6 May 2024
Recent US data have thrown the Fed’s plans to enact a policy pivot off course. The primary problem is sticky inflation; the Fed’s preferred price gauge jumped 3.7% q/q annualised in Q1, up from around 2% in the second half of last year. Q1 GDP came in below expectations but masked still-strong consumer spending, while some keenly watched surveys have softened. Meanwhile, labour data point to a gradual cooling of demand, but the picture varies across indicators.
Broadly resilient growth and labour data have allowed the Fed to focus on inflation. The upshot is that the Fed has backed away from any near-term rate cuts – something Chair Powell confirmed in his press conference last week.
Ultimately, we expect core inflation to return to a downward trend in H2 2024 – disinflation is just delayed. That’s particularly the case when housing-related components begin to reflect the muted rent increases that have been underway for well over a year. But the Fed will need to see a few months of better inflation data to feel confident that it can start to ease policy, which effectively means taking the summer off and returning to the issue in September.
This year started with seven rate cuts being priced for 2024. Moving to zero may not be a big problem for risk assets if GDP and profits growth hold up. But the longer interest rates are frozen at restrictive levels, the more likely they are to bite the economy and cause some financial instability. That may create problems further down the road, even challenging the widely-held assumption of investors for a ‘soft’ or ‘no landing’.
The growing influence of ESG (Environmental, Social and Governance) in portfolio management has made it a mainstream political topic. In a year when half the world’s population will be voting in national elections, key ESG issues will be under scrutiny.
One area to watch is that while new reporting frameworks have helped to tackle issues like ‘greenwashing’, there are still divergent views that need to be aligned on ESG regulations across the US, Europe and Asia. Another key development is the shift from ‘tell me’, to ‘show me’ when it comes to disclosure on ESG claims. And as part of this drive to improve transparency, there are moves to enhance data quality and ensure ethical use of AI.
Elsewhere, there is growing attention on supporting Asia and EM countries to decarbonise. And efforts are also being made to ensure workers in carbon-intensive industries in both DMs and EMs don’t suffer unduly in the low-carbon transition. Finally, a trend to keep an eye on is the continuing popularity of investing in biodiversity and nature, as evidenced by a four-fold growth in assets under management in European funds in this area.
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.
Source: HSBC Asset Management. Macrobond, Bloomberg. Data as at 11.00am UK time 03 May 2024.
The Q1 earnings season is past the midpoint, and so far, results have been encouraging. Broadly speaking, the Magnificent Seven (Mag7) have delivered versus expectations, even if idiosyncratic issues are driving a wedge between individual stock performance.
But while earnings have been impressive, there are risks. Currently, the Mag7 12-month forward price-earnings ratio (PE) is 30x versus 18x for the rest of the S&P. It shows how much investors are willing to pay-up for breathtaking profit growth. But with the market cap of the Mag7 having grown eight-fold over the past decade to over USD13 trillion (larger than MSCI Europe at USD11 trillion), their sheer size will make maintaining strong profits growth harder. And it sets the market up for a material correction if earnings disappoint.
On a sequential basis, EPS growth is expected to broaden out over coming quarters, lessening the dependence on a small group of companies. The question then becomes if the remaining 493 can deliver the goods?
April was a tough month for Western government bond markets as investors priced out 2024 Fed rate cuts, with the US 10-year yield rising by around 50bp. The US dollar also rose. But Asian local currency bonds managed to weather the storm, seeing fairly limited drawdowns. We think this is reflective of the region’s solid macro fundamentals and decent valuations.
Unlike the US, inflation across Asia is well under control, making real bond yields attractive. For those economies close to policy targets, potential rate cuts later this year – aided by a potential Fed pivot – could lower nominal yields and create capital gains.
Putting cash to work in Asian bonds as part of global asset allocations also comes with diversification benefits. Markets in China, India, and Indonesia tend to reflect more domestic macro and policy cycles and local supply-demand conditions. This means they have lower correlations with global bonds. Supply and demand conditions in the India bond market are especially favourable at the moment, given fiscal consolidation and rising inflows ahead of increasing weightings in the GBI-EM bond index this summer.
Past performance does not predict future returns. The level of yield is not guaranteed and may rise or fall in the future.
Source: HSBC Asset Management. Macrobond, Bloomberg. Data as at 11.00am UK time 03 May 2024.
Source: HSBC Asset Management. Data as at 11.00am UK time 03 May 2024.
US Treasuries rallied after Fed Chair Powell said, “it’s unlikely that the next policy move will be a hike”, and the FOMC acknowledged there has been a “lack of progress” in achieving the 2% inflation target. Global equity markets were mixed. In the US, the rate-sensitive Russell 2000 fared better than the S&P 500 and Nasdaq as investors digested mixed Q1 earnings. The Euro Stoxx 50 index weakened despite signs of recovery in the eurozone. The Nikkei 225 index posted modest gains, with the yen rebounding against the US dollar following reports of Ministry of Finance intervention. In EM, the Shanghai Composite rallied on rising optimism of further supportive policy measures following the latest Politburo meeting. India’s Sensex index also performed well. Both oil and gold were weaker last week, as was copper, which fell amid continued concerns about weak physical demand in China.
WARNING: THE CONTENTS OF THIS DOCUMENT HAVE NOT BEEN REVIEWED BY ANY REGULATORY AUTHORITY IN THE PEOPLE’S REPUBLIC OF CHINA OR ANY OTHER JURISDICTION. YOU ARE ADVISED TO EXERCISE CAUTION IN RELATION TO THE INVESTMENT AND THIS DOCUMENT. IF YOU ARE IN DOUBT ABOUT ANY OF THE CONTENTS OF THIS DOCUMENT, YOU SHOULD OBTAIN INDEPENDENT PROFESSIONAL ADVICE.
This document has been issued by HSBC Bank (China) Company Limited (the “Bank”) in the conduct of its regulated business in China. It is not intended for anyone other than the recipient. The contents of this document may not be reproduced or further distributed to any person or entity, whether in whole or in part, for any purpose. This document must not be distributed to the United States, Canada or Australia or to any other jurisdiction where its distribution is unlawful. All non-authorised reproduction or use of this document will be the responsibility of the user and may lead to legal proceedings.
This document has no contractual value and is not and should not be construed as an offer or the solicitation of an offer or a recommendation for the purchase or sale of any investment [in any jurisdiction in which such an offer is not lawful] or subscribe for, or to participate in, any services. The Bank is not recommending or soliciting any action based on it.
The information stated and/or opinion(s) expressed in this document are provided by HSBC Bank (China) Company Limited. We do not undertake any obligation to issue any further publications to you or update the contents of this document and such contents are subject to changes at any time without notice. They are expressed solely as general market information and/or commentary for general information purposes only and do not constitute investment advice or recommendation to buy or sell investments or guarantee of returns. Do not rely on it for any investment or financial decisions.
The Bank and HSBC Group and/or their officers, directors and employees may have positions in any securities or financial instruments mentioned in this document (or in any related investments) (if any) and may from time to time add to or dispose of any such securities or financial instruments or investments. The Bank and its affiliates may act as market maker or have assumed an underwriting commitment in the securities or financial instruments discussed in this document (or in related investments) (if any), may sell them to or buy them from customers on a principal basis and may also perform or seek to perform investment banking or underwriting services for or relating to those companies.
The information contained within this document has not been reviewed in the light of your personal circumstances. Please note that this information is neither intended to aid in decision making for legal, financial or other consulting questions, nor should it be the basis of any investment or other decisions. You should carefully consider whether any investment views and investment products are appropriate in view of your investment experience, objectives, financial resources and relevant circumstances. The investment decision is yours but you should not invest in any product unless the intermediary who sells it to you has explained to you that the product is suitable for you having regard to your financial situation, investment experience and investment objectives. The relevant product offering documents should be read for further details.
Some of the statements contained in this document may be considered forward-looking statements which provide current expectations or forecasts of future events. Such forward looking statements are not guarantees of future performance or events and involve risks and uncertainties. Such statements do not represent any one investment and are used for illustration purpose only. Customers are reminded that there can be no assurance that economic conditions described herein will remain in the future. Actual results may differ materially from those described in such forward-looking statements as a result of various factors. We can give no assurance that those expectations reflected in those forward-looking statements will prove to have been correct or come to fruition, and you are cautioned not to place undue reliance on such statements. We do not undertake any obligation to update the forward-looking statements contained herein, whether as a result of new information, future events or otherwise, or to update the reasons why actual results could differ from those projected in the forward-looking statements.
Investment involves risk. It is important to note that the capital value of investments and the income from them may go down as well as up and may become valueless and investors may not get back the amount originally invested. Past performance contained in this document is not a reliable indicator of future performance whilst any forecasts, projections and simulations contained herein should not be relied upon as an indication of future results. Past performance information may be out of date. For up-to-date information, please contact your Relationship Manager.
Investment in any market may be extremely volatile and subject to sudden fluctuations of varying magnitude due to a wide range of direct and indirect influences. Such characteristics can lead to considerable losses being incurred by those exposed to such markets. If an investment is withdrawn or terminated early, it may not return the full amount invested. In addition to the normal risks associated with investing, international investments may involve risk of capital loss from unfavourable fluctuations in currency values, from differences in generally accepted accounting principles or from economic or political instability in certain jurisdictions. Narrowly focused investments and smaller companies typically exhibit higher volatility. There is no guarantee of positive trading performance. Investments in emerging markets are by their nature higher risk and potentially more volatile than those inherent in some established markets. Economies in emerging markets generally are heavily dependent upon international trade and, accordingly, have been and may continue to be affected adversely by trade barriers, exchange controls, managed adjustments in relative currency values and other protectionist measures imposed or negotiated by the countries with which they trade. These economies also have been and may continue to be affected adversely by economic conditions in the countries in which they trade. Investment schemes are subject to market risks. You should read all scheme related documents carefully.
Copyright © HSBC Bank (China) Company Limited 2024. All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, on any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the prior written permission of HSBC Bank (China) Company Limited
