2025-10-06 07:04

Key takeaways The Fed has delivered a widely expected 0.25% rate cut. While the FOMC still sees inflation risks as tilted to the upside and its base case is solid growth and broadly stable unemployment next year, the bulk of the committee is concerned about labour market risks. Like many emerging markets this year, India’s inflation rate is low and under control – giving the Reserve Bank of India (RBI) space last week to cut rates by 0.25% to 5.25% and introduce measures to boost liquidity. The South African rand has moved to its strongest levels since early 2023, breaching the ZAR17.0 level versus the US dollar. Key to this is the country’s improving fiscal position, with its deficit now back to the pre-Covid average. Chart of the week – Diversify the diversifiers For the first two decades of the 2000s, the performance of stocks and bonds was negatively correlated. So, when stocks underperformed, bonds tended to do better. That dependability helped to shape thinking on ways of achieving an optimal portfolio mix – including the 60/40 stocks/bonds allocation – with bonds providing ballast and diversification. But that correlation has flipped to positive in the post-pandemic era, driven by inflation volatility and policy uncertainty. While last week’s Fed rate cut was a move to insulate the labour market (see page 2), with growth holding up, policies being supportive, and supply shocks in the mix, we could see faster cyclical inflation in 2026, and that points to potentially sticky long bond yields. Because of this, the traditional role of bonds as a diversifier could continue to prove less reliable, leaving investors to reconsider old assumptions and sparking a search for “bond substitutes” as a source of diversification and portfolio resilience. It means that liquid alternatives are back in focus – and that includes hedge funds. In the post-GFC era, hedge funds weren’t particularly in demand from investors, given that traditional bonds were an effective hedge. But today’s environment is more similar to the 1990s, when inflation was stickier, the world was more fragmented, central banks’ role a bit more limited, and fiscal policy more active. It means that expected return profiles across macro, credit, and trend-following hedge fund strategies show a potentially compelling diversification premium. With the stock/bond correlation potentially remaining positive in this new, higher-inflation environment, “bond substitutes” in the form of hedge funds – as well as other alternative asset classes – can offer a way to “diversify the diversifiers”. Market Spotlight Credit control Huge capex spending on AI infrastructure has been a major investment theme this year. The current build-out is the first of what’s expected to be a three-phase cycle that will see a shift to more firms using AI software, and then broad adoption and monetisation. Yet, uncertainties still persist over future returns and the risks of over-investment. Current capex spending has been focused on semiconductors, data centres, and power infrastructure. Hyperscalers are projected to spend nearly USD400 billion this year. But the scale of commitments through 2028 – projected at close to USD3 trillion – is gradually shifting the funding dynamics for these major firms. Declining free cash flow has led to more reliance on external financing, with bond issuance estimated at around USD200 billion through the period. For now, the hyperscalers have strong credit fundamentals, manageable debt and robust free cash flow. So, the present backdrop has better debt characteristics than the dotcom bubble and the GFC. But given the scale of funding needed, the complexities of adoption, high expectations, and the potential for overcapacity in AI infrastructure, risks will need to be monitored carefully in the coming years. 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. 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. Diversification does not ensure a profit or protect against loss. 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 is not guaranteed in any way. Source: HSBC Asset Management, Bloomberg, Macrobond. Data as at 7.30am UK time 12 December 2025. Lens on… Odd jobs The Fed has delivered a widely expected 0.25% rate cut. But two members dissented in favour of unchanged policy, and the ‘dot plot’ signalled four non-voters also preferred no change. Stephen Miran voted for a 0.50% cut. Chair Powell said the policy rate is now within a “plausible range” of neutral with the Fed “well positioned” to see how the economy evolves. While the FOMC still sees inflation risks as tilted to the upside and its base case is solid growth and broadly stable unemployment next year, the bulk of the committee is concerned about labour market risks. Chair Powell revealed the Fed thinks that payrolls growth is being overstated by around 60k per month, meaning employment has fallen by an average of 20k per month since May, rather than rising at the published near-40k pace. Powell noted this situation requires watching “very carefully”. Investors need to do the same. A modestly pro-risk stance, including EM equities and bonds where valuations still offer some cushion, may help hedge against disappointing macro news. Reserve Boost for India Like many emerging markets this year, India’s inflation rate is low and under control – giving the Reserve Bank of India (RBI) space last week to cut rates by 0.25% to 5.25% and introduce measures to boost liquidity. India’s headline CPI inflation is on track to average around 2% year-on-year in the financial year that runs to end-March 2026 – a multi-decade low. And although inflation is expected to pick up again, it isn’t expected to overshoot the RBI’s 4% target. For markets – which still face uncertainty over the timing of any trade deal with the US – the RBI cut should help to underpin already strong growth, making it potentially good news for stocks, especially in rate-sensitive sectors. Bonds should also benefit, with high real yields making them potentially compelling in the EM local-currency sovereign bond space. Plus, India’s record of fiscal prudence, strong structural drivers, and the inclusion in major global bond indices are all positives. However, the cut was delivered against the backdrop of a weakening trend in the rupee. With the RBI having now delivered a cumulative 1.25% of cuts, the actions of the Fed in 2026 look more important as a constraint to further significant policy action. ZAR struck The South African rand has moved to its strongest levels since early 2023, breaching the ZAR17.0 level versus the US dollar. Key to this is the country’s improving fiscal position, with its deficit now back to the pre-Covid average. The Q3 current account deficit also came in smaller than expected. This is significant given that South Africa was previously labelled a "fragile-five" economy – with fiscal weakness making it vulnerable to capital flight. Indeed, the five-year average of its current account balance now shows a surplus, and its terms-of-trade have soared during the second half of this year. The South African Reserve Bank recently adopted a more stringent 3% inflation target from the previous range of 3-6%. This could allow the country to lock in lower interest rates over time, and be growth positive. In a year when many emerging markets have been ”lucky” because of weakness in the US dollar, South Africa is further evidence that EMs have also been “good”. Macro reforms and more developed financial markets have derisked many EMs – making these markets less volatile than many developed markets. 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. Diversification does not ensure a profit or protect against loss. 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 is not guaranteed in any way. Costs may vary with fluctuations in the exchange rate. Source: HSBC Asset Management. Macrobond, Bloomberg. Data as at 7.30am UK time 12 December 2025. Key Events and Data Releases Last week The week ahead Source: HSBC Asset Management. Data as at 7.30am UK time 12 December 2025. 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 is not guaranteed in any way. Market review Risk markets firmed following the Federal Reserve’s latest 0.25% rate cut, with the US dollar slipping against major currencies. Fed Chair Powell stated that the FOMC is “well positioned to wait and see how the economy evolves”. Front-dated US Treasuries rose as the Fed started the reserve management purchase operations, while long-end US Treasury yields moved sideways ahead of upcoming employment and CPI inflation data. Meanwhile, hawkish comments from ECB member Schnabel weighed on longer-dated German bunds. US equities posted broad-based gains, led by the Russell 2000, although tech stocks experienced volatility. The Euro Stoxx 50 also advanced, and Japan’s Nikkei 225 edged higher ahead of this week’s BoJ meeting. In EM Asia, indices in China and India were on course to close last week modestly lower. Elsewhere, oil prices declined, while gold price strengthened. https://www.hsbc.com.my/wealth/insights/asset-class-views/investment-weekly/article/

2025-10-03 07:04

Key takeaways The Reserve Bank of India (RBI) kept the policy rate unchanged at 5.5% for the second consecutive meeting and retained the monetary stance at “neutral”. The RBI raised its FY 26 (April 2025 – March 2026) GDP growth forecast to 6.8% from 6.5% previously. It also cut its inflation projection for FY26 to 2.6% (from 3.1% previously), owing to the good monsoon season, which should result in softer food price inflation. The RBI also released its 4QFY27 inflation forecast at 3.9%. Based on the guidance from the RBI, we believe that should the 50% tariffs continue till year-end, the central bank is likely to cut rates by 0.25% to 5.25% in the December MPC meeting. We retain our neutral stance on Indian equities and favour domestically oriented sectors, which should be relatively more resilient. We are overweight on the consumer discretionary, financials, industrials and healthcare sectors. Please refer to the full report for details about the event and our investment view. https://www.hsbc.com.my/wealth/insights/market-outlook/special-coverage/rbi-stays-on-hold-keeps-the-door-open-for-future-cuts/

2025-10-02 07:05

Key takeaways The US government began its shutdown on 1 October as Congress failed to reach a funding agreement before midnight of 30 September. The last shutdown took place in 2018. While essential services like the military, border security, Social Security checks, and air traffic control would keep operating, non-essential services would pause, and many agencies would furlough staff, and key government reports like jobs and inflation data could be delayed. The economy would feel the impact as each week of shutdown could reduce quarterly GDP by about 0.1-0.2%. The politics and uncertainty surrounding a government shutdown have typically created volatility and have resulted in equity markets recalibrating. However, this potential short-term weakness is usually overcome by the longer-term fundamentals, which remain positive for the US market. For fixed income investors, uncertainty can cause some short-term volatility but often also adds to the safety appeal of US Treasuries. In addition, the shutdown does not change our view that the Fed will cut rates in October and December, which should support bonds. The US dollar could see some weakness in the short term, but it may easily reverse should the conflicts resolve. Please refer to the full report for details about the event and our investment view. https://www.hsbc.com.my/wealth/insights/market-outlook/special-coverage/us-government-shutdown-could-raise-volatility/

2025-09-30 21:04

Key takeaways The re-start of the Fed’s rate cut cycle boosts equities, bonds and gold to new highs. Historically, equities and bonds tend to perform well in the 12 months after the Fed resumes easing. We now expect two more 0.25% rate cuts this year. As the 10-year US Treasury yield is now below our year-end forecast of 4.3%, we reduce our maturity preference for US Treasuries to 5-7 years. We see further upside for US equities due to multiple drivers in place, with rate cuts being one of those. The AI liftoff drives huge activity and investment in the AI ecosystem. Together with a healthy pick-up in M&A activity, steady increases in share buybacks and dividends, as well as a constructive cyclical outlook and structural drivers such as nearshoring and the US re-industrialisation, we stay bullish on US equities, preferring IT, Communications, Industrials and Financials. Apart from a positive outlook for the US market, diversification across geographies, sectors, asset classes and FX can help capture additional opportunities and manage risks. Geographically, we also like China and Singapore for their different economic cycles and growth drivers compared to those of the US. We overweight Financials and Industrials in most regions for their cheaper valuations than IT and attractive opportunities. Quality bonds, gold and alternative assets are good diversifiers amid slowing growth. A multi-asset strategy is an effective way to achieve all of the above. https://www.hsbc.com.my/wealth/insights/asset-class-views/investment-monthly/fed-easing-creates-opportunities-across-markets/

2025-09-29 12:02

Key takeaways We expect USD inertia in the weeks ahead, barring marked hawkish US data surprises… …but Japanese factors may gain more traction in USD-JPY and other JPY crosses. Focus will include LDP leadership election and the BoJ’s October decision. In the coming weeks, the USD looks set to be trapped, in our view. Factors, such as the still buoyant risk appetite (Chart 1) and continued concerns over the Federal Reserve’s (Fed) independence amid the US administration’s legal cases (Reuters, 23 September 2025) point to further USD downside, but this could be offset by cyclical upside risks, given that markets are priced more dovishly than what the recent Fed rhetoric would seem to justify. It is worth noting that the September “dot plot” shows that the Fed is basically evenly divided between the need for one or two cuts during 4Q25. With a c90% chance of a Fed rate cut at the 28-29 October meeting in the price (Bloomberg, 25 September 2025), it may be hard for US data (like non-farm payroll on 3 October and CPI on 15 October) to out-dove markets and the risks are skewed to a bigger USD bullish reaction if the numbers land hawkishly. Source: Bloomberg, HSBC Source: Bloomberg, HSBC While USD sentiment remains the key driver to USD-JPY, Japanese factors may gain more traction in the coming weeks. Concerns about possible JPY weakness related to Japan’s ruling Liberal Democratic Party (LDP) leadership election (4 October) seem overblown, as the winner will be aware that cost-of-living concerns are what drove their predecessor out. Our economists also expect the Bank of Japan (BoJ) to hike its rates at its 30 October meeting, and markets only see a c55% chance of this happening. As such, a BoJ hike will probably provide further support to the JPY over the near term. For GBP-JPY (Chart 2), we see the pair going lower in the week ahead, as the GBP is likely to be dragged down by elevated UK fiscal concerns (see FX Viewpoint – GBP: Fiscal risks for details). Other than GBP-JPY, EUR-JPY is also likely to go lower in the weeks ahead, as the EUR may lack catalysts for near-term gains. https://www.hsbc.com.my/wealth/insights/fx-insights/fx-viewpoint/jpy-cross-rates-in-focus/

2025-09-29 07:04

Key takeaways There were no major surprises in the recent volley of interest rate decisions from major. Frontier market stocks have outperformed both emerging and developed markets this year – with the MSCI Frontier index up 33%. That’s been driven by the tailwind of a weaker US dollar and the relatively insulated nature of Frontiers from global market volatility. Recent data from an NBER and OpenAI project show that ChatGPT adoption has risen threefold (from 10% to 30% of the internet-using population) in the richest economies over the past year. Yet, the real surge is in middle-income countries, where usage has jumped 5-6 times. Chart of the week – 1990s redux? As AI enthusiasm continues to dominate investor sentiment, US stock indices are pushing to fresh all-time highs. And with the Federal Reserve resuming its easing cycle amid ongoing evidence that the US economy has achieved a “soft landing” following its aggressive hiking cycle of 2022-23, parallels are being drawn to the mid-90s bull run in markets. Indeed, the similarities are striking. The US economy experienced a soft landing in 1995, just as the personal computer revolution and rise of the internet was transforming society and boosting productivity – similar to the potential impact of AI today. But is that where the similarities end? Starting points matter. 1995 began with the 12-month forward PE of the S&P 500 at just above 12x, versus around 22x now. We also know that the latest 1990s was characterised by a potentially favourable macro backdrop of falling inflation and unemployment, and hyper-globalisation. A structural decline in bond yields contributed to a rerating of equity multiples. By contrast, today’s global backdrop of economic fragmentation is keeping inflation sticky and means the supply side is prone to shocks. With government finances increasingly stretched, bond yields are likely to remain high, and macroeconomic volatility is expected to continue. Investors should take the potential impact of AI seriously. The current bull run could continue for a while. But with many of the tailwinds of the 1990s now acting as headwinds, could Alan Greenspan’s (premature) bathtub musings of “irrational exuberance” in 1996 be more relevant to today’s market environment? Market Spotlight Spread thin Credit spreads – the gap between the cost of borrowing for governments and corporates – have narrowed to near-record lows this year. The spread on US investment grade (IG) credit, for example, tightened to 0.72% the week before, its lowest since 1996. High yield spreads are also close to long-run tights. And it’s a similar story in European credit too. The credit rally has been a highlight of global investment returns this year. In part, it’s been driven by easy financial conditions, better-than-expected earnings, resilient balance sheets, and stable leverage. The limited impact of tariffs on company profit margins, so far, has also spurred confidence, and the recent decision by the Fed to cut rates despite elevated inflation could further fuel the positive backdrop. For investors, narrow credit spreads can mean slimmer returns, but with US rates still relatively elevated, ‘all in’ yields remain attractive. Given that firms with stronger balance sheets can be more resilient to economic cracks, some fixed income specialists prefer high-quality investment grade (IG) to high yield. 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. 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. Diversification does not ensure a profit or protect against loss. 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 is not guaranteed in any way. Source: HSBC Asset Management, Bloomberg, Macrobond. Data as at 7.30am UK time 26 September 2025. Lens on… The rate escape There were no major surprises in the recent volley of interest rate decisions from major central banks. The US Federal Reserve restarted its easing cycle, while the Bank of England (BoE) and the Bank of Japan (BoJ) – like the European Central Bank (ECB) a few weeks earlier – kept policy on hold. But the decisions – and accompanying commentary – revealed diverging views on the outlook, and the near-term path for rates. In the US, new FOMC member Stephen Miran was the lone dissenter (favouring a 0.5% cut) in an otherwise unanimous vote for a 0.25% cut (to 4.00-4.25%) on labour market weakness. Despite elevated inflation, the market is pricing two more 0.25% US cuts by year-end, and two in 2026. Elsewhere, the BoE has been divided since the summer on the risks of elevated inflation and weak growth, with further UK cuts not now expected until 2026. A bigger surprise was at the BoJ, where the prior assumption of there being no rush to tighten policy was dashed by two dissenting votes, which put a rate hike this year back into play. One central bank closer to resolving these policy dilemmas is the ECB. After eight rate cuts, eurozone inflation is close to target and policy is in neutral territory – mission accomplished. The efficient frontier Frontier market stocks have outperformed both emerging and developed markets this year – with the MSCI Frontier index up 33%. That’s been driven by the tailwind of a weaker US dollar and the relatively insulated nature of Frontiers from global market volatility. Discounted valuations, steady profits growth, and strong structural stories have all attracted investors – and new policy easing by the Fed could be another catalyst. According to some equity experts, there continue to be broad opportunities across the asset class. One example is in Gulf Cooperation Council (GCC) countries, which have taken a mediating role in regional geopolitical issues, whilst prioritising domestic reforms. Saudi Arabia, for instance, continues to press ahead with investments in major national initiatives. Meanwhile, a better-than-expected outcome on US tariffs should mean that Frontiers continue to benefit from a re-routing of global supply chains, including growing demand for ‘nearshoring’ from Europe. In sum, relatively low volatility, low intra-country correlations, and the continued tailwind of a weaker US dollar all support the positive outlook for Frontier equities. AI as an equaliser An interesting trend in generative artificial intelligence (AI) isn't just how popular the technology is becoming, but where uptake is happening more quickly. Recent data from an NBER and OpenAI project show that ChatGPT adoption has risen threefold (from 10% to 30% of the internet-using population) in the richest economies over the past year. Yet, the real surge is in middle-income countries, where usage has jumped 5-6 times. There isn’t much difference now in ChatGPT usage between countries at the 50th vs 90th percentile of GDP per capita. For example, Brazil, South Korea, and the United States all now show similar usage levels and near-universal internet access, despite having GDP per capita of USD10k, USD34k, and USD86k, respectively. This convergence could have meaningful market implications. Generative AI is expected to deliver around 25% of productivity gains over the medium-long run, according to academic research. If middle-income economies embed these AI tools faster than their developed peers, they may capture efficiency dividends sooner. This could support equity upside in emerging and frontier markets. 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. Diversification does not ensure a profit or protect against loss. 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 is not guaranteed in any way. Source: HSBC Asset Management. Macrobond, Bloomberg. Data as at 7.30am UK time 26 September 2025. Key Events and Data Releases Last week The week ahead Source: HSBC Asset Management. Data as at 7.30am UK time 26 September 2025. 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 is not guaranteed in any way. Market review Risk markets struggled to make headway. Fed Chair Powell emphasised two-sided risks on inflation and the labour market, dampening optimism for significant US rate cuts. The US dollar strengthened against a basket of major currencies, while gold prices reached new highs. 10-year US Treasury yields rose modestly, with the front-end losing ground with four 0.25% rate cuts now priced in by end-2026. US and euro area IG credit spreads widened slightly but remained close to record tights. In equity markets, US stocks broadly retreated, with weakness in tech stocks weighing on the Nasdaq. The Euro Stoxx 50 edged down, while Japan’s Nikkei 225 rose to another all-time high amid a weaker yen. EM Asia equities were mixed: South Korea’s Kospi declined, whereas China’s Shanghai Composite and India’s Sensex rose. In commodities, oil prices rallied amid lingering concerns over geopolitical risks. https://www.hsbc.com.my/wealth/insights/asset-class-views/investment-weekly/1990-s-redux/