2025-01-20 12:02

Key takeaways We believe the JPY will not be an exception to broad USD strength in 2025, but it should not bear the brunt again. Downside risk to USD-JPY could stem from domestic inflows. Upside risks could come from a dovish BoJ or a hawkish Fed. Our view on the JPY for 2025 is that it will not be an exception to broad USD strength, but it should not bear the brunt like it did over the past few years. We do not see it as one of the currencies in the front line of US tariff risks. The main challenge for the JPY is still a deeply negative interest rate differential with the US. This has been affecting the JPY since 2022 (Chart 1) and fundamentally undermines the JPY via capital outflows and high FX hedging costs for residents. But there are some nuances this time around: (i) JPY-funded carry trades (i.e., selling the JPY to fund the purchase of higher-yielding assets) are not as popular as before given high market volatility, and (ii) the JPY is no longer the lowest yielding G10 currency (that would be the CHF, when looking at longer tenors). Additionally, both Japan’s Ministry of Finance (MoF) and the Bank of Japan (BoJ) are unlikely to welcome further JPY weakness because of the public’s discontent over the loss of purchasing power, and the negative impact of imported inflation. The MoF may defend the JPY if the exchange rate diverges from fundamentals. Rate hikes by the BoJ could also serve as a “circuit breaker” for upward USD-JPY momentum (Chart 2). Indeed, the JPY has strengthened recently following the BoJ’s remarks by Deputy Governor Ryozo Himino (14 January) and Governor Kazuo Ueda (15 January), noting “encouraging messages on wage increases” from companies, and markets now see a higher chance for a rate hike at the 23-24 January meeting (from c50% chance at the start of the year to c85%) (Bloomberg, 16 January 2025). Lower US yields after a slight downside surprise in US December inflation data also helped. Source: Bloomberg, HSBC Source: Bloomberg, HSBC We expect USD-JPY to show a gradual upward drift but the annual high-low range for USD-JPY can be very wide, i.e., 29 yen on average in the most recent three years. The main upside risks to USD-JPY could come from the risk of rate hikes by the Federal Reserve and a dovish BoJ. Conversely, downside risks to USD-JPY could arise if US-centric risk aversion arises, or if there is a domestic pivot in Japan’s Government Pension Investment Fund’s (GPIF) five-year asset allocation (the plan will be announced in the coming months). The last two reviews announced in March 2020 (for FY2020-24) and October 2014 (for FY2015-19) led to a sharp increase in the portfolio allocation to foreign bonds (from 15% to 25%) and foreign equities (from 12% to 25%), respectively. https://www.hsbc.com.my/wealth/insights/fx-insights/fx-viewpoint/2025-01-20/

2025-01-20 07:04

Key takeaways Despite a backdrop of volatile rates, policy uncertainty, and geopolitical stress, global corporate credit spreads currently trade at close to 30-year tights. This tightening has been driven by a combination of strong fundamentals and stable technical demand. The S&P 500 has delivered back-to-back annual gains of nearly 25% over the past two years. Last year, analysts pencilled-in an expected 2024 index price gain of only mid-single-figures. That was too bearish, and it proved once again that full-year price forecasting is notoriously difficult. This year, analysts think the index will gain around 10%. Brazilian bonds and the real (BRL) have been under pressure in recent months. There have been clear drivers behind recent moves, with the structural fiscal picture remaining a concern. Chart of the week – Reverse conundrum Developed market government bonds have lost significant ground in recent months. The benchmark US 10-year Treasury yield reached 4.8% mid-week; a level last seen in October 2023. UK 10-year Gilt yields rose to 4.9%; their highest level since 2008. But what does the threat of bond yields crossing 5% mean for investors? Some macro market onlookers are calling this the “reverse conundrum”. It’s a play on the “conundrum” first termed by Alan Greenspan to describe stubbornly-low long bond yields in the face of 17 Fed rate hikes through to mid-2006. Today’s “reverse conundrum” is this process flipped around… despite Fed cuts, bond yields are on the rise. The rise is down to a combination of fiscal concerns, bond issuance worries, and, to some extent, investor nervousness about policy mistakes. Relative to recent history, the pattern is unusual and if the “reverse conundrum” holds, it could signal that we have entered a new economic and market regime. We would no longer be in the era of low bond yields. That could have profound implications for asset allocators. It would be a world where long bond yields would have to compensate investors for inflation and fiscal risks, with bonds no longer offering a guaranteed all-weather hedge for portfolios. Meanwhile, higher discount rates would create a pricing challenge for assets right across the risk curve (with skinny risk premiums particularly vulnerable to a re-pricing). That would leave investors seeking a new range of alternatives and private markets to build portfolio resilience. If this really is a “reverse conundrum” world, there would be a strong case for taking an active and opportunistic approach to investing in 2025. Market Spotlight Opportunities in European-listed real estate The global listed real estate sector weakened late last year amid uncertainty over the timing of future Fed rate cuts. But some listed real estate analysis suggests parts of the European-listed market trade at an attractive discount to both other asset classes and the direct property sector. With private real estate capital markets showing signs of re-opening, investment volumes should continue to pick up, with listed property players well-placed to benefit. In part, this is supported by the fact that REIT (Real Estate Investment Trust) balance sheets are currently in good shape, with low leverage. Given that European economic growth is forecast to lag other regions this year, some specialists favour sectors less reliant on growth to deliver returns. They include those with secular tailwinds like senior housing, and sectors with embedded income growth like industrial warehouses. Dividend yields from global real estate equities are standing at a premium to wider equities. 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 17 January 2025. Lens on… Credit quality Despite a backdrop of volatile rates, policy uncertainty, and geopolitical stress, global corporate credit spreads currently trade at close to 30-year tights. This tightening has been driven by a combination of strong fundamentals and stable technical demand. Spreads have been underpinned by robust profits growth and continuing evidence of US economic resilience, particularly in the labour market. With US rates still elevated – and further policy easing now being priced-out by the market – high credit yields have been a major attraction for fixed income investors. This ensured that a record supply of bond issuance last year was soaked up by keen demand. In a higher-for-longer rate scenario, riskier credits may be vulnerable as more leveraged firms struggle to cover interest expenses or as economic growth cools. Floating rate spread products, like securitised credit or private credit, should maintain their yield advantage. US momentum The S&P 500 has delivered back-to-back annual gains of nearly 25% over the past two years. Last year, analysts pencilled-in an expected 2024 index price gain of only mid-single-figures. That was too bearish, and it proved once again that full-year price forecasting is notoriously difficult. This year, analysts think the index will gain around 10%. In 2024, resilient profits, the strong performance of ‘Magnificent 7’ stocks, and expectations of revitalised US growth under the incoming administration were key drivers of returns. With Q4-24 earnings season now under way, we should get a sense of whether that can continue. Financial stocks are among the first to report, with Factset data showing that they are expected to see the highest quarterly year-on-year profits growth rate of all 11 sectors, at 39.5%. Overall, index profits are expected to grow by 11.7% yoy in Q4 (and by around 14.5% yoy in CY2025). One catch is that strong recent sentiment in the S&P 500 has driven valuations higher. The index currently trades on a forward 12-month P/E ratio of 22x (above its 10-year average of 18x). Brazilian headwinds Brazilian bonds and the real (BRL) have been under pressure in recent months. There have been clear drivers behind recent moves, with the structural fiscal picture remaining a concern. Just to stabilise public debt relative to GDP, Brazil needs a primary surplus of 2% of GDP. At the end of Q3 2024, it had a budget deficit of 9.2%. The road to sustainability is both long and difficult. Yet, at least in the short term, it is tempting to consider whether Brazilian local-currency assets may have become oversold. From a policy perspective, Congress has approved most of the expenditure containment measures proposed last year, which can mitigate risks of further fiscal slippage. The finance ministry is working on further measures to reduce expenditure. The real yield (based on CPI inflation) on long-end Brazilian bonds is now over 10%, the highest since the 2008 global financial crisis. 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 17 January 2025. Key Events and Data Releases Last week The week ahead Source: HSBC Asset Management. Data as at 7.30am UK time 17 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 A benign US core CPI inflation print lifted risk appetite, with the US dollar consolidating ahead of US president-elect Trump’s inauguration. Core government bonds rose, with Gilts outperforming US Treasuries and Bunds, aided by a downside surprise in UK inflation. US equities exhibited broad-based strength, led by the small-cap Russell 2000 index. The Euro Stoxx 50 index posted solid gains, whereas Japan’s Nikkei 225 fell on a firmer yen, as investors raised expectations for a January BoJ rate hike. Other Asian stock markets were mixed. Strength was most evident in the Shanghai Composite and Hang Seng indices. South Korea’s Kospi reversed early losses last week as the BoK signalled further easing in the near term, despite keeping its policy rate on hold. India’s Sensex struggled to gain traction, with corporate earnings in focus. In commodities, rising supply concerns propelled oil prices to a five-month high, while gold and copper advanced. https://www.hsbc.com.my/wealth/insights/asset-class-views/investment-weekly/2025-01-20/

2025-01-13 08:05

Key takeaways Gold is likely to remain well supported in 2025 on a cocktail of fiscal, geopolitical, and trade risks. Central banks’ demand are also likely to remain strong, but a maturing rate-cutting cycle may be less supportive for gold. Gold rallies may also be curbed by positive US real rates and a firm USD, alongside physical market dynamics. Gold prices hit a record high of USD2,790 per ounce in October 2024, and remain over USD2,600 per ounce at the moment. Over the near- to medium-term, the uncertainty surrounding the policies of the incoming US administration, in particular trade policies, could boost gold prices. Geopolitical risks could sustain gold prices at historically high levels. Growing concerns over mounting fiscal deficits may keep gold prices at higher levels than would otherwise be the case. Global public debt would exceed USD100trn or c93% of global GDP by the end of 2024 and will approach 100% of GDP by 2030, according to the International Monetary Fund’s biannual publication “Fiscal Monitor” released on 23 October 2024. However, our precious metals analyst thinks that there is a limit to how far gold prices may go. Monetary policy, while currently supportive, may be less of a bullish input for gold as the monetary cycle progresses. In the US, gradual declines in inflation are still likely to leave real rates strongly positive, even in the light of rate cuts by the Federal Reserve. In our precious metals analyst’s view, the relationship between US real rates and gold may be restored (Chart 1). In other words, US real rates are likely to weigh on gold prices eventually. Gold prices and the USD generally move inversely to each other (Chart 2). We expect the broad USD to strengthen further in 2025 (FX Viewpoint: USD on a firm footing (3 January 2025)), which may curb gold rallies. Source: Bloomberg, HSBC Source: Bloomberg, HSBC Meanwhile, gold may face headwinds from rising supply and weaker physical demand, in our precious metals analyst’s opinion. High gold prices are encouraging more gold mining output and additional recycling supply, while gold miners are facing mounting challenges (like environmental and regulatory constraints, and higher production costs). In the face of high gold prices, demand for gold jewellery and gold coins & bars may become weaker. Central bank demand is also set to moderate especially when gold prices rally past USD2,800 per ounce; however, purchases may increase should gold prices correct. https://www.hsbc.com.my/wealth/insights/fx-insights/fx-viewpoint/2025-01-13/

2025-01-13 07:04

Key takeaways US 10-year US Treasury (UST) yields continued to push higher last week, extending an upward trend that began shortly after the Fed’s first rate cut in September. Japanese stocks underperformed global peers in dollar terms in Q4 2024. Potential changes in US trade policy, plus the strength of US stocks and the dollar influenced the performance. Chinese stocks delivered double-digit gains in 2024, with the market outperforming major regional neighbours like India and South Korea. That was largely driven by a leap in valuations after a fresh round of economic and market stimulus measures last September. Chart of the week – China beats India in 2024 In 2024, central banks cut rates, fiscal policy remained active, and growth stayed resilient. Many assets – especially stocks and precious metals – did very well. Geopolitics mattered a lot for the market narrative. But (apart from gold), it’s hard to see much evidence of it in 2024 investment market returns. Megatrends were important in 2024. The AI theme powered growth stocks to outperform value. And the prospect of tax cuts and deregulation turbo-charged investor confidence in US stocks (so called “US exceptionalism”). That all meant that the US market outperformed Europe massively – by more than 20 percentage points in dollar terms. And bonds put in a decent performance in 2024, unless you were invested in Brazil or Japan. Even so, stocks outperformed Treasuries and other core fixed income assets in 2024 because the macro backdrop of no recession, rate cuts, and profits resilience was simply more equity-friendly. Likewise in emerging markets. Bonds performed reasonably well – with India bonds a highlight. But EM stocks outperformed EM bonds, and the performance of Chinese stocks (outperforming India) was noteworthy (see Page 2). From here, the uncertain macro backdrop looks set to persist in 2025. That’s likely to translate to periods of elevated volatility in markets and calls on investors to do their homework when it comes to asset allocation. Market Spotlight Questions for 2025 In an unusually uncertain macro environment, making forecasts for the year ahead is even tougher than normal. But here are some of the key macro questions we think will feature heavily in investors’ minds in 2025… A key question, of course, is which way the narrative on Fed rates will swing next. Could markets even price a Fed hike? And what would that mean for Treasuries, the dollar, and risk assets? Likewise, how will rising policy and geopolitical uncertainty impact trade, global growth, inflation, and investor risk appetite in 2025? With yields rallying at the long end, and signs of term premium rising too, could “bond market vigilantes” play an influential role in disciplining policy makers this year? And can US exceptionalism keep on going? Will US consumers keep on spending? Can 2024’s market megatrends, like AI, keep on performing? There could be scope for global stock market performance to finally broaden out in 2025, boosting the broader US, European, and Japanese markets. And further policy support in China could be a catalyst to close the valuation discount in Chinese, Asian, and Frontier stocks. There’s certainly plenty for economists and investors to think about at the start of 2025. The value of investments and any income from them can go down as well as up and investors may not get back the amount originally invested. Past performance does not predict future returns. 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. Diversification does not ensure a profit or protect against loss. Source: HSBC Asset Management. Macrobond, Bloomberg. Data as at 7.30am UK time 10 January 2025. Lens on… Rising yields US 10-year US Treasury (UST) yields continued to push higher last week, extending an upward trend that began shortly after the Fed’s first rate cut in September. This defies the textbook crunch lower in yields that usually occurs after the Fed starts to lower rates. Structural, rather than cyclical, factors appear to be driving the sell-off. Activity data have been in line with expectations and the latest core PCE inflation number was on the low side. To some analysts, the move reflects a mix of markets pricing in a higher neutral policy rate, given the resilience of growth; and increasing concerns about US government debt dynamics. The base case is that some moderation in US growth and inflation allow the Fed to ease 0.50%-1.00% in 2025, limiting the scope for a significant further sell-off in USTs. However, the situation warrants close attention. As well as weighing on growth prospects and raising financial stability risks, rising UST yields can create problems in other markets. For example, since early December, the equal-weighted S&P 500 is significantly down, while longer-dated UK gilts have underperformed USTs, reflecting the UK’s stretched fiscal position and weak growth. Japanese value Japanese stocks underperformed global peers in dollar terms in Q4 2024. Potential changes in US trade policy, plus the strength of US stocks and the dollar influenced the performance. Domestic forces were also at play, with uncertainty over the timing of Bank of Japan rate hikes. Yet, the outlook for Japanese stocks is potentially positive for three reasons. First is that Japan continues to shift from prolonged disinflation to reflation, with consensus nominal GDP rising to 3.3% this year. Second, initiatives to boost corporate governance continue, with firms hiking shareholder payouts (dividends and buybacks), leading to fitter balance sheets and higher return on equity (ROE). Third, Japanese valuations have not kept pace. Not only have price-to-book values lagged the broad rise in ROE, but there has also been a substantial pick-up in dividend yields, which are up by close to 80% over the past decade on a relative basis. During the same period, 12m forward relative price-earnings (PE) ratios have also declined, leaving Japanese stocks trading at 14.5x versus the world on 18x. That could offer a compelling entry point for investors. China caution Chinese stocks delivered double-digit gains in 2024, with the market outperforming major regional neighbours like India and South Korea. That was largely driven by a leap in valuations after a fresh round of economic and market stimulus measures last September. Yet, Chinese markets have been weak of late. Investors are fretting over headwinds ranging from lacklustre domestic demand and geopolitical risks to the strong US dollar and the prospect of tariffs. There is also uncertainty over the timing and scope of further domestic policy support. On that front, parliamentary sessions in early March could see details on the 2025 growth and fiscal deficit target, the annual bond issuance quota, and other economic and social targets. Officials have already set a pro-growth policy tone for 2025. More demand-side stimulus, further efforts to stabilise the property sector, and structural reforms to rebalance the economy could support the growth outlook. For investors, Chinese stocks continue to trade at a discount despite analysts being optimistic on the profits outlook. Any positive news following the March meetings could boost sentiment and foreign inflows. 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. Diversification does not ensure a profit or protect against loss. Source: HSBC Asset Management. Macrobond, Bloomberg, Datastream. Data as at 7.30am UK time 10 January 2025. Key Events and Data Releases This week The week ahead Source: HSBC Asset Management. Data as at 7.30am UK time 10 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 A widespread sell-off in core government bonds stifled risk markets amid ongoing uncertainty over US trade policy and the rate outlook. The US dollar continued to strengthen against major currencies. Gilts lagged behind Treasuries and Bunds due to rising UK fiscal concerns, with poor investor demand for the latest 30-year Gilt auction. US equities struggled to make headway ahead of the Q4 2024 earnings season. Europe’s Stoxx 50 index began the year on a positive note, but Japan’s Nikkei 225 tracked US stocks lower. In other Asian markets, Hong Kong’s Hang Seng fell, led by losses in some tech heavyweights on lingering worries over geopolitical tensions. Mainland China’s Shanghai Composite also slid, and earnings worries put pressure on India’s Sensex. Korea’s Kospi index bucked the trend, aided by stronger tech shares. In commodities, gold and copper advanced, while oil remained firm. https://www.hsbc.com.my/wealth/insights/asset-class-views/investment-weekly/2025-01-13/

2025-01-09 12:02

Key takeaways As we step into 2025, the short-term outlook remains uncertain… …in terms of trade, inflation, growth, and policy choices… …and so we highlight the key data to track as the year progresses. Despite a myriad of challenges, the global economy performed better than we may have expected in 2024 – a year marked by multiple elections, elevated interest rates and geopolitical uncertainty. Inflation moderated at a decent pace over the year – sufficiently to allow most central banks to begin their easing cycles. 2025 looks set to be a year of enormous uncertainty again. This time, surrounding president-elect Trump’s second term and the path of US policy that could influence so many corners of the global economy, from the strength of US demand and global trade flows to how much more easing is delivered by the Federal Reserve. Trade risks Trade policy will be key. There is clearly a lot of uncertainty around how Trump’s tariff announcements will translate to policy – especially around what rates will actually be levied, how and the timing. The question is whether trade can continue to be an engine of growth for key economies around the world. Global goods trade seems to be holding up for now, but the risks are firmly tilted to the downside. Source: Macrobond Source: Peterson Institute for International Economics (PIIE) Europe’s growth challenges Another question mark hangs over Europe after a year of political change and weak growth. Indeed, the region’s composite PMI remained in contraction in December, highlighting continued weakness in manufacturing, particularly in France and Germany, however services returned to growth. We expect the European Central Bank to continue their gradual pace of easing this year, with another three 25bp cuts at the January, March and April meetings. Source: Macrobond Source: Macrobond Inflationary battles On the inflation front, despite the progress in 2024, the war against inflation isn’t quite over. There are pockets of price pressures in different parts of the world, such as US rental inflation, that are hanging around making some central bankers nervous about their easing plans. However, with some core goods and food prices rising again we could see strains in terms of household incomes that hold back consumer demand. Source: Macrobond Source: Macrobond Finally, there are plenty of questions over the direction of policy across the world (not just in the US) in a year following big electoral change. Will governments be able to deliver their promises to voters in a world of elevated debt and growing bills to pay? All in all, it looks set to be another highly unpredictable year, and tracking the right data will be crucial to guide us all through it. Source: Bloomberg, HSBC ⬆Positive surprise – actual is higher than consensus, ⬇ Negative surprise – actual is lower than consensus, ➡ Actual is in line with consensus Source: Refinitiv Eikon, HSBC https://www.hsbc.com.my/wealth/insights/market-outlook/macro-monthly/2025-01/

2025-01-07 07:05

Key takeaways While the Fed cut rates as widely expected, they expect inflation to remain above 2% in 2025, indicating a less aggressive easing cycle with just two cuts this year. We forecast three cuts with a total of 0.75%. On the growth front though, fiscal stimulus and improved optimism are positives for US equities. Backed by multiple growth drivers, equities should outperform bonds and cash in 2025. We favour US, UK, Indian, Japanese and Singaporean equities the most. Although the Trump administration’s policy priorities may lead to uncertainty over the inflation and rate outlook, bonds remain a key diversifier against geopolitical and policy risks. Investment grade credit with 5-7 year maturities still offers attractive yields. In Q4 2024, we reduced exposure to markets that are vulnerable to US tariff risks, such as the Eurozone (including Germany) and Mexico and prefer those with robust domestic-driven growth opportunities, including Japan, India and ASEAN economies. To withstand external headwinds, we expect the Chinese government to ramp up its policy stimulus to boost domestic demand. Multi-asset strategies, which provide geographical and asset class diversification, can help balance opportunities and risks. https://www.hsbc.com.my/wealth/insights/asset-class-views/investment-monthly/2025-01/