2024-11-13 12:02

Key takeaways We push out our first RBI rate cut call from December 2024 to February 2025... ...as the RBI waits for the likely October inflation spike to drop, and global financial markets to stabilise. A few better activity prints in October, thus far, have lowered the urgency to cut, though several others indicate that easing will be needed down the line. When the RBI changed its stance from hawkish to neutral in the August policy meeting, it seemed a rate cut would follow soon. And when the chorus around the release of softer growth data got louder, it seemed like a rate cut was just around the corner, in fact in the upcoming December policy meeting. But the backdrop has changed. We think four developments over the past four weeks will make the RBI hold the repo rate steady at 6.5% at its December meeting. Game-spoiler inflation. CPI inflation rose from 3.7% in August to 5.5% in September, led by a combination of a weak base, as well as a strong sequential rise in prices. CPI inflation is likely to rise further to 5.9% in October, led by higher food inflation. In particular, we find a sharp spike in edible oil prices, triggered in part by higher import taxes (Exhibit 1), and still high vegetable inflation (Exhibits 2 and 3). In the past the RBI used to often look through vegetable price inflation, but that is not the case anymore. Back-to-back shocks seem to have made officials distrustful of quick disinflation in vegetable prices. In fact, we believe they will not even take solace in the fact that the prices of pulses, eggs, meat, and fish, have softened recently. October growth-comeback? Some data points have come in stronger in October. These include GST revenue growth, the manufacturing and services PMIs, vehicle sales and registration, petrol and diesel consumption, and international passenger arrivals. And even though, as the month progresses, several other growth indicators may come in weaker than before, these improved prints seem to have taken off some of the urgency around rate cuts, making the RBI more open to waiting a while longer before easing. External volatility returns. With the dollar appreciating 4.2% since early-October, of which c1% happened over the last 48 hours, there has been weakening pressure on EM currencies. And while the RBI has ample FX reserves to support the currency, it may prefer to wait now, and ease at a time global markets are more stable. Unwaveringly hawkish communication. True, the RBI softened its stance in the August meeting. But since then, the governor has spoken at several forums about the perils of premature easing, calling it “very risky” at a time of “significant upside risk to inflation” (Bloomberg, 6 November 2024). This commentary is also at a time when markets have reprised Fed rate cuts. All said, we expect the RBI to stay on hold at its December meeting. But we hold on to our view of two rate cuts in this cycle, spread across the February and April meetings (December and February earlier, Exhibit 5). Our sense is that when the new vegetable crop is harvested at end-2024, food inflation could fall quickly, with cooler temperatures and full-up reservoirs aiding the process. When we look at a broad set of growth indicators, we find that a lower proportion are growing at a fast clip compared to a quarter ago, particularly in financial services and consumption-related sectors (Exhibit 4). As such, it’s only a matter of time before we see rate cuts, even though it won’t likely be at the December meeting, nor will it be a deep rate cutting cycle. https://www.hsbc.com.my/wealth/insights/market-outlook/india-economics/2024-11/

2024-11-11 12:02

Key takeaways The China National People’s Congress (NPC) Standing Committee meeting on 8 November approved an incremental increase of RMB6trn in the local government special debt limit to swap hidden debt over three years through the end of 2026. Adding up RMB4trn allocation from the existing special local government bond issuance quota for debt swaps over five consecutive years and RMB2trn existing fiscal resources for repayment of hidden debt related to shantytown renovation, the total scale of debt swaps for local governments will amount to RMB12trn over the next five years. We expect negative near-term market responses to the below-expectation new fiscal impulse, and the lack of new demand-size stimulus to boost the property sector and consumption. However, looming uncertainties surrounding trade tensions and potential tariff hikes under the Trump administration will likely trigger further policy stimulus from China to mitigate downside risks to growth in 2025. We stay neutral on mainland Chinese and Hong Kong equities in anticipation of increased market volatility driven by the developments of Beijing’s policy stimulus and Trump’s trade tariffs. We favour quality Chinese internet stocks with steep valuation discounts to their US tech peers, above-sector-average earnings prospects and improving shareholder returns. In Hong Kong, we favour undervalued high dividend stocks in the insurance and telecom sectors, as well as select oversold property developers with strong balance sheets. Within the A-share market, we prefer high-quality SOEs paying attractive dividend yields, high-end manufacturers with global competitiveness and overseas market positioning and resilient consumer leaders that can benefit from potential enlarged policy support for consumption. What happened? The NPC Standing Committee meeting on 4-8 November approved an incremental fiscal support package for the local government debt swap plan. The fiscal package fell short of elevated market expectations for a “big bang” comprehensive stimulus package with the size of RMB6trn to RMB12trn to tackle the problems of local government debt, property market stress, bank recapitalisation needs and subdued consumption. The new fiscal package includes the following support measures: 1) RMB6trn increase in local government special debt limit to swap hidden debt – The additional RMB6trn local government special bond quota will be used over three years through the end of 2026, implying RMB2trn annual additional fiscal impulse for swapping hidden local government debt. 2) Annual allocation of RMB800bn from special local government bond issuance quota for debt swaps – Starting in 2024, RMB800bn will be allocated from the special local government bond (SLGBs) issuance quota each year for five consecutive years to be used for debt repayment, including swapping hidden debt, totalling RMB4trn allocation from 2024 to end-2028. 3) RMB2trn repayment for hidden debt related to shantytown renovation due in 2029 and subsequent years will still be repaid according to the original contracts. Finance Minister Lan Fo’an provided forward guidance on potential increase in fiscal stimulus and other countercyclical policy support in the future without sharing specific details on potential support for the property market and private consumption: 1) Property support policies – The MoF is formulating a plan for local governments to use funds raised by the issuance of SLGBs to purchase idle land and acquire unsold property inventory for conversion into affordable housing to accelerate the de-stocking of unsold properties. Supportive tax policies to support the property sector have been submitted for NPC review and approvals. 2) Recapitalisation of commercial banks – The MoF is accelerating preparation work for the issuance of special central government bonds (SCGB) to replenish core Tier-1 capital of the six larger state-owned commercial banks. 3) Further fiscal support to boost consumption – Potential increase in fiscal stimulus to support equipment upgrading and consumer durable goods trade-in to boost domestic demand. Investment implications We expect the below-expectation fiscal support and the lack of demand-side stimulus announced by the NPC Standing Committee, along with the US election results with Trump’s policy of imposing a minimum of 60% tariff on all Chinese import products, will likely add volatility to the mainland Chinese and Hong Kong stock markets in the coming months. Hence, we stay neutral on these two equity markets. The Chinese internet stocks are less vulnerable to trade tensions and tariff risks. We continue to see re-rating opportunities in quality Chinese internet stocks and prefer internet leaders that are priced at substantial discounts to their US Big Tech peers, and those with above-sector-average earnings prospects and improving shareholder returns through share buybacks. We also favour the local services, e-commerce, and online gaming sub-sectors as they offer a better risk-reward outlook. We favour quality Chinese SOEs paying high dividends and with above-market average earnings growth. Given the deep discount of the H-shares to A-shares on a like-for-like basis, the SOEs with their H-shares trading at attractive discounts to their A-shares could see better Southbound flows. We think the Southbound flows through the Stock Connect should continue given the low-for-longer rate environment in mainland China. We stay selective towards mainland Chinese property companies and banks in the offshore market given that there is no new direct support for the property market. For the Chinese banks, the policy to recapitalise the six largest state-owned commercial banks remains a key investor focus. We also attach focus on the net interest margin outlook due to lower mortgage and other lending rates and the bad debts of the banks. In Hong Kong, we favour undervalued high dividend stocks in the financials and telecom sectors and select oversold property developers with strong balance sheets. The stock market should benefit from the fall in US policy rates lowering funding costs. Banks and insurers should also benefit from the better fee income from wealth management business. The housing market will remain under near-term pressure given the supply overhang. In China’s onshore market, our preference for quality SOEs paying high dividends remains intact, as they offer attractive dividend income that boost total returns. We also selectively position in high-end Chinese manufacturing leaders with a proven track record of global competitiveness and overseas market positioning, allowing them to withstand tariff risks. In the consumer sector, we favour services leaders which deliver resilient earnings and consumer discretionary stocks that benefit from ongoing government-sponsored replacement subsidies. Volatility of A-share market will likely surge amid uncertainty over policy stimulus and US trade tariffs Source: Bloomberg, HSBC Global Private Banking and Wealth as at 10 November 2024. Past performance is not an indicator of future performance. https://www.hsbc.com.my/wealth/insights/market-outlook/special-coverage/2024-11-11/

2024-11-11 07:05

Key takeaways Chinese stocks rallied in September on news of further policy support, and they’ve largely held those gains. Momentum picked up in early November, and the Shanghai Composite is still up 20%+ since the new measures were announced. President-elect Trump’s victory in the US election, together with a strengthening dollar, has reinforced negative sentiment towards emerging market (EM) currencies and local-currency assets. A concern for investors ahead of the US election was the potential impact on global trade from aggressive US tariffs. Chart of the week – US stocks and bonds decouple The S&P 500 hit fresh all-time highs last week with the decisive outcome of the US presidential election removing one form of uncertainty for investment markets. US stocks also found a fresh catalyst via the potential for lower corporate tax rates and deregulation, boosting the profits outlook. The recent good run in US stocks has coincided with a period of rising US Treasury yields. Investors are grappling with a likely combination of ongoing fiscal activism, global economic fragmentation, renewed inflationary pressures, and a shallower Fed rate cutting cycle. So far, the stock market has shrugged off the pick-up in yields. But there is no guarantee that higher-for-longer rates won’t damage risk appetite. Investment markets have been “hypersensitive” to economic news this year. The addition of policy uncertainty could intensify market volatility. US stock valuations look stretched and profits expectations are elevated. Positive European and Asian growth in 2025 suggests there is still room for markets outside of the US to perform. But for emerging markets, the dollar outlook is key, as is the next set of policy support measures from China. Market Spotlight Step by step The Fed looked through the noise of the US elections and delivered a 0.25% cut, which it had been expected to do for several weeks. The rationale for the move was that the funds rate is at restrictive levels while inflation is moderating, and the labour market is back in better balance. Looking forward, the Fed is faced with a more uncertain outlook, given potentially large changes in fiscal and trade policy. Medium-term upside inflation risks have likely increased while the growth outlook has become more ambiguous – depending on the ultimate mix of fiscal and trade policies, growth could exceed or disappoint current expectations. Given the more unpredictable outlook, Chair Powell may want to recall the words of former ECB President Mario Draghi, “In a dark room you move with tiny steps”. In other words, the best course of action is likely to be gradually taking the policy rate back towards a more neutral level unless data and events push you strongly to do something else. 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 08 November 2024. Lens on… Chinese momentum Chinese stocks rallied in September on news of further policy support, and they’ve largely held those gains. Momentum picked up in early November, and the Shanghai Composite is still up 20%+ since the new measures were announced. Last week, the China National People’s Congress (NPC) Standing Committee approved an incremental increase of RMB6 trillion in the local government special debt limit to swap hidden debt over three years through the end of 2026. For stocks, the prospect of further policy support could mean strong potential for growth and recovery. Some specialists see Chinese stocks continuing to trade at a wide discount to peers and still lightly-owned by international investors. They favour both quality growth companies and high dividend-paying stocks. That said, Chinese firms remain vulnerable to potential risks, including geopolitical tensions and any weakness in global economic conditions. Emerging FX pressures President-elect Trump’s victory in the US election, together with a strengthening dollar, has reinforced negative sentiment towards emerging market (EM) currencies and local-currency assets. Investors have been nervous about the potential impact of higher US tariffs on global trade, as well as potentially higher bond issuance and a widening of the US fiscal deficit. A repricing of US rate expectations hasn’t helped EM assets either. Weaker EM currencies risk stoking inflation and could prompt a re-assessment of the EM policy outlook. Brazil’s central bank hiked rates by 0.50% in October to quell rising inflation, providing relief for the currency. The Brazilian real has weakened nearly 14% this year – hitting a record low following the US election – maintaining the pressure for further tightening amid rising concerns about the sustainability of fiscal policy. While this is a near-term risk for many EM economies, a number of currencies have long-term valuation buffers. The Fed-driven global easing cycle, albeit possibly slower and shallower, should limit downside risks, as should the policy-stimulus driven cyclical recovery in China. Frontier resilience A concern for investors ahead of the US election was the potential impact on global trade from aggressive US tariffs. One area which could prove resilient to greater trade frictions is frontier markets, where countries have learnt to steer a path between competing third parties. Key to this is that frontiers are a relatively low correlation, low volatility asset class in the equity space, with domestically-driven economies. That can shelter them from global macro events. The shift towards a more multi-polar world has tested this, but frontiers are tending to prioritise neutrality. In Gulf Cooperation Countries, for example, Saudi Arabia has opted to play a mediator role in regional tensions, preferring instead to focus on its domestic economy, social reforms, and diversifying from oil into sectors like tourism and leisure. Another example is Vietnam, which has managed to benefit from ’nearshoring’ but still maintains a positive trade partnership with both China and the US. All in, frontier markets could offer a route through potential tariff tensions. 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 08 November 2024. Key Events and Data Releases Last week The week ahead Source: HSBC Asset Management. Data as at 7.30am UK time 08 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 appetite rose following the presidential election in the US, with the US dollar strengthening on expectations of continued “US exceptionalism” and looser fiscal policy. Core government bonds weakened, with rising US fiscal concerns lifting US Treasury yields, led by the 10yr. The Fed lowered rates by 0.25%, hinting at a more cautious view on inflation, and the BoE lowered rates by 0.25%. In the US, equities saw broad-based gains, with the S&P500 reaching an all-time high. European stocks weakened, led by lower autos. The Nikkei 225 advanced, as the Japanese yen hovered around its 3-month low. In EM, mainland China’s Shanghai composite rallied on encouraging business surveys amid optimism over further fiscal stimulus. Hong Kong’s Hang Seng index and Korea’s Kospi moved higher. In commodities, OPEC+’s decision to delay production cuts supported oil prices. Gold fell, while copper edged higher. https://www.hsbc.com.my/wealth/insights/asset-class-views/investment-weekly/2024-11-11/

2024-11-08 12:02

Key takeaways As expected, the FOMC cut the Fed funds rate by 0.25% to the 4.5-4.75% range. We continue to expect the Fed will lower policy rates in December by 0.25% and four more times for a total of 1% to a range of 3.25-3.5% in 2025. Economic growth is slowing but still strong as real economic growth slowed from 4.4% q-o-q to 2.8% (seasonally adjusted annual rate) in 3Q24. Inflation remains under control as both the GDP deflator and the quarterly PCE deflator in 3Q24 are below the Fed’s target range of 2%. Payroll growth is slowing but the unemployment rate remains near a 55-year low of 3.4%. Donald Trump is set to become the 47th President of the United States with 295 electoral college votes as of 7 November according to the New York Times. The Republicans have retaken control of the US Senate, after flipping seats in West Virginia, Ohio and Montana. The results guarantee the Republicans at least 52 out of 100 seats. While there’s still some uncertainty around the House race, it currently appears that the House of Representatives will be controlled by the Republicans. If the Republicans win a majority in the House, that will give them a sweep of the executive and legislative branches. As a result, several initiatives like tax policy and tariffs could be passed with a simple majority in Congress. Although the race for the House of Representatives isn’t yet settled, we believe a Trump presidency is likely to offer additional support to US stocks, principally because of the proposed tax cuts and likely deregulation. We add further to our existing US equity overweight. For the bond market, fiscal stimulus, the potential for unusually large Treasury issuance and potential tariff-related upward pressure on inflation may lead to further volatility. We downgrade USD investment grade bonds to neutral. What happened? As expected, the FOMC cut the Fed funds rate by 0.25% to the 4.5-4.75% range. We expect the Fed will lower policy rates in December by 0.25% to a range of 4.25-4.5%. In 2025, we forecast the FOMC will cut policy rates four more times for a total of 1% to a range of 3.25-3.5%. The Fed's confidence that inflation will move sustainably to target argues for a continued gradual policy easing towards neutral. Powell reiterated Fed will support economy: “If the economy remains strong and inflation isn’t sustainably moving toward 2%, we can dial back policy restraint more slowly. If the labour market were to weaken unexpectedly or inflation were to fall more quickly than anticipated, we can move more quickly.” Consumer inflation enters the Fed’s symmetric target range Source: Bloomberg, HSBC Global Private Banking and Wealth as at 7 November 2024. Economic growth is slowing but still strong. Real GDP has slowed from 4.4% q-o-q to 2.8% (seasonally adjusted annual rate) in 3Q24. Consumer spending has slowed from 4.9% in 1Q23 to 3.7% in 3Q24. The GDP deflator rose 1.8% q-o-q while the quarterly PCE deflator was 1.5% q-o-q in 3Q24. Both are below the Fed’s target range of 2%. Given a slowing economy and coming technology-driven deflation, potential inflation risks seem to be on the downside. Labour markets remain healthy. Payroll growth is slowing but the unemployment rate remains near a 55-year low of 3.4%. Donald Trump is set to become the 47th President of the United States with 295 electoral college votes as of 7 November according to the New York Times. The Republicans have retaken control of the US Senate, after flipping seats in West Virginia, Ohio and Montana. The results guarantee the Republicans at least 52 out of 100 seats. The remaining 27 House of Representatives races haven’t been called. The Republicans currently have 210 seats vs. the Democrats’ 198. The Republicans need 8 more House seats to secure a majority, while the Democrats need 20 (data as at the time of writing). Investment implications Despite uncertainty surrounding domestic politics and a host of other issues, the Fed easing cycle continues. Although the race for the House of Representatives isn’t yet settled at the time of writing, we believe a Trump presidency is likely to offer additional support to US stocks, principally because of the proposed tax cuts and likely deregulation. As a result, we add further to our existing US equity overweight. According to FactSet as of 1 November, earnings are forecast to rise 9.3% in 2024 and 15.1% in 2025. These forecasts were made prior to the election. The potential for lower household and corporate taxes should be further accretive to earnings. Pontential positive impacts on sectors: Financials: Financial deregulation could increase lending capacity, reduce compliance costs, and potentially raise profitability for banks and financial services firms. Potential increase in M&A could lift earnings as well. Consumer Staples and Consumer Discretionary: Lower household taxes may increase disposable income, potentially boosting consumer spending across both staples and discretionary sectors. However, higher tariffs could raise the cost of goods sold. Technology: Reduced regulation on data privacy and tech operations could increase investment. Lower corporate taxes may also benefit tech firms with substantial domestic operations and investment in R&D. Communications Services: Deregulation in data and internet privacy could create a more favorable environment for digital advertising, content creation, and communications platforms, potentially boosting growth in this sector. For the bond market, fiscal stimulus, the potential for unusually large Treasury issuance and potential tariff-related upward pressure on inflation may lead to further volatility. As a result, we downgrade USD investment grade bonds to neutral. We continue to see investment grade bonds as a way to generate income by locking in current yields, but think investment grade bond price appreciation becomes less likely while volatility picks up. We think there will be continued strong demand for gold as a hedge against tail risk, hence, we upgrade gold to an overweight position. Potential macro and policy implications Potential market implications https://www.hsbc.com.my/wealth/insights/market-outlook/special-coverage/2024-11-08/

2024-11-07 12:02

Key takeaways While solid economic and earnings growth data, Fed rate cuts and structural trends are positive for US equities, we believe a Trump presidency is likely to offer additional support due to the proposed tax cuts and deregulation. As fiscal stimulus and potential tariff-related upward pressure on inflation may lead to further volatility in bonds, we downgrade Global, US and Asian investment grade bonds to neutral. The Eurozone faces challenges of slow growth and potential US tariffs, hence warranting our downgrade of Europe ex-UK equities to underweight. The UK is better positioned due to its better macro outlook and lack of a US-UK trade deficit. UK equities are also more defensive in nature and cheap. We continue to see opportunities in European IT, energy and healthcare. While we are waiting for more clarity around the size and the specific details of China’s fiscal stimulus measures, the potential for increased US tariffs adds to the complexity, so we remain neutral on mainland Chinese and Hong Kong stocks. Yet, valuations remain cheap. Within the region, we favour Japan, India and Singapore due to their favourable market conditions and positive growth drivers. South Korean stocks are moved down to neutral due to tariff concerns. https://www.hsbc.com.my/wealth/insights/asset-class-views/investment-monthly/2024-11-update/

2024-11-07 12:02

Key takeaways The Associated Press has called the 2024 US presidential election for Donald Trump. The Republican Party will gain control of the Senate, but several key Senate and House races have yet to be called. The US Dollar Index (DXY) surged to a four-month high. The Associated Press (AP) has called the 2024 US presidential election for Donald Trump, having secured more than the 270 required minimum threshold of Electoral College votes. According to the AP, Republicans will hold at least 51 seats in the Senate in 2025 (out of 100 total), therefore ensuring majority control. The margin of Republican control in the Senate is not yet clear, as the AP has yet to make calls for several races. Many of the most competitive races in the House of Representatives remain uncalled, and there is some uncertainty whether Republicans will secure a majority in that chamber. The market reaction to the US election results is all about expectations, and the impact of expectations is already apparent in the strength of the USD (Chart 1). The possibility of a Republican clean sweep bolsters expectations for fiscal stimulus and higher tariffs, both of which may be inflationary and slow the pace of Federal Reserve (Fed) easing in 2025 and support the USD. Thoughts of deregulation and possible corporate tax cuts may foster capital inflows into the US. Should results confirm a clean sweep, the USD could rally further. Source: Bloomberg, HSBC Source: Bloomberg, HSBC The flipside to this USD strength is FX weakness elsewhere (Chart 2). Among G10 currencies, the EUR is the most exposed to tariff concerns, especially when the Eurozone economy is still struggling with weak growth. The JPY is weakening alongside rising US yields and weakness elsewhere in Asia currencies. While the knee-jerk reaction has been supportive of our core view of USD strength, we would caution against extrapolating the move too far. After all, the presidential inauguration day is not until 20 January 2025, and policies requiring congressional approval would take longer still to become reality. Perhaps, the greatest argument, is that market expectations do not always translate into reality. A clean sweep would open the door to fiscal stimulus but does not guarantee it. Fiscal legislation could be vulnerable to different policy priorities within the Republican Party. It is also unclear how warmly the USD would welcome an expansion of the US budget deficit from an already sizeable starting point. Similarly, USD strength built on expectations of higher tariffs could be on porous ground if they are ultimately used only as a bargaining chip in trade negotiations. https://www.hsbc.com.my/wealth/insights/fx-insights/fx-viewpoint/flash-2024-11-07/