23 June 2025
As expected, the US Federal Reserve kept rates steady last week, as it continues to navigate the impact of changing trade policy, cooling growth and employment, and a rising oil price. The so-called dot-plot that maps the future path of policy is still pencilling in two rate cuts by the end of the year, but only one further cut (rather than two) in 2026.
Even before last week’s meeting, it was clear that policy uncertainty has weighed on US and global growth forecasts, with economists busy nudging down their growth numbers for 2025. Expectations for the US have moved down the most. This makes sense given the high level of uncertainty now facing US consumers and businesses, and how the inflationary impact of tariffs affects consumer disposable incomes and Fed policymaking. The bottom line is US growth looks to be “catching down” to other developed markets.
As US exceptionalism fades, a new economic regime –the G-zero economy – is coming into view. The old idea of US hegemony, or the G10, is replaced with a new G-zero, where no one economic power has the willingness or ability to lead the global order. It is an economic regime where supply shocks are more important, and where growth is more constrained, and inflation is higher, and more volatile.
Investors must recognise that uncertainty is no longer a transient feature of markets but a structural one. Adaptability, flexibility, and a globally diversified approach to portfolio construction will be essential for navigating the months and years ahead successfully.
Cyclical growth is converging in western economies, and economic power is gradually shifting to Asia.
This new, multi-polar world has profound consequences for investing. As US exceptionalism fades, G-zero economics takes over (see story above), and asset classes that have been overlooked for years have a chance to shine. A structurally weaker dollar allows EM central banks to be proactive, which supports returns in EM stocks and local currency bonds. Recent market action has also seen correlations between US bond yields, stocks and the dollar go haywire. This calls for investors to consider new asset classes as potential safe havens in portfolios.
In a multi-polar world, EM country correlations are also likely to fall – we can see this in the divergence of China and India market performance in recent years. This creates a strong argument that EM allocations should reflect a greater importance of country effects, and that EM exposure can offer portfolios a powerful source of diversification.
Overall, investors must accept that uncertainty is a feature of the system, not a bug. This keeps volatility elevated and weighs on returns, and it reinforces the need to add other assets that can help build 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 20 June 2025.
Asian economies have faced growth headwinds this year from shifts in global trade policy, geopolitical tensions, and rising market volatility. But improved external macro fundamentals – helped by supportive policy and strategies to safeguard macro-financial stability – have helped enhance Asia’s resilience. And longer-term, some macro strategists think the region could be well-placed to benefit from a reordering of global trade. Most Asian economies have diversified their trade links and reconfigured supply chains in recent years. They could now see opportunities from even stronger regional economic co-operation, product advancements driven by new technology, and new trade agreements. Renewed momentum in structural reforms could also be a growth catalyst. |
That could be good news for Asia’s stock markets. Chinese equities, for example, trade at a discount to developed and other emerging markets. Earnings revisions have been positive this year, with cooling trade tensions potentially driving a pick-up, and 12-month forecast earnings growth currently at 9%.
With US public finances under strain and growth cooling, the bond market vigilantes have kept US yields elevated this year. Following Moody’s decision to strip the US of its AAA rating, other global agency downgrades risks forcing investors to look elsewhere for perceived safe haven assets. China is gradually diversifying away from US assets, a trend that has accelerated over the past 3-4 years. Japan’s holdings are in line with the long-term average, and the eurozone’s have even increased, but rising yields in Europe and Japan could spark a shift in favour of Bunds and JGBs. Further USD weakness plus a fracturing of the G7 may also reduce investors’ desire to hold Treasuries. |
Global diversification away from Treasuries has the potential to create a vicious cycle of higher US yields, greater concerns about debt sustainability, and more ratings downgrades. But it’s not straightforward. The global universe of the safest bonds remains dominated by US Treasuries, with outstanding debt roughly 14 times larger than that for Bunds. And Japan has its own fiscal problems, reflected in its single A rating.
For many years, investors have been used to seeing a negative correlation in the returns from stocks and bonds. But that once-dependable relationship has broken down of late – hurting the performance of conventional 60/40 portfolios. It reinforces the need to build portfolio resilience – and one option is to consider alternative asset classes as both diversifiers and differentiated sources of return. An allocation to hedge fund strategies, in particular, can benefit portfolios because of their low correlation with broader market indices. They can improve the risk/return profile of a traditional portfolio, while potentially providing downside protection. A typical balanced hedge fund portfolio insulated against as much as 90% of market weakness in Q1 2025. |
Indeed, market uncertainty can be a catalyst for some hedge fund strategies. Equity market neutral strategies can perform well in periods of volatility, while global macro strategies can benefit from interest rate movements and opportunities in commodity markets. With volatile market narratives currently a feature of the system, hedge funds could offer much needed diversification.
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 20 June 2025.
Source: HSBC Asset Management. Data as at 7.30am UK time 20 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.
Heightened geopolitical tensions pressured risk markets last week, with oil prices rising further. The US dollar rebounded modestly against major currencies, while gold prices retreated from recent gains. US Treasury yields were largely steady during a holiday-shortened week, as investors digested the latest FOMC meeting, where Fed Chair Powell noted that uncertainty has “diminished but remains elevated”. US equities were little changed over the first three trading sessions. The Euro Stoxx 50 declined, while Japan’s Nikkei 225 advanced. Other Asian markets traded mixed: Hong Kong’s Hang Seng and mainland China’s Shanghai Composite fell, but South Korea’s Kospi surged to its highest level since late 2021, extending its post-election rallies.
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