Gold performed well
Learn about the factors behind the recent sustained rally in the gold price
60/40 portfolio regression
How a typical diversification strategy works
Asian interest rate outlook
The impact of Indonesia's surprise interest rate hike on Asian policy
This week's key chart – earnings divergence
Investor sentiment continues to be hit by expectations of prolonged high US interest rates. In this context, the Q1 earnings quarter is particularly important. Earnings per share growth in the first quarter is now expected to be just 0.5% year-on-year, down from 3.4% forecast last month. It is still in the early stages of the earnings quarter, and the rest will largely depend on the performance of the "Big Seven" tech giants.
U.S. full-year 2024 profit expectations have been trending toward improvement over the past few months. At the same time, the economic environment continues to be robust. Analysts expect earnings per share growth to be less reliant on big tech companies by the end of the year.
Earnings revisions in most emerging market equities are trending downward. This divergence is partly due to the pressure of prolonged high interest rates from the Federal Reserve and foreign exchange volatility caused by the strength of the US dollar.
But the situation is not entirely negative. Asia's first-quarter earnings have so far marginally beaten expectations. The recovery in chip demand has led to an improvement in trade flows. There are signs of success in Chinese mainland's policy support. If the situation persists, the earnings outlook is likely to stabilize. Overall, valuations in emerging markets are relatively low, supporting our continued bullishness on the asset class.
Market Focus
Resilience in frontier markets
Frontier market equities were dragged down by the sell-off in global equities during the month. The prospect of prolonged high US interest rates weighed on performance, but the decline was relatively modest (-4%).
One of the reasons for this may be the low correlation between the countries that benefit from the multiple frontier markets, resulting in diversification and lower volatility. Frontier markets are generally dominated by domestic investors, sentiment is also driven by local issues, and global investors have relatively low holdings (and undervalued valuations).
In addition, frontier markets have a low correlation with emerging and developed markets, making their allocations a potential source of diversification. The world's fastest-growing economies also include frontier countries, such as large Asian countries such as the Philippines and Vietnam (22% and 16% of the MSCI Frontier Emerging Markets Index, respectively). The former is expected to further benefit from "friendly shoring", while the latter is expected to lead in Asia's policy easing cycle.
The value of the investment and the income received may go down as well as up and investors may not get back the principal amount invested. Past performance is not indicative of future returns.
Source: HSBC Asset Management. Macrobond and Bloomberg. Data as of 26 April 2024 (11:30 a.m. UK time).
Market movements
Gold rose brightly
Gold prices have risen as much as 15% since early March. Traditionally, gold has been seen as an inflation hedge, and renewed concerns about persistent inflation appear to have played some role in gold prices. In addition, gold tends to benefit from investor anxiety, which has been heightened by recent geopolitical developments.
Structurally, gold has performed well recently, as investors face long-term challenges such as climate change, economic fragmentation, and resource nationalism, all of which contribute to inflation and increase economic uncertainty. Geopolitical tensions and the poor fiscal position of the United States have led to a diversification of foreign exchange reserves in major emerging markets away from dollar-denominated assets.
Gold prices have historically had a strong negative correlation with real US Treasury yields, but these developments may have broken that relationship. Even though gold may still be favored by investors seeking potential portfolio hedging in a "multipolar world", this is one of the reasons to remain cautious about gold.
Put cash into your portfolio
A typical 60/40 stock-bond portfolio, where downside protection provided by bonds balances the upside risk of equities, has always been a reliable way to provide risk-adjusted returns. However, this strategy failed in 2022 as two previously uncorrelated asset classes fell in tandem. The risk of persistently high stock-bond correlation amid high inflation and an uncertain outlook has led to the abandonment of this strategy.
But the failure of this strategy appears to be grossly exaggerated. Last year, the 60/40 portfolio had a total return of 18% and is also on the upswing year-to-date. In part, this is driven by a stock market rally. However, bond yields remain elevated as the market expects the outlook for interest rates to remain high for an extended period of time. This makes the income component of bonds an important source of return within the portfolio.
In the unlikely event of an adverse growth shock or if the policy rate is lowered, bonds may have the potential for capital appreciation. However, the focus is on the need for further progress in slowing inflation, which could bring back the central bank's "policy support" view and reduce the correlation between stocks and bonds.
Indonesia unexpectedly raised interest rates
More and more central banks around the world are cutting interest rates, and the news of Indonesia's surprise interest rate hike last week has been in the spotlight. Bank Indonesia Governor Perry Warjiyo said the decision to raise the interest rate to 6.25% was a "pre-emptive and forward-looking" measure to control inflation in response to the "deterioration of global risks".
Looking at Asia, macro discussions have focused on the impact of higher US interest rates and stronger oil prices for longer periods of time. The Fed's hawkish stance and the "king dollar" have pushed Asian currencies lower, casting doubt on the rate cut cycle.
Recent data from Asia showed slightly higher-than-expected inflation, and the positive effect of the base effect will subside in the second quarter, suggesting that Asian central banks are not in a hurry to follow in Latin America and Eastern Europe in cutting interest rates early. The point is that Bank Indonesia's actions last week should not be seen as a return to a rate hike strategy, as it is not justified in terms of growth and inflation trends. However, it appears that the rate cut cycle in Asia will be delayed, and the actual rate cut may be lower than analysts expected.
Past performance is not indicative of future returns. Interest rate levels are not guaranteed and may go up or down in the future.
Source: HSBC Asset Management. Macrobond and Bloomberg. Data as of 26 April 2024 (11:30 a.m. UK time).
Announcement of important events and data
Last week's market overview
Market outlook for next week
Source: HSBC Asset Management. Data as of 26 April 2024 (11:30 a.m. UK time).
Market review
Rising US inflation concerns weighed on core government bonds, risk markets held firm, and the dollar index weakened. The U.S. core personal consumption expenditures deflator unexpectedly rose in the first quarter of 2024, reinforcing the market's current narrative that U.S. interest rates will remain elevated for an extended period of time ahead of this week's FOMC meeting. U.S. stocks have risen repeatedly, and first-quarter earnings performance has been mixed. The Dow Jones Europe 50 index rose slightly, and the economic sentiment in the eurozone improved. The Bank of Japan kept policy unchanged in April, and the Nikkei was boosted by a generally weak yen, with the inflation forecast for FY24 raised to 2.8%. In emerging markets, the Shanghai Composite Index edged lower, while India's Sensex Index was in positive territory. On the commodities front, oil prices ended a two-week losing streak as supply concerns persisted. Easing geopolitical concerns weighed on gold prices.
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