams based in Asia

Awarded Best of the Best Award by Asia Asset Management in 2008-2010, 2012, 2013, 2015-2017

Long track record in Asian fixed income dating back to 1996

Embedded into the strong compliance and governance framework of HSBC Group

2

Why invest in Asian bonds?

Notes:

1. Source: CEIC, HSBC Global Asset Management, as of December 2017

2. Source: IMF World Economic Outlook, April 2018; the weights of Asia in global and emerging market indices are based on Barclays Global Aggregate Index

and JP Morgan CEMBI Broad Div as of 30 April 2018

3. Any forecast, projection or target contained in this presentation is for information purposes only and is not guaranteed in any way. HSBC accepts no liability

for failure to meet such forecasts, projections or targets. For illustrative purposes only

Asia

5.9%

North

America

2.2%

Europe

1.8%

Latin America

1.4%

GDP forecast Asia continues to be the fastest growing major

region of the world. It is forecasted to grow at

around 6% in 2018, while growth in the rest of

the world will barely touch 2%. Not only have

Asian economies shown stronger balance sheet

as a result of their lower debt to GDP ratios than

most developed economies, the recent foreign

capital inflows and FX appreciation have

enabled many Asian countries to accumulate FX

reserves in 2017

Despite its rising global influence, Asia remains

considerably underrepresented in both

developed and emerging bond indices For

example, Asia accounts for around 4% and 35%

of Barclays Global Aggregate Index and JP

Morgan Emerging Market Bond Index

respectively2

-40

-30

-20

-10

0

10

20

30

40

50

HK CN IN ID KR MY PH SG TW TH

% change in FX reserves

End-2017 vs. Jun-2013 End-2017 vs. end-2015 End-2017 vs. end-2016

Rest of the World Asia

Asia accounts for about

47% of the world’s

population

Asia accounts for about

35% of the world’s

GDP

Asia accounts for less

than 3% of Barclays

Global Aggregate

Asia is underrepresented in major Global Bond Indices2

Healthy FX reserves in Asian countries1

3

Asian fixed income markets

A closer look

The Asian Fixed Income market can be split broadly into two categories:

1) Asian USD credit market

2) Local currency bond market

The Asian USD credit market is approximately USD900 billion in market size and is made up of a diverse

geography of countries, and categorized by investment grade and high yield bonds. It is freely available to

global investors. The following chart shows the breakdown of the JPMorgan Asia Credit Index (JACI),

which is one of the most comprehensive and inclusive indices available

The Asian Local currency bond market is over USD13 trillion in market size and over half of this is made up

of China alone, a market which has opened up significantly in the last few years

(USDbn)

Asian local currency bond markets2Asian USD credit markets1

(USDbn)

Notes:

1. Source: JPMorgan Asia Credit Index, as of 29 March 2018

2. Source: AsiaBondsOnline; market sizes as of 29 December 2017, (India market size as of June 2017, taken from CEIC); Yield numbers as of 2 May

2018

3. Asian local bond index as defined in Markit, as of 29 March 2018

Data shown is for illustrative purposes only and does not constitute any investment recommendation to buy or sell in the above-mentioned countries and

asset classes

Asian IG Asian HY

Yield (%) 4.43 7.10

Duration 4.99 3.56

No. of securities 970 427

Asian local

bond index3

Yield (%) 3.77

Duration 6.22

No. of securities 1339

0%

1%

2%

3%

4%

5%

6%

7%

8%

0

50

100

150

200

250

300

350

400

450

500

Chin

a

Indonesia

Ko

rea

Hong K

on

g

India

Ph

ilippin

es

Ma

laysia

Sin

ga

pore

Th

aila

nd

Sri L

anka

Pa

kis

tan

Ma

cau

Mo

ngolia

Size of Asian USD credit market (LHS) Yield (RHS)

0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

9,000

10,000

Chin

a

Ko

rea

India

Thaila

nd

Ma

laysia

Sin

ga

pore

Indonesia

Ph

ilippin

es

Size of Asian local currency bond market (LHS)

10-year Government Yields (RHS)

4

Reasons for considering Asian USD credit

Healthy macro conditions. Solid external balances should help keep Asian currencies more stable and

improve Asian institutions’ ability to pay debts denominated in foreign currencies

Solid credit profile on the corporate level. Default rate for Asian hard currency bonds is expected to remain

low in 2018

Good diversification for global credit portfolios. Asian fixed income has registered low volatility, and low

correlation with other asset classes

Competitive yields relative to developed markets. Despite stronger credit fundamentals in the region, Asian

credits are still trading at a yield premium over comparable US and Euro credits. This should offer better

value for Asian bond investors

Strong market demand with limited increase in supply. Net supply of Asian credit is expected to be at the

lowest level since 2012 and refinancing risk is manageable with improved access to alternative funding

channels, adequate liquidity and weak capex needs

Notes:

Source: 1. JP Morgan as of 16 April 2018; 2. Bloomberg, HSBC Global Asset Management, data as of February 2018; 3. JP Morgan as of April 2018

Any forecast, projection or target contained in this presentation is for information purposes only and is not guaranteed in any way. HSBC accepts no liability for any

failure to meet such forecasts, projections or targets. For illustrative purpose only

Low default rate3

Asset class Asia IG Asia HY

Asian

Composite

CEMBI IG 0.03 0.11 0.11

CEMBI HY 0.21 0.45 0.37

US IG Corp 0.27 0.37 0.38

US HY Corp 0.19 0.34 0.34

Euro IG Corp 0.33 0.40 0.43

Euro HY Corp 0.32 0.44 0.46

Low correlation to other asset classes2

Yield to maturity, % Duration, years Yield to maturity, % Duration, years

Competitive yields relative to developed markets1

4.073.82

1.29

4.374.63

4.10

0.99

4.59

4.24

7.38

5.28 5.26

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

0.0

1.0

2.0

3.0

4.0

5.0

Asia IG Corp(A3)

US IG Corp(A3)

Euro IG Corp(A3)

EM IG Corp(Baa1)

5Y average Current Effective duration - RHS

7.30 7.08

4.39

7.327.27

6.62

3.31

6.66

3.48

3.863.93

4.17

3.0

3.2

3.4

3.6

3.8

4.0

4.2

4.4

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

Asia HY Corp(B1)

US HY Corp(BB)

Euro HY Corp(Ba3)

EM HY Corp(Ba3)

5Y average Current Effective duration - RHS

0%

2%

4%

6%

8%

10%

12%

14%

2012 2013 2014 2015 2016 2017 2018F

Asia EM Europe Latin America

MENA EM (total) US

5

Reasons for considering Asian currency bonds

Source:

1. CEIC, Bloomberg, HSBC Global Asset Management, data as of December 2017;

2. Source: Bloomberg, as of 26 April 2018, S&P, Moody's; (S) - Stable outlook, (P) - Positive outlook, (N) - Negative outlook

Any forecast, projection, or target contained in this presentation is for information purpose only and is not guaranteed in any way. HSBC accepts no liability for any

failure to meet such forecasts, projections or targets. For illustrative purpose only.

-150-100-50

050

100150200250300350400

CN HK IN ID JP KR MY PH SG TW TH

% of GDP International Investment Position (IIP)

Foreign assets Foreign liabilities Net International Investment Position (IIP)

Sovereign ratings for major countries2

Credit rating1 Major Asia Major non-Asia EM G7

AAA Singapore Aaa(S)/AAA(S) Canada Aaa(S)/AAA(S)

Germany Aaa(S)/AAA(S)

AA Hong Kong Aa2(S)/AA+(S) Kuwait Aa2(S)/AA(S) United Kingdom Aa2(S)/AA(N)

Korea Aa2(S)/AA(S) Qatar Aa3(N)/AA-(N) France Aa2(S)/AA(S)

Taiwan Aa3(S)/AA-(S) United Arab Emirates Aa2(S)/NR United States Aaa(S)/AA+(S)

A China A1(S)/A+(S) Saudi Arabia A1(S)/A-(S) Japan A1(S)/A+(P)

Malaysia A3(S)/A-(S) Chile Aa3(N)/A+(S)

Israel A1(S)/A+(P)

BBB India Baa2(S)/BBB-(S) Peru A3(S)/BBB+(S) Italy Baa2(N)/BBB(S)

Indonesia Baa2(S)/BBB-(S) Colombia Baa2(N)/BBB-(S)

Philippines Baa2(S)/BBB(S) Mexico A3(S)/BBB+(S)

Thailand Baa1(S)/BBB+(S)

BB Russia Ba1(P)/BBB-(S)

Brazil Ba2(S)/BB-(S)

Turkey Ba2(S)/BB(N)

South Africa Baa3(S)/BB(S)

B Nigeria B2(S)/B(S)

Argentina B2(P)/B+(S)

Strong Current account positions. Current account positions are strong for most Asian countries as backed

up by healthy FX reserves, which suggests potential for appreciation

Debt ratios are much lower. Many Asian countries are net creditor to the rest of the world with their external

debt to percentage of GDP ratios remain relatively stable

Underrepresentation in Emerging market indices. Despite accounting for over 60% of EM’s GDP, Asia’s

weight in the JP Morgan CEMBI Broad diversified index only accounts for 35%, which suggests that the

global investors are running a structural “short” in Asian markets

Increased likelihood of further rating upgrades. Some parts of the region are widely regarded as

“developed” with investment grade rating. As macro economic fundamentals improve in the region, further

rating upgrades are likely

Many Asian countries are net creditor to the rest of the world1

6

Markets in focus – China

Onshore Offshore

Where are the bonds traded? Mainland China Outside mainland China

Market size USD8,739 billion USD72 billion

Accessibility

Can be accessed by all onshore investors and

offshore investors with access rights or through

Bond Connect

Can be accessed by all offshore

investors

Notes:

1. Others include corporates, enterprise bonds etc

2. Source: Asianbondsonline, SIFMA, PBoC as of December 2017.

3. Bloomberg, as of 31 January 2018

Any forecast, projection or target contained in this presentation is for information purposes only and is not guaranteed in any way. HSBC Global Asset

Management accepts no liability for any failure to meet such

forecasts, projections or targets

For illustrative purposes only

Onshore and offshore RMB bonds

The onshore RMB bond market used to be largely closed to foreign investors, except those with certain

licenses and quotas. With Bond Connect launched in 2017, foreign investors are permitted to invest in the

China interbank bond market (CIBM) through mutual access arrangements in respect of trading, custody

and settlement

The offshore RMB bond market was developed in 2010 mainly as an easy way for non-Chinese investors to

gain exposure to RMB currency and interest rates

With the continued opening up of the onshore bond market, we expect the onshore and offshore bond

markets to become highly correlated

USD 39.2 trillion

USD 10.2trillion

USD 8.7 trillion

0 10 20 30 40 50

US

Japan

China

Onshore RMB bond market is the third largest in

the world2

0

100

200

300

400

1/14 7/14 1/15 7/15 1/16 7/16 1/17 7/17

Equities Bonds

Foreign ownership of Chinese assets is growing,

but from low levels relative to the size of the

market3

USD billion

Onshore Chinese bond market structure1

05

1015202530

Po

licy b

ank b

ill

Local gov't

bond

So

vere

ign

Industr

ials

Fin

ancia

ls

Utilit

ies

En

erg

y

Ma

teria

ls

Consum

er

Dis

cre

tio

nary

Oth

ers

% of Market cap

13%

37%

29%

11%

8% 2%

<1Y

1-3Y

3-5Y

5-7Y

7-10Y

>10Y

The onshore RMB bond market ranks third in the

world in terms of its size and is dominated by

central government and policy bank bonds

The market offers a wide range of maturities with

short-term bonds accounting for 50% of the bonds

outstanding%

7

Markets in focus – China (cont’d)

Source: HSBC Global Research, as of March 2018

Any forecast, projection or target contained in this document is for illustrative purpose only and is not guaranteed in any way. HSBC accepts no liability for

any failure to meet such forecasts, projections or targets.

Hypothetical analysis is for illustrative purpose only and should not be relied on as indication for future result

Reasons for considering RMB bonds

Higher yields compared with international markets of similar size or the same credit rating (A+ or A1)

Low historical volatility and correlation compared with other asset classes

CNY is less volatile than other currencies in general and has appreciated significantly against USD in 2017

Potential inclusion in global bond indices could lead to increased future investor demand

China 6.1%

US 34.9%

Eurozone 21.9%

Japan 16.5%

UK 5.4%

Canada 3.0%

Supranational2.1%Australia 1.6%

Korea 1.3%

Others 7.2%

China 0.6%

US 37.1%

Eurozone23.3%Japan 17.6%

UK 5.8%

Canada 3.2%

Supranational2.3%Australia 1.7%

Korea 1.4%

Others 7.0%

Change in composition of Global Aggregate Index after onshore bonds’ inclusion

Before inclusion After inclusion

Potential index inclusion to drive significant investor demand into Chinese markets

Index inclusion is expected to drive significant investor demand, given the significance and size of Chinese

equity and bond markets

In March 2018, Bloomberg announced inclusion of Chinese government and policy bank bonds into the

Bloomberg Barclays Global Aggregate Index

The inclusion will be phased in over a 20-month period beginning in April 2019, leading to an estimated inflow

of USD140 billion

The announcement will put pressure on Citi and JPMorgan, the other two major index providers, to include

onshore RMB bonds into their key indices

0.00.51.01.52.02.53.03.54.04.55.0

Chile Offshore ChinaOnshore China CzechRepublic

Slovenia Ireland Slovakia Israel Japan

10 year government bond yields of selected markets which are rated A+ or A1Yield (%)

Source: Bloomberg, data as of 10 April 2018

8

Markets in focus – India

Indian bond market

The Indian bond market has grown rapidly in the past few years. It is a large, well diversified and liquid

market that is dominated by government issuance.

The market can be broadly classified in three segments:

Government Securities comprising the Central and State Government securities and treasury bills

Public Sector Undertaking (PSU) bonds, generally treated as surrogates of sovereign paper, often due to the

comfort of Government ownership of the PSUs

Corporate securities comprising debentures/corporate bonds and commercial papers

Reasons for considering India bonds

Attractive yields - Indian government bond yields are attractive relative to emerging market peers, but

especially so against developed markets

Supportive macro environment – A number of effective measures have been put in place by RBI and the

government to help control inflation, and keep liquidity at neutral level. Current account deficit has narrowed

significantly thanks to the increased foreign direct investments

Greater accessibility – Recent reforms on the development of the onshore fixed income and currency

markets have facilitated market access to foreign investors. The reduction on withholding tax on interest

income of the Masala bonds also boosted investor demand. Announced in April 2018, the limit for FPI

investment in Government Securities has increased by 0.5% each year to 5.5% of outstanding stock of

securities in FY 2019 and 6% in FY 2020. All of these measures have helped widen the investor base and

increase inflows from foreign investments

Onshore Offshore

Where are the bonds traded? India Outside India

Currency INR Mainly USD

Market size USD1,193 billion1 USD57 billion2

Accessibility

Not freely accessible to foreign

investors, but can be accessed

through FPI (Foreign Portfolio Investor)

license

Limitations may apply once the

license is obtained

Can be accessed by all offshore

investors

These bonds can be hedged into

Rupee with non-deliverable

forwards (NDF)

Limited supply of offshore INR

bonds / Masala bonds

Notes:

1. HSBC Global Asset Management, as of September 2017; JPMorgan Asia Credit Index, as of 31 March 2018

2. JP Morgan Asia credit index as of 31 March 2018

3. Bloomberg, data as of 27 February 2018

Any forecast, projection or target contained in this presentation is for information purposes only and is not guaranteed in any way. HSBC Global Asset Management

accepts no liability for any failure to meet such forecasts, projections or targets. For illustrative purposes only

India 10Y bond yields are attractive

relative to its EM peers3

7.684

0

2

4

6

8

10

12

14

16

Nig

eria

Turk

ey

Bra

zil

India

Mexic

o

Russia

Indonesia

Colu

mbia

Ph

ilippin

es

Pe

ru

Chile

Rom

ania

Ma

laysia

Po

lan

d

Hungary

Th

aila

nd

Yield (%)

48.0

53.0

58.0

63.0

68.0

73.0

250

300

350

400

450

1/3

1/2

013

7/3

1/2

013

1/3

1/2

014

7/3

1/2

014

1/3

1/2

015

7/3

1/2

015

1/3

1/2

016

7/3

1/2

016

1/3

1/2

017

7/3

1/2

017

1/3

1/2

018

FX Reserves (LHS) INR/USD exchange rate (RHS)

Healthy FX reserves provide a reasonable cushion

against volatility3

USDbn

9

Markets in focus – Indonesia

Onshore Offshore

Where are the bonds traded? Indonesia Outside Indonesia

Currency IDR Mainly USD

Market Size USD184 billion1 USD88 billion2

Accessibility

Foreign investors can freely

access the local bond market.

There are no limitations on

foreign ownership

Can be accessed by all

offshore investors These bonds can be hedged into

Rupiah with non-deliverable

forwards (NDF)

Notes:

1. ABD, as of 30 December 2017

2. JP Morgan Asia credit index as of 31 March 2018

3. Bank of Indonesia, as of February 2018

Any forecast, projection or target contained in this presentation is for information purposes only and is not guaranteed in any way. HSBC Global Asset Management

accepts no liability for any failure to meet such forecasts, projections or targets. For illustrative purposes only

Indonesian bond market

The Indonesian bond market has steadily expanded with improving liquidity in the past few years and is

dominated by government issues

There are no restrictions on foreign investments in this market

Not only is Indonesia a fully rated investment grade country now, it also ranks third as an investment

destination in Asia

Reasons for considering Indonesian bonds

Positive market technicals – The market offers competitive yields, which attract steady capital inflows from

foreign investors in the long term. Moreover, recent domestic regulatory changes have led to increasing

demand from local pension funds and insurance companies

Attractive yields - Indonesian bond yields are attractive relative to emerging market peers as well as

developed markets. At the time of writing, the yield of the 10 year government bonds is over 6.5%

Constructive macro environment – Indonesia sovereign rating is steadily improving on the back of relatively

low leverage, current account improvement, and benign inflation. Meanwhile, the improvement in macro

fundamental provides better stability for the currency

0 20 40 60 80 100 120 140

1998

2008

Nov-17

FX Reserves (USD bn) Inflation (%)

Indonesia’s outlook and fundamentals

remain robust3

Indonesia’s foreign direct investments

are on the rise3

Indonesia’s economy is expected to grow at 5.1-5.5% yoy for

2018, following closely behind India and China. Both FX

reserves and inflation have improved significantly in the last

two decades since the Asian financial crisis.

Source: Ministry of Finance Indonesia, Republic of Indonesia Presentation

Book December 2017

Source: Ministry of Finance Indonesia, Republic of Indonesia Presentation

Book as of January 2018; FDI figures based on comparisons from Q416 to

Q417

8.9%

Trade &

Reparation

USD265.4m

Transportation

Warehouse, and

Telecommunication

USD1,208.3m

Leather Goods and

Footwear Industry

USD212m

Textile Industry

USD128.6m

Mining

USD1,169.6m

FDI by

Sectors

45.8%

432.0%

824.4%

189.6%

10

HSBC Global Asset Management

Asian Fixed Income capabilities

Asian Fixed Income - AUM of USD 82.3 billion

Pan Asian fixed income

Asian credit (IG and HY)

Asian local currencies

Single currency fixed income

Offshore RMB bonds

Onshore RMB bonds

Indian fixed income

Indonesian fixed income

HKD bonds

SGD bonds

Capability Launch date

Asia Credit 1996

Asia High Yield 2011

Asian Local Currencies 2011

Offshore RMB bonds 2011

Onshore RMB bonds 2008

India Fixed Income 2002

Indonesia Fixed Income 2010

HKD Bond 2004

SGD Bond 2005

Source: HSBC Global Asset Management, as of 31 March 2018

11

Experienced investment

teams with a strong track

record dating back to

1996 for Asian bonds

Strong global investment

platform across

geographies

A robust investment

process built on solid

proprietary research

Embedded into the strong

compliance and

governance framework of

the HSBC group

A well resourced, stable

and award winning team

Wide range of Asian fixed

income products, with

strong performance and

attractive returns

HSBC Global Asset Management

Over 20 years in managing Asian bonds

Source: HSBC Global Asset Management as at 31 December 2017.

Strong global investment platform and operations supports local investment teams

Hubs in the major fixed income markets

175 Fixed income investment

professionals

47 Credit analysts

11 Investment Strategists

USD192.9bn fixed income assets under

management

12

The value of investments and any income from them can go down as well as up and investors

may not get back the amount originally invested.

Exchange rate risk: Investing in assets denominated in a currency other than that of the investor’s

own currency perspective exposes the value of the investment to exchange rate fluctuations

Liquidity risk: Liquidity is a measure of how easily an investment can be converted to cash without a

loss of capital and/or income in the process. The value of assets may be significantly impacted by

liquidity risk during adverse market conditions

Emerging market risk: Emerging economies typically exhibit higher levels of investment risk. Markets

are not always well regulated or efficient and investments can be affected by reduced liquidity

Derivative risk: The use of derivatives instruments can involve risks different from, and in certain

cases greater than, the risks associated with more traditional assets. The value of derivative

contracts is dependent upon the performance of underlying assets. A small movement in the value

of the underlying assets can cause a large movement in the exposure and value of derivatives.

Unlike exchange traded derivatives, over-the-counter (OTC) derivatives have credit and legal risk

associated with the counterparty or the institution that facilitates the trade

Operational risk: The main risks are related to systems and process failures. Investment processes

are overseen by independent risk functions which are subject to independent audit and supervised

by regulators

Concentration risk: Funds with a narrow or concentrated investment strategy may experience higher

risk and return fluctuations and lower liquidity than funds with a broader portfolio

Interest rate risk: As interest rates rise debt securities will fall in value. The value of debt securities is

inversely proportional to interest rate movements

Derivative risk (leverage): The value of derivative contracts depends on the performance of an

underlying asset. A small movement in the value of the underlying can cause a large movement in

the value of the derivative. Over-the-counter (OTC) derivatives have credit risk associated with the

counterparty or institution facilitating the trade. Investing in derivatives involves leverage (sometimes

known as gearing). High degrees of leverage can present risks to sub-funds by magnifying the

impact of asset price or rate movements

Emerging market fixed income risk: Emerging economies typically exhibit higher levels of investment

risk. Markets are not always well regulated or efficient and investments can be affected by reduced

liquidity, a measure of how easily an investment can be converted to cash without a loss of capital,

and a higher risk of debt securities failing to meet their repayment obligations, known as default

High yield risk: Higher yielding debt securities characteristically bear greater credit risk than

investment grade and/or government securities

Contingent Convertible Security (CoCo) risk: Hybrid capital securities that absorb losses when the

capital of the issuer falls below a certain level. Under certain circumstances CoCos can be

converted into shares of the issuing company, potentially at a discounted price, or the principal

amount invested may be lost

Key Risks

13

Important information

The value of investments and the income from them can go down as well as up and investors may

not get back the amount originally invested. Past performance contained in this document is not a

reliable indicator of future performance whilst any forecasts, projections and simulations

contained herein should not be relied upon as an indication of future results. Where overseas

investments are held the rate of currency exchange may cause the value of such investments to

go down as well as up. Investments in emerging markets are by their nature higher risk and

potentially more volatile than those inherent in some established markets. Economies in Emerging

Markets generally are heavily dependent upon international trade and, accordingly, have been and

may continue to be affected adversely by trade barriers, exchange controls, managed adjustments

in relative currency values and other protectionist measures imposed or negotiated by the

countries with which they trade. These economies also have been and may continue to be affected

adversely by economic conditions in the countries in which they trade. Mutual fund investments

are subject to market risks, read all scheme related documents carefully.

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buy or sell investments. Some of the statements contained in this document may be considered forward

looking statements which provide current expectations or forecasts of future events. Such forward looking

statements are not guarantees of future performance or events and involve risks and uncertainties. Actual

results may differ materially from those described in such forward-looking statements as a result of

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