2024-10-22 07:05
Key takeaways Large fiscal space, but details yet to come through; stock market tools are now being implemented. Private enterprise promotion law proposed with emphasis on creating fair competition to shore up confidence. We see more fiscal stimulus forthcoming to help reach this year’s growth target. China data review (Q3 and September 2024) GDP rose by 4.6% y-o-y in Q3 supported by an improvement in domestic activity in September. The key driving force has been the recent rollout of expanded consumer trade-ins and equipment upgrading programs since August, helping to lift growth of industrial production and retail sales both in y-o-y and m-o-m terms. Retail sales grew by 3.2% y-o-y in September with home appliances (+20.5% y-o-y, from 3.4% in August) and autos (+0.4% y-o-y, from -7.3% in August) the key beneficiaries of the consumer trade-in program. Meanwhile, Industrial Production picked up 5.8% y-o-y as manufacturing sector purchases of equipment rose 16.4% year-to-date through September. Property investment declined by 9.4% y-o-y in September, although the pace moderated from the 10.2% y-o-y fall in August. Recent policy easing measures in tier-1 cities have led to stronger sales, while mortgage payment adjustments and extended loan provisions should also provide support. CPI inflation rose a modest 0.4% y-o-y in September, reflecting sluggish consumption trends in prior months. PPI deflation deepened to -2.8% y-o-y due to weak domestic activity, particularly from the property sector, as well as softer global commodity prices. Export growth softened to 2.4% y-o-y in September (from 8.7% y-o-y in August) on the back of extreme weather (e.g. typhoons in the Yangtze River Delta), global shipping events (e.g. US shipping strike) and a high base. Imports, meanwhile, rose by a muted 0.3% y-o-y (from 0.5% y-o-y in August) given a less favourable base and ongoing weakness in domestic demand. Policy support ramping up Since 24 September, many departments have held press conferences, with a package of incremental policies covering monetary support, stocks, property sector, private enterprises, people's livelihood, industry and other aspects. We detail key announcements below. Tackling the challenges The Ministry of Finance (MoF)’s 12 October press conference was a mixed result for markets. On the one hand, it fell short of announcing a specific fiscal amount but noted that additional bond issuance and fiscal deficit increases were under discussion. Indeed, Caixin reported on 13 October that policymakers are considering issuing RMB6trn of special government bonds to swap local government debt. The upcoming State Council executive meeting and the National People’s Congress Standing Committee meeting will be the key meetings to watch. On the other hand, the meeting helped to address key issues facing China’s economy: resolving local government debt and stabilising the property market. The Finance Minister stated that “a significant one-time increase in the debt limit will be used for local government debt swaps”, the strongest measure to support resolving local government debt in recent years. There is also the possibility that central government debt could be used to alleviate some of the burden. Meanwhile, proceeds from special local government bonds (SLGB) will be permitted to acquire land or unsold commercial housing for the first time to stabilize the housing market, which should help improve property developer liquidity and produce positive wealth effects to support consumption. Rejuvenating the housing market Officials from bodies including the Ministry of Housing and Urban and Rural Development, MoF and People’s Bank of China (PBoC) held a joint press conference on 17 October to introduce two key policies for the property sector: using cash resettlement to renovate 1 million homes in urban villages (i.e. compensating residents financially instead of providing alternative housing or physical relocation), and increasing lending for “whitelist” projects to RMB4trn by year end (from RMB2.23trn), to complete unfinished, partly-sold housing projects. Funding for the program is set to come from a mix of SLGB, policy bank loans and commercial bank loans. Indeed, MoF officials have noted that there is still RMB2.3trn of SLGB available to be used this year, some of which we think could go towards the housing sector. Overall, the policy stimulus measures announced since the end of September should provide tailwinds for growth, but we think that more fiscal support is needed, and a more specific package is likely on the way. More than just fiscal Fiscal aside, other policies are rapidly being implemented to shore up the economy and markets. Examples include the PBoC’s new RMB500bn liquidity facility for the stock market, the State Administration for Market Regulation’s measures to strengthen financing support for small and medium enterprises, and the new private economy promotion law from Ministry of Justice and National Development and Reform Commission to address matters including fair competition, financing, and innovation, which is aimed at boosting market confidence. Source: LSEG Eikon * Past performance is not an indication of future returns Source: LSEG Eikon. As of 18 October 2024, market close https://www.hsbc.com.my/wealth/insights/market-outlook/china-in-focus/2024-10/
2024-10-21 12:02
Key takeaways As widely expected, the ECB delivered its third rate cut of the year in October; the EUR weakened slightly. The near-term focus will probably move to the US elections, with fiscal policy becoming a growing talking point… …but the FX market should also look at the Eurozone’s fiscal policy and its challenging economic outlook. On 17 October, the European Central Bank (ECB) cut all policy rates by 25bp, the third cut of the year, taking the deposit rate to 3.25%. The ECB is increasingly worried about growth, while noting that incoming information “shows that the disinflationary process is well on track”. Our economists expect 25bp cuts in December and every meeting until April 2025. This widely expected decision saw a slightly weaker EUR, with EUR-USD tracking its yield differential (Chart 1). The near-term FX focus will probably move to the 5 November US elections. We take note of how the USD has tended to strengthen into previous US presidential elections (Chart 2). History could rhyme this time too, given the tightness of the race and unclear implications for fiscal, trade, tax, and spillovers to monetary policy (see FX Viewpoint – USD and four US election scenarios). Source: Bloomberg, HSBC Source: Bloomberg, HSBC Looking beyond the short-term reactions, we think the implications of the US elections will probably prove unhelpful for most European currencies over the medium term. Neither US presidential candidate appears to be fiscally conservative – a stance that could weigh on the EUR via stronger US growth and higher US yields under clean sweep outcomes (i.e., one party manages to win the White House and both chambers of Congress in the election).This is a contrast to the tightening of the Eurozone’s fiscal policy amid the return of the Growth and Stability Pact. A divided US Congress would reduce this EUR headwind. European countries will also be wary of US trade policies, particularly given their current weak growth outlook. While the Republican campaign appears to have a more aggressive stance on tariffs, the Democrat administration has also pursued some trade protectionism policies. The EUR and currencies with large trade exposures to the Eurozone (such as the GBP and NOK) will unlikely fare well. https://www.hsbc.com.my/wealth/insights/fx-insights/fx-viewpoint/2024-10-21/
2024-10-21 07:04
Key takeaways Customer pressure and regulations are driving demand for green alternatives to traditional plastic materials. Yet, the terminology around alternative plastics is confusing and can easily lead to consumer misperception. We look at 4 key myths of alternative plastics nomenclature; we think better labelling and consumer education could help. Customer pressure and regulations are driving demand for green alternatives to traditional plastic materials. These materials are generally perceived to be eco-friendly alternatives to conventional plastic. However, the terminology around alternative plastics is confusing and can easily lead to consumer misperceptions on their sustainability. In this issue of #WhyESGMatters, we look at four key myths surrounding alternative plastic nomenclature. We explain why investors should think not only about creating plastic alternatives, but about how to encourage a circular economy mindset. This can include better labelling and consumer education. Did you know? European Bioplastics expects global bioplastics to grow at 22% annually until 2028. Packaging is the largest end market for plastics, accounting for over 35% of the total c300m tonne annual market. Products with the OK Biobased certified label mean they only have at least 20% biobased materials. An Australian survey found only 7.7% of respondents correctly rejected the statement that all bioplastics are biodegradable. Even reaching a 25% recycled target for PET by 2030 would require a fivefold increase in recycling capacity. A material classified as “compostable” will likely only biodegrade in an industrial composting, not your at home composter. Source: European Bioplastics, Leela Dilkes-Hoffman, et. Al., Public attitudes towards bioplastics – knowledge, perception and end-of-life management, Resources, Conservation and Recycling, 2019, HSBC estimates. The alternative plastic pivot Not quite plastic The pressure to reduce plastic waste, especially from single-use plastics, is mounting on corporates from regulators, investors and consumers. Among elimination and reuse solutions, companies are investing in innovative “green” alternative plastics, sometimes called bioplastics, that look and feel like traditional plastic but are made from biomass and/or have biodegradable properties – think compostable utensils and biobased water bottles. These materials are generally perceived to be eco-friendly alternatives to conventional plastics by reducing fossil fuel use, greenhouse gas (GHG) emissions and/or plastic pollution. Overview of alternative plastics: Important terms * For the purpose of this report we define these alternative plastic key terms according to the European Environmental Agency. However, there’s no globally recognised definition for these terms and this has led to widespread confusion by the general public on these materials. Source: European Environment Agency Myths versus reality Myth 1: biobased means biobased The myth The reality It’s all in the mix: Biomass and petroleum sources are often mixed to maintain the durability and quality associated with traditional plastics. There is no universally agreed-upon threshold to define the minimum biobased content needed for a material to be classified as biobased, and the existing certified labels often have low biobased thresholds. For example, the USDA BioPreferred labelling programme certifies products which meet a minimum biobased content requirement of 25%. Similarly, products with the OK Biobased certified label, often used in the EU, indicate that they have at least 20% biobased materials. Manufacturers often self-label products with biobased terminology, which brings little transparency to the actual biomass content. Other terminology like “bioplastic” “plant-based” and “renewable materials” are also used interchangeably with “biobased” on packaging, adding confusion to customers. Not all biobased products are created equally. The biomass source, the production process, and the final properties of the material can all have varying environmental impacts. It’s important to consider that biobased terminology isn’t always indicative of environmental impacts. Myth 2: Biobased means biodegradable The myth The reality It’s all down to chemistry: In fact, on a molecular level, many biobased plastics are identical to their fossil fuel alternatives and last just as long in nature. Whether these non-biodegradable biobased plastics are recyclable depends on their chemical composition. For example, some biobased (non-biodegradable) materials can be recycled through current collection infrastructure, while others need their own specialised recycling process. It’s crucial to keep in mind that just because a material is biobased doesn’t mean it’s biodegradable, and vice versa. Biobased packaging isn’t always biodegradable Source: Bio-plastics Europe, HSBC Myth 3: Biodegradable means compostable The myth The reality Try this one at an industrial facility: The term “biodegradable” gives no parameters for how quickly and under what conditions a material can biodegrade. Therefore, regulators across the globe are promoting the use of “compostable” terminology to describe alternative packaging – which means a product meets the requirements to biodegrade under the conditions associated with an industrial composting facility. Contrary to an at-home composter, these facilities expose the material to high temperatures and certain microbes essential for biodegradation. And now, the small print: Currently, many countries have adopted compostability standards for alternative plastics. These include the International Organisation for Standardisation (ISO) international benchmark for compostable plastics (ISO 17088), in addition to country-specific standards, such as ASTM 6400 in the US and EN 13432 in the EU. Generally speaking, standards classify a material as “compostable” if a minimum of 90% of the material can biodegrade in an industrial compost environment within 6 months. Myth 4: Compostable means compostable The myth The reality Don’t try this one at home: As discussed in myth three, 3rd party certified industrial composting labels are available, but this doesn’t mean that such packaging can be thrown into home or community composting facilities. Although you may find some alternative packaging labelled as ‘home compostable’, the varying environments within home composting equipment provide no guarantee that these materials will fully degrade. The take-back that isn’t: Limited access to industrial composting facilities and confusion between words like “compostable”, “home compostable” and “industrial compostable” can bring challenges to the disposal of alternative plastic materials. A UK study showed that 60% of sampled items, which were attempted to be home-compost by citizens, weren’t certified for home processing. As a result, many composting facilities choose not to take compostable packaging materials due to concerns about potential contamination of compost with chemicals in packaging and inadequate product labelling being insufficient to ensure packaging is certified compostable. Making plastic less dramatic Reimagining plastics The emerging alternative plastic industry not only faces challenges in integrating sustainable practices, but also in production scale and cost constraints. However, the landscape around alternative plastics is rapidly evolving – there are a growing number of materials, applications and products entering the market. We think scientific advancements and growing international commitments to reducing plastics will help drive innovation. In a collective initiative organised by Planet Tracker, investors with a total USD6.8trn in assets called on petrochemical companies to reduce fossil fuel reliance and eliminate toxic chemicals in plastics. Additionally, the 5th session of the Intergovernmental Negotiating Committee, which aims at developing an international legally binding instrument on plastic pollution, will happen later this year – putting plastics on the global agenda. Raising the bar on corporate accountability Many companies have set goals to replace their single-use plastics with alternatives. Nonetheless, given the opaque sustainability of these “green” plastics, we think companies need to better understand their green packaging claims and build guardrails to avoid misleading consumers. Key company considerations include: Identifying purpose – It’s essential to have a clear understanding of packaging claims and supply chain implications. Additionally, companies should assess whether the decision to use alternative plastics aligns with their strategic objectives, compared to other plastic solution, e.g. elimination and reuse. Consumer education – Whether there’s clear consumer awareness of products and their sustainable uses. This includes providing information about how materials can be properly disposed of to have the most sustainable impact. Labelling – Understanding the certification and standards in operating regions and providing credible third-party labels that bring integrity and transparency to the material. Waste infrastructure – Whether waste infrastructure is available to their customer base, and/or how they can promote more efficient recycling and composting systems. Conclusion Alternative plastics can be potential solution to the plastics problem, addressing their associated GHG emissions and waste. However, as the market for alternative plastics matures, it’s crucial to address the complexities of sustainability and consumer education to ensure that the potential environmental benefits of these can be fully realised. We think companies and investors should focus not only on creating plastic alternatives, but also on encouraging a circular economy mindset, looking for ways to reduce, reuse, and recycle plastics, as well as how readily plastics can be broken down in a non-harmful, non-toxic and cost-effective manner. We also expect to see more regulations around product labelling, which will provide customers with better clarity. Companies that choose to use alternative plastics who align with verified third-party labelling, promote consumer education, and consider readily available waste infrastructure, give themselves the best chance to take advantage of the environmental benefits of alternative plastics. https://www.hsbc.com.my/wealth/insights/esg/why-esg-matters/2024-10-09/
2024-10-21 07:04
Key takeaways At its October meeting, the European Central Bank (ECB) delivered its second rate cut in as many months and its third of this easing cycle. The private credit market has grown rapidly in recent years, driven in part by strong demand for direct lending. Reforms implemented over the past decade along with more credible monetary and fiscal policy have allowed India to begin tapping its catch-up potential and enviable demographics. Chart of the week – China’s policy ‘put’ After recently announcing new stimulus measures, China’s policymakers have yet to fill in the details on the scale of support planned for tackling issues in housing markets, local governments, and consumer confidence. But with recent press conferences unveiling new commitments, there is clear evidence of a fundamental shift in policy thinking. Speculating on the precise timing of China’s stimulus isn’t sensible. However, the “three arrows” policy strategy – liquidity, fiscal/credit, structural measures – offers a way forward to boost the economy out of the deflation trap. With further policy meetings in the calendar – the NPC standing committee in a few weeks – we may hear more soon. As for markets, many Asian investors remain cautious on Chinese stocks, arguing that it will take a long time for capital flows to return. But at 11.5x earnings, China still trades at a heavy discount to EM (14x) and global stocks (21x). With bad news still in the price, good news could be ‘doubly good’ for stocks. Another way to think about market effects is that China’s stimulus sets up a rotation trade in global stocks. China’s rally has already caused volatility in regional fund flows, affecting markets like India, South Korea, and Japan. Market Spotlight Taking geopolitics seriously Geopolitical risks have been on the rise in 2024 – but the first question might be, “so what?”. Many investors already feel well-equipped to deal with geopolitical risks. Most of the time, after all, the “geopolitical risk premium” has only a fleeting or transitory influence on investment markets. The effects unwind fairly quickly. But this time could be different. There are several reasons why investors need to take geopolitics seriously in their asset allocation considerations. First, economic power is diffusing to Asia and the Global South, with profound implications for the macro-economy and the financial system. Second, the global environment has become less friendly to international cooperation. And third, the policies and principles that have stabilised the global order over the last 30 to 40 years seem increasingly obsolete. It means that the “nice” economic regime now risks being “vile” – or, to spell it out, one of “Volatile Inflation and Limited Expansion”. If left unchecked, it implies rising prices and lower economic growth potential. For investors, portfolio strategy will need to be prepared for such an eventuality and resilient to the implications of shorter business cycles, greater market dispersion, and changed correlations. 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. Source: HSBC Asset Management. Macrobond, Bloomberg. Data as at 11.00am UK time 18 October 2024. Lens on… ECB speeds up At its October meeting, the European Central Bank (ECB) delivered its second rate cut in as many months and its third of this easing cycle. During the summer, the expectation was that it would cut at a pace of 0.25% every other meeting. What has changed? One factor is that the Federal Reserve has become more willing to ease policy. However, there have also been important eurozone developments. First, the latest inflation numbers show tentative signs that service sector inflation is now weakening, having been relatively sticky earlier this year. Wage growth is also softening, supporting the view that inflation pressures are fading. Second, activity data have surprised to the downside – the PMIs point to a deceleration in growth during H2 2024, led by Germany. With the inflation situation improving, growth looking patchy – particularly in Germany – and the ECB easing policy at a brisker pace, Bunds have been outperforming US Treasuries since mid-September, reversing the trend seen since mid-April. Going direct The private credit market has grown rapidly in recent years, driven in part by strong demand for direct lending. There have been two key reasons for this: one is that traditional banks have retrenched from parts of the lending market, leaving private credit managers to fill the void. Another is that direct lending proved popular with private equity managers during the post-Covid deal-making boom. For private credit investors, the returns have been strong. With an average yield of nearly 12%, the asset class has outperformed other Credits. With the global easing cycle underway, returns are expected to moderate over time, but it’s expected to remain a high yield asset class. While North America and Europe currently dominate the direct lending markets, Asia is comparatively small – but growing strongly in some areas. With around 80% of total credit in Asia still provided by banks, there is growing demand for alternative sources of finance for fast-growing firms, mergers and acquisitions, and private equity deals. Navigating new India Reforms implemented over the past decade along with more credible monetary and fiscal policy have allowed India to begin tapping its catch-up potential and enviable demographics. The IMF expects India to be the fastest growing G20 economy over the remainder of the decade, with real GDP rising by almost 50% by 2029. Consistent with the recent strong and expected growth, MSCI India has outperformed MSCI ACWI by a significant margin over the last five years. Importantly, however, the Indian equity market now offers greater diversification and less volatility than in the past – MSCI India now comprises over 150 stocks versus under 80 in late 2019. Moreover, it is not just in the equity space that India stands out – its 10y government yield is among the highest for investment grade issuers and has a low correlation with global bonds. Add in an undervalued INR, which also exhibits less volatility than the average EM currency, and there is a strong case for India to be viewed as an asset class in its own right, rather than simply part of a benchmark. 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, Preqin. Data as at 11.00am UK time 18 October 2024. Key Events and Data Releases Last week The week ahead Source: HSBC Asset Management. Data as at 7.30am UK time 18 October 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 A solid increase in US retail sales during September buoyed US Treasury yields towards the end of last week. In stocks, the small-cap Russell 2000 saw the strongest gains, with the large-cap S&P 500 touching new highs, helped by upbeat Q3 earnings news. In Europe, the ECB cut rates by 0.25%, noting that inflation was increasingly under control but warning the outlook for the bloc’s economy was worsening. In Asia, Chinese equities pulled back for a second week following recent rallies, with a slew of macro data releases and policy expectations remaining in focus. India’s Sensex also fell, but some ASEAN markets fared better, with Thai and Indonesian equities ending positively. Brazil’s Ibovespa and Mexico’s IPC were also both on course to finish higher. Elsewhere, the oil price fell on easing fears over tensions in the Middle East. Gold once again reached new highs. https://www.hsbc.com.my/wealth/insights/asset-class-views/investment-weekly/2024-10-21/
2024-10-14 12:02
Key takeaways On 12 October, China’s Finance Ministry (MoF) unveiled a package of incremental fiscal stimulus but provided limited details of the comprehensive fiscal expansion plan. The lack of stimulus details fell short of lofty market expectations of a big-bang fiscal stimulus bonanza. Finance Minister Lan Fo’an revealed the plan to raise the local government debt limit by a large amount in a one-off effort. Other measures included accelerated deployment of RMB2.3trn of unused SLGBs issuance quota in 2024, RMB400bn additional local government bonds issuance quota for 2024, issuance of SCGBs for bank recapitalisation and greater support for vulnerable groups like students. We remain neutral on mainland Chinese and Hong Kong equities as we look for concrete evidence of a forceful fiscal stimulus plan. We favour internet stocks due to their steep valuation discounts to their global peers, healthy earnings outlook and reduced regulatory risk premium. We also like quality Chinese SOEs paying high dividends, and consumer brands that benefit from the new consumption related policy stimulus. 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. What happened? China’s Finance Ministry (MoF) unveiled a package of incremental fiscal stimulus to supplement the monetary, property and capital market support measures announced on 24 September. However, it fell short of lofty market expectations of a big-bang fiscal stimulus bonanza and remains uncertain whether the full details will be available when the next State Council executive meeting and National People’s Congress (NPC) Standing Committee meeting take place in late October. Key takeaways from the MoF’s press conference include: 1) Significant capacity of the central government to raise debt and fiscal deficit – China’s Finance Minister Lan Fo’an emphasised the central government’s significant capacity to increase leverage and revealed the MoF’s plan to raise the local government debt limit by a relatively large amount in a one-off effort, which was described as the “most forceful” in recent years. 2) Proceeds of SLGBs can be used to buy undeveloped lands and unsold homes – For the first time, local governments will be allowed to use the proceeds raised by issuance of special local government bonds (SLGBs) to buy undeveloped lands and unsold homes for redevelopment into subsidised housing. 3) Accelerated deployment of RMB2.3trn of unused SLGBs issuance quota in 2024 – This comprises proceeds of issued bonds that are not yet used, plus bonds that haven’t been issued but are within the 2024 issuance quota. 4) RMB400bn additional local government bonds issuance quota for 2024 – This will be done through the unspent bond issuance quotas accumulated from previous years. This additional funding is offered to make up for the significant revenue shortfalls of local governments this year. 5) Issuance of SCGBs for bank recapitalisation – Special central government bonds (SCGBs) will be issued to fund capital injection for recapitalisation of the six largest state-owned commercial banks. This will strengthen their core Tier-1 capital and lending power to support the economic recovery. 6) More decisive fiscal reform – A series of fiscal reform measures will be launched in the next two years to improve the budget system, perfect the fiscal transfer payment system and establish a mature government debt management system. 7) Greater support for vulnerable groups – The MoF guided for greater fiscal spending for low-income families and students, with the aim of boosting household consumption. Further to the slight increases in minimum levels for pensions and medical subsidies, the MoF announced the increase in transfer payment to support students on the back of the rising youth unemployment rate. Missing details of key stimulus plans could be due to pending approvals of the fiscal deficit and debt quotas by the State Council and NPC Standing Committee. Markets will closely watch out for the agendas and policy announcements at these key meetings in late October. Investment implications We remain neutral on mainland Chinese and Hong Kong equities as we look for a forceful fiscal stimulus plan that would provide a comprehensive local government debt resolution and more significant central government debt financing to reverse the property market downturn. However, the support policies announced so far should help reduce downside risk in growth in coming months and deliver the full-year GDP growth of 4.9% this year. Mainland Chinese and Hong Kong stocks remain under-owned by global investors. The valuations of MSCI China (11.8x) and HSI (10.2x) continue to stay below their 5-year averages and represent a steep discount to the 12-month forward P/E of S&P 500 (21.9x) and MSCI World (19.7x). Acceleration of government bonds issuance will do the heavy lifting in providing extra fiscal stimulus Source: Bloomberg, HSBC Global Private Banking and Wealth as at 13 October 2024. Past performance is not an indicator of future performance. We prefer internet companies with 1) more robust earnings outlook; 2) bigger valuation discounts to their historical valuations during the reopening rally in 2023; and 3) solid financial positions with the ability to lift total shareholder returns through share buybacks and higher dividends. We continue to favour quality Chinese SOEs paying high dividends. Those with their H-shares trading at an attractive discount to their A-shares could see better Southbound flows support. We also prefer consumer brands that are better positioned to benefit from the new consumption related policy stimulus. We prefer to stay selective in mainland Chinese property companies and banks. 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. The equity market should benefit from the expected Fed rate cuts in the coming months, which should help lower funding costs in the Hong Kong economy and the domestic property market. Within the A-share market, we prefer a balance of defensive high-quality SOEs with attractive dividend yields in light of the low yield environment onshore, and high-end manufacturers with global competitiveness. We also position selectively in resilient consumer stocks, including services, and consumer goods that can potentially benefit from enlarged fiscal support for household consumption. https://www.hsbc.com.my/wealth/insights/market-outlook/special-coverage/2024-10-14-mof/
2024-10-14 12:02
Key takeaways With the US elections less than a month away, the markets’ focus on polls will further intensify. The latest readings show that the race between former President Donald Trump and current Vice President Kamala Harris remains tight. Hence, it is dangerous to bet on the outcome. All potential outcomes have pros and cons for markets. A Republican victory could lead to lower taxes and deregulation, but higher trade tariffs could raise inflationary fears and slow down rate cuts, creating an offsetting headwind. A Democratic victory would likely result in less uncertainty regarding global policies and less fiscal stimulus. History shows that volatility tends to increase before the elections but eases when the result is known. Equity markets tend to rise in the 6 months after the elections, regardless of the outcome. We base our investment strategy on earnings, interest rates and growth fundamentals, which remain constructive, supporting our bullish view on US equities. We continue to lock in yields of quality bonds at current attractive levels. Bond performance should be supported by continued Fed rate cuts. What happened? 2024 is the year that half of the world’s population will have gone to the polls, and the US elections on 5 November are probably the event with the most significant implications for the global economy and markets. Polls continue to evolve, and betting agencies’ odds reflect the ups and downs in people’s views of what will happen. But actual election victory chances are determined by who gets most of the Electoral College votes, not who has the largest share of the national votes. Much will depend on those states where there is no clear majority – the so-called ‘swing states’, where just a small number of votes could determine which candidate gets the electoral votes. Those states are Arizona, Georgia, Michigan, Nevada, North Carolina, Pennsylvania and Wisconsin. We do not think it is possible or wise to invest on the basis of a likely outcome. We point to the 2016 elections, where Democrats won the popular vote, but Donald Trump moved into the white house because of a narrow victory in a few key swing states. There are also 34 Senate seats and all 435 seats in the House of Representatives up for election. The current prediction illustrates the broad range of potential outcomes and uncertainty. There are four potential US election outcomes, with no clear favourite at this stage Source: Polymarket, HSBC Global Private Banking and Wealth as at 10 October 2024 Investment implications For the overall market direction, the election result may matter less than is sometimes assumed. Across election cycles, we tend to see higher volatility leading up to the election, but the volatility will ease when the result is known. In the event of a close election result, a recount or dispute could extend market volatility, but only temporarily. The US equity market returns tend to be positive in the 6 months after the elections, regardless of the result. Our graph shows the historical annual average returns for the four possible scenarios, highlighting that equities can rally both in case of a Democratic or a Republican president. Under a Trump presidency, we would expect fiscal easing for both companies and households as a result of the extension of existing tax cuts. This tends to be positive for equity markets, but the tailwind may be offset by higher import tariffs, which would not only hurt Chinese and European exporters but also potentially raise costs for US companies and households, boosting inflation. In turn, this could lead to slower Fed rate cuts. Historical annual returns of US stocks under four scenarios Source: Bloomberg, Factset, HSBC Global Research and Wealth as at 18 September 2024. Past performance is not a reliable indicator of future performance. From a sector perspective, we have recently seen that cyclical sectors and those potentially benefitting from deregulation (including technology, consumer discretionary, and financials) have performed well when Donald Trump’s polling numbers have improved. However, a reduction in immigration could weigh on sectors like construction and hospitality, as they rely on access to foreign workers, while higher tariffs could increase the cost of inputs for the industrials and consumer discretionary sectors. If Kamala Harris wins, there are offsetting factors, too. Continuity with the Biden administration may reduce uncertainty and could be a positive for markets. However, fewer tax cuts compared to a Trump presidency could be viewed as a negative. Climate change-related investments would see policy support, while the effort to re-onshore manufacturing are expected to continue. Whoever wins the presidency, if there is no clean sweep, policies would be less ambitious, reducing the market impact. The current market action suggests that investors have been reducing concentrated positions in their portfolios to avoid being wrong-footed on election day. For example, popular overweight positions in technology have been reduced, while investors have been adding to traditionally less favoured utilities and real estate stocks. As previously noted, we have been broadening our sector exposure beyond technology to include US financials, industrials, communications, and healthcare. Given the unpredictability of the elections and our view that the volatility is only temporary, we continue to base our investment strategy on other factors, namely Fed rate cuts, solid earnings, and resilient economic growth. These supportive fundamentals continue to warrant a bullish US equity stance. As for bonds, we continue to lock in yields of quality credit. Stronger-than-expected economic data have driven up yields in the past weeks, providing an opportunity to lock them in as cash rates continue to decline. US election scenario grid Source: HSBC Global Research, HSBC Global Private Banking and Wealth as at 10 October 2024. https://www.hsbc.com.my/wealth/insights/market-outlook/special-coverage/2024-10-14/
