Investment Weekly: Fed cuts open door to more EM easing

3 November 2025

The Fed delivered a 0.25% “insurance” rate cut last week and ended its balance sheet runoff, as widely expected. The ‘news’ was in the guidance around the future path for policy, which was less dovish than the market had priced in ahead of the meeting. Powell highlighted “strongly differing views” on the FOMC, with a rate cut in December “far from a forgone conclusion”. This somewhat hawkish tilt reflects better-than-expected economic activity driven by wealthy consumers and AI-related investment. The FOMC also appears a little more confident that labour market cooling remains gradual.

Despite this change of tone following the meeting, the market is still pricing in three to four cuts over the next 12 months, reflecting better news on inflation. As Chair Powell noted, although the impact of tariffs is being felt in goods prices, disinflation is becoming evident in the services sector meaning that, excluding tariffs, inflation would likely be close to 2%.

The mix of better-than-expected growth and inflation data, alongside modest Fed rate cuts, should help sustain the positive trend in risk assets since April, especially given better news on trade. However, investors should consider where the best risk-reward trade-offs lie. The recent strength in US equities has certainly been eye-catching, but the market remains concentrated in tech, where valuations look stretched.

Meanwhile, emerging markets (EM) remain well positioned, supported by significant valuation discounts and Fed easing, which opens the door for further rate cuts by emerging central banks. Lower US rates can also contribute to downward pressure on the US dollar, a critical driver of EM returns in 2025 so far.

Last week’s draft proposals for China’s 2026-2030 five-year plan offered some insight into Beijing’s longer-term growth priorities. For investors, some key themes could support further positive momentum in China’s risk assets:

#1. Scientific and technological innovation and self-reliance are top priorities. In a year where tech and AI have been dominant narratives propelling markets upward, a drive to significantly strengthen China’s capacity for basic research and innovation – including around AI – can sustain investor interest in the country’s burgeoning tech sector.

#2. There appears to be a greater emphasis on economic rebalancing and increasing the share of household consumption. Policy initiatives to achieve this focus on indirect measures, such as improving the social safety net. Ongoing efforts to boost domestic demand could increase resilience to external shocks and trade tensions.

#3. “Anti-involution” is mentioned, although details are light with a call for fair competition based on quality rather than low costs. With overcapacity continuing to be a problem, we expect this to remain a key focus, although the drive is likely to be calibrated and gradual given concerns over negative economic impacts. Along with demand-side measures, this could gradually reflate the economy, and boost company profitability.

It’s now wait and see on the concrete policy actions.

Step in hedge funds. Not only does this asset class offer attractive returns – holding up against the traditional 60/40 portfolio in the decade so far – but they have demonstrated lower correlations with stocks than US Treasuries. It is true that hedge funds didn’t perform as well in the 2010s, but that was a period of low macro volatility, little equity dispersion, and ultra-low interest rates, all of which created challenging conditions for hedge funds to perform. With the macro and market regime now looking more like the 1990s and 2000s, could we be entering a new golden period for the asset class?

The good news for global investors in 2026 is that this process of re-rating has further room to run, with most PE ratios still well below historical averages, including those in the US. Profit expectations for ex-US markets in 2026 have also been upgraded. Perhaps these numbers have a better chance of sticking as trade tensions subside? Broadening out still looks good as a market theme for next year.

For some equity analysts, the outlook still looks bright. Profits growth is expected in the mid-to-high teens in the coming two years. The economy is benefitting from both the government and central bank’s focus on maintaining macro stability while pushing for higher growth. The Reserve Bank of India’s October meeting signalled further rate cuts, while the recent overhaul of the goods and services tax regime has the potential to turbocharge spending by the country’s vast consumer base. The longer-term story around demographics, capex, and a pro-business reform agenda remain critical growth drivers too.

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 tttshould 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. Costs may vary with fluctuations in the exchange rate. Source: HSBC Asset Management. Macrobond, Bloomberg. Data as at 7.30am UK time 31 October 2025.

Source: HSBC Asset Management. Data as at 7.30am UK time 31 October 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. *The ongoing government shutdown in the US may delay the expected releases of official data

Risk appetite strengthened on a one-year US/China trade agreement and broadly positive US Q3 earnings. Fed Chair Powell warned a December Fed easing was “not a foregone conclusion”, boosting the US DXY dollar index. US Treasuries weakened due to a re-pricing of US rate expectations, with investors pricing in around three 0.25% rate cuts by end-2026. US and eurozone credit spreads tightened, led by high yield. US equities were mixed, and the tech-led Nasdaq outperformed. The Euro Stoxx 50 and the Nikkei 225 rose to record highs. Japanese export stocks benefitted from a weaker yen. EM Asia stock markets were mixed. Korea’s Kospi posted strong gains amid rising optimism of a US/Korea trade agreement. The Shanghai Composite edged higher whilst the Hang Seng fell in a holiday-shortened week. India’s Sensex index moved sideways. In commodities, gold and oil fell.