2025-07-01 08:05

Key takeaways Geopolitical risk has receded for now, but could still prompt occasional support for the USD if the situation changes. In our view, the USD is likely to consolidate over the next few weeks, but with risks skewed towards additional weakness. US trade and fiscal policy uncertainty lingers and structural pressures build, suggesting a weaker USD in the months ahead. The USD rally during the Israel-Iran military conflict, though short-lived, was revealing insofar as it showed that for all the questions being posed by the FX market about the USD’s merits, it is still where we scramble if geopolitical tensions are rising (see the chart below). If the recently agreed ceasefire between Israel and Iran holds, the USD is likely to consolidate over the coming weeks; but the risk of periodic USD spikes higher remains should the situation change. Source: Bloomberg, HSBC The coming weeks could be pivotal in shaping the path for the USD if we get clarity on US trade policy, US budget outlook, and the consequent most likely path of the Federal Reserve’s (Fed) monetary policy. Specifically, we will face a deadline on the tariff pause on 9 July, the final stages of efforts to pass a budget through US Congress, and the run-up to a 29-30 July Federal Open Market Committee (FOMC) meeting. Clarity on where US trade policy will ultimately land is likely to remain elusive. On this front, US Commerce Secretary, Howard Lutnick, said the US and China finalised a trade understanding reached last month in Geneva, and added that the White House has imminent plans to reach agreements with a set of 10 major trading partners (Bloomberg, 27 June 2025). Structural USD concerns might be alleviated if the US Congress can deliver a budget that does not point to a blowout deficit. However, time is running out to meet the US administration’s aspiration to have an agreed budget in place by 4 July. All this should keep the Fed on the sidelines, despite recent openness from some members to a July cut. Without fresh catalysts, the USD is likely to grind, albeit with downside risks, in the near term. Going into 2H25, our framework suggests that the USD has room to weaken moderately. The cyclical component is not obviously negative for the USD if both the US and global economies are slowing. However, the policy factor has been weighing on the USD and it may not be calmer going forward when many trade discussions are ongoing and deals are still light on detail. Meanwhile, the structural de-dollarization force is showing signs of growing importance. https://www.hsbc.com.my/wealth/insights/fx-insights/fx-viewpoint/usd-further-weakness-after-near-term-consolidation/

2025-06-30 07:05

Key takeaways European stocks have outperformed most global markets in 2025. It follows 15 years of underperformance versus the US – leaving it at a deep valuation discount coming into 2025. After a challenging period marked by higher financing costs and policy uncertainty, fundamentals in direct real estate are stabilising and liquidity is improving. Investor focus has been centred on downside risks this year. But it is important to remember upside risks too. One obvious channel is an AI-led productivity rebound. Chart of the week – US dollar as the key driver of H1 returns What can investors expect from markets in the second half of 2025? So far this year, fading US exceptionalism has been a defining feature of the investment landscape. For years, US leadership has been characterised by relatively strong GDP growth, outsized stock market returns, and the strength of the dollar. For markets, it has been dollar weakness in particular, that has influenced returns in the first half – and that looks set to continue. The H1 headline is that US stocks have underperformed the rest of the world. A weaker dollar, cooling US growth, and higher levels of uncertainty – driven by unpredictable policy – have driven investors to look further afield for superior risk-adjusted returns. That’s seen a switch in equity leadership to Europe, the Far East, and emerging markets (EM), and value outperforming growth. Dollar weakness has created new policy space for EM central banks, with proactive rate cuts – in contrast to a reactive Fed – oxygenating EM bonds and stocks, which have long been under-owned in the era of US exceptionalism. Meanwhile, stronger EM currencies have boosted the appeal of local bonds to global investors. Meanwhile, a regime of “deficits forever” and a cautious Fed have kept 10-year Treasury yields high in H1, limiting returns and impairing their traditional role in protecting portfolios. Selective credits, real assets and liquid diversifiers like hedge funds and infrastructure have been positive. And the price of gold – a natural haven in uncertainty – has soared. As pressure builds on risk-adjusted returns, it is important that investors are ready to adapt. Staying nimble and embracing tactical asset allocations will be key to navigating inherently unsettled markets. Market Spotlight Roaring tigers Asian stock markets were volatile in the first six months of 2025 – but there were some stellar returns. The MSCI Asia ex-Japan index is up 13% year to date in USD terms, eclipsing US gains. Fading US exceptionalism (especially a weaker dollar) is a catalyst for the rest of the world assets. A solid performance in China (+19%, USD) was helped by tech sector strength – including advances at AI firm DeepSeek – progress on a US trade deal, and an ongoing policy put. Meanwhile, South Korea (+32%) set the pace on post-election expectations of fresh policy stimulus and corporate governance reforms, as well as an AI-demand led semiconductor sector recovery. Hong Kong (+18%) was buoyed by lower local rates and a pick-up in trading activity and new listings. And Taiwan posted a 5% gain in H1 but saw a strong pick-up in Q2 largely attributable to FX effects. Overall, some equity analysts continue to see Asia offering broad sector diversification and quality-growth opportunities at reasonable valuations – but selectivity is key. The value of investments and any income from them can go down as well as up and investors may not get back the amount originally invested. Past performance does not predict future returns. The level of yield is not guaranteed and may rise or fall in the future. For informational purposes only and should not be construed as a recommendation to invest in the specific country, product, strategy, sector, or security. Diversification does not ensure a profit or protect against loss. Any views expressed were held at the time of preparation and are subject to change without notice. Any forecast, projection or target where provided is indicative only and is not guaranteed in any way. Source: HSBC Asset Management, Bloomberg. See page 8 for details of asset class indices. Data as at 7.30am UK time 27 June 2025. Lens on… Europe pricier, but still cheap European stocks have outperformed most global markets in 2025. It follows 15 years of underperformance versus the US – leaving it at a deep valuation discount coming into 2025. The main catalyst was fading US exceptionalism and ultra-high policy uncertainty, which delivered a wake-up call for both European policymakers and investors. Germany’s decision to open the fiscal taps to fund spending on defence and industry was key and raises the prospect of renewed growth across the bloc. A backdrop of falling inflation and ECB policy easing has also helped. Europe’s valuation discount has compressed lately – but there’s still a wide gap with the US. The forward price/earnings ratio of the MSCI eurozone index re-rated to 14.5x from 13x in H1, taking it above its 10-year average. And the German index now trades at a near-20% premium to its 10-year average PE, on strength in its aerospace and industrials sectors. That’s more than the S&P 500, with Sweden close behind. Year-on-year 2025 eurozone profit growth expectations have fallen to 4% on tariff and currency risk, but it looks set to rise to 11.5% in 2026. Despite the H1 rally, some equity analysts see pockets of exceptional value in wider Europe to keep investors happy. Good properties After a challenging period marked by higher financing costs and policy uncertainty, fundamentals in direct real estate are stabilising and liquidity is improving. Capital values are expected to edge upward in the next 12-months, driven by income-led growth, instead of property yield compression. But this recovery may not be uniform across sectors. Retail is one to watch. Long overlooked, it’s re-emerging as a strong performer. Vacancy rates are near historic lows in markets like the US and Tokyo, and rents are rising on the back of a healthier, more resilient tenant base. Yields also remain attractive compared to other sectors. Looking ahead, senior housing and data centres may also continue to lead the charge in non-traditional segments. Powered by AI, cloud infrastructure, and demographic tailwinds, these areas show sustained rental growth and rising demand. With alternative asset classes playing a key role as portfolio diversifiers, some specialists believe that with careful consideration and a long-term view, investors can find opportunities in a real estate market entering a more balance and income-driven phase. Programmed productivity Investor focus has been centred on downside risks this year. But it is important to remember upside risks too. One obvious channel is an AI-led productivity rebound. Almost 9.2% of US firms now use AI, almost double last year’s rate, with financial, IT, and educational sectors leading the charge. Academic studies suggest AI can lift labour productivity by 25% on average. Longer-term, this could have significant upside implications for aggregate output, consumption, investment, and R&D. Of course, the pace and breadth of these gains hinges on how quickly firms adapt, how AI diffuses across sectors, and how issues like data privacy and outdated tech stacks are tackled. For markets, increased efficiency could drive corporate profits higher for firms leveraging AI effectively, resulting in upside for equity prices. Meanwhile, bond yields could also see upward pressure amid higher growth that raises demand for capital and pushes r* (the neutral rate) higher. But like all big technological leaps, it won’t be straightforward. Some job losses are likely, while inflation could drop on faster supply growth. Expect this issue to add to uncertainty in the coming years. Past performance does not predict future returns. The level of yield is not guaranteed and may rise or fall in the future. For informational purposes only and should not be construed as a recommendation to invest in the specific country, product, strategy, sector, or security. Diversification does not ensure a profit or protect against loss. Any views expressed were held at the time of preparation and are subject to change without notice. Index returns assume reinvestment of all distributions and do not reflect fees or expenses. You cannot invest directly in an index. Any forecast, projection or target where provided is indicative only and is not guaranteed in any way. Source: HSBC Asset Management. Macrobond, Bloomberg. Data as at 7.30am UK time 27 June 2025. Key Events and Data Releases Last week The week ahead Source: HSBC Asset Management. Data as at 7.30am UK time 27 June 2025. For informational purposes only and should not be construed as a recommendation to invest in the specific country, product, strategy, sector or security. Any views expressed were held at the time of preparation and are subject to change without notice. Any forecast, projection or target where provided is indicative only and is not guaranteed in any way. Market review Easing geopolitical tensions boosted risk markets, with oil prices declining markedly, and the US dollar continued its recent downtrend against major currencies. US Treasury yields fell amid growing Fed rate cut expectations, driven by some dovish remarks from Fed officials and soft macro data, while rising fiscal concerns weighed on German Bunds. Global equities rose, as robust gains in US tech sector propelled the S&P 500 and Nasdaq Composite close to their all-time highs. In Europe, the Euro Stoxx 50 index was on course to post modest gains. In Asia, equity markets saw broad-based advances, led by Japan’s Nikkei 225, with Chinese equities also rallying. In Latin America, Brazil’s Bovespa index traded sideways while Mexico’s IPC closed higher. https://www.hsbc.com.my/wealth/insights/asset-class-views/investment-weekly/us-dollar-as-the-key-driver-of-h1-returns/

2025-06-27 12:02

Key takeaways India appears among the most resilient economies in Asia... ...with signs of a broader recovery under way. and hopes that it may carve out a niche for itself as supply chains are once more rejigged. Positive developments As we still await certainty around global tariffs and trade flows, three positive developments have taken place on India’s growth front recently. One, inflation has fallen quickly, and this has raised purchasing power of the informal sector consumers across rural and urban India, who make up two-thirds of the consumption pie. This comes at a time rural production and incomes have risen and is likely to provide a much needed shot in the arm to consumption. Two, the new leadership at the Reserve Bank of India (RBI)is easing policy quickly. Their steps include rate easing, liquidity infusion, and regulatory easing. Efforts to front-load much of the easing is likely to hasten transmission into deposit and lending rates, augmenting the supply of credit, even if the demand for credit, admittedly, will take longer to rise. Three, services exports, which now make up half of overall exports, remain resilient. As we have documented in the past, they have moved up the value chain, from simple IT services exports to a host of professional services exports. Resilient growth 1Q25 GDP growth came in at 7.4%, stronger than 6.4% a quarter ago. The practice of cash accounting instead of accrual accounting in the subsidy bill may have inflated GDP numbers in the quarter; however, even the alternate growth measure, Gross Value Added (GVA), suggests a rise in activity in the quarter (6.8% versus 6.5% in the previous quarter). All said, we recently raised our GDP forecast from 5.9% to 6.3% for FY26 (6.2% to 6.7% for CY25). We believe that within this headline improvement, some important changes will happen across sectors. Investment may come in weaker than before, and even weaker than consumption growth. Private capital expenditure generally weakens during periods of uncertainty. Consumption growth could come in stronger than before as informal sector consumption rises, even though formal sector consumption, which makes up the remaining third of the consumption pie, softens (led by uncertain equity market returns and global trade flows). Can current global uncertainties be turned into opportunities over the medium term? We find that India has grown faster in periods of strong integration with the world. We further find that global financial integration has been strong, but global trade integration has been weaker. However, with the economy slashing import tariffs and fast-tracking trade deals, it may stand to gain once the tariff storm settles. As supply chains get rejigged once again, India could attract a larger share of manufacturing and exports, particularly in labour-intensive mid-tech goods like textiles. Policy issues The RBI eased more than expected in the 6 June Monetary Policy Committee (MPC) meeting. One, it cut by 50bp, more than consensus expectation of 25bp, taking the repo rate to 5.50%, and delivered a 100bp in rate cuts in 2025 so far. Two, it cut the cash reserve ratio(CRR)by 100bp, a move that was largely unexpected. This cut is expected to add INR2.5trn to liquidity but could eventually be used to sterilise the USD40-45bn of FX swaps that are expected to mature between June and December. We see the repo rate and CRR cuts as a package to add liquidity, but in a way that supports banking sector net interest margins. Three, the stance was changed from accommodative to neutral. While the governor reiterated that after the RBI’s actions on 6 June, there is “very limited space” for further easing, we continue to expect a 25bp rate cut in the December quarter. The RBI forecasted inflation at 3.7% for FY26, but we believe it could come in lower at 3.2%, opening space for further easing. It can be asked why the RBI eased so much at a time when growth is holding up. Our sense is that the RBI is using this opportunity to raise structural credit growth and potential GDP growth. In fact, the governor said that “while price stability remains the focus of monetary policy, we are not oblivious to putting in place complementary monetary and credit policies and regulations that support growth and prosperity”. This, to us, signals a new RBI. One that is not just focused on the current business cycle but also on India’s potential growth. On the fiscal front, the government may choose to appropriate a part of the fall in global oil prices in the form of higher revenues instead of cutting pump prices. This could make fiscal consolidation much easier than budgeted. We think the fiscal deficit target of the government will be met, supporting India’s macro stability credentials. On the external front, the current account deficit is likely to remain low as long as investment remains soft. The area to watch, instead, are capital inflows. Net FDI inflows have been weak (because of large repatriation), and portfolio inflows remain unpredictable. https://www.hsbc.com.my/wealth/insights/market-outlook/india-economics/in-a-better-place/

2025-06-27 12:01

Key takeaways The uncertainties around tariffs are set to weigh on exports and investment, curbing growth across the region. But falling inflation opens the door for more rate cuts, while looser fiscal reins should also offer a cushion. With external headwinds stiffening, the big opportunities lie in a sustained boom in local consumption in years to come Indonesia is in a bit of a lull, waiting for traction from policy by its new government. Tariffs are a bigger concern in Malaysia, even if growth momentum continues to impress. Singapore, too, faces impact from global turmoil. In Thailand, trade uncertainties are compounded by political uncertainty, while the Philippines is looking for another year of solid growth helped by robust domestic spending. It is Vietnam that worries the most in ASEAN about tariffs, though its competitiveness is likely to see it weather it all, eventually. Economy profiles Key upcoming events Source: LSEG Eikon, HSBC Indonesia A new innings Indonesia’s recovery since the pandemic has been rather soft, led, in part, by tight fiscal and monetary policy over the last few years. 1Q25 GDP came in at 4.9%, weaker than the previous quarter. GDP is now 7.5% lower than the pre-pandemic trend. And, more recently, the April and May manufacturing PMIs dipped into contractionary territory, while bank credit growth and core inflation remain soft. Our now-caster model points to growth of 4.5-5%, lower than the official GDP numbers of about 5%. As such, we see a case for looser fiscal and monetary policy in 2025. Let’s start with fiscal policy. The government unveiled two separate fiscal stimulus packages over the last few months. The first one, effective from 1 January, included a free food scheme for children, a rice assistance programme, an electricity tariff discount, an accelerated housing programme, and a reduction to planned VAT rate hikes. However, alongside these, the government also announced operational expenditure cuts. Putting the two together, net expenditure growth was not strong, and the government is sitting on higher cash balances than a year ago. More recently, the government announced a second fiscal stimulus package effective from 5 June, incorporating transportation discounts, wage subsidies, discounted insurance cover, food assistance and direct transfers, costing the government 0.1% of GDP. Eventually if the rise in the fiscal deficit is led more by falling revenue than rising expenditure, it may not have large growth multipliers. And growth support would then fall more on the shoulders of monetary easing. Indonesia also wants to raise potential GDP growth over the medium term. We believe breaking away from commodity price swings by raising geographically diversified and higher value-added exports could bring large gains. Some good things have happened in recent years. Indonesia has gained market share in global exports. However, these haven’t been able to lift domestic growth, as about half of the exports are commodity-related with limited backward linkages. Thankfully, a window of opportunity may open up. Indonesia’s exports to the US look very different, in fact a lot like Vietnam’s export mix, comprised of apparel, footwear, electronics, and furniture. However, these are still rather small (for instance, just 9% of Indonesia’s exports go to the US) and need to be scaled up. Is that doable? It will not be easy, but it is not impossible either. Indonesia doesn’t run a formidable trade surplus with the US, which could arguably protect it from large tariff increases post ongoing negotiations. It could, therefore, benefit from supply chains getting rejigged once again. But, first, Indonesia will have to work hard on several fronts – enhancing infrastructure development, expanding trade agreements, developing a skilled workforce, and streamlining business practices. Indonesia runs a negative output gap Source: CEIC, HSBC Inflation is well below BI’s 2.5% target Source: CEIC, HSBC Malaysia The steadiest central bank in Asia What a whirlwind it has been since the tariff “Liberation Day” was announced by the US White House on 2 April. Malaysia, like many ASEAN peers, is facing a dilemma of finding itself being the victim of its own success. The “reciprocal tariff” imposition of 24% on Malaysia has been paused, which was later followed by the US’s sectoral reprieve on electronics imports. No doubt this is music to the ears of Malaysia, as its exempted electronics shipments to the US alone account for 6% of its GDP, but this may only be temporary. Indeed, tariffs threats loom large over export-oriented economies, particularly those that benefitted from trade tensions under Trump 1.0. Questions arise whether ASEAN will likely see another reshuffle of FDI relocations between member states, benefitting those with lower tariff rates than Malaysia. We do not believe so. The decision to move FDI is not solely dependent on tariffs, it also reflects a confluence of factors including existing industry clusters, extensive free trade agreements, investment climate, energy supply, and, most crucially, the cost effectiveness of the local labour force. In this case, Malaysia remains in a decent position, unlikely to lose its FDI attractiveness to those with lower tariffs, and even likely to lure some supply chains from peers with higher tariffs. However, significant uncertainty puts investors on a cautious footing with respect to new disbursements, at least in the near term, likely exacerbating the trade shocks. While the market’s attention is naturally on tariff risks, it is important to look at Malaysia’s domestic resilience. Fortunately, Malaysia’s decent private consumption and the continuation of mega infrastructure projects can partially offset some external risks. All in all, we maintain our 2025 growth forecast at 4.2%, reflecting our caution on global trade prospects. We also keep our 2026 growth forecast at 3.9%. In addition, inflation remains in check. Headline CPI decelerated to 1.5% y-o-y YTD, down from 1.8% in 2024. Given subdued inflation momentum, we keep our headline inflation forecast at 1.9% for 2025 and 1.7% for 2026. While there may be upside risks to inflation from the potential subsidy rationalisation on RON95, there have been conflicting news reports on whether this will happen as planned. Still, if international oil prices continue to fall closer to the subsidised price of MYR2.05/l, coupled with a strong ringgit, there is little need to subsidise. But these are two big assumptions. Malaysia has been witnessing an investment renaissance Source: CEIC, HSBC Malaysia has seen consistent inflows of FDI, though caution may linger in the near term Source: CEIC, HSBC Philippines Improving growth prospects As investors look for economies that are safe from the turmoil of tariffs, the Philippines is one of the Asian economies that comes to mind. Unfortunately, the archipelago didn’t start 2025 with a “bang”. Growth in Q1 2025 surprised to the downside, decelerating to 5.4% y-o-y. Unlike others in ASEAN, the Philippines did not benefit from importers front-loading orders in anticipation of higher tariffs. In addition, the economy’s services exports – considered one of the two Business Process Outsourcing (BPO) capitals of the world – underperformed. From an average of c10%, growth in services exports dipped to c7%. The peso’s relative strength might have stifled the competitiveness of the sector with the Real Effective Exchange Rate (REER) floating at record-high levels, and above the REER of India, the other BPO capital of the world. However, the prospects get better when we look under the hood – enough to stay excited about the economy. Growth in household consumption – the bulwark of the Philippine economy – finally picked up after slowing to a pace last seen during the Global Financial Crisis (GFC) as household purchasing power likely improved with inflation well below the central bank’s 2-4% target band. With inflation down, the Bangko Sentral ng Pilipinas (BSP) is already deep within its easing cycle, cutting policy rates by as much as 125bp to 5.25%. As a result, credit growth has been “trotting” upwards from the lows of 2023. And there is much more to come with the central bank expected to ease monetary policy further, by 25bp, with risks for more cuts. The economy’s ambitious infrastructure agenda should also lend support to overall investment and, thus, growth. On the trade front, the Philippines has the opportunity to increase its market share in the US since it has the least reciprocal tariff rate announced amongst major emerging Asian economies, at 17%. Though the final tariff rates are still fluid, the Philippines can benefit from a ‘China+1+1’ strategy since US relations may be the least contentious with the Philippines vis-à-vis other ASEAN economies. Indicators reflect this improving outlook, with the overall PMI index and new orders much better in the Philippines than in most other ASEAN economies. Not the best start, to say the least. But we think the Philippines has the momentum, tools, and the fundamentals to power through the incoming slowdown in global growth in 2025 and beyond. Indicators show robust demand as the Philippines enters a tougher global outlook Source: LSEG Datastream, HSBC With inflation subdued, the economy has room to ease monetary policy further Source: CEIC, HSBC. NB: Shaded area represents HSBC forecasts. Singapore Softer growth While Singapore ended 2024 on a strong footing, signs pointed to a softening economic momentum even before the tariff tensions from 2 April. Singapore’s 1Q25 GDP growth fell 0.6% q-o-q seasonally adjusted, raising the question whether Singapore will see a technical recession. The falling GDP momentum was almost entirely due to a contraction in manufacturing, with the main culprit being volatile pharmaceutical production. In addition to manufacturing, trade-related and consumer-oriented services also saw subdued growth. This means that Singapore’s growth outlook is set to face more challenges, despite the 90-day pause in reciprocal tariffs, with the 10% baseline tariff increases already applying to all economies, except China. However, we do not believe Singapore is likely to enter a technical recession in 2Q25, though it may only narrowly avoid one. Thanks to some de-escalation of trade tensions and the exemption from tariffs of electronics shipments to the US, high frequency indicators have shown that front-loading activities have already taken place in April. Non-oil domestic exports (NODX) accelerated by a double-digit y-o-y rate in April alone. We expect the trend to continue for the rest of 2Q, as exporters race to front-load shipments to the US before the looming deadlines of trade negotiations on 9 July. Despite some de-escalation around US-China trade tensions, there is not yet any clarity on the outcome. Given Singapore’s limited domestic market, its growth will be more heavily weighed down by external uncertainties than in its ASEAN peers. All in all, we maintain our growth forecast at 1.7% for 2025, at the upper end of the government’s growth forecast range of 0-2%. We also keep our 2026 growth forecast at 1.6%. In addition, inflation continues to make good progress. Core inflation decelerated sharply from 2.8% in 2024 to only 0.6% y-o-y YTD through April, thanks to the broad-based cooling of price pressures. Given the subdued domestic demand-induced inflation and low oil prices, we expect core inflation to come in around 0.9% for 2025 and 1.0% for 2026. Despite some moderation, Singapore’s semiconductor production growth continues to be firm Source: CEIC, HSBC Singapore’s inflation continues to decline to below 1% y-o-y Source: CEIC, HSBC Thailand Speedbump Thailand started the year strong, despite the uncertainty, with its economy growing 3.1% y-o-y in 1Q, surprising market participants. However, demand components that were expected to slow down, did taper off: private consumption decelerated as household debt tightened consumer pockets; investment cooled as trade uncertainty kept investors on the fence; and services exports substantially eased as tourism took a step back with fewer Chinese tourists visiting the region. Although expected, goods exports outperformed in 1Q, growing 13.8% y-o-y. External demand, especially for chips, hard disk drives, and electrical appliances surged in anticipation of higher US tariffs. But what surprisingly boosted growth – and, perhaps, foretelling what lies ahead – was a slowdown in both goods and services imports. Goods imports decelerated to 4% y-o-y (from 9% in 4Q 2024), while services imports fell 4.3% y-o-y. Apart from household debt, households may be reeling their purchasing back in anticipation of tougher labour and business conditions, most especially for MSMEs (Micro, Small, and Medium Enterprises). In fact, the sentiment of both consumers and medium-sized firms has turned towards a declining trend, in stark contrast to the steady improvement of the sentiment amongst large-sized enterprises. Even more telling is the continuous drawdown of inventories, which have fallen year-on-year 13 times during the last 16 months. Households and business owners may already be gearing for growth to take a hit in the months ahead. Reciprocal tariffs by the US, of course, will be the biggest drag, with the US being Thailand’s largest destination for exports. Though nobody is truly certain about what the final outcome will be on tariffs, the final tariff rate for Thailand will be important; we estimate that every 10ppt tariff imposed on Thailand will decrease its GDP growth by 0.5ppt. Indirect effects also matter. US tariffs on China will likely lead to China redirecting its exports to ASEAN, toughening competition in the region. Thailand, then, finds itself in a perilous situation. China’s oversupply of goods is highly concentrated in those that Thailand also produces, such as car parts and electrical appliances. This, in turn, provides deflationary pressure on the economy. Assuming that reciprocal tariff rates are lowered after the 90-day pause, we expect growth to clock in a tepid pace of 1.7% in 2025, and then, marginally improve to 1.9% in 2026. Growth in 1Q 2025 came in strong due to a sharp slowdown in imports Source: Macrobond, HSBC Sentiment among consumers and MSMEs has turned bearish Source: CEIC, HSBC Vietnam Front-loading trade After decent growth of 6.9% y-o-y in 1Q25, Vietnam is bracing for more trade volatility. That said, the 90-day pause on “reciprocal tariffs” until 9 July is a much welcome reprieve, with high frequency indicators showing strong front-loading activities in 2Q25. Export growth rallied to c20% y-o-y in April and May, half of which was thanks to the frontloading of non-phone electronics shipments. That said, imports also surged by a similar magnitude, leading to a rather marginal trade surplus of only USD600m per month on average. However, the clock is ticking, as the global trade outlook remains highly uncertain. News reports suggest that Vietnam is set to purchase US agriculture imports worth of USD2bn (The Investor, 3 June). However, details on where the trade negotiations are heading remain scarce. Since the tariff turmoil in April, there has been greater urgency by policymakers to strengthen efforts to support the domestic economy. Major infrastructure projects are being completed, such as Tan Son Nhat International Airport’s Terminal 3 in Ho Chi Minh City, while more are in the pipeline, such as the USD8bn Lao Cai – Hanoi – Hai Phong railway (Vietnamplus, 20 May). Encouragingly, the domestic sector is showing signs of improvement, with retail sales picking up. Vietnam has also seen the strongest recovery in international tourists YTD in the region. All in all, we maintain our growth forecast at 5.2% in 2025 and 5.6% in 2026, although we note how US trade policy outcomes settle can heavily swing Vietnam’s growth trajectory. Outside of growth, inflation has decelerated from 3.6% in 2024 to 3.2% y-o-y YTD through May. The underlying trend remains benign and is well below the State Bank of Vietnam’s (SBV) inflation target ceiling of 5.0%. With global energy prices continuing their downtrend, we maintain our inflation forecast at 3.0% for 2025 and 3.2% for 2026. Exports have been holding up during the 90-day pause on “reciprocal tariffs” Source: CEIC, HSBC Retail sales has been faring better in recent months Source: CEIC, HSBC https://www.hsbc.com.my/wealth/insights/market-outlook/asean-in-focus/domestic-consumption-to-the-rescue/

2025-06-23 07:04

Key takeaways The Bank of Japan kept rates on hold this week, but its QT tapering announcement could support the JPY. JPY has drifted sideways lately with another round of “dedollarisation” likely needed to break the stalemate. We see USD-JPY heading lower on US policy uncertainty, JPY undervaluation, and potential US policy easing. The Bank of Japan (BoJ) kept interest rates on hold at 0.5% for the third consecutive meeting this week and remains non-committal to the timing of the next rate hike amid growth uncertainties. The market has the next rate hike fully priced in only by March 2026. The BoJ’s announcement to start quantitative tightening (QT) tapering (reducing the pace of balance sheet expansion) from April 2026 can be considered marginally positive for the JPY as it may help contain local investors’ bond outflows. But fiscal and supply concerns remain while the economic outlook stays subdued. In short, Japanese markets need more visibility on a US-Japan trade deal. USD-JPY has been drifting sideways for the past two months. Our modeling suggests that (1) the pair is now mostly driven by the USD itself; (2) correlation with historical explanatory factors such as yield differentials and risk sentiment remain lower than usual; and (3) the range of model-derived USD-JPY values has been stable at roughly 140-150. Another wave of ‘de-dollarisation’ is probably needed to break USD-JPY out of this stalemate while global investors' diversification inflows to Japanese equities have slowed much more than flows to Europe since April. Indeed, the JPY has underperformed other currencies since late April (see chart). This is probably to do with earlier extreme long JPY positioning. Net long JPY futures and options position surged to an all-time high in late April, based on CTFC data. In comparison, the market was only modestly net long European currencies at the time. Some market participants may have bought JPY as a portfolio hedge in April but with global equity markets having recovered since then, that demand likely waned. The number of net long JPY contracts has fallen by 20% since late April. Overall, we expect the JPY to strengthen against the USD by the end of the year on the back of US policy uncertainty, JPY undervaluation, and renewed expectations for the Federal Reserve easing. However, the market remains sensitive to headlines about US-Japan trade talks, especially regarding FX discussions. Source: HSBC, Bloomberg https://www.hsbc.com.my/wealth/insights/fx-insights/fx-viewpoint/jpy-upside-despite-steady-policy-rates/

2025-06-23 07:04

Key takeaways Asian economies have faced growth headwinds this year from shifts in global trade policy, geopolitical tensions, and rising market volatility. But improved external macro fundamentals – helped by supportive policy and strategies to safeguard macro-financial stability – have helped enhance Asia’s resilience. With US public finances under strain and growth cooling, the bond market vigilantes have kept US yields elevated this year. For many years, investors have been used to seeing a negative correlation in the returns from stocks and bonds. But that once-dependable relationship has broken down of late – hurting the performance of conventional 60/40 portfolios. Chart of the week – US catching down As expected, the US Federal Reserve kept rates steady last week, as it continues to navigate the impact of changing trade policy, cooling growth and employment, and a rising oil price. The so-called dot-plot that maps the future path of policy is still pencilling in two rate cuts by the end of the year, but only one further cut (rather than two) in 2026. Even before last week’s meeting, it was clear that policy uncertainty has weighed on US and global growth forecasts, with economists busy nudging down their growth numbers for 2025. Expectations for the US have moved down the most. This makes sense given the high level of uncertainty now facing US consumers and businesses, and how the inflationary impact of tariffs affects consumer disposable incomes and Fed policymaking. The bottom line is US growth looks to be “catching down” to other developed markets. As US exceptionalism fades, a new economic regime –the G-zero economy – is coming into view. The old idea of US hegemony, or the G10, is replaced with a new G-zero, where no one economic power has the willingness or ability to lead the global order. It is an economic regime where supply shocks are more important, and where growth is more constrained, and inflation is higher, and more volatile. Investors must recognise that uncertainty is no longer a transient feature of markets but a structural one. Adaptability, flexibility, and a globally diversified approach to portfolio construction will be essential for navigating the months and years ahead successfully. Market Spotlight New Rules Cyclical growth is converging in western economies, and economic power is gradually shifting to Asia. This new, multi-polar world has profound consequences for investing. As US exceptionalism fades, G-zero economics takes over (see story above), and asset classes that have been overlooked for years have a chance to shine. A structurally weaker dollar allows EM central banks to be proactive, which supports returns in EM stocks and local currency bonds. Recent market action has also seen correlations between US bond yields, stocks and the dollar go haywire. This calls for investors to consider new asset classes as potential safe havens in portfolios. In a multi-polar world, EM country correlations are also likely to fall – we can see this in the divergence of China and India market performance in recent years. This creates a strong argument that EM allocations should reflect a greater importance of country effects, and that EM exposure can offer portfolios a powerful source of diversification. Overall, investors must accept that uncertainty is a feature of the system, not a bug. This keeps volatility elevated and weighs on returns, and it reinforces the need to add other assets that can help build portfolio resilience. The value of investments and any income from them can go down as well as up and investors may not get back the amount originally invested. Past performance does not predict future returns. The level of yield is not guaranteed and may rise or fall in the future. For informational purposes only and should not be construed as a recommendation to invest in the specific country, product, strategy, sector, or security. Diversification does not ensure a profit or protect against loss. Any views expressed were held at the time of preparation and are subject to change without notice. Any forecast, projection or target where provided is indicative only and is not guaranteed in any way. Source: HSBC Asset Management, Bloomberg. Data as at 7.30am UK time 20 June 2025. Lens on… Trading up in Asia Asian economies have faced growth headwinds this year from shifts in global trade policy, geopolitical tensions, and rising market volatility. But improved external macro fundamentals – helped by supportive policy and strategies to safeguard macro-financial stability – have helped enhance Asia’s resilience. And longer-term, some macro strategists think the region could be well-placed to benefit from a reordering of global trade. Most Asian economies have diversified their trade links and reconfigured supply chains in recent years. They could now see opportunities from even stronger regional economic co-operation, product advancements driven by new technology, and new trade agreements. Renewed momentum in structural reforms could also be a growth catalyst. That could be good news for Asia’s stock markets. Chinese equities, for example, trade at a discount to developed and other emerging markets. Earnings revisions have been positive this year, with cooling trade tensions potentially driving a pick-up, and 12-month forecast earnings growth currently at 9%. TINA to Treasuries? With US public finances under strain and growth cooling, the bond market vigilantes have kept US yields elevated this year. Following Moody’s decision to strip the US of its AAA rating, other global agency downgrades risks forcing investors to look elsewhere for perceived safe haven assets. China is gradually diversifying away from US assets, a trend that has accelerated over the past 3-4 years. Japan’s holdings are in line with the long-term average, and the eurozone’s have even increased, but rising yields in Europe and Japan could spark a shift in favour of Bunds and JGBs. Further USD weakness plus a fracturing of the G7 may also reduce investors’ desire to hold Treasuries. Global diversification away from Treasuries has the potential to create a vicious cycle of higher US yields, greater concerns about debt sustainability, and more ratings downgrades. But it’s not straightforward. The global universe of the safest bonds remains dominated by US Treasuries, with outstanding debt roughly 14 times larger than that for Bunds. And Japan has its own fiscal problems, reflected in its single A rating. The hedge fund edge For many years, investors have been used to seeing a negative correlation in the returns from stocks and bonds. But that once-dependable relationship has broken down of late – hurting the performance of conventional 60/40 portfolios. It reinforces the need to build portfolio resilience – and one option is to consider alternative asset classes as both diversifiers and differentiated sources of return. An allocation to hedge fund strategies, in particular, can benefit portfolios because of their low correlation with broader market indices. They can improve the risk/return profile of a traditional portfolio, while potentially providing downside protection. A typical balanced hedge fund portfolio insulated against as much as 90% of market weakness in Q1 2025. Indeed, market uncertainty can be a catalyst for some hedge fund strategies. Equity market neutral strategies can perform well in periods of volatility, while global macro strategies can benefit from interest rate movements and opportunities in commodity markets. With volatile market narratives currently a feature of the system, hedge funds could offer much needed diversification. Past performance does not predict future returns. The level of yield is not guaranteed and may rise or fall in the future. For informational purposes only and should not be construed as a recommendation to invest in the specific country, product, strategy, sector, or security. Diversification does not ensure a profit or protect against loss. Any views expressed were held at the time of preparation and are subject to change without notice. Index returns assume reinvestment of all distributions and do not reflect fees or expenses. You cannot invest directly in an index. Any forecast, projection or target where provided is indicative only and is not guaranteed in any way. Source: HSBC Asset Management. Macrobond, Bloomberg. Data as at 7.30am UK time 20 June 2025. Key Events and Data Releases Last week The week ahead Source: HSBC Asset Management. Data as at 7.30am UK time 20 June 2025. For informational purposes only and should not be construed as a recommendation to invest in the specific country, product, strategy, sector or security. Any views expressed were held at the time of preparation and are subject to change without notice. Any forecast, projection or target where provided is indicative only and is not guaranteed in any way. Market review Heightened geopolitical tensions pressured risk markets last week, with oil prices rising further. The US dollar rebounded modestly against major currencies, while gold prices retreated from recent gains. US Treasury yields were largely steady during a holiday-shortened week, as investors digested the latest FOMC meeting, where Fed Chair Powell noted that uncertainty has “diminished but remains elevated”. US equities were little changed over the first three trading sessions. The Euro Stoxx 50 declined, while Japan’s Nikkei 225 advanced. Other Asian markets traded mixed: Hong Kong’s Hang Seng and mainland China’s Shanghai Composite fell, but South Korea’s Kospi surged to its highest level since late 2021, extending its post-election rallies. https://www.hsbc.com.my/wealth/insights/asset-class-views/investment-weekly/us-catching-down/