Become a Creator today!Start creating today - Share your story with the world!
Start for free
00:00:00
00:00:01
What's on the mind of EM investors, the FX outlook and future cities - HSBC Global Research
18 Plays4 years ago
In this edition, Murat Ulgen dives into the detail of HSBC's latest research on emerging market investor sentiment; Paul Mackel looks at challenges looming for EM currencies; James Pomeroy sees post-pandemic headaches for urban policymakers. 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 to HSBC Global Viewpoint
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.
Weekly catch-up with HSBC analysts
00:00:21
Speaker
Hello and welcome to the Macro Viewpoint everyone.
00:00:23
Speaker
I'm Chris Brown-Hames, the Managing Editor here at HSBC Global Research.
00:00:27
Speaker
This is our weekly catch up with our dynamic team of analysts and strategists on what's capturing their attention in the global economy and the financial markets.
00:00:36
Speaker
I'm joined today by Mary Watkins.
00:00:38
Speaker
Mary?
00:00:38
Speaker
Thanks Chris.
00:00:39
Speaker
This week we're talking about cash and why investors say they aren't putting more of it to work right now in emerging markets.
00:00:45
Speaker
We'll be joined by our Global Head of Emerging Markets Research, Murat Olgan.
Investor Sentiment and Cash Reserves
00:00:50
Speaker
We also dig a little deeper into the growth outlook and Fed tapering with Paul Mackle, Global Head of FX Research, and how that's affecting currencies.
00:00:58
Speaker
And we'll link up with global economist James Pomeroy about his view of the world's largest cities 18 months into a pandemic that may well have a lasting impact on the shape of urban life.
00:01:08
Speaker
This podcast was recorded for publication on the 29th of July, 2021.
00:01:13
Speaker
And of course, all of our disclosures and disclaimers must be read on the link traveling with this podcast.
00:01:19
Speaker
Now the results of HSBC's fifth survey of emerging market investor sentiment are hot off the digital presses.
00:01:25
Speaker
Murat Ulgin is the global head of emerging markets research.
00:01:29
Speaker
Murat, let me start by asking how you define the mood of investors at
Concerns about Inflation and Fed Policies
00:01:33
Speaker
the moment.
00:01:33
Speaker
Yes, so exactly half of the EM investors are neutral on EM prospects over the next three months, which is slightly higher than what we saw in the April survey.
00:01:43
Speaker
But the bullishness also has gone up a bit.
00:01:46
Speaker
40% of the respondents are bullish on EM prospects versus 34 in April.
00:01:50
Speaker
The interesting thing is there is still lots of cash on the sidelines.
00:01:55
Speaker
Around 45% of the investors have in excess of 5% cash in their portfolios.
00:02:02
Speaker
And we have questioned a large universe of EM investors representing more than a half a trillion dollar of assets under management.
00:02:11
Speaker
And the other interesting fact is 59% of investors, they actually want to keep the cash level same in the near term.
00:02:18
Speaker
That's the highest number so far since the inception of the survey.
00:02:22
Speaker
It kind of tells us that investors are waiting for an opportunity, but they're not yet to make the move yet.
00:02:29
Speaker
And why do you think they're being so cautious?
00:02:31
Speaker
Well, there have been so many gyrations in the concerns.
00:02:35
Speaker
I mean, remember, as recently as last month, in June, it was all about inflation in the US and elsewhere around the world.
00:02:42
Speaker
The hawkish tilt by the Fed caused some worries for investors.
00:02:47
Speaker
And only very recently, these words have shifted towards global growth with the resurgence of COVID cases around parts of the world, new variants, what they all mean for global economic recovery.
00:03:00
Speaker
So the concerns have been shifting pretty rapidly and is inevitably causing investors some indecisiveness, which we can also see on the average risk score
00:03:10
Speaker
When we ask investors, you know, how much risk are you willing to take at the current juncture with zero being no risk and 10 highest risk, the score in the weighted average terms has improved slightly to 6.2, but actually it was pretty close to last month's six.
00:03:25
Speaker
So that still shows that they're not yet ready to take on much risk.
00:03:31
Speaker
And what do you think their biggest concern is?
00:03:33
Speaker
The biggest concern is about the Fed, the potentially tighter U.S. monetary policy, Fed tightening, also Fed tapering.
00:03:41
Speaker
This is actually a bigger concern than COVID.
00:03:44
Speaker
And in this survey, we asked them how would emerging markets react to potential Fed tapering?
00:03:51
Speaker
A full 78% said it would be either slightly negative or negative.
00:03:56
Speaker
Very few investors said this would be broadly neutral for emerging
Impact of Fed Tapering on Markets
00:03:59
Speaker
markets.
00:03:59
Speaker
That clearly is the main concern for emerging market investors.
00:04:04
Speaker
Now, what's quite interesting is that their expectations for inflation have actually fallen.
00:04:09
Speaker
On the other hand, you've got the predictions of or expectations of quite a few interest rate hikes in emerging markets.
00:04:17
Speaker
That is true.
00:04:17
Speaker
And that's also in line with expectations about growth because now 60% of investors expect growth to accelerate across EM over the next 12 months, which was much higher in the previous surveys.
00:04:28
Speaker
And in line with that, the expectation of higher inflation has also come down.
00:04:31
Speaker
Now 59% expect higher inflation.
00:04:34
Speaker
across EM over the next 12 months.
00:04:35
Speaker
This was 77% in April.
00:04:37
Speaker
But despite that, as you said, 56% of investors are expecting higher rates in EM, which is much higher than the previous survey.
00:04:45
Speaker
So their expectation of inflation has come down a bit, but despite that, they're looking for much higher rates.
00:04:51
Speaker
That to me is quite telling and probably the motivation behind is partly
00:04:56
Speaker
to prepare for potential Fed tapering this time, to preempt Fed taper and avoid a repeat of what happened in 2013 with taper tantrum.
00:05:06
Speaker
They had to reply with pretty rapid rate hikes to increase the risk premium and avert capital flow.
00:05:13
Speaker
So perhaps emerging markets, investors think that EMs are preparing to avoid a repeat of such an episode.
00:05:21
Speaker
And have there been any changes in EU investor preferences around particular asset classes or indeed particular regions?
Rise in ESG Concerns Among Investors
00:05:28
Speaker
There have been some changes.
00:05:29
Speaker
You know, Asia is still the region with net positive sentiment across all asset classes, but the net sentiment has come down.
00:05:36
Speaker
And the positioning also appears to be moving more in favor of commodity linked regions like Latin America, like Middle East, like Africa.
00:05:45
Speaker
So that's one change.
00:05:47
Speaker
E-MFX is seen in a better light.
00:05:49
Speaker
40% of investors are looking for E-M currencies to appreciate in the near term.
00:05:53
Speaker
This was 22% previously.
00:05:55
Speaker
And there appears to be preference for those currencies where the countries are hiking interest rates rapidly, sort of front-load into rate hikes.
00:06:03
Speaker
Fixed income positions have been curtailed.
00:06:06
Speaker
There is slight preference for external debt and there is some yield seeking.
00:06:10
Speaker
You know, investors are focusing on high yield markets.
00:06:13
Speaker
And on equities, there is mild optimism compared to the previous survey.
00:06:18
Speaker
But investors are looking for EM equities to underperform EM equities.
00:06:22
Speaker
And finally, Murat, I know the survey looks at ESG factors.
00:06:25
Speaker
Is anything coming through more strongly this month?
00:06:29
Speaker
Yes, so the ESG engagement has picked up compared to the previous survey.
00:06:33
Speaker
Every quarter we ask investors whether they run an ESG portfolio, either directly or indirectly.
00:06:39
Speaker
And the total number this time was 45% compared to 40%.
00:06:42
Speaker
The ranking of key ESG risks still remains the same.
00:06:46
Speaker
It is climate change for environmental risk.
00:06:49
Speaker
It's inequality for social risks.
00:06:51
Speaker
And it's the minority shareholder protection when it comes
Emerging Market Currency Challenges
00:06:54
Speaker
to governance.
00:06:54
Speaker
But what's interesting this time is audit process
00:06:58
Speaker
has gained considerable attention of investors as a key governance risk, which perhaps might be related to the earnings season in the background.
00:07:06
Speaker
Murat, thank you very much for explaining all that.
00:07:08
Speaker
Thank you very much.
00:07:09
Speaker
Murat Olgan, our Global Head of Emerging Markets Research, talking about the latest HSBC EM Sentiment Survey.
00:07:19
Speaker
In our next report, we stay with a focus on Fed policy and the prospects for tapering of Fed-ask purchases.
00:07:26
Speaker
Paul Mackle, Global Head of FX Research, has just published the EM FX Roadmap, our monthly guide to EM currency directions.
00:07:34
Speaker
Our producer in Hong Kong, Graham Mackay, spoke with Paul earlier and started by asking him about the second half outlook.
00:07:41
Speaker
Well, I think first we need to step back and just go through some of the drivers for emerging market currencies, which have turned a bit more challenging over the last month.
00:07:51
Speaker
The first is that the broader dollar itself has remained more resilient.
00:07:56
Speaker
It's partly to do with the Fed message from June.
00:07:59
Speaker
being on the hawkish side.
00:08:01
Speaker
The second thing is that we're increasingly debating whether global growth has indeed peaked.
00:08:07
Speaker
And I think some of these emerging market currencies are very much sensitive to some of these uncertainties.
00:08:15
Speaker
Now, over the coming months, I still think that there's going to be a number of headwinds that make it more challenging for emerging market currencies
00:08:23
Speaker
to strengthen materially.
00:08:24
Speaker
So what are these factors?
00:08:26
Speaker
The first is, again, we're not going to get away from the debate about global growth.
00:08:31
Speaker
I think that's going to matter a lot more.
00:08:33
Speaker
Secondly, as the Fed begins to taper its balance sheet at the end of this year, that will begin to steer the dollar gradually, slowly but surely in a stronger direction.
00:08:46
Speaker
These currents could pose more challenges for emerging market currencies, which in turn means
00:08:52
Speaker
that we're going to have to dig a little bit deeper to identify the positive factors.
00:08:56
Speaker
And a lot of that will come down to the local policy factors and whether these are moving in the right direction or not.
00:09:04
Speaker
And you highlight Fed and People's Bank of China policy in particular in this report.
00:09:08
Speaker
How are those shaping your thinking?
00:09:11
Speaker
Well, it's central to our thinking about what could happen to the dollar versus the renminbi this year.
00:09:16
Speaker
We've been of the view that the exchange rate would be gradually drifting higher.
00:09:21
Speaker
That is, the renminbi would be weakening modestly versus the dollar.
00:09:25
Speaker
And what's associated with that is this idea of policy divergence between the Fed and PBOC.
00:09:32
Speaker
The Fed, as I mentioned, is expected to taper its balance sheet.
00:09:35
Speaker
We recently saw China lower its reserve requirement ratio
00:09:39
Speaker
And it's telling you that they're doing a little bit more to help out growth.
00:09:43
Speaker
So it's a very different backdrop for each currency.
00:09:47
Speaker
And that's central for many other emerging market currencies, because after all, the renminbi is an anchor in the FX market.
00:09:55
Speaker
And if it's weakening a little bit, then as I said, there could be some spillover effects to other currencies too.
00:10:03
Speaker
So given the uncertainties you've already highlighted, is there any cause for optimism as the year progresses?
00:10:08
Speaker
The short answer is yes.
00:10:10
Speaker
The reason being is because local factors are going to become increasingly more important.
00:10:16
Speaker
We're thinking about divergent monetary policy.
00:10:18
Speaker
Some central banks have been raising their interest rates in a pretty proactive manner.
00:10:23
Speaker
Ultimately, I think that will prove to be supportive for those currencies like the Brazilian real, the Russian ruble, some of those in Central Europe.
00:10:32
Speaker
This is where I think that there should be some optimism emerging.
00:10:36
Speaker
But elsewhere, for instance, in the ASEAN region, the economic outlook is likely to still be rather subdued given the ongoing challenges from COVID and monetary policy is going to be very much seen as in stuck in a slower gear.
00:10:52
Speaker
So I think, as I said, divergence is a key theme.
00:10:55
Speaker
There is some optimism, but it comes a lot down to the prudent policy choices taken on board by different emerging market central banks.
Recovery of Cities Post-COVID
00:11:03
Speaker
And those that do so should lead to stronger currencies.
00:11:08
Speaker
Paul Mackel, thanks again.
00:11:10
Speaker
Thank you very much.
00:11:13
Speaker
We turn to the future now, the future of cities with global economist, James Pomeroy.
00:11:18
Speaker
James, welcome.
00:11:20
Speaker
Future cities is one of the nine big themes we track here at HSBC Global Research.
00:11:24
Speaker
You've just published a report, Cities and the Pandemic.
00:11:27
Speaker
So 18 months into COVID, how are they faring?
00:11:31
Speaker
The cities have had a pretty rotten 18 months, as the whole world has, but cities have been really, really adversely hit because people working from home, people not being able to go to leisure activities, all of these things are heavily concentrated in cities.
00:11:46
Speaker
And it's why a brunt of the economic damage has come.
00:11:49
Speaker
Now, there had been some hope that as you start to take restrictions off, you started to see some of that activity return.
00:11:55
Speaker
And so far, the evidence is incredibly mixed.
00:11:58
Speaker
You've got some parts of the world and some sectors where there is a little bit of a recovery and some places where there really isn't.
00:12:04
Speaker
And there's this big
00:12:05
Speaker
divergence I guess between those economies where restrictions are easing and where they're not and if you take some of the big cities in Asia the likes of Jakarta or Kuala Lumpur activity levels there are still very very depressed because of restrictions whereas things are looking a little better in some ways in parts of the world where restrictions are coming off such as in the UK so in London or in the US.
00:12:27
Speaker
So James what are people doing in cities?
00:12:29
Speaker
So there's a big divergence between what people are doing in terms of recreation and what people are doing in terms of office attendance.
00:12:36
Speaker
And many people aren't going back to offices.
00:12:39
Speaker
If you take the cities where broader activity data are back up close to pre-pandemic levels, you still have office attendance that is below 50% based on Google mobility data.
00:12:51
Speaker
And the really striking thing for me looking at all these numbers is if you take some of the cities in the world where pre-pandemic people were working from home the most, so the likes of Stockholm and Oslo, what you can see there is there hasn't really been any improvement in the number of people going to the office on a daily basis.
00:13:07
Speaker
Those numbers are just at low levels, as low as we've had since the pandemic began, suggesting that even as economies do open up and people start going back out to
00:13:15
Speaker
to go to leisure activities, we can see this in restaurant bookings data, people just aren't going back to offices and that's clearly going to create a problem for some businesses further down the line.
Transportation Trends and Policy Challenges
00:13:25
Speaker
And how are people travelling around cities?
00:13:28
Speaker
Also not on public transportation and this is something we're seeing quite clearly in most parts of the world is that you're seeing a big pick up in private transport usage but not so much in terms of public transportation usage.
00:13:40
Speaker
So if you get the data from city authorities themselves in New York or in London,
00:13:44
Speaker
It looks like public transportation is being used by about 50% as many people as we were seeing pre-pandemic.
00:13:52
Speaker
But what we are seeing is congestion levels in those cities almost back at pre-pandemic levels.
00:13:57
Speaker
And you're seeing based on Google data, based on Apple data, all of these different mobility numbers, you're seeing car traffic numbers, the amount of people traveling.
00:14:05
Speaker
in private vehicles coming back much, much more strongly than public transportation.
00:14:10
Speaker
And that's going to create a problem in terms of congestion quite clearly, unless that changes further down the line.
00:14:16
Speaker
So James, what are the implications for policymakers?
00:14:19
Speaker
It's a big challenge, I think.
00:14:21
Speaker
You've got multiple issues here.
00:14:22
Speaker
Firstly, if you haven't got as many people going into offices as you had pre-pandemic, clearly there's a struggle there in terms of what we do with a lot of the businesses that rely on that footfall.
00:14:33
Speaker
The profitability of these businesses is clearly...
00:14:36
Speaker
not going to be as high, do we need as many offices, do we need the same number of trains that are running in rush hour if there's fewer people commuting?
00:14:43
Speaker
These are all big questions that I think city authorities are going to have to think about as the pandemic sort of evolves and as we start to see a little bit of a return, not necessarily to normality, but to a sort of post-pandemic
00:14:57
Speaker
new normal.
00:14:58
Speaker
There's also a big question about this public versus private transportation issue and quite clearly what's happening at the moment is people want to go back out and do things, but they feel much more comfortable traveling in a taxi or a private vehicle, rather than on a crowded train or bus.
00:15:13
Speaker
And if that persists and we do see activity levels in cities continue to pick up more broadly, then that's going to create a huge congestion problem, a huge pollution problem.
00:15:22
Speaker
And it's something that we think cities would like to avoid.
00:15:25
Speaker
And therefore, we could see some policy decisions made to try and disincentivise people from using private vehicles or cars and to try and incentivise the use of public transportation, because that can help to alleviate those problems and help to make cities hopefully better functioning places to live.
00:15:42
Speaker
James, thank you very much.
00:15:44
Speaker
So that's our update for this week.
00:15:46
Speaker
Special thanks to our guests, Murat Olgan, Paul Mackle and James Pomeroy.
00:15:50
Speaker
Thanks for listening.
00:15:51
Speaker
We'll be back soon.
00:15:57
Speaker
Thank you for listening today.
00:15:59
Speaker
This has been HSBC Global Viewpoint Banking and Markets.
00:16:03
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.