2024-12-02 07:06

Key takeaways Investor sentiment towards emerging markets (EM) has been cautious in the wake of US elections and growing concerns about tariffs. Asian stock markets have delivered decent performances this year, with mainland China and India setting the pace. In addition to concerns about potential changes to US trade policy next year, the Eurozone is already dealing with its own fair share of problems – much of which are weighing on the euro. Chart of the week – Will rising policy uncertainty push market volatility higher in 2025? Rising uncertainty over economic and trade policy has been hanging over global markets in recent weeks. It’s the kind of anxiety that typically goes hand-in-hand with higher stock market volatility. So far, most of the volatility has been in rates markets. And that’s hardly surprising given uncertainty over the inflation outlook, particularly in a year when bond pricing has been hyper-sensitive to macro data. Meanwhile, US stocks remain in a strong uptrend. But with market multiples pricing perfection (the S&P 500 hit another new high last week), bond yields still elevated, and growth cooling into 2025 – can calm conditions last? In a “multi-polar world” of economic fragmentation and competing trade blocs, the most significant consequence for investors is a higher and more unpredictable inflation regime. This could constrain central bank policy easing, weighing on growth and corporate profits. Fixed income returns may still depend on yield income to support returns, and government bonds may not be a dependable hedge for portfolios. With geopolitics potentially disrupting underlying investor assumptions on the growth, profits, and inflation outlook, market volatility could easily pick up, should the global news flow deteriorate - and the most expensive parts of the market could be vulnerable. Market Spotlight Going private Private credit has been a popular portfolio diversifier with investors in recent years – helped by an era of elevated rates that enhanced returns. But with central banks pivoting in the second half of 2024, a shift to lower rates has raised questions about whether that will change. Yet, demand for private credit has remained robust. One explanation is that, while rates are on their way down, they are unlikely to fall to the very low levels experienced during the last decade. If rates begin to normalise at around 3%, it should leave room for private credit assets to deliver still-attractive all-in yields – particularly when compared to fixed-rate bonds. In fact, private credit premiums could potentially deliver a cushion as floating-rate yields decline. Another attraction is that private credit doesn’t rely on an exit market to fund the distributions given that loans are repaid after a fixed period. This has been an important differentiator to private equity markets, where a weaker exit environment recently has led to lower distributions back to investors. Despite recent growth, private credit only accounts for around 6% of corporate lending in the US – which is one of the most mature private credit markets. The value of investments and any income from them can go down as well as up and investors may not get back the amount originally invested. Past performance does not predict future returns. 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 29 November 2024. Lens on… Upbeat on EM credit Investor sentiment towards emerging markets (EM) has been cautious in the wake of US elections and growing concerns about tariffs. EM sovereign bonds (tracked by the EMBI index), for instance, are a high-duration asset class with a structurally improving average credit-rating outlook. If bond yields gradually grind lower globally, EM sovereigns could be well-placed to perform given their historically high all-in yields. Spreads have compressed but are expected to remain well-behaved, thanks to a structural improvement in credit quality. That said, global risks remain high, which could impact the asset class. Worries about inflation and more active fiscal policy mean markets are pricing a shallower path for US monetary easing. And tariffs are unlikely to leave many EMs unscathed, with risks of a strong US dollar tightening global financial conditions. For EM investors, country sensitivity to these headwinds will depend on factors like existing free trade agreements, relationships with the new US administration, and the degree of trade exposure that they have to the US. Asia’s solid earnings Asian stock markets have delivered decent performances this year, with mainland China and India setting the pace. But as Asia’s Q3 earnings season rolls on, we’ve seen regional variations in terms of sector winners and losers. Technology-led markets in South Korea and Taiwan are still the region’s profit engine. Strong demand in industries like semiconductors and hardware has been potent, particularly in South Korea, which has seen a strong rebound in profits growth. In Japan, Q3 has also been solid, with financial stocks the big driver on improving margins. But its discretionary stocks have lagged, with profits falling among automakers. In mainland China, financial stocks (particularly insurance firms) have underpinned robust Q3 profits growth, and firms in hardware and e-commerce have been strong too. By contrast, profits in India have surprised to the downside. But weak macro momentum in the quarter is expected to recover, and sectors like financials, healthcare, and real estate have performed well. Overall, some specialists continue to see fair valuations across the region, as well as solid growth and appealing economic diversification. Euro woes In addition to concerns about potential changes to US trade policy next year, the Eurozone is already dealing with its own fair share of problems – much of which are weighing on the euro. Growth has weakened again, with manufacturing PMIs in France and Germany in the low 40s and services failing to do enough to produce positive growth. Then there is political uncertainty, with general elections in Germany in February and ongoing instability in France. These risks have led to a sharp repricing in the relative outlooks for growth and monetary policy. Markets have priced in more aggressive monetary easing by the ECB, just as Fed rate cuts have been priced out. The result is the euro has weakened in the face of a strengthening US dollar – and the next few months could be challenging. The good news is a weaker euro supports domestic exporters, despite near-term caution on the profits outlook. Likewise, ECB rate cuts should boost both the macro outlook and government bonds. Past performance does not predict future returns. The level of yield is not guaranteed and may rise or fall in the future. For informational purposes only and should not be construed as a recommendation to invest in the specific country, product, strategy, sector or security. Any views expressed were held at the time of preparation and are subject to change without notice. Index returns assume reinvestment of all distributions and do not reflect fees or expenses. You cannot invest directly in an index. Any forecast, projection or target where provided is indicative only and not guaranteed in any way. Source: HSBC Asset Management. Macrobond, Bloomberg, Datastream. Data as at 7.30am UK time 29 November 2024. Key Events and Data Releases Last week The week ahead Source: HSBC Asset Management. Data as at 7.30am UK time 02 December 2024. For informational purposes only and should not be construed as a recommendation to invest in the specific country, product, strategy, sector or security. Any views expressed were held at the time of preparation and are subject to change without notice. Market review Risk markets were stable, with the US dollar index correcting lower amid rising trade tensions. Core government bonds rallied as investors digested the latest appointments to the forthcoming US administration. Rising budget concerns prompted a wider 10yr yield spread between French and German government bonds. US equities posted modest gains in a holiday-shortened week, whereas the Euro Stoxx 50 index softened, led by a weakness in French stocks. Japan’s Nikkei 225 reversed earlier gains last week as the yen rebounded versus the US dollar. Emerging market equity performance was mixed. China’s Shanghai Composite and India’s Sensex advanced, while Korea’s Kospi index dropped on lingering worries over domestic macro outlook and geopolitical risks as the BoK delivered a surprise rate cut. In commodities, oil and gold consolidated. Copper edged higher. https://www.hsbc.com.my/wealth/insights/asset-class-views/investment-weekly/2024-12-02/

2024-11-28 12:02

Key takeaways UK PMIs fell below the 50-mark as uncertainty weighs. Bank of England updated its forecasts after the Budget. Hard data moved in the wrong direction – GDP growth was slower and inflation accelerated. Source: HSBC A lot to digest and greater uncertainty ahead Since the UK Budget on 30 October, macro and political news has come thick and fast, leaving markets, households and businesses with a lot to digest. Politically, a change of government in the US could see a further rise in protectionist policies and raises questions as to how the UK government will seek to work with President-elect Trump. Meanwhile, a looming confidence vote for German Chancellor Scholz could see a general election in Europe’s largest economy in early 2025. The European Central Bank, Federal Reserve and Bank of England (BoE) all cut interest rates by a further 25bp and signalled more to come, but that was not enough to reassure business sentiment. UK PMI fell into contractionary territory in November for the first time this year and future expectations of growth fell. For consumer confidence, the headline measure remains weak, but seasonal sales helped see an improvement. The BoE pushed back against higher interest rates Alongside a second 25bp rate cut, the BoE’s November monetary policy meeting also included updated economic forecasts that incorporated the latest fiscal policy announcements. GDP growth and inflation were upwardly revised and estimates for the unemployment rate was lowered. In spite of that, rhetoric was centred on a keep calm and carry on approach to gradual rate cuts. Additional Budget-related near-term inflationary pressures were expected to abate fairly quickly (Chart 2) and, conditioned on an average interest rate of 3.7% from 2025, inflation is seen below target. That implies that the BoE deems an interest rate at that level to be too high and may be an implicit push back against market expectations of a 4.0% medium-term rate. And we are inclined to agree and see interest rates falling more quickly in the second half of 2025 to 3.25% by year-end 2024. GDP growth slows and headline inflation rises back above 2% GDP growth moderated by more than expected to 0.1% in Q3. More positively, however, household consumption saw a broad-based acceleration while business investment also rose. That said, retail sales fell sharply in October, offering a soft start for output growth in the final quarter of 2024. Headline CPI inflation rose to 2.3% y-o-y in October from 1.7% previously, although that was predominantly driven by a c10% rise in the Ofgem Price Cap. Indeed, the BoE will look through the known volatility in energy prices, but still elevated services inflation and private sector wage growth are in keeping with a hold in Bank Rate at 4.75% at the final BoE policy meeting of 2024 on 19 December. Source: Macrobond, S&P Globa Source: Macrobond, ONS, BoE forecasts Source: Macrobond, BoE https://www.hsbc.com.my/wealth/insights/market-outlook/uk-in-focus/2024-11/

2024-11-25 12:03

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

2024-11-25 12:02

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

2024-11-25 07:05

Key takeaways With Q3 earnings season drawing to a close in the US, last week saw results from the market’s most closely watched technology giant, Nvidia. It’s quarterly profits were ahead of analyst forecasts for the quarter. Indeed, with more than 90% of companies in the index having reported, around 75% of them have beaten profit expectations. US stock buybacks have boomed in recent years as companies looked to boost earnings-per-share, buoy their valuations, and allocate cash to reward shareholders. Recent action with the US dollar looks to be following the 2016 playbook. The DXY index or “dixie” is up around 3-4% since the US election, about the same as in the 15 days following the 2016 poll. Chart of the week – A difficult starting point for US stock valuations Over the previous week, risk markets have paused for breath. US stocks have unwound some of their big post-election gains, high-yield credit spreads have picked up from multi-year lows, and commodity prices have lost ground. We think recent market action reflects a new reality facing investors. There is a “tug of war” between enthusiasm around significant aspects of the US policy outlook – mainly deregulation and tax cuts – versus concerns about the potentially stagflationary effects of loose fiscal policy and an acceleration of the trend in US isolationism. US 10-year yields are hovering just below April’s year-to-date highs despite the Fed now in easing mode and inflation in a holding pattern, with room for more disinflation in 2025. This is because there is now much greater uncertainty around the inflation outlook, reflected in the recent pick-up in the US term premium. Structurally higher inflation and interest rates pose many challenges for investment markets. It weighs on the growth and earnings outlook. And it makes stock valuations less attractive versus bonds. The most expensive parts of the stock market such as US mega-cap tech – which look priced for perfection – could be vulnerable. Market Spotlight High flying assets Four years after being badly hit by Covid travel restrictions, air traffic has finally caught up with 2019 levels – but the global aviation industry’s cyclical and structural growth drivers are changing. A new research explores the sector’s investment outlook – with a focus on airports, which are a key part of the infrastructure asset class. Overall demand looks robust, but new trends in the traveller ‘mix’ and geographic growth are emerging. While business travel continues to decline, demand from cohorts travelling for leisure and ‘visiting friends and relatives’ is growing quickly. And in terms of regional demand, industry forecasts suggest that fast-growing developing nations will contribute 85% of the industry’s growth over the next 20 years – with Asia Pacific expected to be a powerhouse. For airport investors, post-pandemic challenges are giving way to new opportunities, with wealth and demographic trends expected to drive above-GDP growth rates for the industry. Together with offering a wider range of travel destinations, there are opportunities for airports to enhance returns with a wider range of premium services. The value of investments and any income from them can go down as well as up and investors may not get back the amount originally invested. Past performance does not predict future returns. Investments in emerging markets are by their nature higher risk and potentially more volatile than those inherent in some established markets. The level of yield is not guaranteed and may rise or fall in the future. For informational purposes only and should not be construed as a recommendation to invest in the specific country, product, strategy, sector or security. Any views expressed were held at the time of preparation and are subject to change without notice. Any forecast, projection or target where provided is indicative only and not guaranteed in any way. Diversification does not ensure a profit or protect against loss. Source: HSBC Asset Management. Macrobond, Bloomberg. Data as at 7.30am UK time 22 November 2024. Lens on… Q3 earnings scorecard With Q3 earnings season drawing to a close in the US, last week saw results from the market’s most closely-watched technology giant, NVIDIA. Like the rest of the S&P 500’s ‘Magnificent 7’ tech stocks, NVIDIA’s quarterly profits were ahead of analyst forecasts for the quarter. Indeed, with more than 90% of companies in the index having reported, around 75% of them have beaten profit expectations. However, the scale of index-wide profits beats – averaging about 4.3% above estimates, according to Factset – is roughly half that of their 5-year average. Firms may be finding it harder to beat forecasts. And given the index trades on a price-to-earnings ratio of 22.3x (versus its 15-year average of 16.4x), prices could be vulnerable if future earnings disappoint. The communication services, IT and healthcare sectors have seen the largest (aggregate) beats, while energy and materials have seen the largest (aggregate) misses. From here, profit growth expectations remain high into 2025. But against a backdrop of policy uncertainty and a cooling economy, any weakness could lead to heightened volatility. Asia’s buyback boost US stock buybacks have boomed in recent years as companies looked to boost earnings-per-share, buoy their valuations, and allocate cash to reward shareholders. Against a backdrop of falling rates – dampening returns on cash holdings – this popularity should persist. But this isn’t just a US phenomenon – Asia stock markets have seen a buyback boost too. A key difference in Asia is that buybacks have been driven by regional efforts to improve corporate governance. Governments have called on firms to be more investor-friendly and improve their valuations. Japan is a prime example, and is now seeing a third consecutive year of record buybacks in 2024. A similar move in South Korea – the ‘Value-Up’ programme – saw a 25% rise in buybacks in H1-24 from H1-23. Mainland Chinese authorities have also demanded action on profitability and shareholder returns. Share repurchases there are on course to break domestic records this year, with September’s stimulus measures including a RMB300bn relending facility earmarked specifically for share buybacks. With Asian markets on undemanding valuations, further progress on corporate reforms and share buybacks could provide upside. FX moves versus 2016 Recent action with the US dollar looks to be following the 2016 playbook. The DXY index or “dixie” is up around 3-4% since the US election, about the same as in the 15 days following the 2016 poll. But moves in individual FX pairs show some interesting differences versus the 2016 experience. The most striking contrast is the Mexican peso. This was one of 2016’s biggest casualties, and although it’s down this time around, it is one of the better performers. Other Latin American currencies have held up well too – the Brazilian real and Columbian peso have hardly budged. This resilience could reflect a hawkish tilt to central bank policymaking in the region in recent months. Moves in Europe have also been quite different. The euro and some Eastern European currencies have been badly hit by the election result. Trade tariffs would come at a very difficult time for the region’s manufacturers. But the good news is FX weakness supports external competitiveness for export-dependent firms. In 2025, US-specific factors – policy and inflation trends – are likely to be a big influence on the dollar. But global economic and political developments will also be key. Past performance does not predict future returns. The level of yield is not guaranteed and may rise or fall in the future. For informational purposes only and should not be construed as a recommendation to invest in the specific country, product, strategy, sector or security. Any views expressed were held at the time of preparation and are subject to change without notice. Source: HSBC Asset Management. Macrobond, Bloomberg, Datastream. Data as at 7.30am UK time 22 November 2024. Key Events and Data Releases Last week The week ahead Source: HSBC Asset Management. Data as at 7.30am UK time 22 November 2024. For informational purposes only and should not be construed as a recommendation to invest in the specific country, product, strategy, sector or security. Any views expressed were held at the time of preparation and are subject to change without notice. Market review Risk markets were resilient despite heightened geopolitical tensions, with both oil and gold prices rallying. The US DXY dollar index paused for breath after its recent strong run. Core government bonds consolidated ahead of key US inflation data and mixed comments from Fed officials. US equities saw a broad-based rally as investors digested Q3 earnings. The Euro Stoxx index fell modestly, while Japan’s Nikkei 225 weakened as the yen rebounded versus the US dollar. BoJ governor Ueda reiterated his commitment to gradual rate hikes. Emerging market stock markets were mixed. The Shanghai Composite and Hang Seng indices finished the week lower, but the tech-driven South Korea Kospi index performed well. India’s Sensex index fell further. In Latin America, Brazil’s Bovespa and Mexico’s IPC equity indices were on the defensive. Meanwhile, copper was little changed. https://www.hsbc.com.my/wealth/insights/asset-class-views/investment-weekly/2024-11-25/

2024-11-22 07:06

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