2024-12-19 12:02

Key takeaways The FOMC cut the US policy rate by 25bp but signaled fewer rate cuts in 2025; this likely means a “skip” in January. While the rate cut was widely anticipated, other aspects of the meeting were more hawkish than expected. We continue to look for a strong USD through 2025, a stance reaffirmed by the outcome of the December FOMC meeting. The Federal Open Market Committee (FOMC) cut rates by 25bp in their December meeting to a range of 4.25-4.50%, as widely anticipated, but other aspects of the meeting were more hawkish than expected. These included new dots projections, a new hawkish dissenter, a notable tweak to the statement, and a press conference that revealed the decision to cut today had been a close call. The USD was justifiably stronger in the wake of the meeting. The decision by the Federal Reserve to lower the policy rate by 25bp was unsurprising. In a Bloomberg survey of economists, 88% expected a 25bp cut, 10% expected unchanged policy, and an outlier 2% forecast a 50bp easing. The market was fully priced for 25bp also. However, in his press conference, Chair Powell indicated that this decision was a “close call”, suggesting the market’s near certainty may have overestimated the FOMC’s appetite for today’s cut. The accompanying statement was little changed, whether looking at the paragraph describing recent economic developments, or to the committee’s view that “the risks to achieving its employment and inflation goals are roughly in balance”. However, the statement now refers to the “extent and timing” of additional rate cuts whereas previously, it merely talked of the “extent”. Chair Powell noted that this change “signals that we are at or near a point at which it will be appropriate to slow the pace of further adjustments” (Bloomberg). The statement also revealed that the Fed’s Beth Hammack dissented from the decision to cut by 25bp, lending a somewhat hawkish footnote to the statement. The new set of dots projections adds to the less dovish tone. The median dot for 2025 was raised to 3.875% from 3.375% in the September release, higher than the median expectation of economists (Bloomberg), including HSBC’s. The Fed’s median projected path during 2025 was in line with market pricing ahead of the meeting, though the market has since repriced hawkishly. It was also shared by 10 members of the FOMC, a solid consensus. The long run dot was raised to 3.00%. Chair Powell was quizzed about whether the new dots incorporated expectations for policy change during President-elect Donald Trump’s second term. He said some FOMC members had begun to weave in possible policy changes, but others had not, and others chose not to reveal whether they had or not. His main takeaway though was that policy uncertainty is another reason for moving cautiously. Another interpretation, in our opinion, is that there may be some upside risks to the dots as other FOMC members update their forecasts in the months and quarters ahead. We retain our view of USD strength in 2025. This is still largely built on US exceptionalism, notably when compared to Europe. In 2024, that was captured in the shifts in interest rate differentials and echoed in a stronger USD. That has been evident again in the wake of the December FOMC. In 2025, other factors are also likely to play a part, including any developments in US trade policy, US deregulation, relative fiscal policy, and geopolitics. In the end, it may still come down to the data, but drivers may become more varied, and we expect the USD to remain on top. https://www.hsbc.com.my/wealth/insights/fx-insights/fx-viewpoint/flash-2024-12-19/

2024-12-17 12:02

Key takeaways China’s Central Economic Work Conference suggests more proactive policy support to come, especially on consumption. Stabilising housing and stock markets, a higher fiscal deficit, and moderately loose monetary policy will help. Business sentiment may be boosted by upholding the rule of law while fierce competition may see some relief. China data review (November 2024) Retail sales softened to 3.0% y-o-y in November from a high base from last year and an earlier launch of the 11.11 Singles Day this year. Durable goods sales from the trade-in programs were robust (home appliances: 22.2% y-o-y; car sales: 6.6%%), but not enough to turn around the slowing momentum in overall retail sales. Industrial production rose by 5.4% y-o-y in November, while manufacturing investment stayed generally buoyant, up 9.3% y-o-y. Some of the improvement in manufacturing production was likely helped by an ongoing boost from trade-in programs for equipment upgrading as well as some front-loading from exporters in anticipation of increased tariffs from the US next year. Infrastructure investment (ex-utilities) lost some strength in November, up 3.3% y-o-y vs 5.8% in October, given new guidance to allow a proportion of special local government bond funding to go towards debt swaps (RMB800bn each year for the next five years). The debt swap program may be stimulative for the economy as it can put cash into the hands of enterprises and employees. CPI inflation softened to 0.2% y-o-y in November despite a low base, as supply increases weighed on food prices. Meanwhile, core CPI remained muted at 0.3% y-o-y. On the producer front, PPI inflation rose to -2.5% y-o-y amid a demand pick up for industrial products, though more time and effort may still be needed to tackle excess capacity in some sectors. Exports rose by 6.7% y-o-y in November, including by 8% to the US, partly attributed to front-loading given risks of higher tariffs next year, and by 15% to ASEAN, likely helped by supply chain shifts. However, import growth dropped to -3.9% y-o-y in November, with iron and copper ore imports down 0.9% and 8.1% y-o-y in volume terms, and the import value of crude oil down 4.7% y-o-y. China’s Central Economic Work Conference 2024: Building resolve China’s top policymakers met for the annual Central Economic Work Conference (CEWC), 11- 12 Dec, to discuss the progress on economic growth and to set policy priorities for next year. The tone echoed the stronger policy stance taken at the Politburo meeting on 9 Dec which called for “extraordinary countercyclical” measures to support growth. Policymakers noted that external pressures have risen while the domestic environment faces its own challenges. They also reiterated their resolve to meet longer-term goals of transitioning the economy. No hard figures: As expected, the CEWC didn’t set quantitative economic and policy targets for 2025, which are often unveiled during the annual Two Sessions in March. Qualitatively, the goal is to ‘maintain steady economic growth’, which suggests the growth target may not deviate much from this year’s c5%. Fiscal policy to be proactive: The CEWC continued to give clear forward guidance around fiscal policy, noting that the fiscal deficit should be widened, while also increasing the issuance of ultra-long dated special central and local government bonds. This suggests a stronger fiscal stance is likely to come through next year. More aggressive monetary policy to come through: Echoing the language from the December Politburo meeting, the CEWC called for ‘moderately loose’ monetary policy, with cuts to required reserve ratios (RRR) and interest rates to be made at the appropriate time, while liquidity should remain ample. The People’s Bank of China (PBoC) may also purchase treasury bonds in the secondary market to inject liquidity. Stepped-up support for consumption: The CEWC press release noted that ‘special actions to boost consumption’ would be taken. These include boosting support for durable goods tradein and equipment upgrading programs, enhancing social safety nets (including employment support), and increasing basic pensions and financial subsidies for medical insurance. The CEWC also pledged to protect people’s livelihood and safeguard social stability. Stabilising housing and equity markets: As policymakers now see the housing market as systemically important to the economy, more forceful measures can be expected if current policies fail to shore up the market. As for the equity market, the latest development is the expansion of the private pension scheme from pilot cities to the entire nation starting from 15 Dec, while making index equity funds and government bonds eligible pension products. Preventing ‘involutionary competition’: The CEWC mentioned that a policy priority is to“comprehensively manage involution-style competition and regulate the behaviour of local governments and enterprises”. We believe this refers to fierce competition in several sectors which has contributed to the profit margin squeeze, over-supply, and deflationary pressure. Taken together, this could mean the government will prioritise consumption support to mitigate supply-demand imbalances, before considering more decisive measures to reduce capacity. New law to boost business sentiment: The Private Economy Promotion law will be enacted to help regulate local government behaviour, particularly regarding extraterritorial and profitdriven law enforcement. The ongoing RMB10trn debt swap has, to some extent, relieved local government debt repayment pressure, and thus reduced incentives for profit-driven law enforcement, but this new law will add an important layer of protection to private enterprises. What about the potentially increasing trade tensions? In addition to more policy support for domestic demand, China is determined to stay open and plans to expand unilateral opening-up in an orderly manner. Notably, China has expanded unilateral visa-waiver programs for more countries and visa-free transit policy to more ports. The next step of opening-up may progress towards fewer restrictions on trade and investment flows. Source: LSEG Datastream * Past performance is not an indication of future returns Source: LSEG Datastream. As of 13 December 2024 market close https://www.hsbc.com.my/wealth/insights/market-outlook/china-in-focus/2024-12/

2024-12-16 08:06

Key takeaways Rate differentials remain key to the broad USD; the Fed’s new dot plot likely in focus. The SNB surprises with a 50bp cut; the CHF weakened. The ECB delivers a dovish 25bp cut; EUR to weaken in 2025. Rate differentials remain key to the broad USD (Chart 1). With US CPI data for November coming in line with consensus expectations (rising 0.3% from a month ago) and the Federal Reserve (Fed) in its blackout period ahead of its policy meeting on 17-18 December, the USD is likely to take its cue from developments outside of the US. This includes a surprise 50bp cut by the Swiss National Bank (SNB), and a widely expected 25bp cut by the European Central Bank (ECB). On 12 December, the SNB delivered a bigger-than-expected rate cut of 50bp, lowering its key rate to 0.5%. The CHF weakened by as much as c0.8% against the USD and c0.7% against the EUR after the announcement before recovering some of the loss as SNB chief Martin Schlegel downplayed the likelihood of negative rates (Bloomberg, 12 December 2024). However, the SNB’s reluctance to cut rates below zero means the policy floor may be closer than previously thought. In turn, this means that, should economic conditions warrant further easing at that rate policy floor, FX intervention to weaken the CHF could be deployed. The SNB also repeated its willingness to do so. In the end, the SNB’s dovish stance and fundamentals may point to further CHF weakness. Source: Bloomberg, HSBC Source: Bloomberg, HSBC On the same day, the ECB delivered its fourth 25bp cut this year, bringing its key deposit rate to 3%. In a dovish move, the ECB removed the reference to policy needing to be “sufficiently restrictive for as long as necessary”, and it also lowered its GDP growth and inflation forecasts slightly (Bloomberg, 12 December 2024). While ECB President Christine Lagarde said the past analysis suggested the neutral rate could be in a range of 1.75-2.50%, our economists think if growth continues to disappoint and inflation is at target, the ECB might feel comfortable taking rates lower without necessarily having to agree on where the neutral rate is. That is why we think EUR-USD could face downside risks in 2025. The key for markets now is what will happen in 2025. If the Fed delivers a 25bp cut at its December meeting, as widely expected, market reaction is likely to be driven by its policy guidance, notably a new round of the Fed’s dot plot. Geopolitics could lend spikes of support to the “safe haven” currencies, like the USD, JPY, and CHF. https://www.hsbc.com.my/wealth/insights/fx-insights/fx-viewpoint/2024-12-16/

2024-12-16 07:05

Key takeaways Following the recent political drama in Europe, the ECB did its best not to add to the volatility and delivered the expected 0.25% rate cut, shunning any pressure to follow the Bank of Canada and Swiss National Bank which delivered 0.50% moves. Small-cap stocks are traditionally popular with investors looking for rapid earnings growth and superior returns. But at the index level, US small-caps have underperformed large-caps since 2008. Trade tariffs are back on the table post-US election – but depending on the details, not all economies will feel the impact equally. Chart of the week – EM policy divergence in 2025 The stars aligned for a broad range of EM asset classes to perform well in 2024, propelled by the prospect of Fed rate cuts, Chinese policy stimulus, and a backdrop of big valuation discounts. While this could continue in 2025, the outlook for EMs has recently become less certain, meaning investors need to be selective. In terms of risks, active fiscal policy, global trade uncertainty, and geopolitical tensions can stoke market volatility, and mean concerns over inflation are likely to persist for a bit longer in 2025. This unsettled backdrop is already creating policy divergence across major EM economies. China, for instance, has maintained a gradual approach to policy easing this year, with authorities last week formally shifting the monetary policy stance from “prudent” to “moderately loose”, helping to buoy stocks. This move came as policymakers debated the economic agenda for 2025 at the annual Central Economic Work Conference, paving the way for further easing. By contrast, India faces a more complicated trade-off between growth and inflation amid a cyclical slowdown and volatile inflation driven by food prices. While growth is expected to recover, and inflation normalise, policymakers currently remain cautious, with a “neutral” policy stance. And at the other end of the spectrum, Brazil’s central bank was forced to make a higher-than-expected 1% rate hike last week in its efforts to stabilise inflation. Put together, we think this divergent policy backdrop – with regions performing differently and facing different sets of challenges – means investors need to do their homework when deciding EM allocations. Market Spotlight Saints and sinners An interesting divergence in fiscal policy has emerged between a number of frontier and mainstream emerging markets – with previous fiscal “saints” and “sinners” switching roles. Some formerly fragile frontier economies have been embracing reforms, and boosting their sustainability metrics, just as several EMs have seen a deterioration. Frontier markets like Argentina, Ecuador, Ethiopia, Kenya, Nigeria, Pakistan, Sri Lanka, and Turkey have adopted reforms (often supported by IMF programs) aimed at mitigating vulnerabilities. Policies have included ending FX market distortions, reining in public debt by targeting primary surpluses, and accumulating foreign exchange reserves. Meanwhile, some mainstream EMs usually associated with stronger macroeconomic fundamentals and better institutional credibility have been pursuing looser fiscal policies – leading to a widening of budget deficits. Prominent examples include Brazil, Hungary, Indonesia, Mexico, Poland, and Thailand. In many cases, these looser policies have been deployed to stimulate domestic growth, and active fiscal policy will be a key feature of the global macro environment in 2025. For investors, it’s a further reminder that selectivity will be important in finding opportunities in EM and FM markets. 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 13 December 2024. Lens on… ECB cuts again Following the recent political drama in Europe, the ECB did its best not to add to the volatility and delivered the expected 0.25% rate cut, shunning any pressure to follow the Bank of Canada and Swiss National Bank which delivered 0.50% moves. With Chair Powell having said recently that the Fed could afford to be “a little more cautious” in delivering rate cuts, it was unlikely that the ECB would throw caution to the wind. While recent eurozone survey data have shown renewed signs of weakness, they have not been the best guide to growth in the past few years. And although the latest CPI data suggest previously sticky service sector inflation may now be softening, more progress on this front would have been needed to prompt an aggressive move by the ECB. However, further easing is coming. With an uncertain political landscape and the potential for the US to impose trade tariffs, downside risks to growth mean the cutting cycle could either extend into H2 or happen faster. This supports the outlook for Bunds, even if a narrowing of the yield gap versus Treasuries would likely be required for a big rally to take hold. Selectivity in small-caps Small-cap stocks are traditionally popular with investors looking for rapid earnings growth and superior returns. But at the index level, US small-caps have underperformed large-caps since 2008. Today, valuation divergence between them has reached historic extremes, with average price-to-book valuations of 5.0 and 2.0 respectively. One factor driving this is company profitability. Research shows that, at more than 15%, the spread of Return on Equity (a measure of profitability) has opened up between them in recent years. Large caps have become more profitable, which is reflected in higher valuations, whereas small-caps have deteriorated. For investors, it’s a reminder that small-cap investing demands nuance. Looking globally to regions like Europe and China, smaller-cap stocks are more closely tied to macro-economic cycles and activity. That can make them volatile, but it also offers potentially attractive exposure to economic recoveries. Tariffs in perspective Trade tariffs are back on the table post-US election – but depending on the details, not all economies will feel the impact equally. In emerging markets, major exporters to the US like Mexico and Vietnam could face some of the greatest risks. But across Asia, the picture is mixed. Technology and electronics centres like South Korea, Taiwan, Malaysia, and Thailand don’t have the same US exposure as Vietnam, but they are more reliant on US trade than India and Indonesia. Perhaps surprisingly, the share of China’s value-added accounted for by US domestic demand is lower than India’s although the threatened tariffs on China are larger. Perversely, the potential for China-related US tariffs could help other Asian economies. First, they could benefit from trade diversion. Second, Chinese policy easing in the face of increased tariffs could have modest positive spillovers regionally. Combined with reasonable valuations in much of Asia, the fact that tariffs are not a given and, even if they are delivered, could take some time. 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 not guaranteed in any way. Source: JP Morgan, HSBC Asset Management. Macrobond, Bloomberg, Datastream. Data as at 7.30am UK time 13 December 2024. Key Events and Data Releases Last week The week ahead Source: HSBC Asset Management. Data as at 7.30am UK time 13 December 2024. 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 lacked clear direction, with the US DXY dollar index strengthening on continued “US exceptionalism”. US Treasuries lagged eurozone government bonds on rising inflation jitters. The ECB lowered rates by 0.25%, dropping their reference to “sufficiently restrictive” monetary policy. US equities retreated from their highs, with the tech-driven Nasdaq outperforming. The Euro Stoxx 50 edged down, as the Nikkei climbed on a weaker Japanese yen, with technology stocks leading. China’s Shanghai Composite reversed early gains last week as investors digested the policy signals from the key meetings, while Hong Kong’s Hang Seng closed higher. South Korea’s Kospi index rebounded, whereas India’s Sensex declined. In Latin America, the Bovespa ended almost flat as Brazil’s central bank hiked rates by 1%. In commodities, oil prices and gold rallied, but copper edged lower. https://www.hsbc.com.my/wealth/insights/asset-class-views/investment-weekly/2024-12-16/

2024-12-09 12:02

Key takeaways Gold prices rose sharply in 2024, fuelled by geopolitical risks, rate cut expectations, and fiscal concerns. Many gold-bullish factors are likely to remain in 2025, but USD strength and relatively high US yields could weigh on gold. Gold may also face headwinds from weaker physical demand and rising supply. Gold has had a strong year, gaining c28% (Bloomberg, 5 December 2024), supported by a combination of geopolitical risks, political uncertainties, rate cut expectations, and fiscal concerns. Approaching the end of 2024, the geopolitical risk thermometer is still gold-supportive (Chart 1), but political uncertainties in the Eurozone that may weigh on the EUR and indirectly support broad USD strength could limit any further gold rally. It is worth remembering that gold being priced in USD generally moves inversely to the USD (Chart 2). Our base case for 2025 is that USD strength is likely to be supported by relatively high US yields, global growth uncertainties, and potentially its “safe haven” status. Nevertheless, there could be moments when the USD may face a squeeze lower. With this in mind, our precious metals analyst thinks that gold prices are likely to have a volatile year, moving moderately lower by end-2025. Note: Caldara, Dario, and Matteo Iacoviello (2021), "Measuring Geopolitical Risk," working paper, Board of Governors of the Federal Reserve Board, November 2021. Source: Macrobond, HSBC Source: Bloomberg, HSBC Current gold prices are high enough to limit jewellery and gold coin & bar demand, primarily in price-sensitive emerging markets, but also in less sensitive western markets, while at the same time encouraging mining and additional recycling supply. In our precious metals analyst’s view, physical gold market’s supply and demand dynamics may help curb the gold rally. Nevertheless, declines in gold prices may be limited amid geopolitical risks and their associated trade risks, with tariff concerns. Should trade frictions rise to the level where trade flows are negatively impacted, this may be highly supportive of gold, in our precious metals analyst’s view. Besides, mounting fiscal deficits worldwide, with high debt-to-GDP ratios, have aided the gold rally in 2024 and may continue to do so next year. Central banks’ demand for gold may also help. https://www.hsbc.com.my/wealth/insights/fx-insights/fx-viewpoint/2024-12-09/

2024-12-09 07:06

Key takeaways Barring a major shock between now and the new year, US stock markets are set to notch up world beating performance in 2024. Despite a good start to 2024, European equities have struggled for momentum since the summer, while US stocks have zipped ahead. 2024 has been a great year for Asia’s credit markets, especially for high-yield bonds. The benchmark JACI high-yield index has delivered double-digit returns. Chart of the week – Political realities bite in France Are good economics now bad politics? Recent developments in France are a case in point. IMF forecasts show the country’s public finances are on an unsustainable path, with the debt ratio expected to reach almost 130% of GDP by the end of the decade. But with the French parliament split into three blocs, there is limited political will to find a solution. French Prime Minister Barnier’s proposed EUR60bn budget consolidation saw him swiftly ejected from office. Amid the political impasse, France’s 10-year government bond spread over Germany has moved higher, and is now above that of Spain and Portugal. Yet, this is not a marker of an imminent crisis. In the words of financial wags, it's not a “Truss moment”. Spreads in France have not blown out in the same way they did in the UK in September 2022, when then-Prime Minster Truss introduced a budget that incorporated significant unfinanced tax cuts, worsening debt sustainability. No such measures are being touted in France for the time being. The market reaction to last week's events in France has been sanguine. That reflects today's better economic reality versus 2022 – ongoing disinflation, central bank rate cuts, and decent global growth. The ECB also provides an ultimate backstop against disorderly market dynamics in the eurozone via the Transmission Protection Instrument (TPI), even if this comes with strings attached. So, although events require monitoring, and the distinction between the eurozone core and periphery is blurring, this is likely to be a slow-burn issue rather than the start of a new crisis. Market Spotlight Hedge funds in a higher-for-longer world With inflation remaining a bit sticky in places, and fiscal activism still in play, it makes sense that investors expect a fairly shallow rate cutting cycle in 2025. The ability of central banks to insulate the economy and markets against adverse shocks – the so called “Fed put” – looks constrained. We think many alternative asset classes offer an attractive solution. Hedge funds, for example, have exhibited consistently low correlations to stocks over the past three years. This coincides with a period of higher rates and a higher dispersion of equity returns which typically benefits “stock picking” strategies that hedge funds embed. This contrasts with the 2010s when record-low interest rates were causing nearly all stocks to rise in unison. For 2025, an environment of rising uncertainty and market volatility would likely to keep dispersion high. And for those hedge funds with significant unencumbered cash balances, higher rates would provide a further boost to their total return. 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 06 December 2024. Lens on… Multiple concerns Barring a major shock between now and the new year, US stock markets are set to notch up world beating performance in 2024. To many, this comes as no surprise in a year where the soft landing was delivered, profit growth rebounded, and AI started delivering on its huge potential. But where does this leave us for 2025? We think US markets can continue to perform well. The prospects of tax cuts and deregulation is the icing on top of the cake that is a resilient US economy. Profit growth is likely to remain strong, even if current expectations of c. 15% for 2025 EPS growth look somewhat optimistic. But a key challenge will be valuations. Decomposing year-to-date equity returns shows multiple expansion has been responsible for the bulk of US gains this year, unlike in emerging markets – particularly in Asia - where profits and dividends have driven stocks higher. This leave US stocks trading on a 12-month forward PE of 22.0x, well above the last 10-year average of 18.6x. Stretched US valuations, along with a “broadening out” of profit growth across the world, make it important to look beyond recent winners. Europe on sale? Despite a good start to 2024, European equities have struggled for momentum since the summer, while US stocks have zipped ahead. Year-to-date, this leaves European stocks experiencing their worst relative performance to the US in close to 50 years. Investor pessimism around Europe is perhaps unsurprising. The export-dependent bloc is weighed down by weak global trade growth, exposure to soft Chinese demand, and competition from China’s lower cost carmakers. German Fortune 500 companies have announced over 60,000 layoffs this year with more expected to come. On top of the bad economic news, the region’s politics looks troubling (see main story). The outcome is a European market that now looks very cheap. MSCI Europe is on a trailing PE of 15.3x versus 30x for the US. At the sector level, discounts look particularly pronounced for consumer staples, healthcare, financials and industrials. So, although caution is warranted, some re-rating is possible – triggered perhaps by scope for China’s reflation, or government support for domestic “world-class” brands. A weaker euro helps. And bargain hunters are likely to be out in force, making M&A and buyback activity a potential boost in 2025. Asian high yield’s evolution 2024 has been a great year for Asia’s credit markets, especially for high-yield bonds. The benchmark JACI high-yield index has delivered double-digit returns. Following a tough period for the market post-pandemic, several factors have reignited investor enthusiasm. Firstly, exposure to China has fallen considerably as troubled real estate names have defaulted and dropped off indices. This “flushing out” process has resulted in a market that is not only more geographically and sectorally diverse, but also has a much lower average default rate. Many companies now operate with healthy balance sheets and easy access to cheap local funding channels. This leaves the asset class in a strong position for 2025. Yields remain higher versus historical levels and DM equivalents, providing room for further spread compression. Of course, China’s macro situation is a key risk to monitor, and there is likely to be noise around tariffs. But improved diversification – including increased exposure to fast-growing India – and ongoing China’s stimulus measures should limit the downside. 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 not guaranteed in any way. Source: JP Morgan, HSBC Asset Management. Macrobond, Bloomberg, Datastream. Data as at 7.30am UK time 06 December 2024. Key Events and Data Releases Last week The week ahead Source: HSBC Asset Management. Data as at 7.30am UK time 06 December 2024. 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 Positive risk market appetite persists despite increased political tensions, and the US Dollar index consolidated. Core government bonds were range-bound, as Fed Chair Powell stated the Fed “can afford to be a little more cautious” on the path to a neutral policy stance. In US equities, the S&P500 touched an all-time high but lagged the Nasdaq. The Euro Stoxx 50 rallied, with France’s CAC rebounding. The Nikkei 225 strengthened on higher machinery makers as the yen traded sideways (vs USD). EM stock markets were broadly higher, led by India’s Sensex index. The Shanghai Composite and Hang Seng advanced ahead of China’s Central Economic Work Conference whereas rising political worries weighed on South Korea’s Kospi index. In commodities, oil edged higher as the OPEC+’s decided to delay a plan to roll back production cuts to April 2025. Gold edged lower, while copper gained. https://www.hsbc.com.my/wealth/insights/asset-class-views/investment-weekly/2024-12-09/