2025-02-05 21:04

Key takeaways A lack of growth and upside risks to inflation have weighed on sentiment. So far the UK has been spared from direct US tariffs threats… …but the risk remains, most notably for a handful of sectors. Sentiment in the trenches at the start of 2025 An (un)healthy dose of the January blues has seen the UK economy mired in weak sentiment in recent weeks. Business and household surveys have fallen sharply while economic growth appears to have ground to a halt in 2H24. GDP data for November showed just a 0.1% m-o-m rise while price rises slowed to 2.5% y-o-y in December. But despite that moderation in inflation, fresh upward risks – a weaker GBP, and higher oil and gas prices – have emerged adding to fears of stagflation. We judge, that despite the prospect of higher near-term inflation, that growth concerns and a softening labour market will enable the BoE to cut interest rates more meaningfully than the 80bp that the market currently expects. That could go some way to boosting sentiment as well as relieve some pressure on the government’s fiscal position. However, UK inflation expectations and sentiment more broadly have fallen foul of global developments as markets have sought to understand what the new Trump presidency will mean for the US and global economies. While the UK has been spared direct tariffs threats, for now, an uncertain global backdrop could provide a persistent volatile undercurrent for the UK economy throughout 2025. Dealing with an “America First” agenda The new Trump administration has hit the ground running with a flurry of policy actions. The latest big development is the announcement of 25% import tariffs on Canada and Mexico, although implementation has been delayed for 30 days, and a 10% additional duty on Chinese imports, effective 4 February. This could have meaningful effects on the economies involved. There’s scope for further developments. Tariff threats on Colombia relating to deportation flights shows how trade policy is being used to exert leverage on non-trade issues. And it’s also worth noting a memo signed by President Trump outlining various trade reviews by 1 April 2025 – including into persistent trade deficits, Chinese trade, the US-Mexico-Canada Agreement (USMCA), prospective new trade deals and more. What could be store for the UK? The UK has so far been spared from such direct tariff threats, partly because the US runs a small goods trade surplus with the UK. But it could be affected if the US implements a universal 10-20% tariff that targets imports from all markets (not our base case), or if more targeted duties are implemented that affect key British export sectors. https://www.hsbc.com.my/wealth/insights/market-outlook/uk-in-focus/2025-01/

2025-02-04 12:02

Key takeaways In the Indian Union Budget for FY 2026 (Apr 2025 – Mar 2026) announced on 1st February, Finance Minister Nirmala Sitharaman struck a delicate balance of providing a boost to capex and consumption while maintaining the path of fiscal consolidation. The government targets to reduce the fiscal deficit to 4.4% (from 4.8% previously) while lowering the personal income tax for the middle-income households. Individuals earning up to INR 1.2m per year will not be liable to pay any income tax. FDI limits for the insurance sector have been increased to 100% and the government has also reduced or scrapped tariffs on several capital goods and raw materials. We view the budget’s focus on boosting both consumption and capex as supportive for Indian equities, especially for the healthcare, financials and consumer-related sectors. Hence, we retain our overweight stance. Income tax cuts can lead to lesser asset quality pressure, faster deposit growth and fee income for Financials, while Healthcare should benefit from measures to boost medical tourism. Lower net borrowing and the aim to reduce central government debt/GDP ratio are positive for INR bonds. What happened? In the Union Budget for FY 2026, Finance Minister Nirmala Sitharaman struck a delicate balance of providing a boost to capex and consumption while maintaining the path of fiscal consolidation. Some of the key highlights of the budget were as follows: Fiscal discipline: In line with our expectation, the government revised their estimate for FY25 fiscal deficit to 4.8%, as the impact from lower nominal GDP growth was more than offset by lagging capital expenditure. More importantly, Finance Minister Sitharaman stuck to their prior guidance to lower fiscal deficit, despite the recent slowdown in growth and announced that they target a 4.4% fiscal deficit in FY26. India’s commitment to stay on the path of fiscal consolidation is a big positive from a macro-economic perspective. India is projected to remain on the path of fiscal consolidation Source: Budget documents, HSBC Global Private Banking & Wealth as of 2 February 2025. Past performance is not a reliable indicator of future performance. Consumption boost and Income tax cuts: The focal point of the budget announcement was the decision to cut personal income tax liability, especially for the middle-income households. Now individuals earning up to INR1.2m per year will not be liable to pay any income tax. This measure is likely to cost the government approximately INR 1tn (~USD 12bn) or 0.3% of the GDP. Capital Expenditures & Lower Borrowing: The government projected the capex to rise by around 10% to INR 11.2tn in FY26, broadly in line with the nominal GDP. This would keep capex unchanged at 3.1% of GDP. However, there appears to be a shift in focus from capex on prior beneficiaries such as roads (+1.5% y-o-y) and railways (0% y-o-y) towards urban infrastructure (+20% y-o-y) and housing (+62% y-o-y). The net government borrowing is also projected to decline towards INR 11.5tn (vs 11.6tn in FY25). FDI Limits & Tariffs: In line with the recommendation of Chief Economic Advisor, the government took steps towards further deregulating the market and has now allowed 100% FDI in the insurance sector. Import tariffs for several goods and equipment across sectors, ranging from textiles to electronics, were reduced or eliminated. The move signals India’s intention to reduce the barriers to trade and gradually incentivize the domestic manufacturers to become more competitive on a global scale. Broadly, the fiscal math seems reasonable to us, based on the assumption of 10.1% nominal GDP growth. However, projections of 12% revenue growth look somewhat optimistic. The government expects 14.4% personal income tax growth (despite the announced income tax relief). Assumptions of non-tax revenues (dividends from the RBI and PSUs) look realistic to us. Hence, we see some risk of disappointment on the revenue and overall fiscal deficit side. However, should the tax cuts unleash a rebound in spending, then the government may still be able to achieve its targets. Investment implications We view the Budget’s focus on supporting consumption and capex, while maintaining fiscal prudence as positive for Indian equities. Hence, we retain our bullish stance . Clearly, Indian equities have been under pressure since September 2024, as a combination of profit-taking, growth concerns and downward revisions of earnings estimates have led to large outflows from foreign investors. Foreign institutional investors pulled out USD 8.4bn from Indian equities in January itself. However, the potential for the recent budget announcement to uplift the sentiment, which combined with India’s more reasonable valuations, can help stabilise the flows. Domestic flows into the equity market continue to be supportive. Indian equities now trade in-line with their historical P/E premium over Asia ex-Japan equities Source: Bloomberg, HSBC Global Private Banking & Wealth s of 2 February 2025. Past performance is not a reliable indicator of future performance. From a sectoral perspective, we see the budget announcements as being positive for the healthcare, financials and consumption-related sectors. Lower personal income tax should lead to more disposable income for the middle-income households, better debt servicing and greater demand for credit cards and investment products. The healthcare sector should benefit from the push for medical tourism under the “Heal In India “ program. The impact on Industrials appears to be mixed, as the slower capex growth might be mildly negative whereas higher disposable income could lead to stronger demand for automotives. The FY26 budget doesn’t alter our bullish stance on Indian local currency government bonds. At the margin, the reduction in net supply is a positive. While the index-inclusion linked flows have stagnated over the past few months, we expect them to resume once the global uncertainty eases. We continue to expect a cumulative of 0.5% rate cuts by the Reserve Bank of India (RBI) in 2025. Therefore, investors are likely to not only receive the relatively attractive coupons, but also potential capital appreciation by maintaining exposure to bonds. https://www.hsbc.com.my/wealth/insights/market-outlook/special-coverage/indian-budget-threading-the-needle/

2025-02-03 12:02

Key takeaways As widely expected, the Federal Reserve kept rates unchanged at 4.25-4.50% unanimously. It seems this pause was just that and not a consideration of a change in the direction of monetary policy. We no longer expect the first cut this year to come in March but look for three rate cuts delivered in 0.25% steps at the June, September and December policy meetings. During the press conference, Jerome Powell continued to stress that the current stance of monetary policy is "meaningfully above the neutral rate”. He said that the unemployment rate has stabilised at a low level in recent months, and labor market conditions remain solid while economic activity has continued to expand at a solid pace. Powell also stated that “Inflation has eased significantly over the past two years but remains somewhat elevated relative to our 2% longer-run goal”. We maintain our overweight on US equities as we believe the fundamentals remain favourable for solid equity market returns, underpinned by lower interest rates, lower inflation, deregulation, AI adoption, and economic stability. Fixed income returns could be more muted as rates fall more slowly with the extension of the monetary policy easing cycle. What happened? As expected, the Federal Reserve kept rates unchanged at 4.25-4.50%. The decision was unanimous. We still forecast 0.75% of gradual rate cuts in 2025, which will be delivered in 0.25% steps at the June, September and December policy meetings, followed by no change in policy rates in 2026. As a result, the federal funds target range will remain 3.50-3.75% for both end-2025 and end-2026. Fed Chair Jerome Powell said on at least five separate occasions that the Committee did not need to be “in a hurry” to make further adjustments to policy rates. The FOMC’s latest assessment follows another year of economic growth outperformance relative to expectations. Powell continued to stress that the current stance of monetary policy is “meaningfully” above the neutral rate”. If policy is still that restrictive, it would not take much to restart interest rate cuts. If policy is much closer to neutral, the bar to restart cuts is higher. Fed easing will be less aggressive than the last tightening cycle Source: Bloomberg, HSBC Global Private Banking as of 29 January, 2025. Forecasts are subject to change. On the economy, Chair Powell stated that “the unemployment rate has stabilised at a lower level in recent months, and labour market conditions remain solid” and that the “economic activity has continued to expand at a solid pace”. Powell said the Fed feels it is “meaningfully restrictive” and doesn’t need inflation to hit the 2% target to begin easing again. He said, “the Fed just needs to see further progress”. Inflation has eased significantly over the past two years but remains somewhat elevated relative to the 2% longer-run goals. Housing inflation is set to decline this spring. Tariffs were lifted from 2018-2019 and US inflation slowed in the subsequent year. Strong US dollar means imported goods prices should remain muted. DeepSeek deflation: the innovation implied by this next generation of AI, suggests the possibility of less demand for computers, storage and energy in future. However, it remains to be seen if AI adoption could pick up pace due to this lower price point, thereby fuelling higher productivity and lower prices. Investment implications US economic growth remains healthy and well above the long-term trend. Dollar strength should continue as other central banks could ease more aggressively. US dollar-denominated investing should remain popular with global investors, driving asset flows and the currency. The technology revolution is just beginning and the productivity enhancing technologies that will diffuse throughout the economy should lift growth, reduce costs and expand profitability. The reindustrialisation of the US continues, and construction of new manufacturing facilities remains quite strong. Near/onshoring of jobs and the securing of supply chain remains a major theme for US corporations. This will continue to be a factor stabilising labour markets and creating wealth. For US equities, the fundamentals remain constructive. However, with a less aggressive Fed easing cycle, the slightly more hawkish tone to monetary policy will have to be offset by increased fiscal stimulus and better economic growth, which the Fed is forecasting. This would allow the earnings-led bull market to broaden out. From a sector perspective, interest rate relief will probably be less dramatic, and the growth imperative remains. Interest rate sensitive sectors should see a less emphatic stimulus from lower market rates. The growth emanating from technology revolution should be positive for the technology, communication services and healthcare sectors. Also, the increased demand for energy from the adoption of these technologies is positive for industrials. Lower interest rates, a positive slope to the yield curve and less regulation should culminate in better economic growth, increased M&A and possibly more IPOs, all of which would be positive for the financial sector. Fixed income returns could be more muted as rates fall more slowly with the extension of the monetary policy easing cycle. If the ongoing backdrop of solid growth is coupled with further disinflationary momentum in the next months, it will extend the Goldilocks scenario. This would be supportive of a risk-on stance, and therefore, we remain overweight on US equities in our asset allocation. https://www.hsbc.com.my/wealth/insights/market-outlook/special-coverage/cautious-fed-pauses-awaiting-further-evidence-of-lower-inflation/

2025-02-03 07:04

Key takeaways Divergent macro trends and trade policy uncertainty resulted in the Fed diverging from other Northern Hemisphere central banks last week. The ECB, Bank of Canada, and Riksbank all cut rates, and the Bank of England is expected to follow suit this week. Argentina has seen an extraordinary turnaround. Last year, it delivered its first fiscal surplus since the 2000s after recording a near 7% deficit in 2017. As world leaders and CEOs return from the ski slopes of Davos Klosters, and the recent annual meeting of the World Economic Forum, a key takeaway is that global risk perceptions have shifted dramatically. Chart of the week – After the AI wobble, what next for investors? Last week saw a market wobble caused by the potential disruption of AI start-up DeepSeek to the US-dominated AI business model. It’s too early to argue for a big negative impact on AI capex or the wider US tech sector, and many software names could be poised to benefit. Access to cheaper AI could even create an explosion in demand – we call this “the Jevons Paradox in action”. While equity volatility spiked last Monday, markets have regained lost ground. Yet, last week’s developments added significant uncertainty in a sector priced for perfection. With Q4 2024 earnings season under way – and big tech profits in focus – it makes sense for investors to be more cautious on the sector. A key theme for 2025 is that investment market performance could “broaden out” into other sectors, rather than remain heavily concentrated in US mega-cap technology. Market performance this year already has a flavour of this theme. If growth can stay resilient and profits deliver as expected, a rotation into laggard sectors and regions, as well as a “deepening” across the market-cap spectrum, should continue. That could boost performance in equal-weighted and factor-balanced equity strategies. Recent market volatility has also been driven by other challenges – including tariff uncertainty, a shifting scenario for the Fed, and stretched valuations (with bond yields rising and super-normal profits more uncertain). That means the market set up is for a “volatile Goldilocks” – a broadly constructive macro backdrop of disinflation, rate cuts, and profits resilience, but with more uncertainty creating a much bumpier ride for investors. Being active and opportunistic will be key in 2025. Market Spotlight EM in the Year of the Snake Last week’s Lunar New Year marked the arrival of the Year of the Snake – the snake being a symbol of wisdom, adaptability, and renewal. Faced with heightened macro and geopolitical uncertainty, as well as recent volatility in high-growth sectors like AI, these traits will be essential for global investors in 2025. One area where flexibility could be particularly important is in navigating trends in emerging markets, given recent signs of rotation in some of last year’s laggards. Latin American markets – which underperformed in 2024 – have been EM pace-setters in 2025. In US dollar terms, the MSCI EM LatAm index is up by nearly 8% this year, with Brazil (+9%), Mexico (+5%), and Chile (+6%) leading the recovery. In Asia, South Korean stocks have also halted last year’s sharp sell-off, with a 9% rise in January. And after a tentative start to the year, Chinese markets show signs of positive momentum versus regional peers like India, and could gain traction on further policy support this year. While heightened volatility remains a risk for investors in 2025 – particularly given trade policy uncertainty – January’s momentum pick-up could be early evidence of a “broadening out” in markets. That could offer opportunities for adaptable investors. Kung Hei Fat Choi! 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 31 January 2025. Lens on… Fed’s the odd one out Divergent macro trends and trade policy uncertainty resulted in the Fed diverging from other Northern Hemisphere central banks last week. The ECB, Bank of Canada, and Riksbank all cut rates, and the Bank of England is expected to follow suit this week. While conditions across these economies are not identical, broadly speaking, growth has been subdued and there is some concern that uncertainty over, or the implementation of, US trade tariffs is more of a problem for activity than inflation. In the US, still-robust growth and a solid labour market allowed the Fed to leave the funds rate unchanged and await details on the new US administration’s policies. While the Fed is not in a hurry, rate cuts later in 2025 remain likely, given “meaningfully restrictive” policy. The base case is that targeted implementation of tariffs against a backdrop of cooling wages results in some cooling of growth and some bumpiness in inflation, but does not unsettle inflation expectations or unnerve the Fed. Overall, an outlook of no recession, further rate cuts, and profits resilience is a largely constructive mix for risk assets and fixed income in 2025. Argentina’s turnaround Argentina has seen an extraordinary turnaround. Last year, it delivered its first fiscal surplus since the 2000s after recording a near 7% deficit in 2017. Monthly inflation collapsed from 25% in December 2023 to under 3% a year later. These shifts helped its hard-currency bonds return a staggering 100% in 2024. Despite the shock therapy and its social costs, the government is popular and may win a greater share of representation in Congress in October’s mid-term elections. So far so good. But there are lingering questions about external adjustment. The country has limited ability to meet rising external debt-servicing needs in the coming years. Fear of stoking inflation means its currency can only be devalued gradually via a ‘crawling peg’, limiting the scope for an improvement in the balance of payments. A new deal with the IMF for external financing is in the works but may be delayed until after the mid-term elections. Overall, Argentina has an improving structural story. While further reform and IMF funding is needed, it is becoming a fiscal ‘saint’ just as many of its EM peers are turning into fiscal ‘sinners’. Top risks in 2025 As world leaders and CEOs return from the ski slopes of Davos Klosters, and the recent annual meeting of the World Economic Forum, a key takeaway is that global risk perceptions have shifted dramatically. Topping the list of concerns in this year’s Global Risks Report is ‘state-based armed conflict’ – which barely featured as a risk in the same survey two years ago. Extreme weather, geoeconomic confrontation, mis/disinformation, and societal polarisation together make up the top five fears. AI was also a major talking-point in this year’s discussions, with leaders focusing on its potential to revolutionise industries as well as concerns over economic disruption, job displacement, and regulatory uncertainty – many of which feed into the top risks. Broadly, this year’s survey reflects a sense that some of the biggest perceived risks to global stability concern geopolitical tensions and climate change. Some analysts see a shift towards an increasingly multi-polar world where fiscal activism, climate change and technology will dominate. It implies a regime of more volatile inflation and rates amid greater macro uncertainty; more complex asset allocation solutions will likely be required. 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 31 January 2025. Key Events and Data Releases Last week The week ahead Source: HSBC Asset Management. Data as at 7.30am UK time 31 January 2025. For informational purposes only and should not be construed as a recommendation to invest in the specific country, product, strategy, sector or security. Any views expressed were held at the time of preparation and are subject to change without notice. Market review Risk appetite soured on an AI-driven sell-off in US big tech and IT stocks early last week, with the US DXY dollar index range-bound. US Treasuries rallied, outperforming Gilts and Bunds. The FOMC left policy unchanged, with Fed chair Powell emphasising “no rush” to alter its policy stance. The ECB lowered rates by 0.25%, with ECB president Lagarde signalling further gradual easing. US equities were mixed as investors digested the latest Q4 earnings updates. The Euro Stoxx rallied further, with Germany’s Dax index reaching a new high. Japan’s Nikkei lost ground as the yen firmed versus the US dollar. In EM, most Asian stock markets were closed for the Lunar New Year holiday, with India’s Sensex eking out a small rise. Brazil’s Bovespa index increased further, with Banco do Brasil hiking rates another 1%. In commodities, oil weakened. Gold and copper were also on course to close higher. https://www.hsbc.com.my/wealth/insights/asset-class-views/investment-weekly/after-the-ai-wobble-what-next-for-investors/

2025-01-28 08:06

Key takeaways The Trump administration’s pro-growth, pro-innovation policies are positive for US equities but may create interest rate and inflation uncertainties. As concerns over a growing deficit have driven real US Treasury yields to attractive levels, we extend our US Treasury and global investment grade duration to 7-10 years. A multi-asset solution with active management can help balance growth and resilience. Gold is also a diversifier to mitigate geopolitical and policy risks. US big banks led Q4 earnings results to the upside. Higher equity valuations are justified by higher RoE, liquidity, and the tech and AI-driven sector composition. We continue to favour US Technology, Communications, Financials, Industrials and Healthcare, which are supported by structural trends and policy tailwinds. Higher US tariffs will pose additional challenges for the Eurozone while the UK Chancellor is under pressure to cut spending amid higher gilt yields and a growing deficit, leading to our downgrade of UK stocks to neutral and an extension of gilt duration. In Asia, a strong earnings growth forecast for the healthcare sector supports an upgrade to a neutral position. We prefer Japan, India and Singapore the most in the region. China met the GDP growth target of 5% for 2024. A focus on bolstering domestic demand remains critical amid potential US trade tariffs. https://www.hsbc.com.my/wealth/insights/asset-class-views/investment-monthly/us-earnings-momentum-continues-as-trump2-begins/

2025-01-28 08:06

Key takeaways DeepSeek, a Chinese AI lab, surprised global markets and US stocks off-guard after they released their R1 large language model, explaining in a detailed paper how to build a LLM (Large Language Model) on a tight budget. This is both because of its supposed outperformance vs other AI models and the claims of much lower development costs. We believe it is too early to know how much this will impact the AI capex trend. While chips could remain volatile for now and most exposed, the development of much better performing models could help other parts of the AI-ecosystem, in particular the users, as it may raise productivity in areas we like such as next gen medicines, automation and cybersecurity. We continue to broaden our equity exposure to names outside of the Mag-7 as we think earnings growth is broadening. Mag-7 stocks have already been losing leadership as investors position more in cyclical sectors for the new US administration, and we think this will continue. We maintain our overweight on global and US equities and continue to adopt an active and multi-asset approach to exploit volatility. What happened? DeepSeek’s AI assistant’s very rapid rise to the top of Apple’s download chart has led to a sharp fall in AI-related stocks. Founded in 2023, the company claims it used just 2,048 Nvidia H800s and USD5.6m to train a model with 671bn parameters, a fraction of what Open AI and other firms have spent to train comparable size models, according to the Financial Times. This has triggered a debate about whether US Tech companies can defend their technical edge and whether the recent CAPEX spend on AI initiatives is truly warranted when more efficient outcomes are possible. However, it seems that the very low cost has been achieved through “distillation” or is a derivative of existing LLMs, with a focus on improving efficiency. This amount also seems to only reflect the cost of the existing training, so costs seem to be understated. It remains a question how much DeepSeek would be able to directly threaten US LLMs given potential regulatory measures and constraints, and the need for a track record on its reliability. That said, the debate about what all of this means will probably create pricing pressure for the industry. In addition, there could be reduced CAPEX; this is particularly the case as there had already been a nagging doubt with many investors about the return on investments, contributing to the pronounced market reaction. Therefore, it will be very important to watch the announcements on this point during the earnings season, which may lead to more short-term two-way volatility. More efficiency and lower prices will certainly be good for the users. It could also accelerate usage and help create new use cases, which in turn should support the demand for chips in the medium-to-long term. Investment implications We think volatility may remain in the short term for chip and AI-model related stocks in particular. We also think many analysts will wait for more clarity from discussions during the earnings season to change any forecasts or target pricing. We reiterate our view that it is important to continue diversifying exposure, as we have been doing. For the AI theme, this means diversifying into the adopters and beneficiaries of AI (both LLM and broader AI), including areas such as automation, healthcare innovation, cybersecurity and services firms, which will benefit from increased efficiencies. It also means diversification beyond the technology sector, as earnings growth is picking up outside of the Mag7, while it is likely to slow (albeit from high levels) for the Mag7. https://www.hsbc.com.my/wealth/insights/market-outlook/special-coverage/deepseek-news-and-its-impact-on-the-ai-ecosystem/