9 June 2025
Eurozone core inflation hit its lowest level since January 2022 last week, dropping to 2.3%, and the disinflation trend looks set to continue. US tariffs are a negative demand shock for the eurozone, which will help keep prices in check. In addition, lower oil and gas prices, a stronger euro, and the possibility of more Chinese goods being diverted from the US to Europe all point to moderating inflation pressures. This leaves the ECB in an enviable position of being able to lean against downside growth risks by cutting rates, as it did for the eighth time this cycle at its June meeting.
Meanwhile, the Federal Reserve is in a trickier position. For the US, tariffs are a supply shock that could keep inflation well above target until mid-2026. And a weaker USD adds to price pressures. So, the Fed is likely to remain cautious on policy easing unless growth deteriorates sharply. But any growth hiccup could raise further questions about US fiscal sustainability, given it would mean even wider deficits and more rapid accumulation of debt. In such a scenario, while the Fed may decide to cut rates aggressively, longer-term yields could prove sticky, with US stocks remaining volatile.
By contrast, ECB rate cuts and Germany’s improving fiscal position – with a relaxation of its “debt brake” a potential game-changer for structural growth – mean that Bunds could perform well in a downside scenario. We think these “policy puts” can provide a powerful catalyst to unlock value in many European stock markets on a longer-term basis. Duration in core eurozone bonds also looks like an attractive option for multi-asset investors looking for “safety substitutes” just as the haven attributes of US Treasuries are under question.
In global portfolios, investors face a conundrum when it comes to the unintended or unrewarded risks of dealing with multiple currencies. And despite this being an obvious potential hazard when investing across international markets, there’s no unified approach to it.
Some of the simplest workarounds involve limiting currency exposure by either staying heavily invested in a home market or by fully hedging all foreign currencies. But the research shows both strategies can damage risk-adjusted returns and miss the diversification benefits of having specific currency exposures.
Some research studies find that it could be preferable for investors to consider a long-term hedging strategy alongside a more active approach to currency management using ‘dynamic currency overlays’. These overlay strategies can be guided using signals that capture risk premia like carry, value, and momentum, and which have been shown to be effective at generating excess returns historically. But portfolio risk constraints can be a limiting factor – so investors need to think carefully about how to apply these strategies to maximise returns.
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. 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. Data as at 7.30am UK time 09 June 2025.
Emerging market stocks have performed well in 2025, with most outpacing the US, and a few – like Latin America, China, and South Korea – delivering strong double-digit returns. Key to that has been sustained weakness in the US dollar – which tends to boost EM economies – and a broadening of attention from the US to EAFE markets. Yet, despite robust overall returns, performance dispersion across EMs continues to be wide. That’s down to a range of local idiosyncrasies, structural stories, and, more recently, the sensitivity of economies to tariffs. Differing returns between China and India are a case in point. Indian equities got off to a subdued start this year, with the economy facing cyclical headwinds, but have rallied in Q2. But Chinese stocks have done even better amid excitement around tech (see next story), strong profits growth, and a sense that authorities retain a policy put. |
The increasing shift to a multi-polar world will lead to more divergence like this, with historical country correlations being disrupted. Investors should pay close attention to local drivers and catalysts to capture genuine diversification upside in EMs.
Current optimism for Chinese technology stocks could not be more different to the bearishness of 2022. Back then, tech firms were under scrutiny from regulators, and even faced the threat of US delisting. Since then, there has been a shift in policy tone, with China’s government emphasising “new quality productive forces”, encouraging high-quality developments, sci-tech innovation, and self-sufficiency in advanced technologies. A macro recovery since 2023, supported by policy stimulus, has also helped. So too has been the major reassessment of China’s ability to innovate at a relatively low cost following advancements by AI firm, DeepSeek. It now appears that Chinese firms could accelerate AI development in areas where homegrown tech is already first class, such as humanoid robots, electric vehicles, and biotech applications. |
Chinese tech stocks have driven performance in the offshore market this year. With the Q1 reporting season nearly over, profits growth has been strong – led by internet companies and e-platforms – and AI adoption is growing. With Chinese stocks trading at a discount to global peers, technology – and AI in particular – could be a re-rating catalyst, just as the moat around US tech appears to be shrinking.
High real yields and a weaker US dollar are providing a strong setting for emerging market local currency debt this year. But there are also important structural changes boosting investor confidence – with South Africa a good example. Its government is embarking on reforms to modernise and transform network industries and boost productivity. The economy runs a modest current-account deficit and recorded its first surplus in two decades in 2021-22. On the fiscal front, its recent budget highlighted a commitment to stabilising debt. The premium that South African government rand-denominated bonds pay over equivalent-maturity swaps, a well-known measure of fiscal risk, remains high relative to IMF budget projections. If those expectations are accurate, it implies a favourable fiscal outlook where yields should gradually decline. |
Meanwhile, the South African Reserve Bank has been conservative in easing policy, which has kept bond yields high, but inflation has stabilised below the central bank’s 3-6% target range. This paves the way for more rate cuts, and makes it easier to move to a single point target at 3%. This could help anchor inflation expectations and create more stable inflation.
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. Source: HSBC Asset Management. Macrobond, Bloomberg. Data as at 7.30am UK time 09 June 2025
Source: HSBC Asset Management. Data as at 7.30am UK time 09 June 2025. 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.
Positive risk sentiment prevailed last week despite lingering US-China trade tensions. The OECD downgraded global growth projections, warning that agreements to ease trade barriers would be “instrumental” in reviving investment. In the US, the dollar weakened against a basket of major currencies, while government bonds firmed on signs of weakness in “soft data”. In the eurozone, the ECB lowered rates by 0.25% to a “neutral level”, with ECB president Lagarde signalling a summer pause in the easing cycle. US and European IG and HY credits consolidated. In stocks, US equities built on recent gains, led by “Magnificent 7” tech giants. European stocks also rose. Japan’s Nikkei 225 traded sideways as JGBs stabilised. EM Asian equity markets moved broadly higher, but Latin American stock markets were weaker. In commodities, oil prices and gold both climbed.
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