Top of main content

Investment Weekly: Fed on summer holidays

6 May 2024

Key takeaways

  • 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.

  • In the current environment of high interest rates, it’s tempting to lock up money in cash accounts. But there are potential opportunity costs of doing so.

  • April was a tough month for Western government bond markets as investors priced out 2024 Fed rate cuts. 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.

Chart of the week – Fed on summer holidays

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’.

Market Spotlight

Emerging trends in ESG

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. The level of yield is not guaranteed and may rise or fall in the future.

Source: HSBC Asset Management. Macrobond, Bloomberg. Data as at 11am UK time 03 May 2024.

Lens on…

Magnificent earnings – a hard act to repeat?

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?

Putting cash to work in fixed income

In the current environment of high interest rates, it’s tempting to lock up money in cash accounts. But there are potential opportunity costs of doing so. The first point to make is fixed-income assets have scope for capital gains, unlike cash. And high-quality government and corporate bonds are inherently less volatile than most equity asset classes, making them less risky.

Also, quants have crunched the numbers and calculated that just a 50bp dip in US Treasury yields would produce a 12-month total return of around 6% on 2-year Treasuries, rising to 13% on a 30-year bond. But the risks are asymmetric. Even if yields rise by 50bp (associated with falling bond prices), you would still make a positive return on 2, 5, and 10-year bonds. This is because high coupons more than offset the capital loss.

Further progress on disinflation has the potential to push yields lower, as this provides central banks with the confidence to cut rates. A downside economic shock could push yields down even more. These scenarios are consistent with a period of outsized returns for bondholders.

Asian bonds shine

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 11am UK time 03 May 2024.

Key Events and Data Releases

Last week

The week ahead

Source: HSBC Asset Management. Data as at 11am UK time 03 May 2024.

Market review

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.

Related Insights

  • For the sixth consecutive meeting (since July 2023), the FOMC voted unanimously to leave...[6 May]

  • As markets are now pricing in a delayed and slower Fed rate cut path due to  sticky US...[2 May]

  • Prepare for an insightful journey with our CIOs who delve into the most critical topics...[26 Mar]

  • As we enter the second quarter, we see a brighter outlook with the Fed rate cuts just...[15 Mar]

Disclaimer

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 by HSBC Bank Canada (including one or more of its subsidiaries HSBC Investment Funds (Canada) Inc. (“HIFC”), HSBC Private Investment Counsel (Canada) Inc. (“HPIC”) and HSBC InvestDirect division of HSBC Securities (Canada) Inc. (“HIDC”)), HSBC Bank (China) Company Limited, HSBC Continental Europe, HBAP, 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, and HSBC FinTech Services (Shanghai) Company Limited (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.

 

Important Information about HSBC Global Asset Management (Canada) Limited (“AMCA”)

 

HSBC Asset Management is a group of companies, including AMCA, that are engaged in investment advisory and fund management activities, which are ultimately owned by HSBC Holdings plc. AMCA is a wholly owned subsidiary of, but separate entity from, HSBC Bank Canada.

 

Important Information about HSBC Investment Funds (Canada) Inc. (“HIFC”)

 

HIFC is the principal distributor of the HSBC Mutual Funds and offers the HSBC Mutual Funds and/or the HSBC Pooled Funds through the HSBC World Selection® Portfolio service. HIFC is a subsidiary of AMCA, and indirect subsidiary of HSBC Bank Canada, and provides its products and services in all provinces of Canada except Prince Edward Island. Mutual fund investments are subject to risks. Please read the Fund Facts before investing.

 

®World Selection is a registered trademark of HSBC Group Management Services Limited.

 

Important Information about HSBC Private Investment Counsel (Canada) Inc. (“HPIC”)

 

HPIC is a direct subsidiary of HSBC Bank Canada and provides services in all provinces of Canada except Prince Edward Island. The Private Investment Counsel service is a discretionary portfolio management service offered by HPIC. Under this discretionary service, assets of participating clients will be invested by HPIC or its delegated portfolio manager, AMCA, in securities, including but not limited to, stocks, bonds, mutual funds, pooled funds and derivatives. The value of an investment in or purchased as part of the Private Investment Counsel service may change frequently and past performance may not be repeated.

 

Important Information about HSBC InvestDirect (“HIDC”)

 

HIDC is a division of HSBC Securities (Canada) Inc., a direct subsidiary of, but separate entity from, HSBC Bank Canada. HIDC is an order execution only service. HIDC will not conduct suitability assessments of client account holdings or of the orders submitted by clients or from anyone authorized to trade on the client’s behalf. Clients have the sole responsibility for their investment decisions and securities transactions.

 

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).

 

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.

 

Important information on sustainable investing

 

“Sustainable investments” include investment approaches or instruments which consider environmental, social, governance and/or other sustainability factors (collectively, “sustainability”) to varying degrees. Certain instruments we include within this category may be in the process of changing to deliver sustainability outcomes.

 

There is no guarantee that sustainable investments will produce returns similar to those which don’t consider these factors. Sustainable investments may diverge from traditional market benchmarks.

 

In addition, there is no standard definition of, or measurement criteria for sustainable investments, or the impact of sustainable investments (“sustainability impact”). Sustainable investment and sustainability impact measurement criteria are (a) highly subjective and (b) may vary significantly across and within sectors.

 

HSBC may rely on measurement criteria devised and/or 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 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 sustainability impact will be achieved.

 

Sustainable investing is an evolving area and new regulations may come into effect which may affect how an investment is categorised or labelled. An investment which is considered to fulfil sustainable criteria today may not meet those criteria at some point in the future.