2025-04-11 07:04

Key takeaways The surprise 90-day reprieve from reciprocal tariffs for most countries has caused a sharp recovery in risk appetite. But uncertainty remains elevated and has now arguably been extended. The main positive is that a potential financial meltdown has been averted, and the all-important Treasury market should recover. Markets may now start to trade on fundamentals again. But global growth, US inflation and global earnings are all facing some challenges. Markets may no longer assume a US recession as their base case, but it remains a risk. As a result, we keep our defensive stance, focused on quality and diversification. We focus on multi-asset strategies with an active approach as managers can take advantage of opportunities and dislocations when they occur (without the need to forecast everything). We favour quality assets with stable cash flows – which include high rated bonds and defensive stocks with strong market positions. As for Chinese markets, our focus on domestically oriented companies is even more important now than before. We expect to see more stimulus that benefit the consumer discretionary and financials sectors in Asia, as well as internet, software and e-commerce leaders but think technology hardware companies are significantly exposed to US tariff and growth risks. What happened? The Liberation Day announcement on 2 April triggered a 13% sell-off of the S&P 500, but markets bounced sharply yesterday, reducing the damage to ‘just’ 4% from the 1 April closing price. Non-US markets are also bouncing. The trigger was yet another surprise announcement by the White House that most countries will be given a reprieve of 90 days on the reciprocal tariffs, meaning that the 10% blanket levy now applies to most countries. The (very important) exception is for imports from China, which saw their tariff raised further, to 125%; China’s own tariff of 84% on US imports comes into force today. Many commentators now assume trade between the US and China will collapse. While the US President did acknowledge the market turmoil, we think it would be too optimistic to assume that there is some kind of ‘government put’ protecting us against equity market downside. Tariffs have only been delayed and significant concessions from other countries will be needed to avoid them being imposed in 90 days time. The question is whether countries are willing and able to give in to the high US demands. The main positive is that fears of a financial market meltdown should now ease. The Federal Reserve’s intervention through Treasury purchases or liquidity measures no longer seems needed for now. Volatility has come down and Treasury markets have recovered sharply. It also means, however, that markets no longer expect four or five rate cuts this year, but only three, which aligns with our assessment. We think investors will start to look at growth, inflation and earnings fundamentals again. In fact, US consumers had already started to worry about signs of some weakening in the labour market and a re-acceleration of inflation as a result of the tariffs. The 125% tariff on Chinese imports will have a big effect on consumer prices. For companies, not every import from China can easily be substituted by another provider. Even if the final good can be made locally or outside of China, some of the components may still need to be sourced from China. As a result, growth and inflation pressures remain. Uncertainty is another negative as it delays investment and spending decisions, and – unfortunately – that uncertainty is further extended due to the 90-day reprieve. Overall, we think markets will no longer assume a US recession as their base case, but it remains a risk. And we believe that companies will start to guide down earnings expectations more actively, which should hurt cyclicals vs defensives, goods vs services, and big importers compared to more local players. Weak confidence will spill over into weaker activity Source: Bloomberg, HSBC Global Private Banking and Wealth as of 10 April 2025. We think US growth and earnings continue to be more negatively affected by the tariffs than in Europe, Japan and India, for example. That’s to a large extent because of the very broad-based tariffs, which mean that US importers cannot find any imports without levies. That increases their cost base, margin pressures and inflation pressures. Companies elsewhere in the world on the other hand can find plenty of goods without tariffs. We also believe that foreign companies and countries will continue to build regional networks to secure new suppliers and new markets. The announcement by the UK and India that they are in the final stages of a trade deal is just one example. Investment implications Investors who try to time the market have been shown that this is very difficult to do. Panic-driven moves may have led some people to sell on Tuesday and miss the rally on Wednesday. Once again, volatility spikes do not tend to last long. The strongest days often follow the weakest days, and investors better stay in the market to avoid missing those bounces. Diversification and a focus on quality are a much better strategy. We focus on multi-asset strategies with an active approach as managers can actively take advantage of opportunities and dislocations when they occur (without the need to forecast everything). We favour quality assets with stable cash flows – which include high rated bonds and defensive stocks with strong market positions. High yield bonds are less preferred as spreads look somewhat tight compared to their usual relationship with equity volatility. As for Chinese markets, our focus on domestically oriented companies is even more important now than before. That said, China’s onshore and offshore equity markets have stayed relatively resilient as compared to the sharp selloff in the US market in recent weeks. Many investors don’t know that the MSCI China has only very limited exports goods sales exposure to the US at only 2% (exports to the US account for only 2.5% of China GDP). We expect severe tariff headwinds to prompt the Chinese government to further ramp up fiscal and monetary stimulus to strive for its 2025 GDP growth target of “around 5%”. The DeepSeek-driven AI innovation and investment boom should offer an important domestic growth engine to mitigate the impact from reciprocal tariffs. We like the domestically-driven sectors of consumer discretionary and financials in Asia but think technology hardware companies are significantly exposed to US tariff and growth risks. https://www.hsbc.com.my/wealth/insights/market-outlook/special-coverage/90-day-tariff-reprieve-can-the-bounce-last/

2025-04-11 07:04

Key takeaways The Reserve Bank of India (RBI) cut the policy rate by 0.25%, bringing the benchmark interest rate to 6.0%. The RBI also changed the monetary policy stance from “neutral” to “accommodative”. The latest meeting reinforces our view that the RBI is likely to cut rates to 5.5% this year, with a 0.25% cut each in its June and August meetings. The central bank cut its FY26 (April 2025-March 2026) GDP growth forecast by 0.2% to 6.5%. It also lowered its inflation forecast to 4.0% (from 4.2% earlier). We retain our overweight stance on Indian equities, while acknowledging the increase in downside risks. Stabilisation in earnings expectations, undemanding valuations and improvement in international flows support the markets for now. The 90-day pause in the implementation of reciprocal tariffs is a positive for export-oriented sectors, though uncertainty is likely to persist. We prefer large-cap over small- and mid-cap equities and favour the financials, healthcare and industrials sectors. We also expect Indian local currency bonds to outperform cash this year. However, less favourable interest rate differentials and the risk of a rebound in the broad USD index (DXY) point towards increased downside risks for the INR. What happened? In line with our expectations, the Reserve Bank of India (RBI) cut the policy rate by 0.25%, bringing the benchmark interest rate to 6.0%. The RBI also changed the monetary policy stance from “neutral” to “accommodative”. Importantly, the decision to cut rates and change the policy stance was unanimous. The RBI governor clarified that the change in stance to accommodative meant that the central bank could cut rates further and this should not be interpreted as a signal for altering liquidity conditions. The governor also highlighted the RBI’s commitment to ensure sufficient liquidity in the financial system. Ongoing decline in food inflation opens room for the RBI to cut rates further Source: RBI, HSBC Global Private Banking and Wealth as of 10 April 2025 It is important to note that the RBI Monetary Policy Committee (MPC) meeting was held prior to US President Trump’s announcement to pause the implementation of the reciprocal tariffs by 90 days. Clearly, the potential impact on growth due to tariffs (which still stand at 10%) heightened financial market volatility and the potential negative second-order impact weighed on the RBI’s decision. The central bank cut its FY26 (April 2025-March 2026) GDP growth forecast by 0.2% to 6.5%. The governor also mentioned that it is tough to quantify the impact of the trade war. Hence, we acknowledge the risk of further downward revision in GDP growth estimates should uncertainty persist. On a positive note, the RBI also lowered its inflation forecast to 4.0% (from 4.2% earlier), aided by the durable decline in food inflation. We expect the near-term food inflation to remain subdued due to the good winter harvest. However, the upcoming months are expected to see prolonged periods of elevated temperature, which could impact crop production and raise the risk of a rebound in food inflation in 2H 2025. Overall, the latest meeting reinforces our view that the RBI is likely to cut rates to 5.5% this year, with a 0.25% cut each in its June and August meetings. That said, given the heightened global uncertainty, it is possible that the timing of the rate cuts could be fluid. Investment implications In our assessment, the RBI meeting was a positive for the domestic equity markets from two aspects. First, the 0.25% rate cut should lead to marginally lower borrowing costs for companies. Secondly, the forward guidance on rate cuts and liquidity is likely to provide greater confidence to markets that the central bank is increasingly looking to support growth, given that inflation has moderated and is close to the RBI’s target of 4.0%. We retain our overweight stance on Indian equities, while acknowledging the increase in downside risks. Stabilisation in earnings expectations, less demanding valuations and improvement in international flows support the markets for now. The 90-day pause in the implementation of reciprocal tariffs is a positive for export-oriented sectors, though uncertainty is likely to persist. From a style perspective, the heightened uncertainty reinforces our preference for large-cap equities over small- and mid-cap. We believe their size, better access to financing and defensive nature could lead them to outperform over the next few months. We are selective and prefer domestic and service-oriented sectors, which are less exposed to tariffs. We favour the financials, healthcare and industrials sectors. We are bullish on Indian local currency bonds and expect them to outperform cash in 2025. The supply-demand dynamics remain supportive, as lower projected net supply for FY26, coupled with robust domestic and international demand, should lead to lower yields. Given expectations of further RBI rate cuts, we expect 10-year government bond yields to edge lower by end-2025. On a relative basis we see better value in AAA corporate bonds, owing to the recent spread widening. However, less favourable interest rate differentials and the risk of a rebound in the broad USD index (DXY) point towards increased downside risks for the INR. https://www.hsbc.com.my/wealth/insights/market-outlook/special-coverage/rbi-hints-at-continued-policy-support/

2025-04-09 07:04

Key takeaways Markets are unlikely to get much clarity after the “Liberation Day” tariff announcements on 2 April as countries now consider retaliation or negotiation, which could lead to more tariff changes. Economic uncertainty will last even longer as businesses and consumers try to assess the impact on them and may postpone investment and consumption decisions. We think that US growth and earnings will be more negatively affected than in most other countries, as the broad-based tariffs make almost all imported inputs more expensive for US firms. That either puts more pressure on inflation or on corporate margins. We expect investors to continue their rotation into other markets, but without adding overall exposure till markets stabilise more. We think the sharp fall in valuations and positioning adjustment we have already seen are not enough to put a bottom under markets. So, investors will continue to watch the very busy news flow, reduce concentrated bets, and diversify across asset classes and markets. European and Asian nations will try to increase trade with other trading partners outside of the US and stimulate local consumption. Given lower inflation pressures than in the US, we expect to see easing of monetary policy there, supporting high quality bonds. An active multi-asset strategy with a focus on quality, including bonds and gold, makes sense. What happened? On 2 April, the US government announced the most historic tariff hikes since 1930’s Smoot-Hawley tariffs Act across almost all of its trading partners. Since then, global risk appetite has taken a hit across asset classes and geographies. Various countries are already planning to impose reciprocal tariffs on the US, increasing the risks of a global trade war. Since 2 April, the S&P500 is down by 11%, while FTSE250 and EuroSTOXX have fallen by 7% and 12%, respectively. In Asia, Hang Seng Index has also corrected by 13%, at the time of writing. Risk-off sentiment is fuelling the demand for safe haven with safe haven bond yields falling. While the correction in the early markets has made valuations a bit more attractive, analysts have only made mild downward revisions to their earnings forecasts so far. We expect more downward revisions as businesses provide negative guidance and see little scope for any convincing bounce. The combination of tariffs and heightened uncertainty is expected to further slow down the global economy, and the US, in particular, as businesses and consumers will put a hold on their spending and investment decisions. But while US equity sentiment has fallen, investor positioning has still not been reduced enough to provide a floor for markets. Hence, we expect the rotation out of the US to continue in the near term. We believe the objectives of the tariffs include the creation or protection of US jobs, the wish to bring US borrowing costs down and get better access for US companies to foreign markets. These ambitious objectives suggest that the government is willing to go through a period of uncertainty before there is any substantial easing of the tariffs. The impact of tariffs is expected to be higher in the US than in the rest of the world. This is because the broad-based tariffs on almost all trading partners do not provide US companies with any ‘cheap’ imports. As a result, either their margins will be compressed or inflation will be raised, hurting the consumer. For now, the market expects a ‘transitory’ inflation spike and is happy to price in four Fed cuts this year, potentially starting in May. We think the Fed may choose to prioritise growth and financial stability concerns. As a result, government bond yields should come down further, aided as well by their safe haven appeal. Asian countries are topping the list of the hardest hit by US tariffs. Open economies like Japan, South Korea, Vietnam and Thailand may be more vulnerable than others. Reciprocal plus auto tariffs will hit the earnings for auto markets in Japan and South Korea the most, while stimulus and domestic consumption should support China and India earnings against the tariff headwinds. Inflation expectations have risen while GDP growth forecasts are coming down Source: Bloomberg, HSBC Global Private Banking and Wealth as of 8 April 2025. Past performance is not a reliable indicator of future performance. Investment implications While we see further downside for US stocks in the short term, we hold a neutral view on a 6-month horizon. Globally, our focus in equities is defensive, selective and focused on quality. We prefer services over goods, and companies with strong cash flows and brand names. We maintain our relative preference for Asia, including China, India, Japan and Singapore due to their domestic resilience. Singapore and Inda stand out as safe havens to tariffs. Tech and domestic sectors including banking and consumption remain our pick in Japan, while the financials, healthcare and industrials sectors with a large-cap bias are our favourites in India. Inflation also remains well under control for the region, providing more room for Asian central banks to cut rates further, supporting growth ahead. In China, we await tactical opportunities from mispricing caused by the tariffs to capture structural growth opportunities, focusing on AI enablers and adopters from the internet, ecommerce, software, smartphones, semiconductors, autonomous driving, and robotics. We also favour the consumption, financial and industrial leaders, as well as quality SOEs paying high dividends. Exports to the US account for 25% of European companies’ revenues, but the impact of tariffs is substantially lower as much of this is related to services, and some of the goods sold are produced in the US. Also, we see Europe’s recent response to the tariffs more balanced in an effort to avoid escalations. However, we would be careful not to misread any announcements by the EU. European markets are trading at 65% discount to their US peers. Additionally, stimulus packages for defence and Germany’s infrastructure package have further added to the appeal. The UK is in a relatively good spot with ‘only’ a 10% tariff and is already in close talks with the US to come to a trade agreement. By not retaliating, we think inflation pressures can be contained, helping to cap borrowing costs for the government and boosting gilt performance. At the same time, the UK is also looking at expanding its trade relation with other countries, like India. While we like UK and Eurozone equities, we maintain our neutral stance and are awaiting sentiment to stabilise before adding further. Amid persistent volatility, we think safe haven assets including high quality bonds and gold should benefit. Multi-asset strategies can help us diversify across geographies and assets, while an active approach in fixed income can capture tactical opportunities as they arise. While we keep an eye on how the governments across the world respond to the US tariffs, and how they focus on driving domestic growth through government stimulus and support, we remain optimistic that markets will rebound in the long term as the fundamentals around re-onshoring, AI innovation and energy security remain strong. https://www.hsbc.com.my/wealth/insights/market-outlook/special-coverage/liberation-day-and-market-turmoil-implications-for-investors/

2025-04-08 12:01

Key takeaways UK hit with a 10% tariff from the US, but the impact will depend on how various governments react. Economic activity has been weak, while labour markets have been resilient, at least for now. Although fiscal headroom was restored, vulnerabilities remain. Source: HSBC Less ‘Liberation’ more ‘Amerexit’ The first quarter of 2025 has been tumultuous as financial markets and policymakers have sought to decipher between the noise and signals. That volatility looks set to continue with US tariff announcements on 2 April giving further impetus to an already uncertain outlook. For the UK, its small goods trade deficit with the US meant it faces the baseline 10% tariff. A relatively better outturn compared to those applied to peers – the EU faces a 20% tariff – but a significant jump from the current 0.5% weighted average tariff. Moreover, the steel, aluminium, and automotive sectors are hit with 25%, while other industries, such as pharma, are yet to be the subject of focus. From here, the UK economic impact will depend on the outcome of any retaliatory measures, deal negotiations, their timing, and any support from the government. If the UK opts for retaliation, that would deepen the economic impact and add to inflationary pressures. However, remarks from UK Business Secretary, Jonathan Reynolds, suggest the focus is on deal negotiation rather than retaliation. On that basis, we judge the risks are weighted towards weaker growth and disinflation. Indeed, financial markets have increased their expectations of Bank of England rate cuts this year and are now more in line with our view of a 3.75% base rate by end2025 (Chart 1). Risks to the downside All that said, the outcome is highly uncertain and the risk to that view is to the downside given that other countries have vowed to retaliate. An escalating trade war could see the UK caught in the economic crosshairs. Such an environment only adds to the picture of economic unease painted by surveys in recent months. Now, official data has confirmed the weak start to the year, with the UK economy contracting 0.1% m-o-m in January. Of the three broad sectors, services was the only positive contributor, while output in both the construction and manufacturing sectors reported sharp declines. That divergence may continue, the PMI survey points to some signs of life in the services sector, but further weakness across production sectors will be a drag on overall growth. Global economic uncertainty, particularly pertaining to tariffs, has weighed on manufacturers. And while European peers appeared to have front loaded activity ahead of tariff announcements, manufacturers in the UK reported a sharp decline across output and new orders in March. There was slightly better news on the inflation front. Headline CPI moderated to 2.8% from 3.0% in the month prior, largely driven by an unusually sharp fall in clothing prices. Retailers have noted softer demand – retail sales volumes rose 0.3% in the three months to February – and the need to offer discounts. Indeed, household consumption rose just 0.1% in 4Q24, while the savings rate rose to 12.0%, its highest on record, excluding the pandemic. It’s possible that a shift in the price level for various non-discretionary items in April will further drag on activity and limit the ability of firms to pass higher unit labour costs on. In our view, the headline inflation rate will resume its acceleration and peak in September. However, wage growth should moderate sharply in the second half of the year, placing a lid on persistent price pressures and enable a gradual – one 0.25ppt cut per quarter – decline in interest rates. Labour market data remains an uncertainty. While the unemployment rate, for now, has remained stable, supported by still decent employment growth, survey measures point to a further weakening in the demand for workers. In our view, the flurry of headwinds facing employers that hit from April will see a continued loosening in the labour market and a rise in the rate of unemployment (Chart 2); although the UK may just avoid outright falls in overall employment. Nonetheless, concerns over job losses alongside still elevated interest rates and another jump in the cost of living will weigh on consumption and consequently GDP growth in 2025. Fiscal buffer restored, but at a cost (cutting) Lack of clarity in official data has worsened and in addition to labour market data issues, the Office for National Statistics has raised concerns about trade, producer prices, retail sales, and possible revision to average wage growth. That carries significant implications for the Bank of England in determining the risk of persistent inflationary pressures and for the government. In that, their low margin for error leaves the Chancellor exposed to small changes in the Office for Budget Responsibility’s economic forecasts (Chart 3). In fact, economic developments since the Autumn Budget did not go the Chancellor’s way. And in the end, the public finances faced a GBP4.1bn shortfall against the fiscal target, Chancellor Reeves went a step further and opted to restore the fiscal margin to exactly where it was in October; a miracle, in our view. Despite its restoration, fiscal policy is in the same, if not a worse, position than a few months ago. Downside risks to growth and considerable uncertainty ahead mean the public finances are not on such a firm footing, and the Chancellor may find herself in the same position in a few months’ time. But with less public spending fat to cut. Source: Macrobond, HSBC forecasts Source: Macrobond, ONS, KPMG/REC Source: OBR https://www.hsbc.com.my/wealth/insights/market-outlook/uk-in-focus/tariffs-adding-to-an-uncertain-outlook/

2025-04-07 12:02

Key takeaways Global trade tensions sharply escalated after the “Liberation Day” announcement and China’s announcement of retaliatory actions. Key US trading partners in Asia are seeking negotiations or exemptions in trade deals with Washington. We believe reciprocal and auto tariffs will increase earnings risks for Japan and South Korea while domestically-driven markets such as China and India will stay relatively resilient in their earnings outlook. As the markets are quickly repricing for increased US recession risks, we expect further rotation out of the US equity market into Asia and Europe. Within our neutral positioning in global equities, we favour Asia ex-Japan markets with strong domestic growth drivers and policy stimulus, including China, India and Singapore, preferring the consumer discretionary, communications services, financials and industrials sectors. Global trade uncertainty and continued disinflation also underpin a more accommodative Asian central bank policy stance, supporting our preference for high quality Asian credit. What happened? Risk assets sold off sharply around the world after US President Donald Trump announced far-reaching and steeper-than-expected reciprocal tariffs that triggered market fears of an escalation of global trade war and recession risks. On 4 April, China announced 34% retaliatory tariffs on all imports from the US, matching a 34% reciprocal tariff on Chinese imports announced by the White House. China’s retaliatory tariffs will be effective on 10 April, one day after the US reciprocal tariffs will be implemented. The newly announced 10% baseline tariffs already came into effect on 5 April. China further announced a series of “countermeasures”, including export restrictions of seven types of rare earth minerals to the US, export controls on 16 American enterprises, an addition of 11 American enterprises to the unreliable entry list, and launching of an anti-dumping probe into medical CT tubes from the US. Asia stands out in the epicenter of the US tariff tantrum with the highest reciprocal tariff rates hitting key US trading partners in the region – 46% on Vietnam, 36% on Thailand, 34% on mainland China, 32% on Taiwan, 25% on South Korea, and 24% on Japan. According to the Cato Institute report, China’s 2023 trade-weighted average tariff rate was only 3% based on WTO trade data, which is much lower than the 67% “foreign tariff rate” calculated by the Trump administration. The formula disclosed by the Office of the US Trade Representative (USTR) was based on countries’ trade surpluses with the US, divided by the value of their total exports to the US, and ten dividend in half. This implies that individual reciprocal tariff rates are determined by the size of countries’ trade surplus with the US rather than absolute levels of their import tariff rates. The ASEAN countries face the highest reciprocal tariff rates due to their large trade surpluses with the US. On 5 April, Vietnam proposed to cut tariffs on US imports to zero from the current 9.4% while Singapore stated it would not retaliate against the 10% minimum US tariff rate imposed on the country. Indonesia has pledged to ease trade rules and Cambodia also promised to cut its own tariffs on US goods and import more American products. We believe reciprocal tariffs will bring substantial earnings impact on North Asia – Japan, South Korea and Taiwan, which have sizeable export sales and trade surpluses with the US. Although mainland China faces a hefty total effective US tariff rate of 74%, the actual revenue and earnings impact on the Chinese equity market may be less significant than expected due to MSCI China’s limited export goods sales exposure to the US at only 2%. Since the US-China trade war in 2028, Beijing has substantially reduced its trade dependence on the US market. Asian exports to the US as percentage of GDP Source: CEIC, HSBC Global Private Banking and Wealth as of 7 April 2025. The additional tariffs on automobiles and auto parts are expected to hit the sales of Japanese and South Korean automakers. Automotive exports to the US account for nearly 7% of Japan’s total exports of all products to the world. Senior Japanese government officials said they would continue to request for exception from the reciprocal tariffs and are ready to offer funding or other support for the local economy. We think Taiwan is better positioned than Japan and South Korea to withstand the tariff shocks because semiconductor products are exempt from reciprocal tariffs. With stronger pricing power, some of the most advanced and competitive chip exporters may be able to pass on the additional costs to their customers. Investment implications As the markets are quickly repricing for increased US recession risks in the wake of the tariff tantrum, we expect further rotation out of the US equity market into Asia and Europe. We attach an even stronger emphasis on domestic resilience in positioning in the Asian equity and credit markets. We remain overweight on Asia ex-Japan equities and favour markets with strong domestic growth drivers and policy stimulus, including China, India and Singapore. Both India and Singapore stand out as relative safe havens amid global tariff escalation. The exemption of pharmaceuticals, a key Indian export to the US, should help mitigate the tariff impact on the Indian economy. We expect severe tariff headwinds will prompt the Chinese government to further ramp up fiscal and monetary stimulus to strive for the government’s 2025 GDP growth target of “around 5%”. The DeepSeek-driven AI innovation and investment boom should offer an important domestic growth engine. The newly announced 30 special initiatives are on the right track to boost the demand side of private consumption. We recently upgraded the domestically-driven sectors of consumer discretionary and financials in Asia to overweight to mitigate tariff risks. China’s AI-led investment boom and more forceful consumption-focused stimulus should bode well for the outlook of the Asian consumer discretionary and communications services sectors. We cut Asian IT to neutral given that technology hardware companies are significantly exposed to US tariff and growth risks. The chances of significant policy easing in Asia have gone up amid global trade uncertainty and continued disinflation in the region. A more accommodative Asian central bank policy stance reinforces our preference for high quality Asian credit. We stay focused on Asian USD investment grade bonds, favouring Asian financials, Indian local currency debt, Chinese hard currency bonds in technology, financials and SOEs. Outside of Asia, as we worry that the tariffs on China and retaliation will start to weigh on analyst sentiment towards the technology sector, while inflation concerns will also lead to weaker demand for consumption, we have downgraded Technology to neutral and Consumer Discretionary to underweight globally, and in the US and Europe. https://www.hsbc.com.my/wealth/insights/market-outlook/special-coverage/seeking-haven-in-asias-domestic-resilience-amid-tariff-tantrum/

2025-04-07 07:04

Key takeaways In a number of EM bond markets, valuations are attractive with real yields considerably above historical medians, and with positive term premia. Following a volatile start to the year for stocks, the upcoming Q1 US earnings season has the potential to have a big impact on markets. Among the themes to watch will be how softening growth and weakening confidence are affecting profits. For those celebrating Easter this year, the ritual of hard-boiling and decorating eggs and gifting chocolate Easter eggs will be a significantly more expensive affair than in 2024. Chart of the week – Reciprocal tariffs Investors had been steeling themselves for “liberation day”. But after last week’s tariff announcement, what happens next in investment markets? Overall, the tariffs, any policy retaliation, and the economic consequences could significantly impact market dynamics. Policy uncertainty is now structurally elevated, partly because investors can’t be sure where tariffs will finally settle. And while recent hard data on GDP and profits have held up, a difficult mix of policy uncertainty, stagflation-lite news, and lower profits expectations, means that investor confidence could falter. In turn, sticky inflation postpones a pre-emptive easing by the Fed, which could have acted as a stock market shock absorber. There are questions now about whether rest-of-the-world stocks can still outperform. After all, history suggests that when the US economy sneezes, the rest of the world catches a cold. But new domestic policy initiatives, especially in Europe and China, could support stock market performance. Likewise, US dollar weakness could act as a stimulus for the rest-of-the-world stocks. Plus, there could be relative winners from last week’s announcement. The base case of ‘spinning around’ has envisaged policy uncertainty driving volatility this year. But if tariffs are fully implemented, a second scenario where growth and profits ‘topple over’ could come more vividly into play. High policy uncertainty continues to point to an agile approach to managing portfolios, meaning diversification and a selective approach that build resilience across geographies, asset classes and factors. Market Spotlight Credit where it’s due Private credit dealmaking enjoyed a pick-up in momentum in the final quarter of last year, outpacing levels seen in Q3, according to the latest data. Much of the activity was driven by refinancings and add-on financings to support company growth. M&A activity also rose modestly in late 2024, aided by improving equity valuations and record levels of private equity ‘dry powder’ (funds waiting to be deployed), although sponsor-backed M&A was below historical peaks. Spreads remained under pressure but appeared to stabilise during Q4, following a modest tightening earlier in the year. Higher base rates kept all-in yields (in USD) in the low double digits for many direct lending deals. Meanwhile, default rates edged up slightly from Q3 but remain below historical averages. Looking ahead, some private credit investment specialists note that demand remains strong as investors seek higher yields and stable income, even in a ‘higher for longer’ rate environment. And spreads continue to offer a premium over public markets. Overall, they believe that experienced managers with flexible strategies, prudent underwriting and active portfolio monitoring should continue to capture attractive risk-adjusted returns. 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 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. HSBC Asset Management. Macrobond, Bloomberg, The White House. Data as at 7.30am UK time 04 April 2025. Lens on… Thin end of the hedge In a number of EM bond markets, valuations are attractive with real yields considerably above historical medians, and with positive term premia. Gradual disinflation should mean many EM central banks can continue to ease policy, with some like India, Colombia, and the Czech Republic easing at a faster pace. Plus, while trade tariffs are often viewed as potentially inflationary in EM, they may actually be disinflationary in some countries by causing a supply glut in goods production. EM currencies, on the other hand, remain a tricky call. In 2024, hedging EM local-currency exposure boosted total returns as the US dollar made gains. Despite this year’s recovery in EM FX, currencies could remain volatile as policy uncertainty persists, with the US dollar playbook looking increasingly unpredictable. Profits still punchy? Following a volatile start to the year for stocks, the upcoming Q1 US earnings season has the potential to have a big impact on markets. Among the themes to watch will be how softening growth and weakening confidence are affecting profits. The impact of tariffs and Chinese tech developments in AI, and EV batteries, could also shape guidance. Among the S&P 500 sectors projected to see the strongest year-on-year Q1 profits growth are healthcare, technology, and utilities. Further out, analysts are expecting year-on-year profit growth of around 11% this year, down from expectations of 14% at the start of 2025 but still above long-run averages. Cooling optimism about the consumer has resulted in the expected share of profit growth from the consumer discretionary and staples sectors halving from their contribution levels last year. But the profit contribution from technology is still going strong – and expected to rise again in 2025. These high expectations could leave both tech stocks and the wider market vulnerable to disappointment. With earnings season arriving amid extreme world policy uncertainty, investors should prepare for surprises. Eggflation For those celebrating Easter this year, the ritual of hard-boiling and decorating eggs and gifting chocolate Easter eggs will be a significantly more expensive affair than in 2024. Both egg and cocoa prices have surged over recent months, as H5 strains of avian influenza have decimated the egg-laying hen population, and cocoa production in Ghana and the Ivory Coast – accounting for around 60% of global supply – has been hit by poor weather conditions. In Ghana, an outbreak of Swollen shoot disease, and mining and smuggling have also weighed on output. Climate change probably explains some of these disruptions. Industry experts have blamed record warm ocean temperatures for contributing to excessive rainfall in West Africa. And some studies have claimed the spread of Avian flu has been exacerbated by new patterns of seasonal bird migrations. Higher egg and chocolate prices are clearly not a big deal for the consumer outlook – eggs account for just 0.2% of the US CPI basket. But they are a stark reminder that we are living in a more volatile inflation regime versus the 2010s, with extreme weather, rising trade protectionism, supply chain rerouting, and active fiscal policy all playing their part in this story. 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 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, Datastream. Data as at 7.30am UK time 04 April 2025. Key Events and Data Releases Last week The week ahead Source: HSBC Asset Management. Data as at 7.30am UK time 04 April 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. Market review Heightened global trade uncertainty weighed on risk markets, with the US DXY dollar index on the defensive. Oil prices declined on rising global demand concerns, and gold consolidated after recent gains. Core government bonds rallied, led by US Treasuries. The front-end of the US yield curve is factoring in 3-4 Fed rate cuts over the next 12 months. New data showed more weakness in US consumer confidence. US credit spreads widened, with IG outperforming HY. US equities saw broad-based falls amid weakening 2025 earnings expectations. The Euro Stoxx 50 index declined on rising eurozone growth concerns. Japan’s Nikkei 225 dropped markedly, with lower JGB yields weighing on financials. EM Asia stock markets posted losses, led by South Korea’s tech-dominant Kospi index. The Hang Seng, Shanghai Composite and India’s Sensex indices all declined. Latin American equities were resilient. https://www.hsbc.com.my/wealth/insights/asset-class-views/investment-weekly/reciprocal-tariffs/