Transcript
Speaker: This is HSBC Global Viewpoint, your window into the thinking, trends and issues shaping global banking and markets.
Speaker: Join us as we hear from industry leaders and HSBC experts on the latest insights and opportunities for your business.
Speaker: Thank you for listening.
Speaker: Hello and welcome to the Macro Viewpoint everyone.
Speaker: I'm Chris Brown-Hames, the Managing Editor here at HSBC Global Research.
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.
Speaker: I'm joined today by Mary Watkins.
Speaker: Mary?
Speaker: Thanks Chris.
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.
Speaker: We'll be joined by our Global Head of Emerging Markets Research, Murat Olgan.
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.
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.
Speaker: This podcast was recorded for publication on the 29th of July, 2021.
Speaker: And of course, all of our disclosures and disclaimers must be read on the link traveling with this podcast.
Speaker: Now the results of HSBC's fifth survey of emerging market investor sentiment are hot off the digital presses.
Speaker: Murat Ulgin is the global head of emerging markets research.
Speaker: Murat, let me start by asking how you define the mood of investors at the moment.
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.
Speaker: But the bullishness also has gone up a bit.
Speaker: 40% of the respondents are bullish on EM prospects versus 34 in April.
Speaker: The interesting thing is there is still lots of cash on the sidelines.
Speaker: Around 45% of the investors have in excess of 5% cash in their portfolios.
Speaker: And we have questioned a large universe of EM investors representing more than a half a trillion dollar of assets under management.
Speaker: And the other interesting fact is 59% of investors, they actually want to keep the cash level same in the near term.
Speaker: That's the highest number so far since the inception of the survey.
Speaker: It kind of tells us that investors are waiting for an opportunity, but they're not yet to make the move yet.
Speaker: And why do you think they're being so cautious?
Speaker: Well, there have been so many gyrations in the concerns.
Speaker: I mean, remember, as recently as last month, in June, it was all about inflation in the US and elsewhere around the world.
Speaker: The hawkish tilt by the Fed caused some worries for investors.
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.
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
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.
Speaker: So that still shows that they're not yet ready to take on much risk.
Speaker: And what do you think their biggest concern is?
Speaker: The biggest concern is about the Fed, the potentially tighter U.S. monetary policy, Fed tightening, also Fed tapering.
Speaker: This is actually a bigger concern than COVID.
Speaker: And in this survey, we asked them how would emerging markets react to potential Fed tapering?
Speaker: A full 78% said it would be either slightly negative or negative.
Speaker: Very few investors said this would be broadly neutral for emerging markets.
Speaker: That clearly is the main concern for emerging market investors.
Speaker: Now, what's quite interesting is that their expectations for inflation have actually fallen.
Speaker: On the other hand, you've got the predictions of or expectations of quite a few interest rate hikes in emerging markets.
Speaker: That is true.
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.
Speaker: And in line with that, the expectation of higher inflation has also come down.
Speaker: Now 59% expect higher inflation.
Speaker: across EM over the next 12 months.
Speaker: This was 77% in April.
Speaker: But despite that, as you said, 56% of investors are expecting higher rates in EM, which is much higher than the previous survey.
Speaker: So their expectation of inflation has come down a bit, but despite that, they're looking for much higher rates.
Speaker: That to me is quite telling and probably the motivation behind is partly
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.
Speaker: They had to reply with pretty rapid rate hikes to increase the risk premium and avert capital flow.
Speaker: So perhaps emerging markets, investors think that EMs are preparing to avoid a repeat of such an episode.
Speaker: And have there been any changes in EU investor preferences around particular asset classes or indeed particular regions?
Speaker: There have been some changes.
Speaker: You know, Asia is still the region with net positive sentiment across all asset classes, but the net sentiment has come down.
Speaker: And the positioning also appears to be moving more in favor of commodity linked regions like Latin America, like Middle East, like Africa.
Speaker: So that's one change.
Speaker: E-MFX is seen in a better light.
Speaker: 40% of investors are looking for E-M currencies to appreciate in the near term.
Speaker: This was 22% previously.
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.
Speaker: Fixed income positions have been curtailed.
Speaker: There is slight preference for external debt and there is some yield seeking.
Speaker: You know, investors are focusing on high yield markets.
Speaker: And on equities, there is mild optimism compared to the previous survey.
Speaker: But investors are looking for EM equities to underperform EM equities.
Speaker: And finally, Murat, I know the survey looks at ESG factors.
Speaker: Is anything coming through more strongly this month?
Speaker: Yes, so the ESG engagement has picked up compared to the previous survey.
Speaker: Every quarter we ask investors whether they run an ESG portfolio, either directly or indirectly.
Speaker: And the total number this time was 45% compared to 40%.
Speaker: The ranking of key ESG risks still remains the same.
Speaker: It is climate change for environmental risk.
Speaker: It's inequality for social risks.
Speaker: And it's the minority shareholder protection when it comes to governance.
Speaker: But what's interesting this time is audit process
Speaker: has gained considerable attention of investors as a key governance risk, which perhaps might be related to the earnings season in the background.
Speaker: Murat, thank you very much for explaining all that.
Speaker: Thank you very much.
Speaker: Murat Olgan, our Global Head of Emerging Markets Research, talking about the latest HSBC EM Sentiment Survey.
Speaker: In our next report, we stay with a focus on Fed policy and the prospects for tapering of Fed-ask purchases.
Speaker: Paul Mackle, Global Head of FX Research, has just published the EM FX Roadmap, our monthly guide to EM currency directions.
Speaker: Our producer in Hong Kong, Graham Mackay, spoke with Paul earlier and started by asking him about the second half outlook.
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.
Speaker: The first is that the broader dollar itself has remained more resilient.
Speaker: It's partly to do with the Fed message from June.
Speaker: being on the hawkish side.
Speaker: The second thing is that we're increasingly debating whether global growth has indeed peaked.
Speaker: And I think some of these emerging market currencies are very much sensitive to some of these uncertainties.
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
Speaker: to strengthen materially.
Speaker: So what are these factors?
Speaker: The first is, again, we're not going to get away from the debate about global growth.
Speaker: I think that's going to matter a lot more.
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.
Speaker: These currents could pose more challenges for emerging market currencies, which in turn means
Speaker: that we're going to have to dig a little bit deeper to identify the positive factors.
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.
Speaker: And you highlight Fed and People's Bank of China policy in particular in this report.
Speaker: How are those shaping your thinking?
Speaker: Well, it's central to our thinking about what could happen to the dollar versus the renminbi this year.
Speaker: We've been of the view that the exchange rate would be gradually drifting higher.
Speaker: That is, the renminbi would be weakening modestly versus the dollar.
Speaker: And what's associated with that is this idea of policy divergence between the Fed and PBOC.
Speaker: The Fed, as I mentioned, is expected to taper its balance sheet.
Speaker: We recently saw China lower its reserve requirement ratio
Speaker: And it's telling you that they're doing a little bit more to help out growth.
Speaker: So it's a very different backdrop for each currency.
Speaker: And that's central for many other emerging market currencies, because after all, the renminbi is an anchor in the FX market.
Speaker: And if it's weakening a little bit, then as I said, there could be some spillover effects to other currencies too.
Speaker: So given the uncertainties you've already highlighted, is there any cause for optimism as the year progresses?
Speaker: The short answer is yes.
Speaker: The reason being is because local factors are going to become increasingly more important.
Speaker: We're thinking about divergent monetary policy.
Speaker: Some central banks have been raising their interest rates in a pretty proactive manner.
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.
Speaker: This is where I think that there should be some optimism emerging.
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.
Speaker: So I think, as I said, divergence is a key theme.
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.
Speaker: And those that do so should lead to stronger currencies.
Speaker: Paul Mackel, thanks again.
Speaker: Thank you very much.
Speaker: We turn to the future now, the future of cities with global economist, James Pomeroy.
Speaker: James, welcome.
Speaker: Future cities is one of the nine big themes we track here at HSBC Global Research.
Speaker: You've just published a report, Cities and the Pandemic.
Speaker: So 18 months into COVID, how are they faring?
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.
Speaker: And it's why a brunt of the economic damage has come.
Speaker: Now, there had been some hope that as you start to take restrictions off, you started to see some of that activity return.
Speaker: And so far, the evidence is incredibly mixed.
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.
Speaker: And there's this big
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.
Speaker: So James what are people doing in cities?
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.
Speaker: And many people aren't going back to offices.
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.
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.
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
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.
Speaker: And how are people travelling around cities?
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.
Speaker: So if you get the data from city authorities themselves in New York or in London,
Speaker: It looks like public transportation is being used by about 50% as many people as we were seeing pre-pandemic.
Speaker: But what we are seeing is congestion levels in those cities almost back at pre-pandemic levels.
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.
Speaker: in private vehicles coming back much, much more strongly than public transportation.
Speaker: And that's going to create a problem in terms of congestion quite clearly, unless that changes further down the line.
Speaker: So James, what are the implications for policymakers?
Speaker: It's a big challenge, I think.
Speaker: You've got multiple issues here.
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.
Speaker: The profitability of these businesses is clearly...
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?
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
Speaker: new normal.
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.
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.
Speaker: And it's something that we think cities would like to avoid.
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.
Speaker: James, thank you very much.
Speaker: So that's our update for this week.
Speaker: Special thanks to our guests, Murat Olgan, Paul Mackle and James Pomeroy.
Speaker: Thanks for listening.
Speaker: We'll be back soon.
Speaker: Thank you for listening today.
Speaker: This has been HSBC Global Viewpoint Banking and Markets.
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.
