Transcript
Speaker: Welcome to HSBC Global Viewpoint, the podcast series that brings together business leaders and industry experts to explore the latest global insights, trends, and opportunities.
Speaker: Make sure you're subscribed to stay up to date with new episodes.
Speaker: Thanks for listening.
Speaker: And now onto today's show.
Speaker: Hello, I'm P.S.
Speaker: Butler in London.
Speaker: And I'm Aline Van Dyne in New York.
Speaker: And welcome to The Macro Brief, our weekly look at the issues influencing financial markets around the world.
Speaker: And it's a busy time with rapidly evolving tariff headlines and geopolitics unnerving investors.
Speaker: In a moment, I'm going to be talking to Stephen Major, Global Head of Fixed Income Research, about the recent moves in the bond market.
Speaker: But first, let's focus on equities, where we have seen sharp and unexpected moves.
Speaker: To shed light on what's really going on behind the headlines, I'm joined by Alistair Pinder, our head emerging markets and global equity strategist.
Speaker: Alistair, welcome to the podcast.
Speaker: Thank you very much for having me.
Speaker: So the S&P 500 hit a record high on the 19th of February.
Speaker: Things have definitely moved sharply and changed since then.
Speaker: What are the shifting narratives driving the moves?
Speaker: So I think it's actually worth taking a step back a little bit further and going back to pre the US election, where the narrative was that if Trump won the election and got a clean sweep, then this would reinforce what is called US exceptionism, because the policies would be focused on tax cuts, it would be focused on trade protectionism, and this would be a really powerful force for US assets.
Speaker: Now, fast forward to today and what's changed is that we probably underestimated the reaction of governments from the rest of the world, which is that what we've seen is China stepping up to the plate with quite sizable fiscal stimulus to offset the headwinds from tariffs and even Europe and specifically Germany
Speaker: has also indicated their willingness to embark on pretty substantial fiscal stimulus as a result of Trump's, you know, wavering support for NATO and Ukraine.
Speaker: So across the board, what we've seen is that these markets and these equity markets that we thought would be struggling,
Speaker: have actually started to do a little bit better.
Speaker: And the US exceptionism story, which I think was a crowd favorite after the US election has started to underperform as investors reassess the earnings impact from higher tariffs and kind of question how long is this uncertainty going to persist?
Speaker: And Alastair, just explain to us why the increased fiscal stimulus in China, in Germany, why is that supportive of equity markets in those countries?
Speaker: Well, I think it comes back down to, you know, the economic growth and the earnings expectations, which, again, you know, taking this, you know, the look at the analysis prior to the elections, consensus is really concerned about how earnings were going to get hit by all of these tariffs, which Trump was promising to impose.
Speaker: And essentially, this fiscal stimulus has essentially provided a safety net.
Speaker: The governments have stepped in and said, OK, if our growth is going to be hit by tariffs, then we're going to offset that by providing our own stimulus.
Speaker: And so what we've seen, particularly in Europe and also in China, in fact, is that earnings momentum has moved sharply more favorable for these two equity markets relative to the US.
Speaker: And I think that has also been a key underlying driving factor for these two equity markets outperforming.
Speaker: Another big move in the markets has been changes in the Magnificent Seven, the big US tech-focused stocks.
Speaker: Just talk us through that, because those drivers are a little bit different to the ones you've just described, right?
Speaker: Completely.
Speaker: And you could almost say that some of these drivers that were causing some of the headwinds for the Magnificent Seven actually started all the way back in August, where there was some kind of concerns about the potential monetization of all of this AI capex spending, which is just huge.
Speaker: I mean, it's really billions and billions and billions of dollars being plowed into AI capex.
Speaker: And the question that investors were asking, well, these stocks are really expensive.
Speaker: You know, how quickly can you really monetize all of that return on investment?
Speaker: And then something else happened, you know, at the beginning of the year, which was DeepSeek.
Speaker: You know, that kind of came out of nowhere and shocked investors.
Speaker: And what that provided, particularly for that global investor, it really highlighted two things.
Speaker: One is that actually a lot of this AI investment can potentially be done at a much cheaper scale.
Speaker: And secondly, it almost opened up a new
Speaker: AI alternative to invest in, which was China's internet names.
Speaker: And to put it into perspective, these stocks trade on roughly 16, 17 times earnings compared to the Magnificent Seven, which now is on around 25 times earnings.
Speaker: Back in 2020, these two China internet names and the Magnificent Seven traded on par with each other.
Speaker: So they've now had this huge valuation disconnect.
Speaker: And people are just looking at China and thinking, maybe this is a cheaper AI alternative.
Speaker: And so that's also weighed on the sentiment of these US tech stocks.
Speaker: Just to recap, we've got tariffs, which could impact growth and inflation potentially, changes in geopolitics and resultant fiscal shifts in some of the biggest economies in the world.
Speaker: And then there's big shifts in expectations around AI and sort of tech developments.
Speaker: So going back to the US, how does this factor into recession expectations?
Speaker: What we've seen is that, first of all, you know, the risk of higher tariffs is definitely going to have a negative hit to GDP.
Speaker: It obviously depends on the extent of tariffs.
Speaker: But even beyond tariffs, what we've also seen is things like the expectation of layoffs amongst government employees, which again could have a negative consequence for GDP.
Speaker: And that's raised expectations or fears, I should say, of the U.S. going into recession.
Speaker: Now, to put things into context, you know, typically when the U.S. goes into a recession, the S&P declines by around 10 percent.
Speaker: Now, there's some differentiation.
Speaker: If you're going into a real deep recession, which we classify as more than a year, actually, that downside could be more than 20 percent.
Speaker: And when you say typically, you mean looking back over history, how long?
Speaker: Completely, going back to almost the 1940s here.
Speaker: So, you know, long-term history.
Speaker: So, you know, if you've got a shallow recession, which is less than a year, you've got around 10% downside.
Speaker: A deep recession, which is more than a year, you know, 20% to 30% downside.
Speaker: So, putting that into context today, well, the S&P 500 is nearly down 10%.
Speaker: So you could say, well, based on this metric, the US equity market is almost pricing in some kind of shallow recession risk.
Speaker: And indeed, we see that in the earnings numbers where for Q1 2025, earnings expectations are 8% below where Q4 of 2024 is.
Speaker: And it's really not expected to meaningfully recover until Q3 of this year.
Speaker: And these are all consensus expectations, consensus expectations.
Speaker: So you can see that that's what the market is kind of concerned about is the hits, you know, to earnings.
Speaker: And I think another big thing that plays here is outside of the recession aspect of it.
Speaker: uncertainty plays a massive role in this, right, which is that, you know, without knowing exactly what's going to happen over the next few months, what we've seen is that capex intentions by companies is slowing.
Speaker: And even the guidance which companies are offering to investors is basically getting lowered because companies can't really plan significantly for the next few months.
Speaker: And so guiding investor expectations lower.
Speaker: And all of that is just basically feeding in to quite a negative sentiment in the market at this point.
Speaker: And just lastly, expectations of potentially slightly reduced growth in the US.
Speaker: Is there a scenario where that could actually be positive for equities?
Speaker: So you could argue that and this kind of feeds into this Fed puts, which is essentially at some point, if growth slows enough, the Fed might be willing to step in and start cutting interest rates and lowering bond yields.
Speaker: And that typically can be seen as positive for the equity markets because it provides, you know, cheaper financing, it lowers the cost of debt, etc.
Speaker: That might be well and true.
Speaker: And we've definitely seen that historically play out.
Speaker: A good example is actually, you know, during the Trump first term.
Speaker: But, you know, the one thing to highlight is that we're in a very different scenario here, which is today we're tackling higher inflation.
Speaker: and sticky inflation.
Speaker: And arguably tariffs can contribute to higher inflation.
Speaker: So even if growth slows, the ability for the Fed to jump in and what we say save equity markets might not be there to the same extent as it has been previously.
Speaker: Now conveniently, we're going to be hearing about bond markets next.
Speaker: So that's a view from equities back to you in London, Piers.
Speaker: Thanks, Aileen.
Speaker: Let's bring in Steve Major, our global head of fixed income research, who joins me from Dubai.
Speaker: Steve, welcome back to the podcast.
Speaker: Thank you, Piers.
Speaker: Thanks for having me.
Speaker: Not at all.
Speaker: And it's fair to say there have been some considerable moves in bond yields this year.
Speaker: Maybe firstly, let's recap on what those have been.
Speaker: In simple terms, it's US Treasury yields down and others like BUNS and China, Japan up.
Speaker: For context,
Speaker: US Treasury yields at one point were 50 basis points down on the year, and they're currently between 20 and 30 basis points down.
Speaker: And the important context here is that the yields were rising into the end of last year.
Speaker: So we're seeing a reversal of the trend that was in place, greeting this new administration,
Speaker: in the US around the election time.
Speaker: For Boons, it's a big increase in yields recently.
Speaker: And the context here is important because yields were falling last year on weak growth and inflation.
Speaker: China, it's more of the same.
Speaker: Yields fell a lot through the second half of last year.
Speaker: This year, they're up about 17 basis points for the 10-year.
Speaker: So quite some divergence between the US and other big markets.
Speaker: So let's look at the reasons behind that.
Speaker: In your flagship report, the fixed income asset allocation, the latest edition of which you've just published, you highlight three factors behind these moves.
Speaker: So maybe let's take them one at a time.
Speaker: Firstly, there's been a dramatic shift in European fiscal policy.
Speaker: Is that related to the sort of big headlines around the so-called debt handbrake being released in Germany?
Speaker: I think the most recent news flow has definitely been on Germany.
Speaker: That was the surprise.
Speaker: And that's what led to the knee-jerk reaction on Bundz.
Speaker: But Piers, there has been some development in the last few months.
Speaker: So at the end of last year, Mr Draghi, the ex-ECB president, was presenting a plan talking about some...
Speaker: common issuance and plans for boosting the European economy.
Speaker: It wasn't about defence, but there were these moves already in place.
Speaker: So I think it's fair to say that American policy has led to a response in Europe that looks like it's going to be a big fiscal expansion.
Speaker: And Germany is in the lead of that.
Speaker: So the second reason was bearish positioning on US Treasuries coming into 2025.
Speaker: What drove that and how extreme was it?
Speaker: Well, yes, in the same way that Bund yields, European yields were low at the start of this year, pushing towards 2% in Germany, and now they're close to 3%.
Speaker: In the US, it was the opposite.
Speaker: We were pushing towards 5%.
Speaker: And it was very much a consensus view that the new administration in the US would have a fiscal policy
Speaker: plus tariff policy and other factors that would be quite inflationary.
Speaker: So many people came into this year selling treasuries, pushing those yields up.
Speaker: So the reversal of that has come through because, in fact, we don't see the fiscal profligacy that some had spoke of.
Speaker: And also, it seems that there's a great deal of uncertainty coming with tariff policy.
Speaker: And uncertainty is not good news.
Speaker: That is not good news for consumers, investors, anyone.
Speaker: And you can see that you've had a response from activity data, on the downside, that is.
Speaker: And finally, importantly, the outlook for the Fed, the outlook for easing has also changed.
Speaker: In fact, you point out, and I remember this well, that at one stage there was even concern that the Fed might start tightening again.
Speaker: So what's the market discounting now vis-a-vis the Fed?
Speaker: Yeah, it's related to the data, Piers.
Speaker: It could be as simple as that in that the data is softer.
Speaker: So the market's now looking at two or three levels.
Speaker: possible rate cuts through this year.
Speaker: At one point last September, we were up to six or seven cuts one year ahead.
Speaker: So the data is one thing.
Speaker: And I think it's important to understand that back in November and December, there was a scenario, not a baseline forecast, but a scenario,
Speaker: that spoke to the theme of rate hikes, of reversing the cuts.
Speaker: Now, just taking that scenario out is like taking a right-hand side tail risk away.
Speaker: That's helped bring the yields down a bit as well.
Speaker: So removing the fear of hikes, I think, is important.
Speaker: And coming back to what you said about Europe and the impact on bond yields in Europe, can that upward move in European yields have had a sort of knock-on effect elsewhere?
Speaker: Well, apparently, yes.
Speaker: Speaking with the team, there's evidence of this.
Speaker: And my understanding is you see overseas investors buying bonds in Japan or in China or wherever, and they hedge back into their local currencies.
Speaker: So everything is quite linked.
Speaker: If boon yields go up, it will change what a European investor needs for other asset classes that would compete with the boons.
Speaker: And that's basically what's happening.
Speaker: There's been a knock-on effect.
Speaker: Everything is, as ever, is interconnected.
Speaker: What about the UK?
Speaker: Is it caught in the middle between what's happening in the US and Europe?
Speaker: Are there also domestic issues that they're having to contend with?
Speaker: I think you could say stuck in the middle.
Speaker: Last year, in the last quarter of 2024, the US Treasury yields may have been dragging the gilt yields up.
Speaker: And at the time, I remember that it was exposing the lack of fiscal space in the UK because the yields went up.
Speaker: It increased the financing costs for the government.
Speaker: So whatever budget plans they had in the UK, they were a bit exposed.
Speaker: We've had sticky inflation.
Speaker: Some of the budget moves may have added to that.
Speaker: So for gilt yields to be coming down, we need to see some activity data, more than surveys, some actual real data that is indicating a slowdown and cooler inflation.
Speaker: I think it really has not helped that Bund yields have surged so much so quickly, because that's, of course, pushing the floor for those gilt yields a bit higher as well.
Speaker: So the UK needs Bund yields to come down and it needs some domestic developments that would support the Bank of England getting back onto that easing path.
Speaker: Now, I'm in London and you're in Dubai, but just over a week's time, we'll be together at the Global Investment Summit, the HSBC Global Investment Summit.
Speaker: And from what I can see, you are in very strong demand for meetings.
Speaker: I mean, how are you finding talking to clients?
Speaker: Are they a bit stressed out by all these sort of day-to-day changes, literally, in terms of what's happening to the markets?
Speaker: How hard is it to sort of give them a sense of how to position themselves?
Speaker: Well, I'm looking forward to meeting the clients in Hong Kong at the GIS peers, and it's probably the best part of the job.
Speaker: I think that the confusion really, really needs to be addressed with a framework to help explain what's going on.
Speaker: And I think it's fair to say there is a lack of consensus.
Speaker: People have been confused.
Speaker: They've been caught perhaps on the wrong side of some of these issues.
Speaker: surprise policy moves.
Speaker: So what we have to do is to try and look through the noise and look to where we're going to settle down in the longer run.
Speaker: Ultimately, investing does require some focus on fundamental valuations.
Speaker: So that's the best part of the job, trying to explain why our forecasts are still pretty much unchanged from where they were before all of this noise has entered into the market.
Speaker: Well, good luck with all those meetings.
Speaker: And again, look forward to seeing you in Hong Kong.
Speaker: But for now, thank you very much for joining us.
Speaker: Likewise.
Speaker: Thank you, Piers.
Speaker: Look forward to seeing you in a couple of weeks.
Speaker: And for those of you who can't join us at the GIS, there will be a special Live Insights event on the last day of the summit.
Speaker: That's the 27th of March.
Speaker: I'll be in Hong Kong putting your questions to Janet Henry, Global Chief Economist, and Murat Olgun, Global Head of Emerging Markets Research.
Speaker: For more details on how to sign up, head to LinkedIn and search hashtag HSBC Research.
Speaker: So that's it for another edition of the Macro Brief.
Speaker: From all of us here, thanks for listening.
Speaker: We'll be back again next week.
Speaker: Thank you for joining us at HSBC Global Viewpoint.
Speaker: We hope you enjoyed the discussion.
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