HSBC Life sees no evidence of incoming rate cuts

Investors expecting the Federal Reserve to soon begin cutting rates appear overly optimistic, according to HSBC Life's chief investment officer.
HSBC Life sees no evidence of incoming rate cuts

A number of asset classes have risen in value in 2023, in large part because investors have been betting that the Federal Reserve will soon move from raising rates to cutting them, a move that William Chan, CIO of HSBC Life says is not evident in the data he has seen.

The US Federal Reserve has pushed interest rates higher for more than a year in a bid to reign in high inflation — driving interest rates to levels not seen since the late 2000s, before the global financial crisis.

“The markets are being a bit optimistic by pricing in some economic slowdown — potentially some technical recession — later this year,” Chan said on a panel at AsianInvestor’s 18th Asian Investment Summit recently.

William Chan,

The potential recession is leading investors to expect up to two rate cuts from the Federal Reserve this year, followed by another series of rate cuts in 2024, but none of the hard data Chan has seen is providing any evidence for an economic slowdown.

“The US economy appears to be more resilient to interest rate hikes than people expected,” said Chan.

Chan said the resilience could be due to a number of factors, such as households having locked in their mortgage rates, the labor market having a very low unemployment rate, and workers having received decent wage rises that have helped them to cope with the increased costs of living.

“The impact of interest rates have so far not been felt by the corporate sector either, and we have had one of the best positive surprise earnings seasons — but that is also a potentially negative scenario that we need to be careful about,” he said.

“After pausing, everybody is expecting the Fed to cut rates, but we can't rule out a situation whereby they need to do more in order to push the very resilient US economy to slow down and therefore justify rate cuts.”

If the Federal Reserve does not signal a softening in policy by September, the markets will likely price out of the rate cuts that have been prematurely priced in and are responsible for pushing up the market, he said.

“Equities have been pushed up nearly 8% so far, and the 10-year treasury bond yield has been pushed down nearly 1% by the market expectation that these rate cuts will happen. That could all unwind if we continue to record very solid economic data and that’s a key area of risk right now,” said Chan.


A state of flux in the markets has replaced the sense of certainty, stability, and familiarity to which investors have become accustomed.

Also read: APG Asia CEO: the age of free money drawing to a close

However, in the face of a possible prolonged interest rate environment, Andrew Hendry, Singapore CEO and head of Asia distribution at Janus Henderson Investors, expressed his surprise at the apparent short-term memories of some investors.

Andrew Hendry,
Janus Henderson Investors

“Before the financial crisis, interest rates being at 4% or 5% was no problem — it certainly wasn’t a disaster and life continued,” Hendry told AsianInvestor’s audience.

Before the zero interest rate environment of the last decade, the last time interest rates were at their lowest point was 1946, at 2%, said Hendry.

“What we've had for the last few years is some weird party — free cost of capital, really weird asset allocation decisions happened, and a lot of bad companies were supported throughout it,” he said.

Active managers, like Janus Henderson, were faced with strange problems because there was no separation between people who had robust balance sheets, good business models, and good revenue; and people that were being given free capital and could just throw money away. All public market equities were rewarded equally, particularly in the US, said Hendry.

“We just love the fact that interest rates have gone up, we love that there's pain in the system, because that variance of winners and losers going back again, in this current climate, is dramatic now,” he said.


Thijs Aaten,

The fact that three of the five largest bank bankruptcies in the US have happened this year, is actually very healthy because the environment of zero interest rates was unhealthy and made decision-making very bizarre, according to Hendry.

Thijs Aaten, CEO of APG Asset Management Asia, firmly agrees with Hendry’s assessment that the interest rates rising ultimately will lead to healthier financial markets.

“Fundamentally, what financial markets should be doing is weeding out companies that waste resources and inefficiently allocate capital,” Aaten told AsianInvestor’s audience.

Also read: Nippon Life sees urgency in fixing ESG data gaps

Keeping interest rates at zero has allowed some big companies and some big banks to remain alive that perhaps should not have been able to survive, he said.

“I'd argue that maybe some of these bankruptcies that we're now seeing in the US have failed banking 101 because if you manage a bank, you need to manage against interest rates so you’re not caught out,” said Aaten, who manages the Asian arm of the €547 billion ($577 billion) Dutch pension fund investor.

The higher rate environment is in fact a return to normalcy, as Aaten sees it.

“I don't see it as a problem for the economy. I'd argue it's more healthy because it will lead to more efficient allocation of resources throughout the investment landscape.”

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