22 September 2025
Last week’s 0.25% rate cut by the US Federal Reserve was billed by Chair Jerome Powell as a “risk management cut”. While core inflation – up 3.1% year-on-year in August – remains well above the Fed’s 2% target, it was the signs of weakness in the labour market that ultimately proved decisive in the FOMC’s decision.
Put together, the macro signals point to a “stagflation lite” environment of weaker growth and still warm inflation. Yet, for now, stock markets continue to look through it. Expectations of a new round of Fed easing – paired with the ongoing AI-driven rally and a dip in policy uncertainty – have contributed to a strong performance in US stocks over the summer. But this hasn’t just been a US markets story...
With emerging market central banks already cutting rates ahead of the Fed in this cycle, US dollar weakness this year created even more space for bold EM policy easing. With the exception of India (see Market Spotlight), this backdrop is a big reason why EM stocks and bonds have been among the best performing assets in 2025. In Q3 alone, we’ve seen significant stock market gains in mainland China, Taiwan, South Korea, Frontiers, ASEAN, and LatAm. Additionally, the latest Fed cuts could support a further broadening out of market returns, and add further impetus to EMs.
Yet there are risks to today’s perfect-looking markets. A new cycle of Fed easing was widely anticipated, so the good news may well have already been priced in. Meanwhile, tariff uncertainty persists, which could spur further volatility. And valuations in US stocks remain high in places – with profits concentrated in technology sectors. With expectations so high, markets could be vulnerable to disappointment.
Some of India’s major asset classes have endured a lacklustre performance this year, yet the country’s impressive growth trajectory remains undeniable. That bodes well for a pick-up in investment returns – especially if headwinds around US trade and domestic growth start to fade. There are three key factors investors should watch.
#1. How fast can India sustainably grow? The IMF sees 6%+ growth out to 2030, but some think that could stretch to double-digits. That’s ambitious in today’s multipolar world, with slower global growth and climate constraints. But India’s structural story – demographics, rural-to-urban migration, infrastructure, and innovation – is powerful.
#2. All eyes on the INR. Dollar weakness has boosted emerging markets in 2025, but the rupee has bucked that trend, depreciating against the USD. That’s partly down to geopolitics, tariffs, and capital rotation to other parts of Asia. But from here, high real yields, a competitive FX rate, and solid external balances should help stabilise the rupee.
#3. Growth at a reasonable price. Indian equities have lagged this year: +2% in USD terms versus +37% in China. In a multipolar world, this kind of country divergence could become the norm. With a PE ratio below 22x, and expected mid-teens earnings growth, Indian stocks trade at a multiple similar to that of the US, but with a cheaper currency and powerful long-term growth drivers.
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 19 September 2025.
Japanese stocks hit an all-time high last week, with the MSCI Japan index up 20% this year in USD terms. Behind the rally has been a pick-up in profits growth, corporate governance reforms, a better-than-expected trade deal with the US, and improving foreign investment flows. But it comes at a sensitive time. After the resignation of PM Shigeru Ishiba, a general election is set for early October. All eyes are on how the outcome might influence Japan’s fiscal path. A recent pick-up in 30-year JGB yields – a phenomenon seen globally – reflects that uncertainty. |
In practice, the Bank of Japan’s direction of travel appears clear, even if the timing isn’t. Last year it reversed course on years of loose policy by hiking rates in response to rising inflation and growth. Further hikes are likely, even if current progress has been slowed by tariff uncertainty, weak domestic demand, and politics.
Looking forward, proactive sponsor support, lender flexibility, and the restart of policy easing in the US should support activity. For seasoned managers, this environment presents opportunities to secure attractive, risk-adjusted returns.
Gold has risen by nearly 40% to USD 3,700 an ounce this year, making it one of the best performing asset classes globally. As a safe-haven, the yellow metal tends to outperform in phases of high geopolitical risk and rising inflation. In the past, the price has correlated closely with real (inflation-adjusted) US yields – but that relationship has broken recently, implying that other drivers are at play. One is likely to be the intensive gold buying of global central banks. From here, near-term price moves are tricky to anticipate. Some multi-asset analysts think a major pause or reversal is unlikely given that USD gold reserves remain very high everywhere. But some caution could be warranted. The last time gold reached current levels in inflation-adjusted terms was the 1980s. |
An alternative play on the asset class could be through exposure to quoted gold miners. A higher gold price has driven a surge in profits. But a lag in analysts adjusting forecasts to the higher price means 12-month forward PE ratios haven’t re-rated meaningfully from previously low levels – so there could be space for valuations to rise.
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, LCD Pitchbook. Data as at 7.30am UK time 19 September 2025.
Source: HSBC Asset Management. Data as at 7.30am UK time 19 September 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, with the US Federal Reserve cutting rates by 0.25% as anticipated. Fed Chair Powell signalled the latest policy easing was a “risk management decision”, reflecting “rising downside risks to employment”. The US DXY dollar index recovered from early weakness and was on course to finish the week flat, while gold prices reached another historic high. The Treasury yield curve steepened modestly, with 10-year and 30-year yields rebounding. European government bonds were range-bound, and both US and euro credit spreads remained tight. In equity markets, US indices, including the S&P 500 and Nasdaq, reached all-time highs, driven by robust technology stock performance. The Euro Stoxx 50 and Japan’s Nikkei 225 also saw positive moves. Other Asian equity markets mostly rose, though China’s Shanghai Composite retreated.
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