2024-09-30 08:31

Key takeaways AUD-USD climbed higher on positive risk sentiment and a hawkish RBA… …but US election risks may add near-term volatility. The outlook for the CHF may hinge on the SNB’s FX stance; policy rate cut makes it one of the world’s lowest rates. Recently, market sentiment has been bolstered by developments in China. On 24 September, China unveiled an outsized easing package, including rate cuts and a 50bp reduction in banks’ reserve requirement ratios (RRR), in addition to measures to support the property sector and capital market (see “FX Viewpoint Flash – RMB: China’s big monetary stimulus” for details). This was followed by the read-out of the Politburo meeting on 26 September, indicating that China would implement “forceful” rate cuts, promote the stabilisation and recovery of the housing market, and that China would ensure necessary fiscal spending (Bloomberg, 26 September 2024). Unsurprisingly, the G10 outperfomers have been the AUD and NZD, both gaining more than 1% against the USD over the past 5 days (Bloomberg 26, September 2024). Meanwhile, monetary policy divergence between the Reserve Bank of Australia (RBA) and the Federal Reserve (Fed) have been supporting AUD strength against the USD (Chart 1). On 24 September, the RBA held its policy rate unchanged at 4.35%, as widely expected, noting that the central bank did not rule “anything in, or out”, but that “near-term” cuts are not likely. Our economists expect the RBA to start its rate-cutting cycle in 2Q25. In contrast, the Fed began its easing cycle with a large 50bp cut in September (see “FX Viewpoint Flash – Mixed signals for the USD after the Fed’s 50bp cut” for details). With this in mind, we expect the AUD to strengthen moderately against the USD in the months ahead. That being said, US election risks may lead to near-term volatility. Source: Bloomberg, HSBC Source: Bloomberg, HSBC Unlike the RBA, the Swiss National Bank (SNB) lowered its policy rate by 25bp to 1.00% on 26 September. This was the third rate cut this year. The SNB also signalled explicitly that further rate cuts may be necessary. Our economists expect the SNB to lower its policy rate to 0.50% by next March. USD-CHF has been tracking its rate differentials (Chart 2). But with one of the world’s lowest rates and Swiss exporters’ discontent with the strong currency (Bloomberg, 17 September 2024), the SNB may consider shifting to a stronger FX stance amidst the disinflationary backdrop. Thus, we continue to look for the CHF to weaken against both the USD and EUR in the months ahead. https://www.hsbc.com.my/wealth/insights/fx-insights/fx-viewpoint/2024-09-30/

2024-09-30 07:30

Key takeaways The RBI has been rattled by credit outpacing deposit growth over a prolonged period, and the changing composition of both. A recent easing of liquidity conditions and higher base money growth will likely push up deposit growth over time. However, to change the composition of deposit and credit, real economy intervention will be necessary. Through the summer, the Reserve Bank of India (RBI) has articulated its worries about weak deposit growth, the rising credit-to-deposit ratio, and compositional shifts (too much unsecured lending, too few sticky deposits) that could hurt financial stability. Many reasons have been attributed to weak deposit growth. But most of them do not stick. Strong inflows into mutual funds could not have cannibalised deposits, as the money stays within the banking system (even if it switches accounts). Currency leakage can’t explain weak deposit growth either, because the ratios have been moderating. Then what explains it? Deposits have two creators – money created by the central bank (known as base money, M0), and money created by the commercial banks (through the money multiplier process). The money multiplier can’t explain the weakness. Rather, the multiplier has gathered pace over the last few years. So then, the weakness in deposits must come from M0 growth. And, indeed, M0 growth has slowed over time, even running below nominal GDP growth. Why would the central bank slow M0 creation? For most of the last two years, inflation has been elevated, the dollar has been strong, and the RBI has been running tight monetary policy – raising rates with a hawkish “withdrawal of accommodation” stance, which is associated with tight liquidity. Meanwhile, delays in government spending due to the new just-in-time accounting framework have also kept liquidity tight. But all of this has changed recently. With the heatwave ending, inflation is converging towards target as per our forecasts, unsecured lending has cooled off, the dollar index has weakened in recent weeks, the RBI’s FX reserves have risen, and the government has ramped up spending. Some of these factors have arguably made the RBI more comfortable with faster M0 growth, while others have already raised M0 growth and eased banking sector liquidity in recent weeks. If this sticks, deposit growth could begin to tick higher, resolving half of the RBI’s worry. However, it may be harder to resolve the composition issue. With rising profitability, corporate saving has risen, resulting in higher callable bulk deposits, while household financial saving has moderated, resulting in weaker sticky deposit. All parts of the economy are not doing equally well and higher corporate profitability in some sectors coexists with weaker mass consumption. The latter has kept private investment and demand for capex loans softer than personal loans (some of which are unsecured). Addressing the two-speed economy issue with reforms will thus be key to resolving the other half of the RBI’s worries sustainably. Summertime debating It’s been a long summer, with policymakers, especially the RBI, articulating at various forums over the last few months, its worries around the imbalance between deposit and credit growth at India’s banks. Credit has been growing faster than deposit growth for the last 30-odd months (see Exhibit 1). No surprise that the credit-to-deposit ratio is elevated (around 80% versus a pre-pandemic average of 75%, see Exhibit 2). Why is this even a problem? An elevated credit-to-deposit ratio tends to autocorrect over time. And, already, there are signs of credit growth softening, leading to some moderation in this ratio. The worries seem to be at a deeper level. It’s not just about the growth in deposit and credit, it is also the composition that is bothering the RBI. On deposits, in the August policy meeting statement, the RBI’s governor said that “banks are taking greater recourse to short-term non-retail deposits and other instruments of liability ...”. This could “expose the banking system to structural liquidity issues.” On credit, the RBI has been concerned about the rapid rise in unsecured lending. While that is gradually slowing, it continues to remain concerned about “excess leverage through retail loans, mostly for consumption purposes”. In this report we drill into the root cause of this problem, and the connections with the RBI’s monetary policy stance. Thereafter we discuss when and how will this issue be resolved. We find that half the problem is already getting rectified as the RBI comes closer to softening its hawkish monetary policy stance. The other half of the problem, namely the composition of credit and deposit, is more complex, with roots in India’s growth composition and saving behaviour, and will require ‘real economy’ intervention, a la economic reforms, rather than just financial nudges. How did we get here? Let’s start with the weakness in deposit growth. Many reasons have been attributed to this weakness. But most of them do not stick. Are strong inflows into mutual funds cannibalising deposits? Not really. If one household takes out money from banks and invests it in mutual funds, some other household makes the underlying shares available, getting a cash deposit in return. Adding up across households, bank deposits remain unchanged. The same, broadly, can be argued for other financial assets like bonds, insurance products, and even property. Is currency leakage hurting banking sector liquidity? Again, no. Because, as a percentage of GDP, currency in circulation has been declining back to pre-pandemic and pre-demonetisation levels (see Exhibit 3). Is weaker foreign equity ownership leading to deposit outflow? Not at all. True that the ownership share of foreigners in India’s equity markets has fallen, while domestic participation has grown. However, when we add up all the engagement India has with the rest of the world, across exports, imports, capital inflows and outflows, which is well captured by the balance of payments, we find it to be in surplus, and a growing surplus at that (from USD48bn in FY22 to USD64bn in FY24; see Exhibit 4), courtesy of strong services exports and portfolio debt inflows. Whodunit? So, what’s really been driving the weakness in deposits? Let’s think through the monetary system carefully. Taking a careful view of how monetary systems are interconnected, it is clear that deposits have two creators – money created by the central bank (known as base money, M0), and money created by the commercial banks (through the money multiplier process, i.e., the credit creation process). And here, the money multiplier (calculated as M3/M0) can’t explain the weakness. Rather, the multiplier has gathered pace compared to the pre-pandemic period (see Exhibit 5). This is consistent with the strong credit growth over this period. So then, the weakness in deposits must come from the weakness in M0, which the central bank creates. And, indeed, it is clear that M0 growth has slowed over time (see Exhibit 6). The RBI’s reaction function and money creation But why would the central bank slow M0 creation. Let’s dig deeper. We believe a few factors influence the level at which the RBI wants to maintain M0. Nominal GDP growth. The RBI endeavours to provide enough liquidity to meet the productive needs of the economy, which is easily proxied by nominal GDP. Indeed, barring periods of one-off shocks, M0 growth and nominal GDP growth have moved closely (see Exhibit 7). An element of discretion. The RBI can choose to keep liquidity tight/loose to help with its objectives like inflation management, financial stability, etc. And, indeed, we find that over the last two years, the RBI has preferred tighter policy (more on this later). M0 growth has been running a shade lower than nominal GDP growth (see Exhibit 8). The government’s larger-than-before balances at the RBI. The government has been rather tardy with expenditure. And it has its reasons. The central government has moved to a just-in-time accounting process, whereby funds are released to the states only when needed, promoting the efficient use of resources, and reducing the cost of idle funds. This has changed the government’s spending schedule; much of the spending now happens later in the year. And, while the money eventually gets spent, it first remains locked up for several months in a row (see Exhibit 9). This is clearly visible in the large gap between banking sector liquidity and core banking sector liquidity (which includes government balances at the RBI; see Exhibit 10). To summarise, the weakness in deposit growth has been influenced by softer M0 growth, which, in turn, has been influenced by endogenous factors (like GDP growth and inflation, and the RBI’s objective regarding them), as well as exogenous ones (the government’s new just-in-time spending framework). But it’s all changing quickly But this is a story of the past. It’s all changing quickly, as we speak. There could have been a few reasons why the RBI kept M0 growth on the weaker side for the last few years. One, inflation was well above target, both in India and in the rest of the world. The RBI was hiking rates with a hawkish stance – a removal of accommodation. Two, the dollar was strong, leading the rupee into bouts of weakness. Arguably, the RBI had a preference for keeping monetary policy tight as an interest rate defence during this time. And three, credit growth was strong, and that as well, in areas the RBI was not comfortable with, like unsecured loans. But each of these have now reversed quickly: Core inflation has been below 4% for the last seven months. Food inflation has finally begun to fall and will likely continue to fall. We find that normalising temperatures since the March heatwave will likely raise crop output and lower prices, with headline inflation at 4% by year-end 2024; this, we believe, will open the door to the RBI officially relaxing its ‘removal of accommodation’ stance and cutting rates. We expect 50bp in rate cuts starting in 4Q 2024, taking the repo rate to 6% by March 2025. After a spell of strong growth, which rattled the central bank, unsecured lending growth has started to cool (see Exhibit 12). This could provide the RBI with some confidence to allow base money (which forms the basis of credit growth) to grow more rapidly than before. The dollar has weakened in recent weeks, providing much needed breathing space to emerging market economies. India, for now, seems to be using this opportunity to accumulate foreign exchange reserves (with foreign currency assets having risen by USD30bn since June), perhaps in a bid to reverse the sharp REER appreciation over June and July (see Exhibit 13 and Exhibit 14). The government has ramped up spending post-elections (see last few observations in Exhibit 9 above), not just spending tax receipts, but also the RBI’s dividend it received a few months ago. In fact, the RBI buying foreign exchange reserves and the government spending from its account at the RBI are ways to raise base money growth. Indeed, M0 growth has already risen from 5.8% y-o-y (over April and May) to 7.3% y-o-y (over June and July). And, relatedly, banking sector liquidity has perked up in recent weeks, leading to market rates at the short end softening by 25bp (see Exhibit 10 above and Exhibit 15). So, will the RBI’s problems be solved? Yes, at least half of them. Let’s take them one at a time – Deposit growth? Yes With base money having risen recently and likely to rise further as the RBI moves from tight to neutral/loose monetary policy, deposit growth could get a shot in its arm. Credit-to-deposit ratio? Perhaps It’s harder to postulate whether the credit-to-deposit ratio will fall, as desired by the RBI. At first glance, if deposit growth rises, the ratio must fall. However, looking deeper, higher deposit growth could also make funds available for higher credit growth (assuming no fall in the money multiplier). Composition of credit and deposit? Not so easily Alas, this is where no quick solution seems visible. The RBI has been concerned about compositional shifts. Too much unsecured lending on the credit side. And too few sticky deposits and too much callable bulk deposits on the deposit side. Some short-term interventions have helped and could continue to help. For instance, higher risk weights since November 2023 have lowered the pace of unsecured loan growth already. However, these would be partial fixes. The reason the composition has gotten skewed lies in the real economy and will require real economy fixes, not just some financial nudges. It’s the real economy On the credit side, demand for personal loans has far outstripped demand for, say, capex loans (see Exhibit 16). Private capex is not firing on all cylinders. Investment in machinery and equipment is weak. Weak mass consumption is likely coming in the way of factories adding capacity. As such, weak mass consumption is the problem that needs fixing to change the composition of credit. On the deposit side, there is a noticeable rise in corporate deposits and a fall in household deposits (see Exhibit 17). This maps well with India’s saving data, whereby corporate saving is above pre-pandemic levels, driven by strong profitability in certain sectors, while net household saving is lower than before (see Exhibit 18). This is partly reflective of a two-speed economy where some sectors are growing well, but all the gains are not flowing down to mass incomes. In short, to improve the composition of credit (more capex loans, less personal loans) and deposit (more retail-led CASA deposits, less corporate bulk deposits), the economy needs to support income growth across the pyramid (low-, mid- and high-tech sectors). This will require careful and timely reforms. One of them being making the most of global trends whereby many companies are trying to rejig production supply chains. Actively pursuing FDI in low- and mid-tech sectors like textiles, food processing, and toys, which tend to be more labour intensive, could raise both investment, as well as wages and incomes. https://www.hsbc.com.my/wealth/insights/market-outlook/india-economics/2024-09/

2024-09-30 07:30

Tourism, as we know it, is changing in the face of rising temperatures and extreme weather events. Particularly in coastal tourism, a stormy future looms as climate impacts, including rising sea levels, put its resilience to the test. We think adaptation measures will play an important role in keeping vulnerable coastal tourism afloat. In this issue of #WhyESGMatters, we discuss the likely impacts of heat stress on global tourism, with a particular focus on coastal tourism. We also look at various adaptation methods that countries can implement to reduce the impacts from climate change. Did you know? Sources: World Travel & Tourism, World Bank, Great Barrier Reef Marine Park Authority, Visit California 1. Heat changing holidays The travel and tourism industry, which contributed nearly 6% of global GDP and employed nearly 290m people in 2021 (as per the World Travel & Tourism Council), faces a myriad of challenges due to extreme temperatures (Figure 1). Relentless heatwaves pose serious health risks, such as dehydration and heatstroke, deterring tourists from venturing outdoors and hampering the industry’s usual vibrant activity. An article published in the journal Science of the Total Environment in 2022 highlights evidence that a 1°C rise in temperature can lead to an 18% increase in direct heat illness morbidity. Further, smaller and less affluent economies may struggle to cope with mounting cooling demand, as travellers seek respite from the scorching heat. The heightened demand for air-conditioned spaces is also likely to cause a sharp increase in energy consumption, putting strain on local energy grids and increasing emissions. Figure 1. Global warming is likely to increase the number of extreme temperature events Source: EM-DAT, CRED / UCLouvain, Brussels, Belgium – www.emdat.be, NOAA. Note: Temperature anomaly are with respect to the 20th century average (1901-2000) On the move Sweltering weather is affecting travel plans. In July last year, the European Travel Commission (ETC) reported a decline in travel intent in Europe compared to previous years. Additionally, the popularity of Mediterranean destinations was found to have declined by 10% compared to the year before. On the other hand, destinations such as Bulgaria and Denmark are becoming increasingly popular due to their milder temperatures. Although there is uncertainty about how tourists will respond to the effects of a changing climate, various popular tourist spots are likely to lose their appeal, paving the way for some lesser-known destinations to shine. This shift in traveller sentiment is likely to have a considerable impact on economies that rely heavily on tourism income. 2. Coastal tourism strains Beaches are popular holiday destinations, accounting for nearly 50% of global tourism. However, coastal tourism is facing an imminent threat due to climate change. The industry is the economic backbone for some of the world’s poorest economies, including the Small Island Developing States (SIDS), which are also among the most vulnerable to climate change. While extreme weather events, such as cyclones and floods, have already posed immediate risks, it’s rising sea levels and ocean acidification that are setting alarm bells ringing. Moreover, secondary impacts, such as water availability and the spread of diseases, are also a growing concern for coastal communities and travellers alike. Sea level rise Many popular tourist spots, such as the Maldives, are at risk of being submerged due to rising sea levels. Indonesia also announced plans in 2019 to relocate its capital from Jakarta in response to the threat posed by rising sea levels. Global sea levels have already risen by 98.5mm since 1993, according to NASA. Furthermore, the average rate of rise is accelerating, tripling from 1.3mm/year between 1901 and 1971 to 3.7mm/year between 2006 and 2018. While the extent of sea level rise depends on emissions and uptake of heat by the oceans, 1bn people could be exposed by 2050. And by 2100, extreme sea level events that previously occurred once per century could strike at least once a year on many coasts. Unfortunately, even under a low CO2 emissions pathway, the world may lose 53% of its sandy beaches, on average, resulting in a loss of 30% of hotel rooms and a 38% decline in tourism revenue by 2100. The imminent risks of shorelines being eroded, tourism infrastructure being inundated, and an increased likelihood of extreme weather events could lessen the recreational value of popular coastal tourist spots, potentially affecting business operators, such as resorts and hotels, water sports and tour operators (snorkelling and diving), ports and airlines. Marine heatwaves and ocean acidification The increased intensity and frequency of marine heatwaves are likely to cause coral reefs to undergo irreversible changes and disrupt marine life, affecting the character of the coastal landscape. For example, a recent marine heatwave that started to emerge in June last year along the coast of Queensland in Australia is raising concerns for the already vulnerable Great Barrier Reef. The World Economic Forum has estimated that 50% of the world’s coral reefs would be under threat by 2035 in the absence of climate risk mitigation. This presents a daunting challenge for coastal tourism as marine exploration activities, such as scuba diving, rely heavily on these vibrant underwater ecosystems. Growing risk Rising temperatures will significantly impact other tourism sub-sectors too: Eco tourism: A study by the European Commission projected increased diversity of land-bird species in higher latitudes and decrease in diversity in mid-latitudes by 2050, based on a moderate-to-high greenhouse gas emission scenario. Climate-induced shifts in species distribution can affect eco-tourism, such as safari operators, whereby declining animal populations make human interaction more difficult. Snow-based tourism: Rising temperatures may result in erratic snowfall patterns and shrinking snowpacks, shortening skiing and snowboarding seasons. Several ski resorts across the Alps closed in 2023/24 due to a lack of snowfall. Resorts at lower elevations are likely to be more severely affected, as they have less snowfall and thus have shorter tourism seasons. Forest-related tourism: Heatwaves and droughts are associated with high risks of wildfires. Between 1979 and 2013, the global burnable area affected by long fire weather seasons experienced a twofold increase, while the average duration of the fire weather season rose by 19%. The increased frequency and intensity of wildfires are likely to negatively affect tourism by limiting recreational opportunities and reducing access to national parks. According to a study conducted by Visit California, wildfires in California in 2018 resulted in an estimated loss of USD20m in tourism revenue in just one month. 3. Rising to the challenge The COVID-19 pandemic exposed the vulnerability of the tourism sector. Poor countries that heavily rely on tourism are poised to face significant challenges, including social unrest, as the flow of tourists slows due to impacts of a warming climate. Adaptation measures, better forecasting and early-warning tools, and disaster risk management will play an important role in the tourism sector’s response to the impending risks. Infrastructure, such as seawalls and breakwater structures, and conservation of natural systems, such as mangroves, are important coastal protection measures. Accommodation strategies, such as elevating key infrastructure and houses, can help reduce the impact of flooding. For instance, elevated houses built 1.5m above ground are subsidised by the government in the Tuamotu Archipelago, which is extremely prone to flooding. Several regions have also been adopting ecosystem-based measures to respond to climate change. Artificial reefs have been increasingly used to support reef restoration in countries such as Antigua and Grenada. In Vanuatu, tourism businesses have been involved in establishing marine-protected areas to address climate-related risks. As the impact of climate change continues to escalate, adaptation measures will become increasingly crucial in safeguarding vulnerable regions. However, we think it’s imperative to acknowledge that long-term resilience relies on a broad-based approach, combining adaptation strategies with global efforts to substantially reduce greenhouse gas emissions. 4. Conclusion Rising emissions and climate change pose additional challenges beyond the immediate heat issues. In this note, we explored a range of other climate change impacts on the tourism sector, with a focus on coastal tourism. We think governments, businesses and investors must plan collaboratively for the long term – assessing exposure and working towards transformational adaptation to safeguard the tourism industry. https://www.hsbc.com.my/wealth/insights/esg/why-esg-matters/2024-03-28/

2024-09-30 07:30

Key takeaways As expected, the FOMC kept rates unchanged at the July meeting. The Fed funds rate remains in the 5.25-5.5% range. We expect the FOMC to begin the monetary policy easing cycle in September by cutting the Fed funds rate 0.25% to a range of 5-5.25%. In 2025, we expect the FOMC to cut rates three times, leaving the Fed funds rate at 4.25-4.5%. The US economy is slowing but growth remains above-trend. Labour markets are cooling as the unemployment rate is drifting higher. Financial markets have shifted of late, reflecting the weakening economy and the better inflation data. The assumption is that the odds of the onset of a Fed monetary policy easing are higher. In addition, small-cap equities have rallied with the increased odds of lower interest rates. In the short term, equity markets will see some continued two-way rotation between sectors and the value and growth styles as they weigh the run-up in valuations, the economy, and the impact of the expected rate cuts. Longer term, continued disinflation, lower interest rates, and strong profit growth (in spite of the slowing economy) will provide a solid backdrop for US equities. We maintain our US equity overweight and our balanced sector stance. Fixed income investors should continue to look for lower policy and market rates, and keep an eye on quality and investment grade as the business cycle slows and balance sheets feel the stress. What happened? As expected, the FOMC kept the Fed funds rate unchanged in the 5.25-5.5% range at its July meeting. We expect the FOMC to begin the monetary policy easing cycle in September by cutting the Fed funds rate 0.25% to 5-5.25%. In 2025, we expect the FOMC to cut rates three times, leaving the Fed funds rate at 4.25-4.5%. There were only a few changes to the statement this time, but they were dovish in nature, leaving the door open to a possible rate cut in September. Fed Chair Jerome Powell stated, “We’re maintaining our restrictive stance of monetary policy in order to keep demand in line with supply and reduce inflationary pressures.” -- indicating that the Fed needs to see further disinflation to ease. Second-quarter inflation readings were heading back toward the 2% target. However, the Fed doesn’t want markets to fully price in rate cuts now as Powell said, “We’ve made no decisions about future meetings and that includes the September meeting.” US growth has been easing, but the move from very strong to more normal growth rates is healthy. The 2Q24 growth was +2.8% and consumer spending was 2.3%. Labour markets are cooling as the unemployment rate is drifting higher. The unemployment rate has risen to 4.1% in June but remains near 60-year lows. Payroll employment rose +177,000 in the last three months vs 267,000 in the first three months of the year. In June, the US PCE deflator pierced the Fed’s 2% symmetric target range of 1.5-2.5%. Powell has often said that the FOMC wants to see inflation “on a clear path” towards 2%. Wages have slowed to 3.9% from a peak of 5.9% in 2022. Will the most aggressive Fed tightening cycle ever result in aggressive easing as well? Source: Bloomberg, HSBC Global Private Banking and Wealth as at 31 July 2024. Investment implications Financial markets have shifted of late, reflecting the weakening economy and the better inflation data. The assumption is that the odds of the onset of a Fed monetary policy easing are higher. In addition, small-cap equities have rallied with the increased odds of lower interest rates. Historically, Fed easing cycles have helped lower the cost of capital, which has been a positive factor for markets, especially in the US. We believe that in the short term, equity markets will see some continued two-way rotation between sectors and the value and growth styles as they weigh the run-up in valuations, the economy, and the impact of the expected rate cuts. Longer term, continued disinflation, lower interest rates, and strong profit growth (in spite of the slowing economy) will provide a solid backdrop for US equities. It remains an earnings-driven equity market. S&P 500 earnings are forecast to rise 10.9% in 2024 and 14.8% in 2025. Lower rates should help boost M&A and investment activity. Therefore, we maintain our US equity overweight and our balanced sector stance. Fixed income investors should continue to look for lower policy and market rates. They should also keep an eye on quality and investment grade as the business cycle slows and balanced sheets feel the stress. We continue to put our cash to work in bonds and multi-asset strategies. US economic resilience, relatively high yields, monetary easing elsewhere, and sometimes underwhelming activity data outside of the US can still contribute to a firm USD, particularly with so much Fed easing already assumed. https://www.hsbc.com.my/wealth/insights/market-outlook/special-coverage/2024-08-01/

2024-09-30 07:30

Key takeaways On 24 September, China unveiled an outsized easing package… …but this may just be the start, in our economists’ view. USD-RMB performance hinges on any improvement in Chinese asset inflows and US election risks amongst others. On 24 September, China’s regulators, including the People’s Bank of China (PBoC), the National Financial Regulatory Administration (NFRA), and the China Securities Regulatory Commission (CSRC), held a joint press conference, announcing a slew of easing policies, covering three main areas: monetary policy, property policy, and capital market policy. The measures are summarised in the table below: Source: Xinhua, Bloomberg, HSBC The stimulus package, beating market expectations, is more cyclical in nature, but is a good starting point for further easing to shore up growth, in our economists’ view. More will have to be done in terms of housing stabilisation, but it may take longer to be rolled out. As there is a need to support liquidity and market sentiment, facilitate credit issuance and boost growth, our economists now expect a further 10bp cut to interest rates, another 50bp of RRR cut, and another RMB1trn of special government bonds to come before the end of 2024. As for the RMB, the offshore RMB (known as “CNH”) strengthened briefly past 7 per USD for the first time since May 2023, as markets are digesting these stimulus measures this morning (Bloomberg, 25 September 2024). In our view, if the new measures offer fresh expectations of a comeback of equity inflows into China or a potential revival of risk appetite, the RMB may see more support. But the question remains whether the inflows will be strong enough to offset other potential drags on the RMB. For example, with the PBoC’s monetary easing, China’s yield gap against the USD may widen again, especially considering that markets pricing for US rate cuts have been more dovish than the Federal Reserve’s latest dot plot (i.e., 80bp of rate cuts vs 50bp by end-2024, Bloomberg, 25 September 2024). Uncertainties over the upcoming US elections may support the USD, and by extension, weigh on the RMB. It is also worth noting that the PBoC shifts to a neutral FX policy stance, with the governor, Pan Gongsheng, reiterating the central bank will prevent onesided expectations and overshooting risks. As such, the PBoC is likely to maintain two-way fluctuation of the RMB exchange rate. https://www.hsbc.com.my/wealth/insights/fx-insights/fx-viewpoint/flash-2024-09-25/

2024-09-30 07:30

Rate cuts and broadening earnings growth support our optimism despite slowing growth and rising uncertainties Last quarter proved to be an eventful period for investors, as more central banks embarked on their policy easing journeys, while rising US recession fears and the sharp strengthening of the Japanese Yen triggered a global equity market sell-off. However, markets regained the lost ground very quickly, which is a good sign that fundamentals such as earnings momentum remain intact. Looking ahead, investors shouldn’t be surprised if market volatility lingers, especially as key central bank meetings and elections are approaching in the US. Yet, we remain positive, as there are still plenty of opportunities across regions and sectors to put money to work. What does this mean for investors? So far this year, equities are up strongly while bonds have been benefitting from rate cut expectations. Although the US economy is cooling, it’s still far from a recession, with Q2 earnings growth accelerating to 10.8%, which marks the highest growth rate since Q4 2021. And comfortingly, rising unemployment was caused mainly by an increase in labour supply rather than elevated layoffs. As fundamentals remain broadly positive, the August correction is seen as a buying opportunity as valuations are now more attractive. The US remains our biggest equity overweight due to its broadening earnings growth and long-term structural opportunities. While the Magnificent 7 tech stocks continue to lead earnings growth, other companies are also benefitting from falling costs and the power of AI, which helps to expand revenue sources and improve productivity. The global rate cut cycle should also help investment and consumption outside of the US. So, the key message for investors is to widen the opportunity set, by looking beyond the US and the technology sector. Geographically, the UK, Japan, India and South Korea stand out for their positive outlook. From a sector perspective, earnings hold the key, and we see promising opportunities in healthcare in Europe, high-end manufacturing in Asia and industrials in the US, to name a few. Balancing risk and opportunity to manage rising market uncertainties Undoubtedly, all eyes will be on the Fed’s policy decision and the upcoming US election, with polls currently suggesting a very close race. Historically, markets tend to rally once the election result is known, but uncertainty is surely building up. Diversification is key to balancing risk and opportunity, and we look to quality bonds, particularly investment grade credit, as another way to diversify exposure and generate a stable income stream. Rate cuts will make it less attractive to hold cash, while bonds continue to offer a chance to lock in current yields near multi-year highs. Finally, we continue to see opportunities in the global transition to a more sustainable, low-carbon future. Renewable energy is a bright spot amid a global effort to triple clean energy capacity by 2030. The growing focus on biodiversity can also be a differentiator, offering investors a way to access potential growth while supporting long-term change. As improving quality of life for our customers is at the centre of our values, we’re pleased to share our views in a special article on how financial planning can improve financial fitness, based on the findings of our Quality of Life Report 2024. We hope our investment themes and insights can help you better position your portfolios in times of rising uncertainties and take your investment to new heights. As always, our investment team is here to share our view and provide you with the support you need. Best wishes for a successful investment journey. https://www.hsbc.com.my/wealth/insights/market-outlook/investment-outlook/2024-09/