2025-04-14 07:04
Key takeaways Central banking is not the easiest of jobs even in relatively stable times. And the current environment is anything but stable. Market volatility has jumped in recent weeks as investors struggle to assess the impact of the US administration’s trade policies. Credit spreads are an important leading indicator for the macro cycle, and perhaps the best single variable to give investors a handle on recession risk. Asian stock markets sold off sharply last week but pared some losses following the US administration’s partial tariff reprieve. Chart of the week – Sticky bond yields A week after announcing ‘reciprocal tariffs’ on trade partners, the US administration has applied the brakes. A 90-day pause sees universal tariffs of 10% for all countries, except China. Higher tariffs for certain sectors remain in place. After days of market declines there has been a big relief rally for stocks. So, what happens next? Markets are still spinning around, with ultra-high policy uncertainty meaning that volatility will remain elevated. Last week’s initial sell-off saw a combination of falling stocks and sticky bond yields, with the market factoring in a ‘stagflation lite’ situation. Specifically, the bigger-than-expected ‘tariff shock’ dragged the growth outlook lower and pushed short-term inflation expectations higher. Recession risk rose materially. Despite the interim reprieve, uncertainty still reigns. US growth continues to slow and trade policy will still raise inflation. For now, the Fed remains in reactive mode – waiting for bad news on the economy. For markets, it means that bond yields are still sticky, and the term premium is elevated. Meanwhile, international stocks are still outperforming year-to-date. With ‘policy puts’ more evident in Europe and China, the case for global investors to rotate to Europe, Australia, Asia, and the Far East (EAFE) and to emerging markets still looks good. Market Spotlight Flight to quality Uncertainty and volatility are set to be a feature, not a bug, of investment markets in the near term. For investors considering ways of building portfolio resilience without sacrificing growth, one strategy is to focus on ‘quality’. Quality is a stock market factor – and a proven long-term portfolio diversifier – that can defend against downside risk but still benefit from market upswings. Under the hood, it captures exposure to firms with strong profitability, consistent financial performance, and the safety of robust financial health. These traits help it deliver through-the-cycle performance. It pays off because quality stocks tend to be undervalued by the market. Meanwhile, investors often bid up the prices of lower quality firms that promise lottery-like returns, but which have a habit of underperforming in a downturn. Some multi-asset insights show that quality delivers its strongest active returns when the economic outlook begins to cool – making it a potentially useful defensive strategy in portfolios. Faced with elevated volatility, investors should pay attention to diversification and selectivity in asset allocation. 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 11 April 2025. Lens on… Fed biding its time Central banking is not the easiest of jobs even in relatively stable times. And the current environment is anything but stable. Market volatility has jumped in recent weeks as investors struggle to assess the impact of the US administration’s trade policies. The Fed must consider not only the impact of the trade policies themselves but also the resulting market volatility on the economy. However, to do this, it must also consider the starting point. Recent data show the economy ended Q1 with the labour market in relatively good health while the downtrend in inflation has been slow and bumpy. This favours the Fed biding its time and seeing where trade policy settles. However, it doesn’t mean the Fed will sit on its hands indefinitely. Continued uncertainty around trade policy, current market volatility and recent survey and consumer data point to a slowdown. Given slowdowns can intensify rapidly, we see the Fed reacting to softer activity data and easing policy gradually from mid-year. Credit conditions Credit spreads are an important leading indicator for the macro cycle, and perhaps the best single variable to give investors a handle on recession risk. That’s important given that policy uncertainty and tariffs have raised worries over the prospect of stagflation and recession. Spreads have risen sharply recently – with US high yield seeing the most significant price adjustment. But they are not extreme versus long run history. That makes sense. The ingredients for a dramatic rise in default rates aren’t present today, even if defaults are likely to creep up. That’s because private sector’s balance sheets remain strong, corporate profits look fine for now, and the maturity wall isn’t too steep. Some credit specialists note that the absolute repricing at this stage is in line with what we have seen in recent event-driven corrections that are normally caused by a shock. Among them the tariff-driven growth scare in 2018/19, rate hikes in 2022, and the regional bank crisis in 2023 – none of which led to a recession. Asia stock check Asian stock markets sold off sharply last week but pared some losses following the US administration’s partial tariff reprieve. Export-oriented markets like Taiwan, Korea, and Japan have faced a particularly choppy time. In mainland China, initial price declines were followed by a mild rebound supported by sentiment that the market is still underpinned by a ‘policy put’. In India, which cut rates by 0.25% last week, the impact on stocks was more moderate given its more limited foreign trade exposure. Near-term, some Asia investment specialists think heightened trade uncertainty and the unpredictable impact on the macro outlook will weigh on sentiment. While Asian consensus profit forecasts have trended higher since mid-Q1, the implementation of tariffs could cause downgrade pressure once their impact is clearer. Those with higher overseas trade and revenue exposure to tariffs and counter-tariffs could be particularly vulnerable. Despite this, Asian markets continue to trade at a material discount to developed markets. And while FX volatility and growth concerns have risen, many EM Asian central banks look well-positioned to ease policy amid a benign inflation outlook. 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 11 April 2025. Key Events and Data Releases Last week The week ahead Source: HSBC Asset Management. Data as at 7.30am UK time 11 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 Risk assets traded in a volatile fashion amid continued global trade uncertainty, with the US dollar falling against major currencies. US Treasuries weakened, and the US yield curve “bear steepened” following benign US core CPI data. Meanwhile, US IG and HY corporate spreads continued to widen. Among developed markets, US equities rebounded in choppy trading, while the Russell 2000 underperformed. European stock markets experienced broad-based weakness, as Japan’s Nikkei 225 pared losses after heavy sell-offs earlier last week. EM equities lagged developed markets. Other Asian stock markets remained on the defensive, with the Hang Seng leading the losses upon returning from a holiday-shortened week. In Latin America, equity market movements in Brazil and Mexico were more moderate. In commodities, oil fell, while copper and gold rallied. https://www.hsbc.com.my/wealth/insights/asset-class-views/investment-weekly/sticky-bond-yields/
2025-04-11 07:04
Key takeaways RBI cut the policy repo rate by 25bp to 6.0%, and changed stance from neutral to accommodative; it also gave implicit assurance of lasting surplus liquidity, and further rate easing. Inflation forecast was cut with the RBI saying that inflation is durably aligning with target; growth forecasts were also trimmed, and we believe can be cut more. We expect another 25bp rate cut in June and August, taking the policy rate to 5.5%, which is our estimate of neutral. In line with our expectation, the RBI cut the policy repo rate by 25bp, taking it to 6.0%.This was a unanimous decision across all six MPC members. It also changed its stance from neutral to accommodative, which we believe clearly signals further rate cuts (more below). The backdrop of this policy meeting was complex.The USA has recently announced a 26% tariff on India. We calculate that India’s GDP growth could take a direct 0.5ppt hit in FY26. The indirect and second-order negative impact could also be meaningful. But heightened volatility in global financial markets suggest that steps to support growth at this juncture should be carefully calibrated and remain focused on preserving macro stability alongside. We believe, the RBI signalled very clearly that it is focused on supporting growth. Certain points stood out to us: One, we think the RBI gave a double assurance that more rate cuts are coming. It changed stance and also cut growth/inflation forecasts, both steps signalling more easing. Two, it clarified that the accommodative stance only refers to policy rate, and not liquidity. This to us means that rate easing will happen on its own right, and not be substituted by liquidity easing. Three, on liquidity, the governor reiterated that the RBI “is committed to provide sufficient system liquidity”. In the press conference he even suggested that around 1% of deposits in liquidity could be available on tap. It is well known that liquidity has swung from deficit in January to a clear surplus. And this surplus is likely to continue, and even get a shot in the arm when RBI dividend is paid out in May. Four, on inflation, the governor said that “there is now a greater confidence of a durable alignment of headline inflation with the target of 4 per cent over a 12-month horizon”. The RBI lowered the FY26 inflation forecast from 4.2% to 4.0% on the back of a “durable softening of food inflation”. We have not seen such confidence on durability for the last few years. Five, on growth, the FY26 forecast was lowered from 6.7% to 6.5%. The governor said that quantification of trade war impact is tough at this point. In fact, in a supporting publication, we clearly noticed that the world growth forecast for 2025 hasn’t yet beenlowered much (3.1% versus 3.3% previously). This means there is likelihood of further growth forecast cuts in subsequent meetings. Six, it reiterated strong external accounts. This is important, because it provides some room to ease, even if external volatility is high. Another way to look at it is to say that the USDINR had gone close to 88 in the recent past, but has pulled back since then. Even if it weakens from current levels (of 86.6 as we write), for some distance, it will only go to levels seen recently, and may not be immediately disruptive. Having said the above, the RBI tried to strike a balance, lest expectations of rate easing become excessive.The RBI revealed its inflation forecast for FY27 at an above-target 4.3%, and growth too, at a higher 6.7% (compared to FY26). This message, that inflation over time can breach the 4% target, should help keep a check on expectations of extreme rate cuts. What next? With growth falling below potential, and inflation below target in FY26, we expect further easing. We are calling for a 25bp rate cut in the June and August meetings, taking the policy rate to 5.5%, which is our estimate of neutral. If growth expectations continue to remain weak, policy rate may even dip below neutral, though that’s not our central forecast. Finally, several reviews are going on, for example the RBI’s liquidity framework and the economic capital framework. These will need to be watched carefully for incremental information over the foreseeable future. https://www.hsbc.com.my/wealth/insights/market-outlook/india-economics/focuses-on-growth-support-amid-tariff-storm/
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/
