2024-11-18 12:03

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

2024-11-18 12:03

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

2024-11-18 12:03

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

2024-11-18 07:05

Key takeaways 2024 has generally been a year of good news on disinflation, resilient growth, and corporate profits. Central bankers have been able to pivot policy, and the global cutting cycle has got underway. The latest round of economic support from Chinese policymakers was a disappointment for those hoping for major fiscal stimulus. More than a decade of sluggish economic growth has contributed to a sizeable valuation discount in UK assets. Chart of the week – US stocks and bonds decouple Investors remain in good spirits post-election, with US stocks steadying after previous week’s big rally. Many crypto assets are hitting new highs, and credit spreads have ground lower to record tights. Potential policy changes – in the form of lower corporate tax rates and deregulation – have given markets a fresh catalyst. Does this extend the trend of “US exceptionalism”? Some analysts don’t think investors should give up on the broadening out trade. The US economic growth premium is still expected to shrink in 2025, and profit growth will be more evenly distributed across the globe. There is still a big valuation case for EAFE and EM stocks. That means that any better-than-expected news can be doubly good news for market performance. But rising policy uncertainty weighs on the global outlook. What’s more likely, therefore, is broadening out at the sector and factor level. In the US, we’ve seen signs that the market is prepared to look beyond the technology sector, with financials and energy performing strongly this quarter on the prospect of a regulatory overhaul. And in an environment characterised by still-high inflation, a shallower cutting cycle, and economic expansion, neglected parts of global stock markets – such as value stocks – could catch up. In 2025, a multi-factor, multi-sector approach could work best. Market Spotlight Taking the credit After a year of dramatic moves in policy rate expectations, a possible shift towards inflationary fiscal policies in the US has once again raised the prospect of the Fed keeping rates higher for longer. One asset class that could be well placed to benefit from that is securitised credit. Given its floating rate nature, securitised credit moves differently to other asset classes during economic cycles and offers an alternative source of risk-adjusted returns. That’s contributed to it being one of the best performing fixed income asset classes over the past two years – with 2024 expected to be another strong year. For allocators, fixed income has historically been a natural portfolio diversifier to stocks, given their usually uncorrelated relationship. But the potential shift back to higher-for-longer rates – and greater correlation between the two assets – raises the risk of the traditional 60/40 stock/bond portfolio coming under threat again. For securitised credit, low correlation to regular fixed income, and lower correlation to stocks than corporate bonds could make it an option for multi-asset portfolios. Given the high starting income levels and wide securitised credit spread (versus history) the mix of both factors could generate attractive total return going forwards for investors. The value of investments and any income from them can go down as well as up and investors may not get back the amount originally invested. Past performance does not predict future returns. Investments in emerging markets are by their nature higher risk and potentially more volatile than those inherent in some established markets. The level of yield is not guaranteed and may rise or fall in the future. For informational purposes only and should not be construed as a recommendation to invest in the specific country, product, strategy, sector or security. Any views expressed were held at the time of preparation and are subject to change without notice. Any forecast, projection or target where provided is indicative only and not guaranteed in any way. Diversification does not ensure a profit or protect against loss. Source: HSBC Asset Management. Macrobond, Bloomberg. Data as at 7.30am UK time 15 November 2024. Lens on… EM inflation risks 2024 has generally been a year of good news on disinflation, resilient growth, and corporate profits. Central bankers have been able to pivot policy, and the global cutting cycle has got underway. But with fiscal policy remaining active, fresh uncertainty around global trade, and geopolitical tensions creating volatility in commodity prices, market concerns about inflation are likely to linger a bit longer in 2025. Nonetheless, consensus forecasts are for inflation rates to continue drifting lower across developed and emerging markets next year. But progress is expected to be slower in some emerging markets, and notably Latin America. Brazil, for example, was among the first to hike rates in response to post-pandemic inflation, and then led the global easing cycle. But in October, its policymakers were forced to hike rates by 0.5% to tackle resurgent inflation. Regional neighbours like Mexico and Chile have faced similar pressures. Overall, most major global economies will see inflation settle in the 2-3% range over the medium term, but regional variations should be expected. Given the idiosyncratic nature of regional economies, there could be rewards for investors prepared to do their homework. China’s policy patience The latest round of economic support from Chinese policymakers was a disappointment for those hoping for major fiscal stimulus. The new plan – which followed a meeting of China’s legislative body, the NPC Standing Committee – is a CNY12 trillion (USD1.7 trillion) effort to tackle longstanding local government ‘hidden’ debt, much of which involves a 3-5-year debt-swap scheme. What investors ideally wanted was news on support for China’s property sector and consumer spending. But despite the limited direct growth boost, the debt-swap plan is still a welcome step towards repairing local government balance sheets. And it has been enough to keep Chinese stocks supported even as trade policy uncertainty has spiked. Further fiscal stimulus planning is likely at December’s Central Economic Work Conference. More details on macroeconomic targets and policies will likely follow next March during the annual NPC meeting. Overall, Chinese policymakers will maintain a gradual approach for now, offering just enough to support investor confidence that “there is more to come”, while reserving some fiscal firepower for 2025 and beyond. UK stocks on sale? More than a decade of sluggish economic growth has contributed to a sizeable valuation discount in UK assets. Equities, for instance, trade on a modest forward price-to-earnings ratio of around 12x. The large-cap FTSE 100 index offers an average dividend yield of 4.1%, and a total shareholder yield, including buybacks, of 6%. That’s almost twice the level of the S&P 500. Even when accounting for sector differences and a large underweight to the tech sector, UK valuations look undemanding. Research suggests that standout yield could get more appealing as interest rates fall, boding well for UK stocks. Signs of economic recovery also point to a potential opportunity for UK assets. But there are catches. Any slowdown in global growth could hurt UK stocks. And domestic economic headwinds, the risk of more aggressive BoE policy easing, and sustained FX moves could cause volatility. Past performance does not predict future returns. The level of yield is not guaranteed and may rise or fall in the future. For informational purposes only and should not be construed as a recommendation to invest in the specific country, product, strategy, sector or security. Any views expressed were held at the time of preparation and are subject to change without notice. Source: HSBC Asset Management. Macrobond, Bloomberg, Datastream. Data as at 7.30am UK time 15 November 2024. Key Events and Data Releases Last week The week ahead Source: HSBC Asset Management. Data as at 7.30am UK time 15 November 2024. For informational purposes only and should not be construed as a recommendation to invest in the specific country, product, strategy, sector or security. Any views expressed were held at the time of preparation and are subject to change without notice. Market review Risk markets were steady as investors digested the potential policy implications of the US presidential election result, with the US DXY dollar index strengthening. Core government bonds were mixed, with fiscal and inflation worries overhanging US Treasuries. US equities softened, with the rate- sensitive Russell 2000 faring worse than the S&P 500 and Nasdaq amid mixed Q3 earnings. The Euro Stoxx 50 index posted modest gains, and Japan’s Nikkei 225 weakened despite a softer yen versus the US dollar. EM equities saw widespread losses due to weakness in technology stocks, mainland China growth concerns, and ongoing geopolitical worries. The Hang Seng and South Korea’s Kospi were the main casualties. The Shanghai Composite and India’s Sensex index also weakened. In commodities, oil prices dropped amid a stronger USD and lingering oversupply concerns. Gold and copper fell. https://www.hsbc.com.my/wealth/insights/asset-class-views/investment-weekly/2024-11-18/

2024-11-18 07:05

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

2024-11-18 07:05

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