Investment Weekly: A hawkish turn

23 March 2026

In the wake of the recent oil shock, markets have priced in a more hawkish path for interest rates. This is a logical reaction, as higher commodity prices directly boost CPI inflation. The 2022 oil price spike and subsequent surge in policy rates demonstrated just how significant a monetary policy response can be, accounting for a large portion of the market damage that year.

But is 2022 the right playbook for today? For inflation to remain persistent, an initial shock must be transmitted through the broader macro system. Today, this might be less of a threat than a few years ago. Western GDP growth rates are notably weaker than they were back then, US growth is unbalanced, labour markets are fragile, and monetary policy is neutral-to-mildly restrictive. Furthermore, amid strained public finances, there will likely be only a tepid fiscal response to support households through this crisis. We are operating in an environment where the so-called “second-round” effects of the initial shock – driven by higher wage demand and increased corporate pricing – are likely to be limited.

After several years of overshooting inflation targets, some central banks may still feel the need to tighten policy. However, given the oil shock also implies downside growth risks, major central banks opted to talk-the-talk with “hawkish holds” rather than walk-the-walk and hike. This approach helps prevent inflation expectations from unanchoring, effectively buying policymakers time. It also suggests that once the current crisis subsides, the easing cycle can continue. That would probably result in a very different market outcome to 2022 – one where the volatility episode is transitory and the stock-bond correlation stays closer to zero.

Geopolitical events and spiking commodity prices have upended 2026’s big market theme of “broadening out”. European stocks, for example, have gone from being outperformers to underperformers. But emerging markets are proving resilient. In today’s risk-off situation, the dollar has been strengthening at a similar pace to that seen in Q1 2022. Capital flight back to the dollar usually means EM outflows, weaker currencies, and worsening EM debt burdens.

But there are clear signs of EM resilience. First, not all EM currencies are down. The Colombian peso is up in March. And currencies in Brazil, China, and Mexico have all outperformed the dollar year-to-date. Second, EM assets haven’t tracked the dollar’s move down. Investors have been de-risking from popular trades, but price action also implies a recognition that EM fundamentals have improved. And third, once we account for the safety characteristics of US Treasuries in this episode, EM bonds still have lower volatility than global ex US government bonds.

The broadening-out trade has been interrupted, but EMs are still looking resilient – if you know where to look.

The new FYP marks a shift in policy focus from rapid growth to quality growth, economic resilience, and national security. Apart from energy, that means boosting domestic consumption, accelerating tech and innovation to drive productivity, and an emphasis on self-reliance – with AI a key focus. Efforts to build a more unified national market, as well as capital market reforms to attract foreign investors, are also priorities. Overall, China’s market resilience, policy support, tech focus, and relatively low valuations, continue to support a positive view.

With policy and geopolitics driving uncertainty, Asia’s dividend track record and increasingly shareholder-friendly outlook should appeal to investors looking for Buffet’s “secret sauce”.

The story for IG is a bit different. Year-to-date spread widening has been relatively contained, anchored by robust balance sheets, insulating the asset class from macro headwinds. Supply dynamics are worth monitoring: record net new issuance is expected in 2026 amid AI-related spending. Even so, IG’s resilience during recent volatility makes it a logical choice for fortifying portfolios in rocky times.

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. Costs may vary with fluctuations in the exchange rate. Source: HSBC Asset Management. Macrobond, Bloomberg. Data as at 7.30am UK time 20 March 2026.

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. Source: HSBC Asset Management. Data as at 7.30am UK time 20 March 2026.

Elevated geopolitical uncertainty is weighing on risk markets, with energy prices remaining volatile. The US dollar retreated following recent rallies, while gold prices weakened further. The US Treasury yield curve flattened: short-end yields rallied as Fed rate cut expectations were largely pared back, while long-end yields stabilised after surging over the past two weeks. In equities, emerging markets fared better than developed markets, with commodity-driven markets in Latin America a key driver. EM Asian bourses traded mixed: Chinese equities weakened. Sensex rebounded modestly, and Kospi surged. Across DM, the S&P 500 drifted lower, with losses in Consumer Staples and Materials offsetting gains in Energy, while the small-cap Russell 2000 edged higher. European stocks saw widespread weakness, as Nikkei 225 also declined.