2025-03-31 12:02

Key takeaways While the BoJ is in a hawkish pause, it is uncertain when the next rate hike will come. The near-term focus for the JPY is likely to be risk appetite around US trade policy. The JPY may outperform ‘risk on’ currencies, but not the USD. The JPY was the best performing G10 currency in the first two months of the year, but its outperformance has not continued into March. Indeed, USD-JPY has been rising since 11 March, as US-Japan yield differentials have stopped narrowing and even widened again recently (Chart 1). While both the Federal Reserve and the Bank of Japan (BoJ) kept their rates steady in March, the BoJ guidance suggests that rates are likely to rise further so long as the domestic economy progresses as expected. But it is still uncertain when the next BoJ’s rate hike will happen. Our economists’ base case is July, while markets are pricing in a c60% chance for this to take place in June (Bloomberg, 27 March 2025). Source: Bloomberg, HSBC Source: Bloomberg, HSBC Meanwhile, some wonder if higher interest rates in Japan (Chart 2) could prompt a domestic pivot by local investors, leading to reduced portfolio outflows, if not outright repatriation inflows. A significant pivot by Japan’s Government Pension Investment Fund (GPIF) to domestic assets for the next five years (if it happens) could see the JPY strengthen. However, Nikkei reported on 11 March that the GPIF will not change its asset allocation targets. At the same time, Japanese Prime Minister Shigeru Ishiba’s government approval rating continued to fall (The Japan Times, 24 March 2025). Over the near term, we think the JPY may not be an entirely ‘clean’ safe haven currency since Japan is also exposed to US tariff risks (e.g. auto tariffs will come into effect at 12:01 am Washington time on 3 April, initially targeting fully assembled vehicles, Bloomberg, 27 March 2025). Nevertheless, the JPY may still outperform other currencies that are even more exposed to US tariff risks (like the EUR and the CAD) or are highly risk-sensitive (like the AUD and the NZD). We are also cognizant of the possibility that the JPY may be called out by the US administration for its undervaluation. All things considered; we see USD-JPY moving sideways over the near term before rising modestly later in the year when the US economy overcomes growth concerns and the BoJ is closer to its neutral rate range. https://www.hsbc.com.my/wealth/insights/fx-insights/fx-viewpoint/jpy-not-a-clean-safe-haven/

2025-03-31 12:02

Key takeaways Amid higher policy uncertainty and an uptick in near-term inflation expectations driven by tariffs, we downgrade US and global equities to neutral and continue to broaden our sector exposure to IT, Communications, Financials, Industrials and Healthcare outside of the Magnificent-7 stocks. We leverage multi-asset strategies and quality bonds to balance risks and opportunities in the current environment and use gold tactically to enhance diversification. We have increased our exposure in Asia with overweight positions in China, India, Singapore and Japan, while the UAE also offers attractive opportunities. With more supportive policies towards AI-led innovation, consumption and the private sector, we raised our China’s GDP growth forecast to 4.8% for 2025. While DeepSeek’s breakthrough has aroused optimism in the tech space, we believe the downstream AI adopters and applications can better capture the opportunities than the semiconductor and hardware players in Asia, leading us to downgrade Asian IT to neutral and upgrade Consumer Discretionary to overweight. Communications Services should also be a beneficiary with its exposure to the internet, telecom and cloud industries, while Industrials can benefit from the rising demand for digital infrastructure. Asian Financials offer attractive valuations and dividend yield. https://www.hsbc.com.my/wealth/insights/asset-class-views/investment-monthly/policy-uncertainty-weighs-on-us-equities/

2025-03-31 07:04

Key takeaways The unusually uncertain outlook means it pays to consider risk scenarios. The base case – ‘spinning around’ – assumes above target inflation and a period of below trend growth, but there is a risk of a more damaging scenario – ‘toppling over’ as we call it – playing out. After spooking markets in last October’s UK Budget by raising taxes but unexpectedly increasing public spending, Rachel Reeves’ Spring Statement was more restrained. Global real estate investment volumes picked-up late last year, rising 31% in Q4 2024 versus the same quarter in 2023. It came as investors took advantage of stabilising interest rates and lower valuations. Chart of the week – Markets spin around in Q1 First quarter action in investment markets has been dominated by policy uncertainty, volatility, and a broadening-out of performance beyond the US. It was a quarter marked by sharp moves and rotations across asset classes. Among the starkest was a sell-off, and then partial recovery, in US stocks. Worst hit were mega-cap tech names, which despite still-strong profits growth, saw momentum slip. A mix of frothy valuations and signs of China’s growing competitiveness in AI (evidenced by advances at tech firm DeepSeek), unsettled confidence. By contrast, European and Chinese stock markets recorded double-digit rallies, with broad emerging markets also seeing gains. That was captured in a swift change of fortune for major style premia, with Value paying off, and Growth losing ground. Coming into the year, post-US election consensus trades had formed, betting on further upside to US stocks and the dollar and higher US bond yields. All three quickly unwound in Q1 on trade uncertainty and signs of weaker US GDP and profits growth. In response, fixed income assets, including government bonds and credits, provided an effective hedge. Other diversifiers – including gold, hedge funds, real estate, and infrastructure – also proved resilient. So, what’s next? After some wild narrative shifts in Q1, the base case is that ‘spinning around’ will persist in markets in 2025, but the growth outlook remains a key question for investors. Policy uncertainty looks set to continue being a risk to the cycle, but it’s not clear when, or even whether, that will translate to the real economy. For Q2, we could see more of a stop-start performance, as investors and policymakers remain in wait-and-see mode. Market Spotlight China sets the pace in Asia Chinese stocks set the pace in Asian stock markets in Q1, rising 17% in a rally driven by the technology sector. Hong Kong stocks (as measured by MSCI HK) also outperformed, with financials leading the gains. A key theme was a rotation favouring cheaper markets, with China beating India, and South Korea beating Taiwan. This came amidst a cautious backdrop, with global policy uncertainty sparking broad fund outflows (excluding Chinese stocks). Regional currencies were mostly positive in response to lower US Treasury yields and a weaker US dollar index, but were still volatile. Inflation continued to ease in most of the region, giving space for central banks to focus on growth risks. In response, government bond yields fell in most Asian economies. One exception was Indonesia, where fiscal and macro concerns drove the rupiah to its lowest level since the late 90s Asian financial crisis, and bond yields rose. In fixed income, Asia credits were resilient despite weaker global risk sentiment, with high yield outperforming investment grade. Overall, global trade policy and regional politics continue to be key issues to watch in Asia in 2025. 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. See page 8 for details of asset class indices. Data as at 7.30am UK time 28 March 2025. Lens on… What could go wrong? The unusually uncertain outlook means it pays to consider risk scenarios. The base case – ‘spinning around’ – assumes above target inflation and a period of below trend growth, but there is a risk of a more damaging scenario – ‘toppling over’ as we call it – playing out. At the limit, changes to US trade policy could result in the effective US tariff rate jumping to levels last seen in the 1930s. For consumers, elevated policy uncertainty is driving fears of unemployment, which is often (but not always) a precursor of a marked labour market deterioration. Even if unemployment does not rise abruptly, consumers could curb spending as a precaution. This would further deter firms from investing and weigh on profits, ultimately putting pressure on stock prices. This could then further undermine spending – a vicious cycle. In the past, the Fed may have leant against elevated uncertainty by pre-emptively easing policy. But the risk is that renewed price pressures from any large-scale tariffs may mean it can only ease policy once confident that a weak economy would rein in inflation. Overall, this would be an environment where volatility spikes and risk asset valuations are damaged, especially where risk premiums are skinny. Fiscal tightropes After spooking markets in last October’s UK Budget by raising taxes but unexpectedly increasing public spending, Rachel Reeves’ Spring Statement was more restrained. With the Office for Budget Responsibility (OBR) downgrading its 2025 growth forecast, and the Gilt-Treasury 10-year spread widening by around 0.5% since mid-February, the Chancellor unveiled back-loaded spending cuts to meet her fiscal rules. Even with these changes, there is little room for slippage and UK net debt-to-GDP ratio (excluding debt held by the Bank of England) is expected to trend higher. The UK is walking a tightrope – debt concerns are putting upward pressure on Gilt yields, which worsens the public finances. But cutting spending or raising taxes to narrow the deficit would undermine already lacklustre growth. This is a potentially cautionary tale for other advanced economies. In Europe, much has been made of recent commitments to boost public investment in Germany – a country with ample fiscal space. But the likes of France and Italy are more likely to face the same constraints as the UK if they try the German approach. With most governments facing pressure to open the fiscal taps to deliver social, economic, and geopolitical objectives, the bond market vigilantes are watching closely. Build it up Global real estate investment volumes picked up late last year, rising 31% in Q4 2024 versus the same quarter in 2023. It came as investors took advantage of stabilising interest rates and lower valuations. MSCI data shows that real estate capital values edged up 0.2% in Q4 last year, having fallen 16% over the prior nine quarters. Occupancy levels are being supported by falling development activity, with rising costs making new projects uneconomic. Retail has been a key beneficiary, with stable leasing and falling vacancy rates boosting rental income. Office vacancy rates were stable in Q4 but remain elevated, especially in the US. Meanwhile, logistics leasing was subdued but is expected to pick up in 2025. Finally, non-traditional sectors are still delivering the strongest rental growth – including senior housing and data centre leasing. Despite uncertainty, some real estate specialists expect capital values to grow in 2025, driven by growing incomes rather than yield compression. And although the outlook for leasing is mixed, low development activity should support property fundamentals across sectors. 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, Datastream, Real Capital Analytics. Data as at 7.30am UK time 28 March 2025. Key Events and Data Releases Last week The week ahead Source: HSBC Asset Management. Data as at 7.30am UK time 28 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 Global trade uncertainty continued to overhang risk markets last week, with the US dollar index trading sideways. US Treasuries fell, and the yield curve steepened while eurozone sovereign bonds remained relatively unchanged. US IG and HY stayed close to recent lows. US equities extended modest gains, whereas the Euro Stoxx 50 index edged lower, primarily driven by lower auto stocks, with Germany’s DAX index being the main casualty. Japan’s Nikkei 225 fell due to weaker export-oriented stocks. Other Asian markets were largely on the defensive, with the most significant weakness observed in South Korea’s Kospi index, followed by the Hang Seng and Shanghai Composite. In contrast, India’s Sensex bucked the trend, rising on the strength of financials. In Latin America, Mexican stocks led the gains in the region as Banxico, the central bank lowered policy rate by 0.5% with dovish guidance. In commodities, oil and gold increased, while copper ended a volatile week with little change. https://www.hsbc.com.my/wealth/insights/asset-class-views/investment-weekly/markets-spin-around-in-q1/

2025-03-26 12:02

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

2025-03-25 08:05

Key takeaways Table of tactical views where a currency pair is referenced (e.g. USD/JPY):An up (⬆) / down (⬇) / sideways (➡) arrow indicates that the first currency quotedin the pair is expected by HSBC Global Research to appreciate/depreciate/track sideways against the second currency quoted over the coming weeks. For example, an up arrow against EUR/USD means that the EUR is expected to appreciate against the USD over the coming weeks. The arrows under the “current” represent our current views, while those under “previous” represent our views in the last month’s report. https://www.hsbc.com.my/wealth/insights/fx-insights/fx-trends/g10-currencies-eyes-on-us-trade-policy/

2025-03-24 12:02

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