29 July 2024
This year’s market action has been characterised by exceptionally low levels of volatility. One of the most followed gauges of equity market volatility – the VIX – has averaged 13.9 in 2024 so far, versus 21.2 over the past five years. But the VIX has picked up recently. The index jumped last week to reach 19.2 at one point.
As H2 progresses, there may be plenty of potential developments that could create a more volatile market environment. As we’ve seen over the past fortnight, stretched valuations in US big tech stocks have made prices vulnerable to any disappointment on earnings and the general news flow in the sector.
And although the economic backdrop remains robust, further cooling is likely as restrictive policy continues to dampen housing and manufacturing activity, and the consumption of lower-income households, which is more dependent on access to credit. Despite the recent good news, the disinflation path is likely to remain bumpy with uncertainty on the extent of Fed easing over the next few quarters. Geopolitics and politics also matter. The global environment is becoming less predictable. And we know from history that equity market volatility typically rises ahead of US elections. Buckle up.
Last week marked India’s first Union Budget since the country’s hotly contested general election earlier this year. Ahead of the announcement, there were concerns about whether Narendra Modi’s BJP, which failed to secure a majority in parliament, could balance competing political demands and still maintain fiscal prudence. As it turned out, the budget committed to reducing the fiscal year 2025 (April 2024 through March 2025) central government deficit target to 4.9% of GDP from 5.6% in FY24. It also addressed pressing issues on growth, reforms, and employment.
This ‘reset budget’ should be positive for the medium-term macro and market outlook. For stocks, plans for a simplified tax code should boost the earnings outlook. Likewise, a shift in capex spending to ‘soft infrastructure’ like education and training – while maintaining a focus on hard infrastructure – are encouraging. These themes should be a plus for sectors like industrials and manufacturing. And efforts to boost job creation should prove positive for the consumer staples sector and autos segment, too. While equity valuations are fairly stretched at 24x forward price-earnings, robust earnings growth means India can still perform well in 2024.
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. While any forecast, projection or target where provided is indicative only and not guaranteed in any way. Source: HSBC Asset Management. Macrobond, Bloomberg. Data as at 11.00am UK time 26 July 2024.
In recent weeks, stocks have seen a major factor rotation from Growth into Value involving the biggest switch out of the tech-heavy Nasdaq into the small-cap Russell 2000 since 1979. This has been largely driven by growing expectations of lower rates amid some disappointing news in the tech sector.
From here, the hunt for value in stocks could well continue. But there are risks if economic growth disappoints. For the risk averse, it could make sense to take a more defensive value approach, with some bond-like equities potentially offering protection from macro headwinds alongside high dividend yields.
Looking at Fed cycles since 1994, defensive stocks normally outperform between the last Fed hike and first rate cut. This time around has been different, with defensives like staples and utilities underperforming the market since the last hike in July 2023. This has contributed to the significant gap in dividend yields between the staples sector versus the wider market.
Recent US macro data have led investors to become far more comfortable with the idea that the Fed can cut rates twice, or possibly more, this year. The initial triggers for this reassessment were some softer-than-expected ISM surveys, a moderation in private sector payrolls and further gradual increase in the unemployment rate. A second consecutive lower-than-expected core CPI inflation print then reinforced the downtrend in rates.
Disinflation and a cooling labour market create a bond-positive environment, with investors able to benefit from still-attractive yields and the potential for capital gains, particularly if growth disappoints.
For investors, yield curve strategies are also an option. Despite short-term rate expectations coming down, the 10y-2y curve remains inverted. This inversion is likely to be unsustainable. In the mid-to-late 1990s – when a soft landing was achieved – the slope of the curve was typically positive, peaking at over 80bp. And in the event of downside growth risks materialising, the curve could steepen very quickly as policy rates are slashed.
Equity markets in several frontier and small-emerging market regions have delivered impressive returns this year, outperforming both emerging and developed markets – with strong performances from markets in Kenya, Kazakhstan, Slovenia, and Romania.
In the current economic cycle, for many frontier markets, relative GDP growth is accelerating, and inflation is falling (along with domestic interest rates). This is leading to a pick-up in the outlook for markets where valuations have been deeply discounted. The frontier market is potentially one of the most mispriced asset classes. On a price-to-earnings valuation basis, it trades at a 30% discount to emerging markets and 53% discount to developed markets currently, well below the five-year average.
Driving future performance, frontier regions are benefitting from strong structural trends, including the relocation of manufacturing hubs, re-routing of supply chains, social reforms, and digitisation. These regions offer lower correlation to other asset classes, lower volatility, and are increasingly taking a politically neutral stance amid rising geopolitical tensions. Yet they continue to be under-owned.
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, Datastream. Data as at 11.00am UK time 26 July 2024.
Source: HSBC Asset Management. Data as at 11.00am UK time 29 July 2024. Any forecast, projection or target where provided is indicative only and not guaranteed in any way.
Data showed that the US economy expanded faster than expected in the second quarter, with GDP up 2.8% annualised. Inflation pressures also continued to ease, cementing expectations of a Fed rate cut in September. Core government bonds were range-bound during last week, with shorter-dated US Treasuries finishing slightly higher. Equities were volatile, with US mega-cap technology stocks selling-off sharply. The S&P 500 and Nasdaq indices were hardest hit, while the small-cap Russell 2000 gained ground. In Europe, the Stoxx Europe 600 was down modestly on mixed earnings news. In Asia, India’s Sensex reversed early weakness to finish higher, while China’s Shanghai Composite was down on concerns over the country’s slow economic recovery. In commodities, oil was on course for its third weekly decline, with gold and copper prices also falling.
This document has been issued by The Hongkong and Shanghai Banking Corporation Limited (the "Bank") in the conduct of its regulated business in Hong Kong and may be distributed in other jurisdictions where its distribution is lawful. 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 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 Global Asset Management 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. The Bank has not been involved in the preparation of such information and opinion. The Bank makes no guarantee, representation or warranty and accepts no responsibility for the accuracy and/or completeness of the information and/or opinions contained in this document, including any third party information obtained from sources it believes to be reliable but which has not been independently verified. In no event will the Bank or HSBC Group be liable for any damages, losses or liabilities including without limitation, direct or indirect, special, incidental, consequential damages, losses or liabilities, in connection with your use of this document or your reliance on or use or inability to use the information contained in this document.
In case you have individual portfolios managed by HSBC Global Asset Management Limited, the views expressed in this document may not necessarily indicate current portfolios' composition. Individual portfolios managed by HSBC Global Asset Management Limited primarily reflect individual clients' objectives, risk preferences, time horizon, and market liquidity.
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. Mutual fund investments are subject to market risks. You should read all scheme related documents carefully.
Copyright © The Hongkong and Shanghai Banking Corporation 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 The Hongkong and Shanghai Banking Corporation Limited.
Issued by The Hongkong and Shanghai Banking Corporation Limited
