2025-02-24 07:04

Key takeaways The ECB has formally updated its estimate of the nominal neutral rate of interest, concluding it is in the range of 1.75% to 2.25%. Commonly referred to as r-star, or r*, the neutral rate is the interest rate that allows full employment and stable inflation over the medium term. Japanese stocks have surprised to the upside in the current Q4 2024 earnings season. Most companies in the Topix index have now reported, and y-o-y earnings growth is about 13%. Is the recent US dollar rally looking tired? It is quite telling that an upside surprise for January US CPI did not lead to any material dollar outperformance. Chart of the week – What next for eurozone stocks? Eurozone equities have outperformed year-to-date with the MSCI index up by c.12% versus a c.4% gain in the S&P 500. The move is rooted in the low valuations seen late last year, with several factors recently starting to unlock this potential – upward revisions to analysts’ overly pessimistic 2025 earnings expectations, a weaker euro, upward surprises on eurozone growth data, improving sentiment towards China, and expectations for looser European fiscal policy. However, eurozone stocks have risen a long way relatively quickly, so some near-term caution may be warranted. While data have surprised marginally to the upside, they have been against low expectations. Equally, optimism over fiscal easing hinges, partly, on the German election outcome and prospects for easing the German debt brake. Rule changes would require a two-thirds majority vote in the Bundestag, which is not a given. The fiscally conservative CDU/CSU is leading in the polls and while its leader, Friedrich Merz, has signalled some possible flexibility on the debt brake regarding defence spending, he favours exploring expenditure restraint in other areas first. Moreover, while the centre-left SPD – a potential coalition partner – is open to some reform, if the CDU/CSU requires the support of the FDP, agreement on this issue could prove more difficult. Nonetheless, with eurozone equities trading at a larger than normal discount to the US, any positive European growth or policy surprises could further extend the recent outperformance. Market Spotlight Shariah-compliant strategies in demand Islamic finance – also known as Shariah-compliant finance – accounts for around 1% of global financial assets. Yet it’s a sector seeing rapid growth, delivering some strong recent performances, and potentially appealing to growing demand for socially-responsible investing. Shariah-compliant assets are screened using principles commonly associated with Shariah law. They include areas like risk sharing, limiting unnecessary uncertainty, and the prohibition of interest. There is a strong emphasis on property rights and fair treatment of employers, employees, customers, and other stakeholders. The screening also excludes exposure to certain business sectors, and sets tolerance limits for certain types of investment income. Although guided by different principles, Shariah screening has similarities with strategies that use environmental, social and governance factors. Both commit to promoting investments that minimise harm to society and uphold ethical conduct. They also tend to focus on stability and risk reduction. That makes them a useful diversification option for asset allocators. As for performance, some Shariah-compliant indices have been delivering strong returns, with the Dow Jones Islamic Market Titans 100 index outperforming the S&P 500 over three and five years. 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. For informational purposes only and should not be construed as a recommendation to invest in the specific country, product, strategy, sector, or security. Any views expressed were held at the time of preparation and are subject to change without notice. Any forecast, projection or target where provided is indicative only and is not guaranteed in any way. Source: HSBC Asset Management. Macrobond, Bloomberg. Data as at 7.30am UK time 24 February 2025. Lens on… The guiding r-star The ECB has formally updated its estimate of the nominal neutral rate of interest, concluding it is in the range of 1.75% to 2.25%. Commonly referred to as r-star, or r*, the neutral rate is the interest rate that allows full employment and stable inflation over the medium term. Yet, while r* is an important benchmark, its unobservable nature makes its estimation difficult. The Bank of England noted recently that an ageing population, global trade disintegration, and higher global risks may be weighing on growth potential, and thus r*. Meanwhile, other factors, such as financial fragmentation, climate change, expansionary fiscal policy, and AI are creating upward pressure. The BoE opted not to give an estimate of the UK’s neutral rate. For the US, the FOMC’s estimated range is c.2.50%-4.00% with a median figure of 3.00% and rising. Lower estimates of the neutral rate in Europe, alongside a more sluggish economy, suggest a long duration positions in Europe. Still-robust growth in the US could imply the neutral rate there is higher than estimated. Japanese surprise Japanese stocks have surprised to the upside in the current Q4 2024 earnings season. Most companies in the Topix index have now reported, and y-o-y earnings growth is about 13%. The industrials and consumer discretionary sectors have been the strongest, buoyed by high overseas exposure. Financials have also done well on higher net interest margins as the Bank of Japan gradually heads towards normalisation. The results have been helped by a tailwind of improving economic momentum, with Q4-24 GDP coming in stronger-than-expected. Government-led corporate governance reforms have also played a part, as are targeted budget stimulus, including inflation relief and support for industries like AI and semiconductors. In response, Japanese stocks have seen a pick-up in analyst earnings upgrades for the coming 12 months. Yet they trade at a discount to peers, with a forward 12-month price-earnings ratio of 15.3x, versus 22.6x in the US. They also trade on a relatively low price-to-book ratio of around 1.5x. Overall, the outlook for Japanese stocks remains positive, although exporters could face headwinds from global policy uncertainty. Toppy dollar? Is the recent US dollar rally looking tired? It is quite telling that an upside surprise for January US CPI did not lead to any material dollar outperformance. If anything, the modest gains were more than unwound following softer underlying details of the PPI print and a weak retail sales release. What we are seeing is that the dollar and US yields are not rising hard on strong US data but falling on any signs of softness. Global factors may also be limiting the dollar’s appreciation trajectory. China’s January credit data suggests a turning point may be at hand. Equally, strong wage and GDP data out of Japan and recent positive eurozone data surprises also lean in this direction. With the USD expensive on a historical basis and plenty of positives already priced in, any disappointing US-related developments, or positive non-US developments relative to pretty downbeat expectations, could start to weigh on the greenback. 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. Index returns assume reinvestment of all distributions and do not reflect fees or expenses. Source: HSBC Asset Management. Macrobond, Bloomberg, Datastream. Data as at 7.30am UK time 24 February 2025. Key Events and Data Releases Last week The week ahead Source: HSBC Asset Management. Data as at 7.30am UK time 24 February 2025. For informational purposes only and should not be construed as a recommendation to invest in the specific country, product, strategy, sector or security. Any views expressed were held at the time of preparation and are subject to change without notice. Market review Risk markets remain resilient despite ongoing geopolitical tensions. The US dollar weakened against developed and EM currencies. Rising fiscal worries weighed on eurozone government bonds, and disappointing UK inflation data pressured Gilts. US Treasuries were range-bound ahead of core PCE figures, with January’s FOMC minutes reiterating the Fed is in no hurry to ease. In the US, the S&P 500 touched a fresh high mid-week, with the Nasdaq slipping on mixed Q4-24 earnings reports. The Euro Stoxx 50 paused for breath after recent gains, and Germany’s DAX was steady. Japan’s Nikkei 225 lost ground as a higher yen weighed on exporters amid a re-pricing of BoJ rate expectations. EM equities were mixed. South Korea’s Kospi index posted decent gains, the Shanghai Composite nudged higher, and the Hang Seng and India’s Sensex drifted lower. In commodities, oil and gold rose. Copper fell. https://www.hsbc.com.my/wealth/insights/asset-class-views/investment-weekly/what-next-for-eurozone-stocks/

2025-02-19 12:02

Key takeaways Singapore’s 2025 budget strived to balance between providing generous short-term support to Singaporeans and supporting long-term priorities. Despite the increased social welfare announcements, the government guided towards a fiscal surplus of SGD 6.8bn (c. 0.9% of the GDP). We view the budget as supportive of Singapore’s short- and medium-term growth outlook. In the budget announcement, Prime Minister Wong acknowledged the cost-of-living pressures and announced several measures to support Singaporean households including SGD 800 vouchers for all Singaporean households and additional vouchers ranging from SGD 600 – SGD 800. The budget also focused on long-term priorities like R&D, clean energy, infrastructure, upskilling of population and measures to prepare for an aging society. We see the budget as supportive of growth and expect 2.6% GDP growth in 2025. We retain our overweight stance on Singapore equities. The budget announcements are mildly positive for Banks (the largest sector by index weight) and retail REITs. Despite the recent rally, Singapore equities trade at reasonable valuations and offer an attractive dividend yield. The measures to boost the attractiveness of Singapore’s stock exchange may lead to greater capital inflows in the longer run. What happened? Singapore’s Prime Minister Lawrence Wong announced the 2025 budget on 18th February. The budget, which comes ahead of the country’s 60th anniversary of independence, was broadly in line with our expectations as it strived to balance between providing generous short-term support to Singaporeans and keeping an eye on long-term priorities. In his first budget as the Prime Minister, Mr. Wong acknowledged the cost-of-living pressures and announced several measures to support Singaporean households. PM Wong also announced support measures for companies grappling with higher costs. The government would offer a 50% rebate on corporate taxes capped at SGD 40k. Dubbed as “Onward Together for a Better Tomorrow”, the budget was also notable in its focus on strengthening the medium-term growth potential of Singapore. The budget announced additional top-ups for the National Productivity Fund (SGD 3bn), Future Energy Funds (SGD 5bn) and Changi Airport Development Fund (SGD 5bn). Additionally, PM Wong announced SGD 1bn to fund a national semiconductor fabrication facility and a SGD 1bn Private Credit Growth fund to finance high-growth local businesses. To upskill the workforce and prepare for an aging society, the government bolstered the SkillsFuture program, allowing part-time training with fixed allowance for citizens above the age of 40. The government also extended the senior employment credit scheme by one year, offering wage offsets for companies hiring Singaporeans above the age of 60. Additional support for seniors in the form of top-ups through the MediSave scheme was also announced. Overall, the plans are to spend SGD 124bn in 2025. While Singapore may not be directly targeted by the US for trade tariffs, given that Singapore runs a trade deficit with the US, uncertainty around global trade is a headwind to an open economy like Singapore. In our view, the budget leaves room for the government to provide additional support for the economy should downside risks increase due to global trade uncertainty. Overall, we expect Singapore’s economy to expand by 2.6% in 2025, closer to the upper end of the 1-3% range indicated by the government. Investment implications The budget largely reinforces our bullish stance on Singapore equities, which have outperformed Asian and ASEAN counterparts since the start of 2024 on the back of strong fundamentals, which remain in place. The enhanced cost-of-living support measures should support domestic consumption. The measure to provide tax relief to smaller companies and to provide wage offsets to companies hiring senior employees should further boost employment. The measure is a marginal positive for banks as it should result in lower credit stress. The proposed tax incentives for companies listed in Singapore and fund managers who invest “substantially” in Singapore-listed equities may result in additional capital inflows. Singapore equities have outperformed ASEAN and Asian equities since the start of 2024 Source: Bloomberg, HSBC Global Private Banking and Wealth, as at 18 February 2025. Past performance is not a reliable indicator of future performance. While the banking sector is likely to face modest margin pressures due to lower interest rates, we believe their focus on wealth management and expansion to neighbouring countries should help offset some of these headwinds. The real estate sector, especially REITs, should benefit from lower yields as most of the major central banks and the MAS ease monetary policy. Singapore equities are still trading at reasonable valuations. This combined with their attractive dividend yield could lead to greater investor interest, especially from investors seeking to generate regular income. Outside of financials and property, other sectors such as telecoms and utilities are also picking up traction as yield plays. https://www.hsbc.com.my/wealth/insights/market-outlook/special-coverage/singapore-budget-2025-something-for-everyone/

2025-02-18 12:01

Key takeaways Trade tensions with the US may have an impact on China’s growth, but could be a blessing in disguise… …if they help to accelerate structural reforms, among which fiscal reform is a high priority. The key objective is to enhance fiscal sustainability and streamline central-local fiscal relationships. China data review (January 2025) China’s headline CPI inflation improved to 0.5% y-o-y in January, given a boost from an earlier Chinese New Year (CNY) holiday, which started in January this year instead of February last year. Core CPI y-o-y growth improved for the fourth consecutive month, up 0.6%, as strong travel activity during the holiday helped boost services consumption. On the producer front, PPI deflation remained unchanged at 2.3% y-o-y as weak demand for industrial products may have weighed on prices. China’s January NBS PMIs showed a broad-based contraction in the manufacturing sector, a fall in construction, and a moderation in services activity momentum. While the earlier CNY holiday may have impacted activity as workers returned to their hometowns, these effects should be mostly mitigated by seasonal adjustments. Thus, the softer activity print means more needs to be done to help revive activity. We anticipate a strong policy push this year, led by fiscal stimulus, although the details will need to wait until March’s Two Session. Credit growth saw a strong seasonal start to the year in January driven by a surge in longer-term corporate lending (RMB4.8trn) as well as more elevated than usual government bond issuances (RMB693bn). An improvement in household longer-term lending is also an encouraging sign. The monthly increase in total social financing (RMB7.1trn) reached a new record high, while growth stayed steady at 8% y-o-y. That being said, durability of the boost to credit remains to be seen and we think policymakers will need to step up support in order to help cushion growth against increased global headwinds. Speeding up reforms to counter external risks While external uncertainties and rising trade tensions may present more challenges to China’s economy, they may also serve as a catalyst for more forceful fiscal easing and structural reforms. Among the policy initiatives laid out by the Third Plenum last year, fiscal sustainability was considered an important long-term objective, and essential for restoring local government fiscal discipline and tackling debt risks. We believe more details will be announced at the National People’s Congress in early March. Fiscal reform to accelerate In July 2024, the Third Plenum pledged to deepen China’s fiscal reforms and the meeting laid out three key themes: enhancing the budget system, refining the tax system, and streamlining the fiscal relationship between central and local governments; the latter received the most attention. While the recent RMB12trn local government debt swap is a positive step to addressing near-term financial pressure for local governments, more needs to be done to achieve fiscal sustainability and prevent recurrence of local government debt pressure. Among the various measures, establishing an incentive-compatible framework between central and local governments will play a vital role. This may include lifting the revenue share for local governments and increasing central government spending responsibilities. Indeed, with the recent economic slowdown and housing market correction, local governments have seen their traditional income sources decline for four years by a total of RMB3.8trn. Source: Wind, HSBC Source: Wind, HSBC Reforming tax collection Tax reform will be the cornerstone for streamlining the central and local government fiscal relationship. An example is shifting the collection point for consumption tax from production to consumption and giving a share to the local governments. This should boost local tax collection and incentivise local governments to focus more on consumption. Reforms may also aim to better align with new types of business (e.g., the digital economy), support key sectors (e.g., green development), and simplify the tax system by increasing the share of direct taxation. Enhancing budget management The Third Plenum suggested that all types of government resources should be placed under budget management for efficient resource allocation and enhancement of fiscal discipline, including both on- and off-budget revenue and spending. On the expenditure side, zero-based budgeting (where all expenses need to be justified each new fiscal year) will be advanced after rolling out several pilot projects, while a performance-based approach is expected to be adopted to improve budgetary management. Source: LSEG Datastream Note: *Past performance is not an indication of future returns. Priced as of 14 January 2025. Source: LSEG Datastream https://www.hsbc.com.my/wealth/insights/market-outlook/china-in-focus/speeding-up-reforms-to-counter-external-risks/

2025-02-18 12:01

Key takeaways We see an attractive re-rating opportunity for Chinese equities as DeepSeek’s breakthrough is unlocking a new phase of AI investment, adoption and monetisation across the country, causing new growth engines to support activity and boost private consumption. To tap into China’s emerging AI autonomy and monetisation opportunities, we upgrade Chinese equities to overweight from neutral, which also raises our allocation to Asia ex-Japan equities to overweight. The development of China’s AI autonomy further spurs market expectations of productivity gains through upgrading the AI ecosystem, which could lead to a more sustained and broad-based recovery of growth and equity valuations. We see room for potential earnings upgrades for MSCI China, led by technology. Within Asia ex-Japan, we now prefer China over India due to China’s distinctive AI re-rating driver and compelling risk-reward profile, conservative foreign investor positioning and a significant valuation discount. We favour AI enablers and adopters, including Chinese industry leaders in the internet, ecommerce, software, smartphone, semiconductor, autonomous driving, and humanoid robotics sectors. We also like beneficiaries of stronger corporate spending in AI infrastructure and applications. What happened? On 17 February, a high-level symposium was chaired by Chinese President Xi Jinping with prominent tech leaders, which reflected a significant policy pivot towards a friendlier and more supportive government stance to bolster the private sector and support tech innovation. The symposium came at a critical juncture when the domestic economy is fighting against deflation pressures, property market stress and global trade uncertainties. The last time President Xi hosted a similar high-level symposium with private entrepreneurs was in November 2018. In a speech delivered at the symposium, President Xi reassured government policy support for the technology sector and urged private enterprises to invest more in tech innovation. We expect the National People’s Congress (NPC), which will start on 5 March, to roll out more policy initiatives to support tech innovation and AI investments, which are heralded as “new productive forces” and rising economic growth engines for years to come. The very rapid rise of DeepSeek has shifted investor sentiment, as it has demonstrated China’s under-appreciated capability to deliver significant technological innovation despite US export restrictions on advanced chips and technologies. The tech-heavy Hang Seng Index (HSI) and Hang Seng Tech Index (HSTECH) have rallied 15.3% and 23% YTD, respectively, driven by the DeepSeek excitement. However, the Hang Seng Index and MSCI China are still trading at 10.3x and 11.3x 12-month forward P/E, respectively (i.e. 54% and 50% discounts to the 22.6x forward P/E of the S&P 500 Index). Investment implications The development of China’s AI autonomy further spurs market expectations of productivity gains through upgrading the AI ecosystem, which could lead to a more sustained and broad-based recovery of growth and equity valuations. We also see room for potential earnings upgrades for MSCI China, led by positive earnings momentum in the technology sector. Accelerating deployment of AI applications should underpin upside potential in earnings expectations. In addition, further fiscal stimulus measures to be announced at the NPC session in March could provide support for domestic consumption recovery and property market stabilisation. The Hang Seng Index and MSCI China are trading at steep valuation discounts to S&P 500 and Mag-7 Source: Bloomberg, HSBC Global Private Banking and Wealth as at 17 February 2025. Past performance is not a reliable indicator of future performance. As a result, we upgrade Chinese equities to overweight from neutral, which also raises our allocation to Asia ex-Japan equities to overweight from neutral. Within the region, we now have a stronger preference for China versus India due to China’s distinctive AI re-rating driver and compelling risk-reward profile underpinned by the conservative positioning of foreign investors and significant valuation gaps with the global and regional peers. We favour beneficiaries of DeepSeek’s low-cost, open-sourced AI models, which are expected to accelerate mass deployment of generative AI devices, autonomous driving, and humanoid robotics across China in a scalable way. With favourable industrial policy support, we expect strong corporate spending in AI infrastructure, enablers and applications, including cloud services, e-commerce, AI smartphones, AI laptops, consumer electronic goods, semiconductors, OEMs, software and AI agents. The three state-owned telecom giants have quickly integrated DeepSeek’s AI models into their infrastructure and products. Chinese smartphone companies will also benefit from the integration of their phones with the localised low-cost, high-performing AI models. China's autonomous driving and humanoid robotic technologies command strong competitive edges at the global stage. China’s EV and robotics industries are well positioned to benefit from the AI breakthrough. So far, the Chinese equity rally is not broad-based and concentrates mainly on tech stocks. This means investors will continue to look for broader policy stimulus. We also believe that more convincing demand-side fiscal stimulus measures are required to support a broader earnings improvement beyond the AI supply chain. Hence, we favour Chinese internet and technology leaders for growth and quality Chinese SOEs for high dividends. US tariffs remain a key risk for Chinese equities, which cannot be ignored but so far China’s trade headwinds have been less of a challenge than market originally feared. The risk of escalation of trade tensions remains a concern as there is lingering uncertainty after the 10% incremental tariffs have been imposed on all Chinese goods. Still, we believe China’s relatively restrained retaliatory response suggests that there is room for trade negotiations. https://www.hsbc.com.my/wealth/insights/market-outlook/special-coverage/upgrade-of-chinese-equities-to-overweight/

2025-02-17 12:02

Key takeaways Tariff headlines appear to be less provocative for FX markets. Perhaps, markets assume that some deals could be struck... …which creates an upside risk for the USD. The law of diminishing returns seems to be in play, as tariff-related headlines seem less provocative for FX markets (see the chart below). Source: Bloomberg, HSBC On 1 February, US President Donald Trump announced a 25% tariff on imports from Canada and Mexico (a 10% tariff on Canadian energy) and a 10% additional duty on Chinese products. The US Dollar Index (DXY) jumped briefly following the weekend’s tariff headlines. There is still a great deal of uncertainty about how the situation will unfold, with moves on Mexico and Canada delayed to 4 March (Bloomberg, 4 February 2025). The DXY erased its earlier gain. That being said, the new 10% tariff on all Chinese imports to the US came into effect on 4 February and China’s tit-for-tat import taxes on some US goods came into effect on 10 February. The DXY hovered around the 108 level (Bloomberg, 10 February 2025). The USD was basically unchanged on the day against most other G10 currencies, despite US President Donald Trump’s confirmation on 11 February that the 25% tariffs will be imposed on US steel and aluminium imports without exceptions, and with an indication from Trump that they may go higher (Bloomberg, 11 February). Markets also shrugged off various promises of retaliation, including from politicians in Canada and the EU. Perhaps, FX markets are once again assuming a deal will be struck with key trading partners before they actually go into effect on 4 March. Whether one views the lack of market action as complacency or pragmatism, it creates an upside risk for the USD, should these latest tariffs end up being implemented. It also shows that the risk of a tit-for-tat escalation is prominent, heightening the stagflationary threat for the global economy. It is also worth noting that the prior premium in the USD relative to its rate differential, potentially reflective of a Trump policy uncertainty premium, has been mostly erased. Whether the premium re-emerges may hinge on whether tariff threats transform into tariff reality. FX markets will probably remain tied to headlines about US policies, like reciprocal tariffs. We still believe the USD is likely to strengthen further, amid the divergence in both growth and monetary policy between the US and other economies, among other factors. https://www.hsbc.com.my/wealth/insights/fx-insights/fx-viewpoint/usd-and-tariff-headlines/

2025-02-17 07:04

Key takeaways US core CPI surprised to the upside, rising by 0.4% month-on-month in January. The bond market, having initially sold off in reaction to the CPI, has calmed down and largely reversed its losses. A key attraction of frontier markets is portfolio exposure to smaller, rapidly growing economies. Mexico has found itself at the centre of a rise in global policy uncertainty recently. Chart of the week – China’s household wealth exposure to property It’s been a good start to the year for investors in China’s stock market. The MSCI China index is already up over 9%, outperforming the wider EM index and the US. This follows a very good performance in 2024 as Chinese authorities’ ramp-up of policy support helped reverse a prolonged period of weak sentiment. A big driver of recent gains has been a rally in China’s tech companies. The unveiling of DeepSeek late last month has triggered a reappraisal of the sector’s profits outlook and potential feedthrough to AI innovation and adoption in the country’s vast consumer market. Also, data on Lunar New Year spending has been strong, and is reflected in a higher-than-expected January CPI print. Deep discounts versus global peers imply potential for large upside moves on better-than-expected news. After DeepSeek, there is potential for accelerated AI adoption across many industries. And last year’s late rally in the US dollar and big pick-up in global yields look to have run out of steam, boding well for the overall EM asset complex. Nevertheless, with a big chunk of China’s household wealth tied up in property, the real estate slump remains a major challenge, and with it the threat of sustained deflation. Recent policy measures have helped stabilise the situation, but more demand-boosting stimulus will be required to keep growth on the right track and maintain positive momentum in markets. All eyes will be on next month’s National People’s Congress (NPC) meeting. Market Spotlight Asian credit outlook Elevated all-in yields and tighter spreads helped deliver a strong performance in Asian credit last year. And despite a recent pick-up in global policy uncertainty, macro tailwinds could make 2025 another strong year for the asset class. Asian markets benefit from the twin-drivers of relatively high GDP growth and benign inflation. But there are other key themes, too. One is China’s continuing path to recovery. Its outlook hinges on navigating external headwinds and domestic imbalances with policies to boost domestic demand and cut industrial over-capacity. A clear pro-growth, pro-market policy stance could help – and we’re expecting more details on policy support in March. That ongoing stimulus could have spillover effects for the rest of Asia and provide a cushion from global headwinds. Meanwhile, the region’s credit market also benefits from the strong growth, rising trade flows, and insulated nature of domestically oriented economies like India and parts of ASEAN, including Indonesia and the Philippines. These economies are less sensitive to global trade, making them potentially more resilient to external shocks. 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. For informational purposes only and should not be construed as a recommendation to invest in the specific country, product, strategy, sector, or security. Any views expressed were held at the time of preparation and are subject to change without notice. Any forecast, projection or target where provided is indicative only and is not guaranteed in any way. Source: HSBC Asset Management. Macrobond, Bloomberg. Data as at 7.30am UK time 14 February 2025. Lens on… CPI surprise US core CPI surprised to the upside, rising by 0.4% month-on-month in January. Some of the strength reflected outsized gains in some components – used car prices jumped 2.2% m-o-m, vehicle insurance rose by 2.0% m-o-m and airfares were up 1.2%. Strong demand for new and used cars in recent months – potentially in anticipation of tariffs – may be supporting prices and insurance premiums. Airfares look more like a case of a bit of noise in the data, what some economists have called ‘residual seasonality’. Absent these factors, core CPI would have risen by a more palatable, albeit still robust, 0.3% m-o-m. Luckily for the Fed, it targets PCE. The CPI data, when combined with the produce price release, has led economists to conclude that core PCE is likely to have risen by 0.2-0.3% m-o-m in January, following prints of only 0.1-0.2% in the previous two months. In that sense, while the Fed won’t be overly happy with the January inflation data, it will also want to see whether it follows the same pattern as recent years – a strong start that fades away. The bond market, having initially sold off in reaction to the CPI, has calmed down and largely reversed its losses. Africa as a growth leader A key attraction of frontier markets is portfolio exposure to smaller, rapidly growing economies. According to the IMF, the average GDP growth rate for frontier economies is 4% over the next five years, well above 2.2% for the US, and 1.2% for the big-four eurozone economies. Vietnam – a big weight in the frontier index – has a well-documented structural growth story centred on attracting FDI amid the recent trend of global “friendshoring”. Bangladesh has become a key textiles exporter. But perhaps less talked about is the impressive growth now being seen in many West African nations, with Côte d’Ivoire, Niger, and Benin expected to grow in excess of 6% per annum over the next five years. A big part of this growth will be driven by recent hydrocarbon development, which brings with it a dependence on global energy prices. And regional politics remain difficult. Nonetheless these growth numbers signal a region with growing economic clout – supported by a young and growing population – and with it an emerging consumer base. As these economies mature, investor allocations and market liquidity are likely to increase. Mexican market outlook Mexico has found itself at the centre of a rise in global policy uncertainty recently. After regional political discussions in early February, volatility in the peso subsided, and the currency rebounded. That upbeat reaction spilled into the stock market, where equities saw a pick-up, and in sovereign bonds, where there was a modest fall in both two- and 10-year yields. However, volatility and investment uncertainty are expected to continue. In FX, the peso has room to depreciate to buffer any shock in terms of trade, and if so, financial authorities may intervene to secure orderly trading conditions without targeting any specific FX level. But peso weakness could pose upside risks to inflation and downside risks to economic activity. These factors are likely to shape policy direction from Mexico’s central bank. The base case view is that while Banxico is ready to decouple slightly from the Fed and cut rates by ~1.50% this year, the uncertain outlook could frustrate efforts. 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. Index returns assume reinvestment of all distributions and do not reflect fees or expenses. Source: HSBC Asset Management. Macrobond, Bloomberg, Datastream. Data as at 7.30am UK time 14 February 2025. Key Events and Data Releases Last week The week ahead Source: HSBC Asset Management. Data as at 7.30am UK time 14 February 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 policy uncertainty continued to overhang risk markets, with the US DXY dollar index weakening. US Treasuries ended a volatile week modestly lower, underperforming Eurozone bonds and UK gilts following higher-than-expected US CPI data, as Fed Chair Powell reiterated that there is no urgency to cut rates. US equities rose, with the Russell 2000 lagging both the Nasdaq and S&P 500. The Euro Stoxx 50 index posted strong gains, bolstered by better-than-expected Q4 earnings, while the German DAX reached an all-time high. Japan’s Nikkei 225 performed well amid a weaker yen. Other Asian markets were mixed, with the Hang Seng leading the region amid optimism about the AI/tech sectors, followed by South Korea’s Kospi, and the Shanghai Composite also extended its rallies. However, India’s Sensex index fell. In commodities, gold and copper were on track to close higher, while oil finished a choppy week with moderate gains. https://www.hsbc.com.my/wealth/insights/asset-class-views/investment-weekly/chinas-household-wealth-exposure-to-property/