2024-12-16 08:06

Key takeaways Rate differentials remain key to the broad USD; the Fed’s new dot plot likely in focus. The SNB surprises with a 50bp cut; the CHF weakened. The ECB delivers a dovish 25bp cut; EUR to weaken in 2025. Rate differentials remain key to the broad USD (Chart 1). With US CPI data for November coming in line with consensus expectations (rising 0.3% from a month ago) and the Federal Reserve (Fed) in its blackout period ahead of its policy meeting on 17-18 December, the USD is likely to take its cue from developments outside of the US. This includes a surprise 50bp cut by the Swiss National Bank (SNB), and a widely expected 25bp cut by the European Central Bank (ECB). On 12 December, the SNB delivered a bigger-than-expected rate cut of 50bp, lowering its key rate to 0.5%. The CHF weakened by as much as c0.8% against the USD and c0.7% against the EUR after the announcement before recovering some of the loss as SNB chief Martin Schlegel downplayed the likelihood of negative rates (Bloomberg, 12 December 2024). However, the SNB’s reluctance to cut rates below zero means the policy floor may be closer than previously thought. In turn, this means that, should economic conditions warrant further easing at that rate policy floor, FX intervention to weaken the CHF could be deployed. The SNB also repeated its willingness to do so. In the end, the SNB’s dovish stance and fundamentals may point to further CHF weakness. Source: Bloomberg, HSBC Source: Bloomberg, HSBC On the same day, the ECB delivered its fourth 25bp cut this year, bringing its key deposit rate to 3%. In a dovish move, the ECB removed the reference to policy needing to be “sufficiently restrictive for as long as necessary”, and it also lowered its GDP growth and inflation forecasts slightly (Bloomberg, 12 December 2024). While ECB President Christine Lagarde said the past analysis suggested the neutral rate could be in a range of 1.75-2.50%, our economists think if growth continues to disappoint and inflation is at target, the ECB might feel comfortable taking rates lower without necessarily having to agree on where the neutral rate is. That is why we think EUR-USD could face downside risks in 2025. The key for markets now is what will happen in 2025. If the Fed delivers a 25bp cut at its December meeting, as widely expected, market reaction is likely to be driven by its policy guidance, notably a new round of the Fed’s dot plot. Geopolitics could lend spikes of support to the “safe haven” currencies, like the USD, JPY, and CHF. https://www.hsbc.com.my/wealth/insights/fx-insights/fx-viewpoint/2024-12-16/

2024-12-16 07:05

Key takeaways Following the recent political drama in Europe, the ECB did its best not to add to the volatility and delivered the expected 0.25% rate cut, shunning any pressure to follow the Bank of Canada and Swiss National Bank which delivered 0.50% moves. Small-cap stocks are traditionally popular with investors looking for rapid earnings growth and superior returns. But at the index level, US small-caps have underperformed large-caps since 2008. Trade tariffs are back on the table post-US election – but depending on the details, not all economies will feel the impact equally. Chart of the week – EM policy divergence in 2025 The stars aligned for a broad range of EM asset classes to perform well in 2024, propelled by the prospect of Fed rate cuts, Chinese policy stimulus, and a backdrop of big valuation discounts. While this could continue in 2025, the outlook for EMs has recently become less certain, meaning investors need to be selective. In terms of risks, active fiscal policy, global trade uncertainty, and geopolitical tensions can stoke market volatility, and mean concerns over inflation are likely to persist for a bit longer in 2025. This unsettled backdrop is already creating policy divergence across major EM economies. China, for instance, has maintained a gradual approach to policy easing this year, with authorities last week formally shifting the monetary policy stance from “prudent” to “moderately loose”, helping to buoy stocks. This move came as policymakers debated the economic agenda for 2025 at the annual Central Economic Work Conference, paving the way for further easing. By contrast, India faces a more complicated trade-off between growth and inflation amid a cyclical slowdown and volatile inflation driven by food prices. While growth is expected to recover, and inflation normalise, policymakers currently remain cautious, with a “neutral” policy stance. And at the other end of the spectrum, Brazil’s central bank was forced to make a higher-than-expected 1% rate hike last week in its efforts to stabilise inflation. Put together, we think this divergent policy backdrop – with regions performing differently and facing different sets of challenges – means investors need to do their homework when deciding EM allocations. Market Spotlight Saints and sinners An interesting divergence in fiscal policy has emerged between a number of frontier and mainstream emerging markets – with previous fiscal “saints” and “sinners” switching roles. Some formerly fragile frontier economies have been embracing reforms, and boosting their sustainability metrics, just as several EMs have seen a deterioration. Frontier markets like Argentina, Ecuador, Ethiopia, Kenya, Nigeria, Pakistan, Sri Lanka, and Turkey have adopted reforms (often supported by IMF programs) aimed at mitigating vulnerabilities. Policies have included ending FX market distortions, reining in public debt by targeting primary surpluses, and accumulating foreign exchange reserves. Meanwhile, some mainstream EMs usually associated with stronger macroeconomic fundamentals and better institutional credibility have been pursuing looser fiscal policies – leading to a widening of budget deficits. Prominent examples include Brazil, Hungary, Indonesia, Mexico, Poland, and Thailand. In many cases, these looser policies have been deployed to stimulate domestic growth, and active fiscal policy will be a key feature of the global macro environment in 2025. For investors, it’s a further reminder that selectivity will be important in finding opportunities in EM and FM markets. 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. Diversification does not ensure a profit or protect against loss. Source: HSBC Asset Management. Macrobond, Bloomberg. Data as at 7.30am UK time 13 December 2024. Lens on… ECB cuts again Following the recent political drama in Europe, the ECB did its best not to add to the volatility and delivered the expected 0.25% rate cut, shunning any pressure to follow the Bank of Canada and Swiss National Bank which delivered 0.50% moves. With Chair Powell having said recently that the Fed could afford to be “a little more cautious” in delivering rate cuts, it was unlikely that the ECB would throw caution to the wind. While recent eurozone survey data have shown renewed signs of weakness, they have not been the best guide to growth in the past few years. And although the latest CPI data suggest previously sticky service sector inflation may now be softening, more progress on this front would have been needed to prompt an aggressive move by the ECB. However, further easing is coming. With an uncertain political landscape and the potential for the US to impose trade tariffs, downside risks to growth mean the cutting cycle could either extend into H2 or happen faster. This supports the outlook for Bunds, even if a narrowing of the yield gap versus Treasuries would likely be required for a big rally to take hold. Selectivity in small-caps Small-cap stocks are traditionally popular with investors looking for rapid earnings growth and superior returns. But at the index level, US small-caps have underperformed large-caps since 2008. Today, valuation divergence between them has reached historic extremes, with average price-to-book valuations of 5.0 and 2.0 respectively. One factor driving this is company profitability. Research shows that, at more than 15%, the spread of Return on Equity (a measure of profitability) has opened up between them in recent years. Large caps have become more profitable, which is reflected in higher valuations, whereas small-caps have deteriorated. For investors, it’s a reminder that small-cap investing demands nuance. Looking globally to regions like Europe and China, smaller-cap stocks are more closely tied to macro-economic cycles and activity. That can make them volatile, but it also offers potentially attractive exposure to economic recoveries. Tariffs in perspective Trade tariffs are back on the table post-US election – but depending on the details, not all economies will feel the impact equally. In emerging markets, major exporters to the US like Mexico and Vietnam could face some of the greatest risks. But across Asia, the picture is mixed. Technology and electronics centres like South Korea, Taiwan, Malaysia, and Thailand don’t have the same US exposure as Vietnam, but they are more reliant on US trade than India and Indonesia. Perhaps surprisingly, the share of China’s value-added accounted for by US domestic demand is lower than India’s although the threatened tariffs on China are larger. Perversely, the potential for China-related US tariffs could help other Asian economies. First, they could benefit from trade diversion. Second, Chinese policy easing in the face of increased tariffs could have modest positive spillovers regionally. Combined with reasonable valuations in much of Asia, the fact that tariffs are not a given and, even if they are delivered, could take some time. 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. Index returns assume reinvestment of all distributions and do not reflect fees or expenses. You cannot invest directly in an index. Any forecast, projection or target where provided is indicative only and not guaranteed in any way. Source: JP Morgan, HSBC Asset Management. Macrobond, Bloomberg, Datastream. Data as at 7.30am UK time 13 December 2024. Key Events and Data Releases Last week The week ahead Source: HSBC Asset Management. Data as at 7.30am UK time 13 December 2024. 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 lacked clear direction, with the US DXY dollar index strengthening on continued “US exceptionalism”. US Treasuries lagged eurozone government bonds on rising inflation jitters. The ECB lowered rates by 0.25%, dropping their reference to “sufficiently restrictive” monetary policy. US equities retreated from their highs, with the tech-driven Nasdaq outperforming. The Euro Stoxx 50 edged down, as the Nikkei climbed on a weaker Japanese yen, with technology stocks leading. China’s Shanghai Composite reversed early gains last week as investors digested the policy signals from the key meetings, while Hong Kong’s Hang Seng closed higher. South Korea’s Kospi index rebounded, whereas India’s Sensex declined. In Latin America, the Bovespa ended almost flat as Brazil’s central bank hiked rates by 1%. In commodities, oil prices and gold rallied, but copper edged lower. https://www.hsbc.com.my/wealth/insights/asset-class-views/investment-weekly/2024-12-16/

2024-12-09 12:02

Key takeaways Gold prices rose sharply in 2024, fuelled by geopolitical risks, rate cut expectations, and fiscal concerns. Many gold-bullish factors are likely to remain in 2025, but USD strength and relatively high US yields could weigh on gold. Gold may also face headwinds from weaker physical demand and rising supply. Gold has had a strong year, gaining c28% (Bloomberg, 5 December 2024), supported by a combination of geopolitical risks, political uncertainties, rate cut expectations, and fiscal concerns. Approaching the end of 2024, the geopolitical risk thermometer is still gold-supportive (Chart 1), but political uncertainties in the Eurozone that may weigh on the EUR and indirectly support broad USD strength could limit any further gold rally. It is worth remembering that gold being priced in USD generally moves inversely to the USD (Chart 2). Our base case for 2025 is that USD strength is likely to be supported by relatively high US yields, global growth uncertainties, and potentially its “safe haven” status. Nevertheless, there could be moments when the USD may face a squeeze lower. With this in mind, our precious metals analyst thinks that gold prices are likely to have a volatile year, moving moderately lower by end-2025. Note: Caldara, Dario, and Matteo Iacoviello (2021), "Measuring Geopolitical Risk," working paper, Board of Governors of the Federal Reserve Board, November 2021. Source: Macrobond, HSBC Source: Bloomberg, HSBC Current gold prices are high enough to limit jewellery and gold coin & bar demand, primarily in price-sensitive emerging markets, but also in less sensitive western markets, while at the same time encouraging mining and additional recycling supply. In our precious metals analyst’s view, physical gold market’s supply and demand dynamics may help curb the gold rally. Nevertheless, declines in gold prices may be limited amid geopolitical risks and their associated trade risks, with tariff concerns. Should trade frictions rise to the level where trade flows are negatively impacted, this may be highly supportive of gold, in our precious metals analyst’s view. Besides, mounting fiscal deficits worldwide, with high debt-to-GDP ratios, have aided the gold rally in 2024 and may continue to do so next year. Central banks’ demand for gold may also help. https://www.hsbc.com.my/wealth/insights/fx-insights/fx-viewpoint/2024-12-09/

2024-12-09 07:06

Key takeaways Barring a major shock between now and the new year, US stock markets are set to notch up world beating performance in 2024. Despite a good start to 2024, European equities have struggled for momentum since the summer, while US stocks have zipped ahead. 2024 has been a great year for Asia’s credit markets, especially for high-yield bonds. The benchmark JACI high-yield index has delivered double-digit returns. Chart of the week – Political realities bite in France Are good economics now bad politics? Recent developments in France are a case in point. IMF forecasts show the country’s public finances are on an unsustainable path, with the debt ratio expected to reach almost 130% of GDP by the end of the decade. But with the French parliament split into three blocs, there is limited political will to find a solution. French Prime Minister Barnier’s proposed EUR60bn budget consolidation saw him swiftly ejected from office. Amid the political impasse, France’s 10-year government bond spread over Germany has moved higher, and is now above that of Spain and Portugal. Yet, this is not a marker of an imminent crisis. In the words of financial wags, it's not a “Truss moment”. Spreads in France have not blown out in the same way they did in the UK in September 2022, when then-Prime Minster Truss introduced a budget that incorporated significant unfinanced tax cuts, worsening debt sustainability. No such measures are being touted in France for the time being. The market reaction to last week's events in France has been sanguine. That reflects today's better economic reality versus 2022 – ongoing disinflation, central bank rate cuts, and decent global growth. The ECB also provides an ultimate backstop against disorderly market dynamics in the eurozone via the Transmission Protection Instrument (TPI), even if this comes with strings attached. So, although events require monitoring, and the distinction between the eurozone core and periphery is blurring, this is likely to be a slow-burn issue rather than the start of a new crisis. Market Spotlight Hedge funds in a higher-for-longer world With inflation remaining a bit sticky in places, and fiscal activism still in play, it makes sense that investors expect a fairly shallow rate cutting cycle in 2025. The ability of central banks to insulate the economy and markets against adverse shocks – the so called “Fed put” – looks constrained. We think many alternative asset classes offer an attractive solution. Hedge funds, for example, have exhibited consistently low correlations to stocks over the past three years. This coincides with a period of higher rates and a higher dispersion of equity returns which typically benefits “stock picking” strategies that hedge funds embed. This contrasts with the 2010s when record-low interest rates were causing nearly all stocks to rise in unison. For 2025, an environment of rising uncertainty and market volatility would likely to keep dispersion high. And for those hedge funds with significant unencumbered cash balances, higher rates would provide a further boost to their total return. 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. Diversification does not ensure a profit or protect against loss. Source: HSBC Asset Management. Macrobond, Bloomberg. Data as at 7.30am UK time 06 December 2024. Lens on… Multiple concerns Barring a major shock between now and the new year, US stock markets are set to notch up world beating performance in 2024. To many, this comes as no surprise in a year where the soft landing was delivered, profit growth rebounded, and AI started delivering on its huge potential. But where does this leave us for 2025? We think US markets can continue to perform well. The prospects of tax cuts and deregulation is the icing on top of the cake that is a resilient US economy. Profit growth is likely to remain strong, even if current expectations of c. 15% for 2025 EPS growth look somewhat optimistic. But a key challenge will be valuations. Decomposing year-to-date equity returns shows multiple expansion has been responsible for the bulk of US gains this year, unlike in emerging markets – particularly in Asia - where profits and dividends have driven stocks higher. This leave US stocks trading on a 12-month forward PE of 22.0x, well above the last 10-year average of 18.6x. Stretched US valuations, along with a “broadening out” of profit growth across the world, make it important to look beyond recent winners. Europe on sale? Despite a good start to 2024, European equities have struggled for momentum since the summer, while US stocks have zipped ahead. Year-to-date, this leaves European stocks experiencing their worst relative performance to the US in close to 50 years. Investor pessimism around Europe is perhaps unsurprising. The export-dependent bloc is weighed down by weak global trade growth, exposure to soft Chinese demand, and competition from China’s lower cost carmakers. German Fortune 500 companies have announced over 60,000 layoffs this year with more expected to come. On top of the bad economic news, the region’s politics looks troubling (see main story). The outcome is a European market that now looks very cheap. MSCI Europe is on a trailing PE of 15.3x versus 30x for the US. At the sector level, discounts look particularly pronounced for consumer staples, healthcare, financials and industrials. So, although caution is warranted, some re-rating is possible – triggered perhaps by scope for China’s reflation, or government support for domestic “world-class” brands. A weaker euro helps. And bargain hunters are likely to be out in force, making M&A and buyback activity a potential boost in 2025. Asian high yield’s evolution 2024 has been a great year for Asia’s credit markets, especially for high-yield bonds. The benchmark JACI high-yield index has delivered double-digit returns. Following a tough period for the market post-pandemic, several factors have reignited investor enthusiasm. Firstly, exposure to China has fallen considerably as troubled real estate names have defaulted and dropped off indices. This “flushing out” process has resulted in a market that is not only more geographically and sectorally diverse, but also has a much lower average default rate. Many companies now operate with healthy balance sheets and easy access to cheap local funding channels. This leaves the asset class in a strong position for 2025. Yields remain higher versus historical levels and DM equivalents, providing room for further spread compression. Of course, China’s macro situation is a key risk to monitor, and there is likely to be noise around tariffs. But improved diversification – including increased exposure to fast-growing India – and ongoing China’s stimulus measures should limit the downside. 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. Index returns assume reinvestment of all distributions and do not reflect fees or expenses. You cannot invest directly in an index. Any forecast, projection or target where provided is indicative only and not guaranteed in any way. Source: JP Morgan, HSBC Asset Management. Macrobond, Bloomberg, Datastream. Data as at 7.30am UK time 06 December 2024. Key Events and Data Releases Last week The week ahead Source: HSBC Asset Management. Data as at 7.30am UK time 06 December 2024. 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 Positive risk market appetite persists despite increased political tensions, and the US Dollar index consolidated. Core government bonds were range-bound, as Fed Chair Powell stated the Fed “can afford to be a little more cautious” on the path to a neutral policy stance. In US equities, the S&P500 touched an all-time high but lagged the Nasdaq. The Euro Stoxx 50 rallied, with France’s CAC rebounding. The Nikkei 225 strengthened on higher machinery makers as the yen traded sideways (vs USD). EM stock markets were broadly higher, led by India’s Sensex index. The Shanghai Composite and Hang Seng advanced ahead of China’s Central Economic Work Conference whereas rising political worries weighed on South Korea’s Kospi index. In commodities, oil edged higher as the OPEC+’s decided to delay a plan to roll back production cuts to April 2025. Gold edged lower, while copper gained. https://www.hsbc.com.my/wealth/insights/asset-class-views/investment-weekly/2024-12-09/

2024-12-04 07:06

Key takeaways The RMB weakened to a one-year low on a higher USDCNY fixing rate and lower Chinese bond yields. It is worth monitoring whether the fixing rate will go beyond 7.20, should broad USD strength continue. Markets will also focus on the upcoming Politburo meeting and the Central Economic Work Conference. The RMB slid to a one-year low today (3 December) after the following developments: Higher USD-CNY fixing rate: The USD-CNY fixing rate was set at 7.1996, the highest rate since September 2023 (see chart below). Lower Chinese bond yields: The Chinese 10-year government bond yield briefly broke the widely watched support level of 2% to hit a record low (Bloomberg, 3 December 2024), while the People’s Bank of China (PBoC) Governor Pan Gongsheng pledged to increase counter-cyclical regulation to reduce overall financing costs in 2025 (Bloomberg, 2 December 2024). Source: Bloomberg, HSBC However, we think it is too early to conclude that the PBoC is ready to tolerate further RMB weakness. The fixing rate is still below the 7.20 mark, which puts the ceiling of the USD-CNY trading band below 7.35. Back in 2023, the fixing rate was around 7.20 for a sustained period of time, with only brief breakthroughs in June and August and a peak at 7.2258 on 30 June (see chart above). Therefore, it is worth monitoring whether the USD-CNY fixing rate will go beyond 7.20 in the coming days, should broad USD strength continue. Over the near term, markets will also focus on potential policy announcements at the Politburo’s meeting on economic work and the annual agenda-setting Central Economic Work Conference. These are expected to be held around mid- December, with the exact dates yet to be announced. Last year, the Politburo meeting was on 8 December, followed by a work conference on 11-12 December. As we approach the end of 2024, we also need to be mindful that the spread between the spot USD-CNY closing rate (16:30 local time) and the daily fixing date may narrow. It happened in 2023, with the spread narrowing quickly in December (as highlighted by the oval in the chart above) against the backdrop of the PBoC’s policy guidance, a weaker USD, and thin market liquidity during the holidays. https://www.hsbc.com.my/wealth/insights/fx-insights/fx-viewpoint/flash-2024-12-03/

2024-12-03 07:06

Key takeaways Recent turbulence events raised awareness of the impact of climate change on flying – but there are other aspects to it. Severe winter storms, heatwaves, and stronger jet streams could impact the operations of the aviation industry, in our view. The aviation industry will evolve to deal with climate change and build resilience through investing in adaptation methods. Air travel is likely to be disrupted by the impact of climate change as more severe winter storms, hotter summer heatwaves and stronger jet streams impact flight operations. In this report, we discuss how aviation-related businesses, including airlines, airports and aircraft manufacturers, need to build resilience through investing in adaptation methods to reduce the incidence of flight delays and cancellations, and the resulting human and financial costs. Did you know? The Arctic blast in January 2024 caused more than 16,000 flight delays in the US Recycled aircraft de-icing fluids could cut de-icing emissions by 40-50% Incidents of severe turbulence rose by 55% from 1979 to 2020 More than 50 American Airlines flights were cancelled in Phoenix in June 2017 due to temperatures exceeding 47°C The strongest jet streams could speed up by c2% for every 1°C of global warming Strong jet streams in winter 2024 propelled commercial aircraft to ground speeds of over 800mph vs. the usual 575mph Every 3°C increase in temperature reduces lift by 1% 14 passengers were offloaded from British Airways flights at London City Airport during the 2018 heatwaves due to weight restrictions Source: What causes air turbulence and is the climate crisis making it worse?, Guardian, 21 May 2024, Johnson E. P., Aircraft deicer: Recycling can cut carbon emissions in half, January 2012, Flight Aware. Travel checklist The need for adaptation measures There has been much public discussion about how the aviation industry has intensified climate change, but relatively less that examines the impact of climate change on the aviation industry. For example, some extreme weather events have become more frequent and severe, which could lead to air travel disruptions. Aviation has been, and will need to be, more prepared for the potential changes brought about by climate change. Impact of extreme weather on the aviation industry Source: HSBC (based on Kreuz M. et al., Effect of restricted airspace on the ATM systems, July 2016) Winter travel guide Winter storms and pre-departure check Blizzards, winter storms, snow and reduced visibility are predicted to become more intense, despite shorter winters and rising temperatures. A recent example was the January 2024 Arctic blast that caused thousands of flight cancellations and more than 16,000 flight delays in the US. That said, we think extreme weather events are likely to cause more disruptions to air travel than continuous winter weather conditions in the future. Carrier flight delays at departure by cause in the United States Source: HSBC (based on Bureau of Transportation Statistics, United States Department of Transportation) De-icing infrastructure Climate change could also increase the incidence of icy conditions, as warmer air, holding more moisture, brings higher levels of rain and snow. Indeed, small amounts of frost and ice on a plane can interfere with takeoff, so we think airlines will need to strengthen their winter infrastructure, including de-icing equipment, workers with de-icing training and aircraft with efficient de-icing technology, to ensure smooth operations. However, these could lead to higher operating costs during the winter and an increase in the financial costs of flight delays. Airports that aren’t usually affected by icing conditions would also need to be prepared for extreme weather events by upgrading their de-icing infrastructure. A disrupted polar vortex causes cold air to move south and brings unusually cold air to mid-latitudes, while a stable polar vortex would contain the cold air around the North Pole. With climate change likely to result in more frequent polar vortex disruptions, airports would need to prepare for extreme winter conditions in mid-latitude areas, such as Texas and the Gulf Coast. Summer travel guide Heatwaves and taking off Heatwaves can also impact flight operations, including the lift an aircraft can generate. Air expands when it heats up, meaning its density becomes lower, affecting lift. In general, every lift reduces by 1% for every 3°C increase in temperature. Planes, therefore, would need longer to reach speeds that can generate sufficient lift for takeoff. However, there are several ways to overcome this, including reducing the weight of the plane or extending the runway. The impact of hot air on flying is, therefore, more significant at airports with short runways. We think airports that fall into this category might need to upgrade their infrastructure (i.e., longer runway distance) to cope with the increase in the number of days with extreme heat. However, some airports have no space to expand due to geographical constraints or dense neighbourhoods in the vicinity. These airports might be disrupted the most. The impact of air temperature on aircraft lift and take-off Source: HSBC Will there be more airports operating 24/7? Aircraft manufacturers have been looking for ways to make planes lighter and more efficient during hot days. However, further gains are likely to require the invention of revolutionary new materials. Quite simply, the most effective way to avoid the heat is to take early morning and late-night flights, as these are less likely to be affected by the heat. Another advantage of scheduling more flights during the cooler hours of the day is to avoid airport workers’ exposure to extreme heat. The temperature of taxiways and runways is usually much hotter than the atmosphere around the airport. Airport operators would need to be aware of protections and guidance provided for the workers during hot days. Frequent travel guide Jet stream and cruising Climate change will lead to faster jet stream winds, the strongest projected to speed up by about 2% for every 1°C of global warming and have multiple implications for flying. Stronger jet streams can speed up flights when travelling in the same direction, as the planes get an additional push from the wind, which increases their relative ground speed. However, the four main jet streams only travel from west to east, so planes flying in the opposite direction are more likely to face stronger headwinds, causing more delays and in some extreme cases, additional or unexpected refuelling stops. The risk of encountering clear-air turbulence (CAT) - turbulence with lower moisture content that is less detectable by conventional radar - also rises with stronger jet streams. Research shows that changes to the jet stream due to global warming will increase CAT by 113% over North America and as much as 181% over the North Atlantic by 2030 to 2050, and that turbulence may cost US airlines as much as USD500m annually. Severe turbulence may cause substantial aircraft damage, and we think compensation claims from injured passengers, as well as associated maintenance and repair costs, could grow with more incidents. Advanced development of weather detection and prediction systems is important for pilots to better understand CAT and to enhance the safety and comfort of flying. This can also reduce fuel used to navigate around turbulent air, lowering operating costs. Conclusion The aviation industry is vulnerable to the increase in the intensity of extreme weather events, which could become increasingly costly. The industry needs to actively assess potential impacts and take relevant actions to adapt to climate change. In our view, investing in technological advancements in weather detection and forecasting, as well as upgrades to equipment and infrastructure, can help the industry adapt to some of the impacts of climate change in the longer term. https://www.hsbc.com.my/wealth/insights/esg/why-esg-matters/2024-11-27/