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Under the Banyan Tree – EM, Asia and the grown-ups in the room
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Dr Murat Ulgen joins Herald and Fred to talk AI, US outflows and Asia's influence over global emerging markets, all in the context of EM's outperformance in 2025.
Click here for appropriate Disclosures, including analyst certifications, and Disclaimers that must be viewed with this podcast: https://www.research.hsbc.com/R/101/QrL2kKQ
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Transcript
Introduction to HSBC Global Viewpoint
00:00:01
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.
00:00:13
Speaker
Make sure you're subscribed to stay up to date with new episodes. Thanks for listening, and now onto today's show.
Spotlight on Asian Markets with Fred and Harold
00:00:33
Speaker
Welcome to Under the Banyan Tree, where we put Asian markets and economics in context. I'm Fred Newman, Chief Asia Economist here at HSBC. Yes, and I'm also at HSBC. My name is Harold Vendelinde, and I'm the Chief Asia Equity Strategist.
Emerging Markets Outlook with Dr. Murat Ulgen
00:00:46
Speaker
But what is most important today is that we have a special guest in the Hong Kong studio today. That is our esteemed global head of macro strategy and emerging market expert, Dr. Murad Ulgen from London.
00:00:58
Speaker
That's right. And we've got a lively conversation coming your way. What is the outlook for emerging markets globally? How should we think about investment in 2026? Well, I also have a question. I want to know what he has thinks about artificial intelligence.
00:01:13
Speaker
So we're basically going to cover everything with Dr. Murat Olgin here from London. Wherever you're listening, come and join us under the banyan tree.
00:01:31
Speaker
So here we are under the banyan tree.
AI's Role in Global Equity Markets
00:01:34
Speaker
And my question to you, Murat, I mean, in the equity space, it seems that there's just one question. What is going on in artificial intelligence? All these stocks have rallied up a lot. um What is your view on that?
00:01:46
Speaker
Thank you, Herat, and thanks, Fred. It's great pleasure to be here and obviously an immense pleasure. I think, wait, before we get to this, I think it's Murat's first time under the banyan tree. He's never been under the banyan tree. It's an immense pleasure to be under the banyan tree. And thank you, gentlemen. Let's start with artificial intelligence. And this is actually something we published very recently. Well, look, it has carried equity markets the whole year, for sure. And the question is, is it going to be a major driver in 2026 well? Which, yeah.
00:02:13
Speaker
which yeah Highly likely, but in different shapes and forms because it's been more the hardware side, infrastructure investments, hyperscalers, data centers. And we think the theme will broaden, will morph into more software, AI adopters, AI enablers, software developments.
00:02:32
Speaker
And you can already see bit of a differentiation happening in the equity market. Yeah. where there is you know immense potential for efficiency gains, for cost reduction. we think the AI story will ramble on, but but so in different ways. So that's very interesting. AI is very, very transformative
AI Developments Beyond the US
00:02:51
Speaker
in many ways. And and I guess there are still you know many plays, if you will, we can think about it. But geographically, everything you've said, that sounds very US, the US economy. How does it help... emerging Asia, how does it help emerging markets? What's there? why is Is growth there gonna benefit from that as well?
00:03:11
Speaker
Yeah, well look, I mean, clearly AI store is not only confined in the US and mainland China has become a major player, especially, you know, with the innovation of DeepSeek in the beginning of the year, clearly helped the equity markets and you can see the excitement in there. But look, this is this is a very broad team, right? I mean, we're talking about huge investments probably made a lot more by equity and free cash flow.
00:03:37
Speaker
And clearly there are lots of comparisons to 1990s, what happened during that time, et cetera. But the CapEx investments are driven more by the incumbents, which are cash rich, would rather than levered up startups.
00:03:49
Speaker
That was the case in the in late 90s, that's right. Correct. And I mean, look, to the extent this carries equities in the US and, you know, hopefully will create efficiency and productivity gains,
00:04:00
Speaker
and this is you know paralleled elsewhere, particularly in mainland China, and then spills over to other emerging markets, it helps global economic activity.
Shift Towards Non-US Assets
00:04:08
Speaker
And this is probably one of the reasons that consider all the curveballs thrown at the global economy this year, right? I mean, from geopolitics to trade, tariffs, policy, fiscal, everything.
00:04:21
Speaker
There is an inherent resilience. Maybe this is already happening in the background. It's a transformative technology, and it will come you know in different shapes and forms. Yeah. This is interesting what you mentioned because Fred was asking how does it impact Asia to large extent, but actually it's the Asian markets. They are the producers of this this hardware, right? They make the chips. So they benefit from this. So if we see a shift from hardware to software, it will be interesting see how that impacts Asian markets next year. At these markets, are a lot of people, I mean, positioning is is very rich. But then there was something, at what Murat said, which we could broaden it out even more. You said there is maybe productivity gains coming through. So we could think of at some point... And that's perhaps the more optimistic view of the AI boom. We could think of the regular companies starting to use ai to improve their own operations and therefore completely unrelated sectors start to then see better productivity and and profitability potentially. And that that's the hope. 100%. actually, Herald has touched on very important issue about Europe.
00:05:25
Speaker
You know, obviously, as you said in the beginning, a lot of US AI stories and by our calculations, AI adoption is already like nearly 48% or something in the US, whereas in Europe, it's only 25%. You might argue there's a huge room in there too. Okay, so there's plenty of room for growth in that front.
00:05:41
Speaker
Okay, AI is a big story, but another big story for 2025, and it might be interesting to get your view for 26, was this idea that at some point, well, investors wanted to shift out of US assets. They've said we had enough about US assets. A dollar weakened at the beginning of the year. Maybe that stabilized a little bit, but there was this idea that investors wanted to buy non-US s assets. um And that presumably must be then reflected in some of the
Investment Flows in US Equities with AI Influence
00:06:10
Speaker
portfolio flows. And and you and your team track very closely how are investors globally are allocating money. Have you seen yeah over the course of this year money being allocated from the US into other markets, including Asia? Yeah, yeah. So look, Fred, um in the beginning of the year, especially post-Liberation Day, was yeah lots of questions. Liberation Day being the day when Donald Trump announced his big tariffs on April 2nd. Look, the point I'm trying to make is tons of questions. Let's say in the first half of the year, there will be outflows from U.S. into the rest of the world. Well, actually, data doesn't show that. When you look at the U.S. Treasury TIC data, TIC data, which is valuation adjusted,
00:06:52
Speaker
adjust it So take tech data is data that tracks investments in and out of the U.S. Portfolio, bonds and equities. You can't see divestments out of, if anything, there investment into U.S. equities.
00:07:04
Speaker
And this comes little bit back to ai again as well. Yeah, started from May and almost consistent. So we haven't seen that in data, all these sort of, you know, question marks by investors, whether there will be, you know, flows the rest of it.
00:07:17
Speaker
Having said that... We've always argued this a passive rotation. This is not about existing investment. This is about the proportion of the new investments. Every surplus, fresh funds generated around the world, what's the proportion of investing in the US or elsewhere in the world? And look, if the performances are a guide, this year, emerging market equities have actually outperformed.
00:07:39
Speaker
You might argue there is some interest and some flows similar for emerging markets debt. So if if I understand it correctly, you're saying that it's not so much that investors globally have sold U.S. assets. It's more that when they invest new money at the margin, they buy a bit more non-U.S. assets. That's where kind of the subtle shift has been with new investments coming in. I think emerging markets definitely benefit in EM fixed income, potentially from that trade, diversification and emerging markets presenting better macro balance and a good, credible macro mix.
Financial Conditions in Emerging Markets
00:08:16
Speaker
We've seen that, although it doesn't cover the outflows from emerging markets in the previous three years, you know, Since the Fed started hiking rates in March 2022, EM fixed income has seen $150 billion dollars of outflows. And this year, by our calculations, we've seen reversal of that a bit, like $40 billion. dollars Still doesn't cover all the outflows. EM equity is a bit of mixed, you know, evidence. But yeah, you might argue now investors are looking internationally, globally, elsewhere, and emerging markets starting at fixed income,
00:08:46
Speaker
They actually did benefit from that. If the money flows back into emerging markets, most of these currencies would have performed reasonably okay? Is that a fair? Well, they already done so, obviously on the back of dollar weakness, which was mostly in the first half of the year. But the thing we've argued for a long time is you don't need the US dollar to constantly keep weakening for emerging markets to attract interest. Obviously, it helps. But as long as U.S. dollar is kind of range-bound and sideways, that's good enough. and This has been precisely the case since the summer.
00:09:18
Speaker
Emerging markets, bonds, and even equities, they kept powering ahead. yeah so So just to take a step back, sort the big picture here is that um there is some indication at the margin of a rotation from the U.S. into other markets in terms of investments, very slow inflation. at the margin. It's more new money rather than existing money being moved.
00:09:41
Speaker
So that's happened in 2025. In 2026, what should investors look for to see whether this might be ah something that will come through? I mean, to me, the biggest trigger would be better EM growth environment.
00:09:55
Speaker
EM growth has always been the pull factor, the magnet. attracting investments, you know, faster pace growth, higher growth differential. And look, I think it's possible because we track emerging markets financial conditions.
00:10:09
Speaker
They've been in the loosening territory for the last three quarters. And it's only reasonable to expect this will continue because emerging markets have been in an easing cycle for the last two years. And you know, what's interesting with that is it's not has been led by the Fed.
00:10:23
Speaker
If anything, Fed is a bit of a laggard. Fed cut rates last year, 100 basis points, and then stopped for nine months this year, and resumed rate cuts in September again, now uneasing path.
Asia's Investment Appeal
00:10:34
Speaker
But emerging markets, you know, across all geographies, they've been cutting interest rates, and this is helping with financial conditions. And we've done some studies in the past. We've looked at the change in financial conditions getting looser,
00:10:47
Speaker
have an impact on economic activity with two to three quarters of a lag. So if that were to happen, Fred, that would be the biggest attraction for EM. And the other thing is, if the Fed cuts rates much deeper, then obviously that would reduce the interest rate on offer on the US dollar and investors would be looking for EM. Actually youre coming to growth, I just look at earnings growth, right? But you see in Asia, at least, a pickup. We see a pickup in India now after earnings coming down. in China, Indonesia as well. So across the region, we see there's a slightly better story.
00:11:19
Speaker
I think that's a great point, Harold. And maybe that's ah also a point then to take a quick break, because after we come back, we want to focus exactly on what this all means for Asia and how Asia looks in the global context from the perspective of Dr. Moritz Ulgen, who looks at global macro strategy here at HSBC.
00:11:49
Speaker
Now, Morat, help us to explain. You look at global investments, global allocation of capital. How do people think about investing in Asia versus other areas of the world? um you know It's a high-growing area, um but that doesn't mean necessarily it's always the most attractive investment destination. so How would you rank how Asia fits in there, emerging Asia with other regions like Latin America, Eastern Europe, Middle East and North Africa, for example? The Gulf. The Gulf. Yeah, sure. I mean, look, Asia is generally a region with lower interest rates in comparison to other emerging market geographies.
00:12:27
Speaker
And, you know, that's because of external surpluses, you know, lower inflation, but also it is a region with faster growth in comparison. So from that perspective, it's a more equity-friendly environment. I mean, you know, still like a lot of fixed income position in Asia, but generally on a relative basis, more, you know, appeal for equity investments. And obviously a lot of equity markets have done really well this year, especially like, you know, Northeast Asia, Whereas the rest, particularly Latin America and parts of CIMIA, where interest rates are relatively higher, there is more interest in fixed income markets or carry trades, as we mentioned, you know, investing in high yielding currencies. What's a carry trade very quickly? So you essentially invest in an emerging market. Well, I mean, in the EM context, in a high yielding currency by exchanging your dollars, your euros, and you try to gain from
China's Influence on Emerging Markets
00:13:20
Speaker
the yield differential. sell your dollars, you put it into Brazil because you get high interest rates. Correct, correct. And assuming that currency is broadly stable, if not appreciates, but you essentially bet on these gains from the yield differentials. So that's the context. But then Asia influences all EM through the sort of, you know, big role that mainland China plays when it comes to trade, when it comes to sentiment, you know, currency linkages, capital investments. And actually this year something very interesting has happened where we have seen US dollar falling sharply in the first half of the year. Then it's been sideways to bouncing a bit recently for the past couple of months.
00:14:00
Speaker
But The EM carry trade, as we defined, has done really well. And to me, the main reason is stable to softly appreciating Chinese renminbi. It's been a great anchor.
00:14:11
Speaker
for currencies, broader space. Yeah, that's an interesting point. So, and a lot of what we've discussed, Harold and ne over over the years and also what I hear from you is China increasingly becoming important as a driver for other markets. And you're saying that... anchor So, anchoring on the currency or in terms of growth. and so Is it fair to say when we think about Latin America in the past, we had to think about what's the US doing? What's the Fed doing? How's the US doing? And now actually we have to also not just keep an eye on the Fed, but we also got to keep an eye on China because it drives the commodity markets, which is important for Latin America. Is that is that a fair assessment? 100%. Take a country like Chile, for instance.
00:14:56
Speaker
Exports to China are nearly 4% of GDP. That's a very big number. And for whole EM complex, if you go back to early 2000, 2001, beginning of globalization, you know proliferation of all the trade ties, emerging market exports to China were only like four or 5% of total.
00:15:15
Speaker
Now they're like 20%. So clearly it plays a very important role, not only through trade, More and more so through capital linkages and financial market sentiment. Currents, as I mentioned, has been a very important anchor this year. And then also the investment coming from China into these markets. I imagine foreign direct investment, infrastructure investment, right? That must be felt. Chinese companies exporting their products there. 100%. 100%. mean, to to understand the behavior of EM financial markets. You know, both from a growth and financial conditions perspective, you have to get both pictures right.
00:15:49
Speaker
It's not only the U.S., but you have to also understand the direction of Chinese markets, Chinese renminbi. These are all very critical inputs now. I have ah another question, Murat, for you. um There's been a lot of talk about the fiscal position of governments in the US and in Europe as well. They have an enormous amount of debt there's a big discussion in particular in the US. This is much less so the case in in Asia, I believe, Fred, right? But ah these debt levels seem extraordinarily high. Is this going to be a problem? And coming back actually to what Fred mentioned, what could drive interest in the emerging market? Is that something that people consider to see as a risk?
Global Public Debt and Emerging Markets
00:16:27
Speaker
100%. let's start with the overall global public debt picture. And I'm going to give you some numbers which are very easy to remember. So global public debt has reached nearly $100 trillion. dollars That's roughly 100% of global GDP, give or take. I can remember. Easy it to remember. Yeah, yeah. 100, 100. I'm good with numbers. But if you go back like 20, 25 years, this was only like about 50% of global GDP. So a massive ramp up. in global public debt. And another easy set of numbers you can remember, about $100 trillion, two-thirds is born by the developed world, $65 trillion dollars wow roughly, and $35 trillion dollars by the emerging world, two-thirds, one-third. Now, these are very big numbers and clearly every now and then these fiscal issues come and impact the market through curveballs and intermittent volatility.
00:17:16
Speaker
emerging markets are in better place. I mean, there are certainly so some number of countries where public debt is high, but broadly speaking, public debt levels are more manageable. Inflation well behaved, that interests are coming in lower.
00:17:30
Speaker
So borrowing requirements are not that onerous. And to some extent, because the macro balance are better, public finance are a better shape relative to the developed world. policy makes monetary and fiscal appears to be relatively more credible, it is attracting interest for EM. So I i call emerging markets the grown-ups in the room on a relative basis.
00:17:51
Speaker
And that's another reason why they perform better
Stability and Growth in Emerging Markets
00:17:54
Speaker
this year. It's interesting because over, you know, we're accustomed in the 1990s and 2000s, there were a lot of macroeconomic challenges in emerging markets, high inflation, high debt, currency volatility. But what you're saying is, Murat, if I understand you correctly, some of these macroeconomic challenges are more obvious or prevalent now in developed markets potentially relative to some emerging markets. I i feel good talking to Murat here. So we have... So i'm going to get invited again. yeah You will definitely get invited again, Murat, because this is a great story for us. right Because the Banyan tree is firmly rooted in emerging markets. Yes. But also I'm thinking we have growth looking a little bit better here. We have...
00:18:37
Speaker
Chinese currencies helping to stabilize the currencies in the regions we just hear. We've been exposed to the nice part of the AI sort of build out. So that's good for Asia as well. There are other growth drivers in the region as well. And we don't have the debt problems that they have in in many other parts, developed parts of the world. So,
Closing and Call to Action
00:18:53
Speaker
yeah.
00:18:53
Speaker
and what your equation And now you know, Dr. Murat, that's why Harold is an equity strategist, because he always sees the positive in things. And he's always smiling as well. That's what I've noticed. that that's That's an essential. Always. Yes. Looks good on me, they tell me. Yes, that's right.
00:19:08
Speaker
So thanks, Murat. We covered a lot of ground here, but thanks for taking time and visiting us here under the Banyan Tree in the Hong Kong studio. And please do come back next time you're coming through. Absolutely. Thank you, gentlemen. Great pleasure.
00:19:21
Speaker
And that's a wrap from all of us here in Hong Kong. Great having you with us and we'll talk to you soon again. In the meantime, the 2026 Asia Excel survey is still open. Please do keep HSBC in mind if you happen to be voting.
00:19:35
Speaker
Also, you can check out our sister podcast, The Macro Brief from London, wherever you get your podcast. Under the Banyan Tree is a global investment research production. Our producer is Graham Mackay. Thanks for listening and take care till the next one.
00:20:13
Speaker
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.