New horizons 9 key themes to guide your outlook HSBC Global Research • 9 key themes to guide your outlook www.research.hsbc.com | 2 Introducing our themes

HSBC Global Research is taking a new approach to investing in today’s world of disruptive, complex and rapid change. We are applying our multi-asset and geographical reach to understand the big events unfolding today and their investment implications through nine big themes. From Disruptive Technology and Future Cities to Demographics and the Energy Transition, this brochure explains our nine big themes and David May how to access them. Global Head of Research [email protected] Watch video ›

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Economics FX broad Equities 1,900 Fixed Income EM investment ESG insights to Data Science Multi-Asset covering >50 coverage of DM & companies with covering Rates themes across aid investment analysing vast highlight key countries EM FX with focus 60% MSCI EM & and Credit across asset classes decisions amounts of data using ideas across asset worldwide on the RMB FM indices DM & EM Machine Learning classes techniques

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Big themes

Automation Demographics Digital Finance Disruptive Energy Future Cities Future Future Transport Lower for Technology Transition Consumer Longer

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Automation Demographics Digital Finance

Helen Fang (Global) James Pomeroy (Global) Kailesh Mistry (Global) Sean McLoughlin (Europe) Herald van der Linde (Asia) Antonin Baudry (Europe) Edward Stanford (Europe) Neha Agarwala (Americas & EEMEA)

Disruptive Technology Energy Transition Future Cities

Davey Jose (Global) Sriharsha Pappu (Global) Stephen Bramley-Jackson (Global) Frank Lee (Asia) Thomas C. Hilboldt (Asia) James Pomeroy (Europe) Lilyanna Yang (Americas) Jonathan Brandt (EEMEA)

Future Consumer Future Transport Lower for Longer

Erwan Rambourg (Global) Henning Cosman (Global) Steven Major (Global) Ravi Jain (Americas & EEMEA) Will Cho (Asia) Lawrence Dyer (US) Karen Choi (Asia) Jeremy Fialko (Europe)

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® In logistics, we Automation estimate only 5% of warehouses currently have incorporated Driven by the potential to increase productivity, automation has advanced from early mechanisation automation of production lines to today’s data-driven industrial Internet of Things (IoT). Already well established ® Automation has in general manufacturing and process industries, automation has huge growth potential in sectors advanced from early mechanisation of with lower penetration, such as logistics production lines to today’s data-driven industrial IoT investment

Robotics: Smarter robot riding on IoT tackles ageing workforce Machine Vision: Secular growth and software driven ® Machine vision software is the high- Already well established in general manufacturing and process Machine vision offers higher precision and consistency than human value part of the industries, automation has huge growth potential in sectors with lower labour on quality inspection tasks. industry and provides penetration. The graph below shows the number of installed industrial leaders with faster robots per 10,000 employees in the manufacturing industry, 2018 With increasingly complex, precise manufacturing demands, and rising growth and superior focus on quality, machine vision offers better yields, higher efficiency returns and lower labour cost for manufacturing industries. ® 85% – share of Singapore 831 industry taken by vision South Korea 774 software, while the other 15% is taken by Germany 338 Pursuit of productivity vision hardware such as Japan 327 cameras

Sweden 247 ® Vision-guided robotics Global average density: 99 and automated Denmark 240 Asia average density: 91 optical inspections Demand for Taiwan 221 are two of the major Machine Vision Rising labour Ageing applications of machine US 217 costs population China’s robot density is vision in manufacturing Italy 200 still below many industrial industries Mainland China 140 economies (2018)

Source: IFR, CRIA & HSBC Source: HSBC

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Equity Research Report Equities EQUITIES Electronic Equipment & Instruments EQUITIES INDUSTRIALS Industrials INDUSTRIALS November 2017 January 2018

February 2021 May 2020 https://www.research.hsbc.com By: Amy Hu (S1700520090001), Corey Chan (S1700518100001) www.research.hsbc.com By: Helen Fang www.research.hsbc.com By: Michael Hagmann, Debashis Chand and Helen Fang By: Helen Fang, Michael Hagmann, Richard Schramm and Anderson Chow https://www.research.hsbc.com SPOTLIGHT Title of report of Title

SPOTLIGHT Global Robotics Global Machine Vision China Automation Global Machine Vision Global Robotics Prometheus unbound Global Industrials – Automation goes digital Initiate coverage: Acing China’s automation ambition The eyes of robots: it’s all about algorithms Automation nation: Robots lead the charge in China The pandemic and China’s push to Machine vision – which enables Industrial IoT will drive more than a be more self-sufficient are pushing robots to see – has the most secular third of IoT benefi ts of USD4trn to Demand for robots in China is going manufacturers to invest more in growth of any sector in the factory USD11trn (by 2025). The necessary into overdrive as more industries need automation… automation industry capex requirements will amount to higher levels of automation USD100bn to USD300bn pa …with domestic automation leaders We see software – especially We believe Japanese giant FANUC (Buy) well-positioned to take market share algorithms – as the key differentiator Rockwell Automation, Schneider has the best growth story and look at its from global peers for companies and it accounts for Electric and Siemens have the expansion in the Chinese market 85% of the industry value most refi ned offerings today. Equities // Subcategory Asset // Subcategory // Asset Initiate on automation leader Inovance Industrials // Equities Siemens’ approach is more As production expands rapidly, China The ongoing search by manufacturers revolutionary in nature at Buy (our top pick), relay-focused robot makers are trying to narrow the for yield enhancement, cost savings Hongfa at Buy, and more slowly Equities knowledge gap through acquisitions growing Siasun at Hold and labour replacement is driving We prefer Siemens (Buy) and | Electronic Equipment & Instruments Equipment | Electronic Helen Fang penetration especially in electronics, Schneider Electric (Buy) semiconductor, 5G and healthcare Head of Industrials Research, APAC and Global Coordinator for

Play interview with Play video with Helen Fang Helen Fang Automation January 2018 Month 20xx Month May 2020 May

Disclaimer & Disclosures: This report must be read with the disclosures and the analyst Disclosures & Disclaimer: This report must be read with the disclosures and the analyst certifications in Disclosures & Disclaimer: This report must be read with the disclosures and the analyst certifications in Disclaimer & Disclosures: This report must be read with the disclosures and the analyst [email protected] certifications in the Disclosure appendix, and with the Disclaimer, which forms part of it the Disclosure appendix, and with the Disclaimer, which forms part of it. the Disclosure appendix, and with the Disclaimer, which forms part of it. certifi cations in the Disclosure appendix, and with the Disclaimer, which forms part of it

China Automation Global Machine Vision Global Robotics Prometheus unbound Initiate coverage: Acing The eyes of robots: it’s all Automation nation: Robots Global Industrials – Follow on LinkedIn China’s automation about algorithms lead the charge in China Automation goes digital ambition Read report › Read report › Read report › Read report › View insights

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® By 2025e, India should Demographics overtake China as the most populous nation ® Mid-tier cities – this The world’s population is seeing the fastest changes in history, with ageing populations, lower birth is where people flock rates and smaller households set to play a key role in determining the pace and shape of global to, more so than the demand growth for a range of goods and services larger metropoles. This creates a new group of consumers in lesser- known cities across The world’s population continues to rise with Africa overtaking Asia Most populous countries by 2030e (% proportion) Asia and Africa ® More women are 15bn working. This is 17.6% 17.1% especially the case Oceania India Mainland China in China and also Latin America 10bn Indonesia where more North America are completing higher Africa 4.1% 3.5% education and getting Europe managerial jobs 5bn Asia US Indonesia ® Demand for healthcare will likely rise fastest not in 0 3.1% 2.6% 1950 1970 1990 2010 2030 2050 2070 2090 ageing societies but Nigeria Brazil in younger nations Source: UN Population Prospects 2019, HSBC where more people are reaching 40

Ideas key to these long term shifts ® Focus on the shrinking household. population growth This is a particular trait women in North Asia – as per mid-tier cities infrastructure Global Demographics,

shrinking household Education the number of single- empty- ageing populationurbanisation nesters

healthcare person households is estimated to rise

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Herald van der Linde, CFA

Key insights Head of Equity Strategy, APAC and Global Coordinator of

4 August 2020 Equity Strategy & Economics Global Demographics

February 2021 Equity Strategy By: Herald van der Linde and James Pomeroy www.research.hsbc.com Asia Demographics Asia

[email protected] Large shifts are coming soon

 Tectonic shifts ahead in the next decade; India’s population Global Demographics should grow bigger than China, while China’s is set to shrink Global Demographics  Meanwhile, Asians are living longer, residing in smaller households, flocking to mid-tier cities, and saving more Mapping out a century of changes  We identify some big picture implications: empty-nesters

The epicentre of population growth trading up, a female future, and rising spending on health will move to Africa later this century, Follow on LinkedIn while India is set to overtake China to We build on our previous research on Asia’s demographics with a new series. This report focuses on long-term investment themes shaped by demographics, while in become the world’s most populous the accompanying notes we work with fundamental analysts to highlight stock Herald van der Linde*, CFA nation by 2025 opportunities, starting with the consumer sector: Asia Demographics – Tectonic shifts Head of Equity Strategy, Asia Pacific The Hongkong and Shanghai Banking Corporation Limited ahead for the consumer sector, 4 August 2020. [email protected] We show what these vast demographic +852 2996 6575 Before the end of this decade, India Big changes are not only around the corner... Barak Hurvitz* changes mean, why ageing is the is expected to surpass China as the world’s most populous country, which should Associate, Equity Strategy biggest social transformation globally… The Hongkong and Shanghai Banking Corporation Limited swiftly be followed by China’s population declining. Markets will start to consider the [email protected]

Asset // Subcategory // Asset implications well before this happens. For instance, companies need to position +852 2996 6941 …and how policymakers have a themselves for slower volume growth, and instead work on their ability to raise prices Prerna Garg* Associate dilemma over how best to spend – possibly by offering better quality products. Bangalore Equity Strategy | Global Strategy Equity

on education, healthcare, jobs and …they are also happening now: Asians are getting older, living longer, and flocking to mid-tier cities. They’re also residing in smaller households while women are having * Employed by a non-US affiliate of HSBC Securities (USA) Inc, and is infrastructure not registered/ qualified pursuant to FINRA regulations. fewer children and working more. All this impacts consumer spending. While COVID- 19 continues to cast a shadow over the region’s economy, it is also accelerating some long-term trends that were already underway like more online shopping.

An academic view: We also interviewed Dr. Stuart Gietel-Basten, Professor of Social Science and Public Policy at HKUST. He stated that it is possible for very low fertility rates to become more common in the region. Further, he suggested that it would be prudent to start planning for a time when families in Asia are not able or willing to care for their older members, and to start thinking about new types of insurance, care, and financial products to deal with this.

Opportunities: (1) We expect Chinese ‘empty-nesters’ to buy more premium products – better quality at higher prices – on almost everything from food and clothing to home furnishings. (2) More women in the workforce, which contributes to Play interview with higher household income and how it is spent. (3) New forms of urbanisation are Herald van der Linde, James Pomeroy unfolding too with growth higher in mid-tier cities, especially in ASEAN and India. and Barak Hurvitz (4) Increased health awareness and rising risks from some diseases, particularly Asiamoney Brokers Poll 2020 diabetes, mean more business for pharmaceutical companies, hospitals, and sellers Voting opens 1st June – 21st August of health equipment. (5) Asians are living and working longer, which allows for a If you value our service and insight, please vote greater accumulation of wealth to finance an extended period of retirement.

February 2021 February Click here to vote

Disclosures & Disclaimer Issuer of report: The Hongkong and Shanghai Banking Corporation Limited Disclosures & Disclaimer: This report must be read with the disclosures and the analyst certifications in 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. the Disclosure appendix, and with the Disclaimer, which forms part of it. View HSBC Global Research at: https://www.research.hsbc.com James Pomeroy

Global Demographics Europe’s demographics Asia Demographics LatAm demographics Economist and Global Coordinator Mapping out a century of The edge of a precipice Large shifts are coming Four investment angles as of Demographics changes soon the region ages [email protected] Read report › Read report › Read report › Read report › Follow on LinkedIn

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® CreditTech – borrowing and Digital Finance lending models developing new routes to market, effective and quick decision We aim to understand and analyse how digital entrants and/or tech savvy business models making through with financial services or ecommerce across financial services disrupt, complement and/or enhance existing operations and key market ® Digital banks and insurers participants. We also consider how such challenger models impact competitive positioning, – conducting all financial customer acquisition, customer retention, efficiency, market share, profitability, risk management services activity online ® Digital currency – Central and underwriting as well as overall market dynamics Bank digital currencies and cryptocurrencies that can replicate key functions of physical money The money flower shows the different qualities of types of money Examples of technology applications ® Digital distribution and price comparison – independent or Central tied direct distribution and/or Digital bank-issued artificial intelligence price comparison platforms ® Fintech infrastructure and Virtual currency along with machine learning, it can interpret and analyse data for risk Poké coin assessment, investment and underwriting as well as improve services such software solution providers Settlement as claims management, fraud detection – B2B service providers or reserve supporting innovation and accounts development Bank deposits, mobile money ® InsureTech – insurance Venmo, M-Pesa CBDC models that increase Central Bank (wholesale) blockchain automation of underwriting, accounts CBDC allows performance of tasks faster and cheaper, track data flow sales, claims management (retail) Private digital internally, holds digital assets and settlement as well tokens as attaching key services Cash (wholesale) to insurance to avoid Widely commoditisation accessible Token-based Cryptocurrency ® InvestmentTech or Bitcoin cloud big data WealthTech – Advisors and increased capacity, agility collection, organisation, interpretation and investment platforms Key: Type of product and flexibility for data analysis of data to support offers, product ® Payments – infrastructure, Example CBDC = Central Bank Digital Currency storage design and underwriting e-wallet, payment acquiring, network providers services Source: BIS PUBLIC HSBC Global Research • 9 key themes to guide your outlook www.research.hsbc.com | 10 Digital Finance

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17 March 2021 Equities 26 May 2020 18 September 2020 Insurance

October 2020 Economics & Currencies By: Kailesh Mistry and Edwin Liu www.research.hsbc.com Equities Equities

Digital currencies Global SPOTLIGHT Brazil Fintech & Instant Payments Financials European Payments Software

Europe What are they and why do they matter? Lessons for Brazil from India and the globe Brazil Post COVID-19 outlook supportive on all key drivers SPOTLIGHT

Insurance meets healthcare meets Insurance    As cash usage declines, new forms of digital money are To understand potential uptake and impact of PIX in Brazil, we Cash use declining faster in favour of digital payments should Antonin Baudry* offset weak consumption recovery and drive strong recovery Analyst emerging Insurance meets studied India’s UPI and other global instant payment platforms HSBC France, S.A. [email protected]   We look at cryptocurrencies and Central Bank Digital  Expect strong uptake in P2P, estimate banks could lose 1-5% M&A catalyst set to remain centre stage: European market +33 1 56 52 43 25

Currencies… Healthcare of revenues but see risk to acquiring revenues as less imminent still fragmented and banks face major challenges * Employed by a non-US affiliate of HSBC Securities (USA) Inc, and is  not registered/ qualified pursuant to FINRA regulations  …and outline the impact they could have on the economy  Select global experiences suggest cards will remain relevant Retain Buy on Worldline and Ingenico, Hold on Nexi and From payer to payer, provider and Wirecard. Raise TPs for all on lower WACC, except Wirecard and policy decisions and new business models will emerge; watch for early adopters risk influencer This report is a deep dive into Brazil’s instant payment platform, PIX, which is scheduled Post COVID-19 recovery should support payment companies: The Q1 2020 As cash usage plummets in many parts of the world, the role played by new forms of results give us better visibility on the potential impact of the lockdowns on revenue in to be launched in November (see PIX and Open Banking, 5 July 2020). To understand digital currencies in the payments chain is only going to grow. But what sort of Insurers are increasingly evolving from the potential uptake for the new system and its impact on financial system participants, Q2 and the likely recovery during H2. We include extracts of recent reports by HSBC currencies? Cryptocurrencies? Central Bank Digital Currencies (CBDCs)? James Pomeroy simply writing and servicing health Neha Agarwala, CFA economist James Pomeroy. In Lifting lockdowns (1 May) he highlights there is no Global Economist we look at India’s well-known UPI platform in detail. We also take a quick look at the fast Stablecoins? Perhaps a mix of them all? These forms of money are all solely digital – Analyst, LatAm Financials & Fintech guarantee of a V-shaped recovery for consumption in H2 2020 but a quicker shift HSBC Bank plc policies to putting themselves at the payment systems in Australia, the UK, Sweden, Malaysia, Singapore and Mexico. HSBC Securities (USA) Inc. and are either issued via the central bank or privately. [email protected] [email protected] from cash to contactless and digital payments (No cash, please, 29 April) could be a +44 20 7991 6714 centre of health and wellness ecosystems PIX – riding on convenience and lower costs. We are optimistic on the uptake of PIX. +1 212 525 5418 strong catalyst for a revenue rebound in 2021, in our view. Cryptocurrencies, in particular, have been getting a lot of attention recently because Paul Mackel With the benefit of learning from the experiences of other payment systems around the Carlos Gomez-Lopez, CFA Global Head of FX Research P&L impact: We are more conservative than before for 2020. We now expect Q2 to be of Bitcoin’s spectacular price rise and the responses to it – with an increasing number globe, we note that PIX will be an inclusive platform and have more advanced features Head of EM and LatAm Financials The Hongkong and Shanghai Banking Corporation Limited This transition encompasses insurance, HSBC Securities (USA) Inc. hit more heavily and there remains uncertainty around the potential recovery in H2, due to of institutional investors showing an interest. Stablecoins, such as Diem, led by [email protected] Subcategory // Asset than what UPI in India had at the beginning (pg11). The Brazilian regulator has been [email protected] +852 2996 6565 likely consumption weakness. However, the temporary slowdown seen so far in 2020 due Facebook, have also gathered much more attention in recent years. telemedicine, wellness and more creating awareness and swiftly adding partners, which should facilitate usage (electricity +1 212 525 5253 to COVID-19 creates a favourable basis of comparison for 2021. Combined with our to enhance the competitiveness of bills, tax payments). Most importantly, Brazilian consumers have an incentive, at least for Ravi Singh* There is no doubt that the rise of cryptocurrencies and stablecoins has alerted Senior Banks Analyst expectation of a quicker switch from cash to digital payments, this would offset the Equities offerings, facilitate customer acquisition P2P (peer to peer) transactions, given the lower cost of PIX transactions. P2B (peer to HSBC Securities and Capital Markets (India) Private governments and policymakers, and is one reason why a number of central banks potential impact of a macro slowdown on consumption in 2021, implying a strong business) could be trickier given the high card penetration rate and consumer’s significant Limited are drawing up plans for their own digital currencies. Sweden and China are leading | Insurance and retention as well as influencing and [email protected] recovery for the payments companies. preference for credit cards with features like instalment payments. However, the +91 22 2268 1238 Kailesh Mistry the way, but these central banks have other motives too, based on the rapid pricing risks experiences in Australia (pg19) and Sweden (pg21) is encouraging for P2B. M&A catalyst to remain centre stage: We expect an acceleration of consolidation. developments of digital payments in their economies. Umang Shah* Analyst, Financials Nexi-SIA talks in Italy are gaining momentum and we update our view on a possible Bank revenues likely be hit; acquirer revenues not imminently. While the experience HSBC Securities and Capital Markets (India) Private This report will look at the differences between these forms of digital payments and merger (potential accretive impact 10-15% on EPS 2020-21e on leverage 4x vs 3.5x Ping An has developed a comprehensive in India has been somewhat positive for banks (pg8), we expect a loss of fee income for Limited the potential economic and monetary impacts. [email protected] before). Ingenico’s acquisition by Worldline is ongoing. The disposal of Ingenico’s health ecosystem for mainland China the banking sector in Brazil. As per our calculations, Brazilian banks earned about +91 22 2268 1243 point of sales business by Worldline would accelerate its capacity for further M&A. BRL36bn in current account services (including TED and DOC; c.5% of total revenue) At its heart this will be a battle over what best serves as a means of payment and/or mainly in-house, while AIA and Pru are Rahil Shah* Wirecard’s share price remains vulnerable to short-term sentiment with a lack of a and BRL9bn in collection services, which include boleto. Our scenario analysis suggests Analyst, Banks, Cement and Metals & Mining store of value in the digital age. The current macro implications of both doing much the same across Asia but HSBC Securities and Capital Markets (India) Private solid and stable shareholder base. We analyse similarities with Iliad and Gemalto. cryptocurrencies and stablecoins are limited – but this may change depending on that the large listed banks could lose at least 3-5% of their earnings in the short term Limited Head of Financials Research, APAC through partnerships or JVs [email protected] Ratings: Since the 19 March lows, share prices have rebounded by c60% on how the underlying technology develops and the number of use cases grows. (pg15). For the payment acquirers, we expect a meaningful impact if and when P2B takes +91 22 6628 3719 average, outperforming the Eurostoxx 50’s 13% (except Wirecard -7%). We favour Tracking how both of these factors develop will be important in the coming years. off; in such a scenario, companies in the micro-merchant segment, like PagSeguro, exposure to online payment, geographical spread in strong economies, capacity to appear more at risk (pg16). The experiences so far in India and Sweden indicate that fast * Employed by a non-US affiliate of HSBC Securities (USA) Inc, and is Central bank digital currencies will likely have a greater economic impact. But the payment platforms have mostly displaced cash, not so much cards. not registered/ qualified pursuant to FINRA regulations capture the consumption recovery and the shift from cash to electronic payment leading pilots in China and Sweden are converging on a similar design in a way that thanks to high exposure to transaction volume and potential for M&A or accretive Expect new opportunities to be created but mindful of risks. Instant is not the end- and Global Coordinator of Digital may mean that, while payment networks could be more efficient and secure, most of disposals. We remain Buy on Worldline-Ingenico (preferred stocks) and Hold on Nexi game here. Indeed, instant or fast payment systems should allow the development of us may not notice a difference day to day. How these pilots develop and how other and Wirecard. We raise our TPs for all on lower WACCs, except Wirecard. value-added services, stimulating competition and innovation (pg17). As in India, Australia central banks react will also be key to follow. and Singapore, we expect new business models to emerge. And the early-movers will Rating and target price summary While there has been much excitement over cryptocurrencies and CBDCs, it is just likely be in advantageous positions. We could also see some increased participation from Current ______TP______Rating __ Upside/ Market cap _____ EV/EBITDA ______PE ______Asiamoney Global RMB Poll 2021 telecom and e-commerce companies. However, we believe customer awareness and 2020 GEMs Forum – Going Virtual Company Ticker Currency price Old New downside (EURm) 2020e 2021e 2020e 2021e as important to remember the implications of getting many of the millions of Ingenico ING FP EUR 119.5 132 141 Buy 18% 7,457 16.6 13.9 25.7 21.5 Voting opens 22nd Feb – 02nd April 2021 th th Finance trust will be the key to adoption (pg18). Although merchants have significant cost 6 – 30 October 2020 Nexi * NEXI IT EUR 14.8 12.5 14.5 Hold -2% 9,291 19.4 16.6 35.1 29.4 unbanked people across the world access to more traditional digital payments, which If you value our service and insight, please vote incentives to use real-time payment systems, customers do not care much how they Wirecard WDI GR EUR 83.2 105 95 Hold 14% 10,284 9.6 6.4 15.5 11.2 is likely to have a far greater near-term economic impact. Click here to vote Register now Worldline ** WLN FP EUR 63.0 70 75 Buy 19% 11,494 19.3 15.6 31.6 25.0 2020 October make a transaction as long as it adds convenience, is economical and safe to use. Source: HSBC estimates. Priced as of close at 21 May 2020 * Includes ISP pro forma 2020e ** Includes Ingenico pro forma 2020e

Issuer of report: HSBC Securities (USA) Inc HSBC France, S.A. Disclosures & Disclaimer Issuer of report: HSBC Bank plc Disclosures & Disclaimer Disclosures & Disclaimer Issuer of report: This report must be read with the disclosures and the analyst certifications in Disclosures & Disclaimer: This report must be read with the disclosures and the analyst certifications in This report must be read with the disclosures and the analyst certifications in This report must be read with the disclosures and the analyst certifications in View HSBC Global Research at: View HSBC Global Research at: View HSBC Global Research at: [email protected] the Disclosure appendix, and with the Disclaimer, which forms part of it. the Disclosure appendix, and with the Disclaimer, which forms part of it. the Disclosure appendix, and with the Disclaimer, which forms part of it. https://www.research.hsbc.com the Disclosure appendix, and with the Disclaimer, which forms part of it. https://www.research.hsbc.com https://www.research.hsbc.com

Digital currencies Spotlight: Insurance Brazil Fintech & Instant European Payments What are they and why do meets Healthcare Payments Post COVID-19 outlook Follow on LinkedIn they matter? From payer to payer, Lessons for Brazil from supportive on all key provider and risk influencer India and the globe drivers Read report › Read report › Read report › Read report › View insights

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® Forecast AI chip Disruptive Technology demand CAGR of 28% out to 2027 – key for Asia manufacturers Technology is disrupting business models around the world, helping companies to make huge leaps ® Cloud’ is still growing, forward. We help investors understand what to watch out for and how to view tech changes and with some 70% of their impact using our HSBC Disruption Framework software yet to migrate ® IoT connected devices to double by 2025, supporting over USD1trn HSBC Disruption Framework of related revenue ® Disruptive technology can be considered as a ‘super dot joiner’; it disruptive new business models through HSBC Disruption Framework 60% of people to have connects numerous themes, sectors and assets classes. artificial intelligence and automation. In our view these are likely to mobile internet by be long-lasting changes in behaviour which could lead to the next 2025, up from ca.49% 2020 was likely to be a tipping point in the adoption of digitalisation. phase of technology-led growth around remote access. Through now We can see this in the way people are behaving as employees our disruption framework, we examine an array of technologies and ® Data growth, with 5G (working from home), as students (online education), as consumers related infrastructure that we think are key to these shifts, and hence likely to make up 20% of (e-commerce), when seeking entertainment (virtual events, e-sports), well-placed to drive long-term outperformance in an already growing mobile connections by and when needing medical advice (e-medicine). We also see this in technology sector – these include connectivity, automation, experiential, 2025 business, especially with asset-heavy industries seeking efficiencies and and digital health. ® Digital health/ telemedicine worth up to USD250bn annually Expectations Expectation > reality in the US alone by 2025; begin Expectations see a need for 60,000 meet reality medical robots globally Expectations Backlash Real by 2025, 4x that in 2018 exceed reality window application New normal Expectation = reality ® Hardware/software Early Hype market for drone-related disruption mania businesses to reach Gradient of estimated

expectation vs. reality USD120bn by 2030 Expectations fall as Expectations experiments deemed ‘failure’ catch reality Expectation < reality

Source: HSBC Source: The Edge of Disruption -- Finding engines of growth for tomorrow

PUBLIC HSBC Global Research • 9 key themes to guide your outlook www.research.hsbc.com | 12 Disruptive Technology

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Equities Thematic 26 January 2021 Thematic Global Global Global

THIS CONTENT MAY NOT BE DISTRIBUTED TO MAINLAND CHINA May 2019 November 2020 By: Davey Jose, Sean McLoughlin, Ashim Paun, Sriharsha Pappu, February 2021 By: Davey Jose, Sean McLoughlin, and Michael Hagmann www.research.hsbc.com By: Davey Jose, David Phillips and Edward Stanford www.research.hsbc.com Thematic Parash Jain and Amy Tyler www.research.hsbc.com Global

SPOTLIGHT Beyond Reality SPOTLIGHT

Is the race to VR in 2020s about to begin? SpotliGHt SPOTLIGHT SPOTLIGHT

The Edge of Disruption of Edge The  frontier second The The pandemic is accelerating the use of virtual reality Davey Jose* Thematic Analyst, Disruptive Technologies Powering the data The Edge of Disruption  Competition is needed to take VR to the next level, in our view HSBC Bank plc The second frontier [email protected] +44 20 7991 1489  Could Apple help the market in the 2020s? revolution Finding engines of growth for tomorrow Frank Lee* Towards low carbon shipping Head of Technology Research, Asia The Hongkong and Shanghai Banking Corporation Limited Is VR on the edge of disruption…? [email protected] The strains facing global electricity With 2020 seeing accelerated digital +852 2996 6916 Shipping represents 13% of global Last year, we published our thematic report The Edge of Disruption – finding engines adoption, we identify four key Nicolas Cote-Colisson* transport CO emissions and has of growth for tomorrow (22 November 2020). In that report, we broke down disruption 2 Senior Analyst, TMT Exponential growth of data usage technology themes for further growth into four key themes: connectivity, automation, digital health and experiential. In this HSBC Bank plc lagged other transport sectors in the [email protected] could drive an acceleration in global short update, we give you our latest thoughts on virtual reality and augmented reality, +44 20 7991 6826 drive to decarbonise Our analysts across Global Equity power consumption by 2030 – which we believe sits within our experiential theme in the ‘real applications’ stage in Amy Tyler* Research look at the potential our HSBC Disruption Framework (see Chart 3). Analyst investors and industry participants HSBC Bank plc With global sea freight demand impact on 20 sectors and their ESG If VR is to climb beyond the ‘real applications’ stage of our framework and move into [email protected] potentially tripling by 2050, policy should be alert to potential risks

implications… the ‘new normal’ in the 2020s, then the space needs to become more competitive, in and technological innovation are key * Employed by a non-US affiliate of HSBC Securities (USA) Inc, and is our view. This would include more hardware companies facing more price competition not registered/ qualified pursuant to FINRA regulations to hitting emissions targets Efficiency gains have offset higher

Asset // Subcategory // Asset …and distil our thematic views to and more VR content. Subcategory // Asset data consumption, but we think around 30 investible ideas that are In a previous update, Beyond Reality: The show must go on – can VR content make The solutions will include greater take off in VR, AV or blockchain may exposed to the likely disruption money today? (20 July 2020), we focused on the development of digital content, such Thematic Thematic use of batteries and LNG/LPG, and, change this; electrification of transport as concerts, conferences, education, games, etc, in VR. In this update, we outline why longer term, ammonia and green we think recent reports of Apple entering VR could be a shot in the arm for the VR may further strain power systems | Global | Global landscape and public visibility. hydrogen could play important roles

We flag 26 stocks with exposure to

Chart 1: Mobile is competitive … – Chart 2: … VR is not competitive yet the theme, highlighting 4 Buy-rated mobile phone market shares, 2Q20 – VR headset market share, 2Q20 ideas

Others Davey Jose Huawei Facebook Others 16% 20% 39% 28% DPVR 9% Samsung Pico 19% Vivo 9% 9% Xiaomi HTC Apple 10% 5% Sony Play video 14% 22% Play the video Play interview with Thematic Analyst and Global Source: IDC Source: IDC Sean McLoughlin and Davey Jose

November 2020 November February 2021 February Coordinator of Disruptive

Disclosures & Disclaimer: This report must be read with the disclosures and the analyst certifications in Disclosures & Disclaimer Issuer of report: HSBC Bank plc Disclosures & Disclaimer: This report must be read with the disclosures and the analyst certifications in 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. View HSBC Global Research at: the Disclosure appendix, and with the Disclaimer, which forms part of it. Disclosures & Disclaimer: 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. https://www.research.hsbc.com the Disclosure appendix, and with the Disclaimer, which forms part of it.

Technology The Edge of Disruption Beyond Reality The second frontier Powering the data Age of Cybersecurity [email protected] Finding growth engines Is the race to VR in 2020s Towards low carbon revolution Spend to defend of tomorrow about to begin? shipping The strains facing global electricity Read report › Read report › Read report › Read report › Follow on LinkedIn Read report ›

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® Clean power Energy Transition generation: Coal and natural gas to be phased out by 2035 in We see a mix of renewable energy sources, efficiency gains, design changes, new storage solutions developed markets, and and continued progress on innovation, adoption, scale and costs as central to the energy transition mostly by 2050 globally case for moving away from carbon intensive energy sources ® Cleaner transport: Diesel and gasoline make way for batteries Snapshot: global Green House Gas emissions flows (2017) and fuel cells in road transport by 2040, Source of emissions Human activities responsible Greenhouse gases (GHGs) Sinks with global regulation limiting shipping and aviation emissions Electricity: 26.2% ® Green buildings: Retrofitting in existing Industry: 11.8% buildings and green Coal: 30.4% Iron & steel 3.1% new builds increase Chemical & petrochem 0.1% 18.7% Transport: 15.9 Cement production 2.2% 24% CO2 to land energy efficiency, as oil Other industry 6.4% and gas are replaced by Oil: 24.4% 17.8% Fugitive & other: 9.5% Road 11.9% Cars 6.2% electricity and hydrogen Carbon dioxide (CO2): 23% CO2 to oceans Aviation 1.9% Vans 2.1% 74.0% as energy sources Shipping 1.6% Buses 0.7% Buildings: 5.8% Pipeline transport 0.3% Trucks 2.9% 41.3% ® Low-carbon Industry: Gas: 14.4% Rail & other 0.2% 53% CO to atmosphere ~50 2 A disparate sector Fugitive 5.6% Solid waste disposal: 1.7% GTCO2e Wastewater handling: 1.9% Own use & other 3.9% requiring diverse Waste incineration & other: 0.4% Residential buildings 4.1% 0.9% Waste: 4.1% solutions, such as Other agri emissions: 2.6% Commercial buildings 1.7% 5% CH4 to land Methane (CH ): 16.2% materials efficiency and Agriculture: 11.4 Enteric fermentation: 4.8% 4 16.8% 95% CH to atmosphere Rice cultivation: 1.2% 4 recycling, electrification, Manure management: 2.7% 1.6% Land use, change & forestry: 6.2% carbon capture and Nitrous oxide (N2O): 27% N2O to pyrolysis Crop & grassland: 1.4% 6.2% in stratosphere hydrogen reduce Industrial processes: 9.1% Forest: 2.1% F-gases: 7.2% emissions from metals Burning biomass: 2.8% 3.0% 73% N2O & 100% of F-gases to atmosphere & mining, chemicals, Calcination & lime production: 3.4% Metals & chemicals: 2.2% cement, oil & gas and Other industrial processes: 3.4% Fluorinated gases Source: HSBC, IEA, EDGAR, Global Carbon Project. Please see our report ‘Future Frontiers -- The pathway towards net-zero’ for more details

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ESG & Climate Change Equities Equities Global Global Energy Equipment & Services

By: Ashim Paun, Sriharsha Pappu, Wai-Shin Chan, Tarek Soliman and March 2021 March 2021 January 2021 the Global Research team www.research.hsbc.com By: Tarek Soliman www.research.hsbc.com By: Tarek Soliman and Sean McLoughlin www.research.hsbc.com SPOTLIGHT SPOTLIGHT

SPOTLIGHT SPOTLIGHT Hydrogen electrolysers Future Frontiers Future Frontiers & Sequestration Capture Carbon Carbon Capture & Hydrogen electrolysers The pathway towards net-zero Sequestration The rock star of clean energy or just a case of FOMO? To achieve the global warming targets Back in the debate, but no silver bullet agreed in the Paris Agreement… Green hydrogen is forcing its way Carbon capture has re-emerged as a up the energy transition agenda; …the world needs to cut emissions key decarbonisation option, but does electrolysers occupy a crucial part of rapidly not represent a ‘silver bullet’ or a the supply chain substitute for deep emissions cuts Our global decarbonisation scenario We see unparalleled growth prospects looks at how cleaner power, transport, After a decade of losing ground to of ~200x to 2030, backed by rising buildings and industry can reduce the wind and solar, the 2020s are likely political and corporate commitment to Asset // Subcategory // Asset Asset // Subcategory // Asset emissions gap to net-zero by 81% Subcategory // Asset ‘make or break’ for the technology to green hydrogen by 2050 play a key role in reaching global net Equities

ESG & Climate Change | Global Change & Climate ESG We initiate on ITM Power (Hold, TP Equities zero emissions 550p) and NEL (Hold, TP NOK33), | Energy Equipment & Services Equipment | Energy | Global Sriharsha Pappu Corporate appetite to invest in CCS both set to be key players but where is growing but remains sensitive to valuations have risen sharply. We policy support. In this report we list maintain a Buy rating on Siemens 51 companies exposed to the carbon Energy (new TP EUR41) which has an capture value chain emerging electrolyser business Head of Chemicals Research and Global Coordinator of Energy

Play interview with Play video with Play video with Ashim Paun Tarek Soliman Tarek Soliman Transition January January 2021 March 2021 March March 2021 March

Disclosures & Disclaimer: This report must be read with the disclosures and the analyst certifications in Disclosures & Disclaimer: This report must be read with the disclosures and the analyst certifications in Disclosures & Disclaimer: This report must be read with the disclosures and the analyst certifications in [email protected] the Disclosure appendix, and with the Disclaimer, which forms part of it. the Disclosure appendix, and with the Disclaimer, which forms part of it. the Disclosure appendix, and with the Disclaimer, which forms part of it.

Future Frontiers Spotlight: Carbon Spotlight: Hydrogen Energy Transition The pathway towards net- Capture & Sequestration electrolysers Our best ideas Follow on LinkedIn zero Back in the debate, but no The rock star of clean silver bullet energy or just a case of Read report › Read report › FOMO? Read report › Read report › View insights

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® Today, roughly 4.2bn Future Cities people live in cities across the world, and this is set to rise to 5.2bn The pandemic has changed the way we think about urbanisation, raising challenges in well-being, by 2030 and 6.7bn by mobility, infrastructure, housing and work practices all of which require careful consideration, 2050, says the UN planning and embodiment in our future cities ® With cities responsible for between 40% to 70% of Green House Gas (GHG) emissions, we expect Global urban population How cities can be smarter cities to prioritise air pollution from transport congestion as air pollution 6.7bn is also responsible for over 3m deaths a year 5.2bn Faster mobile Smarter buildings Predictive More working Prefab ‘flatpack’ globally and broadband using less energy policing from home housing ® Green, Social and networks Sustainability Bonds are increasingly being issued to fund green and social projects in urban areas. In 2020, green, 2030 2050 Bigger public Faster emergency Online Paying fines or More cycle lanes social and sustainability transport networks response education taxes via app bond issuance reached USD 400bn, up 24% vs Source: UN, HSBC 2019, and is expected to rise to USD650bn in 2021, a 60%+ increase on Ideas key to these long-term shifts issuance in 2020 congestion public service green bonds ® Although economies climate change and pollution fewerwomen cars are expected to open up throughout 2021, will fewer crime andcrime safety people travel to cities for

autonomousquality life of vehicles private sector bond work and entertainment? housing journeys credit risksocial and sustainability bond smart cities

PUBLIC HSBC Global Research • 9 key themes to guide your outlook www.research.hsbc.com | 16 Future Cities

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Economics & ESG 24 February 2021 Global

October 2019 By: James Pomeroy and Ashim Paun www.research.hsbc.com Economics Cities and inflation Global

Why urban migration is worth watching Global

 The pandemic has made urban living less popular… Future cities  …which is weighing on rental prices…

 Cut congestion, lift growth …that may not recover fully until cities regain their allure Urbanisation trends may not be something that many investors spend too much time Urban congestion creates huge costs worrying about. They are typically seen as slow-moving, longer-term issues that don’t affect asset prices or the economy in the short term. for the global economy But, as a result of the pandemic, that may have changed. The nature of the pandemic This will only rise without investment has at least temporarily made living in large cities less attractive, particularly in apartments with limited access to outside space. In the developed world, where remote in public transport and new city working jobs are more common, we can see that fewer people are moving to cities (and layouts young people are staying with parents more), meaning that while house prices are James Pomeroy Economist surging, rental demand in cities remains soft. This is weighing on rental prices, a key HSBC Bank plc We outline what could and should be component of inflation. [email protected] done across the world +44 20 7991 6714 While timely data aren’t available everywhere, information from private apartment listings Ryan Wang providers are showing this trend in big cities. In the US, according to Apartment List, US Economist HSBC Securities (USA) Inc. three of the largest metropolitan areas – Los Angeles, New York, and Chicago – have [email protected] seen y-o-y declines ranging from -4% to -9% recently. Rental demand outside big cities +1 212 525 3181

has held up, but not enough to keep the national indices up: average rental prices on Apartment List were down 1.2% y-o-y in January. Stephen Bramley-Jackson In the UK, according to HomeLet, rental prices in Greater London were down 3.9% y-o-y in January, despite rising 5.8% y-o-y elsewhere. In Australia, CoreLogic data cited by the RBA shows that rental inflation for apartments is negative in Melbourne and Sydney, while rental vacancy rates have spiked.

While prospective renters are being offered lower prices, CPI data on rents more closely reflect the prices paid by all tenants, including those that have not moved. In most metro areas in the US where we have data, the CPI data on rents have cooled off but have Global Head of Real Estate stayed in positive y-o-y territory. A key question is how long any downward pressure on rental inflation will persist, and this will likely depend on how quickly the appetite to move into major cities revives. This could matter a lot for inflation developments in the coming years, particularly in the US where rents account for 30% of the CPI basket.

As a result, the movement of people in and out of cities will be a key indicator to Research and Global Coordinator of Play interview with follow. If the end of the pandemic is met with a robust economic recovery and a James Pomeroy return to urban living, particularly for young renters, then we could see rental demand and prices pick back up. But, if remote work holds these flows back as people don’t need to move to cities to Future Cities be close to offices, then lower rental prices in large cities may weigh on headline inflation rates for some time.

Disclosures & Disclaimer: This report must be read with the disclosures and the analyst certifications in Disclosures & Disclaimer Issuer of report: HSBC Bank plc 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. View HSBC Global Research at: [email protected] the Disclosure appendix, and with the Disclaimer, which forms part of it. https://www.research.hsbc.com

Future cities Cities and the pandemic Future Cities Future Cities Cut congestion, lift growth What is the impact from The changing shape of A different type of Follow on LinkedIn re-opening? urbanisation urbanisation – ways to play Read report › our theme Read report › Read report › Read report › View insights

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® The global beauty Future Consumer market has seen huge demand shifts during 2020 as parts of the The future of consumption will be driven by Asian consumers and women in terms of both industry have proved spending volumes and influence on other consumer clusters resilient but others have suffered, most notably make-up. Skincare, fragrance, makeup As such, we focus consumer research on the “4Cs”: Population (mn) 40-64 years with household income >USD50,000 and hair care sectors are collectively worth 120 China USD320bn 100 Chinese US ® Fragmented, female 80 and retail-heavy dominating many subsectors 60 jewelry segment 40 likely to outperform the Japan luxury sector, outside 20 UK a handful of brands we 0 are less optimistic about Channels 2010 2015 2020 2025 2030 2035 2040 2045 the watch trade Source: Global Demographics, HSBC what place for brick and mortar versus online surge ® The European Stickiness of online behaviour post vaccine (Brazil) Consumer Staples and Beverages 0% 20% 40% 60% 80% 100% sector had a resilient 2020 given massive Consolidation Expect to buy post vaccine dislocation caused by COVID-induced M&A and scale advantages COVID-19. Not only did During 2020 the covered companies generally do a good job Pre-COVID-19 at coping with swings in demand but the big Conscience brands came into their own after a number of buy less, buy better, health concerns, buy purpose not More than Once a 2-3 times Once a Once in 2-4 Once a once a week week a month month months year years of pressure from just products, circularity and second hand Source: HSBC, Toluna; number of respondents: 1,671 smaller-start-ups

PUBLIC HSBC Global Research • 9 key themes to guide your outlook www.research.hsbc.com | 18 Future Consumer

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Equities Equities Equities Equities Consumer Future Consumer Consumer Global Luxury Goods

December 2020 January 2021 March 2021 February 2021 By: Jeremy Fialko, Erwan Rambourg, Karen Choi, Antoine Belge and Robert Price www.research.hsbc.com By: Jeremy Fialko and Robert Price www.research.hsbc.com By: Ravi Jain and Felipe Cassimiro www.research.hsbc.com By: Erwan Rambourg and Anne-Laure Bismuth www.research.hsbc.com SPOTLIGHT

SPOTLIGHT Global Beauty Time to shine to Time Brazil: Anatomy of the digital consumer digital the of Anatomy Brazil: European Staples in 2021 in Staples European European Staples in 2021 Brazil: Anatomy of the Global Beauty Time to shine Ready for the next stage digital consumer Onwards and upwards Bullish outlook for luxury jewelry, watches more mixed Despite the extraordinary swings of Prepare for a new normal post vaccine Dislocation caused by coronavirus 2020 most staples demonstrated the has raised important questions over Fragmented, female and retail-heavy the beauty industry’s direction resilience of their business models In our third proprietary Brazil survey, jewelry segment likely to outperform we focus on the rise of the digital the luxury sector. Outside of Rolex Our proprietary survey of 4,700 Yet much of the sector’s H1 consumer and the lasting impact of and a handful of other brands, we are consumers seeks answers – they outperformance was given back in COVID-19 on consumer behavior less optimistic about the watch trade H2 and valuations have returned are reassuring with appetite for the category undimmed towards historical averages We offer insights into brand Tiffany to shine at LVMH (Buy) preferences across e-commerce, though not a transformational deal; Asset // Subcategory // Asset Asset // Subcategory // Asset Asset // Subcategory // Asset The sector offers several attractive Subcategory // Asset Raise our L’Oréal target price to mobile wallets, apparel, footwear, Richemont (Buy) more of a pure play opportunities. We remain Buy on EUR305 from EUR246, rated Hold, sporting goods, food retail, restaurants, on jewelry

Equities and change three more target prices. Equities Henkel, Nestlé, Reckitt, Diageo Equities Equities cosmetics, and travel/leisure and Danone Upgrade Henkel to Buy from Hold. Retain Hold rating on Swatch despite | Consumer | Consumer | Global Luxury Goods Luxury | Global

| Future Consumer | Future Erwan Rambourg LVMH, Amorepacific and LG H&H Weekends post vaccine will likely valuation gap remain Buy include restaurants, theaters, and malls, but there are enough datapoints in the survey to reinforce stickiness in online purchase frequency Global Head of Consumer and Retail Research and Global

Play video with Play video with Play video with Ravi Jain Jeremy Fialko Erwan Rambourg Coordinator of Future Consumer December 2020 December January January 2021 February 2021 February March 2021 March

Disclosures & Disclaimer: This report must be read with the disclosures and the analyst certifications in [email protected] Disclosures & Disclaimer: This report must be read with the disclosures and the analyst certifications in Disclosures & Disclaimer: This report must be read with the disclosures and the analyst certifications in Disclosures & Disclaimer: 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. the Disclosure appendix, and with the Disclaimer, which forms part of it. the Disclosure appendix, and with the Disclaimer, which forms part of it. the Disclosure appendix, and with the Disclaimer, which forms part of it.

European Staples in 2021 Brazil: anatomy of the Global Beauty Time to shine Ready for the next stage digital consumer Onwards and upwards Bullish outlook for luxury Follow on LinkedIn Prepare for a new normal jewelry, watches more Read report › post vaccine Read report › mixed

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® Full-EV penetration in Future Transport Germany was around 11% in H1 2021, up from 4% one year earlier Traditional car manufacturers, new electric vehicle (EV) players, technology companies and mobility and plug-in Hybrid providers are all competing for future transport and mobility revenue streams, while also negotiating electric vehicles (PHEV) penetration was around complex regulation and decarbonisation. Our Future Transport theme allows investors to monitor 12% up from 4% one and navigate important trends as value flows into, out of and across the mobility value chain year earlier ® We see total cost of ownership parity of Global BEV volumes to increase more than 5x by 2025 according to IHS Markit ... while besides EVs, the real disruption is battery electric vehicle – with additional upside risk if OEMs achieve their own BEV targets and from EV- Software/Digitalisation, with Volkswagen (BEV) and internal friendly policy changes under the new US administration… tripling its investment (EURbn) combustion engine (ICE) vehicles from around Battery electric vehicle (BEV) sales, million units Automaker targets by 2025 2025 depending on region 16 and segment, while VW’s 5.4m Others (based on IHS) Digital technology crossover sport utility 1.0m Nissan 27 12 BMW 14 vehicle (SUV BEV) is RoW 0.4m 0.6m Mercedes Hybrid US 11 already near margin parity GM 8 12 8 1.0m powertrains with its ICE counterpart Europe 2.0m Tesla 4 Great Wall 4 0.65m ® HSBC views transport 1.0m Hyundai Mainland as the “second frontier” China 3.0m VW Group 32 33 35 Electrification 0 0.5m Toyota of decarbonisation and 2020 2021e 2022e 2023e 2024e 2025e 2018 2019 2020 suggests pathways Source: IHS Markit, Company announcements Source: VW, HSBC across cars, trucks, *annual planning rounds for the investment budget shipping and aviation Market capitalization of selected incumbent has increased by +34% YTD vs YE2020 while disruptors have only increased by +6% can reduce transport (mainly driven by Tesla) emissions 81% by 2050 Market capitalisation in EURbn YE 2020

VW+BMW+Ford+GM = EUR205bn Tesla+NIO+LG Chem = EUR653bn

23 Aug 2021 VW+BMW+Ford+GM = EUR275bn Tesla+NIO+LG Chem = EUR690bn Source: FactSet, HSBC Research PUBLIC HSBC Global Research • 9 key themes to guide your outlook www.research.hsbc.com | 20 Future Transport

Key insights

28 January 2021 24 March 2021

THIS CONTENT MAY NOT BE DISTRIBUTED TO MAINLAND CHINA THIS CONTENT MAY NOT BE DISTRIBUTED TO MAINLAND CHINA Equities Climate Change Global Autos Autos Future frontiers Global

Chipageddon or catch-up trade? Global Climate solutions to net-zero emissions

 FTSE Autos back to pre-crisis levels at 7.1x 24M-fwd PE, but Henning Cosman*  Decarbonisation targets are increasing in ambition European Head of Automotive Equity Research Ashim Paun discount to FTSE EU and Industrials very high now, due to HSBC Bank plc Co-Head, ESG Research; Climate Change Strategist  [email protected] Reducing emissions to ‘net zero’ levels requires radical action HSBC Bank plc lockdown and chip shortage concerns – a catch-up opportunity +44 20 7991 0369 [email protected] across a range of human activities +44 20 7992 3591  Edoardo Spina* We remain constructive, with strong Q4’20e earnings, robust Amit Shrivastava* Analyst, Automotive Research  HSBC Bank plc We use our proprietary Climate Database to create five screens Climate Database Lead, European Equity Strategist 2021e demand and sticky cost savings – with Buys on BMW, [email protected] HSBC Securities and Capital Markets (India) Private +44 20 3359 2239 of 88 companies earning a majority of revenue in relevant areas Limited Daimler, Stellantis and VW – although all for different reasons [email protected] Pushkar Tendolkar* +91 80 4555 2759  We update our global EV forecast in this note and include a Analyst, Global Autos Atmospheric carbon continues to rise, as we emit more greenhouse gases each year. HSBC Securities and Capital Markets (India) Private Limited Wai-Shin Chan, CFA mini case study on EV/software/tech as Auto valuation drivers [email protected] We have already experienced 1.2°C warming since pre-industrial times, and the Head, Climate Change Centre; Co-Head, ESG +91 80 4555 2752 Research impacts of this are worsening. And so, in Future frontiers – The pathway to net-zero, The Hongkong and Shanghai Banking Corporation Limited

March 2021, as governments, companies and investors around the world begin to [email protected] 2021e global car sales (LVS) +11% after -15% in 2020a – with strong Q4’20e results * Employed by a non-US affiliate of HSBC Securities (USA) Inc, and is +852 2822 4870 not registered/ qualified pursuant to FINRA regulations target net-zero emissions, we look across sectors and ask the question: and supply/demand fears temporary, we remain constructive: Based on our Anushua Chowdhury conversations with EU Auto OEMs and suppliers before the Q4’20 quiet period, as usual, Associate How can the deep, economy-wide transition necessary for this level of Bangalore OEMs are more vague on market outlooks than suppliers, but overall our +10% 2021e decarbonisation be achieved? LVS forecast is well supported by bottom-up views at this point – and VW and Valeo pre- A four-sector focus: The focus so far has been on replacing fossil fuels in power * Employed by a non-US affiliate of HSBC Securities (USA) Inc, and is releases bode well. The top-down view is more uncertain, with lockdowns and chip not registered/ qualified pursuant to FINRA regulations generation. As we have argued, the transport sector follows this – the second major shortages (see pg 09) impacting Q1/H1 2020 volumes. On balance, however, underlying step is to replace the internal combustion engine. In our recent report, we go much demand seems strong enough to allow a robust 2021e volume recovery on easy 2020 further, and look at future frontiers for decarbonisation, moving beyond power and comps in the EU, US and China (see pg 11) – with our +11% 2021e LVS growth above cars to consider other clean transport modes, greener buildings and low-carbon IHS (see pg 17). We see upside risks to 2021e/22e consensus earnings, if sticky cost industry. We see these as necessary to put the world on a pathway towards savings continue to meet robust demand (see pg 04). And while share prices will likely achieving the stronger Paris Agreement target of limiting warming to 1.5C (aligned Henning Cosman remain volatile following the strong recovery, we are constructive on Autos into 2021. with net-zero emissions by 2050). FTSE Autos & Parts now at pre-COVID-19 levels at 7.1x 24M-fwd PE, but gap to Climate solutions to net-zero emissions: In this note, we offer five stock screens other sectors much larger: EU Autos have only performed in line with EU Industrials and the broader market despite sharp positive earnings revisions. The FTSE EU Autos & that comprise companies earning a majority (>50%) of their revenues in relevant Parts index is at pre-crisis levels, while 2022e forecast volumes and EPS are still c10- climate activities: 15% below pre-crisis forecasts. But with the discount to the broader market at 7.1x – and  Clean power – incorporating pure-play climate companies earning revenues OEMs and suppliers performing better than expected on right-sizing costs – there may be from our Bio-energy, Hydro/Geothermal/Marine, Solar, Wind, Diversified European Head of Automotive room for positive earnings estimate revisions and a relative re-rating and catch-up trade. renewables, Integrated Power and Nuclear climate themes

EV, Mobility and China remain valuation drivers. We have Buys on BMW, Daimler,  Clean transport – incorporating companies from our Energy Storage, Fuel Cell Stellantis and VW. Besides the usual data tables, we update our global EV forecast in and Transport Efficiency climate themes this report (see pg 19) and perform a mini case study on Software/Mobility driving  Green buildings – incorporating companies in our Buildings Efficiency climate valuations in the global Autos space (see pg 24). Our OEM stock calls also reflect our Equity Research and Global theme constructive view – although all motivated by company specific reasons (see pg 07).  Industrial efficiency - incorporating companies in our Industrial Efficiency climate theme Company BBG Ticker Currency CMP Target price Rating Upside Market Cap (m) BMW BMW GR EUR 72.08 85.00 Buy 17.9% 43,392  Triple filter – companies earning climate revenues in the above four areas, rated Asiamoney Global RMB Poll 2021 Daimler DAI GR EUR 58.89 66.00 Buy 12.1% 63,001 Buy or Hold by HSBC equity research analysts, and with improving emissions Voting opens 22nd Feb – 02nd April 2021 Coordinator of Future Transport Volkswagen VOW3 GR EUR 163.00 195.00 Buy 19.6% 85,724 If you value our service and insight, please vote Stellantis STLA IM EUR 12.87 18.50 Buy 43.7% 40,160 intensity of revenues earned Click here to vote Source: HSBC estimates, Bloomberg for closing prices as on 26 January 2021

Disclosures & Disclaimer Issuer of report: HSBC Bank plc Disclosures & Disclaimer Issuer of report: HSBC Bank plc This report must be read with the disclosures and the analyst certifications in View HSBC Global Research at: 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. View HSBC Global Research at: https://www.research.hsbc.com the Disclosure appendix, and with the Disclaimer, which forms part of it. [email protected] https://www.research.hsbc.com

Global Autos Asia EV Battery Auto Suppliers Future frontiers Chipageddon or catch-up Hard to ignore accelerating LVP turns the corner, Climate solutions to net- Follow on LinkedIn trade? electrification momentum #FutureTransport more foe zero emissions than friend? Read report › Read report › Read report › Read report › View insights

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PUBLIC HSBC Global Research • 9 key themes to guide your outlook www.research.hsbc.com | 21 Lower for Longer

The global lower-for-longer rates theme withstood many challenges because short-term cyclical and reflationary impulses failed to overcome structural headwinds. Our view takes account of key determinants of low real rates, including debt overhangs, demographics, globalisation and technology. The footprint of this decade-long theme can be seen from the publications on the next page

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Source: HSBC, Bloomberg. Quarterly data, 120-day moving average in dark red.

PUBLIC HSBC Global Research • 9 key themes to guide your outlook www.research.hsbc.com | 22 Lower for Longer

It’s not about the Japan’s trillion dollar The Trump Premium Lower for longer US yields & leverage Bonds in 2025 money Fed’s trillions bond rotation Where are Changes to our US Challenges to our How more debt and slow Lessons from Japan are bullish for bonds the bond flows going? yield forecasts bond view growth reduce rates 27 SEP 2012 19 MAR 2013 11 NOV 2016 1 SEP 2017 15 JUL 2018 6 AUG 2019

11 November 2016 15 July 2018 6 August 2019 1 September 2017 Global Fixed Income Strategy abc Global Fixed Income Strategy abc    Special Global Research Special Global Research

FIXED INCOME FIXED INCOME Fixed Income RATES  FIXED INCOME RATES  Bonds in 2025 Rates The Trump Premium GLOBAL  US yields & leverage Lower for longer   Our non-consensus view is that QE3 We think Japanese buying of overseas

will drive US Treasury yields to new bonds could be close to a trillion dollars Changes to our US yield forecasts US How more debt and slow growth reduce rates United States Lessons from Japan Global

lows this year Challenges to our bond view It’s not about the Japan's trillion dollar

 The impact of the Fed’s trillions is  This private sector outflow is being  The US is seeing a reflation trade based on expectations of a big Steven Major, CFA  US debt levels have increased and growth slowed compared to  We revisit our view from ‘Bonds in 2021’ and see five key Global Head of Fixed Income Research  We are frequently faced with challenges to the low-for-longer Lawrence Dyer money passed onto assets in five ways, which bond rotation fiscal boost following Donald Trump’s election victory HSBC Bank plc Head of US Rates Strategy driven by anticipation of the Bank of past tightening cycles, upping the impact of rate hikes HSBC Securities (USA) Inc. reasons why bond yields should remain low for even longer [email protected] bond yield view [email protected] we identify and use to create a QE Japan’s huge monetary stimulus +44 20 7991 5980 Fed’s trillions are bullish for bonds Where are the bond flows going?  Hence, we increase our forecast for the 10-year Treasury yield to  Our short-term borrowing stress measure suggests that the +1 212 525 0924  Our views should be seen in the context of Japan’s 30-year Scorecard Lawrence Dyer  It is five years since we cut our forecasts and we probe our Steven Major, CFA 2.5% (up 100bp) for Q1 2017 Chief US Rates Strategist FOMC’s hike projections (dots) will restrict growth battle with excessive debt and the policy responses  German Bunds and French OATs are Global Head of Fixed Income Research HSBC Securities (USA) Inc. below-consensus US yield call by considering five topical risks HSBC Bank plc  [email protected] Our QE Scorecard implies that QE3 is the biggest winners so far, but  But we keep our end-2017 forecast unchanged at 1.35%  This supports our view that higher leverage and slower growth [email protected]  We cut our end-2019 US 10-year Treasury and Bund yield +1 212 525 0924  We explain why we think those risks are contained and why +44 20 7991 5980 bullish for Treasuries, credit, EM debt emerging markets are also benefiting because we think the economy will slow if yields rise are reasons to forecast lower-for-longer Treasury yields forecasts to 1.50% and -80bp, respectively and equities, but bearish for mortgage the structural drivers supporting low yields remain in place

and inflation-linked bonds Tracking bond flows after the BoJ shift The Fed is tightening, but we still expect yields to stay low. The forces that have kept Lower… for even longer The aggressive monetary easing that Japan is planning to Trump premium - how much is enough? Possible risks to our view that bond yields will remain at low levels, and those yields low since the great recession have not changed (Bonds in 2021: Why we expect In essence, we expect bond yields to remain low for the following reasons: 1) those The Fed’s QE trillions are not ‘printing’ money boost its economy and kill deflation is already having a big President-elect Donald Trump made plenty of promises during the US election most often cited by investors, include: yields to stay low, 4 October 2016) and the 5y5y forward is near its expected peak (Peak central banks with negative rates are already preparing to further experiment with life Steven Major, CFA The Federal Reserve’s new wave of quantitative easing impact in international bond markets. Money is flowing out campaign but gave very little detail. There are now widespread expectations of tax Rates: A new era for US Treasuries, 5 February 2014). We estimate that USD12trn of Global Head of Fixed Income Research below zero, 2) inflation is likely to stay low, 3) QE is not working to reverse disinflation, HSBC Bank plc of Japan in anticipation of further yen weakness and because cuts and increased spending, particularly on infrastructure, but little clarity on how  Central bank balance sheets Steven Major, CFA non-federal US debt is sensitive to short-term rate changes today. At 64% of GDP, this is (QE3) follows similar large-scale asset purchase policies Global Head of Fixed Income Research 4) debt levels remain excessively high, and 5) growing interdependence between fiscal [email protected] such programmes will be financed. We cannot afford to wait for more detail before near its 50-year peak (Figure 5). Higher debt levels and slower nominal growth means +44 20 7991 5980 adopted in November 2008 (QE1) and November 2010 of the incredibly low JGB yields. The biggest beneficiaries  Framework changes at central banks HSBC Bank plc [email protected] each 25bp rate hike has a bigger dampening effect than before. The Fed could hike by and monetary policy. are core European bond markets as Japanese investors seek changing our bond yield forecasts. We are cautious about how many of Mr. Trump’s +44 20 7991 5980 Lawrence Dyer (QE2). Each step of the Fed’s unconventional policy  Head of US Rates Strategy pledges can be delivered, including on trade and tariffs. What we do have is analysis Whether or not inflation can stay low less than it projects and/or growth could slow more than it expects, in our view. additional yield and the prospect of currency gains. Over the Turning Japanese: lower and flatter HSBC Securities (USA) Inc. response – which will soon add up to close to USD2 trillion of the term premium, inflation expectations, and forward yields, which gives us some  Tax reform and other supply-side reform impact on growth [email protected] past six months, 20% of the gross issuance of core Eurozone Quantifying these effects requires answering the question: How does a 100bp increase in Our analysis is underpinned by Japan’s experience over the last 30 years as it has +1 212 525 0924 – has been met with controversy. Opposition comes from insight into how far the Treasury curve could reprice. debt has effectively been bought by Japanese investors.  the Fed funds rate affect the cost of servicing debt and future spending? We have asked struggled with high debt levels, extremely low inflation, and (more recently) negative those who think QE has no real economic impact, to those The economic cycle and the yield curve Daniela Russell Approximately 100bp increase in term premium this question in many meetings with investors in recent months. No one had a quantitative interest rates. For bonds, Japanification means permanently low yields and curve Head of UK Rates Strategy who believe the policy will be inflationary. But it’s not about With more stimulus likely, we think this trend will continue, In this report, we highlight the trends that have supported our views over the HSBC Bank plc We think the 10-year US Treasury yield could rise to 2.5% in Q1 17. This increase may answer. The Federal Reserve website’s section on monetary policy reflects the flattening that extends up the curve from shorter maturities. It also means lower [email protected] the money, rather about where it goes and how it is used. driving down yields in core Eurozone markets, particularly hurt economic growth, and given the structural factors at play and the large number of last five years. These include: conventional discussion (see Debt Cost Measure section). It highlights the importance of yields elsewhere as trillions of dollars flow to places that offer better returns. +44 20 7991 1352 27 September 2012 Germany and France. We think the yield on 10-year German unknowns, we are keeping our end-2017 forecast at 1.35%. Our view recognizes the long-term rates as well as how changes in equity and home prices affect wealth and We assess the impact of the Fed’s trillions by tracing where  Central bank QE spills across borders Taking the hatchet to our bond yield forecasts Bunds could fall close to 1.0% later this year, reflecting the cyclical pressure pushing yields upwards but also that longer-term structural drivers, such consumption. The effects of change in short-term interest rates receives little attention. Steven Major, CFA the money went, and where the cash received by investors extensive new demand for a relatively scarce product. This as the debt overhang, will weigh on growth and yields (Bonds in 2021).  There is too much debt, the servicing of which is deductive from growth Informed by the powerful Japan effect and the projections out to 2025, we have cut Strategist selling assets to the Fed was invested. By following the 19 March 2013 This may reflect the view that higher debt servicing costs for a borrower results in higher goes against the consensus view that Bund yields will rise. our bond yield forecasts from already low levels. For 10-year US Treasury and Bund HSBC Bank plc  QE is not inflationary, in fact it can be the opposite income for the lender. If both had the same marginal propensity to consume, then rate money, we identify five ways Fed purchases are felt by Steven Major, CFA Rationale for near-term increase in yield forecast yields, the new forecasts are 1.50% (from 2.1%) and -80bp (-20bp), respectively, for +44 20 7991 5980 [email protected] hikes would simply shift consumption from borrowers to savers -- total consumption markets and the wider economy: 1) yields on assets targeted Global Head of Fixed Income Research USD1 trillion outflow Normalization of term premium towards the average level of the last four years would  Term premium drives the large bond sell-offs both end-2019 and end-2020. HSBC Bank plc would not change. However, it is more likely that many borrowers have limited financial Lawrence Dyer by the Fed; 2) use of cash by investors selling to the Fed; In total, we estimate USD700bn-USD1trn could flow out of represent an approximate increase of 100bp in yield from the low point. The term +44 20 7991 5980 [email protected]  Forward yields above nominal GDP projections are a bullish signal resilience and will spend any savings (Forbes) and have difficulty paying higher bills Our 2025 view is that the central tendency for US bond yields is approximately 2.0%, Strategist premium rise reflects the potential shift in the level of bond supply versus demand, in line 3) bank reserves; 4) economic expectations; and 5) policy Japan over the next year, reflecting both higher historical (Pew Charitable Trust) while wealthier savers will not change their consumption. reflecting longer-term real rates close to zero and inflation continuing to average no HSBC Securities (USA) Inc. André de Silva, CFA with projections of an increased budget deficit. The 2.5% 10-year Treasury forecast for  Central bank forward guidance contributes to lower volatility expectations. There is no printing of money analogous to levels of Japanese investor ownership and an extrapolation more than 2.0%. This is consistent with our long-held view. HSBC’s year-ahead US +1 212 525 0924 [email protected] Head of Asia-Pacific Rates Research Q1 17 is 110bp above the low point for nominal yields reached in the summer. To understand the effect of shifting short-term rates, we construct a borrowing stress 1920s Germany: the Fed is effectively funding its purchase The Hongkong and Shanghai Banking Corporation Limited of recent evidence of flows from the mutual fund sector. The  Higher yields are not sustainable if debt is not reduced Treasury forecast has been in the 1.5-2.5% range for the last seven years. measure: the nominal growth trend minus the cost of the debt sensitive to short-term of assets by steering reserves in the banking system in +852 2822 2217 [email protected] beneficiaries include other core markets, supranationals and Why is the end-2017 forecast not higher?  Common misconceptions inform mainstream bond yield forecasts rates. We then compare historical levels of this stress measure to what would happen We have considered how we could be wrong certain directions. agencies. We think Indonesia, Mexico, Brazil, Poland, We believe that if yields increase too much in the short-term then financial conditions will Table 1 on page 11 shows the full history of forecasts and how they compared to based on the FOMC’s median economic and funds rate guidance. In our scenario analysis we consider bond-bearish outcomes, the most commonly Turkey and South Africa will be among the emerging tighten, resulting in less growth and a constrained Fed. Our analysis shows that, We used these insights to create a QE Scorecard to assess consensus and spot rates, along with a list of the relevant publications. cited being higher inflation. For this to have more influence on our thinking we would markets affected. historically, shifts in supply have not changed the relationship between longer-run We estimate tightening to the 2020 median FOMC dot, 3.375%, would have the same need to see sustained wage increases and a reversal of globalisation effects. the potential impact of QE3 on Treasuries, mortgage bonds, economic growth and interest rates. Therefore, we expect yields to fall again on the basis effect on consumption as a 30% drop in US equity prices. Interestingly, today’s fed funds We also consider radical policy proposals like MMT (Modern Monetary Theory) and View HSBC Global Research at: http://www.research.hsbc.com inflation-linked debt, credit, EM debt and equities. Our View HSBC Global Research at: http://www.research.hsbc.com BoJ QE will contain JGB yields that Trump’s policy proposals, which combine tax cuts and spending cuts, may not boost rate is already moderately restrictive based on our analysis (Figure 1). believe that some of the ideas already exist in the interdependence between conclusion is the opposite of the consensus view that QE3 These private sector purchases of foreign bonds will not lead growth by enough to support higher yields. Steven Major,Major CFA MiFID II – Research monetary and fiscal policies. Issuer of report: HSBC Bank plc will be inflationary and push US Treasury yields higher, and Issuer of report: HSBC Bank plc to higher JGB yields if the BoJ launches earlier quantitative our target is for 10-year Treasury yields to test the 1.4% low easing, including buying longer maturities, under Haruhiko Is your access agreed? CONTACT us today Disclaimer & Disclosures point in the coming months. Disclaimer & Disclosures Kuroda, the new Bank governor. This report must be read with the This report must be read with the disclosures and the analyst certifications disclosures and the analyst certifications Disclosures & Disclaimer Issuer of report: HSBC Bank plc Disclosures & Disclaimer Issuer of report: HSBC Securities (USA) Inc. 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Global Head of Fixed Income IncomeResearch Research and Global Coordinator of Decade of denial Fiscal fallacies Down, down, deeper US bonds – the QE Back to the future What really matters [email protected] for Longer Fixed Income Asset Bonds are not and down US rates – quandary Three Lower-for-longer and Fixed Income Asset Allocation potatoes an alternative scenario common misconceptions regime shifts Allocation [email protected] 9 JAN 2020 20 JAN 2020 4 JUN 2020 29 JUN 2020 25 MAR 2021 9 JUN 2021

4 June 2020 29 June 2020 Follow on LinkedIn

9 January 2020 20 January 2020 25 March 2021

Fixed Income Fixed Income Fixed Income Fixed Income Fixed Income Rates Down, down, deeper and Rates US bonds – the QE quandary Rates Fixed Income Asset Fiscal fallacies Rates Back to the future Rates Follow on LinkedIn Allocation down

Global US rates – an alternative scenario Three common misconceptions United States Decade of denial Bonds are not potatoes Lower-for-longer and regime shifts United States

  To maintain the diversification properties of owning US  We use event studies to show that US Treasury yields are There is nothing that changes our long-term view of low-for-  For those calling for 2020 to be the “year of fiscal policy” we  To qualify as a market regime shift there has to be a large longer rates. Perennial expectations of cyclical recovery fuel have some bad news Treasuries, rates might need to be free of the zero bound where they are because of rates not QE and abrupt upward move in the longer-run real rate... the market’s short duration position    Applying long-end yields to infer shadow rates exaggerates Supply does not matter to our long-term bond yield forecasts Down, down, deeper and down is a low probability alternative  ...which persists for many years, supported by positive  We are bullish Bunds given the weak economic backdrop scenario which would have a big impact… the true policy accommodation for the real economy  Government bonds appear to exhibit the micro-economic feedback loops. We set the bar high for a change of view and relative valuations. Long-dated US TIPS offer value   characteristics of goods that have an elastic demand curve …so it is worth considering alongside the maintenance of the The larger Fed balance sheet and increase in money supply  The cyclical impulse informing the current narrative is unlikely  Yields are still above our end-2020 forecasts, which include status quo, which informs the base case scenario do not mean inflation is about to rise to reverse the secular drivers causing low rates 1.5% for US Treasuries and minus 60bp for Bunds Bonds are not potatoes Unlike potatoes, government bonds are unlikely to go bad (default) over time. So the Client questions centre on these misconceptions Thought experiments on what constitutes a regime shift Markets underweight scenarios that can have a big impact Whilst defending our US Treasury forecasts we realised that the pushback to our Valuations stretched but low-for-longer prevails Page 4 value of a bond today is defined by the expected path of short rates and a term We went back to the 1960s and the period of above-trend growth that sowed the Steven Major, CFA It is just maths. When rates have been at 2.0%, with the Fed in easing mode and the premium. The overly simplistic view that increased supply of bonds means prices will Steven Major, CFA view has a common thread leading to the QE quandary. So we were motivated to Steven Major, CFA seeds of the 1970s inflation. If that’s what investors think is coming next then they Global Head of Fixed Income Research Steven Major, CFA The decade of denial saw expectations of cyclical recovery often disappointed and a market implying 50bp of rate cuts, we could say it was equivalent to a 25% probability Global Head of Fixed Income Research Global Head of Fixed Income Research HSBC Bank plc Global Head of Fixed Income Research fall (i.e. yields will rise) has been popularised with renewed calls for fiscal loosening. HSBC Bank plc write this paper to provide a better understanding about the three main HSBC Bank plc better prepare for an additional 150bp increase in longer-run real rates, and that’s on similarly misplaced belief in the view that bond yields would rise. Whilst most market [email protected] Steven Major, CFA The Hongkong and Shanghai Banking Corporation Limited of a move to zero and 75% probability of unchanged. Now we are at zero and we [email protected] [email protected] +44 20 7991 5980 But this is analogous to estimating the price impact of an increase in the supply of Global Head of Fixed Income Research misconceptions: 1) yields are lower because of QE, 2) that by extension QE is a top of what’s already occurred. For perspective, a further increase that takes forward [email protected] participants have accepted that low-for-longer rates is now a base case, we wonder wonder whether implying 10bp of rate cuts means there is a 10% probability of minus +44 20 7991 5980 +44 20 7991 5980 potatoes without reference to demand. We examine demand through a micro- HSBC Bank plc substitute for rate cuts, and 3) the bigger balance sheet will feed through to higher bond yields towards 4.0% would represent a reversal of all the declines since the +852 2996 6590 whether investor positioning and psychology has sufficiently adjusted. [email protected] 1%. Extending the process further implies -1% becomes a 10% probability of -10%. Lawrence Dyer Lawrence Dyer economic prism and do some empirical tests that find support in the literature. +44 20 7991 5980 inflation and yields. Global Financial Crisis (GFC). It is not our view, just a description of what regime shift Lawrence Dyer Head of US Rates Strategy Head of US Rates Strategy It’s not our forecast but this number is close to what the Taylor rule implies. HSBC Securities (USA) Inc. Head of US Rates Strategy We like ultra-long US TIPS Page 8 Daniela Russell HSBC Securities (USA) Inc. in the FOMC’s and bond market’s long-run rate outlook might look like. HSBC Securities (USA) Inc. [email protected] The “supply matters” approach misses what actually matters Head of UK Rates Strategy Our forecast is still 50bp for US 10-year Treasuries [email protected] [email protected] An alternative source of duration to the conventional market, long-dated TIPS also Down, down, deeper and down +1 212 525 0924 +1 212 525 0924 Bonds are not potatoes, but if they were the market stall analogy would be like HSBC Bank plc Long-term structural themes justify policy rates staying low for a very long time. One The evolution of our view – checking back +1 212 525 0924 provide protection against a rise in inflation, at a time when the Fed is openly [email protected] Rather than incremental shifts below the zero bound we look at the seemingly Shrey Singhal, CFA This is not the first time the low rate regime has been challenged, and it will probably Shrey Singhal, CFA ignoring their value versus alternative foods (relative value). And it would be odd to +44 20 7991 1352 of these themes is the level of debt that just got a lot larger, making it even more Fixed Income Strategist pursuing catch-up strategies. We prefer the 30-year segment based on our analysis implausible -10% generated by the Taylor rule. Unencumbered by the zero bound, not be the last. Cyclically driven yield forecasts and market moves have oscillated Fixed Income Strategist make forecasts that exclude the demand – especially from large price-insensitive Duncan Toms difficult for rates to rise. QE ‘rules of thumb’ that suggest yields are too low, and HSBC Securities (USA) Inc. HSBC Securities (USA) Inc. of prospective total return1. Fixed Income & Multi-Asset Strategist yield curves would experience a huge bull-steepening, perhaps going beyond [email protected] between recession and reflation expectations. Some forecasters forever look for [email protected] buyers. For the bond market, these include central banks (in QE operations), as well HSBC Bank plc views on the balance sheet expansion being inflationary, are distractions from what +1 212 525 5126 previous extremes, and the insurance value of Treasuries would be maintained higher inflation but we don’t see what would change the multi-decade trend of lower +1 212 525 5126 Bullish Bunds on fundamentals and relative valuations Page 13 as the vast set of investors, who see their liabilities rise when yields fall. [email protected] really matters to the longer-run equilibrium policy rate. +44 20 7991 3025 because long-duration positions would still work to effectively hedge risky asset yields and inflation. Lower-for-longer started with the QE that came after the GFC in Bizarre as it may seem when the yield on the 10-year is minus 24bp, we think Bunds The demand curve for bonds can be relatively elastic Lawrence Dyer positions. There would likely be an extended rally across financial assets too. Treasury market looks through the noise 2008-09. The regime withstood the test of ‘taper tantrum’ (2013) and the ‘Trump are cheap. The economic backdrop remains sluggish, the possibility of further easing Head of US Rates Strategy We believe the demand curve for government bonds can be relatively elastic HSBC Securities (USA) Inc. For most of April, May and June the 10-year Treasury range has been just 10bp. In bump’ (2017). It is now grappling with the ‘Biden bazooka’. has been priced-out and then there is the comparison with Treasuries. When Status quo brings new challenges compared with the supply curve, so that even a big move in supply does not have to [email protected] the volatility of March the range for daily closes was 66bp and this belies the true shopping for high quality, core rates duration, we think this is the place to go. +1 212 525 0924 Central banks can only watch falling longer-run real rates result in a meaningful shift lower in the price. This view is supported by the long-term Yield curves will continue to evolve into a ‘hockey stick’ shape whilst the zero bound intra-day volatility. When we consider the size of the stimulus and the ‘lumpiness’ of HSBC’s economics team sees a 6% 2021 US GDP (The great experiment, 24 March relationship between real yields and shifts in the deficit. Together, it suggests factors holds; these convex curves have relatively flat front-ends and steep long segments. UK 10-year gilts: Global factors have contributed to the re-pricing Page 15 net bond supply, the market’s smooth transition has been impressive. 2021), reflecting the challenge of the 2021 growth surge. Unlike the economy, the Fed aside from supply play a more important role in determining the level of bond yields. Lower bond volatility would likely continue with tight trading ranges but bonds could The recent rise in front-end UK rates came alongside a similar re-pricing in the Euro has had its own regime change: it now looks to a longer-run average of realised inflation, lose diversification appeal as they no longer serve as ‘insurance’ against risky asset Our view means we prefer to use periods of volatility to position for lower yields. In area and US, and can explain much of the back-up in 10-year gilt yields. It has left and the policy review is not scheduled for five years. Applying a long-run average to The short rate matters most to the bond yield positions. This potentially challenges the view for risky assets described above. the longer maturities we look for curve flattening opportunities. valuations at odds with where we think the balance of risks lies. As the BoE moves growth and inflation forecasts for the coming years finds a return toward trend, not a new The government bond markets efficiently discount all available information so that from laggard to leader of the central bank doves in 2020, this is bullish for UK gilts. We address each of the three misconceptions regime. By definition, the structural and secular forces that gave us low rates are not bigger deficits and higher debt/GDP ratios are factored-in. If a loosening of fiscal Deeply negative interest rates are not the base case After a brief executive summary this paper is divided into three sections: likely to reverse quickly. Central banks cannot do much about the birth rate, or make old Mildly bullish on credit markets globally Page 11 and Page 18 policy is expected to boost future growth potential, then the central bank may Much has been written about negative interest rates and there is a debate as to people young again, neither can they make the debt overhangs vanish. Policy support in China and from major Western central banks should keep credit respond by changing its forecasts and signalling higher policy rates. This happened whether they ‘work’ as intended and on whether the costs outweigh the rewards. 1. Bond purchases and yields spreads tight in the near term. Although we are mildly bullish across credit markets in the US in 2017, when in anticipation of higher policy rates the front-end of the Evidence for and against is based on the experience of moderately negative interest No change to our longer-run forecasts rates that appear to have hit constraints. Deeply negative rates would be different 2. Substituting QE for rate cuts View insights globally, our risk appetite is kept in check by the prospect of modest spread curve adjusted more quickly than the long-end. The curve flattened. Our longer-run 1.0% US 10-year Treasury forecast is unchanged, because we and the measurement of success or failure would presumably be based on the 3. Balance sheet, money supply and the return of inflation believe the lower-for-longer framework remains intact. Fundamentally driven, long- compression ahead. HSBC Investment Seminar different objectives to those of slightly negative rates. term investors, may require an event or a trigger that changes the narrative before Asiamoney Global RMB Poll 2021 ______1 Total return measures price appreciation, accrual and coupon payment Sterling Markets in 2020 they can step-in to buy bonds. For our near-term forecasts, neutral means neutral; Voting opens 22nd Feb – 02nd April 2021 Wednesday, 22January 2020 | London we regularly update our tactical view in our Fixed Income Asset Allocation If you value our service and insight, please vote Register now publication, the latest of which was published on 10 March 2021. Click here to vote

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