2025-03-18 12:02

Key takeaways China’s National People’s Congress (NPC) announced a c5% GDP growth target and steady policy support. Policy is shifting to supporting consumption and rolling out structural reforms to urbanise the migrant population. New laws to build a business-friendly environment should boost confidence and facilitate innovation. China data review (January-February 2025) Retail sales rose by 4% y-o-y in January-February on the back of the recent expansion in consumer durable goods trade-in programs. Consumer durable goods trade-ins were front-loaded in January with a quota of RMB81bn, which was expanded to include consumer electronics (phones, tablets, and smart watches). By category, communications appliances (+26%) and household appliances (+10.9%) were the stand outs. Despite the improvement in consumption figures, there are warning signs that the key drivers for consumption growth (income and wealth) are facing pressure, with the unemployment rate rising to 5.4%, the highest level since 1Q23. Meanwhile, the property market remained under pressure as property investment declined 10% y-o-y in January-February, residential floor sales fell 3.4%, and new floor starts were down 29% y-o-y. Industrial production sustained elevated growth rates, up 5.9% y-o-y in January- February, due to robust export growth and equipment trade-in programs. However, there may be some pressure on manufacturing to come with the impact of tariffs and a drag from global demand is likely to pick up. Meanwhile, policy moves to adjust industrial capacity in some sectors such as steel may also be accelerated, which could lead to a near-term hit for production, although this should help lead to better adjustment in prices and in turn profitability. Headline CPI contracted 0.7% y-o-y in February given distortions from the earlier (January) start to the Chinese New Year (CNY) holiday this year and a plunge in food prices. Indeed, the National Bureau of Statistics noted that excluding the earlier CNY, CPI actually rose 0.1% (NBS, 9 March). Meanwhile, PPI deflation saw a slight improvement to 2.2% y-o-y in February amid recovery of some demand for industrial products. Exports rose 2.3% y-o-y in January-February showing resilience despite the implementation of 10% US tariffs on 4 February. Indeed, exports continued to rise, both to the US (+2.3%) and to intermediary markets such as ASEAN (+5.7%) and Latin America (+3.2%). However, imports dropped 8.4% y-o-y in January-February, partly related to lower prices as well as supply-side adjustments in industrial sectors, e.g., iron ore imports were down 30%. NPC wrap-up: Expanding domestic demand on all fronts China’s week-long annual policy setting meetings concluded on 11 March. In addition to the key briefings on the Government Work Report and the fiscal budgets (Figure 1), there were six press conferences led by department heads throughout the week, highlighting key policy details for their respective fields. We discuss the key takeaways. Plans to boost growth Policymakers set an ambitious growth target of “around 5%” for 2025, while reiterating it would implement proactive macro policies to support growth. The Government Work Report and fiscal budgets provide overall guidance while the press conferences held throughout the week provided more details on how the government will prop up domestic demand this year. This has become more critical as the global backdrop remains highly uncertain and more tariff risks remain on the horizon. The key policy themes were centred around boosting technology and innovation, unlocking consumption in more areas (e.g. services) and accelerating support for China’s structural transition. Now, it comes down to implementation. Technology development in the spotlight Various department heads noted a range of measures to support ongoing technology innovation and adoption, which should help build on the recent momentum stemming from new Artificial Intelligence (AI) developments in China such as DeepSeek and Manus. The policy measures announced were broad and emphasised capital market and financing support such as the development of a technology board for the bond market, promotion of merger and acquisitions for more indebted technology companies, expanded relending facilities for technology transformation, and boosting education capacity. Building a business-friendly environment While DeepSeek’s success has lifted business confidence regarding China’s technology innovation, a broad-based recovery is still needed. A new law aimed at ensuring the legal protection of private enterprises – the Private Economy Promotion Law – is on a fast-track, while the construction of a unified national market is likely to accelerate, which is designed to tackle internal trade barriers and level the playing field (source: Xinhua, 9 March). Cyclical and structural policies to boost consumption Domestic demand strength is likely to rely on sustainable consumption growth. To support this, direct cyclical policies have been expanded (e.g. funding for consumer durable goods trade-in programs doubled to RMB300bn), more spending is earmarked for higher quality public services, and measures have been rolled out to boost household disposable income. Of particular importance is the upgraded ‘Hukou reform’ – c300m migrant workers and their families will be eligible for public services, including schools, healthcare, and social housing based on their residence. Other structural policies include increased support for lower income groups and social welfare such as increasing minimum basic standards for pensions (which should help 320m people), increasing fiscal subsidies for medical insurance, and the gradual rollout of free pre-school education – currently China provides nine years of free, compulsory education covering primary school and middle school years. Such policies can help to improve income levels, unlock precautionary savings, and also help to address demographic challenges. There’s also an emphasis on supporting service consumption, which only accounts for c50% of total consumption spending despite the rapid growth witnessed post-pandemic. The commerce minister said that the primary challenge in developing service consumption is the shortage of quality supply. In addition to supporting domestic players to provide diversified services, China is promoting opening-up in telecommunications, healthcare, and education industries as well as advancing the orderly opening of sectors including internet and culture. Additional policies for China’s transition Aside from expanding consumption and improving innovation, which are key aspects of supporting China’s longer-term productivity, there was also mention of adjusting capacity. While policymakers have lowered this year’s inflation target to 2%, there will be more policies to promote consumption, which should help CPI inflation. But equally important will be adjustments in supply. Policymakers have noted that they would aim to withdraw outdated and inefficient capacity, which could involve raising production standards or window guidance for firms. This should in turn help to lift prices and improve profitability for firms. Source: Government Work Report 2025, Xinhua, HSBC Source: LSEG Eikon Note: *Past performance is not an indication of future returns. Priced as of 14 March 2025. Source: LSEG Eikon https://www.hsbc.com.my/wealth/insights/market-outlook/china-in-focus/npc-wrap-up-expanding-domestic-demand-on-all-fronts/

2025-03-17 08:06

Key takeaways Political change in Germany and the broader debate around US outperformance have weighed on the USD lately… …but recent tariff headlines received only muted FX reaction. Beyond near-term movements, we expect the USD to remain strong over the long run. The US Dollar Index (DXY) has declined to its lowest level since November 2024, hovering around 103-104 recently. The USD’s poor showing is partly due to the German election and the incoming government’s change in fiscal stance, which have played an important role in benefiting the EUR of late. It is also because markets have reservations about the US growth outlook, treating US policy uncertainty as USD negative, rather than a source of expected USD strength (Chart 1). Germany’s fiscal package is likely to be positive for the EUR over the near term, thereby weighing on the USD. However, it is not certain that the German and Eurozone growth outlooks will improve rapidly, given implementation risks. Plus, some of this euphoria could be offset by US tariffs that could also turn the USD stronger against the EUR and other currencies. At the moment, tariff risks remain underpriced. The EUR shrugged off the arrival of new tariffs on exports to the US, and retaliatory tariffs from the EU on 12 March. Similarly, the CAD did not react to the escalation in trade conflicts between the US and Canada. These recent tariff headlines received only muted FX reaction, which suggests that this is all temporary noise that will be resolved. Source: Bloomberg, HSBC Source: Bloomberg, HSBC Against the backdrop of an intensifying trade war, the Bank of Canada (BoC) delivered a 25bp cut at its 12 March meeting, taking its policy rate down to 2.75%. The decision was expected, bringing total easing since June 2024 to 225bp. BoC governor, Tiff Macklem, called the trade battle between the US and Canada a “new crisis” (Bloomberg, 13 March 2025). USD-CAD continues to hover around its year-to-date average of 1.43-1.44, tracking closely with its yield differential (Chart 2). As such, if a prolonged trade war happens, significant policy easing by the BoC could see USD-CAD surge, but this is not our base case. Our central case is that the USD will probably recover some lost ground over the long run, as US tariffs rise, the Federal Reserve does not cut more than what is already priced, and the rest of the world begins to look less exceptional again. https://www.hsbc.com.my/wealth/insights/fx-insights/fx-viewpoint/usd-still-scope-to-recover/

2025-03-17 07:04

Key takeaways Chinese equities have delivered one of the strongest performances in global markets in 2025, helped by surging momentum in technology stocks. There has been a sudden shift in the market mood music surrounding the euro of late. Perhaps more importantly, there is now excitement in FX markets regarding a significant increase in eurozone government spending on energy, climate and, most recently, defence and infrastructure. Frontier markets have been impressively resilient to global volatility this year, with Vietnam stocks – which account for around a quarter of the MSCI Frontier Markets index – advancing 6% in Q1 so far. Chart of the week – The Fed ‘put’ in investment markets US stock markets have fallen sharply in recent weeks, with tech sector shares leading the decline. It’s the latest of several episodic waves of market volatility that investors have endured already in 2025. The latest moves come amid elevated uncertainty over trade and economic policy. Investors are concerned about the growth outlook for US GDP and corporate earnings. And that’s jarring against stretched US stock valuations. It also comes as events outside the US are forcing a reassessment of TINA – “there is no alternative” to US stocks. Plans for fiscal stimulus in Germany have caused a reassessment of Europe’s long-term growth and earnings prospects. Tech sector advancements in China are also catching investor attention. Arguably, the latest sell-off would have been worse without the recent fall in government bond yields, and the rise in 2025 Fed rate cut expectations, to 3-4. But a key question now is where is the “Fed put”? If the Fed stays in wait-and-see mode amid tariff uncertainty and sticky inflation, while growth continues to slide, then markets have a problem. But if inflation can stay low, the Fed has a lot of policy space and could cut rates hard, if needed. So far, inflation progress looks good, with core inflation excluding shelter and used cars now running close to 2%. We think a broadening out of returns can continue across sectors, styles and regions. But the probability that growth “topples over” has clearly risen. So, it could pay to consider which asset classes – like private and securitised credits – can hedge against volatility. It will also be important to remain agile and dynamic in investment portfolios given today’s complex macro reality. Market Spotlight Confidence building in Asian real estate There were signs of growing confidence in the Asia-Pacific real estate market last year. Industry data from JLL shows that regional investment volumes grew by 23% year-on-year to USD131.3bn. In Q4 2024 alone, volumes were up by 10% year-on-year, marking the fifth consecutive quarter of annualised growth. Japan set the pace overall, with a second consecutive year of record-breaking deal volumes propelled by the relatively weak yen and low borrowing costs. Developments in mainland China were also notable – where there was further guidance on policy stimulus and early signs of improving demand in some markets, like Shenzhen, hinting at a pick-up in investor interest. There were also signs of recovery in Hong Kong’s office leasing volumes. But sector risks remain. If policy and geopolitical uncertainty prove to be inflationary, it could disrupt the global rate cutting cycle. And with some Chinese property developers in the headlines over default risk concerns, the country’s property market still faces headwinds. Despite that, there are potential grounds for cautious optimism for a continuing revival in Asian real estate in 2025. While the path to recovery is likely to be patchy, regional supply overhang is easing, leasing markets are improving, and global rate cuts should be a benefit. 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 14 March 2025. Lens on… A tale of two tech sectors Chinese equities have delivered one of the strongest performances in global markets in 2025, helped by surging momentum in technology stocks. The pick-up has come just as US markets have weakened – led by a slump in ‘big tech’ names, with Magnificent Seven stocks down a combined 15% this year. So, why are Chinese tech stocks doing so well? Recent industry developments – like the emergence of AI start-up DeepSeek and its R1 model – have reset investor assumptions about Chinese tech’s ability to compete for supremacy in fields like AI and robotics. Chinese authorities have also redoubled their support for the sector. This month’s NPC meetings saw plans to accelerate AI adoption and digital tech, with an expansion of the PBoC’s tech industry re-lending programme and a new bond platform to support innovation funding. For investors, evidence of Chinese tech leadership, government support, and sector valuations that remain at a deep discount to the US, have been enough to fire-up optimism. Evidence of new AI and tech advancements benefitting China’s tech sector and other industries could drive a further re-rating for the sector, and the wider market. Make the euro great again There has been a sudden shift in the market mood music surrounding the euro of late. Until recently, the dominant narrative for the single currency was based on weak growth that prevailed for much of last year even as inflation remained high. Yet, the euro has found a base in recent weeks amid a story of fading US exceptionalism and divergent macro momentum relative to the US, where some recent data has been soft. Perhaps more importantly, there is now excitement in FX markets regarding a significant increase in eurozone government spending on energy, climate and, most recently, defence and infrastructure. In places, it’s reignited speculative talk of more fiscal and strategic cohesion across the bloc. These positives for the euro have shielded it from the impact of global trade policy uncertainty which, until recently, had been holding the euro back from strengthening in line with interest-rate differentials. While escalating trade tensions could complicate the story, those rate differentials should remain supportive of further euro strength as the business cycle outlook for the eurozone and the US is re-assessed. The softening in US CPI inflation last week adds further impetus to this divergence story. Vietnam – leading from the frontier Frontier markets have been impressively resilient to global volatility this year, with Vietnam stocks – which account for around a quarter of the MSCI Frontier Markets index – advancing 6% in Q1 so far. A re-routing of global supply chains in recent years has transformed Vietnam into a major manufacturing hub and a global exporter. Government efforts to simplify regulations, cut red tape, and attract foreign investment have paid off, and the country is now gaining a foothold in more advanced industries like semiconductors and AI. While trade policy uncertainty remains a risk, the latest forecasts from the IMF expect Vietnam’s 6% GDP growth last year to be matched in 2025 – outpacing its ASEAN peers. Its moderate debt-to-GDP ratio of roughly 34% in 2024 is also lower than many regional neighbours. In terms of valuations, Vietnamese stocks command a premium to broader frontier markets – with a PE ratio of 16x for MSCI Vietnam versus 11x for MSCI Frontier Markets. 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 Vindicative only and is not guaranteed in any way. Source: HSBC Asset Management. Macrobond, Bloomberg, Datastream, IMF World Economic Outlook. Data as at 7.30am UK time 14 March 2025. Key Events and Data Releases Last week The week ahead Source: HSBC Asset Management. Data as at 7.30am UK time 14 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 appetite remained weak amid continued trade policy uncertainty, with the US dollar index trading sideways. US Treasuries edged higher as investors digested the latest US CPI data in the run-up to the March FOMC meeting, while European government bonds were range-bound. US investment grade and high-yield corporate bond spreads widened significantly, driven by rising worries over US growth. Among stock markets, US indices weakened across the board, led by a sell-off in tech stocks in volatile trading as negative market sentiment persisted. The Euro Stoxx 50 index fell alongside the German DAX index, while Japan’s Nikkei 225 index rebounded after declines in previous weeks ahead of the upcoming BoJ meeting. In other Asian markets, the retreat in tech stocks weighed on the Hang Seng, whereas China’s Shanghai Composite rose. India’s Sensex index fell, as South Korea’s Kospi index ended barely changed. In commodities, oil prices were stable, with gold and copper extending their gains. https://www.hsbc.com.my/wealth/insights/asset-class-views/investment-weekly/the-fed-put-in-investment-markets/

2025-03-14 07:06

Rising AI adoption broadens the opportunity set in an uncertain world The start of 2025 has brought the acceleration of major changes in the global landscape. DeepSeek’s breakthrough artificial intelligence (AI) model is not only challenging the established dominance of the US but also drawing everyone’s attention to the potential for mass AI adoption. We now see AI as the key to unlocking opportunities across markets and sectors. Meanwhile, tariffs and frictions are shaking up trade and raising inflation concerns, and international relations and policies are becoming less predictable. However, these unfavourable forces are occurring when the global economy is in good health, interest rates are falling in most developed markets, and many corporates are cash-rich. Economists are projecting a respectable GDP growth rate of around 3% for the global economy and 2.3% for the US. While that should offer strong protection against any surprises, we think diversification is as important as ever in the current environment. What does this mean for investors? The underperformance of US equities year-to-date underlines the need for a broader opportunity set. There are two main reasons for this: first, the run-up in equity valuations driven by the Magnificent 7 stocks is pushing investors to look for other options. Second, accelerating AI adoption will create a rush to invest in software and automation across all industries. Governments, too, recognise the need to invest in electrification and infrastructure to grow strategically important industries to stay competitive and ensure security in all of its aspects, including defence and cybersecurity, as well as access to electricity and resources. This trend is happening around the world. So, while the US remains fundamentally resilient, US exceptionalism is waning, and we’re broadening geographically into Asia, where we continue to favour India, Singapore and Japan, as their domestic drivers remain intact. During Q1 2025, we also added China and the UAE to our preferred list. The story of DeepSeek and the enthusiasm over technological innovation has put previously unloved Chinese tech stocks back in the spotlight. Government support is a shared driver for both China and the UAE, leading to more investment in technology-related capex, and the UAE is further supported by its strong structural drivers and the boom in its housing and tourism sectors. Naturally, technology is a direct beneficiary, but the power of technological innovation, intertwined with supporting policies and structural tailwinds, points to opportunities elsewhere too, across IT, Communications, Financials, Industrials and Healthcare. Outside of the Magnificent 7 stocks in the US, we expect earnings growth momentum in the Forgotten 493 companies in the S&P 500 to be increasingly compelling, and adopt a similar strategy in Asia and Europe to capture broadening earnings growth. A need to diversify through multi-asset strategies and non-traditional assets We think geographical and sector diversification can best be delivered through multi-asset portfolios as we aim to exploit structural and tactical opportunities amid rising uncertainty. As the Fed is expected to cut rates further in the second half of 2025, US Treasuries and quality bonds offer attractive returns at their current yield levels. While we lengthened bond durations in Q1 to lock in attractive yields for longer, we’re also leveraging flexible duration strategies to capture any opportunity that arises. In fact, the market dynamics we see in today’s fast-moving world have prompted us to look for an even higher level of diversification by adding renewables, infrastructure and gold as and when appropriate. To go deeper into some of our investment themes, we’ve included an article about the enthusiasm of AI and its implications, and the role of multi-asset strategies in retirement planning – both from our in-house experts. We hope these insights, together with our four investment themes for Q2, will guide your investment journey in the months ahead. https://www.hsbc.com.my/wealth/insights/market-outlook/investment-outlook/rising-ai-adoption-broadens-the-opportunity-set-in-an-uncertain-world/

2025-03-12 12:02

Key takeaways Uncertainty around US tariffs continues… …creating both growth and inflation risks… …with survey data heading in the wrong direction across the board. Global sentiment, both on the consumer and business fronts, has taken a hit in recent weeks, with uncertainty around tariffs, geopolitics and price spikes starting to show up in the data. Subdued data The post election run up in US survey data, risk asset prices and broader optimism has come off the boil in recent weeks. Almost every survey reading that we follow has dipped, some sharply, and the limited hard data we’ve had since the start of the year point to a US economy that may be slowing sharply. Of course, tariffs are a key part of this, and trade-related uncertainties continue to dominate news headlines, with tariffs on Canada and Mexico and further tariffs on Chinese goods coming into force, as well as plans for a much wider set of tariffs on a variety of goods and economies. The early-April decision on reciprocal tariffs for economies with import taxes on US goods looms large for many across the world. Source: Macrobond Source: Macrobond But equally, for American consumers, some are worried about their job prospects from the cuts across government (and the spillovers to private contracts), while others are getting more nervous about inflation – with expectations rising sharply in the latest surveys. How much of that is tariffs, and how much is egg prices remains to be seen. Source: Macrobond Source: Macrobond Confidence remains soft In Europe, where confidence has been subdued for some time, rising energy and food prices threaten the progress made on inflation. Adding the risk of tariffs in the coming months and uncertainty about the geopolitical situation in Ukraine, it’s no surprise that growth in the region has been sluggish. The hope is that the increased spending from Germany helps to turn this around, and that is being reflected in the strong moves in European equities in recent weeks. In Asia, much will depend on the success of Chinese stimulus measures. Faced with the impact of tariffs from the US, policy has focused on the domestic economy, and the National People’s Congress saw the growth target for 2025 set at 5.0% and more fiscal stimulus measures announced. Source: Macrobond Source: Macrobond There is also a question of how much of any resilience seen in the manufacturing data in early 2025 is just front-loading. US imports surged in January and surveys have picked up. But if the decline in shipping rates post the Lunar New Year are anything to go by, it looks like we may be seeing a pay back in demand – suggesting further downside risks. Policy-related uncertainties aren’t likely to go away in the coming months. That makes for a very uncertain world for policymakers, and we expect central banks to be cautious, even if rate cuts are likely to continue. The world, however, needs the confidence to improve. Source: Bloomberg, HSBC ⬆Positive surprise – actual is higher than consensus, ⬇ Negative surprise – actual is lower than consensus, ➡ Actual is in line with consensus Source: LSEG Eikon, HSBC https://www.hsbc.com.my/wealth/insights/market-outlook/macro-monthly/needing-a-confidence-boost/

2025-03-10 08:05

Key takeaways The EUR has outperformed many other currencies so far in March… …supported by the prospect of Germany’s fiscal boost and higher European bond yields. The ECB cut rates again in March, but the path for future easing is still in doubt; the risk of US tariffs looms ever larger. Following Germany’s moves towards looser fiscal policy, the EUR has become the second best performing G10 currency so far this month (Chart 1) and EUR-USD climbed to a 4-month high (Bloomberg, 6 March 2025). On 4 March, Germany's incoming coalition partners, CDU/CSU and SPD, announced a massive fiscal programme of infrastructure and defence spending, involving constitutional changes. The government aims to table the package in parliament before 25 March. The changes will require two-thirds majority in the lower and the upper house, which seems likely, in our economists’ view. The EU has potentially created EUR650bn of fiscal space for defence by the activation of the escape clause from fiscal rules and could provide EUR150bn of loans for defence investment. Allocating funds is one thing, but governments may find it difficult to spend it within the expected timeframe. It is worth remembering that Germany’s 2022 EUR100bn defence fund has almost all been allocated, but less than 25% had been spent by January 2025. Looser fiscal policy will support growth but by how much and over what period remains uncertain. Meanwhile, the risk of US tariffs looms ever larger. A White House announcement imposing trade tariffs on the EU is expected by 2 April. While the FX market is being dominated by big picture topics, like US trade policy and German fiscal policy, EUR-USD has been basically following what its 2-year yield differential has implied (Chart 2). This means the key to the EUR remains the policy outlook for the European Central Bank (ECB). Source: Bloomberg, HSBC Source: Bloomberg, HSBC On 6 March, the ECB cut its rate by 25bp, taking the key deposit rate and the main refinancing rate down to 2.50% and 2.65%, respectively. The decision came as expected, bringing the total easing since June 2024 to 150bp. The ECB said, “monetary policy is becoming meaningfully less restrictive”, and “especially in current conditions of rising uncertainty, it will follow a data-dependent and meetingby-meeting approach". Over the past few days, markets have focussed on the upside growth and inflation risks from the fiscal boost and now see the ECB policy rate ending 2025 at c2.0%, up from c1.80% (Bloomberg, 6 March 2025). https://www.hsbc.com.my/wealth/insights/fx-insights/fx-viewpoint/eur-usd-hits-4-month-high/