2024-10-21 07:04

Key takeaways Customer pressure and regulations are driving demand for green alternatives to traditional plastic materials. Yet, the terminology around alternative plastics is confusing and can easily lead to consumer misperception. We look at 4 key myths of alternative plastics nomenclature; we think better labelling and consumer education could help. Customer pressure and regulations are driving demand for green alternatives to traditional plastic materials. These materials are generally perceived to be eco-friendly alternatives to conventional plastic. However, the terminology around alternative plastics is confusing and can easily lead to consumer misperceptions on their sustainability. In this issue of #WhyESGMatters, we look at four key myths surrounding alternative plastic nomenclature. We explain why investors should think not only about creating plastic alternatives, but about how to encourage a circular economy mindset. This can include better labelling and consumer education. Did you know? European Bioplastics expects global bioplastics to grow at 22% annually until 2028. Packaging is the largest end market for plastics, accounting for over 35% of the total c300m tonne annual market. Products with the OK Biobased certified label mean they only have at least 20% biobased materials. An Australian survey found only 7.7% of respondents correctly rejected the statement that all bioplastics are biodegradable. Even reaching a 25% recycled target for PET by 2030 would require a fivefold increase in recycling capacity. A material classified as “compostable” will likely only biodegrade in an industrial composting, not your at home composter. Source: European Bioplastics, Leela Dilkes-Hoffman, et. Al., Public attitudes towards bioplastics – knowledge, perception and end-of-life management, Resources, Conservation and Recycling, 2019, HSBC estimates. The alternative plastic pivot Not quite plastic The pressure to reduce plastic waste, especially from single-use plastics, is mounting on corporates from regulators, investors and consumers. Among elimination and reuse solutions, companies are investing in innovative “green” alternative plastics, sometimes called bioplastics, that look and feel like traditional plastic but are made from biomass and/or have biodegradable properties – think compostable utensils and biobased water bottles. These materials are generally perceived to be eco-friendly alternatives to conventional plastics by reducing fossil fuel use, greenhouse gas (GHG) emissions and/or plastic pollution. Overview of alternative plastics: Important terms * For the purpose of this report we define these alternative plastic key terms according to the European Environmental Agency. However, there’s no globally recognised definition for these terms and this has led to widespread confusion by the general public on these materials. Source: European Environment Agency Myths versus reality Myth 1: biobased means biobased The myth The reality It’s all in the mix: Biomass and petroleum sources are often mixed to maintain the durability and quality associated with traditional plastics. There is no universally agreed-upon threshold to define the minimum biobased content needed for a material to be classified as biobased, and the existing certified labels often have low biobased thresholds. For example, the USDA BioPreferred labelling programme certifies products which meet a minimum biobased content requirement of 25%. Similarly, products with the OK Biobased certified label, often used in the EU, indicate that they have at least 20% biobased materials. Manufacturers often self-label products with biobased terminology, which brings little transparency to the actual biomass content. Other terminology like “bioplastic” “plant-based” and “renewable materials” are also used interchangeably with “biobased” on packaging, adding confusion to customers. Not all biobased products are created equally. The biomass source, the production process, and the final properties of the material can all have varying environmental impacts. It’s important to consider that biobased terminology isn’t always indicative of environmental impacts. Myth 2: Biobased means biodegradable The myth The reality It’s all down to chemistry: In fact, on a molecular level, many biobased plastics are identical to their fossil fuel alternatives and last just as long in nature. Whether these non-biodegradable biobased plastics are recyclable depends on their chemical composition. For example, some biobased (non-biodegradable) materials can be recycled through current collection infrastructure, while others need their own specialised recycling process. It’s crucial to keep in mind that just because a material is biobased doesn’t mean it’s biodegradable, and vice versa. Biobased packaging isn’t always biodegradable Source: Bio-plastics Europe, HSBC Myth 3: Biodegradable means compostable The myth The reality Try this one at an industrial facility: The term “biodegradable” gives no parameters for how quickly and under what conditions a material can biodegrade. Therefore, regulators across the globe are promoting the use of “compostable” terminology to describe alternative packaging – which means a product meets the requirements to biodegrade under the conditions associated with an industrial composting facility. Contrary to an at-home composter, these facilities expose the material to high temperatures and certain microbes essential for biodegradation. And now, the small print: Currently, many countries have adopted compostability standards for alternative plastics. These include the International Organisation for Standardisation (ISO) international benchmark for compostable plastics (ISO 17088), in addition to country-specific standards, such as ASTM 6400 in the US and EN 13432 in the EU. Generally speaking, standards classify a material as “compostable” if a minimum of 90% of the material can biodegrade in an industrial compost environment within 6 months. Myth 4: Compostable means compostable The myth The reality Don’t try this one at home: As discussed in myth three, 3rd party certified industrial composting labels are available, but this doesn’t mean that such packaging can be thrown into home or community composting facilities. Although you may find some alternative packaging labelled as ‘home compostable’, the varying environments within home composting equipment provide no guarantee that these materials will fully degrade. The take-back that isn’t: Limited access to industrial composting facilities and confusion between words like “compostable”, “home compostable” and “industrial compostable” can bring challenges to the disposal of alternative plastic materials. A UK study showed that 60% of sampled items, which were attempted to be home-compost by citizens, weren’t certified for home processing. As a result, many composting facilities choose not to take compostable packaging materials due to concerns about potential contamination of compost with chemicals in packaging and inadequate product labelling being insufficient to ensure packaging is certified compostable. Making plastic less dramatic Reimagining plastics The emerging alternative plastic industry not only faces challenges in integrating sustainable practices, but also in production scale and cost constraints. However, the landscape around alternative plastics is rapidly evolving – there are a growing number of materials, applications and products entering the market. We think scientific advancements and growing international commitments to reducing plastics will help drive innovation. In a collective initiative organised by Planet Tracker, investors with a total USD6.8trn in assets called on petrochemical companies to reduce fossil fuel reliance and eliminate toxic chemicals in plastics. Additionally, the 5th session of the Intergovernmental Negotiating Committee, which aims at developing an international legally binding instrument on plastic pollution, will happen later this year – putting plastics on the global agenda. Raising the bar on corporate accountability Many companies have set goals to replace their single-use plastics with alternatives. Nonetheless, given the opaque sustainability of these “green” plastics, we think companies need to better understand their green packaging claims and build guardrails to avoid misleading consumers. Key company considerations include: Identifying purpose – It’s essential to have a clear understanding of packaging claims and supply chain implications. Additionally, companies should assess whether the decision to use alternative plastics aligns with their strategic objectives, compared to other plastic solution, e.g. elimination and reuse. Consumer education – Whether there’s clear consumer awareness of products and their sustainable uses. This includes providing information about how materials can be properly disposed of to have the most sustainable impact. Labelling – Understanding the certification and standards in operating regions and providing credible third-party labels that bring integrity and transparency to the material. Waste infrastructure – Whether waste infrastructure is available to their customer base, and/or how they can promote more efficient recycling and composting systems. Conclusion Alternative plastics can be potential solution to the plastics problem, addressing their associated GHG emissions and waste. However, as the market for alternative plastics matures, it’s crucial to address the complexities of sustainability and consumer education to ensure that the potential environmental benefits of these can be fully realised. We think companies and investors should focus not only on creating plastic alternatives, but also on encouraging a circular economy mindset, looking for ways to reduce, reuse, and recycle plastics, as well as how readily plastics can be broken down in a non-harmful, non-toxic and cost-effective manner. We also expect to see more regulations around product labelling, which will provide customers with better clarity. Companies that choose to use alternative plastics who align with verified third-party labelling, promote consumer education, and consider readily available waste infrastructure, give themselves the best chance to take advantage of the environmental benefits of alternative plastics. https://www.hsbc.com.my/wealth/insights/esg/why-esg-matters/2024-10-09/

2024-10-21 07:04

Key takeaways At its October meeting, the European Central Bank (ECB) delivered its second rate cut in as many months and its third of this easing cycle. The private credit market has grown rapidly in recent years, driven in part by strong demand for direct lending. Reforms implemented over the past decade along with more credible monetary and fiscal policy have allowed India to begin tapping its catch-up potential and enviable demographics. Chart of the week – China’s policy ‘put’ After recently announcing new stimulus measures, China’s policymakers have yet to fill in the details on the scale of support planned for tackling issues in housing markets, local governments, and consumer confidence. But with recent press conferences unveiling new commitments, there is clear evidence of a fundamental shift in policy thinking. Speculating on the precise timing of China’s stimulus isn’t sensible. However, the “three arrows” policy strategy – liquidity, fiscal/credit, structural measures – offers a way forward to boost the economy out of the deflation trap. With further policy meetings in the calendar – the NPC standing committee in a few weeks – we may hear more soon. As for markets, many Asian investors remain cautious on Chinese stocks, arguing that it will take a long time for capital flows to return. But at 11.5x earnings, China still trades at a heavy discount to EM (14x) and global stocks (21x). With bad news still in the price, good news could be ‘doubly good’ for stocks. Another way to think about market effects is that China’s stimulus sets up a rotation trade in global stocks. China’s rally has already caused volatility in regional fund flows, affecting markets like India, South Korea, and Japan. Market Spotlight Taking geopolitics seriously Geopolitical risks have been on the rise in 2024 – but the first question might be, “so what?”. Many investors already feel well-equipped to deal with geopolitical risks. Most of the time, after all, the “geopolitical risk premium” has only a fleeting or transitory influence on investment markets. The effects unwind fairly quickly. But this time could be different. There are several reasons why investors need to take geopolitics seriously in their asset allocation considerations. First, economic power is diffusing to Asia and the Global South, with profound implications for the macro-economy and the financial system. Second, the global environment has become less friendly to international cooperation. And third, the policies and principles that have stabilised the global order over the last 30 to 40 years seem increasingly obsolete. It means that the “nice” economic regime now risks being “vile” – or, to spell it out, one of “Volatile Inflation and Limited Expansion”. If left unchecked, it implies rising prices and lower economic growth potential. For investors, portfolio strategy will need to be prepared for such an eventuality and resilient to the implications of shorter business cycles, greater market dispersion, and changed correlations. 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 11.00am UK time 18 October 2024. Lens on… ECB speeds up At its October meeting, the European Central Bank (ECB) delivered its second rate cut in as many months and its third of this easing cycle. During the summer, the expectation was that it would cut at a pace of 0.25% every other meeting. What has changed? One factor is that the Federal Reserve has become more willing to ease policy. However, there have also been important eurozone developments. First, the latest inflation numbers show tentative signs that service sector inflation is now weakening, having been relatively sticky earlier this year. Wage growth is also softening, supporting the view that inflation pressures are fading. Second, activity data have surprised to the downside – the PMIs point to a deceleration in growth during H2 2024, led by Germany. With the inflation situation improving, growth looking patchy – particularly in Germany – and the ECB easing policy at a brisker pace, Bunds have been outperforming US Treasuries since mid-September, reversing the trend seen since mid-April. Going direct The private credit market has grown rapidly in recent years, driven in part by strong demand for direct lending. There have been two key reasons for this: one is that traditional banks have retrenched from parts of the lending market, leaving private credit managers to fill the void. Another is that direct lending proved popular with private equity managers during the post-Covid deal-making boom. For private credit investors, the returns have been strong. With an average yield of nearly 12%, the asset class has outperformed other Credits. With the global easing cycle underway, returns are expected to moderate over time, but it’s expected to remain a high yield asset class. While North America and Europe currently dominate the direct lending markets, Asia is comparatively small – but growing strongly in some areas. With around 80% of total credit in Asia still provided by banks, there is growing demand for alternative sources of finance for fast-growing firms, mergers and acquisitions, and private equity deals. Navigating new India Reforms implemented over the past decade along with more credible monetary and fiscal policy have allowed India to begin tapping its catch-up potential and enviable demographics. The IMF expects India to be the fastest growing G20 economy over the remainder of the decade, with real GDP rising by almost 50% by 2029. Consistent with the recent strong and expected growth, MSCI India has outperformed MSCI ACWI by a significant margin over the last five years. Importantly, however, the Indian equity market now offers greater diversification and less volatility than in the past – MSCI India now comprises over 150 stocks versus under 80 in late 2019. Moreover, it is not just in the equity space that India stands out – its 10y government yield is among the highest for investment grade issuers and has a low correlation with global bonds. Add in an undervalued INR, which also exhibits less volatility than the average EM currency, and there is a strong case for India to be viewed as an asset class in its own right, rather than simply part of a benchmark. 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, Preqin. Data as at 11.00am UK time 18 October 2024. Key Events and Data Releases Last week The week ahead Source: HSBC Asset Management. Data as at 7.30am UK time 18 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 A solid increase in US retail sales during September buoyed US Treasury yields towards the end of last week. In stocks, the small-cap Russell 2000 saw the strongest gains, with the large-cap S&P 500 touching new highs, helped by upbeat Q3 earnings news. In Europe, the ECB cut rates by 0.25%, noting that inflation was increasingly under control but warning the outlook for the bloc’s economy was worsening. In Asia, Chinese equities pulled back for a second week following recent rallies, with a slew of macro data releases and policy expectations remaining in focus. India’s Sensex also fell, but some ASEAN markets fared better, with Thai and Indonesian equities ending positively. Brazil’s Ibovespa and Mexico’s IPC were also both on course to finish higher. Elsewhere, the oil price fell on easing fears over tensions in the Middle East. Gold once again reached new highs. https://www.hsbc.com.my/wealth/insights/asset-class-views/investment-weekly/2024-10-21/

2024-10-14 12:02

Key takeaways On 12 October, China’s Finance Ministry (MoF) unveiled a package of incremental fiscal stimulus but provided limited details of the comprehensive fiscal expansion plan. The lack of stimulus details fell short of lofty market expectations of a big-bang fiscal stimulus bonanza. Finance Minister Lan Fo’an revealed the plan to raise the local government debt limit by a large amount in a one-off effort. Other measures included accelerated deployment of RMB2.3trn of unused SLGBs issuance quota in 2024, RMB400bn additional local government bonds issuance quota for 2024, issuance of SCGBs for bank recapitalisation and greater support for vulnerable groups like students. We remain neutral on mainland Chinese and Hong Kong equities as we look for concrete evidence of a forceful fiscal stimulus plan. We favour internet stocks due to their steep valuation discounts to their global peers, healthy earnings outlook and reduced regulatory risk premium. We also like quality Chinese SOEs paying high dividends, and consumer brands that benefit from the new consumption related policy stimulus. In Hong Kong, we favour undervalued high dividend stocks in the insurance and telecom sectors, as well as select oversold property developers with strong balance sheets. What happened? China’s Finance Ministry (MoF) unveiled a package of incremental fiscal stimulus to supplement the monetary, property and capital market support measures announced on 24 September. However, it fell short of lofty market expectations of a big-bang fiscal stimulus bonanza and remains uncertain whether the full details will be available when the next State Council executive meeting and National People’s Congress (NPC) Standing Committee meeting take place in late October. Key takeaways from the MoF’s press conference include: 1) Significant capacity of the central government to raise debt and fiscal deficit – China’s Finance Minister Lan Fo’an emphasised the central government’s significant capacity to increase leverage and revealed the MoF’s plan to raise the local government debt limit by a relatively large amount in a one-off effort, which was described as the “most forceful” in recent years. 2) Proceeds of SLGBs can be used to buy undeveloped lands and unsold homes – For the first time, local governments will be allowed to use the proceeds raised by issuance of special local government bonds (SLGBs) to buy undeveloped lands and unsold homes for redevelopment into subsidised housing. 3) Accelerated deployment of RMB2.3trn of unused SLGBs issuance quota in 2024 – This comprises proceeds of issued bonds that are not yet used, plus bonds that haven’t been issued but are within the 2024 issuance quota. 4) RMB400bn additional local government bonds issuance quota for 2024 – This will be done through the unspent bond issuance quotas accumulated from previous years. This additional funding is offered to make up for the significant revenue shortfalls of local governments this year. 5) Issuance of SCGBs for bank recapitalisation – Special central government bonds (SCGBs) will be issued to fund capital injection for recapitalisation of the six largest state-owned commercial banks. This will strengthen their core Tier-1 capital and lending power to support the economic recovery. 6) More decisive fiscal reform – A series of fiscal reform measures will be launched in the next two years to improve the budget system, perfect the fiscal transfer payment system and establish a mature government debt management system. 7) Greater support for vulnerable groups – The MoF guided for greater fiscal spending for low-income families and students, with the aim of boosting household consumption. Further to the slight increases in minimum levels for pensions and medical subsidies, the MoF announced the increase in transfer payment to support students on the back of the rising youth unemployment rate. Missing details of key stimulus plans could be due to pending approvals of the fiscal deficit and debt quotas by the State Council and NPC Standing Committee. Markets will closely watch out for the agendas and policy announcements at these key meetings in late October. Investment implications We remain neutral on mainland Chinese and Hong Kong equities as we look for a forceful fiscal stimulus plan that would provide a comprehensive local government debt resolution and more significant central government debt financing to reverse the property market downturn. However, the support policies announced so far should help reduce downside risk in growth in coming months and deliver the full-year GDP growth of 4.9% this year. Mainland Chinese and Hong Kong stocks remain under-owned by global investors. The valuations of MSCI China (11.8x) and HSI (10.2x) continue to stay below their 5-year averages and represent a steep discount to the 12-month forward P/E of S&P 500 (21.9x) and MSCI World (19.7x). Acceleration of government bonds issuance will do the heavy lifting in providing extra fiscal stimulus Source: Bloomberg, HSBC Global Private Banking and Wealth as at 13 October 2024. Past performance is not an indicator of future performance. We prefer internet companies with 1) more robust earnings outlook; 2) bigger valuation discounts to their historical valuations during the reopening rally in 2023; and 3) solid financial positions with the ability to lift total shareholder returns through share buybacks and higher dividends. We continue to favour quality Chinese SOEs paying high dividends. Those with their H-shares trading at an attractive discount to their A-shares could see better Southbound flows support. We also prefer consumer brands that are better positioned to benefit from the new consumption related policy stimulus. We prefer to stay selective in mainland Chinese property companies and banks. In Hong Kong, we favour undervalued high dividend stocks in the insurance and telecom sectors, as well as select oversold property developers with strong balance sheets. The equity market should benefit from the expected Fed rate cuts in the coming months, which should help lower funding costs in the Hong Kong economy and the domestic property market. Within the A-share market, we prefer a balance of defensive high-quality SOEs with attractive dividend yields in light of the low yield environment onshore, and high-end manufacturers with global competitiveness. We also position selectively in resilient consumer stocks, including services, and consumer goods that can potentially benefit from enlarged fiscal support for household consumption. https://www.hsbc.com.my/wealth/insights/market-outlook/special-coverage/2024-10-14-mof/

2024-10-14 12:02

Key takeaways With the US elections less than a month away, the markets’ focus on polls will further intensify. The latest readings show that the race between former President Donald Trump and current Vice President Kamala Harris remains tight. Hence, it is dangerous to bet on the outcome. All potential outcomes have pros and cons for markets. A Republican victory could lead to lower taxes and deregulation, but higher trade tariffs could raise inflationary fears and slow down rate cuts, creating an offsetting headwind. A Democratic victory would likely result in less uncertainty regarding global policies and less fiscal stimulus. History shows that volatility tends to increase before the elections but eases when the result is known. Equity markets tend to rise in the 6 months after the elections, regardless of the outcome. We base our investment strategy on earnings, interest rates and growth fundamentals, which remain constructive, supporting our bullish view on US equities. We continue to lock in yields of quality bonds at current attractive levels. Bond performance should be supported by continued Fed rate cuts. What happened? 2024 is the year that half of the world’s population will have gone to the polls, and the US elections on 5 November are probably the event with the most significant implications for the global economy and markets. Polls continue to evolve, and betting agencies’ odds reflect the ups and downs in people’s views of what will happen. But actual election victory chances are determined by who gets most of the Electoral College votes, not who has the largest share of the national votes. Much will depend on those states where there is no clear majority – the so-called ‘swing states’, where just a small number of votes could determine which candidate gets the electoral votes. Those states are Arizona, Georgia, Michigan, Nevada, North Carolina, Pennsylvania and Wisconsin. We do not think it is possible or wise to invest on the basis of a likely outcome. We point to the 2016 elections, where Democrats won the popular vote, but Donald Trump moved into the white house because of a narrow victory in a few key swing states. There are also 34 Senate seats and all 435 seats in the House of Representatives up for election. The current prediction illustrates the broad range of potential outcomes and uncertainty. There are four potential US election outcomes, with no clear favourite at this stage Source: Polymarket, HSBC Global Private Banking and Wealth as at 10 October 2024 Investment implications For the overall market direction, the election result may matter less than is sometimes assumed. Across election cycles, we tend to see higher volatility leading up to the election, but the volatility will ease when the result is known. In the event of a close election result, a recount or dispute could extend market volatility, but only temporarily. The US equity market returns tend to be positive in the 6 months after the elections, regardless of the result. Our graph shows the historical annual average returns for the four possible scenarios, highlighting that equities can rally both in case of a Democratic or a Republican president. Under a Trump presidency, we would expect fiscal easing for both companies and households as a result of the extension of existing tax cuts. This tends to be positive for equity markets, but the tailwind may be offset by higher import tariffs, which would not only hurt Chinese and European exporters but also potentially raise costs for US companies and households, boosting inflation. In turn, this could lead to slower Fed rate cuts. Historical annual returns of US stocks under four scenarios Source: Bloomberg, Factset, HSBC Global Research and Wealth as at 18 September 2024. Past performance is not a reliable indicator of future performance. From a sector perspective, we have recently seen that cyclical sectors and those potentially benefitting from deregulation (including technology, consumer discretionary, and financials) have performed well when Donald Trump’s polling numbers have improved. However, a reduction in immigration could weigh on sectors like construction and hospitality, as they rely on access to foreign workers, while higher tariffs could increase the cost of inputs for the industrials and consumer discretionary sectors. If Kamala Harris wins, there are offsetting factors, too. Continuity with the Biden administration may reduce uncertainty and could be a positive for markets. However, fewer tax cuts compared to a Trump presidency could be viewed as a negative. Climate change-related investments would see policy support, while the effort to re-onshore manufacturing are expected to continue. Whoever wins the presidency, if there is no clean sweep, policies would be less ambitious, reducing the market impact. The current market action suggests that investors have been reducing concentrated positions in their portfolios to avoid being wrong-footed on election day. For example, popular overweight positions in technology have been reduced, while investors have been adding to traditionally less favoured utilities and real estate stocks. As previously noted, we have been broadening our sector exposure beyond technology to include US financials, industrials, communications, and healthcare. Given the unpredictability of the elections and our view that the volatility is only temporary, we continue to base our investment strategy on other factors, namely Fed rate cuts, solid earnings, and resilient economic growth. These supportive fundamentals continue to warrant a bullish US equity stance. As for bonds, we continue to lock in yields of quality credit. Stronger-than-expected economic data have driven up yields in the past weeks, providing an opportunity to lock them in as cash rates continue to decline. US election scenario grid Source: HSBC Global Research, HSBC Global Private Banking and Wealth as at 10 October 2024. https://www.hsbc.com.my/wealth/insights/market-outlook/special-coverage/2024-10-14/

2024-10-14 07:04

Key takeaways The USD typically strengthens in the run-up to US elections. Among the four possible outcomes, clean sweep outcomes are likely to offer greater scope for USD strength to persist. But it would be a mistake to extrapolate the initial reaction into 2025, as others factors, like Fed policy, may be more dominant. The FX market likes to distil issues, such as the 5 November US elections, into a simple binary outcome, but this would be a mistake. The complexity is not only a function of the result being too close to call, but also the result of there being numerous implications, impacting fiscal, trade, and monetary policy, among other aspects. In addition, the impact may vary over time. Historically, the USD has fared well in the run-up to US elections, likely reflecting the “safe haven” allure amid heightened political uncertainty. That is likely to be true over the coming weeks. Once the result is known, we will see the next response in the FX market (we run through four possible outcomes below), perhaps persisting for days, weeks, or months. But it would be a mistake to assume that he post-result reaction will continue to set the tone into 2025. There are plenty of ways in which the FX market could stall or reverse that initial move, for example, if actual policy outcomes fail to match expectations, or if other factors supersede political forces as the key FX drivers. A Republican clean sweep: The USD is likely to rally sharply if there are signs of future fiscal stimulus that would temper market expectations for the Federal Reserve (Fed) easing in 2025. The likelihood of higher trade tariffs would also support the USD, particularly if they feed inflation expectations and further temper pricing for Fed rate cuts. Potential corporate tax cuts and deregulation expectations might draw investment flows into USD assets. Nevertheless, the USD could face headwinds, including concerns that the Republican Party would talk down the USD or call for lower US interest rates. Rising risk appetite might also temper the “safe haven” USD. But we would expect bullish USD forces to win out initially. Nonetheless, a USD rally would have its limits entering 2025, as it would not be guaranteed that actual delivery of policy would fully match those expected by markets. A Republican presidency, divided government: The initial USD reaction is still likely to be bullish, with markets likely to anticipate higher trade tariffs (and perhaps inflation), and a more business-friendly regulatory backdrop. But the USD would not benefit from the fiscal easing expectations that a clean sweep would have brought. A divided Congress could foster a more fractious debate regarding tax cuts expiring in 2025, which could create a “fiscal cliff” mood in markets. Most likely, however, Fed policy would return as the dominant USD driver in 2025, amid fiscal gridlocks. We believe a modest initial post-election USD rally could extend into 2025. A Democrat clean sweep: This outcome could point to a sling-shot path for the USD. The initial post-election reaction is likely to be USD negative, as markets price out the potentially USD-positive aspects that a Republican presidency might have fostered. But that reflex would be unlikely to set the tone for the USD into 2025. A clean sweep could still belatedly foster market expectations for USD-positive fiscal stimulus, albeit with different elements to a Republican clean sweep. This could temper market expectations for the pace of Fed easing in 2025, with attendant USD upside. Any initial USD-negative reaction in November could reverse in 2025. A Democrat presidency, divided government: On paper, the ultimate status-quo outcome, but one which could see some initial USD weakness, amid adjusting to price out fiscal stimulus expectations. This scenario should not carry lasting implications for the USD, but other drivers, such as Fed policy and the pace of easing elsewhere, would likely be more dominant. https://www.hsbc.com.my/wealth/insights/fx-insights/fx-viewpoint/2024-10-14/

2024-10-14 07:04

Key takeaways Q3 results season kicks off this week with 8% of the S&P 500 (by market cap) reporting, and 60% expected by Halloween. Annual consensus profits growth is 10% for this year, and 15% for 2025. Many Frontier and smaller emerging market countries were relatively quick to respond to the post-Covid inflation surge, hiking rates faster than the US. Growing expectations of a soft economic landing bode well for US investment grade (IG) debt. Chart of the week – US economic data holding up September’s strong US employment report, with non-farm payrolls up 254k (versus 150k expected) and the unemployment rate unexpectedly edging lower to 4.1%, was good news for those hoping for a soft landing for the world’s largest economy. The recent run of better-than-expected economic data (see chart) also coincides with an underlying trend of disinflation – despite September’s stronger-than-expected CPI print. Leading indicators point to a further moderation in price pressures, including the shelter component which is contributing to high services inflation. August’s market wobble – partly triggered by a weak July payrolls number – now seems like a distant memory. US stock markets are notching up fresh all-time highs and the US 10-year Treasury yield is back above 4%. A soft landing is good news for global risk assets. But markets are likely to remain volatile as investors grapple with uncertainty over the economic outlook. Rates remain restrictive and the US election has the potential to usher in policy shifts. And despite better US macro news, some labour market data suggests cooling ahead. The October payrolls report could be weak again. Earnings could also disappoint – doubly bad news given stretched valuations. Market Spotlight Chinese markets take a pause for breath It was a bumpy week for Chinese stocks as investors digested the recent surge in prices and the National Development and Reform Commission’s (NDRC) announcement that it would accelerate bond issuance to support the economy. A pause for breath last week isn’t surprising given the extremity of recent market moves – the MSCI China had gained around 26% in the 10 trading days leading up to the Golden Week holiday. Investor expectations around the speed and scale of incoming fiscal support may have become too optimistic. Despite the lack of details on potential fiscal stimulus offered by the NDRC, it is likely that Chinese authorities will still unveil a meaningful fiscal package in the coming weeks. The Ministry of Finance held a press briefing on 12 October, while another opportunity for action comes at the National People’s Congress standing committee meeting later this month. 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 11.00am UK time 11 October 2024. Lens on… Analysts spooked Q3 results season kicks off this week with 8% of the S&P 500 (by market cap) reporting, and 60% expected by Halloween. Annual consensus profits growth is 10% for this year, and 15% for 2025. But on a quarterly year-on-year basis, analysts have slashed forecasts for Q3 to just 2.9% – down from 10.2% a year ago. So, what has spooked them? Economically-sensitive sectors like materials, consumer discretionary (autos/retail), and industrials have seen some of the biggest cuts. Soft economic data over the summer are likely to blame, and lower oil prices hit energy names. But from Q4, that changes. Five quarters of growth averaging 14% (double the long-run average) suggests a rosier outlook. Technology is set to be the fastest growing sector in Q3, while analysts expect energy to be the weakest. Financial stocks, which are among the first to report, are anticipated to slow. Overall, a low growth bar could offer scope for above-average beats for Q3. But with the market already trading on a relatively high PE of 21x, a soft landing and giddy profit growth from Q4 onwards appear to be priced-in, just as momentum in tech earnings is starting to slip. Value at the frontier Many Frontier and smaller emerging market countries were relatively quick to respond to the post-Covid inflation surge, hiking rates faster than the US. With real rates now significantly positive, they have room to cut – and stimulate growth – without pressuring their currencies. We’ve seen recent cuts in countries like Iceland, Kenya, Pakistan, and Serbia. It’s a trend that should act as a tailwind for Frontier valuations. It comes as valuation discounts between Frontier and both DM and EM regions remain well above their 5-year averages. Frontier markets are currently trading at a price-earnings ratio of 9.7x – a 51% discount to DMs (at 19.9x) and a 24% discount to EMs (at 12.8x). Yet, Frontier offers superior earnings growth and higher dividend yields, plus the diversification benefit of low correlation with other asset classes. This is largely being driven by structural trends like the relocation of manufacturing hubs, re-routing of supply chains, social and economic reforms (especially across Gulf Cooperation Council countries), and digitisation. ‘All in’ appeal of US IG Growing expectations of a soft economic landing bode well for US investment grade (IG) debt. With Fed policy easing expected to continue at a cautious pace, and recent jobs data mitigating recession worries, 10yr Treasury yields have risen, which has improved the attractive all-in yields that IG debt offers. IG debt has a high correlation with government bonds. So, if risk appetite falters, IG should be a defensive play as the widening in credit spreads is likely to be, at least partially, offset by the fall in government bond yields. The fundamental backdrop for IG has also been positive. Corporate profits have been resilient, and the net issuance outlook is expected to remain favourable. Above all, investor demand remains upbeat. There have been strong flows for much of this year into US IG exchange traded funds and the unwinding of popular carry trades during the summer did little to dent investor enthusiasm. The experience suggests that the marginal spread-widening required to attract buyers is smaller than it was in the past. 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 11.00am UK time 11 October 2024. Key Events and Data Releases Last week The week ahead Source: HSBC Asset Management. Data as at 11.00am UK time 11 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 Risk markets were firm ahead of Q3 earnings season in the US. Core government bonds fell on an upward surprise in September’s employment report. US CPI data also came in stronger than expected. Bunds continued to fare better than US Treasuries as investors priced in a 0.25%, rate cut at October’s ECB Council meeting. In stocks, the US S&P 500 touched a new all-time high, the Euro Stoxx 50 index traded sideways, and Japan’s Nikkei 225 inched higher. Emerging market equities weakened as investors awaited further details on potential fiscal stimulus for the Chinese economy. The Hang Seng fell sharply, with China’s Shanghai Composite also weakening after the Golden Week holiday. The Korean Kospi rebounded, with India’s Sensex little changed. In commodities, geopolitical tensions are supporting energy prices. Copper weakened, while gold was on course to finish the week flat. https://www.hsbc.com.my/wealth/insights/asset-class-views/investment-weekly/2024-10-14/