Oil shock spurs hawkish talk but EM assets hold firm

March 24, 2026 (MLN): Markets have priced in a more hawkish path for interest rates following a recent oil shock, as higher commodity prices directly feed into CPI inflation.

Drawing on the experience of the 2022 oil price spike which triggered a significant monetary policy response and accounted for a large portion of that year's market damage central banks are once again under pressure.

However, HSBC Asset Management cautions that 2022 may not be the right playbook this time. Western GDP growth rates are notably weaker today, US growth is unbalanced, labour markets are fragile, and monetary policy is already neutral-to-mildly restrictive.

Strained public finances also mean only a tepid fiscal response is likely. As a result, "second-round" effects driven by higher wage demands and increased corporate pricing are expected to be limited.

Major central banks have opted to "talk-the-talk" with hawkish signals rather than immediately hiking rates a strategy aimed at preventing inflation expectations from becoming unanchored.

Once the crisis subsides, the easing cycle is expected to continue, pointing to a very different market outcome compared to 2022, with the volatility episode likely transitory and stock-bond correlation staying closer to zero.

Despite geopolitical turmoil and spiking commodity prices disrupting 2026's "broadening out" theme with European stocks moving from outperformers to underperformers emerging markets are showing resilience.

Not all EM currencies are down; the Colombian peso is up in March, and currencies in Brazil, China, and Mexico have outperformed the dollar year-to-date.

EM assets have not fully tracked the dollar's move, and EM bonds continue to exhibit lower volatility than Global ex-US Government bonds.

According to HSBC Asset Management, China's stock market has remained remarkably resilient. Strategic reserves, diversified sourcing and import routes, and an expanded energy mix are providing energy resilience.

At the recent "Two Sessions" meetings, policymakers set a new 2026 real GDP growth target of 4.5–5.0%, up from "around 5%" previously.

The new Five-Year Plan shifts focus toward quality growth, economic resilience, and national security with domestic consumption, tech innovation, AI, and self-reliance as key pillars.

HSBC maintains a positive view on China, citing market resilience, policy support, tech focus, and relatively low valuations.

Dividends in Asia (ex-Japan) account for more than half of total returns over the past 25 years, compared to around a third in the US. Policy action in Korea and China is encouraging firms to boost payouts, and Asian firms are in increasingly strong financial shape.

Asia's dividend track record and shareholder-friendly outlook are seen as appealing for investors seeking resilient income in uncertain times.

US investment grade and high-yield spreads entered 2026 at multi-year tights, leaving them vulnerable to macro disappointments.

The high yield sector faces challenges from K-shaped dynamics, geopolitics, and concerns over private credit and software names.

While spreads have widened this year, investors may not be adequately compensated for the risks.

Investment grade, by contrast, has seen more contained spread widening, supported by robust balance sheets making it a logical choice for fortifying portfolios in rocky times.

HSBC's baseline scenario calls for solid global growth, some sticky inflation, modest rate cuts, and reduced policy uncertainty though risk asset valuations remain stretched.

A cautiously pro-risk positioning is recommended, with selective exposures across fixed income, risk assets, and private markets.

EM equities, Asia ex Japan, and IG credit are among the preferred exposures, while global high yield warrants a more defensive stance focused on quality credits.

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