12 December 2008
Pan-Asia
Issue no. 70
Garry Evans*
Strategist
The Hongkong and Shanghai Banking
Corporation Limited (HK)
+852 2996 6916
garryevans@hsbc.com.hk
View HSBC Global Research at:
http://www.research.hsbc.com
*Employed by a non-US affiliate of
HSBC Securities (USA) Inc, and is not
registered/qualified pursuant to NYSE
and/or NASD regulations
Issuer of The Hongkong and Shanghai
report: Banking Corporation Limited
Disclaimer &
Disclosures
This report must be read
with the disclosures and
the analyst certifications in
the Disclosure appendix,
and with the Disclaimer,
which forms part of it
Equity Strategy
abc
Global Research
AI – Asia Insights
Thinking the unthinkable
 Forecasting is always hard; we think laterally about 2009
 What is certain next year – and what are the big surprises?
 Also, we reveal the world’s worst piece of economic data
It’s very difficult to make predictions, especially about the future. Yogi Berra
It is that time of year when people like to ponder on where markets might go over the next
12 months and adjust investment strategies accordingly. We will be publishing our Asia
Strategy Quarterly in early January, which means we are deep in thinking mode at the
moment, trying to figure out what is likely to happen next year – and what people think is
likely to happen, that might not.
We won’t reveal our conclusions until the New Year, but we believe it might be useful to
think out loud a little. Forecasting is always hard – and probably more than usually so at
the moment given multiple uncertainties – so it is worth thinking laterally about the full
range of possibilities. We have come up with lists of factors the consensus believes are
“near certainties” (example: that interest rates will stay very low), and potential big
surprises, i.e. unlikely events that have a higher probability than the market realises (like,
could Chinese growth fall below 6%?). We did a similar exercise last December and, in
the event, almost as many of our surprises came true as did the near certainties.
Separately, for a bit of pre-Christmas fun (we have a warped sense of humour), we asked
colleagues to come up with the single most scary piece of economic data they could find.
What could be more negative than the Baltic Dry Freight Index falling 94% in seven
months, global IPOs down 98% in Q4, or Chrysler selling cars in the UK at half price?
1. Near certainties for 2009 2. Possible surprises
Asian earnings decline Renminbi depreciates
Global growth very weak China grows 6% or less
Equities don’t fall by as much as in 2008 US growth rebounds strongly in H2
Asian equities stage a 30%-plus rally at some point …or remains negative all year
Asian exports decline Investors balk at buying US Treasuries
Inflation falls and ends 2009 very low, even negative Inflation risk reappears
Interest rates stay low Stock markets end 2009 25% up
US recession over before the end of the year …or have another negative year
Commodity prices fall much further
Nationalisation of big US banks
Big banks bailed out in Korea, Taiwan, India
A household name Asian company goes bust
Country defaults
Significant social unrest
A war (or civil war) somewhere in Asia
Regime change in North Korea
Source: HSBC Source: HSBC
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HSBC strategy recommendations

Recommended market weights
Market HSBC recommended Benchmark Weighting End-08 Current YTD 12-mth EPS growth
weight weight target index perf * fwd PE forecast 2008
Japan 47.5% 47.5% Neutral 900 835 -34% 12.3 -22%
Australia 13.0% 15.1% Under 4500 3,641 -56% 8.9 8%
China 11.0% 9.0% Over 48 43 -49% 10.3 3%
Korea 6.5% 7.6% Under 1300 1,146 -59% 9.3 -19%
Taiwan 5.0% 6.0% Under 5500 4,659 -49% 16.8 -40%
Hong Kong 5.0% 4.9% Neutral 18000 15,578 -51% 11.8 -31%
India 4.0% 3.7% Neutral 12000 9,655 -65% 9.7 -1%
Singapore 4.5% 2.8% Over 2200 1,822 -50% 10.3 -7%
Malaysia 2.0% 1.4% Over 1000 855 -47% 11.0 -15%
Indonesia 0.5% 0.9% Under 1700 1,316 -59% 7.4 14%
Thailand 0.0% 0.7% Under 550 424 -54% 6.9 105%
Philippines 0.0% 0.2% Under #N/A 1939 -53% 10.5 -6%
Source: HSBC (Weights relative to MSCI Asia Pacific) *MSCI index in USD terms

Recommended sector weights

Sector HSBC recommended Benchmark Weighting Overweights Underweights
weight weight
Financials 23.0% 26.6% Under AU, IN, JP, KR, TW
Industrials 18.0% 14.6% Over CH, HK, IN, KR, SG TW
IT 11.0% 12.8% Under HK, JP, KR, TW
Consumer disc 9.0% 11.4% Under AU, CH, HK, IN, JP, KR,TW
Materials 9.5% 11.4% Under CH, TW AU, IN
Telecoms 7.0% 5.6% Over HK, IN, JP, MY, TW KR
Energy 5.5% 5.3% Neutral CH, TW
Consumer staples 5.0% 5.1% Neutral CH, TW
Utilities 6.0% 3.9% Over CH, MY IN
Healthcare 6.0% 3.3% Over JP, KR
Source: HSBC (Weights relative to MSCI Asia Pacific)

Top high-conviction buy ideas

Code Name Country/ Sector HSBC rating Upside to target Price Market cap
region price (%) (local, 12/10/08) (USDm)
836 HK China Resources Power CH Utilities Overweight (V) 57.5 15.32 (HKD) 8,311
857 HK PetroChina CH Energy Overweight (V) 12.5 7.11 (HKD) 164,234
2727 HK Shanghai Electric Group CH Industrials Overweight (V) 30.3 3.07 (HKD) 6,529
823 HK The Link REIT HK Real estate Overweight 29.8 14.10 (HKD) 3,937
19 HK Swire Pacific HK Industrials Overweight 82.1 56.00 (HKD) 6,548
BHARTI IN Bharti Airtel IN Telecoms Overweight (V) 14.6 735.80 (INR) 28,510
LT IN Larsen & Toubro IN Industrials Overweight (V) 60.3 779.80 (INR) 9,316
9433 JP KDDI Corp JP Telecoms Overweight 19.8 626,000.00 (JPY) 30,255
033780 KS KT&G KR Consumer Overweight 26.6 79,000.00 (KRW) 7,866
SIA SP Singapore Airlines SG Airlines Overweight 20.3 11.64 (SGD) 9,205
Source: HSBC Note: These stocks are chosen by the strategy team from among HSBC analysts’ top large cap Overweights (in terms of upside to target price) with reference to the markets or
sectors where the strategy team has an overweight call. Valuation and risks can be found from p74 of Pan-Asian Equity Strategy: Next problem: growth. It will start to wilt, pub. 8 Oct. 2008.

Top sell ideas

Code Name Country/ Sector HSBC rating Downside to Price Market cap
region target price (%) (local, 12/10/08) (USDm)
670 HK China Eastern Airlines Co CH Airlines Underweight (V) -33.3 0.75 (HKD) 846
ICICIBC IN ICICI Bank IN Financials Underweight (V) 8.7 400.05 (INR) 9,089
8035 JP Tokyo Electron, Ltd. JP IT Underweight (V) 9.4 2,715.00 (JPY) 5,284
3009 TT Chi Mei TW IT Underweight (V) -25.4 10.05 (TWD) 2,196
Source: HSBC Note: These stocks are chosen by the strategy team from among HSBC analysts’ top large cap Underweights (in terms of upside to target price) with reference to the markets or
sectors where the strategy team has an underweight call. Valuation and risks can be found from p74 of Pan-Asian Equity Strategy: Next problem: growth. It will start to wilt, pub. 8 Oct. 2008.

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Issue no. 70

What didn’t happen in 2008 3. 2008: near certainties

The power to become habituated to his Forecast Outcome

surroundings is a marked characteristic of Fed to cut rates further Yes

US growth to slow Yes
mankind. Very few of us realize with conviction Japanese growth to slow Yes
Credit markets to remain unstable Yes
the intensely unusual, unstable, complicated, Asian export growth to soften in H1 No
unreliable, temporary nature of the economic Political change in Korea, Taiwan, India, Thailand, Japan 2/5
Chinese authorities to continue to cool economy No
organization by which [we have] lived for the past Overseas M&A by Asian companies increases Yes
Chinese portfolio investment overseas to be major factor No
[decades]. We assume some of the most peculiar 61%
and temporary of our late advantages as natural, Source: HSBC
permanent, and to be depended on, and we lay
our plans accordingly. (John Maynard Keynes: 4. 2008: surprises
The Economic Consequences of the Peace) Forecast Outcome
US dollar strengthens Yes
Keynes, as so often, was right. Human beings, and Chinese growth slows sharply Not yet
especially investors, have a habit of extrapolating Japanese politics see radical change No
Outright recession in the US Yes
from the recent past. That, presumably, is why Excess liquidity turns Asian stock markets into a bubble No
US housing market bottoms out No
momentum often does well as an investment style, Asian corporates start to borrow more Yes
and why markets tend to trend. Indian election sees Congress winning increased majority n/a
Asia sees rapid growth in M&A/private equity deals No
Another one-off RMB revaluation No
To avoid falling into this trap, we started last year, Beijing launches military attack on Taiwan No
as part of the planning process for our New Year Oil price falls sharply Yes
41%
preview, to try to consciously map out the range
Source: HSBC
of possible outcomes for equity markets. That
helps to remind us of what is universally assumed 5. 2008: inflection points
to be true, and what is believed by the consensus Important? Impact:
to be highly unlikely (or not considered at all). positive or
negative?
Last December, for example, we published four How much does US consumption slow Yes --
Does Chinese growth decelerate Somewhat -
tables of our thoughts for 2008 on: (1) what the Do bank and corporate defaults rise Yes --
consensus sees as near certainties (Table 3 on this Rising protectionism in the US ahead of No 0
presidential election
page), (2) surprises – outcomes that the consensus Does Fed veer towards averting recession Yes - then ++
or damping inflation
believes highly unlikely but where the probability
Success of Beijing Olympics No 0
of their occurring is perhaps as high as 20-30% Do US investors sell out from Asian stocks Yes --
(Table 4), and (3) the key inflection points – Source: HSBC

factors that will affect Asia most during the year,

which we need to have a view on to call markets
correctly (Table 5). We also produced a table of
what themes, with the benefit of perfect hindsight,
would have worked over the past 12 months. (We
find this a useful exercise since it often throws up
ideas about the sort of themes that can influence
markets. We have not reproduced the 2007 table
here – but below we think about what these
themes would have been in 2008.)
How good were the predictions? Most of the
certainties did come about: the US economy
slowed and the Fed cut rates (although much more
dramatically than anyone expected). Where the
consensus was wrong was that inflation ceased to
be an issue; the Chinese authorities cooled the
economy only until the summer, then did an
abrupt U-turn, and by the end of the year were
pulling out all the stops to prevent it from over-

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cooling. We were also only half-right about
political change: there were regime changes in
Korea and Taiwan, but they turned out to be a lot
less positive than we thought (and India, Thailand
and Japan have pretty much the same government
as 12 months ago).
Where 61% of the “near certainties” happened,
the percentage of unlikely events that occurred
(41%) was not that much lower. The risk scenario
for 2008 – a sharp global slowdown – did come
about, which meant that the dollar strengthened,
the oil price fell sharply and the US went into an
outright recession.
Our judgement on the likely inflection points was
not far off the mark either. We got too excited
about protectionism and the Beijing Olympics, but
we correctly identified the slowdown in US
consumption and Chinese growth, rising bank and
corporate defaults, and the massive sell-off of
emerging market assets by US investors as the
key drivers of stock markets. With hindsight, we
might have added inflation – the worries about it
in H1 and its disappearance as a theme in H2.
Who dares forecast 2009?
Reflecting on the accuracy of one’s thinking 12
months ago is a humbling exercise. In retrospect,
2008 would have been a very easy year to get
right from an investment point-of-view if one had
made the simple call that the global economy was
going into the worst recession since the 1930s,
driven by major dislocations in the financial
system (we were more bearish than some, but not
bearish enough).
For optimum performance, investors should
simply have had the most defensive portfolio they
were allowed, with maximum amounts in cash
and government bonds (Table 6). If they needed
to own Asian equities at all, they should have
bought quality companies with strong balance-
sheets in sectors such as food, utilities and
4
abc
telecoms. Malaysia was about the only market
that clearly outperformed in the region – but even
this index is down 47% y-t-d. Braver investors
might have tried to time trading the rallies – but,
frankly, we haven’t met anyone who felt capable
of doing this successfully, given the tremendous
volatility throughout the year.
6. Themes that would have worked in 2008
Theme
Ultra defensiveness
Overweight utilities, healthcare, consumer staples
High cash levels
Quality balance sheets
Long Malaysia
Short China, India, Korea
Short cyclicals
Avoid small caps
Buy commodities in H1, sell in H2
Long government bonds
Trade the rallies (Jan, Apr, Nov)
Source: HSBC
Near certainties for 2009
So where does the consensus stand on 2009? We
suspect that the mostly widely held view is that
the next two quarters will be difficult for the
global economy, but that the combination of rate
cuts and fiscal stimulus packages will allow
growth to bottom in Q2, with a decent (but still
sub-trend) rebound in growth in H2 (especially
strong in China); the financial system will
stabilise, although companies will find it difficult
to refinance for some time to come.
Our list of near certainties (see Table 1 on Page
1), then, reflects this – and is essentially an
extrapolation of where we are today:
 Asian earnings decline. The bottom-up
analysts’ consensus is still looking for 4%
EPS growth in 2009 (including 10% in China
and 16% in India) but we find that no fund
managers believe this. Our expectations are
for as much as a 20% EPS decline for the
region as a whole (with -5% for China and
+5-10% for India).
 Equity Strategy
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Issue no. 70
 Global growth is very weak. HSBC
forecasts -0.7% real GDP growth for the US
in 2009. The consensus for all major regions
(US, Europe and Japan) is now negative.
 Equities don’t fall by as much as in 2008.
Even after the recent rally, MSCI Asia ex Japan
is down 54% y-t-d in US dollar terms. At this
rate, 2008 will be the worst year since the index
started in 1991 (beating 1997, when it fell by
45.5% and 2000, when it was down 37.9%). It is
almost certain that next year won’t be as bad,
although a positive return cannot be guaranteed.
Note that in 1998 stocks fell by another 7.4%
and in 2001 by 4.2%.
 Asian equities stage a 30%-plus rally at
some point. We would even say a 50%-plus
rally but, while that is certainly possible, it is
not a near certainty. Bear markets typically
see very powerful rallies (note the current
one, with MSCI Asia ex Japan up 22.7%
since its 20 November low). The first leg of a
new bull market typically sees close to a 50%
rise in the regional index (it was 46% after the
Asia Crisis in 1999, and 47% after the tech
crash in 2001). One way or the other, the
market will have a big jump at some point
next year – but it may not last.
 Asian exports decline. With China’s exports
now falling 2.2% y-o-y and export data for
Taiwan, Korea and Japan looking even worse,
export performance next year is highly likely
to be poor. Can an Obama stimulus package
get US consumers spending again? With the
household savings rate likely to rise over the
next few years from its current 1% to perhaps
8-10%, this seems rather unlikely.
 Inflation falls and ends the year very low,
perhaps negative. HSBC now looks for US
headline CPI to fall to -0.4%, and core PCE
inflation to 1.4% next year. In China, we expect
abc
CPI to fall to -0.2% in 2009, with inflation
turning negative as early as Q1. There are some
suggestions that, with massive monetary
stimulus, inflation could rear its ugly head again.
But the overwhelming probability for next year
is deflation.
 Interest rates stay low. HSBC expects the
Fed to cut the Fed Funds Rate to zero next
week. Rates in Japan are likely to go back to
zero too. With inflation yesterday’s story and
growth likely to remain anaemic, rates in
Europe will be close to zero, and in Asia,
while they are unlikely to go to zero, they will
likely remain at historically low levels.
 The US recession is over before end-2009.
As we argued in AI last week, the longest US
recession since 1960 has been 16 months, and
the longest since 1900 (excepting the 43-
month Great Depression in the 1930s) was 24
months. Unless we have a Great Depression
II, therefore, US growth will bottom out
between April and December.
Potential surprises
The potential big surprises for 2008 come from
two sources: (1) big divergences either side of the
main (disappointing but mild) economic scenario,
either an unexpectedly strong rebound, or a near
meltdown, and (2) from unexpected consequences
of the credit crunch of 2008. Here’s our list of
what might surprise us in 2009.
 Renminbi depreciates, leading to
competitive devaluations. After China
allowed the RMB to fall by almost 1% against
the dollar last week (perhaps as a trial
balloon) this would perhaps not come as such
a big surprise. But the big downside risk is
that it triggers beggar-my-neighbour
devaluations. Will Japan intervene if the yen
goes above 100 to the dollar? How would
President Obama react to a weakening RMB?
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 China grows 6% or less. Almost all whether there could not at least be a crash in
investors believe that China’s massive fiscal the Treasury market – perhaps combined with
stimulus packages (with more to be a sharp fall in the dollar.
announced over coming weeks) will work and
 Inflation risk reappears. The key economic
that, after a difficult Q1, the economy will
debate is whether the massive liquidity
rebound strongly from the spring. That is
injection by the Fed (and by central banks in
HSBC’s view too, but supposing it doesn’t
Asia) does not eventually lead to inflation.
happen and that increased government
Textbooks, too, will tell you that the least bad
spending is not big enough to offset a slump
way to unwind a credit bubble is through
in exports and private-sector capex and even
inflation. It seems more likely that deflation
weakness in consumption?
will be a problem for the next year (see
 US growth rebounds strongly in H2. If the above), but inflation becomes a risk as soon
Obama administration spends 6-7% of GDP as the global economy starts to recover
on a fiscal stimulus package, in combination (which may necessitate sharp rate rises,
with zero short-term interest rates, couldn’t thereby killing off the nascent economic
the economy rebound more robustly than recovery)
anyone now expects? HSBC forecasts
 Stock markets end 2009 25% up. We
annualised q-o-q GDP growth of 3.2% in Q3
suspect that the consensus expects a mildly
as the stimulus kicks in, but the impact could
positive year for stock markets, perhaps with
be double that in the one quarter if the
a rebound in the second half, with the index
package is implemented effectively.
ending the year up 10% or so. That is
 …or US growth remains negative all year. probably the least likely outcome. Markets
Alternatively, suppose that consumers are likely to remain volatile, in our view, and
continue to repair balance-sheets and refuse to the only way they are likely to end the year up
spend, companies cut back capex, banks 10% is after violent ups and downs on the
remain reluctant to lend and exports remain way. When we do enter a new bull market
sluggish as global growth is weak and the (and our view is that this is unlikely for
dollar strengthens further. Government another 12 months), stocks will perform
spending would be the only driver of the better than this.
economy and might be insufficient to allow
 …or have another negative year. The most
GDP to grow at all.
likely outcome, then, perhaps is that, as in
 Investors balk at buying US Treasuries. 1998 and 2001 (as explained above), a big
With the US throwing trillions of dollars at negative year is followed by a mildly negative
rescuing the economy (as much as 60% of one when stocks bounce around and end the
GDP – see below), does there come a point year down a bit.
where investors get scared of the rise in US
 Commodity prices fall much further. The
debt levels, and become reluctant to buy US
consensus on commodities is that they will
Treasuries? On our numbers, public debt is
now stabilise, with crude oil trading in the
likely to rise from 37% of GDP to a little over
USD50-60 range in 2009. If global growth
50%, which is still low. But with 10-year
continues to weaken (and with supply starting
Treasury yields down to 2.7%, we wonder

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to come through in some metals after years of
mining capex), commodity prices could fall
much further. At the very least, we highly
doubt that any stock market rebound will be
led by the resources sector as in 2003-7.
 Nationalisation of big US banks. Is the risk
in the US financial system really out of the
way? The message from the credit markets
(see for example HSBC’s Clog Index, a
measure of market risk aversion, which is still
at around 1,900 – compared to a base of 100
in January 2007) is that it is not. With US
house prices likely to fall further, and defaults
in consumer credit and from corporate
borrowers likely to increase, we see further
problems ahead for US financial institutions.
The US government has shown its
determination to prevent any from failing. But
it may be forced to nationalise a number of
major banks. That is perhaps not a risk to the
financial system – but it would be a shock to
the banks’ shareholders.
 Big banks bailed out in Korea, Taiwan,
India. There may also be more vulnerabilities
in Asian banking systems than the consensus
fears. We would not rule out a major bank
somewhere in Asia having to be nationalised
by the government.
 A household name Asian company goes bust.
With bank finance still hard to get, capital
markets largely closed, and demand falling off a
cliff, we think the market could be surprised by
some big companies – those that over-expanded
during the good times or pushed up their
debt/equity ratios too far – declaring
bankruptcy. In 1998, 8% of Asian debt issuers
defaulted, and in 2001 4%. We expect a default
rate next year of 5-8%. We do not believe that
the market is prepared for this.
abc
 Country defaults. In Asia, perhaps only
Pakistan is at risk. But central and eastern
European countries look under significant
pressure. Any defaults here would further
delay the return of US and European investors
to emerging markets.
 Significant social unrest. It is easy to come
up with doomsday scenarios after the
economic upheavals of 2008. But history
teaches that the sort of economic dislocation
we have had (and will continue to have for
some time to come), with soaring food prices,
followed by companies going bust and rising
unemployment, is likely to create social
problems. That is why China is so desperate
to keep growth close to 8%.
 A war (or civil war) somewhere in Asia. At
the extreme, the social unrest could lead to war.
We are extremely concerned about the situation
in Thailand, and about the deterioration of
relations between India and Pakistan after the
Mumbai bombings. But wars are inherently
unpredictable, and where the flashpoint will
emerge next year is hard to say.
 Regime change in North Korea is perhaps
the most likely source of big political trouble.
Kim Jong-il’s death would open up all sorts
of strategic questions: does China support a
new military regime in North Korea? Does
South Korea push for reunification? How do
the US and Japan react?
Key factors to have a view on?
With so much uncertainty, what are the key
inflection points for 2009 that investors should have
a view on – or at least be aware of– when making
allocation decisions? Table 7 shows our suggestions.
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7. Inflection points in 2009
When does global recession end?
When does the US housing market bottom?
Deflation or inflation (or both)?
Will China's stimulus measures work?
When does credit crunch start to ease?
Result of Indian election
India/Pakistan relations
When do US investors buy GEMS equities again
Does the US dollar start to weaken?
Source: HSBC
Most of these will not be surprising. The market
next year will clearly be heavily influenced by the
depth and length of the current recession, its
unforeseen consequences, and the success of
policymakers’ responses. But we would also keep
an eye on politics: India, Thailand, Malaysia,
Japan and Indonesia could all see changes of
government, and the progress of Lee Myung-
bak’s reforms in Korea and negotiations between
Beijing and Taipei could be important for these
markets. Watch out too for a turn in the dollar:
when dollar strength ends, this could be signal
that global risk aversion is easing and that US
investors will start to go back into overseas
markets. That could lead to Asian stocks starting
to outperform again.
These questions are easier to pose than to answer.
For our attempt to answer them, please see our
Quarterly, to be published in the first full week
of January.
The worst data in the world
Finally, a lighter note on which to end our last
Asia Insights before Christmas. Over the past
couple of weeks, we have been running a
competition among colleagues in equity sales and
research at HSBC to find the single most dramatic
piece of data which shows just how bad a state the
global economy is in.
Some of our colleagues submitted anecdotes, both
personal and from the media. One Singapore-based
colleague noted that he had started to take the bus to
work (a 45-minute trip), rather than a taxi, for the
8
abc
first time in 10 years. Another colleague reported
that his sister, a primary school teacher in Maryland,
had been teaching without paper for the past month,
because the school had run out of money to buy it.
(Many proposed investment banking bonuses as the
gloomiest data-point, since these could decline by
100% this year.)
Among media clips were the following (Google
the headline to get full details):
 “Buy one [Chrysler] car [in Britain, for
£20,000] and get another one FREE as car
dealers try to boost sales” (Daily Mail)
 “Sex sells at half price as Bangkok hit by
turmoil” (The Times)
 “Britons ‘saving money with’ sex: As the
credit crunch bites, Britons may be turning to
sex as a cheap way to pass the time, a charity
says” (BBC)
 “I saw mummy hit Santa Claus: Angry
parents beat up Santa after taking their
children to a ‘rip-off’ Christmas grotto in
England” (Sydney Morning Herald).
More seriously, the following (in rising order of
ghastliness) were the worst bits of data we found:
 Consumption of electricity by Italian
industry fell by 30% in October and
November, according to Terna, which runs
the national grid.
 Biggest miss on economic forecasts: US
non-farm payrolls. The consensus among
economists for the change in non-farm
payrolls in November, announced December
5, was for a decline of 335,000 (October had
seen a decline of 240,000 at the time of the
initial announcement). The actual number
came in at -533,000 – a miss of 59%.
 Equity Strategy
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Issue no. 70
 Biggest cut in earnings guidance: insurance
company Sonpo Japan, lowered full-year
guidance (at the time of its first half results in
November) by 206%, from JPY54bn to
-JPY57bn, because of write-offs in its sub-
prime related financial guarantee business (it
had believed that AAA sub-prime insurance
and bonds meant its insurance portfolios and
investments were rock solid).
 The credit default swap spread for UK
government debt is now twice as high as for
McDonald’s. UK CDS currently trade at 116bp,
versus 68bp for McDonald’s (Chart 8). As
recently as September, UK CDSs were at 17bp
when McDonald’s CDSs traded at 28bp.
8. CDS spread for UK sovereign bonds and McDonald’s
140
UK McDonald's Corp
120
100
80
60
40
20
0
Aug Sep Oct Nov Dec
Source: Bloomberg
 The amount the US authorities have
committed so far to bailing out the
financial system: USD5.6trn. That consists
of: the Term Auction Facility USD900bn,
stimulus package USD168bn, TSLF
USD225bn, Bear Stearns USD30bn, ABCP
USD56bn, auto industry USD25bn, TARP
USD700bn, MMIFF USD540bn, CPFF
USD1.8trn, AIG USD113bn, Citigroup
USD240bn, Fannie/Freddie debt USD600bn,
TALF USD200bn. (Source: Slate.com).
Bloomberg has an even bigger number,
USD7.7trn. And neither of those numbers
includes a potential Obama stimulus package
abc
of perhaps USD500-800bn early next year.
We are, therefore, talking of perhaps close to
USD9trn already. By way of comparison, US
GDP last year was USD13.8trn.
 The Baltic Dry Freight Index has fallen by
94% since May (Chart 9).
9. Baltic Dry Freight Index
14000
12000
10000
8000
6000
4000
2000
0
Jan Apr Jul Oct
Source: Bloomberg
 IPOs. The number of global IPOs in the third
quarter of 2008 fell 82% year-over-year to 20
from 112 in 3Q07, while the amount of
proceeds raised declined 80% to USD9.3
billion (source www.ipohome.com). More
dramatically, 4Q07 IPOs totalled 172 (value
USD94.3bn), and thus far there have only
been three in 4Q08, i.e. a fall of 98% y-o-y in
volume terms. To top that, there were 36 IPOs
globally in December 2007. IPOs for
December 2008 so far... NIL!
 Volvo had only 115 net new orders for
trucks in Europe in the July-September
quarter (compared 41,970 in Jul-Sep 2007).
That is a 99.7% decline. Gross orders for the
quarter were not as bad as that dramatic
headline number suggests (they were down
about 50% y-o-y) but the company reviewed
its order book position, which resulted in the
cancellation of some orders and the transfer
of others to non European plants. This low net
new order number will be reflected in very
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low sales going forward. As a result, Volvo is

not giving sales guidance for 2009.

But the most extreme piece of data must be that

you now have to pay the US government to
borrow money from you:

 The yield on three-month US Treasury

Bills has fallen to -0.01% (yes, negative) from
3.2% since the start of the year (Chart 10).

10. US three-month Treasury Bill yield

3.5
3.0
2.5
2.0
1.5
1.0
0.5
0.0
Jan Apr Jul Oct

Source: Bloomberg

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Disclosure appendix
Analyst certification
The following analyst(s), who is(are) primarily responsible for this report, certifies(y) that the opinion(s) on the subject
security(ies) or issuer(s) and any other views or forecasts expressed herein accurately reflect their personal view(s) and that no
part of their compensation was, is or will be directly or indirectly related to the specific recommendation(s) or views contained
in this research report: Garry Evans, Gary Chiu, Steve Man, Michelle Kwok, Mark Webb, Rajiv Sharma, Sumeet Agrawal,
Neale Anderson, Sean Yang, Eric Lin, Todd Dunivant, Shishir Singh, Frank Su, Brett Hemsley and Scott Foster

Important disclosures
Stock ratings and basis for financial analysis
HSBC believes that investors utilise various disciplines and investment horizons when making investment decisions, which
depend largely on individual circumstances such as the investor's existing holdings, risk tolerance and other considerations.
Given these differences, HSBC has two principal aims in its equity research: 1) to identify long-term investment opportunities
based on particular themes or ideas that may affect the future earnings or cash flows of companies on a 12 month time horizon;
and 2) from time to time to identify short-term investment opportunities that are derived from fundamental, quantitative,
technical or event-driven techniques on a 0-3 month time horizon and which may differ from our long-term investment rating.
HSBC has assigned ratings for its long-term investment opportunities as described below.

This report addresses only the long-term investment opportunities of the companies referred to in the report. As and when
HSBC publishes a short-term trading idea the stocks to which these relate are identified on the website at
www.hsbcnet.com/research. Details of these short-term investment opportunities can be found under the Reports section of this
website.

HSBC believes an investor's decision to buy or sell a stock should depend on individual circumstances such as the investor's
existing holdings and other considerations. Different securities firms use a variety of ratings terms as well as different rating
systems to describe their recommendations. Investors should carefully read the definitions of the ratings used in each research
report. In addition, because research reports contain more complete information concerning the analysts' views, investors
should carefully read the entire research report and should not infer its contents from the rating. In any case, ratings should not
be used or relied on in isolation as investment advice.

Rating definitions for long-term investment opportunities

Stock ratings
HSBC assigns ratings to its stocks in this sector on the following basis:

For each stock we set a required rate of return calculated from the risk free rate for that stock's domestic, or as appropriate,
regional market and the relevant equity risk premium established by our strategy team. The price target for a stock represents
the value the analyst expects the stock to reach over our performance horizon. The performance horizon is 12 months. For a
stock to be classified as Overweight, the implied return must exceed the required return by at least 5 percentage points over the
next 12 months (or 10 percentage points for a stock classified as Volatile*). For a stock to be classified as Underweight, the
stock must be expected to underperform its required return by at least 5 percentage points over the next 12 months (or 10
percentage points for a stock classified as Volatile*). Stocks between these bands are classified as Neutral.

Our ratings are re-calibrated against these bands at the time of any 'material change' (initiation of coverage, change of volatility
status or change in price target). Notwithstanding this, and although ratings are subject to ongoing management review,
expected returns will be permitted to move outside the bands as a result of normal share price fluctuations without necessarily
triggering a rating change.

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*A stock will be classified as volatile if its historical volatility has exceeded 40%, if the stock has been listed for less than 12
months (unless it is in an industry or sector where volatility is low) or if the analyst expects significant volatility. However,
stocks which we do not consider volatile may in fact also behave in such a way. Historical volatility is defined as the past
month's average of the daily 365-day moving average volatilities. In order to avoid misleadingly frequent changes in rating,
however, volatility has to move 2.5 percentage points past the 40% benchmark in either direction for a stock's status to change.

Prior to this, from 7 June 2005 HSBC applied a ratings structure which ranked the stocks according to their notional target
price vs current market price and then categorised (approximately) the top 40% as Overweight, the next 40% as Neutral and
the last 20% as Underweight. The performance horizon is 2 years. The notional target price was defined as the mid-point of the
analysts' valuation for a stock.

From 15 November 2004 to 7 June 2005, HSBC carried no ratings and concentrated on long-term thematic reports which
identified themes and trends in industries, but did not make a conclusion as to the investment action that potential investors
should take.

Prior to 15 November 2004, HSBC's ratings system was based upon a two-stage recommendation structure: a combination of
the analysts' view on the stock relative to its sector and the sector call relative to the market, together giving a view on the
stock relative to the market. The sector call was the responsibility of the strategy team, set in co-operation with the analysts.
For other companies, HSBC showed a recommendation relative to the market. The performance horizon was 6-12 months. The
target price was the level the stock should have traded at if the market accepted the analysts' view of the stock.

Rating distribution for long-term investment opportunities

As of 11 December 2008, the distribution of all ratings published is as follows:
Overweight (Buy) 45% (31% of these provided with Investment Banking Services)
Neutral (Hold) 36% (33% of these provided with Investment Banking Services)
Underweight (Sell) 19% (22% of these provided with Investment Banking Services)

Information regarding company share price performance and history of HSBC ratings and price targets in respect of its long-
term investment opportunities for the companies the subject of this report,is available from www.hsbcnet.com/research.

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HSBC & Analyst disclosures

Disclosure checklist
Company Ticker Recent price Price Date Disclosure
BHARTI AIRTEL BRTI.NS 735.80 10-Dec-2008 6, 7
CHI MEI 3009.TW 10.05 10-Dec-2008 2, 5, 6, 7
CHINA EASTERN AIRLINES 0670.HK 0.75 10-Dec-2008 2, 5, 6, 7
CHINA RESOURCES POWER 0836.HK 15.32 10-Dec-2008 4
ICICI BANK ICBK.NS 400.05 10-Dec-2008 2, 5, 6, 7, 11
LARSEN & TOUBRO LART.BO 779.80 10-Dec-2008 1, 2, 5, 6, 7
PETROCHINA 0857.HK 7.11 10-Dec-2008 4, 5
SINGAPORE AIRLINES SIAL.SI 11.64 10-Dec-2008 5, 6, 7
SWIRE PACIFIC 0019.HK 56.00 10-Dec-2008 2, 4, 5, 6, 7, 11
THE LINK REIT 0823.HK 14.10 10-Dec-2008 5
TOKYO ELECTRON, LTD. 8035.T 2715.00 10-Dec-2008 6
Source: HSBC

1 HSBC* has managed or co-managed a public offering of securities for this company within the past 12 months.
2 HSBC expects to receive or intends to seek compensation for investment banking services from this company in the next
3 months.
3 At the time of publication of this report, HSBC Securities (USA) Inc. is a Market Maker in securities issued by this
company.
4 As of 30 November 2008 HSBC beneficially owned 1% or more of a class of common equity securities of this company.
5 As of 31 October 2008, this company was a client of HSBC or had during the preceding 12 month period been a client of
and/or paid compensation to HSBC in respect of investment banking services.
6 As of 31 October 2008, this company was a client of HSBC or had during the preceding 12 month period been a client of
and/or paid compensation to HSBC in respect of non-investment banking-securities related services.
7 As of 31 October 2008, this company was a client of HSBC or had during the preceding 12 month period been a client of
and/or paid compensation to HSBC in respect of non-securities services.
8 A covering analyst/s has received compensation from this company in the past 12 months.
9 A covering analyst/s or a member of his/her household has a financial interest in the securities of this company, as
detailed below.
10 A covering analyst/s or a member of his/her household is an officer, director or supervisory board member of this
company, as detailed below.
11 At the time of publication of this report, HSBC is a non-US Market Maker in securities issued by this company and/or in
securities in respect of this company

Analysts are paid in part by reference to the profitability of HSBC which includes investment banking revenues.

For disclosures in respect of any company, please see the most recently published report on that company available at
www.hsbcnet.com/research.

* HSBC Legal Entities are listed in the Disclaimer below.

Additional disclosures
1 This report is dated as at 12 December 2008.
2 All market data included in this report are dated as at close 10 December 2008, unless otherwise indicated in the report.
3 HSBC has procedures in place to identify and manage any potential conflicts of interest that arise in connection with its
Research business. HSBC's analysts and its other staff who are involved in the preparation and dissemination of Research
operate and have a management reporting line independent of HSBC's Investment Banking business. Chinese Wall
procedures are in place between the Investment Banking and Research businesses to ensure that any confidential and/or
price sensitive information is handled in an appropriate manner.
4 As of 30 November 2008, HSBC beneficially owned 2% or more of a class of common equity securities of the following
company(ies) : PETROCHINA

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Disclaimer
* Legal entities as at 22 August 2007 Issuer of report
'UAE' HSBC Bank Middle East Limited, Dubai; 'HK' The Hongkong and Shanghai Banking The Hongkong and Shanghai
Corporation Limited, Hong Kong; 'TW' HSBC Securities (Taiwan) Corporation Limited; 'CA' Banking Corporation Limited
HSBC Securities (Canada) Inc, Toronto; HSBC Bank, Paris branch; HSBC France; 'DE' HSBC
Trinkaus & Burkhardt AG, Dusseldorf; 000 HSBC Bank (RR), Moscow; 'IN' HSBC Securities Level 19, 1 Queen’s Road Central
and Capital Markets (India) Private Limited, Mumbai; 'JP' HSBC Securities (Japan) Limited, Hong Kong SAR
Tokyo; 'EG' HSBC Securities Egypt S.A.E., Cairo; 'CN' HSBC Investment Bank Asia Limited, Telephone: +852 2843 9111
Beijing Representative Office; The Hongkong and Shanghai Banking Corporation Limited, Telex: 75100 CAPEL HX
Singapore branch; The Hongkong and Shanghai Banking Corporation Limited, Seoul Securities Fax: +852 2596 0200
Branch; HSBC Securities (South Africa) (Pty) Ltd, Johannesburg; 'GR' HSBC Pantelakis
Website: www.research.hsbc.com
Securities S.A., Athens; HSBC Bank plc, London, Madrid, Milan, Stockholm, Tel Aviv, 'US'
HSBC Securities (USA) Inc, New York; HSBC Yatirim Menkul Degerler A.S., Istanbul; HSBC
México, S.A., Institución de Banca Múltiple, Grupo Financiero HSBC, HSBC Bank Brasil S.A. -
Banco Múltiplo, HSBC Bank Australia Limited, HSBC Bank Argentina S.A., HSBC Saudi Arabia
Limited.
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Global Equity Strategy Research Team

Global Asia
Kevin Gardiner Garry Evans
Global Sector Head +852 2996 6916 garryevans@hsbc.com.hk
+44 20 7991 6714 kevin.gardiner@hsbcib.com
Leo Li
Europe +852 2996 6919 leofli@hsbc.com.hk

Robert Parkes Akane Nishizaki

+44 20 7991 6716 robert.parkes@hsbcib.com +81 3 5203 3943 akane.nishizaki@hsbc.co.jp

Vivek Misra Steven Sun

+91 80 3001 3699 vivek.misra@hsbc.co.in +852 2822 4298 stevensun@hsbc.com.hk

CEMEA Jacqueline Tse

+852 2996 6602 jacquelinetse@hsbc.com.hk
John Lomax
+44 20 7992 3712 john.lomax@hsbcib.com