24 Jun 2024
Investment markets continue to embed a positive outlook for global economic and corporate earnings growth – consistent with limited damage from the impact of high rates. Market implied measures of volatility are at rock-bottom levels, and sentiment is bullish. But geopolitics remains a key risk to this benign outcome for markets.
Heading into H2, a number of significant events in the political calendar could inject more volatility into investment markets – elections in France and the US in particular, will be watched closely. Political risks look to be stacking up.
And more generally, the global economic system looks more susceptible to geopolitical shocks now. The global economy is fragmenting. Globalisation is running out of steam. This has come as economic power shifts to Asia and emerging markets – the share of world GDP from the BRICS-plus is set to accelerate in the next couple of decades – allowing them to increasingly flex their economic muscles.
There will be some ‘winners’ from this global shift. India, Mexico, and Southeast Asian economies such as Vietnam and Malaysia can benefit from the trends of ‘friend-shoring’ and ‘near-shoring’. Country-level economic performance is set to be increasingly idiosyncratic – good news for investors hoping to find diversification in their EM allocation. But the big picture consequence is a more volatile and unpredictable economic regime.
The fast-growing private credit market has been well positioned to benefit from the current high-for-longer rates environment. As a largely floating rate asset class, current yields of more than 11% are higher than many other credits, and greater than the historic returns from global equities over the last decade.
After growing rapidly for more than 10 years, new private credit fundraising fell slightly in 2023, to an expected USD200 billion. Recent data suggest that decline has continued in 2024. In part, it’s because high rates are putting pressure on some borrowers and reducing demand in areas of the market.
But credit specialists think more certainty on the timetable for rate cuts will reinvigorate the market. And while lower base rates would mean yields easing back from current highs, private credit will remain a relatively high yielding portfolio diversifier that carries an illiquidity premium. Meanwhile, the ongoing retrenchment of banks from many areas in which they were historically dominant should mean the market for private lending continues to grow.
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.
This information shouldn't be considered as a recommendation to buy or sell specific sector/stocks mentioned. Any views expressed were held at the time of preparation and are subject to change without notice.
Source: HSBC Asset Management. Macrobond, Bloomberg. Data as at 11.00am UK time 21 June 2024.
Coming into 2024, markets were pricing between five and seven rate cuts for the major western central banks. Now, they are looking for one to three, depending on the central bank in question.
Importantly, this does not just represent a delay to the rate cutting cycle; longer-term policy rate expectations have also shifted up meaningfully over the past six months, from levels that were already well above the pre-Covid norm.
Ultimately, the resilience of economies in the face of high policy rates has convinced markets that the neutral interest rate has risen across economies, and we have moved decisively away from the post-GFC era of ultra-low rates.
This has left yields across a range of fixed income assets at attractive levels, allowing us to ‘put cash to work’. In addition, high quality bonds can provide some protection should any downside growth risks materialise, given central banks have ample room to cut rates if needed.
The currency is down 11% year-to-date against the US dollar – hitting a 34-year low. The rationale for a yen resurgence in 2024 was simple – Fed cuts combined with gradual Bank of Japan normalisation. But the Fed has delayed its rate cutting cycle. And the Bank of Japan has underwhelmed with its exit from ultra-accommodative policy – with previous week’s BoJ meeting disappointing investors expecting detail on the paring back of its bond buying – leaving the currency vulnerable.
H2 could see a revival in the yen’s fortunes. We have a scenario for modest dollar depreciation from here as US growth leadership wanes and the Fed tees up its first cut. The yen also looks disconnected from underlying rate differentials. But vital to a recovery of the currency will be more rapid BoJ normalisation which in turn requires greater evidence of sustained inflationary pressures.
Turkey’s stock markets began 2024 on a solid footing. In early March, momentum was already building, with foreign investors enthused by a shift to more orthodox economic policymaking, and increased activity from a strong domestic retail base. Since then, the MSCI Turkey index has rallied by another 25%.
The Turkish government still seems committed to reducing inflation, with recent news flow indicating that Finance Minister Şimşek will continue to prioritise it. Analysts expect CPI inflation to begin a steep descent from here, falling from 75% in May to around 50% by year end.
They think this can help equity multiples continue to edge higher from still-depressed levels (and well below the 10x average before 2017). They also factor in a decent 10% of earnings growth for 2024 and a stellar 38% for 2025, with financials, insurance and service sectors potentially outperforming names more sensitive to higher financing costs and a stronger lira.
Past performance does not predict future returns.
Source: HSBC Asset Management. Macrobond, Bloomberg. Data as at 11.00am UK time 21 June 2024.
Source: HSBC Asset Management. Data as at 11.00am UK time 21 June 2024.
Risk appetite remained positive amid a light week for economic data, with core government bonds largely range-bound. Ten-year French sovereign yields stabilised after the recent sell-off, with the European Commission suggesting that seven EU countries should be added to the EU Excessive Deficit Procedure. In a holiday-shortened week, US equities rose modestly, with the tech-driven Nasdaq testing new highs. The Euro Stoxx 50 index rebounded, led by French stocks, whilst Japan’s Nikkei 225 weakened as the yen fell to a two-month low against the US dollar. There was a mixed performance in EM equities, with Brazilin stocks edging higher despite Banco do Brasil pausing its easing cycle. The Shanghai composite index fell modestly amid mixed Chinese data, while India’s Sensex was flat. In commodities, oil prices continued to recover on rising demand optimism. Copper and gold rose.
This document or video is prepared by The Hongkong and Shanghai Banking Corporation Limited (‘HBAP’), 1 Queen’s Road Central, Hong Kong. HBAP is incorporated in Hong Kong and is part of the HSBC Group. This document or video is distributed and/or made available, HSBC Bank (China) Company Limited, HSBC Bank (Singapore) Limited, HSBC Bank Middle East Limited (UAE), HSBC UK Bank Plc, HSBC Bank Malaysia Berhad (198401015221 (127776-V))/HSBC Amanah Malaysia Berhad (20080100642 1 (807705-X)), HSBC Bank (Taiwan) Limited, HSBC Bank plc, Jersey Branch, HSBC Bank plc, Guernsey Branch, HSBC Bank plc in the Isle of Man, HSBC Continental Europe, Greece, The Hongkong and Shanghai Banking Corporation Limited, India (HSBC India), HSBC Bank (Vietnam) Limited, PT Bank HSBC Indonesia (HBID), HSBC Bank (Uruguay) S.A. (HSBC Uruguay is authorised and oversought by Banco Central del Uruguay), HBAP Sri Lanka Branch, The Hongkong and Shanghai Banking Corporation Limited – Philippine Branch, HSBC Investment and Insurance Brokerage, Philippines Inc, and HSBC FinTech Services (Shanghai) Company Limited and HSBC Mexico, S.A. Multiple Banking Institution HSBC Financial Group (collectively, the “Distributors”) to their respective clients. This document or video is for general circulation and information purposes only.
The contents of this document or video may not be reproduced or further distributed to any person or entity, whether in whole or in part, for any purpose. This document or video must not be distributed in any jurisdiction where its distribution is unlawful. All non-authorised reproduction or use of this document or video will be the responsibility of the user and may lead to legal proceedings. The material contained in this document or video is for general information purposes only and does not constitute investment research or advice or a recommendation to buy or sell investments. Some of the statements contained in this document or video 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. Actual results may differ materially from those described in such forward-looking statements as a result of various factors. HBAP and the Distributors do not undertake any obligation to update the forward-looking statements contained herein, or to update the reasons why actual results could differ from those projected in the forward-looking statements. This document or video has no contractual value and is not by any means intended as a solicitation, nor a recommendation for the purchase or sale of any financial instrument in any jurisdiction in which such an offer is not lawful. The views and opinions expressed are based on the HSBC Global Investment Committee at the time of preparation and are subject to change at any time. These views may not necessarily indicate HSBC Asset Management‘s current portfolios’ composition. Individual portfolios managed by HSBC Asset Management primarily reflect individual clients’ objectives, risk preferences, time horizon, and market liquidity.
The value of investments and the income from them can go down as well as up and investors may not get back the amount originally invested. Past performance contained in this document or video 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. Where overseas investments are held the rate of currency exchange may cause the value of such investments to go down as well as up. 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. Investments are subject to market risks, read all investment related documents carefully.
This document or video provides a high-level overview of the recent economic environment and has been prepared for information purposes only. The views presented are those of HBAP and are based on HBAP’s global views and may not necessarily align with the Distributors’ local views. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of its dissemination. It is not intended to provide and should not be relied on for accounting, legal or tax advice. Before you make any investment decision, you may wish to consult an independent financial adviser. In the event that you choose not to seek advice from a financial adviser, you should carefully consider whether the investment product is suitable for you. You are advised to obtain appropriate professional advice where necessary.
The accuracy and/or completeness of any third-party information obtained from sources which we believe to be reliable might have not been independently verified, hence Customer must seek from several sources prior to making investment decision.
The following statement is only applicable to HSBC Mexico, S.A. Multiple Banking Institution HSBC Financial Group with regard to how the publication is distributed to its customers: This publication is distributed by Wealth Insights of HSBC México, and its objective is for informational purposes only and should not be interpreted as an offer or invitation to buy or sell any security related to financial instruments, investments or other financial product. This communication is not intended to contain an exhaustive description of the considerations that may be important in making a decision to make any change and/or modification to any product, and what is contained or reflected in this report does not constitute, and is not intended to constitute, nor should it be construed as advice, investment advice or a recommendation, offer or solicitation to buy or sell any service, product, security, merchandise, currency or any other asset.
Receiving parties should not consider this document as a substitute for their own judgment. The past performance of the securities or financial instruments mentioned herein is not necessarily indicative of future results. All information, as well as prices indicated, are subject to change without prior notice; Wealth Insights of HSBC Mexico is not obliged to update or keep it current or to give any notification in the event that the information presented here undergoes any update or change. The securities and investment products described herein may not be suitable for sale in all jurisdictions or may not be suitable for some categories of investors.
The information contained in this communication is derived from a variety of sources deemed reliable; however, its accuracy or completeness cannot be guaranteed. HSBC México will not be responsible for any loss or damage of any kind that may arise from transmission errors, inaccuracies, omissions, changes in market factors or conditions, or any other circumstance beyond the control of HSBC. Different HSBC legal entities may carry out distribution of Wealth Insights internationally in accordance with local regulatory requirements.
Important Information about the Hongkong and Shanghai Banking Corporation Limited, India (“HSBC India”)
HSBC India is a branch of The Hongkong and Shanghai Banking Corporation Limited. HSBC India is a distributor of mutual funds and referrer of investment products from third party entities registered and regulated in India. HSBC India does not distribute investment products to those persons who are either the citizens or residents of United States of America (USA), Canada, Australia or New Zealand or any other jurisdiction where such distribution would be contrary to law or regulation.
The following statement is only applicable to HSBC Bank (Taiwan) Limited with regard to how the publication is distributed to its customers: HSBC Bank (Taiwan) Limited (“the Bank”) shall fulfill the fiduciary duty act as a reasonable person once in exercising offering/conducting ordinary care in offering trust services/ business. However, the Bank disclaims any guarantee on the management or operation performance of the trust business.
The following statement is only applicable to PT Bank HSBC Indonesia (“HBID”): PT Bank HSBC Indonesia (“HBID”) is licensed and supervised by Indonesia Financial Services Authority (“OJK”). Customer must understand that historical performance does not guarantee future performance. Investment product that are offered in HBID is third party products, HBID is a selling agent for third party product such as Mutual Fund and Bonds. HBID and HSBC Group (HSBC Holdings Plc and its subsidiaries and associates company or any of its branches) does not guarantee the underlying investment, principal or return on customer investment. Investment in Mutual Funds and Bonds is not covered by the deposit insurance program of the Indonesian Deposit Insurance Corporation (LPS).
Important information on ESG and sustainable investing
Today we finance a number of industries that significantly contribute to greenhouse gas emissions. We have a strategy to help our customers to reduce their emissions and to reduce our own. For more information visit www.hsbc.com/sustainability.
In broad terms “ESG and sustainable investing” products include investment approaches or instruments which consider environmental, social, governance and/or other sustainability factors to varying degrees. Certain instruments we classify as sustainable may be in the process of changing to deliver sustainability outcomes. There is no guarantee that ESG and Sustainable investing products will produce returns similar to those which don’t consider these factors. ESG and Sustainable investing products may diverge from traditional market benchmarks. In addition, there is no standard definition of, or measurement criteria for, ESG and Sustainable investing or the impact of ESG and Sustainable investing products. ESG and Sustainable investing and related impact measurement criteria are (a) highly subjective and (b) may vary significantly across and within sectors.
HSBC may rely on measurement criteria devised and reported by third party providers or issuers. HSBC does not always conduct its own specific due diligence in relation to measurement criteria. There is no guarantee: (a) that the nature of the ESG / sustainability impact or measurement criteria of an investment will be aligned with any particular investor’s sustainability goals; or (b) that the stated level or target level of ESG / sustainability impact will be achieved. ESG and Sustainable investing is an evolving area and new regulations are being developed which will affect how investments can be categorised or labelled. An investment which is considered to fulfil sustainable criteria today may not meet those criteria at some point in the future.
THE CONTENTS OF THIS DOCUMENT OR VIDEO HAVE NOT BEEN REVIEWED BY ANY REGULATORY AUTHORITY IN HONG KONG OR ANY OTHER JURISDICTION. YOU ARE ADVISED TO EXERCISE CAUTION IN RELATION TO THE INVESTMENT AND THIS DOCUMENT OR VIDEO. IF YOU ARE IN DOUBT ABOUT ANY OF THE CONTENTS OF THIS DOCUMENT OR VIDEO, YOU SHOULD OBTAIN INDEPENDENT PROFESSIONAL ADVICE.
© Copyright 2024. The Hongkong and Shanghai Banking Corporation Limited, ALL RIGHTS RESERVED.
No part of this document or video 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 The Hongkong and Shanghai Banking Corporation Limited.
