Top of main content

Investment Weekly: Euro 2024!

3 June 2024

Key takeaways

  • After rallying in Q1 2024, Japanese stocks have delivered a more subdued performance in Q2. A key reason has been weakness in the yen, which has fallen to multi-year lows against the US dollar.

  • Against the backdrop of a strong US dollar, emerging market Asia FX has proved to be relatively resilient this year. While countries across the region have responded to the pressure in different ways, the general picture is that Asian currencies have only seen modest weakness versus their major EM peers.

  • When trying to explain recent US economic resilience, one overlooked factor may have been the impact of a significant increase in US immigration last year.

Chart of the week – Unstoppable…for now

With Europe’s Q1 earnings season drawing to a close – and more than 90% of stocks having now reported – the big picture is that the continent’s corporates are materially beating consensus expectations. After consistently being on the back foot versus US peers post-Covid, European firms – and share prices – are feeling the effects of an improving macro environment and a rebound in earnings momentum. And, crucially, they also now face the prospect of a rate cut from the European Central Bank next week. The Stoxx Europe 600 index is up over 7% year-to-date.

The outlook for 2024 index earnings growth is currently just above 5%. Financials – which saw the most earnings ‘beats’ and highest upward revisions in Q1 – are forecast to contribute 40% of the growth this year. And with the sector’s price-earnings ratio 30% below its own long-run average and double the normal discount to US peers, there is room for price gains. Meanwhile, technology, which has underpinned earnings growth in the US, is set to be a net drag on earnings growth in Europe this year. But there should be a turnaround in tech fortunes at the end of this year. Analysts expect this to push index EPS growth higher to match the US more closely at around 10% in 2025.

Overall, appealing valuations and the potential for a cyclical pickup offers some reasons to be confident. But the outlook remains dependent on the Fed policy, which ultimately constrains the ECB. And it’s hard to see a robust European recovery if US economic momentum falters.

Market Spotlight

All eyes on securitised credit

Many areas of the corporate credit market are currently trading at historically tight spreads. But one investment grade asset class benefitting from higher rates yet still offering potential long-term value, is securitised credit.

As a largely floating rate asset, the coupons on securitised credit rose in 2022 and 2023 and have yet to meaningfully fall. As long as rates remain high, the securities could continue to generate high income. And while spreads have tightened during the last quarter, they remain close to the middle of the range since 2009 (excluding Covid).

The recent tightening has been less significant in commercial mortgage-backed securities (CMBS). That’s not surprising given the fragile outlook for commercial real estate. It means performance of CMBS has depended heavily on the profile of secured properties. Sectors like Life Sciences, Multifamily and Prime Offices that accommodate working from home, are expected to keep performing well. But secondary offices and secondary shopping malls face a more uncertain outlook – meaning that security selection is key. 

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 01 June 2024.

Lens on…

Japanese stocks slip

After rallying in Q1 2024, Japanese stocks have delivered a more subdued performance in Q2. A key reason has been weakness in the yen, which has fallen to multi-year lows against the US dollar. Historically, there has been a negative correlation between the yen and Japanese stocks because a weak currency tends to boost big exporters. But there are downsides too. Higher import costs have crimped the margins of domestic firms, notably in the energy and materials sectors. And after a period of strong international inflows, the weaker yen now risks being a deterrent to foreign investors.

Despite these frictions, the outlook for Japanese stocks is positive. Earnings growth has been resilient, helped by stronger regional trade flows and robust demand in sectors like technology. In May, Japan’s manufacturing PMI survey moved into expansion territory for first time in a year. Ongoing corporate governance reforms also help. And in terms of valuation, Japan still trades at a discount to other DM markets like the US.

Resilient Asian FX

Against the backdrop of a strong US dollar, emerging market Asia FX has proved to be relatively resilient this year. While countries across the region have responded to the pressure in different ways, the general picture is that Asian currencies have only seen modest weakness versus their major EM peers.

This resilience is down to several factors. One is that Asian economies have been in better shape to fend off FX stress than in the past. FX reserve adequacy ratios and basic balances have been bolstered, and balance of payments risks are more manageable. Asian central banks have also had a wider range of policy tools at their disposal to curb excessive one-sided FX moves without needing to deplete their FX reserves.

Key risks remain, particularly given the wide rate differentials with the US and the potential for prolonged dollar strength. The dollar could soften later this year as Fed rate cuts come closer into view, and that could benefit Asian currencies. A cyclical recovery in Asia’s export cycle, particularly in high-technology industries, also provides some upside potential.

Immigration and the golden path

When trying to explain recent US economic resilience, one overlooked factor may have been the impact of a significant increase in US immigration last year. Recent estimates from the Congressional Budget Office (CBO) suggest that net immigration was 3.3m last year, up from 2.7m in 2022 and 1.2m in 2021, and well above the 900k average between 2010 and 2019.

Population growth is an easy way to guarantee higher rates of economic growth – look at India today. But importantly, an increase in the size of the labour force helps keep a lid on wage demands and thus underlying inflation pressures. This is a key tenet of the golden path scenario which incorporates other positive supply-side shocks such as a pickup in productivity growth, or benign geopolitics and subdued commodity prices – typically good news for markets.

The CBO expects another strong year of population growth in 2024. But beyond that, political pressure may mean immigration levels are likely to taper off no matter who occupies the White House.

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 01 June 2024.

Key Events and Data Releases

Last week

The week ahead

Source: HSBC Asset Management. Data as at 11am UK time 01 June 2024.

Market review

Hawkish Fed comments weighed on risk markets last week. Core government bonds sold off modestly with markets factoring in only one 0.25% Fed funds rate cut this year as investors await the European Central Bank council meeting. The DXY US dollar index consolidated. US equities saw widespread weakness with the interest rate-sensitive Russell 2000 underperforming. The Euro Stoxx 50 fell, led by weaker tech stocks. Japan’s Nikkei 225 was also on the defensive as supply concerns and interest rate worries weighed on JGBs. In EM, the Shanghai Composite traded sideways despite China’s official manufacturing PMI dipping back into negative territory in May. India’s Sensex dropped amid caution ahead of the outcome of the general election. In commodities, oil prices were steady ahead of the OPEC+ meeting. Copper weakened on disappointing Chinese data, and gold moved sideways.

Related Insights

  • Market expectations for Fed rate cuts have been on a roller-coaster ride, swinging from too...[23 May]

  • 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]

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.