2025-07-02 12:02
Key takeaways Fiscal spotlight continues to shine bright amid policy changes. Inflation and labour market data are on track to help deliver a BoE rate cut in August. Businesses and households are under considerable pressure. Source: HSBC One year on The government has been in office for one year and while a lot has changed for the global and UK economies, the intense spotlight on UK public finances has not. The 12 June Spending Review highlighted the difficult trade-offs required against a backdrop of limited fiscal wriggle room. In order to keep commitments to boost funding for the NHS and raise defence spending to 2.6% of GDP by 2027, other departments are set to see real-term cuts from 2026-27. However, since then, spending commitments have continued to be announced. Alongside NATO allies, the UK has committed to raise defence spending to 5.0% of GDP by 2035. Within that, core defence expenditure has a 3.5% of GDP target at a cost of an additional GBP30bn a year by 2035 (chart 1), a headache for the next government. While 1.5% on “security and resilience” by 2027 would suggest that that funding will come from departmental budgets already set out at the Spending Review, rather than additional funds. Elsewhere, partial policy U-turns on welfare spending cuts and winter-fuel payments erode the small fiscal headroom ahead of the next Autumn Budget. UK economy muddles through At the latest Bank of England policy meeting in June, the committee voted to leave rates unchanged at 4.25%. The meeting minutes pointed to the need to see further progress in the disinflationary process for rate cuts to continue. Indeed, despite the recent acceleration in headline CPI to 3.4% y-o-y, it was in line with expectations and underlying inflationary pressures appear to have eased. Services inflation slowed, wage growth in April was slower than expected and labour markets continue to loosen. The rate of unemployment rose to a near four-year high in April, to 4.6%. On the activity side GDP tumbled in April following a robust Q1 that was supported by unsustainable factors. For Q2, business surveys point to a muddling through in the face of a plethora of uncertainties, subdued demand and rising input costs. For services firms, the PMIs reported the greatest margin squeeze in over two years in June (chart 2). Similarly, renewed cost pressures on household budgets see reports of cutbacks, notably in food where price growth is reaccelerating. Meanwhile, the housing market, a bellwether of consumer sentiment, is yet to find any momentum after the hike in stamp duty, prolonged recovery in household budgets, and still restrictive interest rates. House price growth slowed to 2.1% y-o-y in June from 3.5% (chart 3). Source: Macrobond, NATO, HSBC Source: Macrobond, S&P Global PMI, HSBC Source: Nationwide, Halifax, ONS, HSBC https://www.hsbc.com.my/wealth/insights/market-outlook/uk-in-focus/fiscal-challenges-still-in-the-spotlight/
2025-07-01 12:02
Key takeaways The geopolitical conflict in the Middle East has caused oil prices to spike, while gold and quality bonds held up well and became negatively correlated with equities. Despite the de-escalation of tensions, uncertainties around trade tariffs, inflation and growth still linger. It is vital to build resilient portfolios through diversification and quality assets, which has worked well in recent market volatility. US earnings growth is expected to be bolstered by continued rate cuts, AI innovation, structural trends and deregulation, benefitting Industrials, IT, Communications and Financials. We upgrade European Utilities to overweight due to improved earnings momentum, cheaper valuations and Germany’s infrastructure plan. The tech revolution and policy tailwinds are positive for Industrials, Communications, Consumer Discretionary and Financials in Asia. Following a rate cut pause in June amid tariff and policy uncertainties, the FOMC is expected to resume easing in September. Despite concerns about the US fiscal deficit, US Treasuries are still fundamentally resilient. Yet, rate volatility warrants a neutral stance for now. While the Bank of England reinforced a gradual approach to easing, we expect another 1.25% of rate cuts from this easing cycle and remain positive on UK gilts for their attractive valuations against a backdrop of slowing growth. While a potential rate hike in October is likely, JGB yields remain unattractive. https://www.hsbc.com.my/wealth/insights/asset-class-views/investment-monthly/building-multi-asset-resilience-against-geopolitical-uncertainty/
2025-07-01 08:05
Key takeaways Table of tactical views where a currency pair is referenced (e.g. USD/JPY):An up (⬆) / down (⬇) / sideways (➡) arrow indicates that the first currency quotedin the pair is expected by HSBC Global Research to appreciate/depreciate/track sideways against the second currency quoted over the coming weeks. For example, an up arrow against EUR/USD means that the EUR is expected to appreciate against the USD over the coming weeks. The arrows under the “current” represent our current views, while those under “previous” represent our views in the last month’s report. https://www.hsbc.com.my/wealth/insights/fx-insights/fx-trends/g10-currencies-time-to-refocus-on-us-policy/
2025-07-01 08:05
Key takeaways Geopolitical risk has receded for now, but could still prompt occasional support for the USD if the situation changes. In our view, the USD is likely to consolidate over the next few weeks, but with risks skewed towards additional weakness. US trade and fiscal policy uncertainty lingers and structural pressures build, suggesting a weaker USD in the months ahead. The USD rally during the Israel-Iran military conflict, though short-lived, was revealing insofar as it showed that for all the questions being posed by the FX market about the USD’s merits, it is still where we scramble if geopolitical tensions are rising (see the chart below). If the recently agreed ceasefire between Israel and Iran holds, the USD is likely to consolidate over the coming weeks; but the risk of periodic USD spikes higher remains should the situation change. Source: Bloomberg, HSBC The coming weeks could be pivotal in shaping the path for the USD if we get clarity on US trade policy, US budget outlook, and the consequent most likely path of the Federal Reserve’s (Fed) monetary policy. Specifically, we will face a deadline on the tariff pause on 9 July, the final stages of efforts to pass a budget through US Congress, and the run-up to a 29-30 July Federal Open Market Committee (FOMC) meeting. Clarity on where US trade policy will ultimately land is likely to remain elusive. On this front, US Commerce Secretary, Howard Lutnick, said the US and China finalised a trade understanding reached last month in Geneva, and added that the White House has imminent plans to reach agreements with a set of 10 major trading partners (Bloomberg, 27 June 2025). Structural USD concerns might be alleviated if the US Congress can deliver a budget that does not point to a blowout deficit. However, time is running out to meet the US administration’s aspiration to have an agreed budget in place by 4 July. All this should keep the Fed on the sidelines, despite recent openness from some members to a July cut. Without fresh catalysts, the USD is likely to grind, albeit with downside risks, in the near term. Going into 2H25, our framework suggests that the USD has room to weaken moderately. The cyclical component is not obviously negative for the USD if both the US and global economies are slowing. However, the policy factor has been weighing on the USD and it may not be calmer going forward when many trade discussions are ongoing and deals are still light on detail. Meanwhile, the structural de-dollarization force is showing signs of growing importance. https://www.hsbc.com.my/wealth/insights/fx-insights/fx-viewpoint/usd-further-weakness-after-near-term-consolidation/
2025-06-30 07:05
Key takeaways European stocks have outperformed most global markets in 2025. It follows 15 years of underperformance versus the US – leaving it at a deep valuation discount coming into 2025. After a challenging period marked by higher financing costs and policy uncertainty, fundamentals in direct real estate are stabilising and liquidity is improving. Investor focus has been centred on downside risks this year. But it is important to remember upside risks too. One obvious channel is an AI-led productivity rebound. Chart of the week – US dollar as the key driver of H1 returns What can investors expect from markets in the second half of 2025? So far this year, fading US exceptionalism has been a defining feature of the investment landscape. For years, US leadership has been characterised by relatively strong GDP growth, outsized stock market returns, and the strength of the dollar. For markets, it has been dollar weakness in particular, that has influenced returns in the first half – and that looks set to continue. The H1 headline is that US stocks have underperformed the rest of the world. A weaker dollar, cooling US growth, and higher levels of uncertainty – driven by unpredictable policy – have driven investors to look further afield for superior risk-adjusted returns. That’s seen a switch in equity leadership to Europe, the Far East, and emerging markets (EM), and value outperforming growth. Dollar weakness has created new policy space for EM central banks, with proactive rate cuts – in contrast to a reactive Fed – oxygenating EM bonds and stocks, which have long been under-owned in the era of US exceptionalism. Meanwhile, stronger EM currencies have boosted the appeal of local bonds to global investors. Meanwhile, a regime of “deficits forever” and a cautious Fed have kept 10-year Treasury yields high in H1, limiting returns and impairing their traditional role in protecting portfolios. Selective credits, real assets and liquid diversifiers like hedge funds and infrastructure have been positive. And the price of gold – a natural haven in uncertainty – has soared. As pressure builds on risk-adjusted returns, it is important that investors are ready to adapt. Staying nimble and embracing tactical asset allocations will be key to navigating inherently unsettled markets. Market Spotlight Roaring tigers Asian stock markets were volatile in the first six months of 2025 – but there were some stellar returns. The MSCI Asia ex-Japan index is up 13% year to date in USD terms, eclipsing US gains. Fading US exceptionalism (especially a weaker dollar) is a catalyst for the rest of the world assets. A solid performance in China (+19%, USD) was helped by tech sector strength – including advances at AI firm DeepSeek – progress on a US trade deal, and an ongoing policy put. Meanwhile, South Korea (+32%) set the pace on post-election expectations of fresh policy stimulus and corporate governance reforms, as well as an AI-demand led semiconductor sector recovery. Hong Kong (+18%) was buoyed by lower local rates and a pick-up in trading activity and new listings. And Taiwan posted a 5% gain in H1 but saw a strong pick-up in Q2 largely attributable to FX effects. Overall, some equity analysts continue to see Asia offering broad sector diversification and quality-growth opportunities at reasonable valuations – but selectivity is key. 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. See page 8 for details of asset class indices. Data as at 7.30am UK time 27 June 2025. Lens on… Europe pricier, but still cheap European stocks have outperformed most global markets in 2025. It follows 15 years of underperformance versus the US – leaving it at a deep valuation discount coming into 2025. The main catalyst was fading US exceptionalism and ultra-high policy uncertainty, which delivered a wake-up call for both European policymakers and investors. Germany’s decision to open the fiscal taps to fund spending on defence and industry was key and raises the prospect of renewed growth across the bloc. A backdrop of falling inflation and ECB policy easing has also helped. Europe’s valuation discount has compressed lately – but there’s still a wide gap with the US. The forward price/earnings ratio of the MSCI eurozone index re-rated to 14.5x from 13x in H1, taking it above its 10-year average. And the German index now trades at a near-20% premium to its 10-year average PE, on strength in its aerospace and industrials sectors. That’s more than the S&P 500, with Sweden close behind. Year-on-year 2025 eurozone profit growth expectations have fallen to 4% on tariff and currency risk, but it looks set to rise to 11.5% in 2026. Despite the H1 rally, some equity analysts see pockets of exceptional value in wider Europe to keep investors happy. Good properties After a challenging period marked by higher financing costs and policy uncertainty, fundamentals in direct real estate are stabilising and liquidity is improving. Capital values are expected to edge upward in the next 12-months, driven by income-led growth, instead of property yield compression. But this recovery may not be uniform across sectors. Retail is one to watch. Long overlooked, it’s re-emerging as a strong performer. Vacancy rates are near historic lows in markets like the US and Tokyo, and rents are rising on the back of a healthier, more resilient tenant base. Yields also remain attractive compared to other sectors. Looking ahead, senior housing and data centres may also continue to lead the charge in non-traditional segments. Powered by AI, cloud infrastructure, and demographic tailwinds, these areas show sustained rental growth and rising demand. With alternative asset classes playing a key role as portfolio diversifiers, some specialists believe that with careful consideration and a long-term view, investors can find opportunities in a real estate market entering a more balance and income-driven phase. Programmed productivity Investor focus has been centred on downside risks this year. But it is important to remember upside risks too. One obvious channel is an AI-led productivity rebound. Almost 9.2% of US firms now use AI, almost double last year’s rate, with financial, IT, and educational sectors leading the charge. Academic studies suggest AI can lift labour productivity by 25% on average. Longer-term, this could have significant upside implications for aggregate output, consumption, investment, and R&D. Of course, the pace and breadth of these gains hinges on how quickly firms adapt, how AI diffuses across sectors, and how issues like data privacy and outdated tech stacks are tackled. For markets, increased efficiency could drive corporate profits higher for firms leveraging AI effectively, resulting in upside for equity prices. Meanwhile, bond yields could also see upward pressure amid higher growth that raises demand for capital and pushes r* (the neutral rate) higher. But like all big technological leaps, it won’t be straightforward. Some job losses are likely, while inflation could drop on faster supply growth. Expect this issue to add to uncertainty in the coming years. 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 27 June 2025. Key Events and Data Releases Last week The week ahead Source: HSBC Asset Management. Data as at 7.30am UK time 27 June 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 Easing geopolitical tensions boosted risk markets, with oil prices declining markedly, and the US dollar continued its recent downtrend against major currencies. US Treasury yields fell amid growing Fed rate cut expectations, driven by some dovish remarks from Fed officials and soft macro data, while rising fiscal concerns weighed on German Bunds. Global equities rose, as robust gains in US tech sector propelled the S&P 500 and Nasdaq Composite close to their all-time highs. In Europe, the Euro Stoxx 50 index was on course to post modest gains. In Asia, equity markets saw broad-based advances, led by Japan’s Nikkei 225, with Chinese equities also rallying. In Latin America, Brazil’s Bovespa index traded sideways while Mexico’s IPC closed higher. https://www.hsbc.com.my/wealth/insights/asset-class-views/investment-weekly/us-dollar-as-the-key-driver-of-h1-returns/
2025-06-27 12:02
Key takeaways India appears among the most resilient economies in Asia... ...with signs of a broader recovery under way. and hopes that it may carve out a niche for itself as supply chains are once more rejigged. Positive developments As we still await certainty around global tariffs and trade flows, three positive developments have taken place on India’s growth front recently. One, inflation has fallen quickly, and this has raised purchasing power of the informal sector consumers across rural and urban India, who make up two-thirds of the consumption pie. This comes at a time rural production and incomes have risen and is likely to provide a much needed shot in the arm to consumption. Two, the new leadership at the Reserve Bank of India (RBI)is easing policy quickly. Their steps include rate easing, liquidity infusion, and regulatory easing. Efforts to front-load much of the easing is likely to hasten transmission into deposit and lending rates, augmenting the supply of credit, even if the demand for credit, admittedly, will take longer to rise. Three, services exports, which now make up half of overall exports, remain resilient. As we have documented in the past, they have moved up the value chain, from simple IT services exports to a host of professional services exports. Resilient growth 1Q25 GDP growth came in at 7.4%, stronger than 6.4% a quarter ago. The practice of cash accounting instead of accrual accounting in the subsidy bill may have inflated GDP numbers in the quarter; however, even the alternate growth measure, Gross Value Added (GVA), suggests a rise in activity in the quarter (6.8% versus 6.5% in the previous quarter). All said, we recently raised our GDP forecast from 5.9% to 6.3% for FY26 (6.2% to 6.7% for CY25). We believe that within this headline improvement, some important changes will happen across sectors. Investment may come in weaker than before, and even weaker than consumption growth. Private capital expenditure generally weakens during periods of uncertainty. Consumption growth could come in stronger than before as informal sector consumption rises, even though formal sector consumption, which makes up the remaining third of the consumption pie, softens (led by uncertain equity market returns and global trade flows). Can current global uncertainties be turned into opportunities over the medium term? We find that India has grown faster in periods of strong integration with the world. We further find that global financial integration has been strong, but global trade integration has been weaker. However, with the economy slashing import tariffs and fast-tracking trade deals, it may stand to gain once the tariff storm settles. As supply chains get rejigged once again, India could attract a larger share of manufacturing and exports, particularly in labour-intensive mid-tech goods like textiles. Policy issues The RBI eased more than expected in the 6 June Monetary Policy Committee (MPC) meeting. One, it cut by 50bp, more than consensus expectation of 25bp, taking the repo rate to 5.50%, and delivered a 100bp in rate cuts in 2025 so far. Two, it cut the cash reserve ratio(CRR)by 100bp, a move that was largely unexpected. This cut is expected to add INR2.5trn to liquidity but could eventually be used to sterilise the USD40-45bn of FX swaps that are expected to mature between June and December. We see the repo rate and CRR cuts as a package to add liquidity, but in a way that supports banking sector net interest margins. Three, the stance was changed from accommodative to neutral. While the governor reiterated that after the RBI’s actions on 6 June, there is “very limited space” for further easing, we continue to expect a 25bp rate cut in the December quarter. The RBI forecasted inflation at 3.7% for FY26, but we believe it could come in lower at 3.2%, opening space for further easing. It can be asked why the RBI eased so much at a time when growth is holding up. Our sense is that the RBI is using this opportunity to raise structural credit growth and potential GDP growth. In fact, the governor said that “while price stability remains the focus of monetary policy, we are not oblivious to putting in place complementary monetary and credit policies and regulations that support growth and prosperity”. This, to us, signals a new RBI. One that is not just focused on the current business cycle but also on India’s potential growth. On the fiscal front, the government may choose to appropriate a part of the fall in global oil prices in the form of higher revenues instead of cutting pump prices. This could make fiscal consolidation much easier than budgeted. We think the fiscal deficit target of the government will be met, supporting India’s macro stability credentials. On the external front, the current account deficit is likely to remain low as long as investment remains soft. The area to watch, instead, are capital inflows. Net FDI inflows have been weak (because of large repatriation), and portfolio inflows remain unpredictable. https://www.hsbc.com.my/wealth/insights/market-outlook/india-economics/in-a-better-place/
