CEEMEA_EQUITY_CONVERSATIONS：PLAYING_THE_SECULAR_CONSUMER_THEME_IN_EM-2012-11-15.ppt

,equity strategy global emerging markets ceemea equity conversations playing the secular consumer theme in em 14 november 2012 john lomax* strategist,abc global research we think the em consumer will drive global growth for the foreseeable future secular consumer themes will outperform financials and consumer discretionary sectors are superior fundamental plays to staples with the emergence of an em middle class, the em consumer is rising rapidly. in “consumer in 2050: the rise of the em middle class”, karen ward and frederic neumann (15 october 2012) suggest that by 2050, em consumption could make up around 2/3 of global consumption compared with 1/3 today. they make projections for consumer spending by category out until 2050 and the main features of this are shown in the table on page 2. the methodology combines projections for income per capita, demographics,hsbc bank plc +44 20 7992 3712,,and changes in spending patterns.,ben laidler head of americas research hsbc securities (usa) inc +1 212 525 3460 herald van der linde* strategist the hongkong and shanghai banking corporation limited +852 2996 6575 .hk erwan rambourg* analyst the hongkong and shanghai banking corporation limited,this note attempts to take their broad predictions and distil these into country, sector and stock calls for ceemea, asia and latam, as well as some global winners. perhaps the most important conclusion of the report is that we need to put the consumer at the centre of our thinking about medium-term equity positioning. given low growth in the developed world, the em consumer will be driving the bulk of what growth there is to be had in the global economy for a considerable time to come. yet the intensity of the,+852 2996 6572 robert parkes* strategist hsbc bank plc +44 20 7991 6716 wietse nijenhuis* strategist hsbc bank plc +44 20 7992 3680,.hk ,story varies markedly between countries and so, of course, does market sensitivity to the story. in ceemea, the best secular consumer stories in the region are in turkey, russia, egypt, nigeria and the uae. south africa, in particular, shows a noticeably weaker trend. we believe that the outlook for asian consumption remains robust, given that growth has tilted towards domestic demand. a lively labour market makes for a decent outlook,view hsbc global research at: *employed by a non-us affiliate of hsbc securities (usa) inc, and is not registered/qualified pursuant to finra regulations,we think. we identify asian stocks that will benefit most from asian consumers trading up,issuer of report:,hsbc bank plc,in latam, peru stands out for having the worlds third-highest,disclaimer & disclosures this report must be read with the disclosures and the analyst certifications in the disclosure appendix, and with the disclaimer, which forms part of it,real per-capita income growth by 2050. brazil is somewhat less compelling. its demographics are less positive, and its starting point is higher in terms of both income per capita and consumer spend; though, we are still looking at growth rates that far exceed those in the developed world.,equity strategy global emerging markets 14 november 2012 ceemea trends in consumer spending as income grows, food and other basics stop absorbing most of someones monthly salary, making room for more discretionary spending. across ceemea, and indeed em more broadly, the table below shows spending on food growing slowly relative to overall spending. within ceemea, food spending is projected to continue to grow relatively more strongly in nigeria, turkey and egypt, but very weakly in russia. by contrast, spending on non-food is generally expected to grow more rapidly. in particular, note that expenditure on housing, energy and furnishings is expected to rise much more rapidly out to 2050. spending in this category is expected to be particularly rapid in russia, turkey and compound annual growth rate between now and 2050,egypt, less so in saudi arabia, and to be relatively lacklustre in poland and especially south africa. most other forms of discretionary spending are also expected to show strong growth rates clothing, health, transport (including auto demand), recreation and culture, education, and restaurant and hotels all show strong average year-on-year growth rates. the only category of spending that shows a significantly weaker trajectory is communications. in almost all instances, telecoms spending is projected to grow less rapidly than income egypt is the only ceemea exception. in fact, telecoms is a relatively mature em sector and penetration rates are already high.,abc,clothing &,housing &,communic- recreation &,restaurants,food,footwear,energy furnishings,health,transport,ation,culture,education,& hotels,overall,philippines peru india malaysia china nigeria pakistan turkey indonesia colombia egypt thailand russia saudi arabia mexico argentina brazil poland south africa us europe,4.7% 2.1% 3.5% 4.0% 2.2% 4.6% 3.9% 3.2% 2.5% 3.7% 4.4% 2.2% 0.9% 2.2% 2.4% 1.9% 2.7% 2.1% 2.4% 1.7% 1.7%,5.8% 4.5% 4.8% 5.3% 4.6% 4.7% 4.1% 4.5% 3.6% 3.8% 4.5% 3.3% 3.3% 3.5% 3.6% 3.1% 2.7% 3.3% 2.3% 1.7% 1.7%,8.2% 7.2% 6.3% 5.6% 7.3% 4.3% 3.7% 4.8% 5.9% 4.2% 4.9% 5.6% 5.9% 3.9% 4.0% 3.5% 3.1% 3.7% 2.8% 1.7% 1.7%,7.0% 5.7% 5.0% 5.4% 5.8% 4.3% 3.6% 4.6% 4.7% 4.2% 4.9% 4.4% 4.5% 3.6% 3.8% 3.2% 3.1% 3.4% 2.8% 1.7% 1.7%,7.1% 6.4% 6.2% 5.9% 6.4% 4.7% 4.1% 5.1% 4.8% 3.7% 4.3% 4.5% 5.1% 4.1% 4.2% 3.7% 2.6% 3.9% 2.2% 1.7% 1.7%,6.4% 5.2% 7.3% 5.5% 5.3% 5.5% 6.1% 4.7% 4.1% 3.9% 4.6% 3.8% 4.0% 3.7% 3.8% 3.3% 2.8% 3.5% 2.5% 1.7% 1.7%,5.7% 3.7% 5.8% 4.6% 3.8% 6.6% 5.7% 3.8% 3.5% 4.3% 5.0% 3.2% 2.5% 2.8% 2.9% 2.4% 3.2% 2.6% 2.3% 1.7% 1.7%,8.4% 7.7% 7.8% 5.9% 7.8% 6.6% 6.0% 5.1% 6.1% 5.3% 6.0% 5.8% 6.4% 4.1% 4.3% 3.7% 4.2% 3.9% 3.8% 1.7% 1.7%,7.7% 5.8% 5.9% 4.8% 5.9% 3.4% 2.8% 4.0% 5.4% 3.2% 3.9% 5.1% 4.6% 3.0% 3.2% 2.6% 2.1% 2.8% 1.8% 1.7% 1.7%,7.9% 7.3% 7.3% 6.0% 7.4% 5.6% 4.9% 5.2% 5.6% 4.2% 4.9% 5.3% 6.0% 4.3% 4.4% 3.9% 3.1% 4.1% 2.7% 1.7% 1.7%,7.0% 5.6% 5.5% 5.3% 5.1% 4.8% 4.5% 4.4% 4.3% 4.2% 3.9% 3.9% 3.9% 3.8% 3.6% 3.1% 3.0% 2.9% 2.6% 1.7% 1.7%,source: hsbc calculations 2,equity strategy global emerging markets 14 november 2012 in line with a huge increase in consumer spending, the report also envisages a surge in demand for the finance industry. at present emerging markets consume about 18% of consumer-facing financial services. this is likely to rise to more than 50% by 2050. stock market implications of course 2050 is a long way off, so we have to be careful about reading too much from very long-term trends into stock market performance. nevertheless, there is clearly considerable investor frustration with risk-on-risk-off and a desire to orient strategy rather more towards long- term secular themes; the consumer 2050 report provides a framework for such an approach. perhaps the most important conclusion of the report is that we need to put the consumer at the centre of our thinking about medium-term equity positioning. given low growth in the developed world, the em consumer will be driving the bulk of what growth there is to be had in the global economy for a considerable time to come. yet the intensity of the story varies markedly between countries and so, of course, does market sensitivity to the story. so, for example, at a very general level, in our view, turkey shows a great consumer trajectory, but the stock market also has a plethora of different ways to play this. by contrast, in russia, consumer spending should also grow decently, but this is much more difficult to capture from a stock market perspective. stock market representation is part of the reason why turkey has performed so much more strongly this year. equally, in south africa, where we expect the consumption trajectory to be relatively slow by em standards, stock market representation is rich. still, in what follows we try to link karen and frederics consumer spending projections to country and sector themes in ceemea. in addition to focusing on the secular trends, we also,the best part of their story structurally appears to lie in the interface between housing and mortgage demand. in most parts of ceemea, mortgage lending is still in its infancy, but the banks should of course be viewed as a generic play on em consumer demand. regarding banks, this story seems to point most clearly towards turkey, russia, egypt and nigeria, if you add its banks into the equation. the significant dangote acquisition premium paid by tiger brands could be viewed as highlighting the current value offered by the nigerian market and in particular its consumer-related plays (tiger brands dangote: medium-term pain for longer- term gain, michele olivier, 23 october 2012). of course many of these segments have already performed well, with the partial exception of russia, but there is still valuation headroom, in our view. for russia, supply indigestion has created headwinds. an additional caveat is that household credit is likely to slow (albeit from c40%) next year, whereas in the other countries it is likely to be accelerating. nevertheless, the longer-term secular story still looks appealing. saudi banks should also benefit from secular growth prospects, and cyclical lending growth is clearly supportive too, although earnings momentum less so (q3 earnings so far have come in 10% below expectations, largely because of credit-quality issues). by contrast, in poland the structural growth story is moderately lacklustre but cyclical conditions are also weak, with soft employment growth in strong contrast to saudi arabia weighing on the lending growth outlook. for south african banks, both secular and cyclical prospects also appear rather discouraging. as regards the cycle, the major threat lies in macro growth prospects in 2013; we forecast gdp growth at 3.1%, but the risk lies to the downside.,abc,consider the overlap between this and the cycle, where appropriate. 3,pb2013e(x),equity strategy global emerging markets 14 november 2012 real private sector credit growth (% y-o-y),abc,2004,2005,2006,2007,2008,2009,2010,2011,2012f,2013f,czech republic egypt hungary kuwait morocco* nigeria poland qatar russia saudi arabia south africa turkey uae,9.5 -6.6 0.4 14.6 7.1 26.6 0.4 19.0 20.5 36.6 8.1 44.5 18.4,18.1 -1.9 9.0 15.5 10.5 30.8 9.0 50.6 17.7 38.2 20.4 45.3 32.7,20.7 3.9 22.4 24.6 17.9 27.8 22.4 38.3 28.2 7.9 24.2 56.0 20.7,21.6 3.3 11.6 36.3 28.3 97.1 29.8 37.1 34.3 13.9 23.7 29.4 37.0,15.7 -28.7 12.3 7.6 20.2 59.4 36.1 31.9 -8.6 18.9 18.7 35.3 36.0,7.0 -2.5 -11.5 4.1 8.9 26.6 -4.0 16.4 8.3 -4.8 4.6 11.3 -0.4,1.2 -2.9 0.6 -4.1 5.2 -4.9 8.9 7.2 4.0 -0.6 5.5 20.6 -2.3,4.1 -10.7 -4.3 -0.5 9.0 15.4 7.7 11.9 5.9 6.7 6.2 35.8 -0.1,0.8 -5.9 -10.1 1.0 6.5 35.0 4.7 16.5 9.9 12.3 2.0 16.0 2.8,3.2 -5.4 -1.5 3.2 7.5 37.5 5.6 15.3 15.3 14.5 3.0 19.0 6.4,note: *claims on the private sector source: thomson reuters datastream, national statistical offices, national central banks, hsbc estimates and forecasts,to a considerable extent our real estate preferences overlap with bank exposure. in terms of our coverage, we think turkey and egypt look especially attractive, saudi arabia somewhat so and south africa less attractive. in the longer term, the following charts highlight what scope there is for a positive synergy to develop between the growth in mortgage lending and real estate demand. in general the ceemea real estate sector has been heavily impacted by regulatory and legal changes ,egypt where real estate companies face challenges against their land banks. for the turkish real estate market, we expect the residential segment to be partly driven by low interest rates. in addition, however, a refreshed urban transformation law (which aims to renew 45-50% of existing housing) and a new law that allows russian and gcc buyers to acquire houses in turkey should help. the hospitality segment should also be dynamic, given already very low vacancy rates.,and these are discussed in “ceemea real estate the three rs: regulations, rates and return” (patrick gaffney et al, 22 october 2012). in many cases, associated fears are overstated, such as in turkey where additional taxes were mooted or ceemea banks valuations: p/b versus roe trend (dots=ceemea banks) 4.0,3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0,y = 11.07x - 0. 29 r 2 = 0.58,5%,10%,15%,20%,25%,30%,ro e 2013e source: hsbc estimates 4,expensive,cheap,equity strategy global emerging markets 14 november 2012 ceemea banks valuations: pb versus roe trend along the cross-section,abc,bank,country,roe 2013e,pb 2013e (x),expensive in relation to trend,capitec bank hldgs masraf al-rayan alinma bank pekao burgan bank firstrand nsgb kuwait finance house komercni national bank of kuwait alrajhi bank pko bp nedbank standard bank akbank riyad bank commercial bank of qatar,south africa qatar saudi arabia poland kuwait south africa egypt kuwait czech republic kuwait saudi arabia poland south africa south africa turkey saudi arabia qatar,28% 13% 7% 13% 15% 20% 18% 12% 15% 15% 28% 16% 16% 15% 15% 12% 13%,3.81 1.90 1.08 1.70 1.88 2.41 2.21 1.50 1.80 1.76 3.16 1.70 1.67 1.55 1.44 1.08 1.18,at-par with the trend,garanti bankasi national bank of abu dhabi,turkey uae,16% 14%,1.51 1.31,cheap in relation to trend,absa qatar islamic bank qatar national bank arab national bank doha bank ltd otp bank asya is bankasi banque saudi fransi abu dhabi comm bank cib credit agricole egypt bank vakifbank yapi kredi bankasi samba financial group union national bank first gulf bank bank vtb oao albaraka turk halkbank sberbank rf,south africa qatar qatar saudi arabia qatar hungary turkey turkey saudi arabia uae egypt egypt turkey turkey saudi arabia uae uae russia turkey turkey russia,16% 16% 19% 14% 16% 11% 10% 15% 15% 13% 26% 20% 13% 16% 17% 11% 17% 14% 15% 22% 22%,1.45 1.41 1.74 1.18 1.42 0.76 0.70 1.15 1.14 0.88 2.30 1.67 0.86 1.14 1.18 0.58 1.13 0.83 0.92 1.38 1.10,source: hsbc estimates,in egypt, we believe that the housing shortage has only been exacerbated over the past two years as construction has dried up. hsbc estimates that the market needs between 400,000 to 500,000 units every year (based on the number of marriages) and that on average over the past 10 years fewer than,250,000 units have been built. the past two years have been even worse. in the gulf, saudi arabia also has a strong demographic profile, and the government stimulus should help real estate companies in the medium term, as more saudis receive government loans.,5,equity strategy global emerging markets 14 november 2012 the new mortgage law will, in the long run, lead to greater affordability among home buyers, but we expect banks to be conservative over the next two years as they try to understand the new rules. elsewhere in the gulf, we also like dubai real estate both on the improvement in the local cycle, but also as a play on hospitality and broader em real estate spending (not least egypt). mortgage penetration in developing countries (2011) source: imf, sama, ministry of finance sa, central bank of uae by contrast for south african real estate, as with banks, both the secular and cyclical impulses are negative. macroeconomic risks appear skewed to the downside and any positive influence from further modest monetary easing is likely to be offset by softer growth numbers. with regard to direct consumer plays, one broad implication of karen and frederics piece seems,to be that investors should prefer discretionary to staples (since food should take up a diminishing proportion of the expenditure aggregate). in fact, it is not quite as straightforward as this since quoted organised retail has in many countries the potential to take considerable market share from the informal sector. nevertheless, the cocktail of a relatively weaker trend in consumer spending and higher input costs from upward pressure on soft commodity prices does, in some cases, create headwinds for the sector. equally staples have been seen as a safe haven through the endless risk-on-risk-off iterations. to the extent that market conditions stabilise, the fundamentals should gradually get traction. indeed, in general, in our coverage, we do prefer discretionary here, by way of illustration in ceemea outside the gulf, hsbc has 7 overweight recommendations and 7 neutral or underweight recommendations compared with 2 overweight recommendations to 10 neutral and underweight in the staples segment. in general, within the ceemea universe, we think turkey offers some of the best plays on the consumer discretionary theme. not only do we expect the spending trajectory in turkey in this category to be relatively strong, but there are also,abc,straightforward ways to express this in terms of mortgage to gdp versus gdp/capita (lhs, usd) 2011 source: central banks, hsbc estimates 6,equity strategy global emerging markets 14 november 2012 stock market representation. we would focus on some of the holding companies, white goods, speciality retail, transport and media. in these sectors in many cases earnings are determined by external as well as domestic demand, but in many instances the turkish consumer is still an important driver. in south africa, which has wide stock market representation on the consumer side, hsbc does not cover the retail segment. however, we do not think that the macro environment facing these names looks anything like as strong as that in turkey, for example, either near term or long term. nevertheless, while we do not expect hotel and restaurant spending growth to be as dynamic as in many other ems, it is still better than in most of the developed world, and we have some positive recommendations in the sa hotels, restaurants and leisure segment. yet not all consumer segments are expected to grow as rapidly; in particu