2025-04-07 07:04

Key takeaways In a number of EM bond markets, valuations are attractive with real yields considerably above historical medians, and with positive term premia. Following a volatile start to the year for stocks, the upcoming Q1 US earnings season has the potential to have a big impact on markets. Among the themes to watch will be how softening growth and weakening confidence are affecting profits. For those celebrating Easter this year, the ritual of hard-boiling and decorating eggs and gifting chocolate Easter eggs will be a significantly more expensive affair than in 2024. Chart of the week – Reciprocal tariffs Investors had been steeling themselves for “liberation day”. But after last week’s tariff announcement, what happens next in investment markets? Overall, the tariffs, any policy retaliation, and the economic consequences could significantly impact market dynamics. Policy uncertainty is now structurally elevated, partly because investors can’t be sure where tariffs will finally settle. And while recent hard data on GDP and profits have held up, a difficult mix of policy uncertainty, stagflation-lite news, and lower profits expectations, means that investor confidence could falter. In turn, sticky inflation postpones a pre-emptive easing by the Fed, which could have acted as a stock market shock absorber. There are questions now about whether rest-of-the-world stocks can still outperform. After all, history suggests that when the US economy sneezes, the rest of the world catches a cold. But new domestic policy initiatives, especially in Europe and China, could support stock market performance. Likewise, US dollar weakness could act as a stimulus for the rest-of-the-world stocks. Plus, there could be relative winners from last week’s announcement. The base case of ‘spinning around’ has envisaged policy uncertainty driving volatility this year. But if tariffs are fully implemented, a second scenario where growth and profits ‘topple over’ could come more vividly into play. High policy uncertainty continues to point to an agile approach to managing portfolios, meaning diversification and a selective approach that build resilience across geographies, asset classes and factors. Market Spotlight Credit where it’s due Private credit dealmaking enjoyed a pick-up in momentum in the final quarter of last year, outpacing levels seen in Q3, according to the latest data. Much of the activity was driven by refinancings and add-on financings to support company growth. M&A activity also rose modestly in late 2024, aided by improving equity valuations and record levels of private equity ‘dry powder’ (funds waiting to be deployed), although sponsor-backed M&A was below historical peaks. Spreads remained under pressure but appeared to stabilise during Q4, following a modest tightening earlier in the year. Higher base rates kept all-in yields (in USD) in the low double digits for many direct lending deals. Meanwhile, default rates edged up slightly from Q3 but remain below historical averages. Looking ahead, some private credit investment specialists note that demand remains strong as investors seek higher yields and stable income, even in a ‘higher for longer’ rate environment. And spreads continue to offer a premium over public markets. Overall, they believe that experienced managers with flexible strategies, prudent underwriting and active portfolio monitoring should continue to capture attractive risk-adjusted returns. 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 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. HSBC Asset Management. Macrobond, Bloomberg, The White House. Data as at 7.30am UK time 04 April 2025. Lens on… Thin end of the hedge In a number of EM bond markets, valuations are attractive with real yields considerably above historical medians, and with positive term premia. Gradual disinflation should mean many EM central banks can continue to ease policy, with some like India, Colombia, and the Czech Republic easing at a faster pace. Plus, while trade tariffs are often viewed as potentially inflationary in EM, they may actually be disinflationary in some countries by causing a supply glut in goods production. EM currencies, on the other hand, remain a tricky call. In 2024, hedging EM local-currency exposure boosted total returns as the US dollar made gains. Despite this year’s recovery in EM FX, currencies could remain volatile as policy uncertainty persists, with the US dollar playbook looking increasingly unpredictable. Profits still punchy? Following a volatile start to the year for stocks, the upcoming Q1 US earnings season has the potential to have a big impact on markets. Among the themes to watch will be how softening growth and weakening confidence are affecting profits. The impact of tariffs and Chinese tech developments in AI, and EV batteries, could also shape guidance. Among the S&P 500 sectors projected to see the strongest year-on-year Q1 profits growth are healthcare, technology, and utilities. Further out, analysts are expecting year-on-year profit growth of around 11% this year, down from expectations of 14% at the start of 2025 but still above long-run averages. Cooling optimism about the consumer has resulted in the expected share of profit growth from the consumer discretionary and staples sectors halving from their contribution levels last year. But the profit contribution from technology is still going strong – and expected to rise again in 2025. These high expectations could leave both tech stocks and the wider market vulnerable to disappointment. With earnings season arriving amid extreme world policy uncertainty, investors should prepare for surprises. Eggflation For those celebrating Easter this year, the ritual of hard-boiling and decorating eggs and gifting chocolate Easter eggs will be a significantly more expensive affair than in 2024. Both egg and cocoa prices have surged over recent months, as H5 strains of avian influenza have decimated the egg-laying hen population, and cocoa production in Ghana and the Ivory Coast – accounting for around 60% of global supply – has been hit by poor weather conditions. In Ghana, an outbreak of Swollen shoot disease, and mining and smuggling have also weighed on output. Climate change probably explains some of these disruptions. Industry experts have blamed record warm ocean temperatures for contributing to excessive rainfall in West Africa. And some studies have claimed the spread of Avian flu has been exacerbated by new patterns of seasonal bird migrations. Higher egg and chocolate prices are clearly not a big deal for the consumer outlook – eggs account for just 0.2% of the US CPI basket. But they are a stark reminder that we are living in a more volatile inflation regime versus the 2010s, with extreme weather, rising trade protectionism, supply chain rerouting, and active fiscal policy all playing their part in this story. Past performance does not predict future returns. The level of yield is not guaranteed and may rise or fall in the future. For informational purposes only and should not be construed as a recommendation to invest in the specific country, product, strategy, sector, or security Any views expressed were held at the time of preparation and are subject to change without notice. Index returns assume reinvestment of all distributions and do not reflect fees or expenses. You cannot invest directly in an index. Any forecast, projection or target where provided is indicative only and is not guaranteed in any way. Source: HSBC Asset Management. Macrobond, Bloomberg, Datastream. Data as at 7.30am UK time 04 April 2025. Key Events and Data Releases Last week The week ahead Source: HSBC Asset Management. Data as at 7.30am UK time 04 April 2025. For informational purposes only and should not be construed as a recommendation to invest in the specific country, product, strategy, sector or security. Any views expressed were held at the time of preparation and are subject to change without notice. Market review Heightened global trade uncertainty weighed on risk markets, with the US DXY dollar index on the defensive. Oil prices declined on rising global demand concerns, and gold consolidated after recent gains. Core government bonds rallied, led by US Treasuries. The front-end of the US yield curve is factoring in 3-4 Fed rate cuts over the next 12 months. New data showed more weakness in US consumer confidence. US credit spreads widened, with IG outperforming HY. US equities saw broad-based falls amid weakening 2025 earnings expectations. The Euro Stoxx 50 index declined on rising eurozone growth concerns. Japan’s Nikkei 225 dropped markedly, with lower JGB yields weighing on financials. EM Asia stock markets posted losses, led by South Korea’s tech-dominant Kospi index. The Hang Seng, Shanghai Composite and India’s Sensex indices all declined. Latin American equities were resilient. https://www.hsbc.com.my/wealth/insights/asset-class-views/investment-weekly/reciprocal-tariffs/

2025-04-03 12:02

Key takeaways The US has announced a 10% baseline tariff along with individual reciprocal tariffs of up to 49% on some economies. Uncertainty will remain elevated as trade partners respond. The tariffs are generally towards the higher end of expectations (though Mexico and Canada are not subject to new duties) and hence a negative for risk appetite, earnings prospects, and global growth. However, they were not completely unexpected. Liberation Day will probably not represent the short-term bottom for US equities or USD. Much uncertainty remains about the breadth and depth of tariffs and the impact on US growth and inflation. We continue to be selective in consumer-related stocks, preferring services over goods, large cap over small cap and focusing on strong cash flow generators. We believe longer-dated safe-haven bonds will benefit as markets worry about more growth than about inflation and continue to overweight gold as a diversifier. What happened? The US has announced a 10% baseline tariff effective 5 April, along with additional individual reciprocal tariffs of up to 49% on some economies beginning 9 April. The previously announced 25% tariff on autos is expected to take effect from 3 April. For the US, tariffs remain a key tool for negotiations. If maintained, the announced tariffs could cut expectations for global economic growth and corporate profits, and lift fears of supply chain disruptions and result in higher finished goods prices. Mexico and Canada are exempt from any new tariffs as they continue to negotiate with the Trump administration on immigration, border security and the drug wars. Many of the US trading partners should have sufficient time to at least start negotiating with the Trump Administration, and the hope is that they hold back on any retaliatory measures, which could otherwise further escalate this tension into a broader trade war. Individual reciprocal US tariff rates for key markets Source: The White House, HSBC Global Private Banking and Wealth as at 3 April 2025. Key highlights of the announcements: Baseline tariff: President Trump will levy a baseline 10% tariff on all imports beginning 5 April under the International Emergency Economic Powers Act (IEEPA). Individual reciprocal tariffs: From 9 April, the US will impose higher individual (bilateral) ‘reciprocal’ tariffs on imports from economies with which it has the largest trade deficits, while other trading partners will continue to face the original 10% baseline tariff. Some products will be excluded, such as steel, aluminium and autos that are already subject to Section 232 tariffs; copper, pharmaceuticals, chips and wood; other goods that may become subject to future Section 232 duties, and bullion, energy and other critical minerals that are not available in the US. For vehicles that qualify for USMCA preferences, tariffs will only apply to the non-US content, but importers will need to submit the amount of US content in each model. It is also not clear whether this US administration will honour the USMCA Section 232 side letters with Canada and Mexico - which provides for a 60-day delay on Section 232 tariffs and annual duty-free import quotas for vehicles and auto parts from these markets. We are not making further revisions to our global growth forecasts which were already lowered to 2.5% in March, due to the tariffs already announced. President Trump has indicated room for negotiation by asking the trading partners to reduce the barriers they put up to US firms. But the executive order also said tariffs could rise further if there is retaliation or if, for example, trade deficits widen. Going forward, if Trump is able to incorporate a lower corporate tax rate (from 21% to 15%) in the next budget, it could result in an expansion of production in the US by foreign companies who choose to move production to the US. This could result in increased revenues as more production and job opportunities emerge in the US economy and would then lower the trade deficit, which is a positive factor for US financial markets. Investment implications Liberation Day will probably not represent the bottom for US equities. Much uncertainty remains about the breadth and depth of tariffs and the ensuing negotiations that the Trump administration is currently engaging in. It is unlikely that we will see the net alpha shift upward in prices and subsequent resumption of disinflation in time for the Fed to ease in June. Once the market understands that the likelihood of a Fed cut in June is not properly priced in, it could create further volatility for US equities. Currently, the market is attaching a 70% probability of a Fed cut in June, which seems high. We expect to see continued volatility in both US equities and bonds in the short term, driven by the combination of the budget battles, treasury issuance, and tariff and trade policy. From a medium-term perspective, though, negotiations should reverse some of the tariffs, while US innovation and re-onshoring should help. There is also the potential for tax cuts to bring better news. US tariff announcements have cut full year 2025 US earnings projections Source: Bloomberg, US Census Bureau, HSBC Global Private Banking and Wealth as at 3 April 2025. Forecasts are subject to change. Bloomberg’s projected 2025 EPS growth dropped from approximately 13% at the start of the year to around 10% by end of March. The downward trend accelerated in February, coinciding with more frequent and broader tariff measures. Europe’s stock market rally may see a pause as negotiations start. Automotives are vulnerable but the absence of a pharma tariff is good news. The UK got a relatively lower tariff, but its open economy makes it vulnerable – not retaliating could help cap inflation and support gilts. The largest US trade deficit is with China, totalling – USD295 billion, reinforcing China’s central role in the trade policy debate. In China and the rest of Asia, we continue to favour domestically oriented businesses. We also think that regional integration will further accelerate. https://www.hsbc.com.my/wealth/insights/market-outlook/special-coverage/liberation-day-an-opening-salvo-to-negotiate-creates-further-uncertainty/

2025-03-31 12:02

Key takeaways While the BoJ is in a hawkish pause, it is uncertain when the next rate hike will come. The near-term focus for the JPY is likely to be risk appetite around US trade policy. The JPY may outperform ‘risk on’ currencies, but not the USD. The JPY was the best performing G10 currency in the first two months of the year, but its outperformance has not continued into March. Indeed, USD-JPY has been rising since 11 March, as US-Japan yield differentials have stopped narrowing and even widened again recently (Chart 1). While both the Federal Reserve and the Bank of Japan (BoJ) kept their rates steady in March, the BoJ guidance suggests that rates are likely to rise further so long as the domestic economy progresses as expected. But it is still uncertain when the next BoJ’s rate hike will happen. Our economists’ base case is July, while markets are pricing in a c60% chance for this to take place in June (Bloomberg, 27 March 2025). Source: Bloomberg, HSBC Source: Bloomberg, HSBC Meanwhile, some wonder if higher interest rates in Japan (Chart 2) could prompt a domestic pivot by local investors, leading to reduced portfolio outflows, if not outright repatriation inflows. A significant pivot by Japan’s Government Pension Investment Fund (GPIF) to domestic assets for the next five years (if it happens) could see the JPY strengthen. However, Nikkei reported on 11 March that the GPIF will not change its asset allocation targets. At the same time, Japanese Prime Minister Shigeru Ishiba’s government approval rating continued to fall (The Japan Times, 24 March 2025). Over the near term, we think the JPY may not be an entirely ‘clean’ safe haven currency since Japan is also exposed to US tariff risks (e.g. auto tariffs will come into effect at 12:01 am Washington time on 3 April, initially targeting fully assembled vehicles, Bloomberg, 27 March 2025). Nevertheless, the JPY may still outperform other currencies that are even more exposed to US tariff risks (like the EUR and the CAD) or are highly risk-sensitive (like the AUD and the NZD). We are also cognizant of the possibility that the JPY may be called out by the US administration for its undervaluation. All things considered; we see USD-JPY moving sideways over the near term before rising modestly later in the year when the US economy overcomes growth concerns and the BoJ is closer to its neutral rate range. https://www.hsbc.com.my/wealth/insights/fx-insights/fx-viewpoint/jpy-not-a-clean-safe-haven/

2025-03-31 12:02

Key takeaways Amid higher policy uncertainty and an uptick in near-term inflation expectations driven by tariffs, we downgrade US and global equities to neutral and continue to broaden our sector exposure to IT, Communications, Financials, Industrials and Healthcare outside of the Magnificent-7 stocks. We leverage multi-asset strategies and quality bonds to balance risks and opportunities in the current environment and use gold tactically to enhance diversification. We have increased our exposure in Asia with overweight positions in China, India, Singapore and Japan, while the UAE also offers attractive opportunities. With more supportive policies towards AI-led innovation, consumption and the private sector, we raised our China’s GDP growth forecast to 4.8% for 2025. While DeepSeek’s breakthrough has aroused optimism in the tech space, we believe the downstream AI adopters and applications can better capture the opportunities than the semiconductor and hardware players in Asia, leading us to downgrade Asian IT to neutral and upgrade Consumer Discretionary to overweight. Communications Services should also be a beneficiary with its exposure to the internet, telecom and cloud industries, while Industrials can benefit from the rising demand for digital infrastructure. Asian Financials offer attractive valuations and dividend yield. https://www.hsbc.com.my/wealth/insights/asset-class-views/investment-monthly/policy-uncertainty-weighs-on-us-equities/

2025-03-31 07:04

Key takeaways The unusually uncertain outlook means it pays to consider risk scenarios. The base case – ‘spinning around’ – assumes above target inflation and a period of below trend growth, but there is a risk of a more damaging scenario – ‘toppling over’ as we call it – playing out. After spooking markets in last October’s UK Budget by raising taxes but unexpectedly increasing public spending, Rachel Reeves’ Spring Statement was more restrained. Global real estate investment volumes picked-up late last year, rising 31% in Q4 2024 versus the same quarter in 2023. It came as investors took advantage of stabilising interest rates and lower valuations. Chart of the week – Markets spin around in Q1 First quarter action in investment markets has been dominated by policy uncertainty, volatility, and a broadening-out of performance beyond the US. It was a quarter marked by sharp moves and rotations across asset classes. Among the starkest was a sell-off, and then partial recovery, in US stocks. Worst hit were mega-cap tech names, which despite still-strong profits growth, saw momentum slip. A mix of frothy valuations and signs of China’s growing competitiveness in AI (evidenced by advances at tech firm DeepSeek), unsettled confidence. By contrast, European and Chinese stock markets recorded double-digit rallies, with broad emerging markets also seeing gains. That was captured in a swift change of fortune for major style premia, with Value paying off, and Growth losing ground. Coming into the year, post-US election consensus trades had formed, betting on further upside to US stocks and the dollar and higher US bond yields. All three quickly unwound in Q1 on trade uncertainty and signs of weaker US GDP and profits growth. In response, fixed income assets, including government bonds and credits, provided an effective hedge. Other diversifiers – including gold, hedge funds, real estate, and infrastructure – also proved resilient. So, what’s next? After some wild narrative shifts in Q1, the base case is that ‘spinning around’ will persist in markets in 2025, but the growth outlook remains a key question for investors. Policy uncertainty looks set to continue being a risk to the cycle, but it’s not clear when, or even whether, that will translate to the real economy. For Q2, we could see more of a stop-start performance, as investors and policymakers remain in wait-and-see mode. Market Spotlight China sets the pace in Asia Chinese stocks set the pace in Asian stock markets in Q1, rising 17% in a rally driven by the technology sector. Hong Kong stocks (as measured by MSCI HK) also outperformed, with financials leading the gains. A key theme was a rotation favouring cheaper markets, with China beating India, and South Korea beating Taiwan. This came amidst a cautious backdrop, with global policy uncertainty sparking broad fund outflows (excluding Chinese stocks). Regional currencies were mostly positive in response to lower US Treasury yields and a weaker US dollar index, but were still volatile. Inflation continued to ease in most of the region, giving space for central banks to focus on growth risks. In response, government bond yields fell in most Asian economies. One exception was Indonesia, where fiscal and macro concerns drove the rupiah to its lowest level since the late 90s Asian financial crisis, and bond yields rose. In fixed income, Asia credits were resilient despite weaker global risk sentiment, with high yield outperforming investment grade. Overall, global trade policy and regional politics continue to be key issues to watch in Asia in 2025. 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 Any views expressed were held at the time of preparation and are subject to change without notice. Any forecast, projection or target where provided is indicative only and is not guaranteed in any way. Source: HSBC Asset Management. Macrobond, Bloomberg. See page 8 for details of asset class indices. Data as at 7.30am UK time 28 March 2025. Lens on… What could go wrong? The unusually uncertain outlook means it pays to consider risk scenarios. The base case – ‘spinning around’ – assumes above target inflation and a period of below trend growth, but there is a risk of a more damaging scenario – ‘toppling over’ as we call it – playing out. At the limit, changes to US trade policy could result in the effective US tariff rate jumping to levels last seen in the 1930s. For consumers, elevated policy uncertainty is driving fears of unemployment, which is often (but not always) a precursor of a marked labour market deterioration. Even if unemployment does not rise abruptly, consumers could curb spending as a precaution. This would further deter firms from investing and weigh on profits, ultimately putting pressure on stock prices. This could then further undermine spending – a vicious cycle. In the past, the Fed may have leant against elevated uncertainty by pre-emptively easing policy. But the risk is that renewed price pressures from any large-scale tariffs may mean it can only ease policy once confident that a weak economy would rein in inflation. Overall, this would be an environment where volatility spikes and risk asset valuations are damaged, especially where risk premiums are skinny. Fiscal tightropes After spooking markets in last October’s UK Budget by raising taxes but unexpectedly increasing public spending, Rachel Reeves’ Spring Statement was more restrained. With the Office for Budget Responsibility (OBR) downgrading its 2025 growth forecast, and the Gilt-Treasury 10-year spread widening by around 0.5% since mid-February, the Chancellor unveiled back-loaded spending cuts to meet her fiscal rules. Even with these changes, there is little room for slippage and UK net debt-to-GDP ratio (excluding debt held by the Bank of England) is expected to trend higher. The UK is walking a tightrope – debt concerns are putting upward pressure on Gilt yields, which worsens the public finances. But cutting spending or raising taxes to narrow the deficit would undermine already lacklustre growth. This is a potentially cautionary tale for other advanced economies. In Europe, much has been made of recent commitments to boost public investment in Germany – a country with ample fiscal space. But the likes of France and Italy are more likely to face the same constraints as the UK if they try the German approach. With most governments facing pressure to open the fiscal taps to deliver social, economic, and geopolitical objectives, the bond market vigilantes are watching closely. Build it up Global real estate investment volumes picked up late last year, rising 31% in Q4 2024 versus the same quarter in 2023. It came as investors took advantage of stabilising interest rates and lower valuations. MSCI data shows that real estate capital values edged up 0.2% in Q4 last year, having fallen 16% over the prior nine quarters. Occupancy levels are being supported by falling development activity, with rising costs making new projects uneconomic. Retail has been a key beneficiary, with stable leasing and falling vacancy rates boosting rental income. Office vacancy rates were stable in Q4 but remain elevated, especially in the US. Meanwhile, logistics leasing was subdued but is expected to pick up in 2025. Finally, non-traditional sectors are still delivering the strongest rental growth – including senior housing and data centre leasing. Despite uncertainty, some real estate specialists expect capital values to grow in 2025, driven by growing incomes rather than yield compression. And although the outlook for leasing is mixed, low development activity should support property fundamentals across sectors. Past performance does not predict future returns. The level of yield is not guaranteed and may rise or fall in the future. For informational purposes only and should not be construed as a recommendation to invest in the specific country, product, strategy, sector, or security Any views expressed were held at the time of preparation and are subject to change without notice. Any forecast, projection or target where provided is indicative only and is not guaranteed in any way. Source: HSBC Asset Management. Macrobond, Bloomberg, Datastream, Real Capital Analytics. Data as at 7.30am UK time 28 March 2025. Key Events and Data Releases Last week The week ahead Source: HSBC Asset Management. Data as at 7.30am UK time 28 March 2025. For informational purposes only and should not be construed as a recommendation to invest in the specific country, product, strategy, sector or security. Any views expressed were held at the time of preparation and are subject to change without notice. Market review Global trade uncertainty continued to overhang risk markets last week, with the US dollar index trading sideways. US Treasuries fell, and the yield curve steepened while eurozone sovereign bonds remained relatively unchanged. US IG and HY stayed close to recent lows. US equities extended modest gains, whereas the Euro Stoxx 50 index edged lower, primarily driven by lower auto stocks, with Germany’s DAX index being the main casualty. Japan’s Nikkei 225 fell due to weaker export-oriented stocks. Other Asian markets were largely on the defensive, with the most significant weakness observed in South Korea’s Kospi index, followed by the Hang Seng and Shanghai Composite. In contrast, India’s Sensex bucked the trend, rising on the strength of financials. In Latin America, Mexican stocks led the gains in the region as Banxico, the central bank lowered policy rate by 0.5% with dovish guidance. In commodities, oil and gold increased, while copper ended a volatile week with little change. https://www.hsbc.com.my/wealth/insights/asset-class-views/investment-weekly/markets-spin-around-in-q1/

2025-03-26 12:02

Key takeaways Trade tensions are set to intensify, weighing on exports and investment across ASEAN. But cooling inflation and policy easing should provide a floor under domestic demand... ...helping the region’s economies endure the challenges in the year ahead with customary poise. Indonesia is looking to rate cuts to help its economy and appears less exposed to the global tariff turmoil than many of its neighbours. Thailand may clock a similar pace as last year, even if the consumer looks increasingly out of breath. The Philippines may step it up a notch, driven by domestic momentum and limited exposure to global trade tensions. In Malaysia, investment is still strong, on both the public and private side, providing a floor to growth as the trade outlook turns more uncertain. Singapore will not fully escape the global turmoil, being a more open economy than most, but a slight fiscal lift will cushion things at home. In Vietnam, growth ambitions remain high, even as the risk of tariffs clouds the outlook, which may force greater fiscal spending. Economy profiles Key upcoming events Source: LSEG Eikon, HSBC Indonesia A new innings With Prabowo Subianto taking over as Indonesia’s president in October 2024, all eyes are on the key policies the new government champions. In the election campaign, Prabowo spoke at length about higher social welfare spending, SOE reform, and continued efforts on manufacturing down-streaming. So far, there have been key announcements on the first two. The government unveiled a free food scheme for children, a rice assistance programme, an electricity tariff discount, an accelerated housing programme, and limited the VAT rate hikes. On the SOEs front, a new Sovereign Wealth Fund (SWF) known as Danantara, reporting directly to the president, has been launched. It is mandated to oversee SOE functioning and drive investment. More clarity is now needed on the role of the erstwhile SWF, and the role of the SOE ministry. Meanwhile, growth momentum has been soft going by the PMI, bank credit growth, and core inflation. Our nowcaster model points to growth of 4.5-5%, lower than official GDP numbers of about 5%. And GDP numbers remain 7% below the pre-pandemic trend, signifying a negative output gap. As such, there is a case for looser fiscal and monetary policy in 2025. Indonesia also wants to raise potential GDP growth as a policy priority. We believe breaking away from commodity price swings by raising geographically diversified and higher value-added exports could bring large gains. Some good things have happened in recent years. Indonesia has gained market share in global exports. It has a trade surplus with the US, and a falling trade deficit with China. But these haven’t been able to lift domestic growth, as about half of the exports are commodity-related with limited backward linkages. However, there are encouraging nascent signs of export diversification. Indonesia’s exports to the US look very different, in fact a lot like Vietnam’s export mix, comprising a lot more apparel, footwear, electronics, and furniture. Vehicle exports to ASEAN are rising, as are electronics exports to the US and Latin America. But these are still rather small (for instance, just 9% of Indonesia’s exports go to the US) and need to be scaled up. Is that doable against an increasingly challenging global backdrop of rising trade protectionism? It would not be easy but is not impossible either. Indonesia doesn’t run a formidable trade surplus with the US, which could arguably protect it from large tariff increases. It could even benefit from supply chains getting rejigged in response to new tariffs on key exporters. But work on several fronts would be needed: enhancing infrastructure development, expanding trade agreements, developing a skilled workforce and streamlining business practices. Indonesia runs a negative output gap Source: CEIC, HSBC Inflation is well below BI’s 2.5% target Source: CEIC, HSBC Malaysia A steady ship in choppy waters Malaysia has been gaining attention on the international stage, and it’s not hard to spot the reasons for optimism. To name just a few, the MYR was the best performer in Asia in 2024, growth accelerated to 5.1% and large tech giants have committed billions of dollars of investment. Political stability and policy reforms have contributed to better sentiment both onshore and offshore. The question is, can Malaysia’s positive momentum be sustained in 2025? It’s not an easy one to answer, as global uncertainty introduces volatility. That said, there are good reasons to believe in Malaysia’s robust economic fundamentals. Keeping the ship steady is the key task in 2025. As a tech-exposed economy, there is more room for Malaysia’s trade to improve, as net exports contribution to growth was minimal in 2024. After all, Malaysia has seen a much slower recovery in semiconductor production than peers. That said, there is a large degree of uncertainty in the US administration’s tariff policies. The good news is that Malaysia’s well-diversified trade portfolio and not-so-chunky trade surplus with the US may offset some tariff risks. However, the US’s proposal of a 25% tariff on semiconductor imports may cloud Malaysia’s trade prospects. Despite external uncertainty, Malaysia has the domestic strength to mitigate some of the impact. There are pockets of resilience in private consumption, given still generous subsidies and wage hikes in civil servants’ pay. On investment, the country has been witnessing an investment boom, thanks to ongoing infrastructure projects and FDI inflows, though the latter may see some near-term caution among investors, given tariff uncertainty. All in all, we cut our 2025 growth forecast slightly to 4.7% (previous: 4.8%), reflecting our caution on global trade prospects. We keep our 2026 growth forecast at 4.5%. In addition, inflation remains in check. Headline inflation decelerated slightly to 1.7% y-o-y in January, down from 1.8% in 2024. Given subdued inflation momentum, we lower our headline inflation forecast to 2.4% for 2025 (previous: 2.7%). That said, we acknowledge upside risks to inflation from the potential subsidy rationalisation on RON95, expansion of sales and services tax (SST) coverage and civil servants’ wage hikes. We believe that Bank Negara Malaysia (BNM) will likely keep its policy rate unchanged at its comfortable level of 3%, a view we have held for some time. Electronic exports continue to rebound but commodities have been contracting Source: CEIC, HSBC Inflation has remained benign, providing room for BNM to stay on hold Source: CEIC, HSBC Philippines From the Fed to ASEAN Growth came in below expectations for the second consecutive quarter in Q4. But this time, it was for a different reason. In Q3 2024, growth underperformed as typhoons took a toll on agriculture and tourism. The next quarter was more of a demand-side issue; growth surprised to the downside again as household consumption – the country’s driver for growth – decelerated to its slowest pace since the Global Financial Crisis. The slowdown, however, was not a result of households buying fewer staples. Rather, it was because they were buying fewer big-ticket items, or goods that often require a loan to purchase. Based on the Bangko Sentral ng Pilipinas’ (BSP) Consumer Sentiment Survey, households are purchasing fewer vehicles, gadgets, and education – all goods and services that are pricey enough to require credit. And, true enough, credit growth by large banks continues to clock a pace that is well below pre-pandemic levels. With consumption down, 2024 growth undershot the government’s 6-8% target for the second consecutive year at 5.6%. If inflation took growth hostage back in 2023, high interest rates are taking a toll on the economy today. Hence, it came as a surprise when the BSP decided to start 2025 by pausing its easing cycle. The BSP was clear in its rationale: it wanted a buffer against the risk of a sharp re-pricing of Federal Reserve rates to manage any potential volatility in the peso. Nonetheless, cognizant of tight financial conditions, the BSP signalled that it is still in the middle of an easing cycle. Once the dust settles, we expect the BSP to continue its gradual easing cycle, cutting the policy rate by 25bp each in April (previous: June), August, and December this year, bringing the policy rate to 5.00% by year-end 2025. Together with the upcoming Required Reserve Ratio cut in March, further monetary easing should rehydrate consumption and investment, and improve growth in 2025. We expect full-year growth to be resilient at 5.9%. Apart from the support from monetary easing, the Philippines is among the most insulated economies in Asia when it comes to tariff risks. It doesn’t have a large trade surplus with the US, nor is it highly exposed to the risk of reciprocal tariffs. The country’s services exports, with digitalisation making services more tradable, also continue to make strides, growing 11% q-o-q seasonally adjusted in Q4 2024. Low inflation should also help buttress demand, more so with rice prices set to cool even further throughout the year. Growth in household consumption decelerated to its slowest pace since 2010 Source: CEIC, HSBC With inflation subdued, the economy has room to absorb FX-induced inflation Source: CEIC, HSBC. NB: Shaded area represents HSBC forecasts. Singapore An election year budget Singapore ended 2024 on a strong footing, largely benefitting from a trade upswing. This resulted in a more-than-decent pace of growth of 4.4% as a developed market (DM) for the whole year. That said, challenges and uncertainties warrant more policy support. Despite strong growth in 2024, unevenness persisted. For one, the manufacturing sector’s recovery was largely aided by the rebound in electronics and the precision and transport engineering sectors. That said, it was dragged down by the pharmaceutical output, given that sector’s volatile nature. The same trend was also observed in the services sector. While wholesale trade saw sustained strength, thanks to the positive spillover impact from a rebound in manufacturing, consumeroriented sectors contracted, suggesting a significant shift in spending by locals overseas that was not offset by the increase in international tourists. Despite a rosy 2024 GDP print, 2025 is characterised by challenges. While Singapore may not be directly targeted by the US, as it is the only ASEAN country that runs a trade deficit, and has a Free Trade Agreement with the US, trade turbulence will likely cloud its growth prospects. Meanwhile, weakness in some domestically oriented services may also persist. While inflation has behaved well in the past year, elevated cost-of-living pressure remains a key concern. All in all, we maintain our growth forecast at 2.6% for 2025, at the upper end of the government’s growth forecast range of 1-3%, but we have tweaked our quarterly profile of GDP prints. In addition, inflation has made good process. Core inflation decelerated from 4.2% in 2023 to 2.8% in 2024, on broad-based cooling of price pressures. Entering 2025, core inflation in January even fell 0.7% m-o-m seasonally adjusted, the largest drop in almost five years. This translated into subdued y-o-y inflation of only 0.8%, undershooting the Monetary Authority of Singapore’s (MAS) forecast range of 1-2%. Given the downside surprise in January and likely continued disinflationary forces from trade tensions, we revised down our core inflation forecast to 1.3% for 2025 (previous: 1.9%). Singapore’s tech production has picked up, following Korea and Taiwan Source: CEIC, HSBC Singapore’s core inflation has decelerated quicker than expected Source: CEIC, HSBC Thailand Wheel and axle The end of the year wasn’t the positive outcome many had expected for the economy. Many had thought growth would be robust due to the implementation of the first phase of the Digital Wallet Scheme, a fiscal stimulus that gave THB10,000 of cash to each of Thailand’s most vulnerable citizens in Q4 2024. Still, growth in the quarter surprised to the downside with the impact of the stimulus limited. Many handout recipients used the cash to pay down debts and, as a result, private consumption did not accelerate as expected. After all, the household debt-to-GDP ratio in Thailand is the highest among upper-middle income economies globally. This showcases the risk of household debt blunting the effectivity of fiscal policy – which the Bank of Thailand (BoT) is looking to address. The woes continued into the start of the year. Thailand’s tourism outlook took a hit early in January as reports of a Chinese actor missing in Thailand filled headlines in China. This dampened tourism sentiment about Thailand, enough for many Chinese tourists to cancel their Lunar New Year trip to the region. Durians also faced a pungent outlook, as China imposed a temporary import ban in January over allegations of chemical contamination (Bangkok Post, 16 January 2025). Though manufacturing exports have been surging, this was largely concentrated in electronics. These goods tend to have a high share of imported components, which, in turn, diminishes the local value-added of exports. 2025 will likely be a tough year for the economy, most especially with tariff risks looming over global trade. On one hand, direct tariffs from the US could harm Thailand, with the US its top destination for exports. On the other hand, US tariffs on Chinese goods might exacerbate import competition even further as China finds other markets to take its inventory. This would then be a headwind to Thailand’s manufacturing sector, with output already falling by 4.2% since 2022. At first, we assumed that to a certain extent, the fiscal levers would be enough support to the economy. Using monetary policy simultaneously would then risk stoking household debt. However, with fiscal policy losing traction, as exemplified by the first phase of the handout, more may be needed for Thailand to get over this economic hump. Like a wheel and axle, we expect monetary policy to help fiscal policy in cranking up growth. We expect the BoT to cut its policy rate by 25bp to 1.75% in Q4 2025, with risks tilted towards an earlier cut. However, to keep household debt at bay, we expect this cut to be the last, implying that the BoT will keep its monetary stance steady throughout 2026. The first phase of the Digital Wallet Scheme only had a limited impact on consumption Source: Macrobond, HSBC The real policy rate remains slightly above pre-pandemic levels Source: CEIC, HSBC Vietnam Achilles’ heel After slow growth in 2023, Vietnam’s economy saw a strong rebound last year, growing 7.1%, restoring Vietnam’s position as ASEAN’s fastest-growing economy in 2024. That said, there is no room for complacency, given growing uncertainty on global trade prospects. While no ASEAN economy has been targeted specifically by US tariff announcements yet, Vietnam appears to face tariff risk. Based on US Customs data, Vietnam’s trade surplus with the US ballooned to USD123bn, almost a 20% y-o-y jump, making it the country with the thirdlargest trade surplus with the US, just after China and Mexico, both of which have been targeted by US tariffs. Coincidentally, Vietnam also runs a sizeable trade deficit with China, which could gain unwanted attention from the US administration. In addition to the trade surplus, Vietnam has the highest tariff rate differentials of ASEAN nations with the US. The US has also scrutinised trading partners with high value-added taxes (VATs) in relation to potential tariffs. While Vietnam has a low VAT among the ASEAN economies, its 2ppt VAT cut to 8% is temporary and is set to expire by mid-2025. Shortly after the VAT proposal, President Trump announced his intention to impose tariffs “in the neighbourhood of 25%” on semiconductor imports, which will likely impact Vietnam as the US is a dominant export destination for its semiconductor shipments and accounts for almost one-third of Vietnam’s total exports. That said, Vietnam has been proactively engaging with the US to mitigate external risks. The two countries recently signed a series of deals, valued at over USD4bn (Hanoi Times, 16 March 2025). On top of previous agreements worth USD50bn and ongoing negotiations of deals worth USD36bn, this would raise bilateral deals to be implemented to USD90bn from 2025 (Hanoi Times, 15 March 2025), but it remains unclear how much this would translate to additional US imports per annum. Overall, we forecast growth at 6.5% for 2025 and 6.3% for 2026. That said, how US trade policies evolve will be crucial for Vietnam. Outside of growth, inflation has ticked up but was largely manageable at 3.3% y-o-y on average in the first two months of 2025. Given upside surprises from food and medical prices, we raised our inflation forecast to 3.5% for 2025 (previous: 3.0%) and 3.3% for 2026 (previous: 3.2%). There has been some moderate frontloading impact on Vietnam’s exports Source: CEIC, HSBC. NB: January and February are combined to adjust for Lunar New Year distortions. Vietnam faces elevated trade risks, requiring proactive engagement by the government Source: CEIC, HSBC. NB: US’s trade deficit with ASEAN is data from the US side and ASEAN’s trade deficit with mainland China is data from the ASEAN side. https://www.hsbc.com.my/wealth/insights/market-outlook/asean-in-focus/resilience-on-display/