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Speaker: Welcome to HSBC Global Viewpoint, the podcast series that brings together business leaders and industry experts to explore the latest global insights, trends, and opportunities.
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Speaker: The following podcast was recorded for publication on the 12th of December 2024.
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Speaker: Hello and welcome to the macro brief from HSBC Global Research.
Speaker: I'm your host, P.S.
Speaker: Butler, and this week we're measuring investor sentiment in the emerging markets and the outlook for 2025.
Speaker: In the wake of the US election putting President Trump back in the White House for a second term from January 20th, confidence amongst EM investors appears to be declining and investors' concerns about growth and inflation are rising.
Speaker: Now, if you're a newcomer to the macro brief and haven't already met him, I'm delighted to introduce to you Murat Alban, our global head of emerging markets research, to help interpret the results of our 18th EM sentiment survey of investors and institutions since 2020.
Speaker: Thank you very much, Piers.
Speaker: It's quite interesting because firstly, they were a lot less bearish than they are today.
Speaker: I mean, the net balance of respondents who are bearish back in December 2023 was 8%.
Speaker: And if I'm right, this time around, it's 23%.
Speaker: So maybe let's get your reactions on that to start off with.
Speaker: Absolutely.
Speaker: And that's correct, Piers.
Speaker: I think it's a good starting point so that we can take stock of 2024 as well.
Speaker: I would say the expectations have broadly played out.
Speaker: I mean, there are very few bearish investors out there, mostly neutral to moderately bullish for this year.
Speaker: And it's been a roller coaster year because the expectation about monetary policy in the developed world, particularly the Fed, has constantly changed from deep rate cuts to pricing out rate cuts, deep rate cuts.
Speaker: And it's been a year of elections as well.
Speaker: You know, record number of people went to the ballot box.
Speaker: So despite all these volatility, sort of a roller coaster market reaction, I would say investors' expectations have played out and emerging markets have done relatively all right.
Speaker: Maybe not as good as the American equity markets, but EM equities are up nearly 15%.
Speaker: That's a pretty solid performance.
Speaker: So far, credit is up 6%, 7%.
Speaker: That is actually pretty good.
Speaker: The local currency debt and FX are broadly flat.
Speaker: But I would say the expectations were kind of met throughout the year, despite all the volatility, all the changes in all the elections.
Speaker: We've had relatively decent performance from the financial assets.
Speaker: The other thing that's interesting to look at is when you ask the investors about what they see as the biggest upside risks and downside risks, and there's been a little bit of an evolution there.
Speaker: I mean, it's still on the upside.
Speaker: Investors still think that rate cuts could still be a potential for positive surprise.
Speaker: But whereas in December of 2023, there were
Speaker: thinking that the easing of political tensions would be a potential upside risk.
Speaker: That's gone away and it's actually gone into the downside risk category.
Speaker: So the investors are worried about geopolitical risks for 2025.
Speaker: Would you think that is a fair assessment?
Speaker: Yeah, I think what the downside things have changed, as you said, and clearly now it's more about the Fed and the developed world rate staying higher for longer is the key risk.
Speaker: And the recession risk in major economies has substantially receded throughout the year progressively, particularly post-US elections.
Speaker: On the upside,
Speaker: We are seeing, as you said, the rate cuts by developed world center banks being the major upside, but also what's happening in China, all the stimulus measures, stabilization activity is seen as an upside risk, 4 a.m., especially in the second half of this year, and also a forward-looking expectation for 2025.
Speaker: There are some mixed views about the geopolitical risk.
Speaker: It's cited as a downside, cited as an upside risk.
Speaker: But what's interesting in the latest survey that we have recently released, the geopolitical tensions easing as an upside risk has actually seen a big jump in terms of its popularity, even though it's not the biggest upside risk, it's definitely featured in there as well.
Speaker: But yes, overall, a lot less worry about recession.
Speaker: It's more about rates staying high for longer.
Speaker: And it's also developed world center banks cutting rates, supporting EM,
Speaker: China stimulus potentially supporting EM and also easing of geopolitical tensions could be a potential upside risk in 2025 as well.
Speaker: Is it significant, Murat, that we haven't actually mentioned the word inflation so far in this forecast?
Speaker: Absolutely, absolutely.
Speaker: We actually had an interesting question for the first time in the survey.
Speaker: We asked investors, how do you see the dual of world and U.S. inflation over the next 12 months?
Speaker: And look, 42% expected to be higher versus only 27% expecting to be lower.
Speaker: It kind of gives you a feeling that even though inflation has come down a lot in terms of its importance throughout the year and also going into 2025, there's still some residual worry out there, particularly with U.S. inflation.
Speaker: But when it comes to EM,
Speaker: There are expectations that inflation will continue to decelerate, albeit with a lower conviction.
Speaker: But now investors are looking for fewer rate cuts from EM center banks compared to the previous survey.
Speaker: So, yes, you're right.
Speaker: We're not talking about inflation that much anymore, but I wouldn't say it's completely gone away.
Speaker: There are some residual worries out there.
Speaker: Now, I want to talk about country preferences, but before I do that, one sort of quick question on cash, and this time coming back to the quarter-on-quarter progression on cash.
Speaker: Am I right in saying it's a bit unusual to see that level of bearishness and yet a big decline in the cash level?
Speaker: So what's happening here?
Speaker: Is that there have been some outflows on fund management?
Speaker: Correct.
Speaker: I mean, it's it's unusually all right seeing a fairly large drop in the cash levels of institution investors investing in EM.
Speaker: It has come down from 5.3 percent of assets under management in our previous September survey down to 4.4 in this survey, December survey.
Speaker: So it's a big drop.
Speaker: We don't usually see this.
Speaker: Our interpretation, there have been some outflows from EM fixed income funds in particular this year and over the last two years.
Speaker: But we also think there have been some fresh inflows into Chinese equity markets where cash was put to work on the back of all these announced stimulus measures and improvement in the outtook of Chinese equities starting from September.
Speaker: I think both of these dynamics probably explain such a big drop.
Speaker: So let's talk about these country preferences because there's a big change in this latest survey.
Speaker: I mean, obviously, during the course of 2024, we saw the preference for LATAM being eroded away gradually and in favor of Asia.
Speaker: But this quarter survey picks up that for the first time in the history of the survey, the Middle East is a preferred region.
Speaker: What's happening there?
Speaker: Yes.
Speaker: So there have been big changes throughout the year.
Speaker: You're absolutely right.
Speaker: Last year when we did this podcast and the survey, Latin was the most preferred region.
Speaker: And throughout the whole year, we've seen progressively investors shifting their attention, their sort of investment decisions outside of Latin America towards EMEA and then in the latter part of the year towards Asia on the back of the stimulus measures coming out of China.
Speaker: We've also seen this big divergence in performances as well.
Speaker: Latam fixed income and local markets and equities were down this year, whereas EMEA was up, Asia also up.
Speaker: But lately we've seen interest in Middle East.
Speaker: Middle East is actually featured both in terms of current positioning of investors in the latest survey, but also forward-looking expectations going into 2025.
Speaker: Our explanation is, well, first, as I mentioned, there is some feeling that geopolitical tensions might ease.
Speaker: But also, when you're in an environment where dollar is strong, U.S. rates are high, you'd rather want to be in a more sort of stable local market, local currency environment than the fact that, you know, most of the Middle Eastern currencies are pegged to the U.S. dollar and the monetary policy as well gives a sense of stability.
Speaker: There is a structural story there as well.
Speaker: And also in some
Speaker: economies out there, the yield levels are high and there are prospects for rate cuts.
Speaker: And given the fact that the rate cuts are actually getting a lot less in other parts of emerging markets, actually Brazil's hiking rates, you are gravitating towards economies where there are prospects for rate cuts, there are all the high yields and there is sort of broad currency stability is probably the explanation here.
Speaker: You talked earlier in the podcast about Chinese equities.
Speaker: What about broadly speaking in terms of asset classes?
Speaker: What is the survey telling us about that?
Speaker: Yeah, I mean, we've seen, obviously, and understand the EMFX sentiment weakening, deteriorating.
Speaker: That is on the back of the resurgent dollar.
Speaker: So every quarter we ask what investors are expecting in terms of EMFX appreciating versus depreciating and look at the net and there has been a big deterioration.
Speaker: When it comes to EMF fixed income, investors still like local debt more over external debt, but this is preferred by fewer investors now.
Speaker: The expectations have fallen because there is probably room for less rate cuts compared to the previous episodes.
Speaker: And EMEquities outlook
Speaker: is dampened a bit.
Speaker: I mean, obviously, you know, China still features very positively, but overall, EM equities are not seen to be outperforming EM equities as much as they used to in the past.
Speaker: I think overall, I would say that people are still looking to invest in certain local debt markets where yields are high and where our prospects of rate cuts, albeit those prospects have come down.
Speaker: So Murat, one intriguing thing about the survey is it didn't seem to reflect anything about trade tensions with all the talk on tariffs.
Speaker: Is that just because it's a little bit too early for them to respond to that?
Speaker: I think that possibly is the reason, Piers.
Speaker: Maybe we'll have more sort of insights about it in the next survey when we have more clarity.
Speaker: But also perhaps the reason is it's kind of blended into other issues that were discussed earlier.
Speaker: and investors were focusing on in the survey.
Speaker: I mean, power of it is geopolitical risk.
Speaker: The other ones are the sort of overall uncertainty with regards to the U.S. policies, not only trade, but also fiscal, immigration, what it means for the monetary policy, et cetera.
Speaker: I think investors are focused on sort of the general outlook post-U.S. election rather than specifically picking on one topic.
Speaker: And as you said, maybe we'll have more insights in the next survey.
Speaker: And finally, anything that I should have asked you about the survey or that caught your eye in terms of this quarter's results?
Speaker: Yeah, I mean, it's interesting because the survey was conducted between 22nd of October and 4th of December.
Speaker: And obviously, that episode was marked by first in the run up to the U.S. election, all the all the expectations of polling around it.
Speaker: And then the aftermath, which was marked by volatility, elevated U.S. rates.
Speaker: stronger U.S. dollar, et cetera, on the back of Republican clean sweep and all the associated uncertainties people think about with regards to U.S. trade, fiscal and immigration policies, what it means for U.S. growth inflation, what it means for the Fed's monetary policy.
Speaker: The survey was conducted throughout that episode.
Speaker: Even though it started before the U.S. election, market expectations had already been gravitating towards such an outcome.
Speaker: So what's interesting to me is
Speaker: that you can argue, and it's fair to say that the survey has captured almost fully the post-US election environment, and despite all these volatility and uncertainties going into 2025, investors are not outright bearish on EM.
Speaker: Yes, they did trim their bullishness, but the net sentiment is still positive.
Speaker: And people are not bearish and people are still looking for opportunities, perhaps shifting their investment decisions to other regions and asset classes.
Speaker: But they're not outright bearish.
Speaker: They're still bullish is, to me, the most interesting outcome.
Speaker: Well, let's hope it stays that way going into 2025.
Speaker: But for now, Murak, thank you very much for joining us.
Speaker: My great pleasure.
Speaker: Thank you, Piers.
Speaker: One additional takeaway for you today on the cost of borrowing.
Speaker: The final meeting of U.S. Federal Reserve policymakers in 2024 is on December 17th and 18th.
Speaker: The FOMC cut the Fed funds target range by 25 basis points to 4.5% to 4.75% in November.
Speaker: We expect further 25 basis point cuts in each of the next five policy meetings, including next week.
Speaker: So that's it for now.
Speaker: Thanks very much for listening.
Speaker: We'll be back next week.
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Speaker: Hello from Under the Banyan Tree.
Speaker: I'm Fred Newman, Chief Asia Economist, coming to you from Hong Kong.
Speaker: On this week's podcast, we're putting the spotlight on the land of the rising sun.
Speaker: What makes the Japanese economy quite so unique?
Speaker: And will it get its mojo back?
Speaker: All that and more on this week's episode.
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