2024-11-25 12:03

Key takeaways Table of tactical views where a currency pair is referenced (e.g. USD/JPY):An up (⬆) / down (⬇) / sideways (➡) arrow indicates that the first currency quotedin the pair is expected by HSBC Global Research to appreciate/depreciate/track sideways against the second currency quoted over the coming weeks. For example, an up arrow against EUR/USD means that the EUR is expected to appreciate against the USD over the coming weeks. The arrows under the “current” represent our current views, while those under “previous” represent our views in the last month’s report. https://www.hsbc.com.my/wealth/insights/fx-insights/fx-trends/2024-11/

2024-11-25 12:02

Key takeaways The USD is likely to consolidate over the near term when markets eye US data releases and the Fed. The case for USD strength in 2025 looks robust… …but there could be moments when the USD may face a squeeze lower. Approaching 2025, the USD may first go through a period of consolidation, in our view. Near-term market focus will probably be US data releases, such as non-farm payrolls (6 December) and CPI (11 December), ahead of the Federal Reserve’s (Fed) meeting on 17-18 December. Markets currently price in a c40% chance of a 25bp rate cut in December and a c70% chance to deliver such a cut in January (Bloomberg, 21 November 2024). Our economists’ central case is that the Fed will probably deliver it in December. But this cut (if it happens) is likely to be accompanied by hawkish revisions to the median interest rate projections (known as “median dots”) and the economic projections. The Fed may even signal that it will pause its rate cuts. All this could send mixed signals to the USD, which is why a consolidation seems more likely to happen in the coming weeks. But looking beyond the near-term FX movements, we think the case for USD strength through 2025 is robust. Our long-held framework for thinking about the USD’s direction of travel boils down to the “circle of trust” – global growth dynamics, US yields relative to others, and risk appetite. On this note, global growth has been lacklustre (Chart 1) and would look even more fragile should tariffs begin to come increasingly into the frame. Expectations of fiscal stimulus and import tariff risks may slow the Fed’s easing pace, maintaining the USD’s high yields relative to other currencies (Chart 2). Both of these could also weigh on risk appetite in FX markets, which would play to the USD’s advantage. In addition, the possibility of deregulation and corporate tax cuts may foster capital inflows into the US, supporting the USD. Source: Bloomberg, HSBC Source: Bloomberg, HSBC Still, there could be moments when the USD may face a squeeze lower next year. For instance, newly elected US President Donald Trump could make USD negative comments. Nevertheless, the past occurrences indicate that the impact on the USD would likely be small and transitory. https://www.hsbc.com.my/wealth/insights/fx-insights/fx-viewpoint/2024-11-25/

2024-11-25 07:05

Key takeaways With Q3 earnings season drawing to a close in the US, last week saw results from the market’s most closely watched technology giant, Nvidia. It’s quarterly profits were ahead of analyst forecasts for the quarter. Indeed, with more than 90% of companies in the index having reported, around 75% of them have beaten profit expectations. US stock buybacks have boomed in recent years as companies looked to boost earnings-per-share, buoy their valuations, and allocate cash to reward shareholders. Recent action with the US dollar looks to be following the 2016 playbook. The DXY index or “dixie” is up around 3-4% since the US election, about the same as in the 15 days following the 2016 poll. Chart of the week – A difficult starting point for US stock valuations Over the previous week, risk markets have paused for breath. US stocks have unwound some of their big post-election gains, high-yield credit spreads have picked up from multi-year lows, and commodity prices have lost ground. We think recent market action reflects a new reality facing investors. There is a “tug of war” between enthusiasm around significant aspects of the US policy outlook – mainly deregulation and tax cuts – versus concerns about the potentially stagflationary effects of loose fiscal policy and an acceleration of the trend in US isolationism. US 10-year yields are hovering just below April’s year-to-date highs despite the Fed now in easing mode and inflation in a holding pattern, with room for more disinflation in 2025. This is because there is now much greater uncertainty around the inflation outlook, reflected in the recent pick-up in the US term premium. Structurally higher inflation and interest rates pose many challenges for investment markets. It weighs on the growth and earnings outlook. And it makes stock valuations less attractive versus bonds. The most expensive parts of the stock market such as US mega-cap tech – which look priced for perfection – could be vulnerable. Market Spotlight High flying assets Four years after being badly hit by Covid travel restrictions, air traffic has finally caught up with 2019 levels – but the global aviation industry’s cyclical and structural growth drivers are changing. A new research explores the sector’s investment outlook – with a focus on airports, which are a key part of the infrastructure asset class. Overall demand looks robust, but new trends in the traveller ‘mix’ and geographic growth are emerging. While business travel continues to decline, demand from cohorts travelling for leisure and ‘visiting friends and relatives’ is growing quickly. And in terms of regional demand, industry forecasts suggest that fast-growing developing nations will contribute 85% of the industry’s growth over the next 20 years – with Asia Pacific expected to be a powerhouse. For airport investors, post-pandemic challenges are giving way to new opportunities, with wealth and demographic trends expected to drive above-GDP growth rates for the industry. Together with offering a wider range of travel destinations, there are opportunities for airports to enhance returns with a wider range of premium services. 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. Investments in emerging markets are by their nature higher risk and potentially more volatile than those inherent in some established markets. 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 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 22 November 2024. Lens on… Q3 earnings scorecard With Q3 earnings season drawing to a close in the US, last week saw results from the market’s most closely-watched technology giant, NVIDIA. Like the rest of the S&P 500’s ‘Magnificent 7’ tech stocks, NVIDIA’s quarterly profits were ahead of analyst forecasts for the quarter. Indeed, with more than 90% of companies in the index having reported, around 75% of them have beaten profit expectations. However, the scale of index-wide profits beats – averaging about 4.3% above estimates, according to Factset – is roughly half that of their 5-year average. Firms may be finding it harder to beat forecasts. And given the index trades on a price-to-earnings ratio of 22.3x (versus its 15-year average of 16.4x), prices could be vulnerable if future earnings disappoint. The communication services, IT and healthcare sectors have seen the largest (aggregate) beats, while energy and materials have seen the largest (aggregate) misses. From here, profit growth expectations remain high into 2025. But against a backdrop of policy uncertainty and a cooling economy, any weakness could lead to heightened volatility. Asia’s buyback boost US stock buybacks have boomed in recent years as companies looked to boost earnings-per-share, buoy their valuations, and allocate cash to reward shareholders. Against a backdrop of falling rates – dampening returns on cash holdings – this popularity should persist. But this isn’t just a US phenomenon – Asia stock markets have seen a buyback boost too. A key difference in Asia is that buybacks have been driven by regional efforts to improve corporate governance. Governments have called on firms to be more investor-friendly and improve their valuations. Japan is a prime example, and is now seeing a third consecutive year of record buybacks in 2024. A similar move in South Korea – the ‘Value-Up’ programme – saw a 25% rise in buybacks in H1-24 from H1-23. Mainland Chinese authorities have also demanded action on profitability and shareholder returns. Share repurchases there are on course to break domestic records this year, with September’s stimulus measures including a RMB300bn relending facility earmarked specifically for share buybacks. With Asian markets on undemanding valuations, further progress on corporate reforms and share buybacks could provide upside. FX moves versus 2016 Recent action with the US dollar looks to be following the 2016 playbook. The DXY index or “dixie” is up around 3-4% since the US election, about the same as in the 15 days following the 2016 poll. But moves in individual FX pairs show some interesting differences versus the 2016 experience. The most striking contrast is the Mexican peso. This was one of 2016’s biggest casualties, and although it’s down this time around, it is one of the better performers. Other Latin American currencies have held up well too – the Brazilian real and Columbian peso have hardly budged. This resilience could reflect a hawkish tilt to central bank policymaking in the region in recent months. Moves in Europe have also been quite different. The euro and some Eastern European currencies have been badly hit by the election result. Trade tariffs would come at a very difficult time for the region’s manufacturers. But the good news is FX weakness supports external competitiveness for export-dependent firms. In 2025, US-specific factors – policy and inflation trends – are likely to be a big influence on the dollar. But global economic and political developments will also be key. 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. Source: HSBC Asset Management. Macrobond, Bloomberg, Datastream. Data as at 7.30am UK time 22 November 2024. Key Events and Data Releases Last week The week ahead Source: HSBC Asset Management. Data as at 7.30am UK time 22 November 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 were resilient despite heightened geopolitical tensions, with both oil and gold prices rallying. The US DXY dollar index paused for breath after its recent strong run. Core government bonds consolidated ahead of key US inflation data and mixed comments from Fed officials. US equities saw a broad-based rally as investors digested Q3 earnings. The Euro Stoxx index fell modestly, while Japan’s Nikkei 225 weakened as the yen rebounded versus the US dollar. BoJ governor Ueda reiterated his commitment to gradual rate hikes. Emerging market stock markets were mixed. The Shanghai Composite and Hang Seng indices finished the week lower, but the tech-driven South Korea Kospi index performed well. India’s Sensex index fell further. In Latin America, Brazil’s Bovespa and Mexico’s IPC equity indices were on the defensive. Meanwhile, copper was little changed. https://www.hsbc.com.my/wealth/insights/asset-class-views/investment-weekly/2024-11-25/

2024-11-22 07:06

A clearer outlook and solid growth drivers paint a bright picture for equities As an eventful 2024 comes to an end, we now stand on the brink of a promising new chapter, with additional clarity supporting an optimistic outlook for equities and a renewed focus on fundamentals. Most notably, it’s clear that the rate-cut path adopted by most developed market central banks and the power of innovation will remain key factors of support for global equities in 2025. The positive sign that the US is on a solid growth trajectory, albeit at a slower pace, also alleviates recession fears, while growth momentum should broaden as we get more clarity on the new US administration’s policy priorities. What does this mean for investors? As interest rates are edging down, companies and investors with abundant cash reserves shouldn’t rest on their laurels and let their real returns diminish. With most central banks on course to cut rates, the positive impact of lower borrowing costs should play out more visibly in 2025, leading to a rebound in M&A activity, increased dividends and share buybacks, as well as more corporate investment in innovation – all of which will continue to drive equity performance. We remain most bullish on US equities, as earnings should continue to deliver upside surprises against a resilient economic backdrop. Why? We think economists tend to underestimate US economic growth, which is expected to remain close to 2% in 2025, and overestimate the importance of economic indicators, such as yield curve inversion. Meanwhile, improving fundamentals in the UK and diverse opportunities in Asia, led by India, Singapore and Japan, also underpin return potential for equities in those markets and help to widen the opportunity set. Structural trends and policy priorities uncover sector opportunities In addition to geographical exposure, we also look to structural trends and policy priorities to identify potential sector winners, and it’s no surprise that the technology sector remains our top pick to deliver robust earnings growth. But innovation also benefits other sectors, such as healthcare and industrials, thanks to the wide application of artificial intelligence, while typically high-dividend utilities stocks should gain from declining interest rates. The US under the Trump administration is likely to prioritise tax cuts and deregulation, supporting the financials and energy sectors. However, higher trade tariffs will be a potential threat to markets having a big trade surplus with the US, so China and the Eurozone may be most exposed to this headwind. Having said that, we believe this may trigger further policy stimulus from China to mitigate downside risks and revive domestic demand. While we’re optimistic about a positive investment journey for equities in 2025, it’s important to remain vigilant, as we’re still faced with complex geopolitical risks and the build-up of government debt – and there’s always the chance of further surprises. Diversification remains a golden rule in investing at all times. Leverage multi-asset strategies and new avenues to achieve diversification While yields have come down, we believe quality bonds still play a critical role as a good source of income and diversification. The mix of equities and bonds in the hands of professionals adds to the appeal of multi-asset strategies, which can adjust asset class allocation, and even bond durations in response to evolving market situations. Finally, investors can achieve greater diversification by adding exposure to investments with lower correlations to equities and bonds. Sustainable energy and infrastructure stand out as interesting avenues for investors looking to optimise portfolio returns. As we navigate this fast-changing financial landscape, the enduring appeal of gold as a safe-haven asset also warrants attention. Our 2024 HSBC Quality of Life Report underlined the connection between effective financial planning and our overall quality of life, and we’ve invited a panel of in-house experts to explore this topic from different perspectives. We hope these insights will help you plan for the new year and your future. Best wishes for a successful investment journey in 2025. https://www.hsbc.com.my/wealth/insights/market-outlook/investment-outlook/2024-11/

2024-11-18 12:03

Key takeaways Policymakers announced a RMB12trn plan aimed at reducing the debt burden on local governments. Debt swaps could save RMB600bn in interest payments and help local governments to pay creditors. Further support for property and consumers is on the table and could be announced early next year. China data review (October 2024) Retail sales rose by 4.8% y-o-y in October boosted by consumer trade-in programmes. The growth in sales of home appliances almost doubled to 39% y-o-y, from c20% in September, while auto sales continued their climb, rising by 3.7% y-o-y. However, services-related retail sales were softer, while restaurant and catering sales saw a mild contraction of 0.3% y-o-y. The property investment drag deepened in October to 12.3% y-o-y, from a decline of 9.4% y-o-y in September, despite some recent improvement in property sales. Home sales in volume terms fell by 1.3% y-o-y, a marked improvement from September (-10.6%). This suggests more support is likely needed for the improvement in sales to broaden out and stabilise the sector. Industrial production growth softened a touch to 5.3% y-o-y in October, though the overall pace was still healthy. Sectors facing excess capacity, such as non-metal minerals (-2.6% y-o-y) slowed, while, high-end manufacturing areas, such as information communications technology production (10.5% y-o-y) and equipment manufacturing (6.6%), continued to outperform. Infrastructure spending remained buoyant on the back of accelerated special local government bond issuance (SLGB), rising 9.1% y-o-y in October. For the remaining two months of the year, infrastructure should still be supported as more funds from SLGB come through. Headline CPI dropped to 0.3% y-o-y in October, with energy being the major drag. Core CPI (0.2% y-o-y) has stayed tepid in recent months as consumer demand has yet to regain significant momentum. Meanwhile, PPI deflation deepened a touch to 2.9% y-o-y, with concerns still on property-related industries and excess capacity in some sectors. Exports rose by 12.7% y-o-y in October, with integrated circuits (17.7%) and laptops (15.7%) the key bright spots. Aside from the low base, some export demand may have been postponed due to typhoon disruptions in September. Meanwhile, imports fell 2.3% y-o-y, largely due to falling oil imports, which dropped 25% y-o-y and contributed 3.7ppt to the decline in overall imports. China’s stimulus plan: easing local government debt burdens The National People’s Congress Standing Committee, China’s top legislative body, approved a RMB12trn package, largely for debt swaps, on 8 November to help ease the local government debt burden. The local government debt ceiling will be raised by RMB6trn to replace existing hidden debt, earmarks RMB800bn of special local government bonds per year over the next five years for debt swaps and repays RMB2trn of hidden debt from shantytown renovation due from 2029. The plan should help local governments save on financing costs (estimated to save RMB600bn in interest costs over five years) and assist them to make overdue payments to contractors. More than meets the eye At first glance, the package might seem disappointing, as there are no specific measures to support domestic consumption or other areas of much-needed stimulus, such as real estate. However, the stimulus is not only sizable (c10% of GDP) but also reduces the debt burden, which can help free up more fiscal space to be used for productive investment. Indeed, the central government has set a firm deadline for local governments to resolve hidden debt, which is incurred outside the statutory government debt budget, by 2028. Over the past few years, the economic slowdown and housing correction have pressured local government finances, leading to a focus on debt repayment, which, in turn, creates further contractionary pressure on the economy. The large-scale debt swap should alleviate a liquidity crunch for local governments and the real economy, while long-term fiscal reforms may better align local government spending and resources, as stressed at the Third Plenum. Fiscal support on the table We view the local debt swap as only one part of the broader stimulus package, with additional fiscal support in focus for 2025. For example, the Finance Minister noted that policy measures to support the property sector and expand domestic demand are under consideration, while the Premier said that “there is a relatively large space for financial and monetary policies, and the policy tools are even more abundant” (Xinhua, 5 November). Although China is likely to meet its c5% growth target this year, domestic consumption remains subdued and external uncertainties are rising, given the US election results. Further announcements could be made at the Politburo meeting and the Central Economic Work Conference, often held by mid-December, though fiscal details are likely to be unveiled next March during the Two Sessions. Source: Wind, HSBC Source: Wind, HSBC Source: LSEG Eikon * Past performance is not an indication of future returns. Source: LSEG Eikon. As of 14 November 2024 market close. https://www.hsbc.com.my/wealth/insights/market-outlook/china-in-focus/2024-11/

2024-11-18 12:03

Key takeaways USD-JPY has rebounded with the market’s hawkish repricing of the Fed, fuelled by the US election results. With high uncertainty on the US’s policy priorities and timeframes, a strong USD should weigh on the JPY. But a significant overshoot of USD-JPY from fundamentals will be met with FX intervention and a possible BoJ rate hike. The JPY has weakened c8% against the USD quarter-to-date because of the market’s hawkish reassessment of the Federal Reserve’s (Fed) policy rate trajectory, on the back of positive US data surprises and potential policies that the new Trump administration may implement. The futures market pricing of a year-end 2025 Fed rate is now at c3.8%, c80bp higher than its end-September pricing of c3% (Bloomberg, 14 November 2024). Admittedly, there is limited information at this juncture on the incoming US administration’s policy priorities and timeframes. But amid high uncertainty, the USD should have an upper hand over the JPY, given the former’s much higher yields and more robust growth. Japan’s basic balance (a combination of current account balance, net foreign direct investment and net portfolio flows) is still in deficit, weighing on the JPY ordinarily. Source: Commodity Futures Trading Commission, Bloomberg, HSBC Source: Bloomberg, HSBC Additionally, the JPY faces headwinds from the possibility of the return of JPYfunded carry trades (i.e., selling the JPY to fund the purchase of higher-yielding currencies or assets), as speculative market has started turning short JPY again since late October and the current positioning is still far from extreme levels seen in 2Q (Chart 1). It is also worth monitoring that USD-JPY seems to have already risen faster than its yield differential recently (Chart 2). But if we do get to that point of divergence from fundamentals, we think a significant overshooting of USD-JPY will be met with FX intervention again, and potentially, a rate hike by the Bank of Japan (BoJ) too – similar to what happened in July. All things considered, we now see USD-JPY rising further over the coming quarters, before stalling at around the multi-decade highs (last reached in the beginning of July). https://www.hsbc.com.my/wealth/insights/fx-insights/fx-viewpoint/2024-11-18/