2025-03-26 12:02

Key takeaways Trade tensions are set to intensify, weighing on exports and investment across ASEAN. But cooling inflation and policy easing should provide a floor under domestic demand... ...helping the region’s economies endure the challenges in the year ahead with customary poise. Indonesia is looking to rate cuts to help its economy and appears less exposed to the global tariff turmoil than many of its neighbours. Thailand may clock a similar pace as last year, even if the consumer looks increasingly out of breath. The Philippines may step it up a notch, driven by domestic momentum and limited exposure to global trade tensions. In Malaysia, investment is still strong, on both the public and private side, providing a floor to growth as the trade outlook turns more uncertain. Singapore will not fully escape the global turmoil, being a more open economy than most, but a slight fiscal lift will cushion things at home. In Vietnam, growth ambitions remain high, even as the risk of tariffs clouds the outlook, which may force greater fiscal spending. Economy profiles Key upcoming events Source: LSEG Eikon, HSBC Indonesia A new innings With Prabowo Subianto taking over as Indonesia’s president in October 2024, all eyes are on the key policies the new government champions. In the election campaign, Prabowo spoke at length about higher social welfare spending, SOE reform, and continued efforts on manufacturing down-streaming. So far, there have been key announcements on the first two. The government unveiled a free food scheme for children, a rice assistance programme, an electricity tariff discount, an accelerated housing programme, and limited the VAT rate hikes. On the SOEs front, a new Sovereign Wealth Fund (SWF) known as Danantara, reporting directly to the president, has been launched. It is mandated to oversee SOE functioning and drive investment. More clarity is now needed on the role of the erstwhile SWF, and the role of the SOE ministry. Meanwhile, growth momentum has been soft going by the PMI, bank credit growth, and core inflation. Our nowcaster model points to growth of 4.5-5%, lower than official GDP numbers of about 5%. And GDP numbers remain 7% below the pre-pandemic trend, signifying a negative output gap. As such, there is a case for looser fiscal and monetary policy in 2025. Indonesia also wants to raise potential GDP growth as a policy priority. We believe breaking away from commodity price swings by raising geographically diversified and higher value-added exports could bring large gains. Some good things have happened in recent years. Indonesia has gained market share in global exports. It has a trade surplus with the US, and a falling trade deficit with China. But these haven’t been able to lift domestic growth, as about half of the exports are commodity-related with limited backward linkages. However, there are encouraging nascent signs of export diversification. Indonesia’s exports to the US look very different, in fact a lot like Vietnam’s export mix, comprising a lot more apparel, footwear, electronics, and furniture. Vehicle exports to ASEAN are rising, as are electronics exports to the US and Latin America. But these are still rather small (for instance, just 9% of Indonesia’s exports go to the US) and need to be scaled up. Is that doable against an increasingly challenging global backdrop of rising trade protectionism? It would not be easy but is not impossible either. Indonesia doesn’t run a formidable trade surplus with the US, which could arguably protect it from large tariff increases. It could even benefit from supply chains getting rejigged in response to new tariffs on key exporters. But work on several fronts would be needed: enhancing infrastructure development, expanding trade agreements, developing a skilled workforce and streamlining business practices. Indonesia runs a negative output gap Source: CEIC, HSBC Inflation is well below BI’s 2.5% target Source: CEIC, HSBC Malaysia A steady ship in choppy waters Malaysia has been gaining attention on the international stage, and it’s not hard to spot the reasons for optimism. To name just a few, the MYR was the best performer in Asia in 2024, growth accelerated to 5.1% and large tech giants have committed billions of dollars of investment. Political stability and policy reforms have contributed to better sentiment both onshore and offshore. The question is, can Malaysia’s positive momentum be sustained in 2025? It’s not an easy one to answer, as global uncertainty introduces volatility. That said, there are good reasons to believe in Malaysia’s robust economic fundamentals. Keeping the ship steady is the key task in 2025. As a tech-exposed economy, there is more room for Malaysia’s trade to improve, as net exports contribution to growth was minimal in 2024. After all, Malaysia has seen a much slower recovery in semiconductor production than peers. That said, there is a large degree of uncertainty in the US administration’s tariff policies. The good news is that Malaysia’s well-diversified trade portfolio and not-so-chunky trade surplus with the US may offset some tariff risks. However, the US’s proposal of a 25% tariff on semiconductor imports may cloud Malaysia’s trade prospects. Despite external uncertainty, Malaysia has the domestic strength to mitigate some of the impact. There are pockets of resilience in private consumption, given still generous subsidies and wage hikes in civil servants’ pay. On investment, the country has been witnessing an investment boom, thanks to ongoing infrastructure projects and FDI inflows, though the latter may see some near-term caution among investors, given tariff uncertainty. All in all, we cut our 2025 growth forecast slightly to 4.7% (previous: 4.8%), reflecting our caution on global trade prospects. We keep our 2026 growth forecast at 4.5%. In addition, inflation remains in check. Headline inflation decelerated slightly to 1.7% y-o-y in January, down from 1.8% in 2024. Given subdued inflation momentum, we lower our headline inflation forecast to 2.4% for 2025 (previous: 2.7%). That said, we acknowledge upside risks to inflation from the potential subsidy rationalisation on RON95, expansion of sales and services tax (SST) coverage and civil servants’ wage hikes. We believe that Bank Negara Malaysia (BNM) will likely keep its policy rate unchanged at its comfortable level of 3%, a view we have held for some time. Electronic exports continue to rebound but commodities have been contracting Source: CEIC, HSBC Inflation has remained benign, providing room for BNM to stay on hold Source: CEIC, HSBC Philippines From the Fed to ASEAN Growth came in below expectations for the second consecutive quarter in Q4. But this time, it was for a different reason. In Q3 2024, growth underperformed as typhoons took a toll on agriculture and tourism. The next quarter was more of a demand-side issue; growth surprised to the downside again as household consumption – the country’s driver for growth – decelerated to its slowest pace since the Global Financial Crisis. The slowdown, however, was not a result of households buying fewer staples. Rather, it was because they were buying fewer big-ticket items, or goods that often require a loan to purchase. Based on the Bangko Sentral ng Pilipinas’ (BSP) Consumer Sentiment Survey, households are purchasing fewer vehicles, gadgets, and education – all goods and services that are pricey enough to require credit. And, true enough, credit growth by large banks continues to clock a pace that is well below pre-pandemic levels. With consumption down, 2024 growth undershot the government’s 6-8% target for the second consecutive year at 5.6%. If inflation took growth hostage back in 2023, high interest rates are taking a toll on the economy today. Hence, it came as a surprise when the BSP decided to start 2025 by pausing its easing cycle. The BSP was clear in its rationale: it wanted a buffer against the risk of a sharp re-pricing of Federal Reserve rates to manage any potential volatility in the peso. Nonetheless, cognizant of tight financial conditions, the BSP signalled that it is still in the middle of an easing cycle. Once the dust settles, we expect the BSP to continue its gradual easing cycle, cutting the policy rate by 25bp each in April (previous: June), August, and December this year, bringing the policy rate to 5.00% by year-end 2025. Together with the upcoming Required Reserve Ratio cut in March, further monetary easing should rehydrate consumption and investment, and improve growth in 2025. We expect full-year growth to be resilient at 5.9%. Apart from the support from monetary easing, the Philippines is among the most insulated economies in Asia when it comes to tariff risks. It doesn’t have a large trade surplus with the US, nor is it highly exposed to the risk of reciprocal tariffs. The country’s services exports, with digitalisation making services more tradable, also continue to make strides, growing 11% q-o-q seasonally adjusted in Q4 2024. Low inflation should also help buttress demand, more so with rice prices set to cool even further throughout the year. Growth in household consumption decelerated to its slowest pace since 2010 Source: CEIC, HSBC With inflation subdued, the economy has room to absorb FX-induced inflation Source: CEIC, HSBC. NB: Shaded area represents HSBC forecasts. Singapore An election year budget Singapore ended 2024 on a strong footing, largely benefitting from a trade upswing. This resulted in a more-than-decent pace of growth of 4.4% as a developed market (DM) for the whole year. That said, challenges and uncertainties warrant more policy support. Despite strong growth in 2024, unevenness persisted. For one, the manufacturing sector’s recovery was largely aided by the rebound in electronics and the precision and transport engineering sectors. That said, it was dragged down by the pharmaceutical output, given that sector’s volatile nature. The same trend was also observed in the services sector. While wholesale trade saw sustained strength, thanks to the positive spillover impact from a rebound in manufacturing, consumeroriented sectors contracted, suggesting a significant shift in spending by locals overseas that was not offset by the increase in international tourists. Despite a rosy 2024 GDP print, 2025 is characterised by challenges. While Singapore may not be directly targeted by the US, as it is the only ASEAN country that runs a trade deficit, and has a Free Trade Agreement with the US, trade turbulence will likely cloud its growth prospects. Meanwhile, weakness in some domestically oriented services may also persist. While inflation has behaved well in the past year, elevated cost-of-living pressure remains a key concern. All in all, we maintain our growth forecast at 2.6% for 2025, at the upper end of the government’s growth forecast range of 1-3%, but we have tweaked our quarterly profile of GDP prints. In addition, inflation has made good process. Core inflation decelerated from 4.2% in 2023 to 2.8% in 2024, on broad-based cooling of price pressures. Entering 2025, core inflation in January even fell 0.7% m-o-m seasonally adjusted, the largest drop in almost five years. This translated into subdued y-o-y inflation of only 0.8%, undershooting the Monetary Authority of Singapore’s (MAS) forecast range of 1-2%. Given the downside surprise in January and likely continued disinflationary forces from trade tensions, we revised down our core inflation forecast to 1.3% for 2025 (previous: 1.9%). Singapore’s tech production has picked up, following Korea and Taiwan Source: CEIC, HSBC Singapore’s core inflation has decelerated quicker than expected Source: CEIC, HSBC Thailand Wheel and axle The end of the year wasn’t the positive outcome many had expected for the economy. Many had thought growth would be robust due to the implementation of the first phase of the Digital Wallet Scheme, a fiscal stimulus that gave THB10,000 of cash to each of Thailand’s most vulnerable citizens in Q4 2024. Still, growth in the quarter surprised to the downside with the impact of the stimulus limited. Many handout recipients used the cash to pay down debts and, as a result, private consumption did not accelerate as expected. After all, the household debt-to-GDP ratio in Thailand is the highest among upper-middle income economies globally. This showcases the risk of household debt blunting the effectivity of fiscal policy – which the Bank of Thailand (BoT) is looking to address. The woes continued into the start of the year. Thailand’s tourism outlook took a hit early in January as reports of a Chinese actor missing in Thailand filled headlines in China. This dampened tourism sentiment about Thailand, enough for many Chinese tourists to cancel their Lunar New Year trip to the region. Durians also faced a pungent outlook, as China imposed a temporary import ban in January over allegations of chemical contamination (Bangkok Post, 16 January 2025). Though manufacturing exports have been surging, this was largely concentrated in electronics. These goods tend to have a high share of imported components, which, in turn, diminishes the local value-added of exports. 2025 will likely be a tough year for the economy, most especially with tariff risks looming over global trade. On one hand, direct tariffs from the US could harm Thailand, with the US its top destination for exports. On the other hand, US tariffs on Chinese goods might exacerbate import competition even further as China finds other markets to take its inventory. This would then be a headwind to Thailand’s manufacturing sector, with output already falling by 4.2% since 2022. At first, we assumed that to a certain extent, the fiscal levers would be enough support to the economy. Using monetary policy simultaneously would then risk stoking household debt. However, with fiscal policy losing traction, as exemplified by the first phase of the handout, more may be needed for Thailand to get over this economic hump. Like a wheel and axle, we expect monetary policy to help fiscal policy in cranking up growth. We expect the BoT to cut its policy rate by 25bp to 1.75% in Q4 2025, with risks tilted towards an earlier cut. However, to keep household debt at bay, we expect this cut to be the last, implying that the BoT will keep its monetary stance steady throughout 2026. The first phase of the Digital Wallet Scheme only had a limited impact on consumption Source: Macrobond, HSBC The real policy rate remains slightly above pre-pandemic levels Source: CEIC, HSBC Vietnam Achilles’ heel After slow growth in 2023, Vietnam’s economy saw a strong rebound last year, growing 7.1%, restoring Vietnam’s position as ASEAN’s fastest-growing economy in 2024. That said, there is no room for complacency, given growing uncertainty on global trade prospects. While no ASEAN economy has been targeted specifically by US tariff announcements yet, Vietnam appears to face tariff risk. Based on US Customs data, Vietnam’s trade surplus with the US ballooned to USD123bn, almost a 20% y-o-y jump, making it the country with the thirdlargest trade surplus with the US, just after China and Mexico, both of which have been targeted by US tariffs. Coincidentally, Vietnam also runs a sizeable trade deficit with China, which could gain unwanted attention from the US administration. In addition to the trade surplus, Vietnam has the highest tariff rate differentials of ASEAN nations with the US. The US has also scrutinised trading partners with high value-added taxes (VATs) in relation to potential tariffs. While Vietnam has a low VAT among the ASEAN economies, its 2ppt VAT cut to 8% is temporary and is set to expire by mid-2025. Shortly after the VAT proposal, President Trump announced his intention to impose tariffs “in the neighbourhood of 25%” on semiconductor imports, which will likely impact Vietnam as the US is a dominant export destination for its semiconductor shipments and accounts for almost one-third of Vietnam’s total exports. That said, Vietnam has been proactively engaging with the US to mitigate external risks. The two countries recently signed a series of deals, valued at over USD4bn (Hanoi Times, 16 March 2025). On top of previous agreements worth USD50bn and ongoing negotiations of deals worth USD36bn, this would raise bilateral deals to be implemented to USD90bn from 2025 (Hanoi Times, 15 March 2025), but it remains unclear how much this would translate to additional US imports per annum. Overall, we forecast growth at 6.5% for 2025 and 6.3% for 2026. That said, how US trade policies evolve will be crucial for Vietnam. Outside of growth, inflation has ticked up but was largely manageable at 3.3% y-o-y on average in the first two months of 2025. Given upside surprises from food and medical prices, we raised our inflation forecast to 3.5% for 2025 (previous: 3.0%) and 3.3% for 2026 (previous: 3.2%). There has been some moderate frontloading impact on Vietnam’s exports Source: CEIC, HSBC. NB: January and February are combined to adjust for Lunar New Year distortions. Vietnam faces elevated trade risks, requiring proactive engagement by the government Source: CEIC, HSBC. NB: US’s trade deficit with ASEAN is data from the US side and ASEAN’s trade deficit with mainland China is data from the ASEAN side. https://www.hsbc.com.my/wealth/insights/market-outlook/asean-in-focus/resilience-on-display/

2025-03-25 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-eyes-on-us-trade-policy/

2025-03-24 12:02

Key takeaways The combination of high import tariffs and low FDI in mid-tech sectors has hurt India’s export potential over the past decade. One positive from the potential US trade tariffs is that they could become a catalyst for change, but reforms must run deep. The experience of China, ASEAN, and India’s own success with services exports could shed light along the way. Too many uncertainties on the external front will likely hurt India’s GDP growth in the short term. But can these be turned into opportunities in the medium term? We go back in history to see what has worked in the past, and what has not. We analyse India’s economy over two periods –the ‘high growth’ decade, FY01-FY10, when India’s growth soared, alongside rising global export share and investment; and the ‘lower growth’ decade, FY11-FY20, when all three softened. How can India escape‘lower growth’ and ascend to ‘high growth’? One key differentiating factor between the two periods was import tariffs, falling in the former, but rising in the latter. In fact, India’s import tariffs are amongst the highest globally, and were hurting exports even before the Trump administration put them centrestage. How have high tariffs hurt India? The economy has not fully plugged into global supply chains. One reason why China could raise its exporting strength (or its forward participation) was because it was open to importing (raising backward participation) before it became self-sufficient. Protectionist tendencies in India may have led to a premature clamping down of backward participation, hurting its export potential. India’s FDI story also sheds light. After soaring in the pandemic period, high-tech FDI has fallen, as global competition has picked up. What India seems to have overlooked is mid-to-low tech FDI in labour intensive manufacturing sectors like food, apparel, furniture, and toys, which stagnated in the ‘lower growth’ period. In fact, India did not gain as much as ASEAN in these sectors during the first Trump Presidency. But if supply chains are rejigged during the second Trump Presidency, following higher tariffs on current large exporters, and the world looks for new producers, India may get a second chance. If sectors such as electronics, apparel, furniture, and footwear, where Vietnam made significant progress in the first Trump Presidency, is a reflection of where global opportunities from supply rejigging lie, it is worth noting that India is already a player, with room to grow. Incidentally, China’s excess capacity is not as large in these mid-to-low tech sectors. Space for another manufacturer may well be there. But first India needs to make changes. And there is good news here. Potential US tariffs may have become a catalyst for reforms –lowering import tariffs, opening up to regional FDI, fast-tracking trade deals, and making the INR more flexible. And India does not have to look too far for models to emulate. Its success in services exports has demonstrated the power of moving up the value chain, from basic (e.g. call centre services) to high-tech (professional services). But for similar success in goods trade,reforms must run deep. Certainly uncertain There are too many uncertainties on the external trade and tariffs front (see exhibits 1 and 2). Higher tariffs on India’s exports will likely lower its GDP growth directly (for instance, as we discuss later, reciprocal tariffs could lower India’s GDP growth by about 0.3ppt), and indirectly (for instance via lowering global FDI flows). In this report, however, we look beyond the immediate impact, and how this adverse shock can be turned into an opportunity. After all, in the past India has reformed best in periods of crisis (a la 1991). We go back into history to understand what worked in the past, and what has not. We analyse India’s economy and its external finances over various periods, and a few lessons are clear. If India can dare to be different by opening up for business by lowering tariff and non-tariff barriers, and be more welcoming of regional FDI in labour-intensive sectors, even as the world is turning more protectionist, it could more meaningfully plug into global value chains, and in the process create more jobs and growth. India may have already embarked on this journey, but success will depend on how far it is ready to go. Let us elaborate. Going back in history Two distinct periods in India show good insights: FY01-FY10 and FY11-FY20 (see exhibit 3). High growth FY01-FY10: This period showed high GDP growth (averaging 7.8% per year), rising investment (by 1.1% of GDP per year), and strong export growth (13% per year in real terms). India’s global export share more than doubled in this decade. This was a period when India was cutting import tariffs (even bringing them down to where China’s tariffs were by 2010, see exhibit 4). There were high imports too, leading to a worsening of the c/a balance (by 0.3% of GDP per year). But because growth was strong, so were capital inflows. The c/a deficit was easily funded, leaving behind a high BoP surplus (2.9% of GDP). Lower growth FY11-FY20: The next decade was quite the opposite. GDP growth was lower (average 6.6% per year), investment weaker (falling by 0.2% of GDP per year), and export growth softer (6% per year). India’s global export share was broadly stagnant in this period. This was a period when India’s import tariffs stopped falling, and even started to rise from 2018 onwards (see exhibit 4). Imports were low too, leading to an improvement in the c/a balance (of 0.3% of GDP). But because the growth prospects were weaker, capital inflows were softer, leaving behind a smaller BoP surplus (0.9% of GDP). What is clear from these periods is that high growth is a function of strong investment and export, and has been experienced best at times of falling import tariffs. The worsening of the c/a balance during the higher growth period has not been a problem, because it was fully funded by higher capital inflows. The challenge for India is to break out of the ‘lower growth’ track, and ascend to ‘high growth’. What can it do right? Are import tariffs too high? India’s share in global merchandise exports has been low and sluggish (see exhibits 5 and 6). The obvious next question is why? Although global liquidity was lower in the ‘lower growth’ period than the ‘high growth’ period, all countries should have suffered. Why did India’s export share stagnate? There could be many reasons, such as the hurdles around the ease of doing business and quality of infrastructure, but what stands out for us in the current environment is elevated tariffs. India has had amongst the highest import tariffs (see exhibit 7), and they have been on the rise (see exhibit 4, although this does not include some cuts in the recent budgets). Non-tariff barriers are also rife (although harder to quantify). WTO data shows that India ranked second after China in imposing antidumping measures against the US. Quality control orders (QCOs) are also on the rise (from 14 notified in 2014 to 186 notified in 2024). These orders are quality standards imposed on imports. They are meant to ensure quality and safety, but can also double up as non-tariff barriers. India’s high tariff and non-tariff barriers have begun to stand out at a time when President Trump has suggested reciprocal tariffs on India’s exports (see exhibit 8), although it is not clear what form reciprocal tariff increases will take, or the likely timeline. Going by the tariff differential with the US, the sectorsmost impacted could be agriculture, automobiles, jewellery, and pharmaceutical products (see exhibit 9). All said, these tariff barriers were already hurting India, even before the Trump administration brought them centre stage. Next, we explore how exactly India has been hurt by high tariffs by undertaking a comparative assessment of India and China in trade integration. India’s still-low integration in the global goods value chains Our India and China analysis uses OECD’s trade in value added (TiVA) database, which helps understand how economies have become integrated into global value chains over time. We use two concepts, backward and forward participation, both expressed as a share of an economy’s gross exports. Backward participation refers to the use of foreign-sourced inputs to produce a country’s exports, and forward participation refers to the use of domestically produced value-added in a foreign countries’ exports. In the case of China, the forward participation has been on the rise for a few decades, making more countries dependent on Chinese produce (see exhibit 10). No surprise that China’s global export share has continued to rise. An important enabler in the process was falling tariffs throughout the period, and higher imports, at least initially. China’s backward participation shows that the reliance on imported inputs increased for several years, before China deepened its manufacturing and became more self-sufficient. In the case of India, we go back to the ‘high growth’ and ‘lower growth’ periods referred to above. Forward participation was rising until about 2010, after which it stagnated (see exhibit 11). Backward participation increased in the ‘high growth’ period, but declined in the ‘lower growth’ period, when import tariffs began to rise. The high tariffs may have made it costly to import, and given that the intermediary inputs industry had not developed by then, India’s forward participation, or more broadly, itsexport potential, suffered. India may have become a victim of premature protectionism. But this can now change, and there are some nascent signs (more later). India’s FDI mystery Having analysed trends in external trade, we move to its funding counterpart, i.e. foreign direct investment (FDI). What’s gone on there? Net FDI into India increased appreciably in the five years before the pandemic (from USD22bn in FY14 to USD31bn in FY19). During the pandemic it increased further (to USD44bn in FY21). Thereafter net FDI has been declining sharply, now to about USD3.5bn (sum of the past four quarters, see exhibit 12). India’s share in regional FDI has also declined (exhibit 13). Which parts of FDI flows have led to this? To recap the definitions: Net FDI: FDI to India –FDI by India; FDI to India: Gross FDI –repatriation. We find that FDI to India has fallen while FDI by India has inched up (see exhibit 14). And within FDI to India, gross FDI has been sluggish, and repatriation has risen(see exhibit 15). The rise in repatriation is not too great a concern in our view, as it is largely secondary sales and IPOs by MNCs as well as exits by PE firms, and perhaps adds to investor confidence that investing in India can be profitable. What bothers us is that gross FDI has been more sluggish than one may have expected given India’s strong growth potential in the few years following the pandemic. The mystery thickens when we find that throughout this period, foreign investment intention in high-tech and futuristic sectors such as renewables, semiconductors, green hydrogen, and data centres was strong (see exhibit 16 and 17). Some of this pledged money never came. Looking closer we find that much of the FDI instead went to advanced economies, in several instances where large government incentives made it attractive. In fact, 23% of global FDI in 2023 went to the US alone. A case of missing mid-to-low tech FDI Our constructed indices show that much of the FDI boost in the pandemic period was led by high-tech sectors such as autos/EVs, electronics, pharmaceuticals, and computer services (see exhibit 18). This FDI culminated in strong growth in high-tech exports (see exhibit 19). And it is this FDI segment that declined in recent quarters given the fierce global competition (as other economies, some with deeper pockets to give subsidies, are competing for the same funds). While high-tech FDI is critical for growth, what seems to have been overlooked is the other half –mid-to-low tech FDI. This includes foreign investment that fuels the more labour intensive sectors such as food, textiles, furniture, and toys. This has stagnated in the ‘weaker growth’ period (falling from 40% of overall FDI in 2000-10 to 30% in 2011-17, and further to 25% in 2018-24). No surprise that India’s mid-to-low tech exports have also been weak. Lessons learnt from the first Trump Presidency As a result of elevated tariffs and soft mid-to-low tech FDI, we believe India was not able to fully seize the opportunities in the first Trump Presidency, when supply chains were rejigged following the imposition of new and elevated tariffs. Did India benefit at all? Yes, but narrowly. It did gain market share in the export of electronics and iron & steel articles (see exhibit 20). But it was not able to gain significant market share in most other sectors, largely mid-tech (e.g. furniture, footwear, apparel, and toys), as well as some high-tech (e.g. machinery, instruments, and vehicles). Other blocks like ASEAN made more progress in raising their global export share (see exhibit 21). Vietnam, in particular, made substantial gains in both mid-to-low tech and high-tech sector exports. If supply chains are rejigged again during the second Trump administration, India may have a chance to grow. If the sectors where Vietnam made most progress during the first Trump administration is a reflection of where global opportunities from supply rejigging lie, note that India is already a player in these sectors. India’s exports in sectors like electronics, apparel, furniture, and footwear are 15-40% of Vietnam’s exports (see exhibit 22). This shows that India’s footprint is large enough to show capability, but with room to grow. After all, wage competitiveness is still on India’s side (see exhibit 23). But what does India need to do right this time around? Overcoming obstacles: US tariffs and China’s excess capacity There are two obstacles for India to overcome before it can increase goods manufacturing and exports –the potential US tariffs under the second Trump Presidency and China’s excess capacity. Let’s address both: US tariffs. India stands out because of its trade surplus with the US (see exhibit 24). Back of the envelope estimates show that reciprocal tariffs could shave off growth by 0.3ppt (although there are many uncertainties around the details). And then there are plans to impose a 25% tariff on pharma and iron and steel products, which could hurt exports further. But these threats could also become a catalyst for India to change a few things that kept it from becoming a larger manufacturing nation. In fact, it is already changing course on several fronts, becoming more ‘open for business’. Lowering import tariffs: Some key tariffs were reduced recently. In the February budget, import tariffs were cut for items like high-end motorcycles, smartphone components, solar cells, and chemicals. Recent news articles show that the government plans to cut tariffs for several other goods such as automobiles, agricultural products, chemicals, pharmaceuticals, and medical devices. Opening up to regional FDI: The economic survey of July 2024, which is an important policy document, made a case for India to become more open to regional FDI, in particular from China. However, this has not culminated in higher FDI inflows yet. Fast tracking bilateral trade deals: India plans to sign a bilateral trade agreement with the US by late 2025. Reports suggest that it plans to buy more oil and defence equipment from the US and increase cooperation in nuclear energy. All of these will likely reduce India’s trade surplus with the US. It has also shown signs of wanting to fast track its trade agreement discussions with other regions such as the EU. Making the INR more flexible: The currency’s 4% depreciation against the dollar over the last few months, and likely flexibility going forward,could help make exports competitive, and give manufacturers the confidence to set up and export from India. As supply chains become rejigged once again, as they did during the first Trump Presidency, and the world looks for new countries to manufacture from, India may have an opportunity to grow its manufacturing sector and exports. China’s excess capacity: Another concern would be the challenge of growing exports at a time of excess capacity in China. Here, we find that while China may have overcapacity in some sectors like electronics, electrical appliances, and automobiles, the same may not be true for other sectors, like furniture, apparel, and chemical products (see exhibit 25). In fact, ASEAN has shown that growing export share despite Chinese overcapacity is possible. Its trade balance is better than pre-pandemic levels for several consumer manufactured goods. Therefore, we believe there are opportunities to grow, despite excess capacity in some pockets. Why manufacturing should learn from services India’s services have done a better job in climbing the value chain than manufacturing (see exhibit 26 and 27). From a focus on call centres in the 1990s, to software solutions in the early 2000s, it is now a seller of complex professional services. In the case of manufacturing, India may have tried to jump directly to high-tech without first going through low and mid-tech. This is not to lower the importance of high-tech manufacturing. It is more to say that lessons from low and mid-tech manufacturing can make India an even better high-tech manufacturer. All said, we do not want to underestimate the challenges of navigating a world with rising protectionism and excess capacity. But we believe that if India remains focussed on being ‘open for business’, it could benefit from supply chain rejigging in response to tariffs on key exporters. https://www.hsbc.com.my/wealth/insights/market-outlook/india-economics/slashing-tariffs-seeking-fdi/

2025-03-24 08:05

Key takeaways The BoE kept rates on hold in March, with a small hawkish surprise in the MPC vote split; GBP-USD largely steady. When growth concerns become more dominant, markets are likely to price in more BoE cuts, thereby weighing on the GBP. The GBP also tends to underperform in periods of high uncertainty. ‘Uncertainty’ is the unsurprising catchphrase among major G10 policymakers at their March meetings, despite the difference in their policy rates (Chart 1). The most recent monetary policy announcement came from the Bank of England (BoE) on 20 March, which also stressed increased uncertainties in the statement. Like the Federal Reserve, the BoE also kept rates steady, as widely expected. (Please read FX Viewpoint Flash: “Fed held rates steady again, trade policy key for USD” for more details.) GBP-USD held relatively steady, despite a small hawkish surprise that only one monetary policy committee (MPC) member, Swati Dhingra, dissenting in favour of a 25bp cut, after two voted for a 50bp cut in February. Source: Bloomberg, HSBC Source: Bloomberg, HSBC The BoE’s slow and steady pace of easing has led to a relatively stable interest rate outlook versus the US. Indeed, larger moves in US rate expectations have driven yield differential and GBP-USD over the past year (Chart 2), as markets are more concerned by the potential impact of tariff policy on the US economy. Over the near term, the risks of US tariffs on Europe from April and an announcement from US President Trump on reciprocal tariffs, among others, would probably pose downside risks to the GBP, as the currency tends to underperform in periods of high uncertainty. As US tariffs rise, weakness in the European and global economy would spill over to the UK economy, which has been struggling. UK survey data in recent months has shown softer labour demand, which is likely to weigh on wage growth and new hiring, pushing unemployment higher over the coming months. It also looks like fiscal policy will tighten, but it is not known when or by how much. Our economists’ base case is that growth and employment concerns will come to dominate over inflation worries. As such, when markets start to price in more BoE cuts, the GBP is likely to face downside risks. https://www.hsbc.com.my/wealth/insights/fx-insights/fx-viewpoint/gbp-usd-holding-the-line-for-now/

2025-03-24 07:04

Key takeaways The noise level in the markets remains very high. A dramatic rise in policy uncertainty is creating a more volatile environment, which could persist. Chinese policymakers have unveiled a new 30-point plan to boost domestic consumption as part of efforts to fire-up the country’s economy. After an impressive two-year rally driven by strong inflows and high growth expectations, Indian stocks have lagged their global peers in 2025 – with MSCI India down 7%. Chart of the week – Central banks in ‘wait–and–see’ mode Uncertainty was very much the broad theme of last week’s central bank policy meetings, with an increasingly complex macro reality clouding the outlook. As expected, the Fed kept rates on hold, maintaining ‘wait-and-see’ mode in the face of heightened policy uncertainty. Fed Chair Jerome Powell signalled no hurry to cut rates as the central bank seeks to balance competing considerations of upward inflation pressure, downside growth risks, and fragile sentiment. The Fed revised down its 2025 GDP growth forecasts to 1.7% from 2.1% and nudged up its inflation expectations – an uneasy mix that raises the spectre of stagflation. The inescapable message was that uncertainty is “remarkably high”, with the so-called ‘dot plot’, which tracks the year-end rate projections of Fed officials, more scattered now than it was three months ago. For other central banks, there was modest divergence but few surprises. Banco do Brasil’s ongoing efforts to tackle resurgent inflation saw it hike rates by 1%. By contrast, Swiss policymakers responded to persistently low inflation with a 0.25% cut. Others, including China, the UK, and Sweden, all followed the Fed’s cautious stance. On balance, we think global central banks remain on course to cut rates this year as cooling labour markets allow inflation considerations to give way to shoring up growth that is being damaged by uncertainty. Barring a major shock, this would be a decent backdrop for global risk assets to perform and laggard markets to continue to catch up. Market Spotlight Sustainable thinking Ten years ago, the United Nations agreed a set of Sustainable Development Goals (SDGs) aimed at promoting a fairer, healthier, and more sustainable future. Since then, asset allocators have used them to measure sustainability outcomes in portfolios. But there have been challenges, particularly because there is no one-size-fits-all way of measuring companies against broad and often overlapping goals. Part of the challenge with SDGs is that they were designed with sovereigns, rather than corporates, in mind and many of them are qualitative. That can make them difficult to measure and apply to investment portfolios, especially at scale. The ambiguity raises the risk of greenwashing and missing out on investment opportunities. The quant solution is to move away from viewing SDGs primarily as reporting metrics aiming to measure every company against every SDG and instead break them into granular investment themes that are easier to link to specific company activities. That way, it’s possible to be more precise about how firms’ impact on those individual themes within SDGs, and do it – with the help of AI – at scale. The result is a more robust, quantitative process for thematic portfolios, that offers a competitive edge in rapidly changing markets. 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 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. Macrobond, Bloomberg. Data as at 7.30am UK time 21 March 2025. Lens on… The new uncertainty trade The noise level in markets remains very high. A dramatic rise in policy uncertainty is creating a more volatile environment, which could persist. What’s new is that volatility is back in the stock market. After the 2021-22 inflation burst, volatility in 2023 and 2024 was mostly contained to short-term interest rates and bond markets, with technical factors also keeping the VIX index supressed. This year, elevated policy uncertainty, the AI wobble, and investors’ reduced faith in US exceptionalism are all creating a rockier journey in US stocks. The US market has gone from hero to zero. China, broad emerging markets, the eurozone, and even the FTSEs are all outperforming. Uncertainty is not great for macro trends either. Both consumers and businesses move into wait-and-see mode, which can stall economic activity. For now, we don’t think the system is in imminent recession danger. Instead, the situation is one of growth cooling down. But even without a more adverse scenario materialising, uncertainty has a price. Investors should prepare for more surprises as we head toward Q2. Only one thing is for sure: the uncertainty trade is back. China’s consumer boost Chinese policymakers have unveiled a new 30-point plan to boost domestic consumption as part of efforts to fire-up the country’s economy. It follows recent National People’s Congress meetings, where domestic demand stimulus was billed as the government’s top priority. The plan reiterates previous announcements designed to raise wages, cut financial burdens, and encourage spending. It includes measures to stabilise the stock market – a driving force of consumer confidence – and develop more bond products suitable for individual investors. As well as promoting traditional consumer sectors like cars and property, the plan also encourages high-growth areas of consumer spend, such as ‘silver tourism’, and AI-powered technologies like autonomous driving, smart wearables, ultra-high-definition video, robotics, and 3D printing. For now, China looks to be in ‘wait and see’ mode amid elevated global economic and trade policy uncertainty. But the policy shift toward consumption is positive. And while there is no magic bullet to drive a quick or strong turnaround in consumer spending, the perceived policy put may continue to support investor sentiment, propagating a virtuous cycle between consumption and the stock market. India stocks – on sale? After an impressive two-year rally driven by strong inflows and high growth expectations, Indian stocks have lagged their global peers in 2025 – with MSCI India down 7%. After recent falls, India’s price/book valuation relative to the rest of the world (excluding the Covid sell-off) has slipped to a 20-year low. But why? Recent weakness has been driven by a mix of foreign investment outflows, lacklustre Q3-FY25 profits news, and trade policy uncertainty. That’s despite the stimulative effects of an RBI rate cut, measures to boost system liquidity, and positive signals from February’s Union Budget. In addition, India’s relatively closed economy could make it less sensitive to trade tariffs than some of its Asian neighbours. Against that backdrop, its stocks are still expected to deliver mid-teens earnings growth in each of the next two years. Near-term performance could be driven by favourable base effects, a pick-up in government capex, and strong rural growth. Longer-term, India’s structural growth story remains intact, underpinned by favourable demographics, rising incomes, supply chain diversification, and government reforms – making recent market weakness a potential buying opportunity. Past performance does not predict future returns. 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. Source: HSBC Asset Management. Macrobond, Bloomberg, Datastream, MOVE: BofA ICE. Data as at 7.30am UK time 21 March 2025. Key Events and Data Releases Last week The week ahead Source: HSBC Asset Management. Data as at 7.30am UK time 21 March 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. Market review Risk markets rebounded as investors digested the latest Federal Reserve FOMC meeting and Chair Powell’s post-meeting remarks, while the US dollar index remained range-bound. Core government bonds saw a broad-based rally. The FOMC downgraded its growth projection, upgraded its near-term inflation forecast and maintained its projection for further gradual easing. US equities mostly rose, led by the Russell 2000. The Euro Stoxx 50 posted decent gains. Japan’s Nikkei 225 moved higher, driven by Financials, as the latest data and the BoJ officials’ comments reinforced market expectations of further gradual BoJ policy normalisation. In emerging markets, India’s Sensex rose strongly, and South Korea’s Kospi performed well, while Chinese equities drifted lower. In commodities, oil prices advanced, with geopolitical developments remaining in focus, and both copper and gold rose. https://www.hsbc.com.my/wealth/insights/asset-class-views/investment-weekly/central-banks-in-wait-and-see-mode/

2025-03-24 07:04

Key takeaways As expected, the Federal Reserve kept rates unchanged at 4.25%-4.50%, making it the second consecutive pause. The FOMC’s latest summary of economic projections (SEP) showed slower GDP growth and higher core inflation vs. projections from December 2024. Mr. Powell acknowledged the increased uncertainty over the economic outlook amid policy changes, but reiterated the wait-and-see approach, apart from slowing the quantitative tightening process, which can be seen as a mild easing step. For US equity investors, the widespread use of tariffs and the potential for accelerating inflation continues to dampen the outlook for corporate profits and economic growth in 2025. Amid uncertainties, we expect US equities to remain volatile in the near term and continue to diversify into the Forgotten 493 stocks in the US and into international markets. We see tactical opportunities in credit as the Fed policy easing should resume soon and continue to expect three rate cuts this year (June, September and December). What happened? As expected, the Federal Reserve kept the federal funds target range unchanged at 4.25%-4.50%. The FOMC continues to balance dual risks of higher short-term inflation due to tariffs on the one hand and the rising tail risk of recession (not our core case) due to the recent weakening of economic data on the other hand. The latest summary of economic projections (SEP) showed slower GDP growth and higher core inflation compared to the previous set of projections made in December 2024. The projection for the unemployment rate at the end of this year was raised modestly from the prior forecast. The inflation outlook was lifted, perhaps taking into account the potential implications of tariffs. However, inflation is still expected to reach the Fed’s 2% target by year-end 2027. Median of the FOMC economic projections, March 2025 Source: Federal Reserve, HSBC Global Private Banking and Wealth as at 19 March 2025. Forecasts are subject to change. In an attempt to mitigate damage caused by the Federal government passing the debt ceiling, effective 1 April 2025, the monthly redemption cap on Treasury securities will be reduced from USD25 billion to USD5 billion, while the cap on agency debt and mortgage-backed securities remains unchanged at USD35 billion. This adjustment signals a more gradual approach to balance sheet normalisation. The potential downside risks to growth and upside risks to inflation, in part from tariffs and trade policy uncertainty, create a complication for the monetary policy outlook. The dot plot, which provides insights into the Committee's expectations for the Federal funds rate, shows that the median projection for 2025 is 3.875%, implying two 0.25% rate cuts by year-end, i.e. a total reduction of 0.50% from the current midpoint of 4.375% (within the 4.25%-4.50% range). We continue to forecast 0.75% of rate cuts in 2025, followed by no change in policy rates in 2026. Will the most aggressive Fed tightening ever result in aggressive easing as well? Source: Bloomberg, HSBC Global Private Banking and Wealth as at 19 March 2025. Forecasts are subject to change. Powell described tariff-driven inflation as potentially transitory and highlighted that short-term inflation expectations have risen due to tariffs, but long-term expectations remain “well-anchored” near the 2% target, suggesting confidence in the Fed's ability to manage inflation over the long run. He explained that central bankers often view tariff effects as one-time price level increases rather than ongoing inflation, unless they trigger broader changes in consumer behaviour or retaliation cycles. He noted that the Fed has revised its 2025 core PCE inflation forecast upward to 2.8% from 2.5%, reflecting these pressures, but stressed the need for more data to assess whether these effects will persist or fade over time. He also estimated a roughly 1-in-4 chance of a recession over the next year, noting that while some forecasters have raised recession probabilities, they remain at moderate levels. Investment implications For fixed income investors, while the disinflation process is occurring more slowly than previously forecast, it seems that the Fed is content with inflation heading toward 2%. As a result, the Fed policy easing should resume soon, which means any backup in market rates is an opportunity. We maintain our preference for an active approach in fixed income. For US equity investors, the widespread use of tariffs and the potential for accelerating inflation continues to dampen the outlook for corporate profits and economic growth in 2025. The FactSet consensus earnings growth estimate for the S&P 500 has been revised from 15% to 11.5%. This sizable downward revision should incorporate a mild slowdown in economic growth and tighter corporate margins if tariffs are enacted and companies choose to absorb part of the increased price levels. Until the tariff policy decisions are finalised, US equities may remain volatile and the outlook for corporate profits is uncertain. It is also important to note that despite the near-term risks, the 2026 forecast for S&P 500 corporate earnings shows a sharp acceleration to 14.2%. Valuations are now much more reasonable, and market sentiment is fairly weak, suggesting that perhaps the worst of this repricing of US equities may be behind us soon. We believe diversification is key and continue to diversify into the Forgotten 493 stocks in the US and across sectors and markets, including China, Singapore, Japan and India. Multi-asset portfolios with an active approach are best placed in this environment to manage ongoing uncertainties. https://www.hsbc.com.my/wealth/insights/market-outlook/special-coverage/the-fed-stays-patient-recognising-increased-economic-uncertainty/