2025-02-03 07:04

Key takeaways Divergent macro trends and trade policy uncertainty resulted in the Fed diverging from other Northern Hemisphere central banks last week. The ECB, Bank of Canada, and Riksbank all cut rates, and the Bank of England is expected to follow suit this week. Argentina has seen an extraordinary turnaround. Last year, it delivered its first fiscal surplus since the 2000s after recording a near 7% deficit in 2017. As world leaders and CEOs return from the ski slopes of Davos Klosters, and the recent annual meeting of the World Economic Forum, a key takeaway is that global risk perceptions have shifted dramatically. Chart of the week – After the AI wobble, what next for investors? Last week saw a market wobble caused by the potential disruption of AI start-up DeepSeek to the US-dominated AI business model. It’s too early to argue for a big negative impact on AI capex or the wider US tech sector, and many software names could be poised to benefit. Access to cheaper AI could even create an explosion in demand – we call this “the Jevons Paradox in action”. While equity volatility spiked last Monday, markets have regained lost ground. Yet, last week’s developments added significant uncertainty in a sector priced for perfection. With Q4 2024 earnings season under way – and big tech profits in focus – it makes sense for investors to be more cautious on the sector. A key theme for 2025 is that investment market performance could “broaden out” into other sectors, rather than remain heavily concentrated in US mega-cap technology. Market performance this year already has a flavour of this theme. If growth can stay resilient and profits deliver as expected, a rotation into laggard sectors and regions, as well as a “deepening” across the market-cap spectrum, should continue. That could boost performance in equal-weighted and factor-balanced equity strategies. Recent market volatility has also been driven by other challenges – including tariff uncertainty, a shifting scenario for the Fed, and stretched valuations (with bond yields rising and super-normal profits more uncertain). That means the market set up is for a “volatile Goldilocks” – a broadly constructive macro backdrop of disinflation, rate cuts, and profits resilience, but with more uncertainty creating a much bumpier ride for investors. Being active and opportunistic will be key in 2025. Market Spotlight EM in the Year of the Snake Last week’s Lunar New Year marked the arrival of the Year of the Snake – the snake being a symbol of wisdom, adaptability, and renewal. Faced with heightened macro and geopolitical uncertainty, as well as recent volatility in high-growth sectors like AI, these traits will be essential for global investors in 2025. One area where flexibility could be particularly important is in navigating trends in emerging markets, given recent signs of rotation in some of last year’s laggards. Latin American markets – which underperformed in 2024 – have been EM pace-setters in 2025. In US dollar terms, the MSCI EM LatAm index is up by nearly 8% this year, with Brazil (+9%), Mexico (+5%), and Chile (+6%) leading the recovery. In Asia, South Korean stocks have also halted last year’s sharp sell-off, with a 9% rise in January. And after a tentative start to the year, Chinese markets show signs of positive momentum versus regional peers like India, and could gain traction on further policy support this year. While heightened volatility remains a risk for investors in 2025 – particularly given trade policy uncertainty – January’s momentum pick-up could be early evidence of a “broadening out” in markets. That could offer opportunities for adaptable investors. Kung Hei Fat Choi! 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 31 January 2025. Lens on… Fed’s the odd one out Divergent macro trends and trade policy uncertainty resulted in the Fed diverging from other Northern Hemisphere central banks last week. The ECB, Bank of Canada, and Riksbank all cut rates, and the Bank of England is expected to follow suit this week. While conditions across these economies are not identical, broadly speaking, growth has been subdued and there is some concern that uncertainty over, or the implementation of, US trade tariffs is more of a problem for activity than inflation. In the US, still-robust growth and a solid labour market allowed the Fed to leave the funds rate unchanged and await details on the new US administration’s policies. While the Fed is not in a hurry, rate cuts later in 2025 remain likely, given “meaningfully restrictive” policy. The base case is that targeted implementation of tariffs against a backdrop of cooling wages results in some cooling of growth and some bumpiness in inflation, but does not unsettle inflation expectations or unnerve the Fed. Overall, an outlook of no recession, further rate cuts, and profits resilience is a largely constructive mix for risk assets and fixed income in 2025. Argentina’s turnaround Argentina has seen an extraordinary turnaround. Last year, it delivered its first fiscal surplus since the 2000s after recording a near 7% deficit in 2017. Monthly inflation collapsed from 25% in December 2023 to under 3% a year later. These shifts helped its hard-currency bonds return a staggering 100% in 2024. Despite the shock therapy and its social costs, the government is popular and may win a greater share of representation in Congress in October’s mid-term elections. So far so good. But there are lingering questions about external adjustment. The country has limited ability to meet rising external debt-servicing needs in the coming years. Fear of stoking inflation means its currency can only be devalued gradually via a ‘crawling peg’, limiting the scope for an improvement in the balance of payments. A new deal with the IMF for external financing is in the works but may be delayed until after the mid-term elections. Overall, Argentina has an improving structural story. While further reform and IMF funding is needed, it is becoming a fiscal ‘saint’ just as many of its EM peers are turning into fiscal ‘sinners’. Top risks in 2025 As world leaders and CEOs return from the ski slopes of Davos Klosters, and the recent annual meeting of the World Economic Forum, a key takeaway is that global risk perceptions have shifted dramatically. Topping the list of concerns in this year’s Global Risks Report is ‘state-based armed conflict’ – which barely featured as a risk in the same survey two years ago. Extreme weather, geoeconomic confrontation, mis/disinformation, and societal polarisation together make up the top five fears. AI was also a major talking-point in this year’s discussions, with leaders focusing on its potential to revolutionise industries as well as concerns over economic disruption, job displacement, and regulatory uncertainty – many of which feed into the top risks. Broadly, this year’s survey reflects a sense that some of the biggest perceived risks to global stability concern geopolitical tensions and climate change. Some analysts see a shift towards an increasingly multi-polar world where fiscal activism, climate change and technology will dominate. It implies a regime of more volatile inflation and rates amid greater macro uncertainty; more complex asset allocation solutions will likely be required. 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 31 January 2025. Key Events and Data Releases Last week The week ahead Source: HSBC Asset Management. Data as at 7.30am UK time 31 January 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 appetite soured on an AI-driven sell-off in US big tech and IT stocks early last week, with the US DXY dollar index range-bound. US Treasuries rallied, outperforming Gilts and Bunds. The FOMC left policy unchanged, with Fed chair Powell emphasising “no rush” to alter its policy stance. The ECB lowered rates by 0.25%, with ECB president Lagarde signalling further gradual easing. US equities were mixed as investors digested the latest Q4 earnings updates. The Euro Stoxx rallied further, with Germany’s Dax index reaching a new high. Japan’s Nikkei lost ground as the yen firmed versus the US dollar. In EM, most Asian stock markets were closed for the Lunar New Year holiday, with India’s Sensex eking out a small rise. Brazil’s Bovespa index increased further, with Banco do Brasil hiking rates another 1%. In commodities, oil weakened. Gold and copper were also on course to close higher. https://www.hsbc.com.my/wealth/insights/asset-class-views/investment-weekly/after-the-ai-wobble-what-next-for-investors/

2025-01-28 08:06

Key takeaways The Trump administration’s pro-growth, pro-innovation policies are positive for US equities but may create interest rate and inflation uncertainties. As concerns over a growing deficit have driven real US Treasury yields to attractive levels, we extend our US Treasury and global investment grade duration to 7-10 years. A multi-asset solution with active management can help balance growth and resilience. Gold is also a diversifier to mitigate geopolitical and policy risks. US big banks led Q4 earnings results to the upside. Higher equity valuations are justified by higher RoE, liquidity, and the tech and AI-driven sector composition. We continue to favour US Technology, Communications, Financials, Industrials and Healthcare, which are supported by structural trends and policy tailwinds. Higher US tariffs will pose additional challenges for the Eurozone while the UK Chancellor is under pressure to cut spending amid higher gilt yields and a growing deficit, leading to our downgrade of UK stocks to neutral and an extension of gilt duration. In Asia, a strong earnings growth forecast for the healthcare sector supports an upgrade to a neutral position. We prefer Japan, India and Singapore the most in the region. China met the GDP growth target of 5% for 2024. A focus on bolstering domestic demand remains critical amid potential US trade tariffs. https://www.hsbc.com.my/wealth/insights/asset-class-views/investment-monthly/us-earnings-momentum-continues-as-trump2-begins/

2025-01-28 08:06

Key takeaways DeepSeek, a Chinese AI lab, surprised global markets and US stocks off-guard after they released their R1 large language model, explaining in a detailed paper how to build a LLM (Large Language Model) on a tight budget. This is both because of its supposed outperformance vs other AI models and the claims of much lower development costs. We believe it is too early to know how much this will impact the AI capex trend. While chips could remain volatile for now and most exposed, the development of much better performing models could help other parts of the AI-ecosystem, in particular the users, as it may raise productivity in areas we like such as next gen medicines, automation and cybersecurity. We continue to broaden our equity exposure to names outside of the Mag-7 as we think earnings growth is broadening. Mag-7 stocks have already been losing leadership as investors position more in cyclical sectors for the new US administration, and we think this will continue. We maintain our overweight on global and US equities and continue to adopt an active and multi-asset approach to exploit volatility. What happened? DeepSeek’s AI assistant’s very rapid rise to the top of Apple’s download chart has led to a sharp fall in AI-related stocks. Founded in 2023, the company claims it used just 2,048 Nvidia H800s and USD5.6m to train a model with 671bn parameters, a fraction of what Open AI and other firms have spent to train comparable size models, according to the Financial Times. This has triggered a debate about whether US Tech companies can defend their technical edge and whether the recent CAPEX spend on AI initiatives is truly warranted when more efficient outcomes are possible. However, it seems that the very low cost has been achieved through “distillation” or is a derivative of existing LLMs, with a focus on improving efficiency. This amount also seems to only reflect the cost of the existing training, so costs seem to be understated. It remains a question how much DeepSeek would be able to directly threaten US LLMs given potential regulatory measures and constraints, and the need for a track record on its reliability. That said, the debate about what all of this means will probably create pricing pressure for the industry. In addition, there could be reduced CAPEX; this is particularly the case as there had already been a nagging doubt with many investors about the return on investments, contributing to the pronounced market reaction. Therefore, it will be very important to watch the announcements on this point during the earnings season, which may lead to more short-term two-way volatility. More efficiency and lower prices will certainly be good for the users. It could also accelerate usage and help create new use cases, which in turn should support the demand for chips in the medium-to-long term. Investment implications We think volatility may remain in the short term for chip and AI-model related stocks in particular. We also think many analysts will wait for more clarity from discussions during the earnings season to change any forecasts or target pricing. We reiterate our view that it is important to continue diversifying exposure, as we have been doing. For the AI theme, this means diversifying into the adopters and beneficiaries of AI (both LLM and broader AI), including areas such as automation, healthcare innovation, cybersecurity and services firms, which will benefit from increased efficiencies. It also means diversification beyond the technology sector, as earnings growth is picking up outside of the Mag7, while it is likely to slow (albeit from high levels) for the Mag7. https://www.hsbc.com.my/wealth/insights/market-outlook/special-coverage/deepseek-news-and-its-impact-on-the-ai-ecosystem/

2025-01-27 12:02

Key takeaways Like consensus economic forecasts and rates markets, we are assuming the best in terms of the tariff path… …and so, we expect USD-CAD to move sideways in 2025, but with upside risks if trade tensions prove more acute. Over the near term, risk-reward favours CAD weakness, given the looming tariff threat on 1 February. Typically, we look to two main drivers of USD-CAD, namely Canadian interest rate differentials against the US (Chart 1), and the outlook for the broad USD (Chart 2). USDCAD is tracking in line with both drivers for now, but some of the rise in US yields and the associated strength in broader USD is built on expectations of a material shift in US policies. In other words, both drivers could change alongside US policy steps. Source: Bloomberg, HSBC Source: Bloomberg, HSBC The recent choppiness in USD-CAD has captured the dilemma for the CAD around the US tariff risks. This means USD-CAD has to weave in a third driver – the outlook for trade relations with the US – for 2025 and beyond. It is unclear what is priced into the CAD for the looming possibility of US tariffs on imports from Canada. That being said, consensus economic forecasts appear to be assuming the best, with little change in Canadian GDP and inflation expectations since the US election. The Canadian economy is still expected to expand by 1.8% and inflation is forecast at 2.1% in 2025, matching pre-US election expectations (Bloomberg, 20 January 2025). But a 25% import tariff levied by the US could bring a 1.8% hit to the Canadian economy, and the hit could be as high as 2.6% if Canada retaliated in full (Canadian Chamber of Commerce, 28 November 2024). There are reportedly plans in place for Canada to impose tariffs on USD150bn of imports from the US (Dow Jones, 16 January 2025). The Bank of Canada (BoC) is likely to respond with much lower rates, although higher inflation through a weaker CAD and tariff effects would be part of the policy mix. But here too, rates markets seem to be hoping for the best, with the implied rate for one-year ahead at c2.7%, not far from where it was at the start of November (Bloomberg, 24 January 2025). Assuming that no meaningful tariffs are imposed, we expect USD-CAD to move largely sideways in 2025. However, as markets assume the best, risk-reward favours CAD weakness over the near term, given the looming tariff threat on 1 February. https://www.hsbc.com.my/wealth/insights/fx-insights/fx-viewpoint/cad-assume-the-best/

2025-01-27 07:04

Key takeaways Returns from emerging Asian stocks have come under pressure since the end of Q3 last year, with India and EM ASEAN among the hardest hit. The first two weeks of the year saw fears of a ‘doom-loop’ emerge in the UK. Rising US yields weighed on the Gilts market, raising questions about UK fiscal sustainability, which if unchecked could have led to a further sell-off in Gilts. Against a backdrop of economic policy uncertainty, global markets could be prone to volatility this year. For asset allocators looking to manage that risk, Frontier markets could offer some relatively low-vol respite. Chart of the week – Global growth in 2025 Economists are gazing into their crystal balls for 2025. Where will growth be fastest? In the last few weeks, we’ve had major economic outlook reports from the IMF, the World Bank, the UN, and the World Economic Forum. In 2025, the global economy looks like it is holding steady, with disinflation continuing. But uncertainty is significantly higher. Among western economies, the US is expected to be the fastest grower, with the IMF raising its forecast to 2.7%. EU (+1%) and Canadian (+2%) growth assumptions have been lowered, but forecasts for the UK and Japan are steady. The world’s premium growth rates in 2025 are in Asia and Frontier markets. Forecasters expect China (+4.6%) and India (+6.5%) to have broadly stable growth momentum. Growth in South Asia countries like Vietnam and the Philippines is also forecast to be 6%+. In Africa, a number of country stories are notable. In East Africa, Rwanda is set for 7.5% growth and Ethiopia for just under 7%. In the West, Niger (+7%) and Senegal (+8%) look like GDP stars. But “top of the pops” in terms of global growth is Guyana in South America, where economists reckon GDP will grow more than 15% in 2025, driven by an oil bonanza. In an environment of elevated policy uncertainty, GDP point forecasting is a hazardous hobby. Even so, the data show some interesting country and regional macro themes. Market Spotlight Strong infrastructure Global listed infrastructure delivered a steady performance in 2024, with valuation multiples across the sector benefitting as central banks cut rates. As an asset class, infrastructure’s appeal lies in its defensive traits, dependable cashflows and inflation-resistant qualities, as well as its exposure to major economic themes. Those themes are currently dominated by digitalisation – which is fuelling significant demand for investment in data centres and networks – and electrification – which is driving investments in onshore wind, solar, and battery storage. In 2025, the infrastructure outlook is focused on potential policy changes under the new US administration, which could affect the asset class in three ways: (1) potential changes to the scope and value of tax benefits under the Inflation Reduction Act, (2) the impact of tariffs, and (3) the potentially inflationary effect of new policies. Aside from short-term disruption, these factors are not currently expected to hinder returns significantly, with the sector either insulated from any changes, well-placed to potentially benefit from less regulatory and permitting pressures or exposed to assets positively correlated with greater US GDP growth. 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. The level of yield is not guaranteed and may rise or fall in the future. Source: HSBC Asset Management. Macrobond, Bloomberg. Data as at 7.30am UK time 24 January 2025. Lens on… Asia headwinds Returns from emerging Asian stocks have come under pressure since the end of Q3 last year, with India and EM ASEAN among the hardest hit. The weakness has been driven by a rally in the US dollar and the prospect of higher-for-longer US rates – as well as geopolitical worries and global trade uncertainty. These factors have weighed on Asian currencies, complicating the ability of regional central banks to cut rates amid a more tepid outlook. In India, weak market confidence has also played a part, with disappointing macro data and earnings news dragging on stocks, which still exhibit rich valuations. Investors are now looking to February’s Union Budget and RBI policy decision as catalysts for a market pick-up. While these challenges demand caution, the tailwinds of superior growth rates driven by strong structural stories continue to support Indian and ASEAN equities. Beyond short-term frictions, their idiosyncratic trends and more domestically-oriented markets should offer opportunities for portfolio diversification, with stable inflation and expected modest policy easing supporting the macro and profits outlook. Gilt trip The first two weeks of the year saw fears of a ‘doom-loop’ emerge in the UK. Rising US yields weighed on the Gilts market, raising questions about UK fiscal sustainability, which if unchecked could have led to a further sell-off in Gilts. So far, such an outcome has been avoided, largely due to a pullback in Treasury yields. And the base case is for a gradual further, albeit potentially bumpy, decline in both Treasury and Gilt yields. Provided the new US administration introduces targeted rather than wide-ranging tariffs, US inflation should behave in a way that allows the Fed to deliver some modest further rate cuts. In the UK, the economy is already stagnating, and employment indicators are weakening notably, so current uncomfortably strong wage and price pressures should fade. This would allow the Bank of England to ease policy by more than priced later in the year. However, recent volatility is a timely reminder that in a world of higher-for-longer rates and the potential for the Fed to remain on hold, the UK’s mix of poor growth and stretched public finances creates risks that warrant close monitoring. Low-vol Frontiers Against a backdrop of economic policy uncertainty, global markets could be prone to volatility this year. For asset allocators looking to manage that risk, Frontier markets could offer some relatively low-vol respite. Frontiers have been consistently less volatile than emerging markets over the past decade – as measured by the standard deviation of daily returns. And for nine of the past 10 years, they have also been less volatile than developed markets. Much of this is down to their domestically-driven economies, with local idiosyncrasies a key reason for low intra-country correlation between them. That’s sheltered them from macro headwinds. But there are also broad investment themes at play. One has been the shift of manufacturing hubs out of China into regional Frontier countries like Vietnam, and a similar ‘nearshoring’ of manufacturing to European periphery countries. Liberalisation and sector diversification, notably in Gulf Cooperation Council countries, has also been important. So too has been the growth of digitisation. 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 January 2025. Key Events and Data Releases Last week The week ahead Source: HSBC Asset Management. Data as at 7.30am UK time 24 January 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 rallied as investors digested US president Trump’s comments during his inauguration, with the US DXY dollar index drifting lower. Core government bonds consolidated ahead of the FOMC and ECB meetings, with US high yield corporate credit outperforming US investment grade. US equities rallied across the board, buoyed by Q4 earnings news and the new AI infrastructure investment plan. The recent outperformance of the equal weighted S&P 500 compared to the ‘Magnificent 7’ stalled. The Euro Stoxx 50 built on recent gains, with Germany’s DAX index reaching an all-time high, and France’s CAC index also performing well. Japan’s Nikkei 225 surged, led by higher IT and communication services stocks, as the BoJ delivered an anticipated 0.25% rate hike. Other Asian markets broadly rose; the Hang Seng extended its gains, while South Korea’s Kospi edged higher. China’s Shanghai Composite and India’s Sensex also posted modest gains. In commodities, oil prices fell, while copper remained firmed, and gold rose further. https://www.hsbc.com.my/wealth/insights/asset-class-views/investment-weekly/global-growth-in-2025/

2025-01-21 07:04

Key takeaways China faces a number of challenges in 2025, but we believe both the government and enterprises are adjusting. More proactive and collaborative economic policies will likely be rolled out, with a focus on supporting domestic demand. Structural reforms should accelerate under a new Five-year Plan: stay tuned for efforts to stabilise business sentiment. China data review (Q4, December 2024) China’s GDP grew by 5.4% y-o-y in Q4 2024, rounding out growth for the full year 2024 at 5%, in line with the government’s target of “around 5%”. Retail sales rose by 3.7% y-o-y in December, continuing to benefit from the consumer trade-in programs, with household appliance sales rising by 39% y-oy and auto sales staying in positive territory. Consumer trade-in programs have so far driven sales of over RMB1.3trn (SCIO, 15 January) while the government recently announced it would add more funding for the program. Industrial production was a key bright spot, rising 6.2% y-o-y in December, helped in part by front-loading from exporters in anticipation of potential tariffs. Even if the front-loading cushion may be more temporary, the expansion of equipment upgrading and trade-in programs has also helped to drive growth. Manufacturing investment was also buoyant, rising by 7.4% y-o-y. Property investment saw a deeper contraction, dropping by 13.3% y-o-y in December, suggesting more time and policy support may still be needed to stabilise the property sector. This is despite some recent green shoots, with residential primary home sales in volume terms rising by 4.4% y-o-y, the second straight month of positive growth. China’s December inflation print saw some mixed performances with headline CPI edging down to 0.1% y-o-y, though headline PPI deflation narrowed to 2.3%. Food became a drag last month, although core CPI managed to improve a touch (to 0.4% y-o-y) due to the recent easing package. The expanded consumer trade-in programs should continue to boost consumer demand and prices levels. Exports rose 10.7% y-o-y in December driven by front-loading of shipments in anticipation of the US imposing higher tariffs this year. Indeed, exports to the US saw its growth double to c16% y-o-y from 8% in November. Meanwhile, imports rebounded to positive territory again, rising 1.0% y-o-y, partly stemming from the front-loading in exports, as processing imports saw a recovery to 7.7% y-o-y. China’s economy in 2025: Five themes to watch As we enter the Year of the Snake, there is a great deal of uncertainty as to what Trump’s proposed policy measures could mean for the global economy. In China, the wait for policy action continues after China’s promise to ‘forcefully’ lift domestic consumption. Given this backdrop, we outline five key macro themes for China’s economy in 2025. 1. Overseas investments set to rise With potential new US trade policies set to reshape trade flows, China’s overseas direct investments (ODI) are accelerating. And unlike during Trump’s first presidency where ODI was mainly about facilitating trade diversions (e.g. moving some production to ASEAN), this time it may act as an alternative strategy to slowing exports with investments closer to end consumers. 2. A major policy shift targeting growth China has set the tone for more forceful and effective economic policies: fiscal easing will likely mean a higher budget deficit and record-high government bond issuance; monetary easing may include additional Reserve Ratio Requirement cuts, interest rate reductions and asset buying from the secondary market. Source: Wind, HSBC Source: CEIC, HSBC 3. Prioritising domestic demand A key feature of China’s policy support is its pro-consumption nature. That will likely come with both cyclical and structural measures. An expanded consumer goods trade-in programme, an increase in basic pensions, and civil servant pay rises are all set to be implemented. China will not only expand the social safety net but also explore ways to stabilise the housing and equity market, though structural measures will take longer. 4. China to emerge from deflation China’s GDP deflator has been in contraction for 7 straight quarters. That said, we expect supply side policies to supplement demand stimulus in order to rebalance demand and supply, and ‘systemically rectify’ the cut-throat competition (NDRC, 3 January). 5. Structural reforms to accelerate China is concluding its 14th Five-year Plan in 2025 and devising a new five-year strategy. Fiscal reform is critical to resolving local governments’ fiscal stress and strengthening their capacity to implement de facto fiscal easing during economic downturns. Other structural reforms, such as establishing a fair and transparent regulatory framework, can also help to rejuvenate entrepreneurship and attract more foreign direct investment. Source: LSEG Datastream * Past performance is not an indication of future returns Source: LSEG Datastream. As of 16 Jan 2025 market close https://www.hsbc.com.my/wealth/insights/market-outlook/china-in-focus/2025-01/