2025-06-02 12:02

Key takeaways US trade court ruled that US import tariffs imposed for national emergency reasons are unlawful. With the appeals process having already resulted in a temporary “stay” to keep them in place… …the USD’s initial bounce was short-lived; we still expect the USD to be on softer ground in the months ahead. The US Dollar Index (DXY) rallied past the 100 level after the US Court of International Trade (CIT) unanimously ruled on 28 May that tariffs imposed on the basis of a national emergency (International Emergency Economic Powers ActIEEPA) were unlawful and should be removed within ten days (Bloomberg, 29 May 2025). The judgement blocks the reciprocal tariffs, the baseline 10% tariffs, and the fentanyl-related tariffs on China, Canada, and Mexico. Sector-specific tariffs enacted using different trade legislation (Section 201, 232, and 301) remain in place. The USD’s initial bounce shows that FX markets have retained their reaction function that good news on the trade front (i.e. lower tariffs) is also good news for the USD. It seems the lens through which markets are examining tariffs is whether it reduces or increases US policy uncertainty. FX markets may also reward the USD for lower tariffs because it is seen as reducing the drag on US growth. Source: Bloomberg, HSBC However, the USD bounce was short-lived. The US administration immediately lodged an appeal with the Federal Circuit Court where it won a temporary “stay” on the CIT’s order to remove the IEEPA tariffs. A full appeal could take months. But US President Trump has other options for delivering tariffs, for example, the sector-specific tariffs (which will involve a consultation period before going in place) or universal tariffs of up to 15% for a maximum of 150 days under Section 122. So, FX markets have chosen not to view this CIT decision as a gamechanger, but the ruling does complicate matters. It also removes the threat of swift punitive tariffs from the US administration’s toolkit. Tariff pauses and the CIT decision may create a sense of a return to normality, but tariffs remain elevated, and the threat of a return to even higher tariffs in July looms large. The futures market expects the Federal Reserve (Fed) to adopt a “wait and see” approach, with the next rate cut only fully priced for the 28-29 October meeting (Bloomberg, 29 May 2025). After assessing cyclical, political, and structural factors, we think that the USD should be on softer ground in the months ahead. https://www.hsbc.com.my/wealth/insights/fx-insights/fx-viewpoint/usd-us-trade-tariff-uncertainty-continues/

2025-06-02 07:04

Key takeaways Emerging market local currency debt looks positioned to do well in a backdrop of high real yields, strong fundamentals, and a weakening US dollar. Last week saw the last of the Magnificent Seven mega-caps deliver Q1 profits numbers – which once again beat analyst expectations. Asset market volatility this year has focused investor attention on ways of giving portfolios sufficient ballast. Chart of the week – Bond market vigilantes are back The “bond market vigilantes” have been spotted riding back into town. Yields on long-dated bonds across the G7 have been rising recently, with a marked steepening in 2y-30y spreads since the end of February. The initial pick-up in yields during March coincided with the news of a major fiscal support package in Germany, which boosted Bund yields along with their French and Italian equivalents and likely pushed up yields globally. This element of the move in long-dated rates can be seen as positive – reflecting a reflation of the eurozone economy driven by the country with ample fiscal space to do it. Since early April, the 2y-30y spreads for Germany, France and Italy have moved very little, but those for the US, Japan and the UK have moved higher. This is potentially more worrying. It coincides with a spike in US policy uncertainty, forcing higher bond risk premiums, together with growing concerns about the fiscal position of the US, Japan, and the UK. The US administration’s fiscal plans imply a further widening of the deficit from an already-unsustainable level. Japan’s gross government debt of well over 200% of GDP is sustainable in a low global rate environment, but not when global yields move to pre-GFC levels. As Japanese yields rise, self-reinforcing dynamics can take over – with higher yields raising questions over sustainability, driving risk premiums higher, in turn putting more pressure on sustainability. For investors, developments in the bond market – and the impact on asset prices – is a key focus. With US Treasuries in turmoil, traditional safe assets are less reliable (see page 2), while higher rates could eventually weigh on stocks. With the risk of “deficits forever”, the bond vigilantes won’t be leaving any time soon. Market Spotlight Building new synergies Over the next 25 years, investments totalling an estimated USD150 trillion are going to be needed to achieve global energy transition targets. Key to that will be the development of infrastructure projects in areas like clean energy, transport, and digital. It comes at a time when traditional lending is scaling back in this space – and according to some Infrastructure Debt specialists, it’s leaving a financing gap that is driving strong demand from both companies and investors for private credit in infrastructure funding. Large-scale infrastructure projects often attract financing from major institutions, which is why infrastructure debt has historically been dominated by insurance companies seeking long-term, investment-grade assets. Yet, specialists see mid-market deals (of USD50-250 million) remaining largely underserved. It is an area now attracting pension funds, family offices, and investors seeking higher-yield, shorter-duration opportunities. For investors that allocated heavily to direct lending in recent years, it also offers a potentially lower-risk alternative while still offering attractive returns versus public markets. Overall, the synergy between private credit and infrastructure financing is reshaping how institutional investors approach alternative assets. 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 30 May 2025. Lens on… Emerging diversifiers Emerging market local currency debt looks positioned to do well in a backdrop of high real yields, strong fundamentals, and a weakening US dollar. Indeed, strengthening EM currencies, combined with falling inflation, are allowing EM central banks to ease policy, further boosting the appeal of EM local bond markets to global investors. And while US tariffs could drag on growth, the demand shock could be disinflationary for EMs, potentially speeding up their policy easing cycles. Despite broad tailwinds, it makes sense to take a differentiated view of the EM bond universe. EM currencies – especially those backed by large external surpluses, some of them in Asia – are likely to outperform. EMs have built up buffers against external risks at differing speeds, and they have varying exposure to global trade. For Indonesian bonds, historically high real yields, low inflation, manageable external balances, moderate debt levels, and reassurance from the finance minister have alleviated market concerns over fiscal risks. A Q1 profits bang – but 2025 whimper? Last week saw the last of the Magnificent Seven mega-caps deliver Q1 profits numbers – which once again beat analyst expectations. Overall, US Q1 profits have delivered a bang, growing 13% year-on-year versus an expected 7% at the start of the quarter. But while sectors like healthcare and technology have raised guidance for the full year, most sectors are pencilling-in flat to falling growth in 2025. In fact, consensus y-o-y profits growth for 2025 has fallen from 14% in January to just over 9% today. Energy, materials and consumer discretionary have seen the deepest downgrades. Revisions in consumer discretionary follow a stellar run for the sector, which is up by 218% over 10 years. But with a 12-month forward price/earnings valuation of 29x (higher than US Tech on 27x). Industrials, which is not cheap on 23x, has exposure to the US government's focus on infrastructure and re-shoring. Beyond the US, full year consensus for Emerging Markets are better in most sectors. And with EM on a PE of 12.3x versus the US on 21.5x, EM stocks could offer more of a valuation buffer against setbacks. In search of safety Asset market volatility this year has focused investor attention on ways of giving portfolios sufficient ballast. For much of the first two decades of this century, a negative correlation between stocks and bonds meant bonds provided a reliable cushion in equity market downturns – good news for 60/40 portfolios. But since 2021, this dynamic has reversed. Resurgent inflation and shaky public finances led to bonds and equities selling off in tandem. For investors, it removed a comfort blanket they’ve relied on for years. Research by some ETF and Indexing teams shows the current correlation landscape resembles patterns seen in the 1970s, 80s, and early 90s – a time when inflationary pressures drove positive correlations between stocks and bonds. The relationship between inflation and economic growth influences how asset classes behave relative to each other. When inflation dominates, as it has post-pandemic, bonds are a less reliable hedge. That’s compounded by concerns over high deficits keeping bond yields sticky. In sum, it poses a challenge to the 60/40 model and may require a change in how investors think about risk and 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 30 May 2025. Key Events and Data Releases Last week The week ahead Source: HSBC Asset Management. Data as at 7.30am UK time 30 May 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 Risk sentiment strengthened last week as the Q1 earnings season neared its end, and investors continued to monitor the trade negotiations and tariff developments. The dollar index rebounded modestly, and Treasury yields pulled back following solid auction results. European yields also declined. US and Euro credit spreads narrowed, with HY outperforming IG. US equities saw broad-based gains, recovering some of the prior week's losses. European markets broadly advanced, as Japan's Nikkei 225 rose amid a weaker yen and a retreat in JGB yields. Other Asian equities lacked clear direction, with South Korea's Kospi leading gains. India's Sensex and China’s Shanghai Composite traded sideways, while Hang Seng fell. In commodities, oil prices declined before an OPEC+ meeting to discuss July output, accompanied by softer gold and copper prices. https://www.hsbc.com.my/wealth/insights/asset-class-views/investment-weekly/bond-market-vigilantes-are-back/

2025-05-26 12:01

Key takeaways The RBA delivered a dovish 25bp cut in May, and a 50bp move was discussed. The AUD weakened after the decision… …but we continue to see scope for a stronger AUD. On 20 May, the Reserve Bank of Australia (RBA) lowered its key policy rate by 25bp to 3.85%, in line with market expectations. This was the second rate cut in the current easing cycle. The RBA Governor, Michele Bullock said after a short discussion about whether to remain on hold, the conversation moved swiftly to the thought of a 50bp or 25bp cut (Bloomberg, 20 May 2025). There were broad-based negative revisions to the RBA’s quarterly forecasts. The RBA now forecasts GDP growth of 2.1% y-o-y in 4Q25 (previously 2.4%) and 2.2% in 4Q26 (previously 2.3%), an unemployment rate of 4.3% in 4Q25 and 4Q26 (previously 4.2%), and trimmed mean inflation of 2.6% in 4Q25 and 4Q26 (previously 2.7%), assuming two more 25bp cuts by end-2025 and one more cut by mid-2026. Rate markets now see the RBA policy rate to end the year at c3.1%, lower than c3.3% before the decision (Bloomberg, 22 May 2025). The AUD edged lower against the USD after the announcement before recovering its loss. Nevertheless, this is a dent but not an end to our bullish AUD view. Externally, trade tensions are de-escalating. This should alleviate the pressure on the regional growth outlook to a certain extent, improve overall risk sentiment (which we use Vanguard FTSE All World excluding US ETF as a proxy), and benefit the AUD (Chart 1). Domestically, the incumbent centre-left Australian Labor Party, led by Prime Minister Anthony Albanese, won the Federal election on 3 May and a second term, with an increased majority of the vote. The current government has ample room and clear willingness to deliver fiscal support if domestic conditions warrant, as the net national debt is low at 19.9% of GDP in 2024-25 (according to the budget 2025-26 released on 25 March). Source: Bloomberg, HSBC Source: Bloomberg, HSBC Positioning wise, AUD-USD has traded at a discount to its key drivers since the US election, in line with still sizable net short positions (Chart 2). Positioning readjustment, in addition to a potential increase in the FX hedge ratio by Superannuation Funds could also be positive for the AUD. All things considered; the risk-reward balance may move in favour of the AUD in the months ahead. https://www.hsbc.com.my/wealth/insights/fx-insights/fx-viewpoint/aud-beyond-the-rbas-dovish-cut/

2025-05-26 07:04

Key takeaways US tariffs policy has been front of mind for markets in recent weeks. But with a meaningful softening of the US administration’s position of late, investors’ focus now looks to be shifting to fiscal policy. When Mario Draghi published his blueprint to revive the EU economy last year, he said the bloc needed sharp increases in public and private investment. So, when Germany – with its long record of fiscal prudence – announced plans for massive spending on infrastructure and defence six months later, no wonder Draghi called it a “game changer”. Last week, a major Chinese battery maker pulled off the biggest share sale in the world this year, with a multi-billion dollar secondary listing in Hong Kong. The move could bode well for other China-quoted firms hoping to attract funding from both domestic and foreign investors. Chart of the week – Does the end of US exceptionalism persist? A dominant theme in the minds of investors this year has been the prospect of an end to US exceptionalism. The previous week’s US credit rating downgrade by Moody’s – while not exactly unexpected – provided a reminder that the US fiscal situation has become untenable. But when we talk about an end to exceptionalism, what has really changed? Over the past decade, investors have enjoyed three types of US exceptionalism. The first is the country’s exceptional GDP growth, especially within the context of the G10 (although a lot of that has been more about fiscal spending and immigration, than it has about productivity). Second is its exceptional stocks. Returns have been boosted by super-normal profits, the Magnificent Seven tech mega-caps, and a big re-rating of the market multiple. Thirdly, there has been the exceptional US dollar. The USD has boosted investor returns and sucked up global capital and investor attention. It also provided portfolio hedging services to global investors – offering strength in times of both US economic outperformance and weak global growth (the “dollar smile”). The critical question now is the extent to which these elements survive? For a start, macro growth is cooling amid policy uncertainty, and that could persist as a dampening effect on US activity for a while. Meanwhile, the premium growth rates are in Asia and Frontier economies. In stocks, the US market cap as a percentage of global stock markets looks to have made a top. And profits growth is expected to be as fast in China as in the US over the next 12 months. As for the USD, it remains over-valued versus most currencies, and many global investors are now exploring hedging FX for US stock exposures – which is a material shift in psychology. The forces making the US look less exceptional could stick around for a while. Market Spotlight Retail therapy Rollercoaster US stock market volatility in the early months of 2025 has given way to a pronounced rally in May. But with fund manager surveys pointing to some unusually bearish institutional positioning in US stocks, it seems that something else has been driving recent moves. According to reported flows data, US stock prices since late April have been supported in part by a pick-up in buying among retail investors. In a repeat of a theme that’s been a fixture in markets for the past decade – particularly in the rebound after the Covid crash of 2020 – retail has been acting like a stabilising force and “buying the dip”. The latest leg-up in prices followed the better-than-expected deal in early May between the US and China to cut tariffs for 90 days. But while developments like that help explain the shift in investors’ perception of risk, there’s potential for it to drive a disconnect between market performance and still ultra-high policy uncertainty. While retail investors got the rally started, the momentum could fade quickly if smart money institutions fail to join in – potentially causing further volatility, with markets continuing to spin around. 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 23 May 2025. Lens on… Beautiful bill, ugly truths US tariffs policy has been front of mind for markets in recent weeks. But with a meaningful softening of the US administration’s position of late, investors’ focus now looks to be shifting to fiscal policy. Moody’s decision to strip the US of its last remaining “triple A” rating is a timely reminder of the challenges facing President Trump’s fiscal package as it moves through Congress. The one-notch downgrade reflected the well-known rising debt burden and widening deficit, which Moody’s expects to be exacerbated by the extension of the 2017 Tax Cuts and Jobs Act (TCJA), the centrepiece of the administration’s fiscal policy. While the details of the “One, big, beautiful bill” are yet to be finalised, it is likely to include fiscal easing over and above the extension of the TCJA. However, Washington will have one eye on the bond market and the USD – the 30-year yield breached 5% last week while the USD is softening again. Meanwhile, although tax cuts may be seen as positive for the stock market, this may be offset by a renewed rise in yields. So, a key question for investors is do these ugly truths force the White House to pare back its ambitions? Go with the euro income flow When Mario Draghi published his blueprint to revive the EU economy last year, he said the bloc needed sharp increases in public and private investment. So, when Germany – with its long record of fiscal prudence – announced plans for massive spending on infrastructure and defence six months later, no wonder Draghi called it a “game changer”. German fiscal expansion, together with expectations of further ECB rate cuts, have improved the prospects for the eurozone economy. Some credit research teams suggest one spillover effect could be a positive change in sentiment in European credit markets. European corporate credit fundamentals are healthy, with steady gross leverage and resilient profitability. Coverage ratios (measuring the ability of firms to service debts) have dipped, but many have strong cash buffers. The asset class should also be resilient to tariffs, with only a limited proportion of both IG and HY markets made up of US registered companies, while direct sales exposure to tariffs is also limited. One note of caution is that a lot of this good news is in the price – spread valuations remain tight. But high all-in yields are compelling for investors looking for steady income flows. A market catalyst? Last week, a major Chinese battery maker pulled off the biggest share sale in the world this year, with a multi-billion dollar secondary listing in Hong Kong. The move could bode well for other China-quoted firms hoping to attract funding from both domestic and foreign investors. It comes amid signs of continuing positive sentiment towards Chinese stocks this year, especially in technology-related sectors, with investors seeking to broaden their international exposure beyond the US. Growing global appetite for Chinese stocks coincides with a recent pick-up in earnings upgrades. That’s been driven by cooling trade tensions between the US and China, and Q1-2025 profits numbers from Chinese firms that are largely in line with market consensus, delivering decent year-on-year growth. In the offshore market, technology industries are the profit engine, with AI still expanding at a clip. In the onshore market，the strongest growth has been in consumption-sensitive sectors like consumer discretionary and staples, in part because of ongoing policy support and the expectation that policymakers will respond (with a “put”) if headwinds worsen. Put together, these latest developments could be a catalyst for further positive performance in Chinese stocks. 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. Data as at 7.30am UK time 23 May 2025 Key Events and Data Releases Last week The week ahead Source: HSBC Asset Management. Data as at 7.30am UK time 23 May 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 Risk sentiment pulled back last week amid growing worries about US debt sustainability, following the US House of Representatives’ passage of a bill extending the 2017 tax cuts last week and Moody’s downgrade of the US credit rating the previous week. The US dollar weakened while longer-dated US Treasury yields rose, with the 30-year yields breaching 5.00%. UK gilt yields also rallied, and most European yields rose too, albeit to a lesser extent. US HY credit spreads widened after weeks of narrowing, while IG spreads remained stable. In equities, US markets saw broad-based losses, while the Euro STOXX50 were largely unchanged. The DAX rose, whereas the CAC40 edged lower. Japan's Nikkei 225 declined amid a stronger yen, and other Asian equities were mixed: Hong Kong’s Hang Seng and mainland China’s Shanghai Composite gained, while South Korea's Kospi and India's Sensex fell. In commodities, oil prices dropped amid investor concerns over a potential increase in OPEC+ production. Gold advanced, and Crypto extended their weekly rallies. https://www.hsbc.com.my/wealth/insights/asset-class-views/investment-weekly/does-the-end-of-us-exceptionalism-persist/

2025-05-23 12:02

Key takeaways It is in periods of rising integration with the world that India has grown its fastest. Financial integration has outpaced trade integration, creating a divergence between (high-end) consumption and (household) investment growth. An opportunity to ramp up trade integration and grow faster is knocking at the door. There is a general sense that India is mostly a domestic demand-driven economy. We disagree. We find that India has grown at its fastest pace in periods of rising global integration with the world. We use the rolling correlation between India and world GDPgrowth as a measure of global integration, and find that the 2000-2010 decade was a period of falling import tariffs, as well as rising global integration, export share, and GDP growth. In the next decade, 2010-2020, all of this changed. Tariffs were raised, and global integration, export share and GDP growth fell. Encouragingly, the few years following the pandemic reflect a rise in global integration once again, though so far it remains slightly one-sided –more financial integration, less trade integration. We drill down into GDP sectors and find that consumption is most integrated with world growth (95%), followed by investment (70%), and then exports (35%). Surprising, as one might imagine exports to be most globally aligned. One reason could be that India’s global connections are stronger in finance (Indian equity markets have become far more aligned with global equities over the last two decades), and this impacts consumption. But integration remains weaker in trade, which influences export and investment. Within investment, we find corporate investment is more globally integrated, something we notice across countries. Meanwhile, integration is lower for household investment, which includes both real estate and investment by small firms. Within consumption, discretionary consumption is more globally interlinked than essentials. If indeed financial integration has been strong, it is likely to support high-end consumers who tend to be better invested in financial markets. Within exports, weak integration has been led by more labour-intensive mid-tech exports (like textiles and toys), which have been sluggish for a decade. Bringing all sectors together, we have two distinct stories unfolding. Stronger financial integration: Those who have been able to enjoy the gains of financial integration, have seen incomes and discretionary consumption rise. Many of these individuals are associated with large firms (where global capex is globally correlated) or new sectors (e.g. rapidly rising professional services exports). Weaker trade integration: On the other hand, lower global integration in mid-tech exports explains weaker growth and incomes, and why individuals in these sectors are largely focused on consumption of essentials, without much surplus for investment. A corollary here would be that steps which raise mid-tech labour-intensive exports can boost India’s trade interlinkages, mass consumption, investment, and India’s GDP growth. An opportunity to grow exports as supply chains are getting redrawn is knocking at the door. More open, more benefits There is a general sense that India is a relatively inward-looking economy. After all, agriculture makes up c18% of GDP and depends more on weather patterns than international demand. And India is more domestic demand-driven, compared to some export-led Asian economies. Having said that, we find that India has grown at its fastest pace in periods of rising global integration with the world. After all, a whole new market opens up when a country is open to it. We use the rolling correlation between India and world growth as a measure of global integration in this report, and find that the 2000-2010 decade was particularly striking as a period of rising global integration and strong India GDP growth (c8% per year, see exhibit 1). This is the time India was slashing import tariffs and integrating further into global trade, resulting in higher export growth, global export share and GDP growth. In the next decade, 2010-2020, India began to raise import tariffs. This period saw a fall in export growth, global export share and GDP growth. We also note that during the last few years, i.e. those following the pandemic, have seen a rise back up in global integration and GDP growth. As we will discuss later in the report, India is making efforts to integrate more with the global economy. But how large and lasting a growth impact, will depend on continued efforts to integrate. One may argue that higher integration exposes a country to global volatility, which may be negative for growth. We look into this carefully through a VAR regression analysis, and find that the positive impact of being more integrated with the world is higher and longer lasting than the negative impact of being exposed to global volatility (see exhibits 4 and 5). All said, deeper interlinkages with the world have led to higher growth over time, more than offsetting the negative impact of rise in volatility. How integrated are the various sectors? Next, we turn our attention to sectoral flavours, because they shed light on the nature of integration with the world and its impact back home. We break down GDP on the expenditure side into consumption, investment and exports, and find some interesting, and even surprising, takeaways. Comparing investment, consumption and export trends. In the pecking order, consumption is most integrated with world growth, followed by investment and then exports (see exhibit 6). This is rather surprising as one might imagine exports to be most correlated with global growth. As we explore more closely later, one reason could be that India’s linkages with the world arestrong on the financial integration side, which impacts consumption, but more limited on the trade side, which influences exports and thereby, investment. Investment details. India’s investment growth has a strong c70% correlation with world growth (see exhibit 7). We break down investment growth into several parts – public, private corporate and household investment. What stands out is the rather divergent trend in corporate versus household investment. Corporate investment has a higher correlation (of 75%) with world growth compared to household investment (of 40%). The global interlinkages of corporate investment did not really fall in the 2010-2020 period (barring the pandemic years, see exhibit 8). This is not surprising. We find that corporate capex globally moves in unison, driven by common factors (for instance,risk sentiment impacting FDI flows). On the other hand, household investment has a smaller correlation (of 40%) with world growth (see exhibit 9). It is importantto note here that household investment in India includes not just real estate and housing, but also investment by small firms. Consumption. Consumption has an even higher correlation with world growth than investment. It fell in the 2010-2020 period, but has risen since. In fact, the correlation has risen to 100%, which is above previous highs. We break down private consumption into two parts – discretionary and essentials (see exhibits 10 and 11). Between these, discretionary consumption has a much higher correlation with world growth (of almost 100%), while essentials have a lower correlation (of 70%). This is understandable. If indeed financial integration has been strong (as we mention above and explore further later in the report), it is likely to have impacted incomes at the top of the pyramid. High-end consumers, who are typically high income earners, tend to be better integrated with (or invested in) financial markets. Meanwhile, those associated more with sectors like agriculture and small firms, where incomes may not be as high, are focused on consuming essentials. This consumption group may not have much investible surplus, and therefore not as strongly integrated with financial markets. Exports. We probe the surprisingly low correlation of export growth and global growth a bit more. The fall in correlation was pronounced in the middle of the 2010-2020 decade when import tariff rates were being raised and export growth was falling (see exhibit 12). We divide exports into the more capital-intensive high-tech and the more labour-intensive mid-tech exports. We find that growth in high-tech exports has far surpassed growth in mid-tech exports (see exhibit 13). In fact, the latter has been rather sluggish for a decade. One can thereby deduce that,led mainly by sluggish mid-tech exports, India’s trade integration with the world has been weak. Bringing it all together So now we have two sets of results: Stronger financial integration. Rising equity market correlation (of the S&P500 and SENSEX indices, see exhibit 14) and the rise in international financial inflows into India show that India has become a lot more financially integrated with the world over time. Those who have been able to enjoy the gains of financial integration have seen incomes and discretionary consumption rise. This even explains the strong correlation between global growth and discretionary consumption. Many of these individuals could well be associated with large firms in the formal sector, where global capex tends to be highly correlated globally. These individuals could also be associated with high-tech exports, such as India’s rapidly rising professional services exports. Weaker trade integration. On the other hand, as discussed above, trade integration has been relatively weaker, led particularly by mid-tech exports. About 45% of India’s goods exports come from small firms. Lower global integration here, then, explains lower mid-tech export growth, and lower incomes in this category. Lower incomes go on to explain why this group is focused a lot more on consumption of essentials, and do not have much surplus to trigger investment. This, then, explains why integration of essential consumption and household investment growth with world growth remains low. A corollary here would be that steps which raise mid-tech exports and India’s trade integration with the world can boost consumption, and particularly investment. But what needs to go right? An opportunity comes knocking Elevated import tariffs have hurt India’s export potential over the last decade, and mid-tech exports, which are also more labour intensive, have been hurt most. In fact, we believe India was not able to fully seize the opportunities in the first Trump presidency, when supply chains were rejigged following the imposition of new and elevated tariffs. Other blocks like ASEAN made more progress in raising their global export share (see exhibit 15). Vietnam, in particular, made substantial gains in both mid-tech and high-tech sector exports. If supply chains are rejigged again during the second Trump administration, India may have a chance to grow. If the sectors where Vietnam made the most progress during the first Trump administration reflect where global opportunities from supply rejigging lie, note that India is already a player in these sectors. India’s exports in sectors like electronics, apparel, furniture, and footwear are 15-40% of Vietnam’s exports (see exhibit 16). This shows that India’s footprint is large enough to show capability, but with room to grow. After all, wage competitiveness is still on India’s side (see exhibit 17). Incidentally, China’s excess capacity is not as large in these mid-tech sectors (see exhibit 18). Space for another manufacturing economy may well be there. But first,India needs to make changes to do it right this time around. External reforms have begun, but must run deep Potential US tariffs on Indian exports may have become a catalyst for external sector reforms. In fact, India has recently taken a few steps which signal that it is becoming more ‘open for business’: Lowering import tariffs: In the February budget, import tariffs were cut for items like high-end motorcycles, smartphone components, solar cells and chemicals. Recent news articles show that the government plans to cut tariffs for several other categories of goods such as automobiles, agricultural products, chemicals, pharmaceuticals and medical devices. Opening up to regional FDI: The economic survey of July 2024, which is an important policy document, made a case for India to become more open to regional FDI, in particular from China. However, this has not culminated in higher FDI inflows yet. Fast tracking bilateral trade deals: India plans to sign a bilateral trade agreement with the USin 2025, with the first phase expected to be finalised by July. Reports suggest that it plans to buy more oil and defence equipment from the US and increase cooperation in nuclear energy. All of these would likely reduce India’s trade surplus with the US. It has also shown signs of wanting to fast-track its trade agreement discussions with other regions such as the EU. The finalisation of the India-UK trade deal on 6 May, following more than three years of negotiation, signals to us a sense of urgency in concluding trade agreements quickly. This may provide some tailwind for other negotiations too. Making the INR more flexible: A flexible rupee does not just act as a shock absorber during times of external volatility, but also helps make exports competitive, and give manufacturers the confidence to export from India. After a period of REER appreciation, the rupee has mean reverted over the last few months. These are a good start. But for long lasting impact from greater integration with the world, and stronger growth and more jobs, these reforms will have to run deep. Key forecasts https://www.hsbc.com.my/wealth/insights/market-outlook/india-economics/challenging-myths-seeking-opportunities/

2025-05-22 12:02

Building a resilient portfolio for an uncertain era The past few months have given investors plenty to ponder, with US trade tariffs causing elevated volatility in multiple asset classes around the world. Traditional safe-haven assets, such as Treasuries and the US dollar, were no exception. What’s more, we expect tariffs to remain with us for some time, as they’re a negotiating tool to obtain concessions from other countries and provide the US administration with a way to finance planned tax cuts. So, economists and businesses have been trying to assess what the impact will be on growth, earnings and inflation. That’s not an easy task, as the tariff levels have been changing and could still change further. That said, the 90-day tariff reprieve (now also including China) offers temporary relief, and there’s hope with the recent US-UK trade deal that other countries will follow. What does this mean for investors? The recent US-China negotiations, albeit a temporary reprieve, have rekindled market optimism. US equities have regained the lost ground since the 2 April Liberation Day announcements, supported by stronger-than-expected Q1 corporate earnings and benign April inflation data. This all seems to point to a better outlook. As a result, we’ve moved global and US equities back to an overweight position. This swift change in view is driven mainly by a U-turn in trade policy, which has reduced recession risks. However, the dust has yet to settle on this period of geopolitical uncertainty. So, we stick to our basic, yet important, rule of diversification and look to deepen it further. We expect other nations to continue or even intensify their trade with non-US trading partners. This means that investors will also want to diversify and capture opportunities beyond the US. Asia is in better shape for various reasons. Notably, its domestic resilience and structural growth opportunities are evident, and clusters of manufacturing expertise in China and Asia can’t easily be broken up. High US tariffs on some Southeast Asian markets will also benefit India’s manufacturing sector, while Singapore stands out as an outlier in the current trade tensions among other Asian markets. Structural trends remain intact From a fundamental perspective, we still have faith in the US’s long-term strengths, particularly in areas like AI adoption and innovation, even though they’ve been overshadowed by tariff-related concerns. In fact, we continue to see examples of AI revolutionising business models or boosting efficiency around the world. If Technology and Communications are beneficiaries of the AI momentum, then the industrials sector is also a winner across all regions, driven by high demand for digital infrastructure and the US administration’s focus on re-industrialization and the onshoring of jobs. Renewable energy can also benefit as AI adoption has a high reliance on electricity. Diversification in focus amid slow but positive growth and gradual easing At this juncture, when tariff negotiations are still up in the air, we continue to use quality bonds with a medium-to-long duration, gold and less-correlated assets to solidify diversification. We also leverage active management to adjust portfolio allocations as and when needed. For individual investors, these objectives can be achieved through multi-asset strategies with exposure to various asset classes, markets and currencies. As always, this report presents our four investment themes and brings more value to our readers by delving into specific topics. This quarter, to help you position your portfolios, we look at the potential scenarios for US tariffs and their investment implications, as well as how Asia can ride on AI-driven opportunities. We hope these insights will help you navigate this period of uncertainty and offer a clearer picture for the months ahead. Best wishes for a smooth investment journey. https://www.hsbc.com.my/wealth/insights/market-outlook/investment-outlook/building-a-resilient-portfolio-for-an-uncertain-era/