2024-10-14 07:04

Key takeaways The USD typically strengthens in the run-up to US elections. Among the four possible outcomes, clean sweep outcomes are likely to offer greater scope for USD strength to persist. But it would be a mistake to extrapolate the initial reaction into 2025, as others factors, like Fed policy, may be more dominant. The FX market likes to distil issues, such as the 5 November US elections, into a simple binary outcome, but this would be a mistake. The complexity is not only a function of the result being too close to call, but also the result of there being numerous implications, impacting fiscal, trade, and monetary policy, among other aspects. In addition, the impact may vary over time. Historically, the USD has fared well in the run-up to US elections, likely reflecting the “safe haven” allure amid heightened political uncertainty. That is likely to be true over the coming weeks. Once the result is known, we will see the next response in the FX market (we run through four possible outcomes below), perhaps persisting for days, weeks, or months. But it would be a mistake to assume that he post-result reaction will continue to set the tone into 2025. There are plenty of ways in which the FX market could stall or reverse that initial move, for example, if actual policy outcomes fail to match expectations, or if other factors supersede political forces as the key FX drivers. A Republican clean sweep: The USD is likely to rally sharply if there are signs of future fiscal stimulus that would temper market expectations for the Federal Reserve (Fed) easing in 2025. The likelihood of higher trade tariffs would also support the USD, particularly if they feed inflation expectations and further temper pricing for Fed rate cuts. Potential corporate tax cuts and deregulation expectations might draw investment flows into USD assets. Nevertheless, the USD could face headwinds, including concerns that the Republican Party would talk down the USD or call for lower US interest rates. Rising risk appetite might also temper the “safe haven” USD. But we would expect bullish USD forces to win out initially. Nonetheless, a USD rally would have its limits entering 2025, as it would not be guaranteed that actual delivery of policy would fully match those expected by markets. A Republican presidency, divided government: The initial USD reaction is still likely to be bullish, with markets likely to anticipate higher trade tariffs (and perhaps inflation), and a more business-friendly regulatory backdrop. But the USD would not benefit from the fiscal easing expectations that a clean sweep would have brought. A divided Congress could foster a more fractious debate regarding tax cuts expiring in 2025, which could create a “fiscal cliff” mood in markets. Most likely, however, Fed policy would return as the dominant USD driver in 2025, amid fiscal gridlocks. We believe a modest initial post-election USD rally could extend into 2025. A Democrat clean sweep: This outcome could point to a sling-shot path for the USD. The initial post-election reaction is likely to be USD negative, as markets price out the potentially USD-positive aspects that a Republican presidency might have fostered. But that reflex would be unlikely to set the tone for the USD into 2025. A clean sweep could still belatedly foster market expectations for USD-positive fiscal stimulus, albeit with different elements to a Republican clean sweep. This could temper market expectations for the pace of Fed easing in 2025, with attendant USD upside. Any initial USD-negative reaction in November could reverse in 2025. A Democrat presidency, divided government: On paper, the ultimate status-quo outcome, but one which could see some initial USD weakness, amid adjusting to price out fiscal stimulus expectations. This scenario should not carry lasting implications for the USD, but other drivers, such as Fed policy and the pace of easing elsewhere, would likely be more dominant. https://www.hsbc.com.my/wealth/insights/fx-insights/fx-viewpoint/2024-10-14/

2024-10-14 07:04

Key takeaways Q3 results season kicks off this week with 8% of the S&P 500 (by market cap) reporting, and 60% expected by Halloween. Annual consensus profits growth is 10% for this year, and 15% for 2025. Many Frontier and smaller emerging market countries were relatively quick to respond to the post-Covid inflation surge, hiking rates faster than the US. Growing expectations of a soft economic landing bode well for US investment grade (IG) debt. Chart of the week – US economic data holding up September’s strong US employment report, with non-farm payrolls up 254k (versus 150k expected) and the unemployment rate unexpectedly edging lower to 4.1%, was good news for those hoping for a soft landing for the world’s largest economy. The recent run of better-than-expected economic data (see chart) also coincides with an underlying trend of disinflation – despite September’s stronger-than-expected CPI print. Leading indicators point to a further moderation in price pressures, including the shelter component which is contributing to high services inflation. August’s market wobble – partly triggered by a weak July payrolls number – now seems like a distant memory. US stock markets are notching up fresh all-time highs and the US 10-year Treasury yield is back above 4%. A soft landing is good news for global risk assets. But markets are likely to remain volatile as investors grapple with uncertainty over the economic outlook. Rates remain restrictive and the US election has the potential to usher in policy shifts. And despite better US macro news, some labour market data suggests cooling ahead. The October payrolls report could be weak again. Earnings could also disappoint – doubly bad news given stretched valuations. Market Spotlight Chinese markets take a pause for breath It was a bumpy week for Chinese stocks as investors digested the recent surge in prices and the National Development and Reform Commission’s (NDRC) announcement that it would accelerate bond issuance to support the economy. A pause for breath last week isn’t surprising given the extremity of recent market moves – the MSCI China had gained around 26% in the 10 trading days leading up to the Golden Week holiday. Investor expectations around the speed and scale of incoming fiscal support may have become too optimistic. Despite the lack of details on potential fiscal stimulus offered by the NDRC, it is likely that Chinese authorities will still unveil a meaningful fiscal package in the coming weeks. The Ministry of Finance held a press briefing on 12 October, while another opportunity for action comes at the National People’s Congress standing committee meeting later this month. 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 11 October 2024. Lens on… Analysts spooked Q3 results season kicks off this week with 8% of the S&P 500 (by market cap) reporting, and 60% expected by Halloween. Annual consensus profits growth is 10% for this year, and 15% for 2025. But on a quarterly year-on-year basis, analysts have slashed forecasts for Q3 to just 2.9% – down from 10.2% a year ago. So, what has spooked them? Economically-sensitive sectors like materials, consumer discretionary (autos/retail), and industrials have seen some of the biggest cuts. Soft economic data over the summer are likely to blame, and lower oil prices hit energy names. But from Q4, that changes. Five quarters of growth averaging 14% (double the long-run average) suggests a rosier outlook. Technology is set to be the fastest growing sector in Q3, while analysts expect energy to be the weakest. Financial stocks, which are among the first to report, are anticipated to slow. Overall, a low growth bar could offer scope for above-average beats for Q3. But with the market already trading on a relatively high PE of 21x, a soft landing and giddy profit growth from Q4 onwards appear to be priced-in, just as momentum in tech earnings is starting to slip. Value at the frontier Many Frontier and smaller emerging market countries were relatively quick to respond to the post-Covid inflation surge, hiking rates faster than the US. With real rates now significantly positive, they have room to cut – and stimulate growth – without pressuring their currencies. We’ve seen recent cuts in countries like Iceland, Kenya, Pakistan, and Serbia. It’s a trend that should act as a tailwind for Frontier valuations. It comes as valuation discounts between Frontier and both DM and EM regions remain well above their 5-year averages. Frontier markets are currently trading at a price-earnings ratio of 9.7x – a 51% discount to DMs (at 19.9x) and a 24% discount to EMs (at 12.8x). Yet, Frontier offers superior earnings growth and higher dividend yields, plus the diversification benefit of low correlation with other asset classes. This is largely being driven by structural trends like the relocation of manufacturing hubs, re-routing of supply chains, social and economic reforms (especially across Gulf Cooperation Council countries), and digitisation. ‘All in’ appeal of US IG Growing expectations of a soft economic landing bode well for US investment grade (IG) debt. With Fed policy easing expected to continue at a cautious pace, and recent jobs data mitigating recession worries, 10yr Treasury yields have risen, which has improved the attractive all-in yields that IG debt offers. IG debt has a high correlation with government bonds. So, if risk appetite falters, IG should be a defensive play as the widening in credit spreads is likely to be, at least partially, offset by the fall in government bond yields. The fundamental backdrop for IG has also been positive. Corporate profits have been resilient, and the net issuance outlook is expected to remain favourable. Above all, investor demand remains upbeat. There have been strong flows for much of this year into US IG exchange traded funds and the unwinding of popular carry trades during the summer did little to dent investor enthusiasm. The experience suggests that the marginal spread-widening required to attract buyers is smaller than it was in the past. 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 11.00am UK time 11 October 2024. Key Events and Data Releases Last week The week ahead Source: HSBC Asset Management. Data as at 11.00am UK time 11 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 Risk markets were firm ahead of Q3 earnings season in the US. Core government bonds fell on an upward surprise in September’s employment report. US CPI data also came in stronger than expected. Bunds continued to fare better than US Treasuries as investors priced in a 0.25%, rate cut at October’s ECB Council meeting. In stocks, the US S&P 500 touched a new all-time high, the Euro Stoxx 50 index traded sideways, and Japan’s Nikkei 225 inched higher. Emerging market equities weakened as investors awaited further details on potential fiscal stimulus for the Chinese economy. The Hang Seng fell sharply, with China’s Shanghai Composite also weakening after the Golden Week holiday. The Korean Kospi rebounded, with India’s Sensex little changed. In commodities, geopolitical tensions are supporting energy prices. Copper weakened, while gold was on course to finish the week flat. https://www.hsbc.com.my/wealth/insights/asset-class-views/investment-weekly/2024-10-14/

2024-10-14 07:04

Key takeaways As expected, the RBI changed its stance from “withdrawal of accommodation” to “neutral”, in order to buy itself more flexibility, while keeping rates unchanged. While the RBI will be carefully analysing the “inflation hump” expected in the September print, it expects one year-ahead-inflation at target levels of c4%. The sequencing is important; the stance was changed today, and we believe rate cuts will begin in the next meeting; we expect 50bp in rate cuts over December and February, taking the repo rate to 6%. In line with our expectation, the RBI kept the policy repo rate unchanged at 6.5%, but changed its stance from ‘withdrawal of accommodation’ to ‘neutral’. It further explained its intent to “remain unambiguously focused on a durable alignment of inflation with the target, while supporting growth”. It also said that a neutral stance will give “greater flexibility and optionality” in monetary policy making. Five of the six MPC members voted for a pause in rates. The new MPC member, Dr. Nagesh Kumar, voted for a cut. All six members voted for the change in stance. As per Bloomberg consensus, a clear majority (40 out of 44 respondents) called for no change in rates. But it was rather divided house between those expecting a stance change, and those not. We believe that a bunch of softer growth indicators of late and our expectation that inflation will get to the 4% target by March 2025, made a case for a softer stance. But with key global uncertainties in the horizon such as US elections and oil prices, it would have been too soon for a rate cut. Careful sequencing We believe the RBI aptly put the horse before the cart. One, being an inflation targeter, it spoke more of upside inflation risks than downside growth risks. The animal analogy was not lost on us. The inflation elephant alluded to in past meetings had been sluggish, taking time to rein in. Meanwhile the inflation horse, mentioned in today’s meeting, had understandably been taken to the stables, but could bolt again if the stable doors were to be opened. We don’t particularly see this as hawkish. We see it aptly aligned with the RBI’s desire to remain close to the 4% inflation target. Two, the RBI seems to be sequencing its moves carefully, starting off with a softening of stance today. We believe the next move will be a 25bp rate cut in the December meeting. RBI style growth-inflation balance While the RBI mentioned that the balance between growth and inflation remains well-poised, we believe it fully acknowledged upside risks to inflation (namely adverse weather events, geopolitical conflicts, commodity price spikes), while not acknowledging the downside risks to its growth forecast. On inflation, Deputy Governor Patra spoke about the short term “inflation hump”, and RBI’s desire to see it pass. Indeed, September inflation is expected to come in at 5.2% y-o-y (versus 3.7% last month), led by base effects and select sticky food prices. On growth, the RBI continues to forecast GDP growth at 7.2% in FY25, which is higher than our forecast of 7%. In the Monetary Policy Report (MPR) which was released along with the policy statement, the FY26 growth forecast has also been kept at an elevated 7.1% (HSBC: 6.6%). But we are going to read between the lines. Even as the RBI highlighted upside inflation risks, the MPR unveiled a 4.1% inflation projection for FY26 (i.e. one year ahead inflation). Given the RBI is driven by future inflation expectations, this is another reason why we think a rate cut is coming up in December. Confident but not complacent The RBI sounded confident on many aspects of the macro economy: Liquidity has eased (after a tight second half of September), the term premium has been stable and transmission to credit markets has progressed satisfactorily (see exhibit 1). On the external front, the current account deficit is likely to remain at sustainable levels, portfolio flows have risen, and FX reserves are at record highs (of over USD700bn). Fiscal consolidation is also underway (though we believe that the centre’s consolidation may be partly offset by wider deficit at the states). But despite the confidence, the RBI was not complacent. In particular, it highlighted two areas of financial stability that need to be monitored. One, stress build-up in a few unsecured loan segments (like loans for consumption purposes, micro finance loans and credit card payments outstanding). And two, some NBFCs pursuing growth too aggressively with an “imprudent growth at any cost approach”. What next? We believe the recent softness in select fast moving growth indicators (PMI Manufacturing, motor sales, cement production, bank credit, corporate tax collections, GST revenue growth and goods exports) is more representative of sector rotation (from urban to rural) rather than a marked slowdown. Therefore, we think this will be a shallow rate cutting cycle, with an aggregate 50bp in easing. We expect a 25bp rate cut in December, followed by another one in February, taking the policy rate to 6%. This aligns with our real rate calculation of neutral rates at 1.75% (the average of the band the RBI communicated in the monthly bulletin), and our medium-term inflation forecast of 4.25%. https://www.hsbc.com.my/wealth/insights/market-outlook/india-economics/2024-10/

2024-10-09 12:02

A sustainable future for beer Climate change affects the taste of beer, and firms in the industry need to ensure taste quality is maintained as demand rises. Brewers are also under pressure to be more sustainable in terms of water use, raw materials and packaging emissions. We think investor scrutiny of retailer commitments could help ensure beer is more sustainably enjoyable. In this issue of #WhyESGMatters, we discuss the climate and environmental issues associated with beer production and what brewers and investors can do to alleviate this impact. Did you know? Beer holds a volume share of 75% in the global alcoholic beverage market. An additional 55% primary energy is needed for one litre of beer packaged in glass vs. in aluminum cans. 90% of Europe’s aromatic hop field area is located in Slovenia, Germany and Czech Republic. Europe supplies 50-63% of hops globally. The average alpha acid content in hops decreased by 34.8% in Celje (Slovenia) between 1971 and 2018. Beer production accounts for 5% of the UK's total water demand. Did you know? Alpha acids are chemical compounds found in the hop plant, which are the source of bitterness, aroma and flavour in beer. Bitter hops have a higher alpha acid content and are generally used to extract bitterness. Aroma or finishing hops have a lower alpha acid percentage, but they contribute to the overall flavour profile. Changes in alpha acids affect the quality of aroma hops, which has an impact on beer’s flavour. Source: M Mozny et al., Climate-induced decline in the quality and quantity of European hops calls for immediate adaptation measures, Nature Communication, 10 October 2023; European Commission, Crop productions and plant-based products: hops and Hop report for the harvest year 2022; D Amienyo, A Azapagic, Life cycle environmental impacts and costs of beer production and consumption in the UK, The International Journal of Life Cycle Assessment, 2016, World Spirit Alliance, Spirits: Global Economic Impact study 2024. Climate change and beer Beer is one of the most popular drinks globally, accounting for 75% of total beverage alcohol volumes, compared to 10.4% for wine, and 9.9% for spirits. The beer industry sits just below spirits in terms of consumer spend, representing 40% of the alcoholic beverage market value. China, the US, and Brazil lead beer market share, accounting for 21.9%, 10.6%, and 7.8% of sales, respectively as of 2022, but Czechs consume the most beer per capita, over 6x China and 3x US, at 189 litres per year. Will climate change take the taste and aroma away? Hops: The growing consumer preference for beer flavours, which depends on high-quality hops, has led to increased focus on the impact of climate change on beer brewing. A recent study by the Czech Academy of Sciences and Cambridge University compared European aroma hops during two periods, 1971–1994 and 1995-2018, and found that rising temperatures associated with climate change delayed the start of the hop-growing season by 13 days from 1970 to 2018. This pushed back the critical ripening period towards the warmer part of the season, lowering the alpha acid content in hops and impacting the aroma and flavour of beer. Climate change is likely to continue to impact European and other top hop-growing regions globally, such as the US (Idaho, Oregon, and Washington), China (Xinjiang and Gansu) and Australia (Tasmania and Victoria). For example a decline of 20-31% in alpha acid content is anticipated in Europe by 2050, while overall yields are expected to shrink by 4-18%. Given that all G20 countries have seen rising temperatures, we expect hop cultivation in these other markets to face similar challenges. Beer production process Note: some techniques may vary, e.g., hops may be added at various stages of the process, such as mash hopping and dry hoping. Source: HSBC, Britannica. Malted barley: Climate change is also likely to affect malted barley crops, with big implications for the beer industry, given malt provides sugars responsible for alcohol concentration and proteins required for beer’s foaming properties. Indeed, one study shows that most of today’s barley harvesting areas will get warmer and dryer, resulting in sharp declines in yields, by 3-17%, depending on the environment. Research also suggests that increased temperatures and heat intensity can lead to significant rises in grain protein concentration, which reduces the starch concentration and enzymes necessary for high-quality malt and good beer production. What does this mean for the sector? We think investors should consider how hop and barley farmers, as well as firms in the sector, implement adaptation measures to ensure availability of high-quality crops. For example, some hop farmers are relocating their gardens to higher elevations and valley locations with higher water tables. They’re also building irrigation systems or protective shading structures and breeding more drought resistant varieties. Some commentators suggest that, ultimately, hop growing is likely to move to cooler locations, even such as Finland or Norway, due to cost considerations; this adaptation measure is proving to be effective in wine industry. For barley, similar adaptation measures can be done; researchers are also working on new strains of barley that can be grown in different conditions while maintaining malt brewing quality, such as ‘winter ready’ varietals. The environment and beer Throughout the lifecycle of beer, sustainability issues exist in the cultivation of raw materials, the production of beer by breweries, and in the packaging and delivering of beers to stores or other places. We discuss three key environmental impacts of beer below. Water Water is an essential component in farming beer’s key ingredients, barley and hops. According to the Water Footprint Network, malted barley required to produce one litre of beer needs nearly 300 litres of water. Water is also key in beer’s production processes, from the mashing of grains to washing and cleaning equipment after each batch is completed. The brewing stage itself consumes, on average, between 4-7 litres of water per litre of beer in smaller craft breweries. In the UK alone, the production of beer requires 185bn litres annually, c5% of the UK’s total water demand. Raw materials Malted barley encompasses a highly energy-intensive production process, so it’s unsurprising that among the raw materials used to make beer, it makes the biggest contribution to emissions. The use of pesticides and fertilisers not only releases further emissions but also raises biodiversity risks. Globally, 64% of agricultural land is at risk of pesticide pollution, and 34% of high-risk areas are high-biodiversity regions. Hops face similar challenges on top of the energy required to dry them before the boiling process. Contribution of different materials to beer’s overall emissions from raw materials Note: Hops are included in ‘Other’ Source: The International Journal of Life Cycle Assessment (2016) Packaging Emissions from packaging contribute the largest part of the beer industry’s carbon footprint, which is largely driven by the production and transportation of glass bottles. It’s estimated that one litre of beer packaged in glass requires 55% more primary energy, compared to the same volume in aluminium cans. Recycling and reducing the weight of glass packaging is key: a 10% weight reduction is estimated to save 5% of emissions. At the same time, kegs are the most sustainable option as they can have a useful life of more than 30 years and can be reused more than 150 times before being recycled. Emissions intensity of beer by packaging and life cycle stage Source: The International Journal of Life Cycle Assessment. Addressing sustainability issues Recent years have seen the rise of carbon-neutral and net-zero breweries. Carbon neutral breweries emphasise the use of carbon offsets, conversely, net-zero breweries take a more proactive approach by addressing emissions across production and supply chains, integrating renewable energy sources and efficient technologies. Brew without the buzz With the rise of health-conscious consumers, a rising number of consumers chooses non-alcoholic beverages. According to a 2023 UK survey, 44% of individuals aged 18-24 consider themselves either occasional or regular drinkers of non-alcohol alternatives, and 33% consider themselves non-drinkers. The industry is catching the drift: popular beer brands have started producing low and non-alcohol beers. Non-alcoholic beers require less processing and resources than alcoholic beers and are therefore more sustainable. But the environmental impact of barley and hops, which are still key to their flavour, remains significant. Flavours fading for craft brewers We think beer lovers should be aware that these flavoured or hop-forward beers come with a higher environmental impact; they require more aroma hops and are often more water and space intensive than other hop varietals. For example, in the US, it takes c70% more land and water to produce one kilogram of aroma hop pellets than for alpha hop pellets. Actions towards sustainable beer production Source: HSBC; Responsible Brewing: An Introduction to Water, Energy, and Waste Management in Breweries, Medium, 08 July 2023; R Nieto-Villegas et al., Effects on beer attribute preferences of consumers’ attitudes towards sustainability: The case of craft beer and beer packaging, Journal of Agriculture and Food Research, March 2024. 4. Conclusion As climate change continues to impact the beer sector, we think investors should also continue to scrutinise companies’ sustainability commitments in the beer industry; future improvements should focus on the raw materials stage, especially malted barley, as well as packaging and water use. An increased focus on adaptation measures is also required to meet beer demand without reducing its quality. We believe that over time, investors input could help make beer more sustainably enjoyable. https://www.hsbc.com.my/wealth/insights/esg/why-esg-matters/2024-08-20/

2024-10-08 12:02

Key takeaways Surging exports are providing a powerful boost to growth across much of ASEAN… …while foreign direct investment continues to remain a bright spot for the region Easing inflation and interest rates should provide a cushion beyond the Year of the Dragon. Indonesia looks to pick up a little steam as well next year, though it will need to heed the pitfalls of easy choices and fiscal slippage to make gains stick for the long term. Things are also ticking up in Thailand, as a new government gets to work, and the tourism recovery continues apace. Malaysia is riding the wave of inward investment, though growth may cool at the margin over the coming year. Singapore, meanwhile, is chugging along, with its growth so far this year better than hoped, though slower global trade could soon add a little drag. The Philippines is taking a little breather this year, before revving up again in 2025 as inflation tumbles and spending power increases. Vietnam has overcome its dip in growth, helped by a robust external sector, while local demand is reviving. Economy profiles Key upcoming events Source: Refinitiv Eikon, HSBC Indonesia A new innings Following the election in February, the General Election Commission (KPU) announced in March that Prabowo Subianto has won an outright majority, garnering 58.6% of the votes, and is set to be Indonesia’s next president, starting on 20 October. All eyes are now on the key people and policies the new government champions. The continued presence of technocrats in key ministerial posts would signal a desire to push ahead with reforms, and the final legislative count will determine the parliamentary muscle power behind potential reforms. Prabowo has spoken at length about continuing current President Jokowi’s reforms – embarking on down-streaming 2.0 and continuing the infrastructure build-out. However, we believe there will be challenges along the way: for instance, slower global demand for nickel electric vehicle (EV) batteries, lowering Indonesia’s carbon footprint, and restructuring certain state-owned enterprises (SOEs). Prabowo has outlined plans to upgrade defence systems and enhance social welfare schemes (in particular a new free lunch programme at schools). The challenge is to keep a lid on the fiscal deficit and hold on to Indonesia’s well-maintained macro stability over the next five years. We do believe that a decade of reforms has put in place several buffers that would help keep the house in order, at least in the short term. For instance, better infrastructure and lower logistics costs will likely keep a lid on core inflation, as has been clear in recent months. Supply-side reforms could help further control the rise in food inflation. And rising exports of processed metals will likely keep the external deficits manageable. For now, however, growth is rather weak. Q2 GDP was 7.8% below pre-pandemic trend levels. The contraction in July and August PMIs suggest that activity weakened into Q3. As Bank Indonesia (BI) cuts rates, the new government takes over and announces its vision, thereby lowering policy uncertainty, and FDI inflows waiting on the side-lines flow in, we believe growth prospects could improve. We expect GDP growth to rise from 5% in 2024 to 5.3% in 2025 and 2026. Our growth model suggests that switching to loose fiscal and monetary policy could help raise growth, but only partially. Moving further up the manufacturing value chain, and graduating from exporting just ores and metals, to exporting EV batteries and EVs, and thereby reducing the impact of commodity price shocks on the economy, could push potential growth to 5.8% by 2028. PMI Manufacturing has slipped into contraction Source: CEIC, HSBC Inflation is well below BI’s 2.5% target Source: CEIC, HSBC Malaysia At full steam After slow growth in 2023, Malaysia’s economy has been roaring again, expanding by 5.1% y-o-y in 1H24. The momentum has also been impressive, hitting 2.9% q-o-q, seasonally adjusted, in 2Q. Beyond strong headline numbers, what is more encouraging is the breadth of the recovery. For one, the long-anticipated revival in manufacturing is rather outstanding. Albeit delayed compared to peers, Malaysia’s manufacturing and trade sectors have finally turned the corner, riding the global tech upturn. After a long stretch of annual declines, electrical and electronics shipments returned to growth on a three-month moving average basis, albeit this remains at a nascent stage. Meanwhile, there is a mixed performance in commodities, with palm oil and LNG exports leading. In addition to manufacturing, what was a great surprise is the performance of construction, which expanded by a double-digit y-o-y pace for the second consecutive quarter. Coupled with the expenditure side of the gross fixed capital formation data, this is not only related to the government’s recent increase in public investment but also reflects rising interest in FDI-related large-scale projects. Meanwhile, services continue to show strength. Not only has private consumption shown resilience, but tourism has also added much-needed fuel, as Malaysia has welcomed tourists equivalent to 90% of its pre-pandemic levels. Given the upside surprise in 2Q, we recently upgraded our GDP growth for 2024 to 5.0% (previously: 4.5%), while keeping 2025 growth at 4.6%. Outside of growth, inflation pressure remains largely muted, despite diesel subsidy rationalization in June. Headline inflation averaged around 1.8% y-o-y in the first seven months of the year. Even after taking into account unfavourable base effects, we expect manageable inflation. We forecast inflation at 2.3% in 2024 and 3.0% in 2025, though acknowledge uncertainty from the potential subsidy rationalisation on the petrol RON95. Our base case is for Bank Negara Malaysia (BNM) to keep its policy rate steady at 3.0% for a prolonged period. As long as inflation falls within BNM’s 2-3.5% forecast range, we do not expect the central bank to move. That said, the risk of a hike is higher than a cut in Malaysia, compared to regional peers. Malaysia has seen a near-full recovery in mainland Chinese tourists Source: CEIC, HSBC. Note: YTD is July for all except MA (June). Inflation has remained manageable, providing room for BNM to stay on hold Source: CEIC, HSBC Philippines Red-eye flight to easing The Philippine central bank, Bangko Sentral ng Pilipinas (BSP), embarked on its easing cycle in August, cutting its policy rate by 25bp to 6.25% – even before the Federal Reserve (Fed) had lowered its policy rate. It is good to look back to see how impressive this was. From 2022 to 2023, not only was inflation in the Philippines the highest in ASEAN, but the economy’s current account deficit was as wide as it was in the run-up to the Asian Financial Crisis. Many, including HSBC, thought that monetary policy in the Philippines had the least independence from the Fed when compared to others in ASEAN. However, the Philippines in 2024 held itself together and turned the corner. The authorities cut the tariff for rice – the country’s most ubiquitous staple – from 35% to 15%, setting the stage for headline inflation to ease to below 3% y-o-y, or to within the lower bound range of the BSP’s 2-4% target band. The current account deficit is also moderating at a pace faster than expected, thanks to the economy’s Business Process Outsourcing (BPO) sector booming over the past year. This provides the BSP with inflows to help strengthen the peso and some support to wiggle away from the Fed. And, given how far inflation can still ease, the BSP already signalled that more rate cuts are to come. The easing cycle comes at a good time. Although growth in the Philippines has held up relative to the rest of Asia, some cracks are already showing. For instance, growth in household consumption dipped to its lowest level since the Global Financial Crisis, barring the COVID-19 pandemic, while growth in durable equipment investment has fallen for the second consecutive quarter. Credit in the economy also remains weak with the cost of borrowing high. That said, we expect the BSP’s easing cycle to reinvigorate small- to medium-scale investments and reduce the debt burden of households, bolstering growth in 2025 and 2026. We are even more bullish on next year’s prospects, with the tariff rate cut on rice potentially freeing-up 1.1% of the economy for growth. With inflation on its way down but nothing terrible happening to GDP, we expect the BSP’s easing cycle to be gradual. We expect only one more 25bp rate cut (to 6.00%) in 2024 and pencil in a total of 100bp worth of rate cuts in 2025, bringing the year-end policy rate to 5.00%. We think the easing cycle will end in 2025, so we expect the policy rate to remain at 5.00% throughout 2026. Due to the tariff reduction on rice, we expect inflation to be below 3% in 2025 Source: CEIC, HSBC. Note: Grey area represents HSBC forecasts. The services trade surplus widened in 2023-24 due to a boom in BPO exports Source: CEIC, HSBC Singapore A mixed bag Singapore has made good progress in its economic recovery in 2024. While the possibility of a technical recession was still on the cards in 2Q23, the recovery momentum continues, helping Singapore to emerge from a severe downturn in the trade cycle to see healthy growth of c3% y-o-y in 1H24. While manufacturing remained in contraction, the magnitude was much smaller, and it is also a mixed story. The culprit was falling pharmaceutical output, which is volatile in nature, and could swing back to growth later. Electronics output still saw a decent recovery, though the pace lags behind other tech-exposed economies like Korea and Taiwan. But this is because they have heavier exposure to Artificial Intelligence (AI)-related production, and Singapore is set to ride a broader recovery in consumer electronics. Despite still subdued manufacturing activity, better-than-expected services came to the rescue. But it is also a mixed bag. On a sequential basis, domestically oriented sectors fared better, while consumer-facing and travel-related ones saw large corrections in 2Q. But this was largely expected, as a busy line-up of large-scale international concerts was concentrated in 1Q. That said, there is still potential to grow further. Singapore has welcomed visitors equivalent to almost 90% of 2019’s level in 1H24. July saw for the first time the return of Chinese tourists exceeding the monthly 2019’s level. All in all, we recently upgraded our growth forecast to 3.0% (previously: 2.4%) for 2024 and maintain our 2025 growth forecast at 2.6%. In addition, the disinflation progress also continues with core inflation decelerating to 2.5% y-o-y in July. Services inflation like education and healthcare continued to trend down, but entertainmentrelated costs barely budged. Most importantly, fuel and utilities cost momentum was muted, and oil prices are likely to stay relatively range-bound for now. As such, we recently revised down our core inflation forecast to 2.8% for 2024 (previously: 3.1%) and 1.9% for 2025 (previously: 2.2%). Despite cooling inflation, we do not believe this will prompt the Monetary Authority of Singapore (MAS) to ease anytime soon; at least inflation trends on their own may not be enough to warrant an easing bias from the MAS. Singapore’s semiconductor NODX has rebounded to double-digit growth Source: CEIC, HSBC Core inflation has been consistently slowing Source: CEIC, HSBC Thailand It’s complicated Thailand’s GDP growth accelerated to 2.3% y-o-y in 2Q 2024, with its fiscal engines finally up and running, despite delaying the release of its budget for six months. The manufacturing production index in July also at last turned positive after falling for roughly 21 months, while goods exports leaped by 21.8% y-o-y as Thailand benefitted from the global tech upcycle. This coincides with the PMI new orders index, which just turned expansionary for the first time in 12 months back in July. All in all, it seems the economy is finally revving up. We expect Thailand to stage a V-shaped recovery for the remainder of 2024, growing 2.7% and 3.7% y-o-y in 3Q and 4Q 2024, respectively. However, a lot happened before the economy got to where it is now. Amidst tough competition from mainland Chinese imports, headline inflation dropped back to below the Bank of Thailand’s (BoT) 1- 3% target band, while the trade balance swung back into deficit. Thailand also saw its political landscape change quickly: in less than 48 hours after Srettha Thavisin was removed from office, parliament elected Paetongtarn Shinawatra as Thailand’s youngest Prime Minister in history. Although progress hasn’t been a straight line, the general direction is improving. In fact, amidst the political volatility, financial markets in Thailand finally ticked up after underperforming for 12 straight months. The SET index in September jumped for the first time this year, while the THB nominal effective exchange rate (NEER) is nearing its pre-pandemic levels. The Thai economy, however, isn’t all in the clear. Yes, government spending and tourism continue to fuel growth. But headwinds persist in manufacturing and consumption. Competition from mainland Chinese imports may limit how far manufacturing can improve while Thailand’s high household debt will likely be a major drag on private consumption. That’s the complicated part. Although headwinds are strong and inflation is weak, we do not expect the Bank of Thailand (BoT) to ease monetary policy from now until 2027. Keeping the policy rate at 2.50% should help guide Thailand’s much-needed deleveraging cycle, particularly on household debt. The SET index finally turned after the new government was formed in August Source: Bloomberg, HSBC Household debt is a structural issue that the authorities have prioritised to tackle Source: BIS, Macrobond, HSBC. CN – Mainland China, Em – Emerging, BZ – Brazil SA – South Africa, MX – Mexico, RU – Russia, and TU – Türkiye. Vietnam Waiting for further lift Vietnam’s economic recovery continues to firm up as the Year of the Dragon progresses. Growth improved and surprised on the upside in 2Q24, rising 6.9% y-o-y in 2Q24. The recovery in the external sector has started to broaden out beyond consumer electronics, although the pass-through to lifting the domestic sector still remains to be seen. For one, the manufacturing sector has emerged strongly from last year’s woes. PMIs have registered five consecutive months of expansion, while industrial production (IP) has registered a bounce-back in activity for the textiles and footwear industry as well. This has supported robust export growth at double digits, with structural forces, such as expanding market access for Vietnamese agricultural produce, also underway. However, the domestic sector is recovering more slowly than initially expected, with retail sales growth still below the pre-pandemic trend. Encouragingly, the government has put in place measures to support a wide range of domestic sectors that is expected to shore up confidence with time. Environment tax cuts on fuel and value-added tax cuts for certain goods and services will last until year-end 2024, while the revised Land Law effective from August will buttress the outlook for real estate. Albeit still early, the latter seems to have already contributed to a boost in foreign investment in the sector, with recent FDI showing broad-based gains. We believe the potential upside risks can offset the temporary economic disruptions from Typhoon Yagi. All in all, we forecast GDP growth at 6.5% for both 2024 and 2025. On inflation, price developments are turning more favourable in 2H24, as unfavourable base effects from energy have faded. An expected Fed easing cycle will also help to alleviate some exchange rate pressures. Taking all these into consideration, we forecast inflation at 3.6% in 2024 and 3.0% for 2025, both well below the State Bank of Vietnam’s target ceiling of 4.5%. Vietnam’s key exports continue to recover, with signs of broad-based growth Source: CEIC, HSBC Inflation moderated notably in August and is expected to remain well below target Source: CEIC, HSBC https://www.hsbc.com.my/wealth/insights/market-outlook/asean-in-focus/2024-10-08/

2024-10-08 07:05

Key takeaways US stocks rose; Treasuries were little changed . European stocks and government bonds rose. Asian stocks advanced. Markets US stocks extended gains on Wednesday as oil prices fell amid easing investor worries over geopolitical tensions. The S&P 500 rose 0.7%. US Treasuries ended little changed amid lower oil prices and solid economic data. 10-year yields held steady at 4.32%. European stocks rebounded on Wednesday amid hopes of easing geopolitical tensions in the Middle East. The Euro Stoxx 50 rallied 2.9%. The German DAX rose 2.7% and the French CAC closed 2.1% higher. In the UK, the FTSE 100 gained 1.9%. European government bonds rose. 10-year German bund yields edged down 2bp to 2.98% and 10-year French bond yields fell 5bp to 3.67%. In the UK, 10-year gilt yields dropped 8bp to 4.83%. Asian stock markets advanced on Wednesday amid hopes of geopolitical de-escalation. Korea’s Kospi surged 8.4%, while Japan’s Nikkei 225 rose 5.2% after a strong Tankan business survey. Hong Kong’s Hang Seng advanced 2.0%, and China’s Shanghai Composite added 1.5%. Elsewhere, India’s Sensex gained 1.6%. Crude oil prices extended declines on Wednesday. WTI crude for May delivery settled 1.2% lower at USD100.1 a barrel. Key Data Releases and Events Releases yesterday In the US, the ISM manufacturing index increased to 52.7 in March, from 52.4 in February, remaining in positive territory in part due to lengthening suppliers’ delivery times. Retail sales rose 0.6% mom in February, after a 0.2% mom drop in January, as motor vehicle purchases rebounded. ADP employment increased by 62k in March, from an upwardly revised 66k rise in February and beating expectations. Releases due today (2 April 2026) No major data releases. https://www.hsbc.com.my/wealth/insights/asset-class-views/investment-daily/id/