Whilst the EM equities are likely to experience some pressure in the near term due tothe UK’s referendum decision to leave the EU, we think this event is not likely to havea durable impact on the EM equities as an asset class. In general, while the rise ofprotectionism across the globe (which the UK’s vote to leave the EU is an exampleof) presents a significant threat to the asset class, we are not convinced that EMequities would be relative losers. For discussion, see our report GEMs EquityStrategy: Protectionist risks to the EM equity story, 14 June 2016. Further, EM'sdirect economic and financial ties with the UK are limited (see HSBC report EmergingMarkets: Fallout from Brexit, Murat Ulgen et al, 24 June 2016).

　　To remind our readers, our bull case on EM equities rests on four key arguments.

　　First, it appears that the EM cycle is stabilising – both in terms of macro and for thecorporate sector. Second, The Fed seems to be approaching monetary policydifferently this year – in 2015 interest rates appeared to be set primarily with an eyeon domestic fundamentals; however now, the Fed is more cognizant of risks arisingfrom elsewhere. For instance, our US economists Kevin Logan and Ryan Wangargue that FOMC will react to Brexit by adopting a more cautious path andaccordingly they pushed their forecast for a Fed rate hike to December fromSeptember and see only one hike in 2017, not two (see HSBC report US economyafter Brexit: Fewer rate hikes ahead, Kevin Logan and Ryan Wang, 24 June 2016).

　　Third, the threat of a hard landing in China has receded – accordingly the US andChinese cycles appear more synchronised and the risks of a potential renminbidevaluation look to be diminishing. In fact, our FX strategists argue that any GBP andEUR weakness could cause the RMB to strengthen against the basket, which may bea source of stability (see HSBC report Emerging Markets: Fallout from Brexit, MuratUlgen et al, 24 June 2016). Fourth, there are some idiosyncratic developments insome individual large EM countries, such as Brazil, which are positive enough to helpassociated stock markets but also to colour the EM landscape as a whole. Inaddition, valuation and liquidity could impact impetus to the story for EM equities.

　　This remains our base case.