2025-07-28 07:04

Key takeaways The US dollar index (DXY) has fallen 10% in 2025, taking it to a three-year low and its worst start to a year since 1973. In part that’s because global investors have cooled on US assets amid policy uncertainty, fiscal worries, and a weaker growth outlook. When rates rose sharply in 2022-2023, flows into money markets soared. But with central banks now cutting rates, the case for switching to fixed income assets is strengthening. Indonesia continues to be a star performer in emerging market local-currency bonds, with IndoGBs generating a total return of more than 5% over the past three months alone. Chart of the week – Is the US economy approaching stall speed? Markets currently see very little chance of a rate cut at this week’s US Fed meeting, with a move not fully-priced until late October. But the discussions between Fed members may be far more interesting, and at least one dissenting vote in favour of a rate cut – Governor Waller – seems likely. While Governor Waller’s recent call for a July rate cut has been viewed as political by some commentators, his arguments should not be dismissed. Essentially, Waller believes tariffs will not produce persistent inflation, because inflation expectations are well-anchored. But he is concerned that the economy is slowing below trend and payrolls growth is near stall speed. While the US’s recent history of above-target inflation means the wider Fed is understandably cautious about cutting rates, Waller has a point regarding the stall speed of the economy. Typically, once growth drops around one percentage point below trend, it goes on to experience a sharper downturn. The current Bloomberg consensus forecast is for growth to drop 1.3 percentage points below the Congressional Budget Office's trend estimate by Q425. Waller’s concerns about downside risks put him at odds not only with most Fed members but also with equity investors, given that the S&P 500 hit another all-time high last week. Investors appear more focussed on positive news on tariffs, such as the US-Japan trade deal, and progress with the US-EU talks. Market Spotlight A new globalisation The 1990s and 2000s period of “hyper-globalisation” was characterised by a major increase in international trade and capital flows. However, global trade growth has stagnated since the financial crisis, hastened by the shock of Covid and rising US protectionism. Investor attention remains centered on the global economic challenges posed by US tariff increases. But less noticed has been how economic interdependency within emerging markets is rapidly growing. China’s flagship Belt and Road initiative (BRI) is a key part of this story. According to a recent study by Australia’s Griffith University and the Green Finance & Development Center in Beijing, China’s investments in BRI members have surged this year, totalling USD124bn in H1, already surpassing last year’s USD122bn total. And unlike the early stages of the BRI, which was primarily state-led, private companies are now taking the lead as they look to seize opportunities in faster growing economies of the Global South. This “new globalisation” could contribute to many emerging and frontier markets experiencing superior rates of economic growth in the coming years. And for investors, this should help unlock valuation opportunities in these regions. 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. HSBC Asset Management, Bloomberg. Data as at 7.30am UK time 25 July 2025. Lens on… Greenback blues The US dollar index (DXY) has fallen 10% in 2025, taking it to a three-year low and its worst start to a year since 1973. In part that’s because global investors have cooled on US assets amid policy uncertainty, fiscal worries, and a weaker growth outlook. In contrast, the euro (+13%) and the British pound (+8%) have strengthened sharply against the dollar this year. That’s been helped by a pick-up in sentiment towards Europe, where major fiscal expansion in Germany boosts the growth outlook. An eye-catching consequence of the greenback weakness is that FX volatility is having a strong influence on stock market index returns. In dollar terms, for instance, the developed market MSCI World index is up by 11% this year. But in euro terms it’s down by 2%. Stock market volatility tends to trump FX volatility, which is a key reason why global investors have historically tended to leave their US exposure unhedged and benefit from the once-dependably strong dollar sweetening their returns. That’s not working this year, and hedging US equity exposure now looks like a potentially preferable option for global investors. Short duration bonds When rates rose sharply in 2022-2023, flows into money markets soared. But with central banks now cutting rates, the case for switching to fixed income assets is strengthening. But with the rate cut path uncertain, and the yield curve still flatter than normal, the return on duration-based investments faces challenges. Indeed, analysis by some Global Fixed Income teams show that, for now, the extra yield on longer-dated bonds may not justify the duration risk (the potential for rates to change over time). In the Global Aggregate bond index, the 1-3 year index currently has a higher yield-to-duration ratio – a key measure of the compensation for taking duration risk – than longer-duration indices. With still-elevated starting yields and potential for capital appreciation as the curve steepens, short duration appears well-positioned. Indonesia in demand Indonesia continues to be a star performer in emerging market local-currency bonds, with IndoGBs generating a total return of more than 5% over the past three months alone. The fundamental story for the country’s bonds remains encouraging. Bank Indonesia is on an easing cycle and cut rates again recently, by more than expected. Core inflation has been ticking lower towards 2%, and GDP growth – stable at around 5% – should be cushioned from external uncertainties as policy eases. Growth should also be buoyed by Indonesia’s recently-agreed US trade deal, which sees exports to the US attract an average tariff of 19%, down from the previously-threatened 32%. It marks a stark shift for a country once badged one of the ‘fragile five’ EMs deemed over-reliant on foreign investment to fund growth. Indeed, Indonesia can afford a growth focus given its low inflation and lack of macro imbalances. Its current account has been roughly in balance since the pandemic and its budget deficit has been well within the statutory 3% limit. Some analysts think it gives real yields space to fall in the coming months, offering further support to bond returns. 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 25 July 2025. Key Events and Data Releases Last week The week ahead Source: HSBC Asset Management. Data as at 7.30am UK time 25 July 2025. For informational purposes only and should not be construed as a recommendation to invest in the specific country, product, strategy, sector or security. Any views expressed were held at the time of preparation and are subject to change without notice. Any forecast, projection or target where provided is indicative only and is not guaranteed in any way. Market review Risk sentiment increased last week amid overall beats in US Q2 earnings and a trade deal announced between US and Japan, and reported progress on a deal between the US and the EU. The US dollar and US Treasury yields fell on the week. European yield moves were mixed and muted overall. US equities saw broad-based gains, with high-beta sectors like technology outperforming. European stock markets saw limited moves, barring the UK which saw solid momentum in the FTSE 100. Japan's Nikkei rose sharply in response to the US trade deal news, with the yen falling. While the Shanghai composite and Hang Seng rose in EM Asia equities, South Korea's Kospi and India's Sensex both lost ground. In commodities, oil was lower and gold rose. https://www.hsbc.com.my/wealth/insights/asset-class-views/investment-weekly/is-the-us-economy-approaching-stall-speed/

2025-07-24 12:02

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-us-trade-policy-outcomes-in-focus/

2025-07-23 07:05

Key takeaways The USD narrative has been negative so far this year… … and some drivers (like US yields) that should be positive for the currency have not worked. Our framework points to a soft USD in the months ahead, but it is worth tracking whether the USD is about to bottom. The US Dollar Index (DXY) slumped c11% in the first six months of the year, posting its worst 1H performance since 1973. Back then, it lost c15% (Bloomberg, 1 July 2025). While the delay in the US reciprocal tariff deadline to 1 August looked like another de-escalation moment, the announcement of potential tariffs on certain countries, namely Brazil, Canada, the EU and Mexico, and targeted products, such as pharmaceuticals and copper, will keep uncertainty high. That being said, the USD has become the best performing G10 currency so far in July (Bloomberg, 17 July 2025). With the second half of the year underway, we continue to rely on our 3-factor framework, benchmarking the USD versus political, structural, and cyclical factors (Chart 1). To summarise, US policy uncertainty persists and is USD negative, albeit not to the same degree as in April. Cyclical pressures on the USD are neutral, given the US economy faces downside risks but the same is true with other currencies. Structural forces have mattered more when considering greater FX hedging of USD assets and conversion by foreigners and corporates, respectively. We have also focused on the deterioration of the US current account and basic balance as reasons behind a softer USD, but such deterioration may not persist once the impact from US tariffs dissipates. The combination of these factors suggests the USD is likely to remain on a softer path in the coming months. Source: HSBC Source: Bloomberg, HSBC But we should be cognisant of what could mark the end of the USD’s decline. An important development would be if the USD began performing in line with what its policy rate implies. If it were to return to a more conventional framework (i.e. both higher US yields and USD, and vice versa, Chart 2), this could also signal a bottoming of the USD is approaching. https://www.hsbc.com.my/wealth/insights/fx-insights/fx-viewpoint/usd-bottoming-out-yet/

2025-07-22 07:05

Key takeaways Weak deposit growth was the story of summer 2024, and weak credit growth is fast becoming the story of summer 2025. Only a partial solution for both episodes can be found in looser RBI monetary policy; the final solution lies in the real economy. Softening growth in the formal sector is dragging down credit growth; an opportunity to fix it has come by, if India focuses on trade reforms. Market memory can be short. Same time last year, we were fretting about weak deposit growth. Today, we are fretting about weak credit growth. We think one thing is common across both episodes. That while all eyes are on the RBI to resolve the situation, the central bank can only partly address the problem using the monetary policy levers at its disposal. Instead, the root of the problem, and the real solution, in both instances, lies elsewhere –the real economy and the composition of GDP growth. Let us explain. Last year’s deposit drag was a two-fold problem –concerns on tepid deposit growth and compositional shifts (too few sticky deposits). Once inflation started to fall, the RBI loosened monetary policy, pushing base money growth up. Real deposit growth started to rise in early 2025. But did the RBI solve the entire problem? Perhaps not. Some rise in deposits would have happened anyway (the credit-deposit ratio tends to mean revert). And the deposit composition problem persists. There remains a noticeable risein callable bulk corporate deposits and a fall in sticky retail household deposits. This, we believe, is not in RBI’s control. Rather, it has its root in the real economy. That in the few years post the pandemic, return to capital (i.e. corporate profit growth) was higher than return to labour (wage growth), and this showed up in savings behaviour. Fast forward to today, and the concern is weak credit growth. Can the RBI help? Yes, it can, and it has, by cutting the repo rate by 100bp, and infusing large amounts of domestic liquidity. Will it solve the entire credit slowdown problem? Likely not. Because just as the deposit composition issue had its roots in the real economy, the credit softness issue does too. Weaker GDP growth has lowered the demand for credit. And more importantly, the pivot from formal to informal sector growth has played a role too. With formal sector fortunes not rising as rapidly this year, the investment demand for credit (e.g. housing loans) will likely be tepid. With informal sector benefiting from better real incomes (both farm and non-farm), the need to take personal loans to fund consumption will likely be weak too. Credit growth is being squeezed from both ends. What’s the way out? In the chicken-and-egg debate of who rises first, GDP growth or credit growth, we have a new contender –reforms. At a time when global supply chains are getting rejigged, if India can do the right reforms, it could become a meaningful producer and exporter of goods, which could spur investment, credit and GDP growth. The reforms include lowering tariff rates, signing trade deals, welcoming FDI inflows, and improving ease of doing business. A start has been made. But for impact, reforms need to run deep. Market memory can be short. At this time last year, we were fretting about weak deposit growth. Fast forward to today, and we are fretting about weak credit growth. We believe one thing is common across both episodes. That while all eyes are on the RBI both then and now, the central bank can only partly address the problem using the monetary policy levers at its disposal. It can’t resolve the problem fully. Instead, the root of the problem, and the real solution, in both instances, lies elsewhere – the real economy and the composition of GDP growth. Let us explain across both episodes. Last year’s deposit drag – the problem Summer 2024 was laced with a string of commentary from the RBI and markets around two issues – weak deposit growth (leading to a rising credit-to-deposit ratio), and some concerns around compositional shifts in the deposit mix (too few sticky household deposits, too much callable corporate deposits). As we explained then, deposits have two drivers – money created by the central bank (known as base money, M0), and money createdby the commercial banks (through the money multiplier process). The money multiplier could not explain the weakness. In fact, the multiplier had gathered pace in that period. The weakness in deposits instead came from weak M0 growth. And, indeed, M0 growth had slowed over time, even running below nominal GDP growth (see exhibit 1). Why would the central bank slow M0 creation? For most of that period, inflation was elevated, credit growth was rapid, and the RBI had been running tight monetary policy – raising rates with a hawkish “withdrawal of accommodation” stance, which is associated with tight liquidity. It didn’t help either that the dollar was strong, leading to central bank dollar sales. Last year’s deposit drag – the solution But then, literally speaking, the weather turned. The heatwaves ended, rains picked up, and inflation declined. Unsecured lending cooled off, and the dollar weakened, all of this making the RBI more comfortable with easier monetary policy, more liquidity, and faster M0 growth. Indeed, since early 2025, the RBI has cut the repo rate and infused domestic liquidity. M0 growth (adjusted for changes in the CRR), is now running at 7.3% (as per June 13, 2025), in line with our nominal GDP forecast for the quarter, from being well under it over the last year. And real deposit growth has ticked up (see exhibit 2). So can it be said that the RBI solved all of the problem? Two points worth noting here before we jump to any conclusion. One, our sense is that some of the problems were auto-solved. The rather elevated money multiplier ensured that deposit growth eventually picks up as per the well-known maxim, ‘credit creates its own deposits’. In fact, as it always tends to happen, the credit-deposit ratio has started to mean revert (see exhibit 3). Two, the other half of the problems continue to persist. The compositional issue of ‘too few sticky deposits’ remain. There remains a noticeable rise in callable bulk corporate deposits and a fall in sticky retail led household deposits (see exhibit 4). And this, we believe, is not in RBI’s control. Rather, it has its root in the real economy, i.e. India’s economic growth. In the few years following the pandemic, return to capital (i.e. profit growth) was higher than return to labour (wage growth, see exhibit 5). This mapped well with India’s saving data, whereby corporate saving was above pre-pandemic levels, driven by strong profitability in certain sectors, while net household saving was lower than before (see exhibit 6). All said, it is fair to say that the RBI helped raise deposit growth back up by raising M0 growth closer to ‘normal’ levels. But some of the rise in real deposit growth may have happened anyway following a period of high credit growth. And the composition of deposits issue lingers on, at the mercy of the real economy. As such, the RBI did lend its support, but could not resolve the problem fully. The current credit weakness – the problem Fast forward to today and the concern has flipped on its head. Real deposit growth has begun to rise after a period of weakness, but real credit growth has started to fall after a period of strength (see exhibit 7). There could be many reasons for this, ranging from lower GDP growth to increased risk weights in unsecured lending. Why is this important? GDP growth has softened over the last few quarters (averaging 6.5% y-o-y over the last 4 quarters, versus 8.5% in the 8 quarters prior). We find a two-way causality, of credit growth impacting GDP growth and vice versa. So if credit growth can be pushed up, GDP growth could arguable rise over time. Can the RBI help? Yes, it can, and it has. The RBI has cut the repo rate as well as the CRR by 100bp each since early 2025. It has also infused domestic liquidity by cINR10tr (see exhibit 8). The transmission of these rates has been off to a good start. On new loans, there is already a24bps transmission until May, by when the repo rate had been but by 50bps. Given another 50bps rep rate cut in June, transmission is likely to rise over subsequent months. Will it solve the entire credit slowdown problem? Likely not. Because just as the deposit composition issue had its roots in the real economy last year, the credit softness issue has links to the real economy too. Weaker growth has lowered the demand for credit. And more importantly, the changing composition of growth has played a role too. We find that after a few years of strong growth, the formal sector is slowing in 2025. This is led by factors such as gains from strong equity markets and rising wage growth now plateauing after a strong run. And after a long period of weakness, the informal sector is improving, led by better weather events, improving farm incomes and falling inflation boosting purchasing power. This pivot in growth composition from formal to informal can be a drag for credit growth. Let us explain. Until last year, the investment demand for credit was strong as households in the formal sector were investing in real estate. Meanwhile the consumption demand for credit was strong too, with households in the informal sector doing poorly and taking loans to meet consumption needs (see exhibit 11). Now, with formal sector fortunes not rising as rapidly as before, this sector may be less willing to sign up for long-term financial debt such as housing loans, thereby slowing personal loan growth. Meanwhile, the informal sector, benefiting from higher real income, may not feel the need to take personal loans to fund consumption (see exhibit 12). Credit growth is being squeezed from both ends. What’s the way out? The current credit weakness – the solution We find that the key driver of credit growth has changed over time, from supply of credit to demand for credit. In the decade ending FY18, which was characterized by the twin balance sheet problem of too much NPLs at India’s banks, supply of credit was the problem (see exhibit 13). This can be seen clearly from a negative correlation between credit growth and lending rates (see exhibit 14). It basically means that the upward sloping supply of credit curve moved backward leading to lower credit growth but higher lending rates (see exhibit 15). Following a painful period of asset quality recognition, the NPLs at banks were lowered, and supply side constraints eased. We find that in the subsequent period (FY18 onwards), the main driver of credit growth was demand for credit. Again, this can be seen clearly from a positive correlation between credit growth and lending rates (see exhibit 14 again). It basically means that the downward sloping demand for credit curve moved rightwards, leading to higher credit growth and higher lending rates (see exhibit 16). At a time when demand is the main driver of credit growth, how does one encourage it? The RBI can play a role, and indeed it has. The transmission of the policy rate cuts into lending rates is off to a good start, and as it progresses, will likely stoke demand for credit over the next few quarters. But as discussed above, the current credit growth problem has its roots in real GDP growth, and more importantly, its composition. Addressing that will likely provide a bigger and more long-lasting solution, than continued RBI policy easing. And we believe RBI knows this. After a period of policy easing, it is gently focusing back on normalization and macro stability. Recent steps in issuing VRRRs to take out some of the excess liquidity and align the call money rate more closely with the policy repo rate, in our view, speaks to that (see exhibit 17). Indeed, this alignment is a cornerstone of India’s inflation targeting regime. So if RBI can’t hand-hold beyond a point, we need to find another way to spur the real economy. In the chicken-and-egg debate of who between the credit growth and GDP growth will rise first, we, thankfully, have a new contender – reforms. Time to reform At a time when global supply chains are getting rejigged once again, if India can do the right reforms and become a more meaningful producer and exporter of goods, that could spur investment and growth. This in turn could give a fillip to credit demand. The opportunity is clear. As we have argued before, there is space for a new producer and exporter of mid-tech goods. India can embrace this opportunity with its abundant labour and wage cost advantage. But to do this, we believe it needs the right reforms – lower tariff rates on intermediary inputs, more trade deals with other economies, more openness to FDI inflows, and more ease of doing business reforms across states. Higher credit growth and GDP growth will likely follow, if India barks up the right tree of reforms, rather than waiting for RBI action to do the trick. https://www.hsbc.com.my/wealth/insights/market-outlook/india-economics/how-much-can-the-rbi-help/

2025-07-21 07:04

Key takeaways 2025 has been a bumpy ride for US stocks, with trade policy uncertainty near record highs. With higher tariff rates, company input costs are likely to rise – so, exposure to firms with higher margins can provide a buffer. Over the past couple of years, the gap between longer- and shorter-dated US Treasury yields has been widening. This so called “curve steepening” has come amid gradual Fed easing and a higher term premium – the extra compensation that investors demand for holding longer-term bonds (usually because of inflation and interest rate uncertainty). Vietnam became the first Asian economy to agree an outline post-Liberation Day trade deal with the US in early July. While negotiations continue, the agreement looks set to cut the tariff on Vietnamese imports to the US to 20% – down from the 46% reciprocal rate that had been on the table. Chart of the week – China’s policy boost Last week’s raft of economic data out of China delivered a mixed picture, with continuing sector divergence, domestic supply-demand imbalances, and muted inflation. Among the positives, exports have been resilient, and industrial output has seen solid growth momentum, with high-tech sectors leading the way. Frontloaded fiscal stimulus drove a rebound in the credit impulse (see chart). But retail sales softened after a strong May, and property sector activity weakened. Overall, China’s real GDP growth held up at 5.2% year-on-year in Q2. But nominal growth fell to 3.9% year-on-year from 4.6% in the previous quarter, with the GDP deflator remaining negative. What do we make of this? Apart from the flagging property sector, robust first-half activity suggests no urgency for new policy stimulus, although further support is still likely given the uneven recovery and supply-demand imbalances. Meanwhile, the trade outlook faces the risk of a global slowdown, US policy uncertainty, and geopolitical tensions. From here, generally stable conditions could give policymakers space to focus on structural priorities and long-term strategies for resilience, rebalancing, and quality growth. On top of trade-in subsidies, we expect more policy support for service consumption and the social safety net, while on the supply-side, a policy push to curb excessive competition in some sectors has intensified recently. There could be further efforts to stabilise the property sector. With sectors like technology now building momentum, this continuing policy boost can potentially drive returns both locally and across other emerging markets. Market Spotlight Private equity – ready for a rebound? It’s been a game of two halves for private equity investors in 2025. Private equity deal flow started well in the first quarter, continuing the 2024 trend of rising dealmaking and exits (asset sales). The anticipation had been that a pro-business Trump administration could provide a boost to private equity activity. However, the introduction of Liberation Day tariffs and policy uncertainty have put pressure on dealmaking. Preliminary second quarter figures from Pitchbook show estimated global deal value down 15.3% compared to the first quarter, and marginally down year-on-year. Meanwhile, exits, which started the year well, have been challenged by a quieter M&A and IPO market. On a positive note, exits are happening at attractive multiples, highlighting the ability of PE general partners (GPs) to generate value despite market challenges. Bigger picture, private equity has historically achieved strong returns after challenging phases, such as after the global financial crisis and the pandemic. GPs can often purchase companies at lower valuations and then benefit from rebounds in the market environment. There is dry powder waiting to be deployed once market conditions settle, confidence returns, and valuation gaps narrow. 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. Data as at 7.30am UK time 18 July 2025. Lens on… Quality time 2025 has been a bumpy ride for US stocks, with trade policy uncertainty near record highs. In periods of uncertainty, investors crave safety, which can favour Quality stocks that typically have higher gross profit margins, superior cashflows, and healthier balance sheets versus sector peers. With higher tariff rates, company input costs are likely to rise – so, exposure to firms with higher margins can provide a buffer. That makes it surprising that Quality in the US – where margins are particularly under threat – has underperformed more than in non-US markets such as Europe and emerging markets this year. Data provided by some Quant Equity Research analysts show US Quality lagging the S&P 500 by 2%, while Momentum has delivered the strongest return. Quality is rarely cheap given its resilience, and it performed well in 2024, which might explain its recent weak performance. But this has opened up some decent valuation opportunities in the factor. Against a backdrop of still elevated economic and geopolitical risks, there could be more reason to like it. Curve appeal Over the past couple of years, the gap between longer- and shorter-dated US Treasury yields has been widening. This so called “curve steepening” has come amid gradual Fed easing and a higher term premium – the extra compensation that investors demand for holding longer-term bonds (usually because of inflation and interest rate uncertainty). Some fixed income experts think further curve steepening is possible. The gap between 10 and two-year yields is below its long-term average. With US deficits projected to remain around 6% to 7% of GDP in the coming years, a higher supply of Treasuries could put upward pressure on long-end yields. US tariff policies have also increased inflation uncertainty. Curve steepening should also be supported from the short end once the Fed restarts monetary easing, especially if a weaker economy pushes the Fed to cut rates by more than market currently expects. Meanwhile political interference with the Fed, for example pushing for more dovish policy, could not only push shorter-term yields lower, but also longer-end yields higher as investors question the Fed’s reliability in tacking inflation. Vietnam at the frontier Vietnam became the first Asian economy to agree an outline post-Liberation Day trade deal with the US in early July. While negotiations continue, the agreement looks set to cut the tariff on Vietnamese imports to the US to 20% – down from the 46% reciprocal rate that had been on the table. It looks possible that goods routed – or transhipped – through Vietnam to the US from other countries will attract a higher tariff rate. Vietnam has become a fast-growing frontier manufacturing hub in recent years. Despite global policy uncertainty, this export-led development contributed to year-on-year GDP growth of 7.5% in the first half of 2025, and has led the highest levels of foreign direct investment since 2009. Vietnamese stocks rallied in response to the trade deal, contributing to a pick-up in the MSCI Fronter index given the country’s significant weighting in it. The Frontier index is outperforming both Emerging and World indices this year. 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 18 July 2025. Key Events and Data Releases Last week The week ahead Source: HSBC Asset Management. Data as at 7.30am UK time 18 July 2025. For informational purposes only and should not be construed as a recommendation to invest in the specific country, product, strategy, sector or security. Any views expressed were held at the time of preparation and are subject to change without notice. Any forecast, projection or target where provided is indicative only and is not guaranteed in any way. Market review Risk markets were stable despite persistent global trade uncertainties. The US dollar gained against major currencies. Long-end US Treasury yields moved higher, driven by increased signs of tariff-related rises in goods prices and stronger-than-expected retail sales data, while German Bund yields edged lower. US IG and HY credit spreads remained compressed. In equity markets, US stocks advanced as investors assessed Q2 earnings, with the tech-heavy Nasdaq outperforming. The Euro Stoxx 50 index was range-bound amid investor concerns over lingering US-eurozone trade tensions. In Asia, Japan’s Nikkei 225 rose modestly ahead of July’s upper house elections. Hong Kong’s Hang Seng rallied, propelled by tech stocks’ strong performance. Benchmark indices in Thailand and Indonesia surged, but India’s Sensex index weakened. In commodities, oil and gold prices consolidated. https://www.hsbc.com.my/wealth/insights/asset-class-views/investment-weekly/chinas-policy-boost/

2025-07-16 08:05

Key takeaways Growth has been off to a decent start this year, but external and domestic headwinds still present challenges. Policy easing may focus on consumption and jobs, while the property market has yet to fully stabilise. The emphasis of China’s next five-year plan, due in Q4, will likely be on transitioning towards higher-quality growth. China data review (June & Q2 2025) GDP growth picked up to 5.2% y-o-y in Q2 and rounded out H1 at 5.3%. While this puts the economy in a better position to reach the “around 5%” growth target this year, the June print showed that some headwinds still persist. Fixed asset investment saw its first y-o-y contraction since November 2021, slowing to -0.1% in June. The property sector slowdown continued to weigh on growth, with property investment falling 12.9% y-o-y, while infrastructure and manufacturing investment both decelerated despite the ongoing rollout of fiscal support as seen in high levels of government bond issuance. Industrial Production rose 6.8% y-o-y in June, receiving a boost from both a temporary external calm due to the reciprocal tariff pause between China and the US and ongoing domestic policy support to cultivate new growth drivers and promote consumer trade-ins and equipment renewals. Relatedly, high-tech manufacturing still led the growth as it rose 9.7% y-o-y in the month. Retail sales were up 4.8% y-o-y in June, down from 6.4% in May, as some subsidies for trade-in programs dried up, weighing on purchases of household appliances and consumer electronics. However, even as some local governments reported the expiration of some funds, almost half of the trade-in subsidy funds are still due to be distributed in the rest of the year. CPI inflation rose 0.1% y-o-y in June, as a steady pickup in core CPI (+0.7% y-o-y) provided a welcome boost, driven by ongoing consumption policy stimulus which continued to support prices of durable goods. But PPI fell further, -3.6% y-o-y, with drags from relatively weak oil prices, excess capacity and insufficient end-demand across some sectors, including along the housing supply chain. Exports grew 5.8% y-o-y in June, boosted by the recent reciprocal tariff pause between the US and China. Shipments to the US saw some recovery as the decline narrowed to -16.1%, up from a low of -34.5% in May. Imports rose 1.1% y-o-y, the first rise since February, as demand was lifted by more fiscal support, bolstering infrastructure-related construction and equipment upgrading. China stimulus: Not in a rush Tariff turbulence with the US has dominated the headlines. While we see two sided-risks on US-China trade from ongoing negotiations, China’s trade-weighted tariff on exports to the US remains at around 50%, including the c20% in place before Trump 2.0. But despite the steep tariff hike, recent trade data has been holding up, as front-loading and trade restructuring have helped to offset the impact. Domestic economic data has also been relatively firm. Pro-growth policies While some downside risks have moderated, we still see pressures on growth. Externally, it’s uncertain whether the US and China can strike a deal before 14 August, the end of the 90-day tariff pause agreed during the Geneva talks. Domestically, over 12 million university graduates this year will add pressure to the labour market, while certain industries are consolidating. Consumption continues to recover, but ongoing property sector weakness lingers. We expect China to roll out pro-growth measures already in the pipeline, though a ‘bazooka’ stimulus seems unlikely. With policymakers favouring structural solutions for structural issues, support is likely to be directed at stimulating consumption and stabilising the job market. Consumption policies are focussing on near-term measures, such as subsidies for durables, and long-term stimulus, such as through expansion of social safety nets and pension reforms. Property holding up Though still a concern, the housing market no longer appears to be the government’s primary policy focus. So long as the situation remains manageable, we don’t expect ‘bazooka’-style measures to be introduced. Most recently, the Central Urban Work Conference was held from 14-15 July, and emphasized a new urbanisation model, which could involve more urban village renovations as well as development of city clusters. Meanwhile, implementation of announced measures continues, for example, with Zhejiang province recently saying that it would use special local government bonds to purchase commodity housing. However, the subdued national trend may have masked a significant dichotomy in the recovery – large cities with population inflows are exhibiting faster rebounds. Higher-quality growth The Outline of the 15th Five-Year Plan will likely to be released in Q4 2025. The emphasis will be on facilitating China’s long-term transition towards higher-quality growth, likely echoing the areas we already see policy pivoting towards in recent years, including frontier technology fields, new forms of consumption, and green development. Source: Wind, HSBC Source: Wind, HSBC Source: LSEG Eikon * Past performance is not an indication of future returns Source: LSEG Eikon. As of 14 July 2025 market close https://www.hsbc.com.my/wealth/insights/market-outlook/china-in-focus/china-stimulus-not-in-a-rush/