Become a Creator today!Start creating today - Share your story with the world!
Start for free
00:00:00
00:00:01
The Macro Viewpoint - EM’s tough run, the dollar’s rise and a demographics challenge?
18 Plays2 years ago
We find out why emerging markets face a tough second half of the year, look at whether the dollar’s recent strength can continue, and assess the UN’s latest population projections and what they could mean for the global economy. Disclaimer. To stay connected and to access free to view reports and videos from HSBC Global Research click here
Hosted on Acast. See acast.com/privacy for more information.
Recommended
Transcript
Introduction and Podcast Overview
00:00:00
Speaker
This is HSBC Global Viewpoint, your window into the thinking, trends and issues shaping global banking and markets.
00:00:09
Speaker
Join us as we hear from industry leaders and HSBC experts on the latest insights and opportunities for your business.
00:00:17
Speaker
Thank you for listening.
Economists' Reports on Emerging Markets and Dollar
00:00:22
Speaker
You're listening to the HSBC Global Research Macro Viewpoint, our weekly review of the key reports from our economists and strategists across the globe.
00:00:33
Speaker
Coming up this week, we find out why emerging markets face a tough second half of the year.
00:00:39
Speaker
We look at whether the dollar's recent strength can continue.
00:00:43
Speaker
and we assess the UN's latest population projections and what they could mean for the global economy.
00:00:49
Speaker
This podcast was recorded on Thursday, the 14th of July, 2022.
Hosts Introduction and Recording Details
00:00:54
Speaker
Our full disclosures and disclaimers can be found in the link attached to this podcast.
00:01:00
Speaker
Hello, I'm Chris Hare.
00:01:02
Speaker
And I'm Aline Van
Emerging Markets Challenges
00:01:03
Speaker
Dyne.
00:01:03
Speaker
Pressure is mounting on the global economy as it battles high inflation and slowing growth.
00:01:09
Speaker
And with central banks, including the Fed,
00:01:11
Speaker
turning more hawkish, the outlook for emerging markets appears challenging.
00:01:16
Speaker
Murat Olgan, Global Head of Emerging Markets Research, joins us now.
00:01:21
Speaker
So Murat, can you begin by reminding us how emerging market assets have performed so far this year?
00:01:27
Speaker
There has been no letter for emerging market financial assets.
00:01:30
Speaker
The second quarter was worse than the first in terms of market performance based on some measures.
00:01:37
Speaker
And the first quarter was already more severe in over a decade, bar the start of the pandemic.
00:01:43
Speaker
In April, we argued for caution, but we weren't expecting the performance to be this bad, even though the investment backdrop was in a state of flux.
00:01:52
Speaker
So emerging markets seeming that already a big worry about stagflation, but now there is an additional concern, the risk of an outright global recession.
00:02:01
Speaker
And just on those recession concerns, what challenges are emerging markets facing?
00:02:06
Speaker
At the moment, we only see partial recession in major economies, perhaps more on the trade side versus resilient services.
00:02:14
Speaker
And in many parts of the world, activity is still respectable, supported by a surge in spending as the economies have reopened.
00:02:22
Speaker
However, EM financial conditions have tightened dramatically to record levels since the global financial crisis based on our measures.
00:02:31
Speaker
The Fed's twin tightening in terms of higher cost of funding and withdrawal of liquidity is biting, inhibiting financial flows to EM and risking a sharp slowdown.
00:02:41
Speaker
The only upside may come from a steady recovery in China, although it seems like the cycles have diverged given China's zero tolerance strategy towards COVID-19.
Inflation and Growth in EM
00:02:52
Speaker
Murat, what's the story with inflation today?
00:02:56
Speaker
Now, weaker activity should, in theory, bring inflation down.
00:02:59
Speaker
But this is a pretty qualified proposition when it comes to EM inflation.
00:03:04
Speaker
Inflation is not a mean reverting phenomenon and responds to policy.
00:03:09
Speaker
As a matter of fact, what we see big spike in inflation is actually rents, expectations, services and services are quite sticky.
00:03:17
Speaker
So we believe the debate about EM inflation will move quickly from has it peaked question to more like is it falling towards target quickly and close enough?
00:03:27
Speaker
We think inflation inertia and persistence will rule in the second half.
00:03:31
Speaker
The sacrifice from growth to bring inflation down to target has increased substantially since the global financial crisis based on our analysis.
00:03:40
Speaker
That's because of deglobalization trends, various supply-side disruptions and shocks, and also loss of productivity and efficiency gains.
00:03:48
Speaker
So how are you viewing EM assets going forward?
EM Assets and Recovery Challenges
00:03:51
Speaker
Now, clearly this is a very challenging environment for emerging markets.
00:03:55
Speaker
Even though asset prices have been cheapening for more than a year, it's difficult to argue that it's stress levels to cover all these risks surrounding the growth inflation trade-off both for EM and DM.
00:04:08
Speaker
So this environment still warrants continued caution.
00:04:12
Speaker
And we think the bounce backs will probably only tactical and opportunities to be rare.
00:04:17
Speaker
They will be mostly supported by a very favorable technical picture in terms of depressed investor sentiment, high cash levels and low positioning of institutional investors as reflected in our latest HSBC EM sentiment survey.
00:04:31
Speaker
Murat, thanks very much.
00:04:32
Speaker
Thank you.
Dollar's Strength and Global Trends
00:04:37
Speaker
Let's move to the currency markets now, where our team have just published their latest monthly outlook.
00:04:42
Speaker
Paul Mackel, Global Head of FX Research, can talk us through the highlights.
00:04:46
Speaker
So, Paul, you've favoured the dollar for nearly a year.
00:04:48
Speaker
Remind us why that is.
00:04:50
Speaker
Well, we've been emphasising two forces coming together.
00:04:52
Speaker
The first is what's happening with global growth or has been happening with global growth.
00:04:57
Speaker
Generally, it's peaked in the second quarter of last year and has been slowing since.
00:05:02
Speaker
And
00:05:03
Speaker
Consistent with that, normally the US dollar tends to do better as do other counter-cyclical currencies.
00:05:09
Speaker
So it's no surprise that the dollar actually has a tailwind from that perspective.
00:05:15
Speaker
The second component to our framework, very much associated with the Fed.
00:05:19
Speaker
The Fed has been very hawkish as we all know, and as that yield support has been rising more so than elsewhere, that too has been central to underpinning the dollar versus many different currencies.
00:05:32
Speaker
So this is clearly a strong outlook for the dollar.
00:05:34
Speaker
What sort of pushback have you had to that view?
00:05:37
Speaker
The type of resistance that we're coming across, it's typical ones that the market is already heavily positioned in favor of the US dollar or a strong dollar.
00:05:46
Speaker
It's very overvalued.
00:05:48
Speaker
Or a US slowdown could cause an abrupt change in the outlook for the US dollar for the worse.
00:05:54
Speaker
And we've been pushing back against those points for quite some time.
00:05:59
Speaker
In particular, the idea about overvaluation.
00:06:01
Speaker
Yes, the dollar is overvalued.
00:06:04
Speaker
We don't disagree with that.
00:06:05
Speaker
However, that can last a lot longer than many people may think.
00:06:10
Speaker
Going back to the early 2000s, the dollar was facing this type of level of overvaluation, but that was very much driven by the weakness of European currencies.
00:06:20
Speaker
And to an extent, history is repeating yet again.
00:06:25
Speaker
Eurodollar has hit parity for the first time in 20 years.
Euro Parity and Geopolitical Impact
00:06:29
Speaker
What are your thoughts there?
00:06:29
Speaker
Well, we're not surprised.
00:06:32
Speaker
A couple of months ago, we've been building the case that the exchange rate would hit parity, if not even trade a little bit below it.
00:06:40
Speaker
And we still think that the downward pressure on the euro and other European currencies, including sterling, can persist in the quarters to come.
00:06:49
Speaker
They're facing a very difficult growth and inflation mix.
00:06:53
Speaker
We also know that the geopolitical angle is not helpful at all with the Russia-Ukraine war.
00:06:58
Speaker
And it's a very kind of different setup in terms of how we're thinking about the Fed, the dollar, and a weak global growth cycle that's benefiting that currency.
00:07:07
Speaker
The others, mainly in Europe, have a lot more to lose.
00:07:10
Speaker
Paul, thanks for the update.
Global Population Forecast
00:07:12
Speaker
Thank you very much.
00:07:12
Speaker
Demographics is a key theme for us here at Global Research.
00:07:20
Speaker
And this week, the UN released its updated forecasts, which show how the world's population is expected to evolve over the rest of the century.
00:07:29
Speaker
James Pomeroy, global economist, is here to give us the key takeaways.
00:07:34
Speaker
So, James, what do the UN's latest figures say about global population growth?
00:07:39
Speaker
So the UN's new forecasts paint a much more downbeat view in terms of the world's population.
00:07:45
Speaker
Back in 2019, the UN's assumptions weren't expecting the world's population to peak at all during the course of this century, whereas now they're looking at that global population to peak in the 2080s.
00:07:56
Speaker
So a bit of a bring forward in terms of that peak.
00:07:59
Speaker
Now, why is that?
00:08:00
Speaker
It's because of lower fertility rate assumptions.
00:08:02
Speaker
So the UN has seen people have fewer children during the course of the pandemic.
00:08:07
Speaker
but also expecting that that number doesn't pick back up as quickly as maybe they would have done in the past.
00:08:13
Speaker
So that lower fertility rate assumption is meaning obviously fewer children being born, not just today, but in the coming years.
00:08:19
Speaker
And that in itself acts as a means by which we start to see
00:08:24
Speaker
the world's population grow less quickly, and then eventually we start to see it peak.
00:08:28
Speaker
How do the UN's figures compare to your forecasts?
00:08:31
Speaker
So the UN publishes this central case, which has the world's population peaking in the 2080s, but they also have a low fertility assumption.
00:08:39
Speaker
So what if fertility rates run at a much lower rate going forwards?
00:08:43
Speaker
And in those assumptions, the world's population peaks in the 2050s.
00:08:47
Speaker
And we've done some analysis previously where we think this is more likely that the world's population will peak sooner, such as in the 2050s, because of people having fewer children.
00:08:56
Speaker
And we think that a lot of things during the pandemic to do with higher cost of buying homes, but also to do with social changes, people have
00:09:05
Speaker
children later, a greater sort of focus on things such as environmental issues, all of these various social shifts, meaning that people opt to have children either later or have smaller families.
00:09:16
Speaker
And all of this together will mean a lower global fertility rate.
00:09:19
Speaker
It will mean a faster turn in the world's population and the world's population could peak much, much sooner than many people are expecting.
00:09:27
Speaker
And what caught your eye at a
Demographic Shifts and Economic Impact
00:09:28
Speaker
country level?
00:09:28
Speaker
Some of the data and the revisions are really, really striking in terms of the revisions around fertility rates in particular.
00:09:36
Speaker
The two that really jump out to me, notably Korea, where the fertility rate has dropped below 0.9.
00:09:43
Speaker
And that's so substantial that it means if nothing changes between here and over the course of the next generation, the Korean population would drop by 60%.
00:09:52
Speaker
Now, this is not a city state or a small economy.
00:09:55
Speaker
This is an economy of more than 50 million people.
00:09:58
Speaker
we could see a substantial drop in the population there.
00:10:01
Speaker
This is a level of birth rate that we just didn't think was plausible, really, in a larger economy.
00:10:06
Speaker
There's another couple of good examples in the UAE, where the UN are expecting now a much bigger population by both 2050 and 2100 due to more favourable migration flows.
00:10:18
Speaker
But also Hong Kong is an interesting case where there's been a real turn in the population estimates to be much lower.
00:10:24
Speaker
That's largely because of much lower fertility rate assumptions there.
00:10:27
Speaker
because of what's happened in the past few years, but also some of these adjustments made more broadly.
00:10:32
Speaker
And quite simply, there's not expected to be enough inward migration to offset that.
00:10:37
Speaker
So the UN now expecting that Hong Kong's population starts to fall quite quickly in the coming years, which they weren't a few years ago.
00:10:44
Speaker
And James, why does all this matter for economies?
00:10:47
Speaker
Well, Demographics Act is a really important bedrock for a lot of
00:10:51
Speaker
economic assumptions.
00:10:52
Speaker
So when we think about growth potential, we want to look at the number of workers, the number of consumers.
00:10:58
Speaker
We need to think about fiscal balances and the ratio of workers to pensioners, to school children in the economy.
00:11:04
Speaker
All of these things are really, really important.
00:11:07
Speaker
But also we have to think about a lot of the near-term challenges facing the global economy around labour markets and whether we're going to have enough workers to
00:11:15
Speaker
In many economies, we have to think about some of the debt challenges that economies are facing in the aftermath of the pandemic.
00:11:21
Speaker
And of course, what all of this means for those potential growth rates.
00:11:25
Speaker
And so these rapid changes that we're seeing in terms of global populations are really, really important in framing those discussions.
00:11:33
Speaker
And if we do see these lower fertility rates, we do see a slower pace of population growth, or we start to see populations starting to shrink.
00:11:41
Speaker
That's going to mean slower potential growth.
00:11:43
Speaker
It's going to be more challenging fiscal situations and it could have an impact on labour market dynamics too.
00:11:49
Speaker
So demographics data are always important.
00:11:52
Speaker
In a period like today where they're changing very, very quickly and we're seeing such substantial shifts in the shapes of populations, they're even more important
Conclusion and HSBC Services
00:12:01
Speaker
than ever.
00:12:01
Speaker
James, thanks very much for your time.
00:12:03
Speaker
Thank you very much.
00:12:06
Speaker
So that's it for today.
00:12:08
Speaker
Thank you to Murat Olgan, Paul Mackle and James Pomeroy for talking to us.
00:12:12
Speaker
And Chris, thank you for stepping in to co-host.
00:12:16
Speaker
My pleasure, Aline.
00:12:17
Speaker
And thanks to you all for listening to the podcast.
00:12:19
Speaker
We'll be back again next week.
00:12:26
Speaker
Thank you for listening today.
00:12:27
Speaker
This has been HSBC Global Viewpoint Banking and Markets.
00:12:32
Speaker
For more information about anything you heard in this podcast or to learn about HSBC's global services and offerings, please visit gbm.hsbc.com.