18 August 2025
One of the biggest surprises of 2025 so far has been how weak the US dollar has been. Coming into the year, most investors were positioned for USD strength amid the belief that Trump’s policy agenda – centred on tax cuts and deregulation – would provide a boost to growth and thus extend US exceptionalism.
Instead, as tariffs dominated the White House’s policy agenda, US growth projections for 2025 have been hit hard. But although US stocks have staged an impressive rebound since April, the dollar remains under pressure, resuming a downward trend in August following a mild recovery last month.
What does this tell us? It may suggest US stocks may be somewhat shielded from conventional macro and policy effects given the outsized influence of tech and AI. But also that the dollar looks more vulnerable to a cyclical backdrop of Fed cuts and growth convergence with other major developed economies.
Structurally, the story around the dollar remains bearish. The currency is expensive. External deficits are likely to remain big, even with tariffs in place. But perhaps more importantly, US institutional integrity may be slowly eroding as policymaking becomes more erratic, legal frameworks are undermined, and the independence of the Fed is under question. This is unlikely to work in the dollar’s favour over the long-term.
So, with US exceptionalism most obviously ending with the dollar, hedging USD-denominated assets should be taken seriously when constructing portfolios. And diversification across regions and currencies will be important, especially in emerging markets which benefit the most from USD weakness.
This month’s strong performance of US mega-cap tech stocks – propelled by a strong Q2 earnings season and renewed AI enthusiasm – has helped push the S&P 500 index to fresh all-time highs. This is reminiscent of the 2023/2024 playbook of US stock performance being driven by a small group of big players. Stock market concentration – for example measured by the share of the top 10 stocks in the S&P 500 – is now at its highest level since the 1930s. This is not necessarily a problem when those stocks are roaring ahead. But it comes with risks.
Concentrated portfolios exposed to the fortunes of a few companies are by construction more idiosyncratic and less diversified (even if the big, listed companies straddle across multiple operations). Plus, if concentration is in the most expensive parts of the stock market – as it is today – it implies weaker medium-term investment 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, Macrobond. Data as at 7.30am UK time 18 August 2025.
Markets cheered July’s lower-than-expected headline US CPI print, with the reading pushing the probability of a September rate cut to 97%, having been as low as 40% a couple of weeks ago. But scratching below the surface reveals some negative developments. Core prices delivered the strongest month-on-month increase since January. And prices of core goods excluding used vehicles are rising at c.2.0% annualised, a clear break from 2024’s trend of gradual decline. Further pass-through across a broad selection of goods seems likely. |
The Fed’s preferred inflation measure – core PCE – has been stuck in a 2.6-3.0% range since mid-2024 and is now set to rise. While this may be the source of some nerves within the Fed, the good news is a cooling labour market and below-trend growth is helping to cap longer-term inflation expectations and wage growth. This means tariff-induced price rises are less likely to result in enduring inflation, making a couple of rate cuts this year achievable. Arguably, such policy easing would be sensible from a risk management perspective, given the potential for the economy hits its stall speed, triggering a more significant slowdown.
Despite a macro landscape in Asia characterised by tariff-driven uncertainty, it’s been a good year so far for the region’s credit markets, with spreads grinding to historical tights across both IG and HY. A key driver of this performance has been supportive fundamentals. Credit rating upgrades are outpacing downgrades while default risks remain low and contained within China high-yield property. What’s more, although supply of Asian USD credit is up double digits year-to-date, it remains negative on a net basis. |
Looking ahead, some analysists think Macau gaming, India commodities and renewables, and selected China and Indonesia industrials could potentially perform in HY. In IG, positive convictions are in bank capital and China tech. More broadly, improved China policy efficacy would have a positive impact on China and Hong Kong names. The good news is reflation appears to have gained importance on the policy agenda, with efforts to address overcapacity, ongoing support to the housing market, and efforts to boost consumption.
The release of ChatGPT-5 has intensified the debate over the labour market consequences of AI adoption. Views span from the expectation that we will see productivity gains without employment losses, to concerns about large-scale displacement with limited output benefits. A balanced take implies that while higher productivity can boost economic output, some displacement of workers is inevitable, consistent with past technological shifts. Roles in computing, mathematics, office administration appear most exposed, though workers with highly transferable technical skills (like programmers) may adapt more quickly. Research suggests that highly paid jobs are more exposed but also face fewer barriers to re-employment. Perhaps the greater concern is the potential hollowing out of middle-skilled jobs, as happened in the 2010s following mass adoption of the internet a decade or so earlier. |
Lower labour costs and higher productivity stemming from AI remain a key feature of upside scenarios for corporate profits and equity market performance over the coming years. But the impact on income and wealth inequality are key uncertainties.
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, BofA Research, Oxford Economics. Data as at 7.30am UK time 18 August 2025.
Source: HSBC Asset Management. Data as at 7.30am UK time 18 August 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.
Risk markets rallied on rising optimism of an early Fed cut amid a strong US Q2 earnings season. While US core CPI ticked higher, led by firmer service sector inflation, goods inflation saw limited signs of tariff-related price rises. The US dollar weakened against major currencies and Treasury yield curve steepened modestly, as investors are factoring in 2-3 Fed rate cuts by year-end. Meanwhile, US and eurozone credit spreads narrowed, with eurozone HY outperforming. In equities, the S&P 500 touched an all-time high and the interest rate sensitive Russell 2000 performed strongly. The Euro Stoxx 50 and the Nikkei 225 also moved higher. In other Asian markets, Indonesian stocks led the regional rallies, hitting a record high. Hong Kong’s Hang Seng also rose, followed by India’s Sensex and Mainland China’s Shanghai Composite. In commodities, gold prices fell, while oil prices moved sideways.
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