11 August 2025
There has been a trend in recent years for global stock markets to turn volatile in early August. It happened again recently, with a pick-up in trade policy uncertainty coinciding with weak US labour data, sending stocks lower. But this summer, US markets have rebounded at near-record speeds. Q2 earnings are beating expectations, and technology stocks are driving the market. Prices are within touching distance of all-time highs. But is it really all good news?
Well, the undercurrents could point to choppier waters ahead. The previous week’s disappointing payrolls print came with marked downward revisions for previous months, and the latest numbers could be slimmed down too. Meanwhile, the economic activity is slowing. With the tariff deadline passed, imports to the US will now see average tariffs of 19% – far higher than it had been expected. And beneath the surface, corporate profits face headwinds. Higher tariffs mean consumer sectors in particular, face a tricky trade-off between hiking prices and losing customers.
Yet, above the surface, it’s calm. Aside from previous week’s brief dip, stock volatility has generally fallen, credit spreads are close to decade lows, and analysts actually nudged up their profit forecasts for S&P 500 firms in July. In part, lower bond yields are helping. Short term US yields have dropped to 3.7% and long bond yields to 4.2%. That lower cost of capital means investors can live with skinny credit spreads and higher PE multiples. Likewise, a weaker dollar also helps – both as a terms-of-trade profits booster for larger companies exporting from the US, and for foreign investors looking to buy in.
A recent academic paper from some multi-asset analysts explore how asset returns respond to climate risk – both from physical climate events and heightened media attention – and what that means for multi-asset portfolio construction.
Using a novel “extreme weather index” (based on temperature, wind, and precipitation data) and a complementary news-based climate concern index, the study quantifies the climate sensitivity – or “beta” – of a broad range of asset classes, from equities and bonds to commodities, real estate, and infrastructure.
A key takeaway is that climate risk should be treated as an asset allocation issue, not just a security selection problem. Bonds generally showed low or even negative sensitivity to climate shocks, while equities, commodities, and property had stronger positive betas. Portfolios tilted towards these climate-sensitive assets delivered stronger performance during periods of climate stress – though often at the cost of higher volatility and tracking error.
The study demonstrates that diversifying across asset classes and adjusting within them (such as using green bonds or climate-tilted equities), can help investors hedge better against climate-related risks without sacrificing long-term portfolio resilience.
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 08 August 2025.
Investors have been fixated on the US growth over the past decade – and potentially overlooking the power of dividends. Dividends matter because they make up a significant portion of longer run returns. A Yale academic study* showed that between 1926 and 2000 dividends made up about 60% of total returns (after inflation). Dividend payments also tend to be more dependable than earnings. While profits can be prone to wild swings, especially in downturns, dividends are relatively more stable. In Europe, for instance, history shows that on average since 1970, falling earnings have only resulted in dividends being cut by one-quarter respectively – that includes the drastic cuts during the Financial Crisis. That’s because company management are wary of changing dividend policies designed to weather setbacks. |
There is currently an abnormally wide dividend yield gap between US and non-US markets. The US yield is about 1.3% (MSCI), with US tech stocks offering only 0.6%. That compares to 3.1% for Europe ex-UK and 3.5% for the UK. These could provide an opportune entry point for long-term investors.
Emerging market stocks have outperformed their developed market peers in 2025 – with the respective MSCI indices delivering net USD returns of 17% versus 11%. That’s been driven by a sense of fading US exceptionalism – with a weaker dollar and cooling growth spurring investors to look beyond the US. The appeal of potentially cheaper EM valuations has also helped, as well as signs of stabilisation in China, where a policy put is supporting confidence. |
But while EMs have outperformed as a whole, local idiosyncrasies mean they shouldn’t be treated as a single bloc. Correlations between EM stock returns show that some key countries don’t tend to perform the same. China and India are a good example. The return correlation between them is only very weakly positive (at just 0.1). That’s reflected in their diverging performance this year, with China leading the EM rally, and India lagging it, further reversing a trend seen between 2021 and 2023.
The Bank of England delivered a hawkish cut at its August meeting, with four of the nine MPC members voting for unchanged policy. The split highlights the difficulties facing the BoE, but this may prove to be a side-show relative to the decisions facing the government. The UK faces a fiscal “black hole” of GBP50bn, according to the policy wonks at the NIESR think tank. If right, the Chancellor faces some tough choices in the Autumn budget. |
Poor productivity growth, rising debt interest payments, a burgeoning social benefits bill, and increasing defence spending all present challenges. With political constraints limiting the scope for spending cuts, the onus is on higher taxes to rein in the budget deficit. But tax rises can weigh on already-soft growth, presenting the risk of a “doom loop”. Investors are giving the UK government the benefit of the doubt, but the “kindness of strangers” may have its limits, particularly if the economy is hit by further negative shocks. A weak USD masks some of the UK-related concerns, but GBP/EUR has been under pressure this year despite a more dovish ECB.
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, *Ibbotson, Chen, “Stock Market Returns in the Long Run” (2002). Data as at 7.30am UK time 08 August 2025.
Source: HSBC Asset Management. Data as at 7.30am UK time 08 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 sentiment was little changed last week as investors absorbed news on US trade deals ahead of the 1st August deadline, and assessed the global monetary outlook following key central banks’ policy meetings. The US dollar strengthened, while US Treasury yields remained range-bound, and European yields slightly declined. Euro credit spreads tightened, whereas US high-yield spreads widened modestly. In equity markets, US stocks mostly declined: the S&P 500 traded lower, with the small-cap Russell 2000 experiencing sharper losses, but Nasdaq edged up, supported by some tech firms’ positive Q2 results. European stock markets were mixed, with German DAX and French CAC lagging. Japan's Nikkei 225 and other Asian equities broadly fell amid weaker regional currencies. In commodities, oil gained ground amid ongoing geopolitical concerns, while gold and copper prices were lower.
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