Transcript
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: Thanks for listening.
Speaker: And now onto today's show.
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.
Speaker: Coming up this week, we consider what's next for the UK following a volatile week for its financial markets.
Speaker: We look at how headwinds to growth are set to stiffen in much of Asia.
Speaker: And we find out why investors have become even more bearish on emerging market assets.
Speaker: This podcast was recorded on Thursday, the 29th of September, 2022.
Speaker: Our full disclosures and disclaimers can be found in the link attached to this podcast.
Speaker: Hello, I'm Piers Butler.
Speaker: And I'm Aline Van Dyne.
Speaker: It's been a week of turmoil in the UK.
Speaker: Markets responded badly to the Chancellor Quasi-Quarteng's recently announced fiscal package, with the pound plummeting to a record low against the dollar and gilt yields soaring.
Speaker: Chris Hare, senior European economist, is here to give us his take on the situation.
Speaker: Chris, why did markets react so strongly?
Speaker: Well in a nutshell it appears that markets reacted on concerns about the extent of unfunded tax cuts contained in the fiscal statement.
Speaker: Now to be fair we already knew that a fiscal loosening was on the cards and actually the new news contained in the statement
Speaker: wasn't all that big in terms of fiscal cost.
Speaker: The big surprise was the cutting of tax rates for people earning above £150,000 per year, which in and of itself isn't actually all that costly.
Speaker: But I think there are just broader concerns here about the direction of travel in terms of tax cuts financed by borrowing,
Speaker: And in this case, it was something that wasn't accompanied by the usual independent forecasts from the Office for Budget Responsibility that we would normally see.
Speaker: So there's quite a few things that market participants are talking about that raise concerns.
Speaker: What does it mean for the Bank of England?
Speaker: Well, market pricing is for the Bank of England to raise bank rate to 6% by next March.
Speaker: And that's from the current rate of two and a quarter percent.
Speaker: Now, the fiscal loosening that we did see in the government's policy plans does bring about the prospect of higher rates.
Speaker: That's true.
Speaker: But we think that possibly markets are a little bit overdone.
Speaker: We've got a forecast where bank rate climbs to a more modest four and a quarter percent by that point.
Speaker: It's possible that some of that market pricing also reflects a possibility that the bank will intervene in order to try to stabilise the pound.
Speaker: That's possible, but not our central case as such.
Speaker: And of course we've also seen other intervention from the Bank of England this week.
Speaker: For example, the undertaking of temporary bond purchases of long-dated gilts to preserve the solvency of pension funds.
Speaker: There is a lot going on here, but certainly it's the case where we're likely to see higher interest rates as a result of the announcements from the government.
Speaker: And what about the impact on households and businesses?
Speaker: Well, on the fiscal side, we are looking at tax cuts for households, particularly among higher earners.
Speaker: And for businesses, the government has pledged not to increase corporation tax as was previously planned.
Speaker: But then at the same time, we're talking about the prospect of substantially higher interest rates.
Speaker: That's going to affect businesses in terms of their funding costs.
Speaker: And it's also going to cause pain to households through higher mortgage rates.
Speaker: So in a sense, you know, there's some fiscal benefits, but also some costs to come from higher interest rates from the Bank of England.
Speaker: And what can we expect from policymakers next?
Speaker: Well, in terms of policy meetings ahead, on the 3rd of November, we've got the next Bank of England meeting.
Speaker: At that meeting, we see a 75 basis point rise in bank rate, but there is potentially a risk of the bank moving more aggressively than that.
Speaker: Then on the 23rd of November, we've got a fiscal statement that's going to be accompanied by forecasts from the Office for Budget Responsibility.
Speaker: And I think there the government will be hoping that those plans will be seen as credible by financial markets.
Speaker: But 23rd of November is still a long way away.
Speaker: I think these policy discussions are going to be pretty febrile over the next few weeks.
Speaker: Chris, thanks very much.
Speaker: Thank you.
Speaker: It's been a busy week for our economists as they released their outlooks for the fourth quarter.
Speaker: We're going to focus on Asia, where our team thinks the region's resilience is about to be tested.
Speaker: Fred Newman is our chief Asia economist.
Speaker: He spoke to Graham Mackay in Hong Kong earlier today.
Speaker: So Fred, if we're talking about Asian economics in general, really front and centre of your recent quarterly was the export picture, which is not a particularly rosy one at the moment, it's fair to say.
Speaker: not very rosy and quite challenging in fact because over the last two years Asia has really been driven by exports.
Speaker: If you think about the global demand for goods that came through during the pandemic that lifted shipments from the region to record highs and now the first cracks are appearing here.
Speaker: In fact, we've seen over the last couple of months a big decline in the new orders for consumer and industrial electronics and that's a very important indicator because
Speaker: One third of Asia's exports are electronics related.
Speaker: And so what we believe is happening here is really that globally consumers are shifting away from goods consumption towards services.
Speaker: And on top of that, you also have weakening growth in many of the biggest economies in the world.
Speaker: And that's really leading to a major drag on exports.
Speaker: And in fact, there's a good risk here of a trade recession for Asia coming through the next six months or so.
Speaker: All right.
Speaker: And that's not even the only risk that we're talking about in Asia at the moment, is it?
Speaker: What other sort of headwinds are we facing in the region?
Speaker: Well, there are plenty of other ones.
Speaker: One is the sharp depreciation of foreign exchange rates, for example, and the volatility in financial markets.
Speaker: It's often raised as an economic headwind because it's quite disruptive.
Speaker: Central banks have to hike interest rates to kind of counterbalance the external pressures that are developing.
Speaker: and it's raising also inflation pressures domestically as exchange rates depreciate.
Speaker: But we would actually argue that some of the risks around here are still manageable.
Speaker: If you look at the balance sheets of Asian economies, both on the external side and domestically, they remain very, very robust.
Speaker: We have plenty of foreign exchange reserves on the external side.
Speaker: We have very high capital ratios and domestic banking systems.
Speaker: So we think that actually, yes, there are short term pressures developing from global financial volatility, but that the balance sheets remain robust enough to see Asia through this within pretty good shape.
Speaker: Well, that's encouraging.
Speaker: Let's talk about Chinese growth, which has been, well, I suppose a bit of a mixed picture.
Speaker: Obviously, we've been talking a lot about property recently, and that clearly remains volatile.
Speaker: But are there any bright spots coming out of mainland China?
Speaker: Well, make no bones about it.
Speaker: China's economy had a bit of a rough ride this year, to say the least.
Speaker: You see a number of drags domestically.
Speaker: One is clearly zero COVID policy, which is curtailing consumer spending growth.
Speaker: And then, of course, also we still have that property market wobble.
Speaker: if you might call it that, which is depressing investment in real estate.
Speaker: And both of these are major drags.
Speaker: Now, the positive is really that over the next few months, we would expect a gradual reopening of the domestic economy.
Speaker: That is a relaxation of virus control measures.
Speaker: And so in 2023, you might expect, therefore,
Speaker: a bit of a reopening bounce to come through in the consumer side that we saw in Western economies as well.
Speaker: And that should lift Chinese GDP growth.
Speaker: And you also see a lot more infrastructure investment coming through.
Speaker: So all told, we still believe that China could clock in about 5, 5.5% growth next year.
Speaker: Okay, so steady but encouraging.
Speaker: What about the rest of the region?
Speaker: Any other bright spots for Asia ex-China?
Speaker: Well, the number of very resilient economies across the region we should highlight, I think, as well.
Speaker: Vietnam stands out.
Speaker: It's going to be the fastest growing economy next year in Asia on our numbers.
Speaker: We have still Malaysia, for example, attracting enormous amounts of foreign direct investment, which will expand its export capacity.
Speaker: And Malaysia might actually prove quite resilient in the global trade recession.
Speaker: And Indonesia, of course, still riding the commodities boom, even if they have pulled back commodity prices.
Speaker: There's still a lot of momentum left on the domestic side.
Speaker: The one market also to highlight, I think, is India.
Speaker: And actually, India next year, according to the UN, will have a larger population than China today.
Speaker: And so it is always important to keep an eye on India.
Speaker: And here, really, despite all the headwinds of higher oil prices, more inflation and a bit of a pullback in consumer spending, you still see the economy probably coming in at the second highest growth rate next year for all of Asia, which for economy of that size is very respectable, despite everything that's going on in the world economy.
Speaker: Great to hear.
Speaker: Fred, thank you very much.
Speaker: Thank you.
Speaker: This week we released the ninth edition of the HSBC Emerging Markets Sentiment Survey.
Speaker: The survey canvassed the opinions of investors responsible for nearly half a trillion dollars of assets under management in emerging markets.
Speaker: Murat Olgun is Global Head of Emerging Markets Research and he joins us now.
Speaker: Murat, welcome to the podcast.
Speaker: Thank you very much.
Speaker: Murat, the last survey was in June and sentiment was already very depressed, but it seems to have become even more so in this latest survey.
Speaker: That is true.
Speaker: The ninth survey continues to paint a green picture.
Speaker: The share of investors who are now in the bearish camp on the yen prospects over the next three months has actually risen to the highest level since the survey began.
Speaker: Now it's 41% and up slightly from 38% in June.
Speaker: The share of investors or bullish hasn't changed.
Speaker: It's still 15%.
Speaker: So when you look at the net sentiment, bullish versus bearish, it has fallen to yet another record low.
Speaker: So everybody focuses on inflation at the moment, but you see in the survey an even bigger elephant in the room.
Speaker: What is that?
Speaker: It is actually, it's the risk of recession in major economies.
Speaker: It has actually overtaken the risk of Fed and developed market tightening.
Speaker: I mean, that still is a high risk, but now investors are fearing more about recession.
Speaker: As a matter of fact, when we ask the questions to investors,
Speaker: It's almost a universal expectation that pretty much everybody is expecting a recession in Eurozone over the next two years.
Speaker: And for the US, this share has gone up from 56% in June survey to now 84%.
Speaker: And more than half of the respondents are actually expecting a global recession.
Speaker: So a lot of negative sentiment recorded by the survey, but you entitled the report looking for a catalyst.
Speaker: Why is that?
Speaker: Yes, so a couple of things.
Speaker: First of all, indeed, the mood has gotten even more bearish, but the deterioration compared to June is only modest, whereas there was a big lag down in the June survey.
Speaker: Second, cash levels are very high.
Speaker: In fact, they have inched up even higher
Speaker: to 6.6% as a share of assets under management on a weighted average basis from 6.5%.
Speaker: But interestingly, there are now more investors looking to deploy cash compared to the June survey, which kind of tells us perhaps they're looking for a catalyst to put this worst cash pile to work.
Speaker: And finally, we have seen a very visible improvement in the equity sentiment on a net basis.
Speaker: So everything put together, you know, and already with a very depressed sentiment, perhaps some investors are looking for a catalyst.
Speaker: Now, the emerging market obviously covers many regions in the world.
Speaker: Any particular regional preferences that emerged from the survey?
Speaker: Yes, indeed.
Speaker: So Asia is once again a preferred region.
Speaker: The net sentiment is positive across all asset classes.
Speaker: And usually what happens when there is too much uncertain volatility, investors prefer Asia for its relative stability.
Speaker: Latin America is still a favorite region, except for FX, and Middle East is the second most preferred region when it comes to equities.
Speaker: On the other hand, Central Eastern Europe is still the least preferred region that is probably likely related to the ongoing war between Russia and Ukraine, as well as the risks of a Eurozone recession.
Speaker: Murat, thank you very much for joining us.
Speaker: Thank you, Piers.
Speaker: So that's it for another week.
Speaker: Thank you to our guests, Chris Hare, Fred Newman, and Murat Wilgin.
Speaker: And thanks to all of you for listening.
Speaker: We'll be back again next week.
Speaker: Thank you for joining us at HSBC Global Viewpoint.
Speaker: We hope you enjoyed the discussion.
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