2024-11-18 12:03

Key takeaways: With the election uncertainty behind us, we recently added to our existing US equity overweight. In the past 20 Presidential election years, the S&P 500 has finished the year in positive territory 18 times. The proposed tax cuts and likely deregulation under the Trump administration are likely to offer additional support to US stocks. The trend around re-onshoring, infrastructure investment and the technological revolution in the US remains strong. The financial and consumer discretionary sectors should benefit from a robust consumer, while the re-industrialisation should support companies involved in automation, optimisation of manufacturing processes and engineering. Probable tariffs by the US can be headwinds for countries like Germany, Mexico and Korea, which are net exporters to the US. The UK should remain resilient as the US runs a trade surplus with it. India has a lot of locally focused investors and companies continue to do well there, supported by a strong domestic consumer, which should limit the impact. Mainland China will be one of the focus areas for tariffs, though the Chinese government aims to offset the impact and boost domestic growth through stimulus measures. The risk-on environment can reduce the appeal of safe-haven bonds, which can increase volatility in the bond market. But with elevated real yields and reduced Fed cut expectations priced in by the markets, we think it continues to make sense to lock in attractive bond yields. Multi-asset strategies benefit from a strong opportunity set, given the many growth engines for equities, low equity-bond correlations and big dispersion between stocks. https://www.hsbc.com.my/wealth/insights/market-outlook/us-election-results/

2024-11-18 07:05

Key takeaways 2024 has generally been a year of good news on disinflation, resilient growth, and corporate profits. Central bankers have been able to pivot policy, and the global cutting cycle has got underway. The latest round of economic support from Chinese policymakers was a disappointment for those hoping for major fiscal stimulus. More than a decade of sluggish economic growth has contributed to a sizeable valuation discount in UK assets. Chart of the week – US stocks and bonds decouple Investors remain in good spirits post-election, with US stocks steadying after previous week’s big rally. Many crypto assets are hitting new highs, and credit spreads have ground lower to record tights. Potential policy changes – in the form of lower corporate tax rates and deregulation – have given markets a fresh catalyst. Does this extend the trend of “US exceptionalism”? Some analysts don’t think investors should give up on the broadening out trade. The US economic growth premium is still expected to shrink in 2025, and profit growth will be more evenly distributed across the globe. There is still a big valuation case for EAFE and EM stocks. That means that any better-than-expected news can be doubly good news for market performance. But rising policy uncertainty weighs on the global outlook. What’s more likely, therefore, is broadening out at the sector and factor level. In the US, we’ve seen signs that the market is prepared to look beyond the technology sector, with financials and energy performing strongly this quarter on the prospect of a regulatory overhaul. And in an environment characterised by still-high inflation, a shallower cutting cycle, and economic expansion, neglected parts of global stock markets – such as value stocks – could catch up. In 2025, a multi-factor, multi-sector approach could work best. Market Spotlight Taking the credit After a year of dramatic moves in policy rate expectations, a possible shift towards inflationary fiscal policies in the US has once again raised the prospect of the Fed keeping rates higher for longer. One asset class that could be well placed to benefit from that is securitised credit. Given its floating rate nature, securitised credit moves differently to other asset classes during economic cycles and offers an alternative source of risk-adjusted returns. That’s contributed to it being one of the best performing fixed income asset classes over the past two years – with 2024 expected to be another strong year. For allocators, fixed income has historically been a natural portfolio diversifier to stocks, given their usually uncorrelated relationship. But the potential shift back to higher-for-longer rates – and greater correlation between the two assets – raises the risk of the traditional 60/40 stock/bond portfolio coming under threat again. For securitised credit, low correlation to regular fixed income, and lower correlation to stocks than corporate bonds could make it an option for multi-asset portfolios. Given the high starting income levels and wide securitised credit spread (versus history) the mix of both factors could generate attractive total return going forwards for investors. 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 15 November 2024. Lens on… EM inflation risks 2024 has generally been a year of good news on disinflation, resilient growth, and corporate profits. Central bankers have been able to pivot policy, and the global cutting cycle has got underway. But with fiscal policy remaining active, fresh uncertainty around global trade, and geopolitical tensions creating volatility in commodity prices, market concerns about inflation are likely to linger a bit longer in 2025. Nonetheless, consensus forecasts are for inflation rates to continue drifting lower across developed and emerging markets next year. But progress is expected to be slower in some emerging markets, and notably Latin America. Brazil, for example, was among the first to hike rates in response to post-pandemic inflation, and then led the global easing cycle. But in October, its policymakers were forced to hike rates by 0.5% to tackle resurgent inflation. Regional neighbours like Mexico and Chile have faced similar pressures. Overall, most major global economies will see inflation settle in the 2-3% range over the medium term, but regional variations should be expected. Given the idiosyncratic nature of regional economies, there could be rewards for investors prepared to do their homework. China’s policy patience The latest round of economic support from Chinese policymakers was a disappointment for those hoping for major fiscal stimulus. The new plan – which followed a meeting of China’s legislative body, the NPC Standing Committee – is a CNY12 trillion (USD1.7 trillion) effort to tackle longstanding local government ‘hidden’ debt, much of which involves a 3-5-year debt-swap scheme. What investors ideally wanted was news on support for China’s property sector and consumer spending. But despite the limited direct growth boost, the debt-swap plan is still a welcome step towards repairing local government balance sheets. And it has been enough to keep Chinese stocks supported even as trade policy uncertainty has spiked. Further fiscal stimulus planning is likely at December’s Central Economic Work Conference. More details on macroeconomic targets and policies will likely follow next March during the annual NPC meeting. Overall, Chinese policymakers will maintain a gradual approach for now, offering just enough to support investor confidence that “there is more to come”, while reserving some fiscal firepower for 2025 and beyond. UK stocks on sale? More than a decade of sluggish economic growth has contributed to a sizeable valuation discount in UK assets. Equities, for instance, trade on a modest forward price-to-earnings ratio of around 12x. The large-cap FTSE 100 index offers an average dividend yield of 4.1%, and a total shareholder yield, including buybacks, of 6%. That’s almost twice the level of the S&P 500. Even when accounting for sector differences and a large underweight to the tech sector, UK valuations look undemanding. Research suggests that standout yield could get more appealing as interest rates fall, boding well for UK stocks. Signs of economic recovery also point to a potential opportunity for UK assets. But there are catches. Any slowdown in global growth could hurt UK stocks. And domestic economic headwinds, the risk of more aggressive BoE policy easing, and sustained FX moves could cause volatility. 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 15 November 2024. Key Events and Data Releases Last week The week ahead Source: HSBC Asset Management. Data as at 7.30am UK time 15 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 steady as investors digested the potential policy implications of the US presidential election result, with the US DXY dollar index strengthening. Core government bonds were mixed, with fiscal and inflation worries overhanging US Treasuries. US equities softened, with the rate- sensitive Russell 2000 faring worse than the S&P 500 and Nasdaq amid mixed Q3 earnings. The Euro Stoxx 50 index posted modest gains, and Japan’s Nikkei 225 weakened despite a softer yen versus the US dollar. EM equities saw widespread losses due to weakness in technology stocks, mainland China growth concerns, and ongoing geopolitical worries. The Hang Seng and South Korea’s Kospi were the main casualties. The Shanghai Composite and India’s Sensex index also weakened. In commodities, oil prices dropped amid a stronger USD and lingering oversupply concerns. Gold and copper fell. https://www.hsbc.com.my/wealth/insights/asset-class-views/investment-weekly/2024-11-18/

2024-11-18 07:05

Key takeaways The long awaited US elections are now behind us but may result in higher policy uncertainty. Global activity data remain steady in aggregate but varied by geography and sector. Inflation continues to grind lower, but there are risks from labour markets and commodity prices. The recent US election news is likely to dominate headlines for coming weeks – with the second term of President Trump set to add to global policy uncertainty. Which policies are implemented, to what degree and when, remains uncertain – with trade policy likely to be a key area of focus. Rates heading lower Despite this uncertainty, many central banks across the world are continuing (or starting) their interest rate cutting cycles. The Federal Reserve lowered rates for a second time in November – and we expect further easing in December – while the Bank of England and European Central Bank have also delivered rate cuts in recent weeks (charts 1 & 2). There is also a growing group of central banks seemingly in a race to neutral – with Sweden’s Riksbank and the Reserve Bank of New Zealand joining the Bank of Canada in stepping up the pace of monetary easing. Source: Macrobond Source: Macrobond In the emerging world, more central banks in Asia are starting to ease – with Thailand the latest to join in. In Latin America, Brazil stands out in turning back towards rate increases and is worth watching – potentially a warning sign of what could happen elsewhere if growth and/or inflation pick up. Economic data picking up The global economic data are also faring reasonably well. Although the outlook is still decidedly mixed between geographies and sectors, we saw a pick-up in the latest set of global PMI data and the latest rounds of stimulus appear to be having a positive impact on some of the Chinese data (charts 3 & 4). Weak spots remain in Europe, but even there we saw some upside surprises to Q3 GDP and some better survey data. Source: Wind Source: Macrobond. Note: FAI is Fixed Asset Investment Sectorally, one area yet to recover is property. As rate cuts build, we could see house prices – which have already begun to rise in major developed markets – push higher, and we could see transaction volumes and construction activity improve from very depressed levels further down the line. Inflation risks remain Inflation data have continued along a more favourable trajectory across the world, but risks are still there. Many commodity prices have risen in recent months and labour markets are showing more resilience than they were a few months ago. Although things are clearly softening a touch, a more resilient labour market and demand outlook could make policy makers question the pace and magnitude of their easing cycles in the coming months. Source: Bloomberg, HSBC ⬆Positive surprise – actual is higher than consensus, ⬇ Negative surprise – actual is lower than consensus, ➡ Actual is in line with consensus Source: LSEG Eikon, HSBC https://www.hsbc.com.my/wealth/insights/market-outlook/macro-monthly/2024-11/

2024-11-18 07:05

Key takeaways The BoE cut rates again but lifted its inflation forecasts… …which support the GBP at least over the near term. The USD weakened after the Fed’s 25bp cut, but we see the US economy consistent with a strong USD. On 7 November, the Bank of England’s (BoE) monetary policy committee (MPC) voted by 8-1 to lower its policy rate by 25bp to 4.75%, with Catherine Mann dissenting in favour of a hold. This second rate cut this year was widely expected. This was also the first BoE meeting since the 30 October UK government budget, which laid out plans for big increases in taxes, spending, and borrowing. The inflationary element within the budget plan has seen markets pare back how aggressively the BoE may cut rates. The UK 2-year government bond yields has moved from c4% to c4.5% over the past two weeks, and markets expect BoE policy rate to bottom at c4% in 3Q25 (Bloomberg, 7 November 2024). Perhaps, the market focus was that the UK central bank lifted its inflation and growth outlook over the next two years based on the budget measures. The BoE now expects inflation to be 2.7% (up 0.5ppt) in 4Q25, 2.2% (up 0.6ppt) in 4Q26, and 1.8% (up 0.3ppt) in 4Q27; while the GDP growth forecast next year is revised upward by 0.5ppt to 1.5%. These forecasts probably have validated the hawkish shift in market expectations for BoE policy rate, which sent GBP-USD higher. It seems more difficult for the GBP to weaken at least over the near term, in our view. On the same day, the Federal Reserve (Fed) also announced a widely expected 25bp rate cut, lowering the federal funds rate to a range of 4.5% to 4.75%. The secondstraight rate cut followed a larger 50bp reduction in September. Changes to the statement were modest and unprovocative for the USD, with no updated Fed forecasts at this meeting. Fed Chair Jerome Powell said that the outcome of the 5 November US election would not have any near-term effects on monetary policy decisions. Our economists still expect the Fed to deliver a 25bp cut in December, followed by an easing of 100bp in 1H25. While the broad USD weakened slightly, we think that the USD will probably revert to data-dependency mode (Chart 1). We see the US economy consistent with a strong USD, especially relative to many other G10 economies. Source: Bloomberg, HSBC Source: Bloomberg, HSBC It is worth noting that UK-US interest rate differentials did little to drive GBP-USD higher (Chart 2). But, when considering the relative fiscal outlook between the UK and the US, we think downside risks for the GBP may remain over the medium term. https://www.hsbc.com.my/wealth/insights/fx-insights/fx-viewpoint/2024-11-11/

2024-11-13 12:02

Key takeaways We push out our first RBI rate cut call from December 2024 to February 2025... ...as the RBI waits for the likely October inflation spike to drop, and global financial markets to stabilise. A few better activity prints in October, thus far, have lowered the urgency to cut, though several others indicate that easing will be needed down the line. When the RBI changed its stance from hawkish to neutral in the August policy meeting, it seemed a rate cut would follow soon. And when the chorus around the release of softer growth data got louder, it seemed like a rate cut was just around the corner, in fact in the upcoming December policy meeting. But the backdrop has changed. We think four developments over the past four weeks will make the RBI hold the repo rate steady at 6.5% at its December meeting. Game-spoiler inflation. CPI inflation rose from 3.7% in August to 5.5% in September, led by a combination of a weak base, as well as a strong sequential rise in prices. CPI inflation is likely to rise further to 5.9% in October, led by higher food inflation. In particular, we find a sharp spike in edible oil prices, triggered in part by higher import taxes (Exhibit 1), and still high vegetable inflation (Exhibits 2 and 3). In the past the RBI used to often look through vegetable price inflation, but that is not the case anymore. Back-to-back shocks seem to have made officials distrustful of quick disinflation in vegetable prices. In fact, we believe they will not even take solace in the fact that the prices of pulses, eggs, meat, and fish, have softened recently. October growth-comeback? Some data points have come in stronger in October. These include GST revenue growth, the manufacturing and services PMIs, vehicle sales and registration, petrol and diesel consumption, and international passenger arrivals. And even though, as the month progresses, several other growth indicators may come in weaker than before, these improved prints seem to have taken off some of the urgency around rate cuts, making the RBI more open to waiting a while longer before easing. External volatility returns. With the dollar appreciating 4.2% since early-October, of which c1% happened over the last 48 hours, there has been weakening pressure on EM currencies. And while the RBI has ample FX reserves to support the currency, it may prefer to wait now, and ease at a time global markets are more stable. Unwaveringly hawkish communication. True, the RBI softened its stance in the August meeting. But since then, the governor has spoken at several forums about the perils of premature easing, calling it “very risky” at a time of “significant upside risk to inflation” (Bloomberg, 6 November 2024). This commentary is also at a time when markets have reprised Fed rate cuts. All said, we expect the RBI to stay on hold at its December meeting. But we hold on to our view of two rate cuts in this cycle, spread across the February and April meetings (December and February earlier, Exhibit 5). Our sense is that when the new vegetable crop is harvested at end-2024, food inflation could fall quickly, with cooler temperatures and full-up reservoirs aiding the process. When we look at a broad set of growth indicators, we find that a lower proportion are growing at a fast clip compared to a quarter ago, particularly in financial services and consumption-related sectors (Exhibit 4). As such, it’s only a matter of time before we see rate cuts, even though it won’t likely be at the December meeting, nor will it be a deep rate cutting cycle. https://www.hsbc.com.my/wealth/insights/market-outlook/india-economics/2024-11/

2024-11-11 12:02

Key takeaways The China National People’s Congress (NPC) Standing Committee meeting on 8 November approved an incremental increase of RMB6trn in the local government special debt limit to swap hidden debt over three years through the end of 2026. Adding up RMB4trn allocation from the existing special local government bond issuance quota for debt swaps over five consecutive years and RMB2trn existing fiscal resources for repayment of hidden debt related to shantytown renovation, the total scale of debt swaps for local governments will amount to RMB12trn over the next five years. We expect negative near-term market responses to the below-expectation new fiscal impulse, and the lack of new demand-size stimulus to boost the property sector and consumption. However, looming uncertainties surrounding trade tensions and potential tariff hikes under the Trump administration will likely trigger further policy stimulus from China to mitigate downside risks to growth in 2025. We stay neutral on mainland Chinese and Hong Kong equities in anticipation of increased market volatility driven by the developments of Beijing’s policy stimulus and Trump’s trade tariffs. We favour quality Chinese internet stocks with steep valuation discounts to their US tech peers, above-sector-average earnings prospects and improving shareholder returns. In Hong Kong, we favour undervalued high dividend stocks in the insurance and telecom sectors, as well as select oversold property developers with strong balance sheets. Within the A-share market, we prefer high-quality SOEs paying attractive dividend yields, high-end manufacturers with global competitiveness and overseas market positioning and resilient consumer leaders that can benefit from potential enlarged policy support for consumption. What happened? The NPC Standing Committee meeting on 4-8 November approved an incremental fiscal support package for the local government debt swap plan. The fiscal package fell short of elevated market expectations for a “big bang” comprehensive stimulus package with the size of RMB6trn to RMB12trn to tackle the problems of local government debt, property market stress, bank recapitalisation needs and subdued consumption. The new fiscal package includes the following support measures: 1) RMB6trn increase in local government special debt limit to swap hidden debt – The additional RMB6trn local government special bond quota will be used over three years through the end of 2026, implying RMB2trn annual additional fiscal impulse for swapping hidden local government debt. 2) Annual allocation of RMB800bn from special local government bond issuance quota for debt swaps – Starting in 2024, RMB800bn will be allocated from the special local government bond (SLGBs) issuance quota each year for five consecutive years to be used for debt repayment, including swapping hidden debt, totalling RMB4trn allocation from 2024 to end-2028. 3) RMB2trn repayment for hidden debt related to shantytown renovation due in 2029 and subsequent years will still be repaid according to the original contracts. Finance Minister Lan Fo’an provided forward guidance on potential increase in fiscal stimulus and other countercyclical policy support in the future without sharing specific details on potential support for the property market and private consumption: 1) Property support policies – The MoF is formulating a plan for local governments to use funds raised by the issuance of SLGBs to purchase idle land and acquire unsold property inventory for conversion into affordable housing to accelerate the de-stocking of unsold properties. Supportive tax policies to support the property sector have been submitted for NPC review and approvals. 2) Recapitalisation of commercial banks – The MoF is accelerating preparation work for the issuance of special central government bonds (SCGB) to replenish core Tier-1 capital of the six larger state-owned commercial banks. 3) Further fiscal support to boost consumption – Potential increase in fiscal stimulus to support equipment upgrading and consumer durable goods trade-in to boost domestic demand. Investment implications We expect the below-expectation fiscal support and the lack of demand-side stimulus announced by the NPC Standing Committee, along with the US election results with Trump’s policy of imposing a minimum of 60% tariff on all Chinese import products, will likely add volatility to the mainland Chinese and Hong Kong stock markets in the coming months. Hence, we stay neutral on these two equity markets. The Chinese internet stocks are less vulnerable to trade tensions and tariff risks. We continue to see re-rating opportunities in quality Chinese internet stocks and prefer internet leaders that are priced at substantial discounts to their US Big Tech peers, and those with above-sector-average earnings prospects and improving shareholder returns through share buybacks. We also favour the local services, e-commerce, and online gaming sub-sectors as they offer a better risk-reward outlook. We favour quality Chinese SOEs paying high dividends and with above-market average earnings growth. Given the deep discount of the H-shares to A-shares on a like-for-like basis, the SOEs with their H-shares trading at attractive discounts to their A-shares could see better Southbound flows. We think the Southbound flows through the Stock Connect should continue given the low-for-longer rate environment in mainland China. We stay selective towards mainland Chinese property companies and banks in the offshore market given that there is no new direct support for the property market. For the Chinese banks, the policy to recapitalise the six largest state-owned commercial banks remains a key investor focus. We also attach focus on the net interest margin outlook due to lower mortgage and other lending rates and the bad debts of the banks. In Hong Kong, we favour undervalued high dividend stocks in the financials and telecom sectors and select oversold property developers with strong balance sheets. The stock market should benefit from the fall in US policy rates lowering funding costs. Banks and insurers should also benefit from the better fee income from wealth management business. The housing market will remain under near-term pressure given the supply overhang. In China’s onshore market, our preference for quality SOEs paying high dividends remains intact, as they offer attractive dividend income that boost total returns. We also selectively position in high-end Chinese manufacturing leaders with a proven track record of global competitiveness and overseas market positioning, allowing them to withstand tariff risks. In the consumer sector, we favour services leaders which deliver resilient earnings and consumer discretionary stocks that benefit from ongoing government-sponsored replacement subsidies. Volatility of A-share market will likely surge amid uncertainty over policy stimulus and US trade tariffs Source: Bloomberg, HSBC Global Private Banking and Wealth as at 10 November 2024. Past performance is not an indicator of future performance. https://www.hsbc.com.my/wealth/insights/market-outlook/special-coverage/2024-11-11/