HSBC Global Private Banking and Wealth

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Investment Outlook
HSBC Perspectives Q3 2025

Willem Sels

Global Chief Investment Officer, HSBC Global Private Banking and Wealth

Building a resilient portfolio for an uncertain era

The past few months have given investors plenty to ponder, with US trade tariffs causing elevated volatility in multiple asset classes around the world. Traditional safe-haven assets, such as Treasuries and the US dollar, were no exception. What’s more, we expect tariffs to remain with us for some time, as they’re a negotiating tool to obtain concessions from other countries and provide the US administration with a way to finance planned tax cuts.

So, economists and businesses have been trying to assess what the impact will be on growth, earnings and inflation. That’s not an easy task, as the tariff levels have been changing and could still change further. That said, the 90-day tariff reprieve (now also including China) offers temporary relief, and there’s hope with the recent US-UK trade deal that other countries will follow.

What does this mean for investors?

The recent US-China negotiations, albeit a temporary reprieve, have rekindled market optimism. US equities have regained the lost ground since the 2 April Liberation Day announcements, supported by stronger-than-expected Q1 corporate earnings and benign April inflation data. This all seems to point to a better outlook. As a result, we’ve moved global and US equities back to an overweight position. This swift change in view is driven mainly by a U-turn in trade policy, which has reduced recession risks. However, the dust has yet to settle on this period of geopolitical uncertainty. So, we stick to our basic, yet important, rule of diversification and look to deepen it further.

We expect other nations to continue or even intensify their trade with non-US trading partners. This means that investors will also want to diversify and capture opportunities beyond the US. Asia is in better shape for various reasons. Notably, its domestic resilience and structural growth opportunities are evident, and clusters of manufacturing expertise in China and Asia can’t easily be broken up. High US tariffs on some Southeast Asian markets will also benefit India’s manufacturing sector, while Singapore stands out as an outlier in the current trade tensions among other Asian markets.

Structural trends remain intact

From a fundamental perspective, we still have faith in the US’s long-term strengths, particularly in areas like AI adoption and innovation, even though they’ve been overshadowed by tariff-related concerns. In fact, we continue to see examples of AI revolutionising business models or boosting efficiency around the world. If Technology and Communications are beneficiaries of the AI momentum, then the industrials sector is also a winner across all regions, driven by high demand for digital infrastructure and the US administration’s focus on re-industrialization and the onshoring of jobs. Renewable energy can also benefit as AI adoption has a high reliance on electricity.

Diversification in focus amid slow but positive growth and gradual easing

At this juncture, when tariff negotiations are still up in the air, we continue to use quality bonds with a medium-to-long duration, gold and less-correlated assets to solidify diversification. We also leverage active management to adjust portfolio allocations as and when needed. For individual investors, these objectives can be achieved through multi-asset strategies with exposure to various asset classes, markets and currencies.

As always, this report presents our four investment themes and brings more value to our readers by delving into specific topics. This quarter, to help you position your portfolios, we look at the potential scenarios for US tariffs and their investment implications, as well as how Asia can ride on AI-driven opportunities.

We hope these insights will help you navigate this period of uncertainty and offer a clearer picture for the months ahead.

Best wishes for a smooth investment journey.

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Investment themes

US economic growth should remain positive yet moderate at around 1.6% in 2025. With a reduction in tariff-related headline risks, we expect the rotation away from US assets to slow. Earnings growth provides an upside risk on already reduced expectations, while potential tax cuts could be another driver of market optimism. Despite a more positive outlook for the US, uncertainty isn’t going away, which reinforces the importance of diversification.

Asia is well-poised to receive capital inflows due to solid structural growth and diverse domestic opportunities, which should be able to partly offset the impact of tariffs. We expect additional targeted stimulus in China to boost domestic demand and, although we see India as a winner from the supply chain realignment, Indian stocks could be volatile in the short term due to the geopolitical conflict. Nevertheless, the long-term structural growth engines remain in place.

The more positive outlook for the US will temper the equity flows towards Europe, leading us to move it to a neutral position there. Elsewhere, the UAE also presents structural opportunities and is less challenged by tariff stresses.

We’ve moved global and US equities back to an overweight position and continue to diversify into Asia and the UAE.
In Asia, we favour China, India and Singapore, with a focus on domestic resilience.

While it will take time to assess the full impact of tariffs on the economy, we shouldn’t let tariffs

overshadow the power of innovation and structural trends, both of which should benefit further from lower rates and tax cuts.

In the US, the unabated enthusiasm around AI-led innovation continues, supported by solid cloud revenues and major 2025 capex plans announced in the Q1 earnings season. Overall earnings growth expectations have already been cut, providing room for upside surprises. Our sector strategy is tilted towards large-cap, quality stocks with a preference for services over goods. The tech revolution, onshoring of jobs and US re-industrialisation continue to offer structural opportunities across sectors.

After decades of underinvestment, Europe’s strategic focus on defence and automation will trigger more industrial activity and R&D. In Asia, the AI theme is more favourable to the communications sector than to technology, due to the former’s higher exposure to AI adopters. The prospects for Consumer Discretionary are stronger than in other regions thanks to policy support. We tap into tactical opportunities caused by the tariffs to capture structural growth.

In the US, we continue to diversify beyond the Magnificent 7 stocks and into Technology, Communications, Financials and Industrials, while remaining overweight on Industrials, Financials and Healthcare in Europe.
In Asia, we favour domestically oriented companies in Communications, Industrials, Consumer Discretionary and Financials.

While a growth slowdown is perceived as the top concern, policy and geopolitical risks remain elevated and any further shocks could leave investors with little time to respond. Although we expect USD weakness to stall, its temporary loss of appeal as a safe-haven currency at the beginning of the trade turmoil shows that currency risk shouldn’t be overlooked when it comes to managing portfolio volatility.

Multi-asset strategies can play a pivotal role in portfolio resilience due to their exposure to various asset classes, markets and currencies. Aided by active and selective management, multi-asset strategies can react swiftly in an evolving political and financial landscape. Some strategies could even tap into the private markets to capture new opportunities.

A focus on quality, diversification and active management also applies to our bond strategy. As many developed market central banks prioritise growth over inflation concerns, we remain on track for more interest rate cuts, which should boost bond performance. Lower commodity prices also provide room for rate cuts to continue in emerging markets.

Multi-asset strategies offer diversification benefits and professional management to mitigate growth, currency and duration risks.
We prefer long-dated (7-10 years) UK gilts, as well as EUR and GBP investment grade credit in our search for attractive yields and diversification beyond the US.

In a period of heightened market uncertainty, it’s imperative to seek further diversification from less-correlated assets. A flight to safe-haven assets, the fall of the USD so far this year and central bank buying should all help the gold price stay high. Nowadays, there are different channels for investors to gain exposure to gold, including commodity-focused ETFs and as part of multi-asset portfolios.

Infrastructure continues to attract strong investment flows, as governments push for urbanisation and national security. The growth of the digital economy is also driving huge demand for digital infrastructure, specifically cloud computing, data centres and networking equipment to support increased use of AI.

AI adoption is highly energy intensive. The reliance on stable electricity supplies requires additional electricity installations and pushes data centre owners to seek alternative solutions to mitigate their environmental impact. This, together with a policy push for energy security, will strengthen investments in the energy transition. Germany, for example, has proposed a new EUR500bn special fund for infrastructure and climate investments. The Next Generation EU facility is also set to invest in digitalisation and energy security.

As gold has historically proven capable of withstanding market volatility, we remain bullish on gold as a hedge against the unexpected.
We look to infrastructure to generate relatively stable cash flows while focusing on renewable energy to capture broadening opportunities.

Regional market outlook

The outlook for trade tariffs is particularly important for the US, as they can raise inflation and reduce the room for interest rate cuts, thereby hurting growth. Therefore, the U-turns, tariff reprieves and trade deals are all positives

that have reduced the recession risks. Markets will eagerly watch for company announcements of big investments into the US to assess how quickly manufacturing activity will pick up. AI-led innovation, meanwhile, can benefit the US technology sector and the many users of AI. As a result of the renewed optimism and reduced tail risks, we’ve moved to an overweight on US stocks.

Europe has been shocked into action by the global tariffs and the need to build out its own defence capabilities. However, while markets were very hopeful when Germany changed its constitution to increase fiscal spending, the latest coalition agreement lacks ambition. It remains to be seen whether the EU manages to reform and deregulate its markets and make real change to its competitiveness. The UK’s trade deals with the US and India are positive, but a deal with the EU would be a real game changer. For now, we’re neutral on Eurozone and UK stocks

Any resolution to the long-running military conflicts on Europe’s borders could be positive for the region. But this is offset by the increased challenges for the EU and the very difficult relationship between the EU and Russia.

In Latin America, Brazil’s resurgent inflation is forcing the central bank to hike interest rates, resulting in lower consumer confidence and downside pressure on growth. While Mexico is very exposed to trade with the US, both nations recognise the need to find a solution. Investment is understandably low, but services are resilient and rate cuts are still likely. As a result, we prefer Mexican stocks over Brazilian stocks.

Asia is proving to be relatively resilient in spite of the tariff headwinds, thanks to the region’s various growth engines. Domestic demand is strong in many Asian markets, while China is ready to add further stimulus if internal demand weakens. Technological innovation and leadership in manufacturing reinforce each other to create another growth engine. As companies adjust and diversify their supply chains, we think India’s manufacturing sector will benefit. Finally, Asia’s inflation outlook is healthy, allowing for more interest rate cuts. As a result, we overweight China, India and Singapore’s stock markets.

While Japan’s economy and stock market benefitted from the weak JPY last year, this effect has been partially reversed this year due to the fall of the USD so far, creating a headwind for Japan. Some of the country’s big exporters, including car makers, are vulnerable to the US tariffs, though many investors believe Japan is well placed to sign a trade deal soon. In the meantime, wages continue to rise at a healthy clip, which should support domestic demand. In light of these mixed fundamental factors, we hold a neutral view on Japanese stocks.

Key data to watch

Source: HSBC Global Research as at 16 May 2025. Estimates and forecasts are subject to change. India inflation forecasts are fiscal year.

Source: Bloomberg, HSBC Global Private Banking and Wealth as at 16 May 2025. Past performance is not a reliable indicator of future performance.

Read the full report

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Notes

The above comments reflects a 6-month view (relatively short-term) on asset classes for a tactical asset allocation. For a full listing of HSBC’s house view on asset classes and sectors, please refer to our Investment Monthly issued at the beginning of each month.

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Investment Outlook: HSBC Perspectives Q3 2025

Building a resilient portfolio for an uncertain era

Investment themes

1. Stay diversified geographically to build resilience

2. Priorities AI adoption and long-term structural trends

3. Mitigate risks through multi-asset and active strategies

4. Seek out less-correlated assets to enhance diversification

Regional market outlook

United States

The Eurozone and UK

EM EMEA and EM Latin America

Asia (ex Japan)

Japan

Key data to watch

Global growth is expected to moderate but stay positive, while strong innovation and policy support remain growth drivers for Asia. The inflation outlook is somewhat mixed

US equity underperformance should be behind us as confidence returns

US equity underperformance should be behind us as confidence returns

Related Insights

Investment Monthly: Reduced trade tensions lift optimism for US stocks

Special Coverage: US-China tariff pause supports de-escalation of trade tensions

Special Coverage: The Fed remains on hold amid tariff uncertainty

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