2025-05-23 12:02
Key takeaways It is in periods of rising integration with the world that India has grown its fastest. Financial integration has outpaced trade integration, creating a divergence between (high-end) consumption and (household) investment growth. An opportunity to ramp up trade integration and grow faster is knocking at the door. There is a general sense that India is mostly a domestic demand-driven economy. We disagree. We find that India has grown at its fastest pace in periods of rising global integration with the world. We use the rolling correlation between India and world GDPgrowth as a measure of global integration, and find that the 2000-2010 decade was a period of falling import tariffs, as well as rising global integration, export share, and GDP growth. In the next decade, 2010-2020, all of this changed. Tariffs were raised, and global integration, export share and GDP growth fell. Encouragingly, the few years following the pandemic reflect a rise in global integration once again, though so far it remains slightly one-sided –more financial integration, less trade integration. We drill down into GDP sectors and find that consumption is most integrated with world growth (95%), followed by investment (70%), and then exports (35%). Surprising, as one might imagine exports to be most globally aligned. One reason could be that India’s global connections are stronger in finance (Indian equity markets have become far more aligned with global equities over the last two decades), and this impacts consumption. But integration remains weaker in trade, which influences export and investment. Within investment, we find corporate investment is more globally integrated, something we notice across countries. Meanwhile, integration is lower for household investment, which includes both real estate and investment by small firms. Within consumption, discretionary consumption is more globally interlinked than essentials. If indeed financial integration has been strong, it is likely to support high-end consumers who tend to be better invested in financial markets. Within exports, weak integration has been led by more labour-intensive mid-tech exports (like textiles and toys), which have been sluggish for a decade. Bringing all sectors together, we have two distinct stories unfolding. Stronger financial integration: Those who have been able to enjoy the gains of financial integration, have seen incomes and discretionary consumption rise. Many of these individuals are associated with large firms (where global capex is globally correlated) or new sectors (e.g. rapidly rising professional services exports). Weaker trade integration: On the other hand, lower global integration in mid-tech exports explains weaker growth and incomes, and why individuals in these sectors are largely focused on consumption of essentials, without much surplus for investment. A corollary here would be that steps which raise mid-tech labour-intensive exports can boost India’s trade interlinkages, mass consumption, investment, and India’s GDP growth. An opportunity to grow exports as supply chains are getting redrawn is knocking at the door. More open, more benefits There is a general sense that India is a relatively inward-looking economy. After all, agriculture makes up c18% of GDP and depends more on weather patterns than international demand. And India is more domestic demand-driven, compared to some export-led Asian economies. Having said that, we find that India has grown at its fastest pace in periods of rising global integration with the world. After all, a whole new market opens up when a country is open to it. We use the rolling correlation between India and world growth as a measure of global integration in this report, and find that the 2000-2010 decade was particularly striking as a period of rising global integration and strong India GDP growth (c8% per year, see exhibit 1). This is the time India was slashing import tariffs and integrating further into global trade, resulting in higher export growth, global export share and GDP growth. In the next decade, 2010-2020, India began to raise import tariffs. This period saw a fall in export growth, global export share and GDP growth. We also note that during the last few years, i.e. those following the pandemic, have seen a rise back up in global integration and GDP growth. As we will discuss later in the report, India is making efforts to integrate more with the global economy. But how large and lasting a growth impact, will depend on continued efforts to integrate. One may argue that higher integration exposes a country to global volatility, which may be negative for growth. We look into this carefully through a VAR regression analysis, and find that the positive impact of being more integrated with the world is higher and longer lasting than the negative impact of being exposed to global volatility (see exhibits 4 and 5). All said, deeper interlinkages with the world have led to higher growth over time, more than offsetting the negative impact of rise in volatility. How integrated are the various sectors? Next, we turn our attention to sectoral flavours, because they shed light on the nature of integration with the world and its impact back home. We break down GDP on the expenditure side into consumption, investment and exports, and find some interesting, and even surprising, takeaways. Comparing investment, consumption and export trends. In the pecking order, consumption is most integrated with world growth, followed by investment and then exports (see exhibit 6). This is rather surprising as one might imagine exports to be most correlated with global growth. As we explore more closely later, one reason could be that India’s linkages with the world arestrong on the financial integration side, which impacts consumption, but more limited on the trade side, which influences exports and thereby, investment. Investment details. India’s investment growth has a strong c70% correlation with world growth (see exhibit 7). We break down investment growth into several parts – public, private corporate and household investment. What stands out is the rather divergent trend in corporate versus household investment. Corporate investment has a higher correlation (of 75%) with world growth compared to household investment (of 40%). The global interlinkages of corporate investment did not really fall in the 2010-2020 period (barring the pandemic years, see exhibit 8). This is not surprising. We find that corporate capex globally moves in unison, driven by common factors (for instance,risk sentiment impacting FDI flows). On the other hand, household investment has a smaller correlation (of 40%) with world growth (see exhibit 9). It is importantto note here that household investment in India includes not just real estate and housing, but also investment by small firms. Consumption. Consumption has an even higher correlation with world growth than investment. It fell in the 2010-2020 period, but has risen since. In fact, the correlation has risen to 100%, which is above previous highs. We break down private consumption into two parts – discretionary and essentials (see exhibits 10 and 11). Between these, discretionary consumption has a much higher correlation with world growth (of almost 100%), while essentials have a lower correlation (of 70%). This is understandable. If indeed financial integration has been strong (as we mention above and explore further later in the report), it is likely to have impacted incomes at the top of the pyramid. High-end consumers, who are typically high income earners, tend to be better integrated with (or invested in) financial markets. Meanwhile, those associated more with sectors like agriculture and small firms, where incomes may not be as high, are focused on consuming essentials. This consumption group may not have much investible surplus, and therefore not as strongly integrated with financial markets. Exports. We probe the surprisingly low correlation of export growth and global growth a bit more. The fall in correlation was pronounced in the middle of the 2010-2020 decade when import tariff rates were being raised and export growth was falling (see exhibit 12). We divide exports into the more capital-intensive high-tech and the more labour-intensive mid-tech exports. We find that growth in high-tech exports has far surpassed growth in mid-tech exports (see exhibit 13). In fact, the latter has been rather sluggish for a decade. One can thereby deduce that,led mainly by sluggish mid-tech exports, India’s trade integration with the world has been weak. Bringing it all together So now we have two sets of results: Stronger financial integration. Rising equity market correlation (of the S&P500 and SENSEX indices, see exhibit 14) and the rise in international financial inflows into India show that India has become a lot more financially integrated with the world over time. Those who have been able to enjoy the gains of financial integration have seen incomes and discretionary consumption rise. This even explains the strong correlation between global growth and discretionary consumption. Many of these individuals could well be associated with large firms in the formal sector, where global capex tends to be highly correlated globally. These individuals could also be associated with high-tech exports, such as India’s rapidly rising professional services exports. Weaker trade integration. On the other hand, as discussed above, trade integration has been relatively weaker, led particularly by mid-tech exports. About 45% of India’s goods exports come from small firms. Lower global integration here, then, explains lower mid-tech export growth, and lower incomes in this category. Lower incomes go on to explain why this group is focused a lot more on consumption of essentials, and do not have much surplus to trigger investment. This, then, explains why integration of essential consumption and household investment growth with world growth remains low. A corollary here would be that steps which raise mid-tech exports and India’s trade integration with the world can boost consumption, and particularly investment. But what needs to go right? An opportunity comes knocking Elevated import tariffs have hurt India’s export potential over the last decade, and mid-tech exports, which are also more labour intensive, have been hurt most. In fact, 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. Other blocks like ASEAN made more progress in raising their global export share (see exhibit 15). Vietnam, in particular, made substantial gains in both mid-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 the most progress during the first Trump administration reflect 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 16). 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 17). Incidentally, China’s excess capacity is not as large in these mid-tech sectors (see exhibit 18). Space for another manufacturing economy may well be there. But first,India needs to make changes to do it right this time around. External reforms have begun, but must run deep Potential US tariffs on Indian exports may have become a catalyst for external sector reforms. In fact, India has recently taken a few steps which signal that it is becoming more ‘open for business’: Lowering import tariffs: 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 categories of 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 USin 2025, with the first phase expected to be finalised by July. Reports suggest that it plans to buy more oil and defence equipment from the US and increase cooperation in nuclear energy. All of these would 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. The finalisation of the India-UK trade deal on 6 May, following more than three years of negotiation, signals to us a sense of urgency in concluding trade agreements quickly. This may provide some tailwind for other negotiations too. Making the INR more flexible: A flexible rupee does not just act as a shock absorber during times of external volatility, but also helps make exports competitive, and give manufacturers the confidence to export from India. After a period of REER appreciation, the rupee has mean reverted over the last few months. These are a good start. But for long lasting impact from greater integration with the world, and stronger growth and more jobs, these reforms will have to run deep. Key forecasts https://www.hsbc.com.my/wealth/insights/market-outlook/india-economics/challenging-myths-seeking-opportunities/
2025-05-22 12:02
Building a resilient portfolio for an uncertain era The past few months have given investors plenty to ponder, with US trade tariffs causing elevated volatility in multiple asset classes around the world. Traditional safe-haven assets, such as Treasuries and the US dollar, were no exception. What’s more, we expect tariffs to remain with us for some time, as they’re a negotiating tool to obtain concessions from other countries and provide the US administration with a way to finance planned tax cuts. So, economists and businesses have been trying to assess what the impact will be on growth, earnings and inflation. That’s not an easy task, as the tariff levels have been changing and could still change further. That said, the 90-day tariff reprieve (now also including China) offers temporary relief, and there’s hope with the recent US-UK trade deal that other countries will follow. What does this mean for investors? The recent US-China negotiations, albeit a temporary reprieve, have rekindled market optimism. US equities have regained the lost ground since the 2 April Liberation Day announcements, supported by stronger-than-expected Q1 corporate earnings and benign April inflation data. This all seems to point to a better outlook. As a result, we’ve moved global and US equities back to an overweight position. This swift change in view is driven mainly by a U-turn in trade policy, which has reduced recession risks. However, the dust has yet to settle on this period of geopolitical uncertainty. So, we stick to our basic, yet important, rule of diversification and look to deepen it further. We expect other nations to continue or even intensify their trade with non-US trading partners. This means that investors will also want to diversify and capture opportunities beyond the US. Asia is in better shape for various reasons. Notably, its domestic resilience and structural growth opportunities are evident, and clusters of manufacturing expertise in China and Asia can’t easily be broken up. High US tariffs on some Southeast Asian markets will also benefit India’s manufacturing sector, while Singapore stands out as an outlier in the current trade tensions among other Asian markets. Structural trends remain intact From a fundamental perspective, we still have faith in the US’s long-term strengths, particularly in areas like AI adoption and innovation, even though they’ve been overshadowed by tariff-related concerns. In fact, we continue to see examples of AI revolutionising business models or boosting efficiency around the world. If Technology and Communications are beneficiaries of the AI momentum, then the industrials sector is also a winner across all regions, driven by high demand for digital infrastructure and the US administration’s focus on re-industrialization and the onshoring of jobs. Renewable energy can also benefit as AI adoption has a high reliance on electricity. Diversification in focus amid slow but positive growth and gradual easing At this juncture, when tariff negotiations are still up in the air, we continue to use quality bonds with a medium-to-long duration, gold and less-correlated assets to solidify diversification. We also leverage active management to adjust portfolio allocations as and when needed. For individual investors, these objectives can be achieved through multi-asset strategies with exposure to various asset classes, markets and currencies. As always, this report presents our four investment themes and brings more value to our readers by delving into specific topics. This quarter, to help you position your portfolios, we look at the potential scenarios for US tariffs and their investment implications, as well as how Asia can ride on AI-driven opportunities. We hope these insights will help you navigate this period of uncertainty and offer a clearer picture for the months ahead. Best wishes for a smooth investment journey. https://www.hsbc.com.my/wealth/insights/market-outlook/investment-outlook/building-a-resilient-portfolio-for-an-uncertain-era/
2025-05-21 12:01
Key takeaways The quick US-China agreement and the US-UK trade deal have substantially reduced downside risks. As earnings growth expectations have been lowered and valuations are more fairly valued, we think the rotation away from US assets will ease. Coupled with AI-led innovation and other structural opportunities, we move global and US equities, as well as Technology, back to overweight while cutting Europe ex-UK equities to neutral. We continue to stay diversified through multi-asset strategies and gold to manage downside risks. The correlation between stocks and bonds has fallen back into negative territory, reinforcing the diversification benefits of bonds. We prefer UK gilts due to their attractive real yields, and GBP/EUR investment grade credit. We expect the Fed to cut rates three more times this year, while the Bank of England is signalling more rate cuts than the market expects. Despite a less daunting tariff outlook, we expect the upcoming trade talks between the US and China to be lengthy and Chinese policymakers to continue ramping up policy support to boost local demand. We remain overweight on Chinese equities with a focus on AI enablers and adopters across industries and expect the market rally to broaden out to the consumption, financial and industrial sectors. Both India and Singapore stand out as relative trade safe havens. https://www.hsbc.com.my/wealth/insights/asset-class-views/investment-monthly/reduced-trade-tensions-lift-optimism-for-us-stocks/
2025-05-20 12:01
Key takeaways China officials announced a raft of policy measures during a recent press conference, backing their pro-growth stance… …including interest rate cuts, support for Central Huijin as a stabilisation fund and policies to bolster the real economy. US-China trade talks have ignited hopes for a de-escalation and, if successful, present upside risks for economic growth. China data review (April 2025) Retail sales grew at 5.1% y-o-y in April, helped by expanded funding for tradein programmes (RMB162bn year-to-date versus RMB150bn last year). Products covered by the scheme saw double-digit growth in April, including communication appliances (19.9% y-o-y) and household appliances (38.8%). For autos, sales volume continued to be strong, up 15% y-o-y, while electric vehicles (EVs) were up 34%, based on CPCA data. Industrial production was up 6.1% y-o-y in April, reflecting the stronger-thanexpected export growth, which was driven by trade restructuring. Policy incentives to promote large-scale equipment upgrading (RMB200bn of funding support) and cultivate technology and innovation also helped boost production. However, some labour-intensive sectors, such as textiles (2.9% y-o-y), may have been hit due to the increased external uncertainties. The property sector remained a key drag on the economy in April, which saw deeper falls in investment (down 11.3% y-o-y), primary home sales (down 2.4% y-o-y in volume terms) and home prices (second hand home prices down 0.4% m-o-m). The government may need to step up support to help reverse the slump, and it still has ample tools to do so. Inflation prints hinted at tepid consumer prices as CPI fell 0.1% y-o-y in April, and rising downward producer price pressures, with PPI down 2.7% y-o-y. Volatile items, such as pork, remained drags to headline CPI, while core CPI continued to receive support from consumption policies. Despite robust export growth in April, its momentum may fade in the coming months, so domestic demand will need to pick up the slack, while helping to stabilise prices. Exports rose 8.1% y-o-y in April, despite prohibitive US tariffs on Chinese goods being imposed at the start of the month. This was helped by a low base and exports to third countries (especially ASEAN), on accelerated trade restructuring, related front-loading and rerouting of direct US-China shipments. Meanwhile, imports fell 0.2% y-o-y but were ahead of market expectations, on improved processing imports, likely related to exports to third countries. China easing: a raft of stimulus Following the pro-growth stance denoted in the April Politburo meeting, the heads of the People’s Bank of China (PBoC), the National Financial Regulatory Administration (NFRA) and the China Securities Regulatory Commission (CSRC) held a press conference on 7 May to roll out financial market stabilisation measures (Table 1). The package, however, did not include direct fiscal support for domestic consumption, in line with our view that China will focus on implementing various fiscal easing already announced during the National People’s Congress in early March. Monetary easing Numerous monetary easing measures were rolled out, including lowering the policy rate by 10bp, structural relending rates by 25bp (from 1.75% to 1.5%) and the Pledged Supplementary Lending rate by 25bp (from 2.25% to 2%). Liquidity injections included an outright 50bp cut in the required reserve ratio (equivalent to a RMB1trn liquidity injection) and creation of several new monetary policy tools. If fully utilised, the new tools add an additional RMB2.1trn of liquidity to the real economy. We think more easing will follow, likely through additional rate cuts in the second half of the year and the PBoC resuming treasury purchases from the secondary market. Stock market stabilisation The CSRC emphasised that market stability is critical to economic growth and the interests of investors, while pledging support for Central Huijin to play the important role as a market stabiliser. There has been a substantial change in policy stance towards the stock market since 24 September 2024, with ‘stock market (and housing) stabilisation’ written into this year’s target. Indeed, Central Huijin announced purchases of A-share ETFs in early April when the trade escalations shocked the market (Securities Times, 8 April); however, this is the first time the CSRC has referred to it as the quasi-market stabilisation fund. The NFRA also announced that it would lower risk factors for insurance companies to increase equity exposure, encouraging more ‘patient capital’ to make stock investments. Supporting the real economy The three ministries consistently pledged support for the real economy. The PBoC’s new monetary tools are aimed at directing new funds towards technology innovation, expanding elderly care and supporting small businesses. The CSRC is prioritising reforms to provide capital support for technology innovation, while enhancing investor protection to increase market reliability. And the NFRA is focusing on financing support for real estate developers, exporters and importers, and adapting regulations to help industrial transformation and upgrading. Reviving consumption Though not a focus of the press conference, we think reviving consumption remains the primary policy target this year. The Labour Day holiday showed improving activity, but we stay cautious as outcomes of tariff negotiations remain highly uncertain, while negative impacts may just be starting to unfold. A mix of both near-term measures, like trade-in programmes and services consumption subsidies, as well as structural measures, such as improved social safety net coverage, pension reforms and stabilisation of the housing sector, will likely be rolled out. US-China trade talks China and the US announced a tentative trade truce in Geneva on 12 May, agreeing to suspend new tariffs for 90 days and scale back existing tariffs (China to face 30%, the US to face 10%). Both sides agreed to establish a ‘consultation mechanism for trade and economic issues’, laying the groundwork for future high-level dialogue. The pullback will be most welcomed by businesses on both sides that were starting to feel the pinch from reciprocal tariffs and presents upside risks to economic growth. Source: SCIO, HSBC Source: LSEG Eikon *Past performance is not an indication of future returns Source: LSEG Eikon. As of 16 May 2025, market close https://www.hsbc.com.my/wealth/insights/market-outlook/china-in-focus/china-easing-a-raft-of-stimulus/
2025-05-19 12:02
Key takeaways DXY is still below what its yield differential implies, but the gap is closing as trade uncertainty recedes, for now. The recovery in the USD may also have been helped by positioning adjustment. Cyclical factors could regain traction; DXY consolidation seems likely, while the AUD and NZD may strengthen over the near term. For most of 2024, the US Dollar Index (DXY) had been tracking its yield differential, but the USD developed a premium to its yield differential in early 2025 amid US growth resilience. That premium came to an end due to US trade policy uncertainty, followed by a swift swing to a USD discount since 2 April when “reciprocal tariffs” were introduced. At one point, the DXY was c7% below the level implied by its yield differential. More recently, that discount has begun to narrow (Chart 1). This started with the USUK trade deal but got real impetus when the US and China announced an official trade truce on 12 May, with big reductions in effective tariff rates for 90 days. The recovery in the USD may also have been helped by positioning adjustment, given the stretched short DXY positioning (Chart 2). Nonetheless, it seems appropriate that the discount still exists, as negotiations are ongoing with no guarantee of success. The US will also want to secure resolutions with other trading partners with whom it runs sizeable deficits, for example, the EU where the process may run more slowly, given the multitude of countries and interests in play. Progress would see the USD gain, and setbacks see it wilt. Source: Bloomberg, HSBC Source: Bloomberg, HSBC Still, the improvement in global trade news flow may reopen the door to cyclical factors getting more traction. A pause in parts of US trade policy should also allow the Federal Reserve to extend its pause on rate cuts so long as the resilience of the labour market and inflation data cooperate. Markets also expect the Fed to keep its policy rate unchanged at its 17-18 June meeting (Bloomberg, 15 May 2025). Until then, DXY is more likely to consolidate than see a big move in either direction. De-escalation in US-China trade tensions and positive news around potential trade deals between the US and other Asian economies should alleviate pressure on the regional growth outlook and improve overall risk sentiment. As such, AUD-USD and NZD-USD are likely to edge higher over the near term. https://www.hsbc.com.my/wealth/insights/fx-insights/fx-viewpoint/dxy-closing-the-gap-with-yield-differential/
2025-05-19 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-when-global-trade-uncertainty-recedes-for-now/
