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Under the Banyan Tree – Anatomy of an Asian retail investor
730 Plays1 month ago
Herald welcomes fellow Asia Equity Strategist Prerna Garg to the studio to discuss the role of retail investors in the region, how they're reshaping the investment landscape and where they're choosing to put their money.
Click here for appropriate Disclosures, including analyst certifications, and Disclaimers that must be viewed with this podcast: https://www.research.hsbc.com/R/101/C9DGRGr
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Transcript
Introduction to HSBC Global Viewpoint Podcast
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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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Make sure you're subscribed to stay up to date with new episodes. Thanks for listening, and now onto today's show.
Focus on Asian Markets
00:00:33
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Welcome to Under the Banyan Tree, where we put Asian markets and economics in context. I'm your host, Harold van der Linde, in Hong Kong. I'm delighted to welcome my fellow Asian equity strategist, Prennig Agh, to the studio today to talk all about Asia's retail investors.
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Who are they? What are they buying? And has the Asian stock market landscape changed from the days where foreign investments were front and center? Those questions and plenty more coming up right here, Under the Banyan Tree.
Trends in Asian Retail Investment
00:01:14
Speaker
Let's start with a bit of context on retail investors in Asia. The trend of households putting money in the stock market is undoubtedly getting more popular across the region. But there's also a lot of room for growth.
00:01:26
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Take mainland China, for example, where only about, say, 12% of households' financial assets are in stocks. And a large amount of that is still in low-yielding cash. On the other hand, local funds in Korea bought $21 billion dollars worth of stocks last year, the highest since 2008.
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So back in the day when I started my career in 1995, I started as an analyst. um The only investors in the Asian equity region were basically European and American funds. That was the the major client that we would visit. If you now fast forward to today,
00:02:06
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The largest investor in the region is actually the Asian retail investor, you could say, right? Because Asia has become richer, it's become older, they've accumulated money. So this is the biggest investor in the region now that's really changed. And so we need to get a real good handle on what these people are doing across the
Profile and Decision-Making of Asian Retail Investors
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region. And for that, we have Prunar Garkin here, our in-house retail investor specialist, you could say, part of our strategy team.
00:02:32
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And she's really looked in deep into this. Pruna, welcome to the podcast. Thank you, Harald. Thanks for having me here. So we want to talk about the retail investor. Can you describe me a little bit what what's going on?
00:02:43
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Harold, before we understand what retail investor is doing in Asia, it's imp important to understand what exactly do we mean by retail investor. yeah yeah So um probably you want to kickstart with telling our audience who exactly this retail investor is. That's a very good point because people always talk about this. So the vision that people have is the retail investor is... A lady or a guy who sits in a trading room at a a local broker somewhere or has spoken with a hairdresser or their taxi driver, and he says, you're buy this stock. And they go or somewhere online, and all happens, and they buy. These are basically Asian households.
00:03:19
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families. They have money in the bank, they can put it at play. But you're right, they can do it in two ways. They can do it themselves on the app or going to a broker and sitting there in some gallery sometimes and sipping tea or with a professional broker. If they do that, then it means it's still their money. But in the stock market, we see this as a professional investor coming through. Or fund manager investing the money. Exactly. What we really want to understand, what are these households doing, right? Yeah. So these households, Asian households, like, you know, historically have always preferred bank deposits or sitting on cash. But in recent years, we see that they are shifting their money from these bank deposits into equity markets. And gold as well, right? And gold as well. But it's still a small proportion when we look at the financial portfolio of these households. Mm-hmm. And we see this happening across the region. We see that households are moving from cash and bank deposits into equity in mainland China. This is across the whole region? It's across the whole region. The only difference is how they do it. For example, in markets like, say, mainland China, a share market like Shanghai and Shenzhen or in Indonesia or in Thailand, these investors tend to move the money themselves. They're like, the so-called retail investor. They sit in a gallery. They sit in gallery. Yeah, they can sit probably on their laptop. I'm just painting a picture here. they take their investment decision themselves. But in other markets, say like Korea and Taiwan and India, they prefer to do it via professional managers. And this money comes into market via mutual funds and ETFs and insurance companies. Okay. And do we see – are they all going for the same sort of thing or do they stick –
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to certain markets or what what are they doing?
Investment Preferences Across Asia
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is So there is also quite a bit of variance when we look at that. For example, in mainland China and India, there is the so-called capital controls wherein like, you know, households cannot really move their money directly overseas. So these investors, these households tend to focus on domestic markets. Also in Taiwan, where they can invest overseas, but there's a preference for local equities. But in markets like Malaysia or Korea in particular, there is a massively going traction for foreign equities and especially U.S. equities. This is quite unique for the Koreans, I think, right? They've they've been really big into U.S. equities, much more so, i think, than other countries. It's unique and it's unique, especially when we look at last year's equity return. Last year, Korean equities were up, what, like 90 percent, say, in last 12 months. very short And despite that, the foreign purchases of these retail investors have been multiplying year by year. um And it could be because they are focusing on specific themes. For example, AI has been a big theme for last few years. But demand for US equities is so strong that I think late last year, we saw this new regulation from Korean government, wherein they're telling the households that if you sell your US equities and you bring the money back to Korea, there are no capital gains for you. So they really want this money to come back because it has impact on their currency. It has impact on their local market. and why Why would the Koreans in particular be so kind of US centric in that sense? I think there is a big debate, like, and always a big debate on why that's the case and why this is not so strong elsewhere. And my understanding is that is because, like, you if you look at, say, since 2011 to 2024, excluding last year,
00:06:43
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Korean markets have been almost flat. I think they've given like, you know, annualized return of one percent. So probably the confidence on local market is not as strong as you have in India, where the markets have given like, you know, 10, 15 percent returns almost every yeah and year. And retail participation, so the retailers actually invest in India is really big, right? Yeah. This and we've seen a lot of regulations, supportive equity market regulations in India. Like, you know, the government wanted to make the SIP, the systematic investment programs, a big theme. And this tends to be the sticky money. So every month we see households are buying, you know, the mutual funds quite religiously.
00:07:19
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And last year, another difference was that non-mutual funds like, you know, insurance funds and pension funds, they also increase their equity purchases. Okay. Okay. So, but if these people invest themselves, typically, as I somewhat jokingly said, they listen to the hairdresser or the taxi driver for their recommendations. Does it mean that they go for all kinds of small stocks we've never heard of? and I think it's a combination of both. Like, you know, of course, there is a bit of herd mentality. We saw like probably around pandemic, cryptocurrency had become a big theme. And from like, you know, hairdressers to drivers, everybody was buying crypto coins. But this year or last couple of years, AI has been big theme. So there are retail investors that are very careful about what they want to buy. But I think that tends to be a lot of peer pressure and they buy those so-called penny stocks or really small stocks that do not give them comfortable returns over a long time. So he's spoken a bit about Korea, spoke a bit about India, but China. So whats what's happening in China? China is the same sort of story also from cash into stocks? um China is the same story, cash into stocks, but Chinese houses are still sitting on massive pile of cash. That's around 23 trillion US dollar. But equities still form only 12% of their financial assets. like close to 80% of all their savings are still in cash. So ah yes, they're moving from bank deposits into equities, but they still have ample cash, which does not yield them very high. And are they also buying US equities? So in mainland China and also in India, it's not that easy to buy US equities because of the capital controls. You cannot easily move your money um across borders. So in mainland China, we see they are instead buying Hong Kong listed stocks. And last year, we saw 160 billion US dollar of Southbound money. That was the largest Southbound money inflows we've seen ever in the history of Southbound or Stock Connect. So yes, they are buying overseas. But here are by overseas, we mean it's majorly Hong Kong listed. And do they buy ETFs? With that, I mean, you know, if you want to diversify your investments, you can buy mutual fund, but you now also have exchange traded funds, right? These are the securities that trade on the exchange. Exactly. So with one, you buy basically a whole diversified sort of portfolio of stocks. Right.
00:09:37
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Is that really
Popularity of ETFs in Asia
00:09:38
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fashionable? There is massive traction for ETFs within Asia, particularly in China. I had actually just a quick stat. There are now more ETFs listed in the US than there are stocks listed in the Oh, wow. That's interesting. And the ETS make combinations of stocks.
00:09:53
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You can buy sort of a portfolio of, let's say, AI stocks or infrastructure stocks or energy or healthcare and all these sort of things or energy and healthcare care and AI if that's what you want. So that's where all these ETFs and combinations come from. Right. So even in Asia, we see mainland China has become the biggest ETF market. It has surpassed Japan to be the biggest ETF exchange in Asia. It's really boomed. And in Taiwan, these ETFs are five times bigger than the traditional mutual funds. So these are two of the fastest growing ETF markets in Asia. In Korea also, ah households or retail investors are increasingly investing in ETFs. But after the conversation we just had, it's not a surprise that almost half of these ETFs invest overseas. Overseas in particular, the U.S. markets.
00:10:40
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Okay, so putting this all a little bit together, the mainland Chinese are buying in Hong Kong. and Some of them doing it themselves. A lot of them go, let's talk connect, but also through mutual funds. The Koreans are buying a lot in in America and the Korean government, at least, is trying to get that back. In Taiwan, the big thing is really ETFs. And in India, it's still a lot of individual stocks that they buy, right? Small mid-caps has been a big thing. It's been a big theme. um But again, in India, they prefer for investing in the small and mid-caps and largely through the mutual funds.
00:11:14
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ASEAN, we haven't spoken about that yet. Yes, I think ASEAN needs ah special attention. ASEAN, I think, is in a very different stage compared to all these markets. If we focus on Malaysia, where this institutional framework is quite well developed, we see that investors invest into market via the mutual funds. However, in Indonesia, retail activity has been very strong. Like it picked up very strongly ah during ah the pandemic and it has remained quite resilient. A lot of young population, half of the people investing in equity market are below 30 years of age. Yeah, those are my nieces and nephews. But the problem is, unlike in India, Indonesia could not really develop a very strong infrastructure to attract the money from households into equity markets. And if you look at the mutual funds, like you even the mutual funds have been largely moving their assets from equity into fixed income markets. The asset class has done much better. So I think Indonesia can do much more given the young demographics, given how fast the middle class is growing. And they need to channelize this money from cash into equity market to make it a bigger financial class.
00:12:23
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Now, we already touched a little bit on Japan. um Is it very similar to what happens there to, say, Korea, or is it very different? I think Japan somewhere is a combination of what's happening in mainland China and ah in Korea. So ah traditionally, even Japanese households, ah they preferred very conservative way of investing. So basically, they just had most of their assets in cash. But I think ah back into ah early 2025, The government um ah came up with a set of regulations in order to move this money from cash into equities. And that's when they increased the tax limits on the NISA accounts. Yeah, NISA accounts are investment accounts. And if you invested in these accounts, your money is tax free. Then that's tax free. So this was like, you know, just to make households, put money to do so. But a large part of this money, this NISA money just gets invested into U.S. equity markets. So ah like, you know, yes, households are buying equities, but just like Korea, they prefer US equities over domestic equities.
00:13:30
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So Haral, we understand that Asian households are buying equities, the retail investors are buying equities, but does it have any implication for the equity market or the region in general?
Impact of Local Investment on Market Stability
00:13:39
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Yeah, I think it has really big implications for how markets behave in Asia. And I would say there are broadly speaking two implications here. The first one is that if you look at the US, a typical family has about 50% of their financial assets, so that's everything they have but not their property, um inequities in equities and stocks.
00:14:01
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In Asia, this is much lower. In China, it's about 12%, as you mentioned. Japan and Korea is 20, Taiwan is 25. So it's much lower. So there's actually still a lot of buying that could come through. That has in the near term that's related to confidence to buy and how markets behave. And this is in particular important in China where people are really taking money out of cash and putting in equities. But over the long run, you would expect that to rise as the equity culture becomes more established. That's the first implication. There's a lot of local buying and regional buying.
00:14:35
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Secondly, and this is related to this, we are therefore not so dependent on foreign capital flows anymore. While in 1995, if there would be a crisis in Argentina, a hedge fund guy who was sitting in New York would say, we want to sell emerging markets because of Argentina. They would be selling, let's say, Taiwan or Indonesia or India for that reason.
00:14:56
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Although there is no connection, but this is, it was all grouped together. Now, now, if there's a crisis in any other country outside of Asia, that could mean that the local investors as well, that's nice and well, but this is completely separated. In my country, it's still pretty OK. So the money becomes much more sticky. And that means that we have less volatile markets. So that's really important. I think India is a good example. Like, you know, last year when global investors preferred to be in AI and India is not really like, you know, a market which has a lot of these AI stocks, we saw quite a big foreign outflow. But the market still remained quite resilient thanks to all the domestic money coming into the equity market. Exactly. That's a really good example of this. And this is, I think, really important because also if you think about the geopolitics in the world, we're moving in a very different sort of direction whereby certain countries, certain blocks emerge, you could say. So you want to be as a region, you want to be yeah kind of self-sufficient in your funding.
00:15:56
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That's important. And what is, of course, important is that there is savings and money in Asia. And we want to channel that into investments in the region as well. And this is now happening, maybe not very fast in Indonesia, but in India, Korea and China, this is the case. So this is a really positive development, I would say.
00:16:13
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So Prana, thanks for enlightening us with all of this. And hope we can get you back on the Thanks, Israel. It was great to be here.
Closing Remarks and Credits
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And that brings us to the end of this week's podcast. Thanks as ever for joining us. And as a reminder that the 2026 Extel Vote is open now for developed Europe and emerging EMEA.
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Please do support HSBC if you happen to be taking part. Voting is open until the 13th of February. Under the Banyan Tree is an HSBC Global Investment Research production. And our producer, who sits next to me here, is Graham Mackay.
00:16:48
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Take care, and we'll be back again week.
00:17:28
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Thank you for joining us at HSBC Global Viewpoint. We hope you enjoyed the discussion. Make sure you're subscribed to stay up to date with new episodes.