2 March 2026
The only certainty is uncertainty! The policy uncertainty index spiked last week on the recent trade and Fed headlines. But financial markets appear unconcerned – US stocks are range-trading, the VIX volatility index is relatively low at 20, and credit spreads are at multi-decade tights. What’s going on?
#1. First, it is very likely that textual data overstates uncertainty. Even the academics who built the policy uncertainty metric now accept that. And the Yale Budget Lab reckons that the effective tariff rate has dropped to the low teens.
#2. A lower effective tariff rate is good news for GDP growth and inflation. US growth is running around its trend pace, thanks to robust profits and the AI capex boom. And, while US inflation is likely to remain a bit sticky through 2026, recent data shows a gradual, bumpy journey back to the inflation target.
#3. Rising policy uncertainty reinforces the idea that the Fed stays on hold over the next few months.
Last year, investment markets climbed the “tariff wall of worry”, performing strongly despite policy uncertainty. That was down to profits staying strong and rates being cut. The real test for investment markets in 2026 will come if inflation remains high, which would constrain the Fed. Or if profits start to wobble.
Meanwhile, the action in markets continues under the surface. There is a “great rotation” underway, from growth and momentum, into value and emerging markets. That process has much further to run.
With China’s Lunar New Year and Spring Festival celebrations drawing to a close, it marks the end of the annual chunyun travel rush – the world’s largest mass migration of people.
From the early data, it looks like this year’s festivities have got people spending, with solid retail and restaurant sales, busy transport systems, and even a pick-up in home sales. Average daily passenger volumes across the country were up by more than 8% year-on-year during the main holiday period. Travel in and out of the country also saw a big rise.
Signs of rising consumer confidence will be welcomed by policymakers, given their renewed focus in the new Five-Year Plan on pursuing more balanced economic growth by cajoling consumption. Further policy moves on this front could emerge from the upcoming National People's Congress in early March, and the Politburo meeting in April.
Meanwhile, after a strong 2025, China’s stock market has been relatively subdued so far in 2026. But growth in the country’s burgeoning tech sector, a solid profits outlook, improving inflows, plus incremental policy to support domestic consumption, are all potential catalysts for further stock market momentum.
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. Past performance does not predict future returns. For informational purposes only and should not be construed as a recommendation to invest in the specific country, product, strategy, sector, or security. Diversification does not ensure a profit or protect against loss. Any views expressed were held at the time of preparation and are subject to change without notice. Any forecast, projection or target where provided is indicative only and is not guaranteed in any way. Source: HSBC Asset Management, Bloomberg, Macrobond. Data as at 7.30am UK time 28 February 2026.
US Treasuries rallied in February (yields fell). But that’s a puzzle against a backdrop of hot growth, two-way inflation risk, and rising oil prices. What’s the story here? A big part of the answer lies in Japan. Long-dated Japanese bond (JGB) yields reached multi-decade highs in mid-January but have since repriced sharply on easing fiscal and inflation concerns. The key point is that in bond markets, the long end is global, while the short end is local. For Treasuries, the US Fed anchors the short end of the curve, but the long end is influenced by international factors, global capital flows, and relative yield dynamics. And, recently, JGBs have been in the driving seat and the key focus for global investors (see chart). |
In multi-asset strategies, the Treasury rally means the stock/bond correlation is negative again. Good news! But the macro regime remains complex – and the economic system is being buffeted by demand and supply shocks. Traditional diversifiers might not be 100% reliable. We continue to “diversify the diversifiers” in portfolios.
Are the new AI overlords about to crash the economy?! It’s a big question that has sparked debate among investors last week. Meanwhile, another – more fundamental – story has been in profits. Sectors intertwined with the AI supercycle – like technology and communications – continue to drive the lion’s share of profits growth. Planned AI capex investment is still eye-watering – and remains a source of concern for many investors – but it has been good news for stocks in the semiconductor and hardware industries. Meanwhile, fears over predatory AI have caused a “software-mageddon”, with business models now under scrutiny. |
Put together, the AI trade continues, but uncertainty over winners and losers is causing uneven returns. Tech has lagged value sectors like materials, utilities, and industrials this year. The case for diversification to markets in Europe, EM, and frontier regions – which are less expensive and less tech-heavy – remains strong.
Several emerging market economies are moving into what looks like a sustained, structurally bullish phase – and South Africa is a case in point. Last week’s budget reaffirmed a commitment to balancing the books, with primary surpluses projected to rise in the coming years and the debt-to-GDP ratio set to peak for the first time in 17 years before declining. Stronger-than-expected revenues mean tax hikes are off the table, and long-term bond issuance is also being cut. Even the IMF has noted the country’s improving policy credibility, progress on reforms, and macro stability. For South Africa, there have been other tailwinds. Higher commodity prices have boosted terms of trade, while high real yields and central bank commitments to a lower inflation target, have anchored confidence. |
Meanwhile, like other emerging markets, South Africa’s stock market has been on a strong run over the past 12 months – with the MSCI SA up 80% in USD terms. In that context, the country’s trajectory highlights how reform, credible policy, and external tailwinds are combining to turn emerging markets into an increasingly appealing structural story for investors.
Past performance does not predict future returns. The level of yield is not guaranteed and may rise or fall in the future. For informational purposes only and should not be construed as a recommendation to invest in the specific country, product, strategy, sector, or security. Diversification does not ensure a profit or protect against loss. Any views expressed were held at the time of preparation and are subject to change without notice. Index returns assume reinvestment of all distributions and do not reflect fees or expenses. You cannot invest directly in an index. Any forecast, projection or target where provided is indicative only and is not guaranteed in any way. Costs may vary with fluctuations in the exchange rate. Source: HSBC Asset Management. Macrobond, Bloomberg. Data as at 7.30am UK time 28 February 2026.
Source: HSBC Asset Management. Data as at 7.30am UK time 28 February 2026. For informational purposes only and should not be construed as a recommendation to invest in the specific country, product, strategy, sector or security. Any views expressed were held at the time of preparation and are subject to change without notice. Any forecast, projection or target where provided is indicative only and is not guaranteed in any way.
Global equities shrugged off resurging US tariff uncertainties, with emerging markets outpacing developed markets. In Europe, the FTSE 100 and Euro Stoxx 50 both reached new highs. In the US, technology stocks experienced choppy trading, as investors distinguished between the “disruptors” and the “disrupted”. The rotation into “asset-heavy” sectors, including energy and utilities, persists, while value stocks extended gains relative to growth stocks. Across Asia, the Nikkei 225 hit a new high. The Kospi index also surged to fresh highs, boosted by strength in technology stocks. The Shanghai Composite advanced ahead of the annual National People’s Congress, while Sensex declined. The US dollar weakened modestly against most major currencies, alongside lower US Treasury yields, with major bond indices edging higher over the week.
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