2024-10-28 07:04

Key takeaways Nearly one-third of S&P 500 firms have reported results for Q3, with the analyst consensus looking for year-on-year earnings growth of 3.5% overall. So far, progress looks good. Sovereign bond investors are in a jittery mood ahead of the UK Chancellor’s inaugural Budget on 30 October. EM expected returns look good. The risk premia for asset classes like stocks, EM local-currency bonds, and Asia high-yield bonds are elevated because policy rates are expected to be a bit higher over the next decade. Chart of the week – EM versus DM growth gap widening Last week’s jamboree of finance chiefs and policymakers at the annual meetings of the IMF and World Bank in Washington confirmed what many investors already know; inflation is in retreat and global growth remains impressively resilient. The soft landing is here. For the US, UK, Japan, Southern Europe, and some Emerging Markets (EM), the IMF has upgraded its 2024 scenario. It’s a triumph for central bankers. But the challenge for investors, of course, is assessing how much of this good news on the economy is already priced in. Heading into 2025, global growth is forecast to continue at 3.2%, adjusted for inflation. US growth is expected to be more normal, at just over 2%. Europe is projected to pick up, with the cost of living shock fading, to 1.2% in the eurozone and 1.5% in the UK. And EM economies are expected to grow at 4.2% on average – with country differences. Asia looks best placed in EM, with 2025 GDP at 5%. India is still expected to be the fastest growing major economy in the world (IMF forecasts 6.5% GDP in 2025). And frontier economies are also projected to grow strongly next year. Faced with this macro scenario of the major economies drawing closer together in their growth rates, investors might well ask whether the era of “US exceptionalism” is coming to an end? Can Europe, Australasia, and the Far East (EAFE) and EMs go from being market laggards to leaders, and outperform the US? Market Spotlight X-factor strategies We’ve seen a rotation in global stock markets this year, and the new analysis of September’s performance sheds light on where that’s been happening. Quant multi-factor strategies work by weighting to ‘factors’ like Quality, Value, Momentum, Size (smaller-cap) and Low Risk. So, their performance explains a lot about changing trends in market sentiment. This year, with so many previous winners (especially in the tech sector) still outpacing the market, Momentum has been strong. But with the Fed cutting rates in September, we saw a shake-up of factor returns during the month. The defensive Quality factor performed best, setting the pace in North America, Asia Pacific ex-Japan, and emerging markets. The market leadership is broadening out across sectors as global policy easing continues and central bankers seek to make the soft landing stick. And with the cyclical Size factor also relatively strong in North America, Europe, and EMs in September, it showed that smaller-caps are very much part of that rotation mix, too. Value ranked in the middle of factor returns globally, but it did perform well in Europe – hinting that investors are feeling more confident about looking beyond US markets for opportunities. 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. Investments in emerging markets are by their nature higher risk and potentially more volatile than those inherent in some established markets. 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. Source: HSBC Asset Management. Macrobond, Bloomberg. Data as at 7.30am UK time 25 October 2024. Lens on… Upbeat earnings Nearly one-third of S&P 500 firms have reported results for Q3, with the analyst consensus looking for year-on-year earnings growth of 3.5% overall. So far, progress looks good. Three of the top five earnings growth contributors in Q3 are expected to be Tech firms, with the other two in Healthcare. Based on results versus expectations, Tech, Real Estate, Financials, Staples, and Healthcare have all come in better than average. But Energy and Materials have been at the lower end. Tech companies are expected to dominate the earnings pie for several quarters to come, but a lot rests on high expectations. The S&P Tech sector currently trades on a trailing price-book value of 12.3x. That’s higher than before the sharp sector sell-off in 2021 (see chart) and surpasses its previous all-time high of 12.1x in 2000. As a comparison, Tech stocks are up by nearly 600% over the past decade, while Real Estate and Consumer Staples are up by only 40% and 60% respectively. With continuing signs of a rotation in sectors and styles, stretched Tech sector valuations demand caution. Deficits forever? Sovereign bond investors are in a jittery mood ahead of the UK Chancellor’s inaugural Budget on 30 October. Like many developed and EM economies, the UK’s parlous fiscal position is a major challenge. The fiscal deficit is at levels usually associated with wartime, while the net debt/GDP ratio has risen to just shy of 100% in 2023, with the IMF expecting that to worsen. Higher GDP growth would be the optimal way to fix it, but UK productivity has flatlined since the global financial crisis. Investment as a percentage of GDP has consistently lagged the US and eurozone since the early 1990s. Major political and economic obstacles make austerity-like policies unworkable. Governments are compelled to pursue active fiscal policies to address inequality, low productivity, and population ageing. The multi-polar world and climate change also require extra spending on defence and the transition to net zero. The upshot is big deficits could be with us for a while. Despite UK inflation trending lower, gilt yields have remained stubbornly high – a signal that investors are uneasy. EM opportunity EM’s expected returns look good. The risk premia for asset classes like stocks, EM local-currency bonds, and Asia high-yield bonds are elevated because policy rates are expected to be a bit higher over the next decade. Good starting valuations mean that, over the long run, investors should be able to harvest income, or achieve capital gains. In addition, EM currencies could boost potential returns further. The FX valuation model tracks the misalignment of current spot rates versus a fundamental valuation anchor. And it incorporates how macro fundamentals will evolve over the next decade to move FX equilibrium. Geopolitical risks and a new multi-polar world mark a profound shift in the economic regime. But EM investors could benefit as macro trends in Asia and the Global South diverge from the West. 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. Source: HSBC Asset Management. Macrobond, Bloomberg, Datastream, Data as at 7.30am UK time 25 October 2024. Key Events and Data Releases Last week The week ahead Source: HSBC Asset Management. Data as at 7.30am UK time 25 October 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 Global markets struck a cautious tone last week ahead of the looming US presidential election on 5 November, and key US payrolls data this week. 10-year US Treasury yields reached a three-month high of 4.26% before easing later last week, with the US dollar also rallying to a three-month high mid-week on uncertainty over the timetable for Fed rate cuts. In US stocks, both the large-cap S&P 500 and small-cap Russell 2000 declined early last week despite generally positive Q3 earnings news. The pan-European Stoxx Europe 600 fell, with Japan’s Nikkei 225 also seeing declines on political uncertainty ahead of the general election on 27 October. In emerging markets, China’s Shanghai Composite was a rare positive performer, but India’s Sensex and Korea’s Kospi indices both lost ground. In commodities, the oil price was broadly stable, and gold traded just short of record highs. https://www.hsbc.com.my/wealth/insights/asset-class-views/investment-weekly/2024-10-28/

2024-10-24 08:06

Key takeaways Geopolitical risks and US election uncertainties buoy gold… …but this is not supported by physical demand… Firm USD and US yields could tame fresh gold rallies. Recently, uncertainties around the US elections on 5 November and geopolitical concerns have been supporting gold. The near-term upward trajectory shows no signs of easing. Gold prices could go even higher over the near term and into 2025, but the rally may become overstretched and possibly be curbed when the USD and the US yields stay firm, in our precious metals analyst’s view. Our precious metals analyst believes gold has entered a new price paradigm, which will probably remain above USD2,200 per ounce, supported by a mix of bullish factors, including “safe haven” demand prompted by geopolitical risks and economic uncertainty. Mounting fiscal deficits are also encouraging gold demand. Global monetary easing and expectations of further easing have increased speculative demand for gold. Nevertheless, a combination of physical and financial market factors may tame the rally, as we move through 2025, with gold prices likely to be moderately lower by end-2025. In the physical market, high gold prices are driving outright declines in gold jewellery purchases, alongside lower gold coins and bar demand. At the same time, global gold output is on an upward trajectory at least for this and next year, with mining being the biggest single source of new supply to the market. High gold prices are also stimulating scrap supply of gold. In other words, gold may face headwinds from weaker demand for jewellery and bar & coins and rising mine supply and recycling levels. Gold exchange-traded funds (ETFs) continue to liquidate holdings, and central bank demand may also moderate in the face of high prices. Source: Bloomberg, HSBC Source: Bloomberg, HSBC It is also worth noting that gold is an asset without a yield and is priced in USD, so gold prices generally move inversely to the USD, albeit not in lockstep. In our view, the USD is likely to stay firm into 2025, supported by relative high yields (as other central banks are likely to ease if the Federal Reserve cut rates further) and its “safe haven” status (amid geopolitical risks and global growth uncertainties). As the global monetary easing cycle continues, further rate cuts may be progressively less supportive of gold prices, especially when the inverse relationship between the USD or US yields (Chart 1 and Chart 2) and gold may be restored. All things considered, our precious metals analyst thinks that gold will probably have a volatile 2025, with a much wider trading range (relative to its 10-year average annual range of USD300 per ounce), before moving moderately lower into end-2025. https://www.hsbc.com.my/wealth/insights/fx-insights/fx-viewpoint/flash-2024-10-24/

2024-10-24 07:05

Key takeaways Economic growth is on track to slow in H2 2024. Headline inflation rate fell below the 2% target … … but services inflation and wage growth remain too high. Source: HSBC … but services inflation and wage growth remain too high A looming fiscal event (30 October) and upcoming monetary policy meeting (7 November) have placed an even greater focus on the latest round of UK economic data and what they could mean for policy. For monetary policy, we see the Bank of England opting for a second 25bp cut in Bank Rate, taking it to 4.75%. However, the inaugural Budget for Chancellor Reeves is more uncertain. The health of the public finances and additional hole identified in July means we expect a little more of everything: spending, tax and borrowing, as well as a change to the fiscal rules. While policy unknowns have put many in no man’s land – consumer confidence fell 7pts in September to its lowest level since March – official data have been more benign. GDP growth in August was 0.2% m-o-m, the first expansion since May and driven largely by a rebound in automotive manufacturing. Meanwhile, indications for output growth in September are positive with retail sales up 0.3% m-o-m and the PMI survey recorded an 11th month of expansion. That said, soft underlying momentum means growth is on track to slow on a quarterly basis: we forecast 0.3% per quarter for Q3 and Q4 2024. Inflation falls below 2% but it’s the labour market that carries the risk Headline CPI inflation rate fell to 1.7% y-o-y in September, a faster moderation than we and the Bank of England had expected. This marked the first reading below the inflation target of 2% since April 2021. By far the biggest downward contribution was from the transport category: a decline in petrol prices on the month and a larger than normalSeptember fall in airfares. However, for the BoE, their focus will be on services inflation, which moderated to 4.9% y-o-y from 5.6%. On a preferred gauge that adjusts for volatile prices such as airfares, the moderation in ‘core’ services inflation was smaller. That could keep some on the MPC cautious that the risk of persistent price pressures remains. They could find comfort in the fall in private sector wage growth to 4.8% in August, a 28-month low, as well as vacancies, payroll data, and surveys all suggesting a softer labour market. Yet the official Labour Force Survey pointed to a retightening. The unemployment rate fell to 4.0% in August and employment rose 373k, albeit the reliability of that survey is in question. Overall, with ambiguity in data and wage growth still too high to be consistent with a 2% inflation rate over the medium term means some MPC members may want to see further progress in both wage growth and services inflation, consistent with our view that rates will be cut more meaningfully in 2025. Source: Macrobond, ONS Source: Macrobond, ONS, HSBC forecasts Source: Macrobond, ONS, HMRC https://www.hsbc.com.my/wealth/insights/market-outlook/uk-in-focus/2024-10/

2024-10-24 07:05

Key takeaways Table of tactical views where a currency pair is referenced (e.g. USD/JPY):An up (⬆) / down (⬇) / sideways (➡) arrow indicates that the first currency quotedin the pair is expected by HSBC Global Research to appreciate/depreciate/track sideways against the second currency quoted over the coming weeks. For example, an up arrow against EUR/USD means that the EUR is expected to appreciate against the USD over the coming weeks. The arrows under the “current” represent our current views, while those under “previous” represent our views in the last month’s report. https://www.hsbc.com.my/wealth/insights/fx-insights/fx-trends/2024-10/

2024-10-22 07:05

Key takeaways Large fiscal space, but details yet to come through; stock market tools are now being implemented. Private enterprise promotion law proposed with emphasis on creating fair competition to shore up confidence. We see more fiscal stimulus forthcoming to help reach this year’s growth target. China data review (Q3 and September 2024) GDP rose by 4.6% y-o-y in Q3 supported by an improvement in domestic activity in September. The key driving force has been the recent rollout of expanded consumer trade-ins and equipment upgrading programs since August, helping to lift growth of industrial production and retail sales both in y-o-y and m-o-m terms. Retail sales grew by 3.2% y-o-y in September with home appliances (+20.5% y-o-y, from 3.4% in August) and autos (+0.4% y-o-y, from -7.3% in August) the key beneficiaries of the consumer trade-in program. Meanwhile, Industrial Production picked up 5.8% y-o-y as manufacturing sector purchases of equipment rose 16.4% year-to-date through September. Property investment declined by 9.4% y-o-y in September, although the pace moderated from the 10.2% y-o-y fall in August. Recent policy easing measures in tier-1 cities have led to stronger sales, while mortgage payment adjustments and extended loan provisions should also provide support. CPI inflation rose a modest 0.4% y-o-y in September, reflecting sluggish consumption trends in prior months. PPI deflation deepened to -2.8% y-o-y due to weak domestic activity, particularly from the property sector, as well as softer global commodity prices. Export growth softened to 2.4% y-o-y in September (from 8.7% y-o-y in August) on the back of extreme weather (e.g. typhoons in the Yangtze River Delta), global shipping events (e.g. US shipping strike) and a high base. Imports, meanwhile, rose by a muted 0.3% y-o-y (from 0.5% y-o-y in August) given a less favourable base and ongoing weakness in domestic demand. Policy support ramping up Since 24 September, many departments have held press conferences, with a package of incremental policies covering monetary support, stocks, property sector, private enterprises, people's livelihood, industry and other aspects. We detail key announcements below. Tackling the challenges The Ministry of Finance (MoF)’s 12 October press conference was a mixed result for markets. On the one hand, it fell short of announcing a specific fiscal amount but noted that additional bond issuance and fiscal deficit increases were under discussion. Indeed, Caixin reported on 13 October that policymakers are considering issuing RMB6trn of special government bonds to swap local government debt. The upcoming State Council executive meeting and the National People’s Congress Standing Committee meeting will be the key meetings to watch. On the other hand, the meeting helped to address key issues facing China’s economy: resolving local government debt and stabilising the property market. The Finance Minister stated that “a significant one-time increase in the debt limit will be used for local government debt swaps”, the strongest measure to support resolving local government debt in recent years. There is also the possibility that central government debt could be used to alleviate some of the burden. Meanwhile, proceeds from special local government bonds (SLGB) will be permitted to acquire land or unsold commercial housing for the first time to stabilize the housing market, which should help improve property developer liquidity and produce positive wealth effects to support consumption. Rejuvenating the housing market Officials from bodies including the Ministry of Housing and Urban and Rural Development, MoF and People’s Bank of China (PBoC) held a joint press conference on 17 October to introduce two key policies for the property sector: using cash resettlement to renovate 1 million homes in urban villages (i.e. compensating residents financially instead of providing alternative housing or physical relocation), and increasing lending for “whitelist” projects to RMB4trn by year end (from RMB2.23trn), to complete unfinished, partly-sold housing projects. Funding for the program is set to come from a mix of SLGB, policy bank loans and commercial bank loans. Indeed, MoF officials have noted that there is still RMB2.3trn of SLGB available to be used this year, some of which we think could go towards the housing sector. Overall, the policy stimulus measures announced since the end of September should provide tailwinds for growth, but we think that more fiscal support is needed, and a more specific package is likely on the way. More than just fiscal Fiscal aside, other policies are rapidly being implemented to shore up the economy and markets. Examples include the PBoC’s new RMB500bn liquidity facility for the stock market, the State Administration for Market Regulation’s measures to strengthen financing support for small and medium enterprises, and the new private economy promotion law from Ministry of Justice and National Development and Reform Commission to address matters including fair competition, financing, and innovation, which is aimed at boosting market confidence. Source: LSEG Eikon * Past performance is not an indication of future returns Source: LSEG Eikon. As of 18 October 2024, market close https://www.hsbc.com.my/wealth/insights/market-outlook/china-in-focus/2024-10/

2024-10-21 12:02

Key takeaways As widely expected, the ECB delivered its third rate cut of the year in October; the EUR weakened slightly. The near-term focus will probably move to the US elections, with fiscal policy becoming a growing talking point… …but the FX market should also look at the Eurozone’s fiscal policy and its challenging economic outlook. On 17 October, the European Central Bank (ECB) cut all policy rates by 25bp, the third cut of the year, taking the deposit rate to 3.25%. The ECB is increasingly worried about growth, while noting that incoming information “shows that the disinflationary process is well on track”. Our economists expect 25bp cuts in December and every meeting until April 2025. This widely expected decision saw a slightly weaker EUR, with EUR-USD tracking its yield differential (Chart 1). The near-term FX focus will probably move to the 5 November US elections. We take note of how the USD has tended to strengthen into previous US presidential elections (Chart 2). History could rhyme this time too, given the tightness of the race and unclear implications for fiscal, trade, tax, and spillovers to monetary policy (see FX Viewpoint – USD and four US election scenarios). Source: Bloomberg, HSBC Source: Bloomberg, HSBC Looking beyond the short-term reactions, we think the implications of the US elections will probably prove unhelpful for most European currencies over the medium term. Neither US presidential candidate appears to be fiscally conservative – a stance that could weigh on the EUR via stronger US growth and higher US yields under clean sweep outcomes (i.e., one party manages to win the White House and both chambers of Congress in the election).This is a contrast to the tightening of the Eurozone’s fiscal policy amid the return of the Growth and Stability Pact. A divided US Congress would reduce this EUR headwind. European countries will also be wary of US trade policies, particularly given their current weak growth outlook. While the Republican campaign appears to have a more aggressive stance on tariffs, the Democrat administration has also pursued some trade protectionism policies. The EUR and currencies with large trade exposures to the Eurozone (such as the GBP and NOK) will unlikely fare well. https://www.hsbc.com.my/wealth/insights/fx-insights/fx-viewpoint/2024-10-21/