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: Hello and welcome to Under the Banyan Tree, where we put Asian markets and economics in context.
Speaker: I'm Harold van der Linde, head of Asian equity strategy at HSBC in Hong Kong.
Speaker: And I'm Fred Newman, chief Asia economist.
Speaker: Today we're also putting politics in context because this week's podcast is all about elections in the region.
Speaker: We'll be asking what a leadership vote can mean for economies across Asia, as well as what makes elections different in this part of the world compared to the West.
Speaker: We'll also take a look at the implication for Asian stock markets and challenge the widely held views that elections are automatically negative for these markets.
Speaker: That and plenty more coming up right here under the Banyan tree.
Speaker: Fred, now is a topical time to talk about elections over the last couple of years.
Speaker: We haven't seen too many elections in Asia.
Speaker: Just the election cycles just worked out this way.
Speaker: But this year and early next year, so over the next 12 months, there's quite a few of them coming up, right?
Speaker: That's right.
Speaker: Politics is coming back on the radar screen as regards to elections.
Speaker: We just had...
Speaker: Two relatively meaningful elections in Asia, one, of course, in Thailand, where we saw the opposition winning a fairly large share of the vote.
Speaker: What that means for the government formation, we'll still need to see.
Speaker: And that's in India.
Speaker: We saw in one of the states, actually, the opposition also surprisingly winning quite a large number of votes.
Speaker: Now, that doesn't mean anything for the national election.
Speaker: But still, it's an indication that politics are coming back into view.
Speaker: Now, over the coming year, we have some key elections across Asia.
Speaker: And investors are starting to think about those.
Speaker: So one is, of course, in Indonesia, we have presidential elections on Valentine's Day.
Speaker: Valentine's Day, 20th of February.
Speaker: 2024.
Speaker: We also have elections, national elections in India coming in, actually, where, of course, that's, you know, biggest democratic election in the world.
Speaker: anywhere in the world.
Speaker: It takes six to eight weeks to really run this election, massive logistical exercise.
Speaker: And then we also have elections actually in Taiwan coming through as well.
Speaker: And that obviously has some implications for economic policy on the island, for example.
Speaker: So those are the key ones.
Speaker: And we are starting to think about this.
Speaker: And I think investors are asking questions around potential outcomes.
Speaker: Now, having said that, how do they generally impact equity markets?
Speaker: As an equity strategist, how do you think about elections and political risk in general?
Speaker: I find that very difficult, to be extremely frank.
Speaker: First of all, we in markets were not political analysts.
Speaker: And even if we were, we can make an analysis.
Speaker: But what then do you do with it?
Speaker: So very often people say, well, the elections is political risk and it therefore should be negative for markets.
Speaker: And that could be right, but it isn't always the case.
Speaker: We actually see markets sometimes doing very well throughout the elections.
Speaker: Also, it might mean a shift in policies, depending on who is going to come in.
Speaker: But also prior to the elections, very often you see that the incumbents increase fiscal spending and these sort of things.
Speaker: And that gives a bit of boost sometimes to growth and profits of companies.
Speaker: And that is then considered to be positive again.
Speaker: So there are negatives, there's positives, there's of course political risk, but maybe if they're moving in a different direction that the market likes a lot, markets can respond positive to that.
Speaker: So it's very difficult to come with an answer to that.
Speaker: There's just a lot of things going on and each election is different.
Speaker: But I think in Asia, elections are somewhat different than the rest of the world anyway.
Speaker: How do you approach elections from a macro perspective?
Speaker: So it's interesting, I think it's worth saying that, you know, if you look at a political science literature that really the way politics works in Asia is different to some other parts of the world.
Speaker: Latin America is often used as a contrast.
Speaker: And one of the differences is that elections are not necessarily fought along general ideological lines.
Speaker: It's not about left versus right, more fiscal spending versus less fiscal spending, for example.
Speaker: Elections are fought around micro topics, specific policies, identity, not really a wrong economic ideology.
Speaker: And that means that we're really seeing macro policy generally more isolated from political demands.
Speaker: That is, parties are not advocating for politics.
Speaker: massive fiscal deficits or shrinking the deficits, really fighting on different topics.
Speaker: In Latin America, for example, it's different where you have, say, strong labor unions or you have other big societal organizations that argue for macro policy standpoints.
Speaker: You don't have it as much in Asia.
Speaker: And therefore, macro policy tends to be relatively insulated and stressed relatively.
Speaker: So we have generally smaller budget deficits, lower inflation, more conservative policy because it's mostly technocrats that run and have more leeway to shape macro policy.
Speaker: But on the micro level, we obviously have much more advocates for certain protection for certain industries or subsidies or, you know, that's really the area where elections are fought over.
Speaker: Personalities count, right?
Speaker: I mean, it is, just to give you a good example, my own nieces and nephews in Jakarta, at one of the elections I asked them, how do you decide who to vote for?
Speaker: They don't have to tell me what they vote for, but how do you decide who to vote for?
Speaker: And it was really said, well, I vote with this guy because he will make the country strong, or he's got a military background, and I think that's really important.
Speaker: that makes us look good and these sort of things.
Speaker: So it is not about this guy is going to put a social network in place or is going to invest in education.
Speaker: There are all sorts of these other issues that seem to be playing a relatively bigger role here.
Speaker: And you see that when you compare, for example, election manifestos across parties.
Speaker: They're often very vague and they usually say exactly the same thing.
Speaker: It's about personalities.
Speaker: It's about identity.
Speaker: It's about allegiance.
Speaker: And that's really what shapes politics.
Speaker: But obviously, that has implications for micro policy.
Speaker: And maybe we'll take a quick break here.
Speaker: And when we come back, we can talk a bit more about the implications of these micro policies that elections bring on investment and on economies.
Speaker: Sounds like a good idea.
Speaker: So welcome back.
Speaker: Harold, we just discussed the fact that macro policy tends to be relatively more insulated in Asia from political demands just because of this political structure and how these societies are structured, what elections are fought over.
Speaker: But the flip side is that, of course, elections also then are fought over micro policy, certain programs, for example.
Speaker: Does that represent a particular challenge for equity investors where they see micro risks coming in when the elections happen?
Speaker: Yeah, I do believe so.
Speaker: I'm going to give you two examples, just maybe chronologically.
Speaker: The first one was in the 1990s, where an Indonesian company had a de facto monopoly on the import of flour and the production of noodles, a big thing in Indonesia.
Speaker: So an extremely profitable business.
Speaker: And clearly, the president Sohatu at the time had provided that monopoly.
Speaker: because he was closely aligned with that.
Speaker: And as soon as he fell away, that then changed.
Speaker: That monopoly was taken away.
Speaker: That company had to completely reinvent itself.
Speaker: We see some, I wouldn't say monopolies breaking up, but similar micro-issues.
Speaker: For example, in Korea, politicians very often talk about the breaking up of tables and corporate structures that they think these companies are protecting themselves too much.
Speaker: not inefficient use of capital.
Speaker: So very often it's these sort of things.
Speaker: I guess that can also be examples of maybe bigger macro stories, right?
Speaker: Japan, maybe, Fred.
Speaker: Abe, I believe, put some big things in place.
Speaker: Yeah, Abe-san famously became prime minister in Japan for the second time, and then he announced a big shift in macro strategy.
Speaker: And that was actually one of the few big examples where an election had
Speaker: direct consequences for macroeconomic policy, but of course a very aggressive monetary and fiscal easing that was designed to get Japan out of its deflation.
Speaker: But that serves more as an exception than a rule in terms of the way elections impact macro policy in Asia.
Speaker: The other thing I would say around micro distortions is that where Asia has been very good at is in building competitive export-oriented manufacturing sectors.
Speaker: And that's been driving productivity and therefore this enormous growth you see across Southeast Asia, for example, and India is now coming into its own there as well.
Speaker: But Asia is actually lagging behind in many ways in terms of opening its domestic services sector to foreign competition.
Speaker: And that has to do a lot with micro protections.
Speaker: where actually the trade barriers and investment barriers are actually quite large compared to other developing economies across the world.
Speaker: And that's where the region lags behind and actually could be growing even faster if we didn't have these micro distortions.
Speaker: Yeah, I think if you look at ASEAN, for example, used to be all a collection of protected markets.
Speaker: They tried to break that down, though, in the sense that these entry barriers have been lowered.
Speaker: Aargin has come together, I think it was in the early 2000s, that we allow for more free trade among our countries in certain sectors, in certain places.
Speaker: So Chinese and Thai cement companies went into Indonesia, broke up an oligopoly there.
Speaker: Indonesian food companies went to the Philippines.
Speaker: So that is changing as well, but you're right.
Speaker: They tend to be a little bit more protected on the domestic side.
Speaker: That's absolutely true.
Speaker: So plenty to watch over the coming year, Harold.
Speaker: We'll be watching not necessarily big announcements around fiscal policy, monetary policy, any change in macro strategy, but we're certainly going to look at the fine print and see what they might change on the micro level.
Speaker: Absolutely, Fred.
Speaker: That's going to keep us busy.
Speaker: So Fred, you and I have both been in the region for decades now.
Speaker: We've witnessed our own share of elections, sometimes getting stuck in it.
Speaker: Do you have any particular election experience in your mind?
Speaker: Well, I think elections are always colorful affairs in Asia.
Speaker: And it's useful to sometimes be on the ground.
Speaker: I remember being in Thailand
Speaker: in the mid-2000s.
Speaker: And we had, of course, the height of the yellow shirt versus red shirt antagonism in the country.
Speaker: And it wasn't actually about necessarily macro policy.
Speaker: The country was divided over social, political issues.
Speaker: And it was, at times, it got very heated.
Speaker: But it was also, and stretches, a quite orderly affair.
Speaker: So you had on Mondays, the yellow shirts out in the street.
Speaker: On Tuesdays, you had the
Speaker: the red shirts and so they took turns and everybody professed their allegiance to a particular camp but they never really mingled and so that last election.
Speaker: Yeah but sometimes if you look at Thai politics it hasn't changed all too much though we have now a new party in Thailand that is kind of trying to transcend that bifurcation of the society.
Speaker: The yellow
Speaker: Yeah, maybe we'll have an orange.
Speaker: We'll probably have an orange come through at some point when the two mix.
Speaker: And that's a generational too, right?
Speaker: So new voters come in.
Speaker: But Harold, you must have seen quite a few elections on the ground as well over the years.
Speaker: Yes, I mean, probably the most dramatic was in May 1998, when Indonesia's president fell and there were tanks on the street.
Speaker: And the country then very quickly shifted towards, we want to have a democracy.
Speaker: A new president came in, an election law was written.
Speaker: I remember reading through it to try to understand how it would work.
Speaker: And they started to campaign and took the lessons from some of the other countries.
Speaker: They said, OK, your party, you can go and campaign on Monday and Monday.
Speaker: But on Tuesday, stay home because then those guys can come out in trucks.
Speaker: They wear red and yellow and blue and all sorts of other colors, white.
Speaker: So Indonesia is really progressing as a democracy in that sense.
Speaker: And next year, February, as we said, they'll be having another round.
Speaker: It's a relatively young democracy.
Speaker: And I think they have flourished.
Speaker: About 20 years now.
Speaker: Really flourished.
Speaker: And there's a fairly rigorous democratic process in place.
Speaker: And next year, we'll see another...
Speaker: Yeah, and then the president will have to step down, so there will be a new one.
Speaker: So it will be interesting to see what he's going to do.
Speaker: And yeah, a lot of stuff for us to analyze, read and talk about again.
Speaker: Certainly, a lot of elections to follow across Asia over the coming year.
Speaker: And on that note, thank you very much for joining us.
Speaker: We'll see you again, same time, same place, next week, under the Binyan Tree.
Speaker: Cheers.
Speaker: Thank you for joining us at HSBC Global Viewpoint.
Speaker: We hope you enjoyed the discussion.
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