2025-09-08 07:04

Key takeaways Global small-cap stocks have been out of favour in recent years. But in the market rally that began in April, there have been some eye-catching performances in small-cap stock indices. Emerging markets are not normally viewed as a defensive play. Yet, that has effectively been the experience in bond markets over last three years. It has been a busy year for US utilities, with policy shifts, strong demand growth and infrastructure needs shaping the outlook. Chart of the week – Vigilantes mounting up? UK 30-year Gilt yields hit a post-1998 high of around 5.70% last week, a 4.5%+ increase from their 2021 average seen ahead of the start of the global tightening cycle. This marks a significant underperformance relative to other developed markets and reflects increasing concerns over the UK’s rising government debt and limited ability to rectify the situation. Spending cuts are politically difficult while the tax take is already historically high, with further increases potentially undermining competitiveness and weakening already-soft growth. France faces similar problems but has the advantage that its current account is broadly in balance meaning it’s less dependent on international investors to fund the government deficit. The big question for global markets, however, is whether concerns over fiscal dominance and Fed independence push US long-dated yields significantly higher? At around 5%, they are already at levels that are seen as putting pressure on equities. The US is in a better position than the UK, given the dollar’s status as the world’s reserve currency and the US economy has stronger long-run growth prospects. Its tax take is also low by international standards, offering a route to improving the public finances, albeit a politically unpopular one. But at this stage, worries over fiscal policy and the independence of monetary policy seem likely to persist. Market Spotlight Back to school With summer holidays over, it was “back to school” for markets last week, with three themes and three big questions. #1, is that despite policy uncertainty, many asset classes are trading at year-highs amid low volatility. Double-digit returns are making 2025 a banner year for investors. Some of the most eye-catching moves have been in Europe, China, and emerging markets – which were all unloved at the start of the year. #2, is that bond market vigilantes have been spotted, but fixed income returns are steady. The yield curve has ‘bull steepened’ in the US on the prospect of rate cuts and sticky long-term Treasury yields. But it has ‘bear steepened’ in Europe and Japan on fiscal worries. Investors have turned to private and public IG credits as bond substitutes, as well as gold. #3, the lower US dollar has significantly influenced asset returns in 2025. A weaker dollar can lift emerging market currencies and give EM central bankers space to ease policy. That has been a big reason why EM bonds and stocks are among the best performing assets in 2025. 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, Macrobond. Data as at 7.30am UK time 05 September 2025. Lens on… Big moves in small caps Global small-cap stocks have been out of favour in recent years. But in the market rally that began in April, there have been some eye-catching performances in small-cap stock indices. In August alone, the Russell 2000 index rose 7%, easily outperforming the S&P 500. That was driven by expectations of Fed rate cuts, supportive government policy in the Big Beautiful Bill, and low volatility which helped boost risk-on sentiment. There have also been some surprisingly strong re-ratings in small-cap valuations outside the US. Moves in Hong Kong and Singapore smaller-caps have been breathtaking (partly due to valuation discounts on offer). At the other extreme, Europe has been more mixed, with mid-cap gains leaving valuations in line with their 10-year PE averages, but small caps barely budging. That’s despite smaller caps in many cases having a superior profit backdrop to large caps in the current cycle. A recent paper shows that European smaller-cap profits have been relatively resilient during this cycle. Bond behaviour Emerging markets are not normally viewed as a defensive play. Yet, that has effectively been the experience in bond markets over last three years. The total return volatility of EM local-currency bonds has been consistently lower than of developed market bonds – and that extends to the volatility of unhedged EM returns in US-dollar terms. This implies that EM-FX volatility has played a part in the performance. One of the main reasons for the divergence is that the fallout from the post-Covid period of global inflation has been especially significant for DM bond yields, which have repriced higher from historically depressed levels. And while EM bonds were also exposed to the inflation spike, EM volatility not only rose by less but has already normalised to pre-pandemic levels – even as DM yield volatility remains elevated. The growing maturity of EM bonds as an asset class, where improved market liquidity, depth and local investor participation have been accompanied by structurally better fundamentals, such as higher policy credibility and much healthier fiscal and external balances. A power play It has been a busy year for US utilities, with policy shifts, strong demand growth and infrastructure needs shaping the outlook. Analysis by some Equity analysts shows that while tariffs have been a focus for markets, companies expect only a modest 2-5% impact on long-term capex plans, helped by diversified supply chains. Crucially, the One Big Beautiful Bill Act has eased concerns by allowing renewable tax credits beyond the legislated deadline and retains those for nuclear and battery storage. This supports utilities’ near-term investment plans, although the eventual loss of credits will raise costs for new renewables. Alongside this, transmission investment has been a key theme. Reforms and permitting changes should speed up projects that connect supply and demand, boost reliability, and integrate renewables. Meanwhile, utilities are benefitting from growing load demand from new data centres, electrification and re-shoring. Overall, there could be attractive long-term growth potential in a sector where infrastructure needs, policy support and regulated returns are well aligned. 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, BofA Research, Oxford Economics. Data as at 7.30am UK time 05 September 2025. Key Events and Data Releases Last week The week ahead Source: HSBC Asset Management. Data as at 7.30am UK time 05 September 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 Investors remained cautious amid growing fiscal concerns, driving the US dollar index modestly higher and gold prices to a record high. 30-year German, Japanese, and UK sovereign bond yields reached multi-year highs before stabilising, while French OATs rebounded ahead of a no-confidence vote for PM Bayrou. An initial fall in 10-year US Treasuries reversed ahead of Friday’s key jobs data, with market currently pricing in at least two 0.25% Fed rate cuts by year-end. High-yield credit spreads in the US and eurozone widened. In equity markets, US stocks were on course to finish the week modestly higher, while European stocks dipped slightly. Japan’s Nikkei 225 advanced, alongside broad gains across in Asian markets. India’s Sensex climbed on optimism for GST rate cuts, but China’s Shanghai Composite paused its recent rally amid worries over potential regulatory measures to cool the market. https://www.hsbc.com.my/wealth/insights/asset-class-views/investment-weekly/vigilantes-mounting-up/

2025-09-05 07:04

Key takeaways Strong Q2 GDP growth masks weakness in the private sector. Uncertainty over the upcoming Autumn Budget could weigh on sentiment and activity. A looser labour market could help dampen inflation concerns. Source: HSBC The fastest growing economy in the G7 GDP data published in August, for the second quarter, was a mixed bag. Strength in the government sector was partially offset by weakness in the private sector, where a 0.2% q-o-q contraction was reported. However, taken as a whole, economic growth in the first half of 2025 was robust relative to a backdrop of heightened global uncertainty, a large rise in labour costs, ‘Awful April’ for consumer prices, and a weakening jobs market. Some déjà vu in the third quarter So far data for the third quarter has provided a little optimism on the activity front. UK PMIs point to an improvement in momentum relative to Q2, and consumer confidence ticked higher alongside stronger growth in consumer credit. There is the prospect that the second half of 2025 will look similar to that of 2024 as the UK government finds itself again in the midst of speculation that the Autumn Budget on 26 November will require a combination of higher borrowing, spending cuts, and tax increases. Indeed, markets, business and consumers alike have become more concerned over future growth, and UK borrowing costs have continued to rise. Higher debt servicing costs, alongside reversals in planned spending cuts, and possible downgrades to growth forecasts all contribute to the erosion of fiscal headroom. How the Chancellor chooses to respond is more uncertain; we see a few possible scenarios, but the key decision will be whether the fiscal can is kicked down the road or is there the political courage to reset the public finances onto a more sustainable footing. Looser labour markets are yet to weigh on inflation Fiscal woes have seen yields on government debt, globally, rise sharply in 2025 but for the UK more specifically, sticky inflation is also a concern. Headline CPI rose to 3.8% y-o-y in July, driven by services and food prices. We think that headline CPI will top 4.0%, double the BoE inflation target, in the coming months. If price growth continues to be broad-based, that may warrant a pause in the BoE’s current one-ratecut-per-quarter pace until there is greater certainty that price pressures have abated. That will depend on labour market loosening translating into softer wage growth. The unemployment rate has risen to 4.7%, and we expect slack will continue to emerge. But, while employment intentions are subdued, official data point to continued growth in jobs; the lack of reliable employment data only adds to BoE cautiousness. Source: Macrobond, ONS, HSBC calculations Source: Macrobond, S&P Global Source: Macrobond ONS, HMRC https://www.hsbc.com.my/wealth/insights/market-outlook/uk-in-focus/the-fastest-growing-economy-in-the-g7/

2025-09-05 07:04

Key takeaways The GST rate cuts and rationalisation across a host of goods and services has been approved by the GST Council and will be effective from 22 September. Key to funding the tax cuts without a large fiscal implication is the folding of the compensation cess into the GST. Growth could be higher and inflation lower, improving India’s macro mix. The Goods and Services Tax(GST) overhaul announced by Prime Minister Modi on 15 August was approved by the GST Council on 3 September. The following are worth noting: Fewer and lower rates. The new rate structure will comprise two key rates – 5% (merit rate) and 18% (standard rate) – alongside a 40% ‘de-merit’ rate. This was arrived at by slashing tax rates from 12% to 5% and from 28% to 18% for the majority of items (though rates were raised for a few items like coal). The new rates will apply from 22 September (except for tobacco products, which will be moved from the compensation cess rate to the 40% GST rate later in the year). Products impacted. On the consumption side, several essential items saw a rate cut (e.g.,toothpaste, shampoo, small cars, air conditioners, and medicines, see Exhibit 1). On the production side, inputs in several sectors will face a lower tax burden (e.g. tractors in the agriculture sector, leather and marbles in labour-intensive goods, cement in construction sector, RE devices in the power sector, medical devices in the healthcare sectors). Some exemptions were added –individual life and health insurance policies will be exempt from the GST. Structural improvements. The rationalisation was not limited to lower and fewer tax rates. Some of the inverted duty problems were corrected for the textiles and fertiliser sectors. Plans were laid out for easier GST registration, pre-filled returns, and quicker refunds. If these improvements are indeed made, it will improve the ease-of-doing-business environment. From compensation cess to a 40% bracket. The compensation cess fund, which served several purposes since the inception of the GST regime, will be closed around September (or when the GST bonds are fully repaid). The items in the compensation cess bucket will be moved to the 40% GST bracket, making it regular GST revenue to be shared by the centre and state governments. This has been a key step for ensuring that the fiscal cost of tax cuts is not too high. Fiscal implication. Details showed that the gross revenue loss from the tax cuts is about INR930bn (USD10.8bn) in a consumption base of FY24. Revenues folded from the compensation cess to the 40% tax bracket can fund INR450bn (USD5.2bn) of the loss, leaving a net loss of INR480bn (USD5.6bn), which is 0.16% of GDP. Scaling this to the FY26 base implies a net revenue loss of INR570bn (0.16% of GDP) over a year. Since only halfofthe fiscal year is left, the implication for FY26 would be around 0.1% of GDP. Growth boost. Crudely put, the government’s loss is the consumer’s gain. Over a year, led by stronger consumption, GDP growth can increaseby 0.2ppt. (However, for this to transpire, the government should not run a tighter fiscal policy to offset the consumption boost.) It is also important to put the GST cuts in a broader context. If we add on the benefits from the income tax cut earlier this year (0.3% of GDP), and a lower debt servicing burden due to repo rate cuts (0.17% of GDP), the overall boost to consumption can be 0.6% of GDP. Of course, a part of this could be saved instead of spent, lowering the net boost. Inflation impact. We estimate that the tax rate cuts can lower headline CPI inflation by c1ppt if producers pass on all benefits to consumers. If the pass-through is only partial, the inflation fall could be closer to 0.5ppt. We expect the RBI to cut rates once again by 25bp in 4Q25, taking the repo rate to 5.25%. https://www.hsbc.com.my/wealth/insights/market-outlook/india-economics/gst-rationalisation-goes-live/

2025-09-04 12:02

Growing optimism as markets gear up for Fed rate cuts Trade tariffs were undoubtedly the key factor shaping market dynamics in Q3, intertwined with inflation and growing US debt concerns. Yet, they didn’t stop US equity indices from reaching new highs, or Q2 earnings growth from exceeding consensus expectations. Rapid technological innovation deserves much of the credit, and we believe this trend will continue. While most of the positive drivers for Q3 should remain in force, we may start to see the real impact of tariffs on growth and inflation in the coming quarter. However, we aren’t too worried because we should see the return of US rate cuts, as the Fed shifts its focus from inflation to tackling a mild growth slowdown. Moreover, the US One Big Beautiful Bill Act has ushered in a new phase of tax cuts, and we expect further deregulation to follow. What does this mean for investors? Most economic indicators suggest that the increase in US inflation will only be mild and gradual, so the wait for rate cuts will soon be over. Lower rates will help boost economic activity and corporate investments, lifting market sentiment and creating further upside for risk assets. Not only will equities benefit, but the bond markets are also primed to perform well, as more investors may move to lock in current yields before rates are cut further. So, we maintain a risk-on approach, with the US, China and Singapore remaining our top picks for equities. Moreover, we’ve recently moved US investment grade bonds back to an overweight position too. AI innovation remains firmly in place The pace and scope of AI adoption are going from strength to strength, helping companies improve productivity and explore new sources of revenue. This should justify technology’s elevated valuations, help offset the impact of tariffs to some extent and offer enormous opportunities across sectors that benefit from the AI ecosystem more broadly – software, cloud services and networks, as well as industrials and infrastructure. Given that the broader tech theme accounts for 48% of the US equity market, US stocks should fare well if this momentum continues. Deregulation can also foster a more conducive environment for growth to accelerate, particularly in the IT and financials sectors. Outside the US, Fed rate cuts and recent dollar weakness are key positives for Asia, and the power of AI innovation remains a key driver for earnings too – especially in China, where leading tech stocks are still trading at 30%-40% discounts to their global peers. China’s renewed focus on supply-side reforms should also help lift earnings expectations. Europe is less preferred, as growth momentum remains lacklustre and its AI adoption is still lagging behind. Overall, we think the US rate cuts and AI innovation will be the key drivers that will help compensate for challenges in some parts of the economy. That’s why we remain positive on the market outlook while keeping an eye on tariff, inflation and growth risks across the board. Diversification in action Our four investment themes for the final quarter of 2025 continue to emphasise diversification across asset classes, sectors and regions, to build resilience in an uncertain world. And this resilience is further enhanced by adding less-correlated assets, such as gold, infrastructure and other alternatives, to our multi-asset strategies. In line with the theme of diversification, we’ve included a special feature on infrastructure and its role in the transition to a net zero future. Another piece looks at unconventional approaches to retirement among affluent investors, with mini retirement growing in popularity. As we head into the final stretch of a volatile year, investors will need to remain on guard against any surprises that could trigger further swings in markets. As always, our investment team is ready to discuss any changes you would like to make to your portfolio. https://www.hsbc.com.my/wealth/insights/market-outlook/investment-outlook/growing-optimism-as-markets-gear-up-for-fed-rate-cuts/

2025-09-02 07:04

Key takeaways Weaker-than-expected US payroll numbers, an elevated real policy rate and Fed Chair Powell’s comments at Jackson Hole reinforce market expectations for rate cuts to resume in September. Investors are likely to move cash to bonds to lock in higher yields. The falling correlation between stocks and bonds also means that quality bonds are better diversifiers against equity market volatility. We upgrade Global and US investment grade to overweight. In the US, the headwinds of growth moderation, tariff-driven goods inflation and elevated valuations should be offset by Fed rate cuts and AI-led innovation, with tax cuts and deregulation providing further support for equities. We remain overweight on global equities, with a preference for the US and Asia, and maintain diversification through multi-asset strategies. In addition to the high US tariffs of 50%, India is also facing short-term cyclical headwinds, leading to slowing earnings momentum and continued foreign investment outflows. We therefore downgrade Indian equities to neutral and prefer China and Singapore in Asia. Government support for AI adoption and domestic consumption, along with a renewed focus on addressing the overcapacity issue, is boosting market optimism for Chinese equities. Defensive qualities and an attractive dividend yield bode well for Singapore’s equity market. https://www.hsbc.com.my/wealth/insights/asset-class-views/investment-monthly/moving-cash-to-bonds-ahead-of-fed-rate-cuts/

2025-09-01 12:02

Key takeaways Most EM currencies have lost upward momentum lately, as markets are looking for clues on the Fed’s rate path… …but the Fed has finally signalled an exit to its rate hold. EM currencies are likely to appreciate in this upcoming Fed’s rate cutting cycle, in our view. Many emerging market (EM) currencies have lost appreciation momentum so far in the third quarter, with most Asian currencies surrendering some earlier gains (Chart 1). This is partly because the US Dollar Index (DXY) has stabilised, rather than falling further, as markets look for clues on the Federal Reserve’s (Fed) policy path. Going forward, the Fed’s policy is likely to be a key driver for the FX market. At the Fed’s annual economic symposium in Jackson Hole in August, Chair Jerome Powell signalled a rate cut soon. Fed funds futures are now pricing in rate cuts of c55bp by the end of the year, with a c88% chance of a 25bp cut at its 16-17 September meeting (Bloomberg, 28 August 2025). Relatedly, the potential for a more dovish tilt in the composition of the Federal Open Market Committee (FOMC) is also catching market attention. Stephen Miran (who authored the ‘Mar-a-Lago Accord’ which laid out a framework to weaken the USD) has been nominated to temporarily fill in for Adriana Kugler (who stepped down from her position as a governor on 8 August but whose term was due to end in January 2026) and he may be confirmed by the Senate just in time to vote at the FOMC’s September meeting. Meanwhile, US President Trump announced on 25 August (US time) that he is removing Fed Governor Lisa Cook. Cook challenged this order in court and in the meantime, the Fed has deferred a decision on her status (Bloomberg, 28 August 2025). If there are growing market concerns about the Fed’s independence, the USD could take a hit. Our base case is for the USD to weaken modestly over the coming months. Source: Bloomberg, HSBC Source: Bloomberg, HSBC In our view, EM currencies could be stable or even outperform in the upcoming Fed’s rate-cutting cycle. First, the US economy is slowing but not in a recession, with Bloomberg’s US recession probability forecast currently standing at c35% (Chart 2), and so there will probably be limited negative spillover impact to EM growth, with rather contained “safe haven” demand for the USD. Second, many EM central banks have been cutting rates and some EM governments have been rolling out more supportive fiscal measures and embarking on market reforms in response to the US’s imposition of tariffs. These measures could support EM growth and currencies. https://www.hsbc.com.my/wealth/insights/fx-insights/fx-viewpoint/em-currencies-when-the-fed-resumes-cutting-rates/