2025-10-10 07:04

Key takeaways Weakness across a broad range of indicators in September… …as existing challenges combine with near-term uncertainty. Lack of disinflation to put the BoE’s interest rate cuts on hold until Spring 2026. Source: HSBC September was a challenging month for the UK economy. Economic activity took a disappointing turn with the composite output PMI falling into contractionary territory, for its second time this year. Moreover, despite an overall pick-up in the PMIs in the third quarter relative to Q2, official data for July showed zero growth on the month. Businesses are operating in a challenging environment with tailwinds now meeting headwinds. It’s perhaps no surprise, then, that business confidence has fallen back, and spend and investment decisions appear to be in ‘wait-and-see’ mode, possibly until after the Autumn Budget when the Chancellor is expected to tighten policy by cGBP30bn by 2029/30 (FT, 2 October 2025). Similarly, consumer confidence was weak with households nervous about the past and future ‘economic situation’. Disinflationary forces have taken a break Meanwhile, price growth likely peaked in September – we forecast a 4.2% y-o-y CPI rate – up from 3.8% reported in August. In particular, food price growth was at its highest since January 2024 while the moderation in services price growth has stalled in recent months. Both are of concern due to their knock-on impact into inflation expectations and broader wage and price setting behaviour. Indeed with medium-term inflation expectations at 4% and real incomes, at best, on par with three years ago, there is a risk that a degree of ‘real wage resistance’ becomes evident in 2026, whereby households aim to offset the recent rise in the cost of living. That upside risk to inflation is possible against a backdrop of a stabilisation in labour demand. Notwithstanding elevated unit labour cost growth, outright falls in headcount appear to have been concentrated in sectors most exposed to higher labour costs while overall employment is just 0.4% lower than October 2024. Positively, the absence of outright labour market weakness puts the UK in a good position for a potential pick-up in activity, if near-term risks subside. However, we expect employment growth to remain soft while improved labour supply pushes the unemployment rate higher; helping to moderate wage growth and return inflation to target in 2027. In policy terms, we expect Bank Rate to be held at 4.00% until the Spring, when the BoE should have greater certainty that these risks have subsided and further disinflation is evident. From April 2026, we expect rate cuts to resume their “gradual and careful” path of one-cut-per-quarter. Source: Macrobond, ONS, HSBC calculations Source: Macrobond, HMRC Source: Macrobond, Bloomberg, HSBC calculations https://www.hsbc.com.my/wealth/insights/market-outlook/uk-in-focus/are-we-at-peak-UK-pessimism-yet/

2025-10-09 07:04

Key takeaways New tariffs on pharma, lumber, furniture, and kitchen cabinets are set to weigh on eurozone exports. US labour market has weakened, and inflationary pressures are building; economic data elsewhere remains resilient. We recently raised our global GDP growth forecasts to 2.6% in 2025 and 2.5% in 2026 given strong Q2 economic data. The global economic outlook continues to be dominated by trade-related uncertainties. After the much-discussed reciprocal tariffs took effect in early August, clearly impacting global trade flows, sector-specific tariffs are now grabbing the headlines. New tariff hit Over the past two weeks, the Trump administration has announced a 100% tariff on branded and patented pharmaceutical products, unless drug manufacturers relocate production to the US. In addition, a 10% tariff will be applied to softwood timber and lumber imports, and a 25% on kitchen cabinets, and upholstered wood furniture starting 14 October. These duties will, however, be capped at 15% for imports from the EU and Japan. Tariffs on films produced overseas have also been mooted. The EU is likely to be strongly affected by the pharma tariffs, even if they end up being capped at 15% as anticipated by the European Commission - imports from Ireland have already been frontloaded earlier this year. Switzerland and Singapore will also be substantially impacted. Meanwhile, Vietnam is the top import source for furniture and household fittings, and so could see some impact if trade flows dip. Source: Macrobond Source: BLS Higher US inflation While these tariffs are causing turbulence in global trade flows, the US is already experiencing an uptick in inflation, particularly in core goods. Products like headphones, motor vehicles and parts, and strikingly, bananas, are already seeing a surge in prices. However, headline CPI and PPI figures are masking these underlying pressures, as lower rental and energy prices continue to offset much of the tariff-driven impact. Source: Macrobond Source: Macrobond Weaker US jobs market Due to the government shutdown in the US, we’re entering a bit of a data vacuum at a crucial time. The US labour market is showing clear signs of cooling, and private sector data and surveys will be given even more importance until we get the next sets of official payrolls and inflation data. The Federal Reserve has already delivered a 25bp rate cut at its September meeting and we expect an additional two 25bp rate cuts this year. Resilient global data Outside the US, economic data continues to prove resilient, even if we find little reason to get too excited about a rapid pick up in domestic demand. Despite falling inflation and interest rates in most economies, we expect consumption to mostly remain subdued, with a few key exceptions. We forecast global consumption growth to moderate from 2.6% in 2025 to 2.4% in 2026. Uncertainty is clearly playing a role here and is also impacting investment across the world. So, while resilience has been a key topic in 2025, it’s hard to get too carried away. Our GDP growth forecasts We recently revised up our global GDP growth forecasts a touch, reflecting stronger than expected growth in many countries in Q2 rather than an improving outlook. The biggest upgrades are to India, parts of ASEAN and Mexico. Still, we see global GDP growth slowing from 2.8% in 2024 to 2.6% in 2025 and 2.5% in 2026. We have also introduced our 2027 forecasts which show an ongoing expansion at a trend rate of growth that is a little lower than the pre-pandemic rate for most countries, reflecting more trade friction, slower labour force growth and high government debt stocks weighing on growth. Note: *India data is calendar year forecast here for comparability. Previous forecasts are shown in parenthesis and are from the Macro Monthly dated 8 July 2025. Green indicates an upward revision, red indicates a downward revision. Source: Bloomberg, HSBC Economics Source: Bloomberg, HSBC ⬆ Positive surprise – actual is higher than consensus, ⬇ Negative surprise – actual is lower than consensus, ➡ Actual is in line with consensus Source: LSEG Eikon, HSBC https://www.hsbc.com.my/wealth/insights/market-outlook/macro-monthly/new-tariffs-take-effect/

2025-10-08 12:02

Key takeaways Front-loading and the AI hardware boom have boosted export volumes so far this year… …but US tariffs are set to take their toll, weighing on trade and investment across ASEAN. Still, this year and beyond, monetary and fiscal easing should help the region digest the impact. Indonesia is on a steady course, for now, with fiscal easing at the margin, as well as substantial rate cuts, expected to support growth at its current pace. Thailand, by contrast, is facing greater challenges, not least because fewer tourists are venturing into the kingdom than in the past. In the Philippines, less affected by US tariffs than many others, growth should tick up in 2026, though in Malaysia, still gaining market share in key sectors, exports will inevitably be affected by slowing trade globally. Singapore, too, remains exposed to the global turmoil, though it has the deep fiscal pockets to smooth over those bumps. Vietnam is taking it all in its stride, even if growth may ease. Economy profiles Key upcoming events Source: LSEG Eikon, HSBC Indonesia Growth urgency Indonesia’s post-pandemic GDP growth has been weak. Despite higher-than-expected 2Q25 GDP growth of 5.1%, we estimate that GDP is still c7.5% below its pre-pandemic trend. The highfrequency indicators like manufacturing PMI, credit, and consumer sentiment also point to softness. That being said, we think that a strong 2Q GDP print reflects a pick-up in informal sector consumption. This growth is benefitting from (1) falling inflation, which is also pushing up real wage growth; (2) the two sets of fiscal stimulus via social welfare schemes; and (3) a recent rise in agricultural production. We believe this can put a floor under growth in an otherwise unstable year but may not be sufficient to push up growth meaningfully, since formal sector consumption, the other half of the consumption pie, is not doing as well. What lies beneath the weak growth momentum is sluggish investment, which over time could hurt the capacity of the economy to create jobs. Against this macro backdrop, street protests in Indonesia intensified towards the end of August, which, we believe, resulted in a slew of policy changes. There was a cabinet reshuffle, including the appointment of a new finance minister. The government planned to transfer part of its cash balances held with Bank Indonesia (BI) to state lenders to boost lending. It revised up its 2026 fiscal deficit target, announced new social welfare schemes for 4Q25, and reintroduced its burden sharing programme for a specific government project. Some other developments we will be watching over the next few weeks include discussions around any changes in the budget deficit cap, and the BI’s mandate. Eventually, we believe reforms will be needed to stoke investment, jobs, and growth. Here, an opportunity to grow manufacturing and raise exports at a time when supply chains are being remapped may well be knocking at the door. With producers looking to remap and diversify manufacturing bases after the new round of US tariff increases, Indonesia may gain in a way it was not able to in the first Trump presidency. Encouragingly, it already produces the goods advanced economies tend to buy from Asia. Indonesia’s exports to the US look a lot like Vietnam’s export mix, comprising a lot more apparel, footwear, electrical machinery and furniture, and very different from the commodity-intensive exports to China. However, these are still rather small and need to be scaled up. Is that doable? It will not be easy, but it is not impossible either. Indonesia will have to work hard on several fronts – enhancing infrastructure development, expanding trade agreements, developing a skilled workforce, and streamlining regulatory and business practices. Indonesia runs a negative output gap Source: CEIC, HSBC Inflation is well below BI’s 2.5% target Source: CEIC, HSBC Malaysia Eyes on semiconductors Since the introduction of “reciprocal tariffs” by the US on 2 April, foreign delegations have rushed to Washington, D.C., to strike trade deals. Malaysia is no exception, particularly as it, along with many ASEAN peers, sought to avoid being the “victim” of their own success. After 1 August, the dust seems to have settled, more or less. From 7 August, Malaysia joined ASEAN emerging markets peers in the “19-20% tariff club” of exports to the US. At first glance, the 19% tariff rate is not ideal, but likely manageable. After all, Malaysia ran a trade surplus with the US of USD25bn in 2024, much smaller than Vietnam and Thailand. Its trade is also more diversified with only a 13% export exposure ratio to the US. Now that everyone in ASEAN-5 faces similar tariff rates, it’s likely that the trade and FDI dynamics will return to the starting point, meaning that Malaysia’s competitiveness remains. Recall that Malaysia was one of the main beneficiaries of earlier US-China trade tensions alongside Vietnam. Its FDI inflows have been consistently topping the region since late 2021, now standing at 4% of GDP in 1Q25 on a 4-quarter-moving average basis. The tariff rate is not the only factor, though undeniably important, in determining the attractiveness of an investment destination. Rather, FDI reflects investors’ long-term confidence in an economy, which involves a confluence of factors. However, major tariff issues remain unresolved. The lingering issue is the fate of potential semiconductor tariffs, which President Trump threatened to be 100% at first and which was later raised to 300%. For Malaysia, the stakes are high as it is deeply embedded in tech supply chains. Its chip exports to the US alone account for 6% of its GDP. However, if Apple’s exemption offers some guidance, many tech giants, who have a long presence in Malaysia, are also likely to follow suit if they make new investment commitments in the US. In fact, many of them have already done so. While the market’s attention is naturally on tariff risks, it is important to look at domestic resilience. Fortunately, Malaysia’s decent private consumption and double-digit investment growth can partially offset some external risks, at least over the near-term. We forecast 2025 growth forecast at 4.2%, and recently upgraded our 2026 forecast to 4.0% (from 3.9%) on better clarity on tariffs. In addition, inflation remains well behaved, as headline CPI decelerated to 1.4% y-o-y y-t-d as of July. Given subdued inflation momentum, we recently lowered our headline inflation forecast to 1.5% (from 1.9%) for 2025 but kept our 2026 forecast at 1.7%. Malaysia is seeing strong, albeit moderating, electronics exports Source: CEIC, HSBC BNM delivered a 25bp rate cut in July, but it was only a one-off pre-emptive one Source: CEIC, HSBC Philippines A good place Liberation Day wasn’t a good day for the archipelago. Having the most amicable ties with the US in Southeast Asia, many had expected the Philippines to garner a better reciprocal tariff rate than its competitors. Liberation Day came and, as it turned out, the Philippines was one of only two countries in Asia that saw their reciprocal tariff rate increase from the rate that was first announced back on 2 April. From 17% on 2 April, the Philippines now faces a slightly higher reciprocal tariff rate of 19%, a rate that is in line with the tariffs imposed on other ASEAN economies. FDI commitments in the Philippines, therefore, dropped and the peso weakened against the USD to as much as 58.3 when the final reciprocal tariff rate was announced. A favourable tariff differential would have been a significant opportunity for the Philippines to attract FDI and boost its manufacturing sector. But not all is lost; the Philippines still finds itself in a good place. It all starts with low inflation and how this has kept the country’s domestic engines humming. Thanks to lower rice prices, inflation has been hovering below the Bangko Sentral ng Pilipinas’ (BSP) 2-4% target band for six consecutive months and is likely to remain soft for rest of the year. With inflation finally under control, the purchasing power of households has remained intact. As a result, private consumption, the economy’s main engine, has accelerated for two consecutive quarters already. And, despite consuming more, households, especially low and middle-income ones, were finally able to save. In fact, BSP data shows that the share of households with income of less than USD500 a month that were able to put aside money for savings was almost back to prepandemic levels in 2Q25. This has pushed the national saving rate high enough to close the economy’s saving-investment gap during the quarter, making the economy less reliant on foreign capital to finance its current account deficit. All this has given the BSP confidence to quicken and, perhaps, deepen its easing cycle, paving the way for domestic investment to rise in the quarters ahead. The Philippines may have lost an opportunity, but its macroeconomic fundamentals and domestic engines are likely to ensure that growth remains intact. We expect the Philippines to be the second fastest growing economy in ASEAN at 5.5% in 2025. The share of households that can save has jumped back to pre-pandemic levels Source: BSP, HSBC Subject to stable rice prices, we expect inflation to average below 3% in 2026 Note: Shaded area represents HSBC forecasts. Source: CEIC, HSBC Singapore Time to pause It is interesting to see how quickly things change. Around “liberation day” in April, there was a debate if Singapore would enter a technical recession in 2Q25. However, 2Q growth delivered a significant upside surprise, growing 1.4% q-o-q or 4.4% y-o-y, even beating some emerging market peers. As a trade-dependent economy, Singapore has benefitted well from trade frontloading. On a y-o-y basis, manufacturing has outshone other sectors, growing 5.4% y-o-y. This is particularly evident in two of Singapore’s growth pillars: electronics and pharmaceuticals. Meanwhile, recent high frequency non-oil domestic exports (NODX) data also point in the same direction. The electronics NODX growth remained at double-digits until decelerating notably in July. This suggests to us that frontloading trade has already peaked, ready for some payback in 2H25. Outside of frontloading, Singapore also saw strong expansion in construction and services activities. The former has benefitted from infrastructure projects, and we think the trend is set to continue, given the construction on Terminal 5 at the Changi Airport. Meanwhile, Singapore’s services also saw broad-based growth. Retail sales have seen some improvements while the wholesale trade sector has been riding on the back of frontloading trade activities. The continued boom in tourism-related sectors has also been encouraging. Singapore’s visitors have recovered to 90% of the 2019 level, not far off a full recovery. All in all, we maintain our GDP growth forecast at 2.8% for 2025, beating the government’s growth forecast range of 1.5-2.5%. We expect growth to be around 1.7% in 2026. Also, inflation has taken a backseat. Core inflation has remained subdued, averaging 0.6% y-o-y y-t-d as of July, thanks to a broad-based cooling of price pressures. Given falling food prices, benign energy costs, and growth uncertainties, we expect the subdued inflation trend to continue. We lowered our core inflation forecast to 0.6% (from 0.7%) for 2025 but have kept it at 0.9% for 2026. While a low inflation environment opens the door for the Monetary Authority of Singapore (MAS) to ease again, we expect the MAS to remain on hold through our forecast horizon. The MAS’s primary focus is undoubtedly on growth, but fiscal policy should take the lead if headwinds are to materialise. Despite benefitting from front-loading, NODX momentum seems to have peaked Source: CEIC, HSBC Singapore’s inflation continues to be subdued below 1% y-o-y Source: CEIC, HSBC Thailand Taking the edge off Thailand has been swimming against the tide for quite some time now. But we believe the current should soon ease off a bit or, at least, be weaker than one might have initially expected. Despite 2Q25 growth being in line with our expectations, we recently upgraded our growth forecast for Thailand to 2.2% in 2025 and 2.0% in 2026 (from 1.7% and 1.9%, respectively). We then expect growth to improve to 2.6% y-o-y in 2027 as global trade normalises. However, we still believe Thailand will grow below its potential. The 2Q25 GDP print supports the view that Thailand’s structural impediments are likely to remain for quite some time. For instance, private consumption has moderated for the seventh consecutive quarter as households, most especially low- to middle-income households, grapple with high levels of debt. Services exports are also likely to remain weak with tourist arrivals still falling year-on-year. Local manufacturers will also continue to face tough competition from Chinese exporters looking for new markets to sell to. This tough import competition is the reason why the goods CPI has remained muted in Thailand. This is where a line can be drawn. Thailand’s goods exports have been outperforming, growing by double-digits, as importers frontloaded their demand in anticipation of tariffs. But when the imminent payback arrives, we don’t think the payback will be as bad as many expect it to be. Key here to understand is that not all the surge in exports is due to frontloading demand. Thailand’s supply chains for printed circuit boards and Hard Disk Drives (HDDs) run deep, with Thailand being the second largest exporter of HDDs globally. And the boom in AI-related investments has brought renewed demand for both. HDD exports, in particular, have grown c50% y-o-y on average over the past 12 months, representing a rejuvenation of a technology that was once thought to be outdated. Thailand will also benefit from its new tariff advantage with China. In the US market, Thailand competes with China on HDDs, computer parts, telephone parts, and pet food. From a tariff advantage of nil to 25 ppt prior to Liberation Day, Thailand’s tariff advantage for these items now ranges from 19-35%. As a result, Thailand is likely to take some market share away from China, taking the edge off the eventual payback in frontloading demand. Inflation is likely to remain low. Upside risks to growth also remain limited. But the downside risks have, thankfully, minimised enough to keep the economy afloat. AI-driven investments have led to renewed demand for Thailand’s electronics goods Source: CEIC, HSBC Cutting the policy rate to below 1.00% would bring real rates to negative territory Source: CEIC, HSBC Vietnam It’s all relative It’s not surprising to see strong growth in 2Q25 across export-oriented economies, thanks to frontloading. However, the magnitude of Vietnam’s 2Q growth surprise stands out. After strong growth of 7% y-o-y in 1Q, Vietnam’s 2Q growth rallied at an impressive pace of 8% y-o-y, outpacing regional peers. No doubt, the frontloading effect is obvious. The manufacturing pillar saw strong growth of more than 10% y-o-y, reflecting the urgency of producers and exporters to rush to ship exports to the US in 2Q25. This is also reflected in record-high quarterly exports, growing over 18% y-o-y in 2Q25. But it’s not just frontloading, 2Q growth is broad-based. The services sector saw strong performance, given decent growth in externally-oriented trade services as well as tourism-related sectors. The trend is also corroborated in retail sales, with the gap between the actual outturn and the pre-pandemic trend narrowing to 6%. Vietnam also saw the fastest tourism recovery in ASEAN. Despite 2Q being off season, Vietnam welcomed 10.7m tourists in 1H25, 20% above the 2019 level. A fast recovery in Chinese visitors, many of whom we surmise are business travellers, helped. It is even more impressive given that Vietnam does not have a visa waiver program with China. The dust has settled in relation to tariffs, with Vietnam receiving a 20% tariff. However, there are key questions yet to be answered. One area of ambiguity is the US announcement of a 40% tariff on “transshipments”, which lacks details on how such a practice is defined, and how the additional tariff would be enforced. Meanwhile, the potential semiconductor tariffs also matter significantly to Vietnam, as its electronics exports to the US alone account for 10% of GDP. All things considered, we forecast GDP growth of 6.6% for 2025 and 5.8% for 2026. This does not only account for the significant 2Q upside surprise, but also reflects a notably lower tariff rate than announced in April. However, uncertainties surrounding trade are far from over. Outside of growth, inflation decelerated to 3.2% y-o-y y-t-d through August. Despite some upside risk to food prices, given the recent worsening of the African swine flu, we expect the underlying trend to remain well below the State Bank of Vietnam’s (SBV) inflation target ceiling of 5.0%. We expect inflation to hit around 3.2% for both 2025 and 2026. Vietnam’s monthly trade surplus has shrunk Source: CEIC, HSBC But retail sales have been improving Source: CEIC, HSBC https://www.hsbc.com.my/wealth/insights/market-outlook/asean-in-focus/policy-easing-supporting-growth/

2025-10-06 12:02

Key takeaways US government shuts down for the first time since 2019. The economic impact will depend on the duration of the shutdown and whether job reductions become permanent. For the USD, its implications are open to debate, but most likely lean to the weak side. The federal government of the US officially shut down on 1 October. If it persists, US economic data releases that come from affected federal agencies will be delayed. This would include releases from the Bureau of Labor Statistics (nonfarm payrolls, CPI, PPI), the Bureau of Economic Analysis (GDP, PCE prices), and the Census Bureau (retail sales, international trade, new home sales). The shutdown will not affect economic releases that come from private-sector sources (such as ADP employment and ISM manufacturing PMI). The FX impact of delayed US data could be spun both ways. Markets are currently pricing in a c99% chance of a 25bp cut by the Federal Reserve (Fed) at the 28-29 October meeting (Bloomberg, 2 October 2025). If the shutdown means that policymakers cannot accurately assess the state of the US economy, there is a chance the Fed will choose to delay the rate cut, thereby supporting the USD. Nonetheless, we see the Fed more inclined to cut rates unless there are hawkish data surprises. This is also our economists’ base case (expecting two more 25bp rate cuts before end-2025). The private sources of data (released on 1 October) confirm the current softening labour market narrative. For example, ADP employment change showed a net employment loss in September; and ISM manufacturing PMI’s employment subindex remained below 50 (indicating a contraction) for an eight straight month in September. With a rate cut almost fully in the price, the USD is likely to remain largely rangebound over the near term, in our view. The economic impact will largely hinge on its duration. There were three government shutdowns during US President Trump’s first term (2017-2021), ranging from just 9 hours up to 35 days. A second element is whether the current shutdown results in job losses rather than workers merely being furloughed. The US Congressional Budget Office (CBO) estimates that about 750,000 employees could be furloughed this time around, and the daily cost of “compensation” or worker pay for the furloughed employees would be roughly USD400m. For example, a 10-day shutdown could be proxied as USD4bn of compensation on services not provided; relative to nominal GDP of USD30trn, this would be 0.13%. The impact on total annual GDP would be relatively small since real economic output should mostly recover after the shutdown ends. But if permanent reductions occur, the economic impact of the shutdown could be much larger. Overall, the implications of the US government shutdown for the USD are uncertain, but most likely lean to the weak side, in our view. https://www.hsbc.com.my/wealth/insights/fx-insights/fx-viewpoint/usd-us-government-shutdown/

2025-10-06 12:02

Key takeaways Elected new LDP president, Sanae Takaichi, is set to become Japan’s next PM. The JPY has weakened as markets digest the policy impact of a Takaichi victory… …but we still see room for a JPY recovery; USD-JPY is likely to fall modestly with a narrowing yield differential. Japan’s ruling Liberal Democratic Party (LDP) selected Sanae Takaichi, 64, as its new leader on 4 October (Saturday). She is thus likely to become Japan’s next prime minister (PM) at the head of a coalition government in a parliamentary vote in mid-October. The JPY opened weaker today (Monday 6 October), with USD-JPY increasing c1.5% to 149.7 (Bloomberg, 6 October at 09:00 am HKT). Heading into this LDP leadership contest, we believed it would be unlikely any Japanese leader would follow policies to weaken the JPY, as the economic reality is that a weaker JPY will further exacerbate cost of living issues. This line of reasoning still resonates with us when Takaichi noted in her victory speech that it is important to control (costpush) inflation. Japan’s likely new PM has expressed dovish views on monetary policy. However, our economists think that the Bank of Japan (BoJ) is likely to raise its policy rate to 0.75% at its 30 October meeting. Markets are now pricing in a c20% chance of a BoJ hike in October, and a c50% chance of this happening in December (Bloomberg, 6 October). USD-JPY is likely to be sensitive to the potential for an indecisive Bank of Japan (BoJ) and pro-easing voices coming back into the frame but could decline amid a dovish pivot of the Federal Reserve (Fed). The JPY is also most likely to be sensitive to Takaichi’s shaping of the FY26 budget in the coming months. Takaichi has in the past supported expansionary monetary and fiscal policies, being an advocate of the reflationary policies of former Prime Minister Shinzo Abe. Depending on coalition discussions, her election therefore likely portends looser fiscal policy, though it is not clear whether she will agree to opposition demands for a lower sales tax (beyond groceries). Instead, she has advocated cash handouts and tax rebates to lower income households (Bloomberg, 5 October). The coming days will be important to gauge her policies and from other potential members in her likely cabinet. However, a near-term factor that could help suppress USD-JPY comes down to the ongoing US federal government shutdown. The USD has tended to drift slightly lower during previous shutdowns. Other offsetting factors that should put a lid on USD-JPY include the risk of FX intervention if USD-JPY rises above the 150 big figure. In addition, narrowing yield differentials between the US and Japan, as well as a rising domestic equity market, among others, could eventually reduce net portfolio outflows from Japan. Our base case is that USD-JPY can still fall modestly with a narrowing yield differential. But given the domestic policy uncertainty, the balance of risk is tilting to a slower convergence. https://www.hsbc.com.my/wealth/insights/fx-insights/fx-viewpoint/jpy-takaichi-san-wins-the-ldp-election/

2025-10-06 07:04

Key takeaways Japanese policymakers face a trilemma – balancing a desire for fiscal stimulus and accommodative monetary policy while avoiding yen weakness. Any two are achievable – but at the cost of the third. In early 2025, many investors were unconvinced about the outlook for Asian stocks this year. Nearly 12 months on, the region has not only delivered a rip-roaring performance, but it’s also seeing a surge in new company listings. Italy’s good progress in improving its fiscal position and building a more stable political climate is a positive development for an economy traditionally known as “the sick man of Europe”. Despite all the hype surrounding tech and AI, Italy's FTSE-MIB has quietly outperformed the US Nasdaq year-to-date. Chart of the week – US tech versus the rest The AI boom has fuelled investment markets in 2025, with US stocks in the technology and communications services sectors delivering exceptional profits growth and driving the market to new highs. Given the surging valuations, those two US sectors alone now account for nearly a quarter of the market cap of all global stocks. Looking ahead to 2026, it’s difficult to deny that the outlook is supported by AI and the strong revenue generation potential that comes with it. But there are some big questions around mega-cap tech valuations now, and uncertainty about the returns from the vast capex spending and the circularity of the financing involved. Recent volatility in tech share prices reflects a sense of unease among investors. So, next year, a “broadening out” of investment returns that has been under way in global markets this year, could spread to the technology sector. That means tech in Asia – including China and India – could be just as profitable, but with less concentration and valuation risk for investors. Innovation in China’s tech sector has already captured attention from the West – for example, in the volatility that followed the release of new AI models from DeepSeek earlier this year. But broadening out doesn’t stop there. It is clear that the AI investment boom isn’t just a tech play, and could spill into other sectors like utilities, construction, healthcare, and basic materials – driving performance in sectors that have lagged this year, and reinforcing a positive view on Asian and other EM stocks. Market Spotlight Diversifying the diversifiers Heading into 2026, multi-asset investors face some key challenges. One is that the combination of a highly complex economic backdrop and uncertainty around AI leaves significant scope for market volatility. We have already seen examples of episodic volatility in 2025, including the tech-led sell-off in November. And when it comes to managing this volatility, there has been a continuing shift this year in the role that US assets – notably traditional diversifiers like Treasuries – play in portfolios. Their correlation with stocks has turned positive in recent years, which has disrupted their ability to act as a portfolio hedge. And that’s left many investors reconsidering old assumptions and looking for “bond substitutes”. In such a scenario, alternative asset classes – including hedge funds, infrastructure, and other real assets – are natural candidates for investors to consider. Private markets can also play a diversifying role: with private credit seeing a strong performance this year, and private equity, which tends to offer structurally low volatility, potentially set to benefit from US rate cuts. So, as a broad asset class, alternatives benefit from different economic and regional exposures, as well as different investment time horizons, making them a potentially effective way of diversifying from traditional diversifiers. 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. 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. Diversification does not ensure a profit or protect against loss. Any views expressed were held at the time of preparation and are subject to change without notice. Any forecast, projection or target where provided is indicative only and is not guaranteed in any way. Source: HSBC Asset Management, Bloomberg, Macrobond. Data as at 7.30am UK time 05 December 2025. Lens on… Japan’s trilemma Japanese policymakers face a trilemma – balancing a desire for fiscal stimulus and accommodative monetary policy while avoiding yen weakness. Any two are achievable – but at the cost of the third. Under the newly-elected PM Sanae Takaichi, the government has recently passed a sizeable fiscal stimulus package (estimated at around 3% of GDP). It’s now clear that the new leadership is prepared to use more active fiscal policy to support growth. But given Japan’s already high debt level, this has driven longer-dated yields higher. It has also put downward pressure on the yen, leaving the BoJ in a bind. Having trodden carefully since starting to normalise policy in March 2024, pressure is building on the central bank to raise the policy rate more quickly, and possibly implement other measures, to support the currency. Japan, alongside other economies such as the UK, is discovering that the pre-Covid world of markets accommodating easy fiscal and monetary policy is a thing of the past. Policy makers now face constraints, trade-offs, and no easy choices. Asia’s IPO boom In early 2025, many investors were unconvinced about the outlook for Asian stocks this year. Nearly 12 months on, the region has not only delivered a rip-roaring performance, but it’s also seeing a surge in new company listings. In terms of money raised, Asia’s market for initial public offerings (IPOs) has been a world-beater, with USD81 billion raised year-to-date. That’s already an increase of nearly 60% on 2023. Industry data suggest that Q3 was particularly strong for IPOs, given fading tariff concerns and Fed rate cuts. Hong Kong, in particular, has reclaimed its position as a major hub for new listings, helped by supportive policy on dual-listings and fast track channels to attract tech firms. Mainland China’s onshore market has also thrived, and so have other ASEAN hubs. India also stands out, where there has been a boom in new listings across sectors, and strong retail demand. For 2026, Asia’s equity markets are expected to remain robust, supported by a stable macro outlook, an increasingly supportive regulatory backdrop, and ongoing shareholder-friendly corporate reforms. Some analysts think that these steadily-expanding markets should continue to offer investors quality growth and diversification opportunities. Molto bene Italy’s good progress in improving its fiscal position and building a more stable political climate is a positive development for an economy traditionally known as “the sick man of Europe”. Even though this title could now arguably be applied to Germany, Italy’s growth remains chronically weak. However, the same cannot be said of its equity market performance. Despite all the hype surrounding tech and AI, Italy's FTSE-MIB has quietly outperformed the US Nasdaq year-to-date. This is not a one-off – since the start of 2021, Italian stocks have matched US tech sector gains. The drivers behind this are largely rooted in sector composition, with Italy's FTSE MIB dominated by banks, energy, and industrial cyclicals, all of which were relative winners in a regime of higher interest rates and inflation, and commodity price volatility. Lower government bond spreads have also contributed to boosting stock multiples. The lesson for investors here is that economic growth is not always an important driver of stock market performance, and valuations matter – Italy entered the post-pandemic period with depressed multiples and room for catch-up on positive news. 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. Diversification does not ensure a profit or protect against loss. 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 is not guaranteed in any way. Costs may vary with fluctuations in the exchange rate. Source: HSBC Asset Management. Macrobond, Bloomberg. Data as at 7.30am UK time 05 December 2025. Key Events and Data Releases Last week The week ahead Source: HSBC Asset Management. Data as at 7.30am UK time 05 December 2025. For informational purposes only and should not be construed as a recommendation to invest in the specific country, product, strategy, sector or security. Any views expressed were held at the time of preparation and are subject to change without notice. Any forecast, projection or target where provided is indicative only and is not guaranteed in any way. *The US government shutdown has ended, but there may still be delays to the expected releases of official data. Market review Positive risk appetite persists. Soft US labour market data cemented market expectations of a 0.25% rate cut at this week’s meeting of Federal Reserve officials, with the market now pricing in three to four 0.25% rate cuts over the next 12 months. The US dollar weakened against a basket of major currencies, while 10-year US Treasury yields remained range-bound. Hawkish comments by Bank of Japan governor Ueda weighed on JGBs amid growing expectations of a December rate hike. In equities, both the US and European markets saw broad-based gains, whilst tech stocks lifted Japan’s Nikkei 225. Other Asian stocks markets were mixed, with Korea’s Kospi seeing gains, but Hang Seng Index and China’s Shanghai Composite were little changed. India’s Sensex index weakened, while Frontier equity indices performed strongly. https://www.hsbc.com.my/wealth/insights/asset-class-views/investment-weekly/article/