2025-02-26 07:05

Key takeaways Table of tactical views where a currency pair is referenced (e.g. USD/JPY):An up (⬆) / down (⬇) / sideways (➡) arrow indicates that the first currency quotedin the pair is expected by HSBC Global Research to appreciate/depreciate/track sideways against the second currency quoted over the coming weeks. For example, an up arrow against EUR/USD means that the EUR is expected to appreciate against the USD over the coming weeks. The arrows under the “current” represent our current views, while those under “previous” represent our views in the last month’s report. https://www.hsbc.com.my/wealth/insights/fx-insights/fx-trends/when-fx-markets-price-little-policy-uncertainty/

2025-02-24 12:02

Key takeaways The USD’s strength has ebbed lately, with the DXY converging with its rate differential… …which suggests little US policy uncertainty in the price of the USD, but we are hesitant to downplay these risks… …and fundamentals still favour the USD. The broad USD has lost steam lately, with the US Dollar Index (DXY) falling below the 107 level. The gap which had emerged between the DXY and that implied by its interest rate differential has also closed (Chart 1). This could be attributed to a reduction of the premium related to the uncertainty regarding the potential measures that could be announced by US President Donald Trump. In other words, there is little Trump policy uncertainty in the price of the USD. Canada and Mexico reached agreements to postpone US tariffs of 25% each on most of their exports until 4 March. The delay has given the CAD some respite, but it ignores the risk that US tariffs could rise, and the Canadian government retaliates. We are hesitant to downplay these risks entirely, as we are in the early stages of US President Donald Trump’s second term. The Trump administration’s current steps would see tariffs rising at their fastest pace since the 1930s but this could accelerate further (Chart 2). The more US tariffs on other countries rise, the greater the likelihood of a strong USD, all things being equal. Source: Bloomberg, HSBC Source: Tax Foundation, US Census Bureau, Historical Statistics of the United States, US International Trade Commission, HSBC The USD now faces asymmetric upside risks related to upcoming tariff deadlines. For example, a further delay in the imposition of tariffs on Canada or Mexico on 4 March might see a slightly weaker USD. But were the broad 25% tariffs to be imposed, the broad USD would likely surge higher. It is also worth monitoring whether the broader rhetoric from the US administration could lean more hawkishly on trade over the coming months, especially if higher US tariffs become an essential component of the fiscal toolkit. From the perspective of currency fundamentals, the USD should remain on a firmer footing, supported by relatively high yields and resilient growth. Unless there is a dramatic shift in the underlying macro picture – for the US and globally – we find it difficult to envisage a large and sustained decline in the USD. https://www.hsbc.com.my/wealth/insights/fx-insights/fx-viewpoint/the-strong-usd-story-isnt-over-yet/

2025-02-24 07:04

Key takeaways The ECB has formally updated its estimate of the nominal neutral rate of interest, concluding it is in the range of 1.75% to 2.25%. Commonly referred to as r-star, or r*, the neutral rate is the interest rate that allows full employment and stable inflation over the medium term. Japanese stocks have surprised to the upside in the current Q4 2024 earnings season. Most companies in the Topix index have now reported, and y-o-y earnings growth is about 13%. Is the recent US dollar rally looking tired? It is quite telling that an upside surprise for January US CPI did not lead to any material dollar outperformance. Chart of the week – What next for eurozone stocks? Eurozone equities have outperformed year-to-date with the MSCI index up by c.12% versus a c.4% gain in the S&P 500. The move is rooted in the low valuations seen late last year, with several factors recently starting to unlock this potential – upward revisions to analysts’ overly pessimistic 2025 earnings expectations, a weaker euro, upward surprises on eurozone growth data, improving sentiment towards China, and expectations for looser European fiscal policy. However, eurozone stocks have risen a long way relatively quickly, so some near-term caution may be warranted. While data have surprised marginally to the upside, they have been against low expectations. Equally, optimism over fiscal easing hinges, partly, on the German election outcome and prospects for easing the German debt brake. Rule changes would require a two-thirds majority vote in the Bundestag, which is not a given. The fiscally conservative CDU/CSU is leading in the polls and while its leader, Friedrich Merz, has signalled some possible flexibility on the debt brake regarding defence spending, he favours exploring expenditure restraint in other areas first. Moreover, while the centre-left SPD – a potential coalition partner – is open to some reform, if the CDU/CSU requires the support of the FDP, agreement on this issue could prove more difficult. Nonetheless, with eurozone equities trading at a larger than normal discount to the US, any positive European growth or policy surprises could further extend the recent outperformance. Market Spotlight Shariah-compliant strategies in demand Islamic finance – also known as Shariah-compliant finance – accounts for around 1% of global financial assets. Yet it’s a sector seeing rapid growth, delivering some strong recent performances, and potentially appealing to growing demand for socially-responsible investing. Shariah-compliant assets are screened using principles commonly associated with Shariah law. They include areas like risk sharing, limiting unnecessary uncertainty, and the prohibition of interest. There is a strong emphasis on property rights and fair treatment of employers, employees, customers, and other stakeholders. The screening also excludes exposure to certain business sectors, and sets tolerance limits for certain types of investment income. Although guided by different principles, Shariah screening has similarities with strategies that use environmental, social and governance factors. Both commit to promoting investments that minimise harm to society and uphold ethical conduct. They also tend to focus on stability and risk reduction. That makes them a useful diversification option for asset allocators. As for performance, some Shariah-compliant indices have been delivering strong returns, with the Dow Jones Islamic Market Titans 100 index outperforming the S&P 500 over three and five years. 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. 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. Source: HSBC Asset Management. Macrobond, Bloomberg. Data as at 7.30am UK time 24 February 2025. Lens on… The guiding r-star The ECB has formally updated its estimate of the nominal neutral rate of interest, concluding it is in the range of 1.75% to 2.25%. Commonly referred to as r-star, or r*, the neutral rate is the interest rate that allows full employment and stable inflation over the medium term. Yet, while r* is an important benchmark, its unobservable nature makes its estimation difficult. The Bank of England noted recently that an ageing population, global trade disintegration, and higher global risks may be weighing on growth potential, and thus r*. Meanwhile, other factors, such as financial fragmentation, climate change, expansionary fiscal policy, and AI are creating upward pressure. The BoE opted not to give an estimate of the UK’s neutral rate. For the US, the FOMC’s estimated range is c.2.50%-4.00% with a median figure of 3.00% and rising. Lower estimates of the neutral rate in Europe, alongside a more sluggish economy, suggest a long duration positions in Europe. Still-robust growth in the US could imply the neutral rate there is higher than estimated. Japanese surprise Japanese stocks have surprised to the upside in the current Q4 2024 earnings season. Most companies in the Topix index have now reported, and y-o-y earnings growth is about 13%. The industrials and consumer discretionary sectors have been the strongest, buoyed by high overseas exposure. Financials have also done well on higher net interest margins as the Bank of Japan gradually heads towards normalisation. The results have been helped by a tailwind of improving economic momentum, with Q4-24 GDP coming in stronger-than-expected. Government-led corporate governance reforms have also played a part, as are targeted budget stimulus, including inflation relief and support for industries like AI and semiconductors. In response, Japanese stocks have seen a pick-up in analyst earnings upgrades for the coming 12 months. Yet they trade at a discount to peers, with a forward 12-month price-earnings ratio of 15.3x, versus 22.6x in the US. They also trade on a relatively low price-to-book ratio of around 1.5x. Overall, the outlook for Japanese stocks remains positive, although exporters could face headwinds from global policy uncertainty. Toppy dollar? Is the recent US dollar rally looking tired? It is quite telling that an upside surprise for January US CPI did not lead to any material dollar outperformance. If anything, the modest gains were more than unwound following softer underlying details of the PPI print and a weak retail sales release. What we are seeing is that the dollar and US yields are not rising hard on strong US data but falling on any signs of softness. Global factors may also be limiting the dollar’s appreciation trajectory. China’s January credit data suggests a turning point may be at hand. Equally, strong wage and GDP data out of Japan and recent positive eurozone data surprises also lean in this direction. With the USD expensive on a historical basis and plenty of positives already priced in, any disappointing US-related developments, or positive non-US developments relative to pretty downbeat expectations, could start to weigh on the greenback. Past performance does not predict future returns. The level of yield is not guaranteed and may rise or fall in the future. For informational purposes only and should not be construed as a recommendation to invest in the specific country, product, strategy, sector, or security. Any views expressed were held at the time of preparation and are subject to change without notice. Any forecast, projection or target where provided is indicative only and is not guaranteed in any way. Index returns assume reinvestment of all distributions and do not reflect fees or expenses. Source: HSBC Asset Management. Macrobond, Bloomberg, Datastream. Data as at 7.30am UK time 24 February 2025. Key Events and Data Releases Last week The week ahead Source: HSBC Asset Management. Data as at 7.30am UK time 24 February 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 markets remain resilient despite ongoing geopolitical tensions. The US dollar weakened against developed and EM currencies. Rising fiscal worries weighed on eurozone government bonds, and disappointing UK inflation data pressured Gilts. US Treasuries were range-bound ahead of core PCE figures, with January’s FOMC minutes reiterating the Fed is in no hurry to ease. In the US, the S&P 500 touched a fresh high mid-week, with the Nasdaq slipping on mixed Q4-24 earnings reports. The Euro Stoxx 50 paused for breath after recent gains, and Germany’s DAX was steady. Japan’s Nikkei 225 lost ground as a higher yen weighed on exporters amid a re-pricing of BoJ rate expectations. EM equities were mixed. South Korea’s Kospi index posted decent gains, the Shanghai Composite nudged higher, and the Hang Seng and India’s Sensex drifted lower. In commodities, oil and gold rose. Copper fell. https://www.hsbc.com.my/wealth/insights/asset-class-views/investment-weekly/what-next-for-eurozone-stocks/

2025-02-19 12:02

Key takeaways Singapore’s 2025 budget strived to balance between providing generous short-term support to Singaporeans and supporting long-term priorities. Despite the increased social welfare announcements, the government guided towards a fiscal surplus of SGD 6.8bn (c. 0.9% of the GDP). We view the budget as supportive of Singapore’s short- and medium-term growth outlook. In the budget announcement, Prime Minister Wong acknowledged the cost-of-living pressures and announced several measures to support Singaporean households including SGD 800 vouchers for all Singaporean households and additional vouchers ranging from SGD 600 – SGD 800. The budget also focused on long-term priorities like R&D, clean energy, infrastructure, upskilling of population and measures to prepare for an aging society. We see the budget as supportive of growth and expect 2.6% GDP growth in 2025. We retain our overweight stance on Singapore equities. The budget announcements are mildly positive for Banks (the largest sector by index weight) and retail REITs. Despite the recent rally, Singapore equities trade at reasonable valuations and offer an attractive dividend yield. The measures to boost the attractiveness of Singapore’s stock exchange may lead to greater capital inflows in the longer run. What happened? Singapore’s Prime Minister Lawrence Wong announced the 2025 budget on 18th February. The budget, which comes ahead of the country’s 60th anniversary of independence, was broadly in line with our expectations as it strived to balance between providing generous short-term support to Singaporeans and keeping an eye on long-term priorities. In his first budget as the Prime Minister, Mr. Wong acknowledged the cost-of-living pressures and announced several measures to support Singaporean households. PM Wong also announced support measures for companies grappling with higher costs. The government would offer a 50% rebate on corporate taxes capped at SGD 40k. Dubbed as “Onward Together for a Better Tomorrow”, the budget was also notable in its focus on strengthening the medium-term growth potential of Singapore. The budget announced additional top-ups for the National Productivity Fund (SGD 3bn), Future Energy Funds (SGD 5bn) and Changi Airport Development Fund (SGD 5bn). Additionally, PM Wong announced SGD 1bn to fund a national semiconductor fabrication facility and a SGD 1bn Private Credit Growth fund to finance high-growth local businesses. To upskill the workforce and prepare for an aging society, the government bolstered the SkillsFuture program, allowing part-time training with fixed allowance for citizens above the age of 40. The government also extended the senior employment credit scheme by one year, offering wage offsets for companies hiring Singaporeans above the age of 60. Additional support for seniors in the form of top-ups through the MediSave scheme was also announced. Overall, the plans are to spend SGD 124bn in 2025. While Singapore may not be directly targeted by the US for trade tariffs, given that Singapore runs a trade deficit with the US, uncertainty around global trade is a headwind to an open economy like Singapore. In our view, the budget leaves room for the government to provide additional support for the economy should downside risks increase due to global trade uncertainty. Overall, we expect Singapore’s economy to expand by 2.6% in 2025, closer to the upper end of the 1-3% range indicated by the government. Investment implications The budget largely reinforces our bullish stance on Singapore equities, which have outperformed Asian and ASEAN counterparts since the start of 2024 on the back of strong fundamentals, which remain in place. The enhanced cost-of-living support measures should support domestic consumption. The measure to provide tax relief to smaller companies and to provide wage offsets to companies hiring senior employees should further boost employment. The measure is a marginal positive for banks as it should result in lower credit stress. The proposed tax incentives for companies listed in Singapore and fund managers who invest “substantially” in Singapore-listed equities may result in additional capital inflows. Singapore equities have outperformed ASEAN and Asian equities since the start of 2024 Source: Bloomberg, HSBC Global Private Banking and Wealth, as at 18 February 2025. Past performance is not a reliable indicator of future performance. While the banking sector is likely to face modest margin pressures due to lower interest rates, we believe their focus on wealth management and expansion to neighbouring countries should help offset some of these headwinds. The real estate sector, especially REITs, should benefit from lower yields as most of the major central banks and the MAS ease monetary policy. Singapore equities are still trading at reasonable valuations. This combined with their attractive dividend yield could lead to greater investor interest, especially from investors seeking to generate regular income. Outside of financials and property, other sectors such as telecoms and utilities are also picking up traction as yield plays. https://www.hsbc.com.my/wealth/insights/market-outlook/special-coverage/singapore-budget-2025-something-for-everyone/

2025-02-18 12:01

Key takeaways Trade tensions with the US may have an impact on China’s growth, but could be a blessing in disguise… …if they help to accelerate structural reforms, among which fiscal reform is a high priority. The key objective is to enhance fiscal sustainability and streamline central-local fiscal relationships. China data review (January 2025) China’s headline CPI inflation improved to 0.5% y-o-y in January, given a boost from an earlier Chinese New Year (CNY) holiday, which started in January this year instead of February last year. Core CPI y-o-y growth improved for the fourth consecutive month, up 0.6%, as strong travel activity during the holiday helped boost services consumption. On the producer front, PPI deflation remained unchanged at 2.3% y-o-y as weak demand for industrial products may have weighed on prices. China’s January NBS PMIs showed a broad-based contraction in the manufacturing sector, a fall in construction, and a moderation in services activity momentum. While the earlier CNY holiday may have impacted activity as workers returned to their hometowns, these effects should be mostly mitigated by seasonal adjustments. Thus, the softer activity print means more needs to be done to help revive activity. We anticipate a strong policy push this year, led by fiscal stimulus, although the details will need to wait until March’s Two Session. Credit growth saw a strong seasonal start to the year in January driven by a surge in longer-term corporate lending (RMB4.8trn) as well as more elevated than usual government bond issuances (RMB693bn). An improvement in household longer-term lending is also an encouraging sign. The monthly increase in total social financing (RMB7.1trn) reached a new record high, while growth stayed steady at 8% y-o-y. That being said, durability of the boost to credit remains to be seen and we think policymakers will need to step up support in order to help cushion growth against increased global headwinds. Speeding up reforms to counter external risks While external uncertainties and rising trade tensions may present more challenges to China’s economy, they may also serve as a catalyst for more forceful fiscal easing and structural reforms. Among the policy initiatives laid out by the Third Plenum last year, fiscal sustainability was considered an important long-term objective, and essential for restoring local government fiscal discipline and tackling debt risks. We believe more details will be announced at the National People’s Congress in early March. Fiscal reform to accelerate In July 2024, the Third Plenum pledged to deepen China’s fiscal reforms and the meeting laid out three key themes: enhancing the budget system, refining the tax system, and streamlining the fiscal relationship between central and local governments; the latter received the most attention. While the recent RMB12trn local government debt swap is a positive step to addressing near-term financial pressure for local governments, more needs to be done to achieve fiscal sustainability and prevent recurrence of local government debt pressure. Among the various measures, establishing an incentive-compatible framework between central and local governments will play a vital role. This may include lifting the revenue share for local governments and increasing central government spending responsibilities. Indeed, with the recent economic slowdown and housing market correction, local governments have seen their traditional income sources decline for four years by a total of RMB3.8trn. Source: Wind, HSBC Source: Wind, HSBC Reforming tax collection Tax reform will be the cornerstone for streamlining the central and local government fiscal relationship. An example is shifting the collection point for consumption tax from production to consumption and giving a share to the local governments. This should boost local tax collection and incentivise local governments to focus more on consumption. Reforms may also aim to better align with new types of business (e.g., the digital economy), support key sectors (e.g., green development), and simplify the tax system by increasing the share of direct taxation. Enhancing budget management The Third Plenum suggested that all types of government resources should be placed under budget management for efficient resource allocation and enhancement of fiscal discipline, including both on- and off-budget revenue and spending. On the expenditure side, zero-based budgeting (where all expenses need to be justified each new fiscal year) will be advanced after rolling out several pilot projects, while a performance-based approach is expected to be adopted to improve budgetary management. Source: LSEG Datastream Note: *Past performance is not an indication of future returns. Priced as of 14 January 2025. Source: LSEG Datastream https://www.hsbc.com.my/wealth/insights/market-outlook/china-in-focus/speeding-up-reforms-to-counter-external-risks/

2025-02-18 12:01

Key takeaways We see an attractive re-rating opportunity for Chinese equities as DeepSeek’s breakthrough is unlocking a new phase of AI investment, adoption and monetisation across the country, causing new growth engines to support activity and boost private consumption. To tap into China’s emerging AI autonomy and monetisation opportunities, we upgrade Chinese equities to overweight from neutral, which also raises our allocation to Asia ex-Japan equities to overweight. The development of China’s AI autonomy further spurs market expectations of productivity gains through upgrading the AI ecosystem, which could lead to a more sustained and broad-based recovery of growth and equity valuations. We see room for potential earnings upgrades for MSCI China, led by technology. Within Asia ex-Japan, we now prefer China over India due to China’s distinctive AI re-rating driver and compelling risk-reward profile, conservative foreign investor positioning and a significant valuation discount. We favour AI enablers and adopters, including Chinese industry leaders in the internet, ecommerce, software, smartphone, semiconductor, autonomous driving, and humanoid robotics sectors. We also like beneficiaries of stronger corporate spending in AI infrastructure and applications. What happened? On 17 February, a high-level symposium was chaired by Chinese President Xi Jinping with prominent tech leaders, which reflected a significant policy pivot towards a friendlier and more supportive government stance to bolster the private sector and support tech innovation. The symposium came at a critical juncture when the domestic economy is fighting against deflation pressures, property market stress and global trade uncertainties. The last time President Xi hosted a similar high-level symposium with private entrepreneurs was in November 2018. In a speech delivered at the symposium, President Xi reassured government policy support for the technology sector and urged private enterprises to invest more in tech innovation. We expect the National People’s Congress (NPC), which will start on 5 March, to roll out more policy initiatives to support tech innovation and AI investments, which are heralded as “new productive forces” and rising economic growth engines for years to come. The very rapid rise of DeepSeek has shifted investor sentiment, as it has demonstrated China’s under-appreciated capability to deliver significant technological innovation despite US export restrictions on advanced chips and technologies. The tech-heavy Hang Seng Index (HSI) and Hang Seng Tech Index (HSTECH) have rallied 15.3% and 23% YTD, respectively, driven by the DeepSeek excitement. However, the Hang Seng Index and MSCI China are still trading at 10.3x and 11.3x 12-month forward P/E, respectively (i.e. 54% and 50% discounts to the 22.6x forward P/E of the S&P 500 Index). Investment implications The development of China’s AI autonomy further spurs market expectations of productivity gains through upgrading the AI ecosystem, which could lead to a more sustained and broad-based recovery of growth and equity valuations. We also see room for potential earnings upgrades for MSCI China, led by positive earnings momentum in the technology sector. Accelerating deployment of AI applications should underpin upside potential in earnings expectations. In addition, further fiscal stimulus measures to be announced at the NPC session in March could provide support for domestic consumption recovery and property market stabilisation. The Hang Seng Index and MSCI China are trading at steep valuation discounts to S&P 500 and Mag-7 Source: Bloomberg, HSBC Global Private Banking and Wealth as at 17 February 2025. Past performance is not a reliable indicator of future performance. As a result, we upgrade Chinese equities to overweight from neutral, which also raises our allocation to Asia ex-Japan equities to overweight from neutral. Within the region, we now have a stronger preference for China versus India due to China’s distinctive AI re-rating driver and compelling risk-reward profile underpinned by the conservative positioning of foreign investors and significant valuation gaps with the global and regional peers. We favour beneficiaries of DeepSeek’s low-cost, open-sourced AI models, which are expected to accelerate mass deployment of generative AI devices, autonomous driving, and humanoid robotics across China in a scalable way. With favourable industrial policy support, we expect strong corporate spending in AI infrastructure, enablers and applications, including cloud services, e-commerce, AI smartphones, AI laptops, consumer electronic goods, semiconductors, OEMs, software and AI agents. The three state-owned telecom giants have quickly integrated DeepSeek’s AI models into their infrastructure and products. Chinese smartphone companies will also benefit from the integration of their phones with the localised low-cost, high-performing AI models. China's autonomous driving and humanoid robotic technologies command strong competitive edges at the global stage. China’s EV and robotics industries are well positioned to benefit from the AI breakthrough. So far, the Chinese equity rally is not broad-based and concentrates mainly on tech stocks. This means investors will continue to look for broader policy stimulus. We also believe that more convincing demand-side fiscal stimulus measures are required to support a broader earnings improvement beyond the AI supply chain. Hence, we favour Chinese internet and technology leaders for growth and quality Chinese SOEs for high dividends. US tariffs remain a key risk for Chinese equities, which cannot be ignored but so far China’s trade headwinds have been less of a challenge than market originally feared. The risk of escalation of trade tensions remains a concern as there is lingering uncertainty after the 10% incremental tariffs have been imposed on all Chinese goods. Still, we believe China’s relatively restrained retaliatory response suggests that there is room for trade negotiations. https://www.hsbc.com.my/wealth/insights/market-outlook/special-coverage/upgrade-of-chinese-equities-to-overweight/