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The Macro Brief - EM investor attitudes, the rise of the drones, central bank update
38 Plays2 years ago
Murat Ulgen assesses the findings from our latest survey of EM investors, Davey Jose explains why the commercial and consumer drone market is poised for huge growth and we update on central bank moves. Disclaimer: https://www.research.hsbc.com/R/51/WfnD2ML Stay connected and access free to view reports and videos from HSBC Global Research follow us on LinkedIn https://www.linkedin.com/feed/hashtag/hsbcresearch/ or click here: https://www.gbm.hsbc.com/insights/global-research.
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Transcript
Introduction and Podcast Details
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The following podcast was recorded on the 15th of June by HSBC Global Research.
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All the disclosures and disclaimers associated with it must be viewed on the link attached to your media player.
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You can find us on Apple and Spotify or wherever you get your podcasts by searching for the Macro Brief.
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And don't forget to give us a rating.
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Now, on to the podcast.
Host Introductions and Topic Overview
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Hello, I'm Piers Butler in London.
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And I'm Mary Watkins and a warm welcome everybody to our weekly Macro Brief Podcast.
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Here's what's coming up today.
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Following a tough few months for financial markets, we assess the mood among emerging market investors as we look at the results of our latest EM Sentiment Survey.
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We examine how the rise of commercial and consumer drones are poised to transform the way things get done across society.
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And we wrap up the views from our economists tracking the latest policy decisions at the Fed, ECB and the Bank of England.
EM Sentiment Survey Insights
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HSBC has just released its latest emerging market sentiment survey.
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This 12th edition in the series gives an insight into what's on the mind of major investors responsible for over half a trillion dollars of assets under management in emerging markets.
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We're joined by Dr. Murat Olgan, Global Head of EM Research, who has been analyzing the findings.
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Murat, welcome.
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Thank you very much.
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So this is the 12th survey.
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We've been on quite a journey since it first started.
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And in fact, the last survey was very bullish in terms of EM sentiment.
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But since then, obviously, we've had volatility in the markets.
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We've had people worrying about things such as the pace of the China recovery.
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So how does EM sentiment look like today?
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Sure, thank you.
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It's been three years since we launched the survey, the 12th quarterly edition indeed.
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So look, investors still retain a broadly constructive view on EM, but as you said, it's been a volatile quarter with all these things impacting the sentiment, and there have been a few changes.
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Actually, there is some moderation in that bullish expectation.
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Now investors who are outright bullish on EM, they've actually dropped to 39% from 47% in the previous survey in March.
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while those who are bearish, they remain unchanged at 17.
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So when you take the net of bullish versus bearish, it's still one of the highest readings of the last two years.
Investor Concerns and Market Outlook
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But similarly, consistent with that moderation of bullish expectations, we've seen cash levels picking up a bit,
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to 5.9% as weighted average as a share of assets under management for 5.1 earlier.
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And also the risk appetite score has moderated to 6.1 from 6.9, where zero is no risk in EM and 10 means highest risk in emerging markets.
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So if we get a bit more specific, what are EM investors worrying about now in terms of emerging markets?
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Yes, I mean, as you said, part of the volatility was because of a hawkish global monetary policy outlook throughout the second quarter and continued rate hikes by global center banks.
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So investors actually still worry about the U.S. Federal Reserve and other global center banks keeping their rates high for longer.
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And the other worry has been there for a while is recession in major economies.
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And what about on the upside?
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Is there anything that they're sort of thinking could be a positive catalyst?
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There are actually.
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As a matter of fact, this one what stands out is the share of investors who think a soft landing in major economies could be a major upside for EM.
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That share has doubled from the previous survey.
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And also some investors believe that inflation can actually fall to targets
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sooner than expected and they appear to be key upside risk for emerging markets out there.
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And when we were chatting ahead of this interview, you said something that really struck me, that in the sort of 25 years or so of covering emerging markets, there was a divergence in this survey that is really seen in emerging markets.
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Tell us what that is.
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So, I mean, in my own experience, the monetary cycles rarely diverge, and emerging markets are usually led by the developed market-centered banks.
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But interestingly in this survey, nearly two-thirds of the investors
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don't expect any rate cuts from the developed market center banks.
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Whereas there's a 40% of the investors who believe that actually emerging market center banks can lower interest rates in the next three months, which is very near term.
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So there is a bit of a striking divergence.
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And I think it's fair enough because a lot of emerging market center banks have started hiking rates a lot earlier than the developed world at the start of the cycle.
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So it's natural that some expect they can also start cutting earlier than the developed markets.
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So just to finish on, looking at the survey and in terms of potential flows, what does the survey reveal?
Regional Investment Preferences
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Sure.
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Well, first of all, Latin America is the most preferred region across the board for all asset classes.
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And it's quite striking because Latin already has seen a spectacular performance here today, but investors are still bullish.
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That's partly explained by this rising interest in EMFX and local fixed income markets by investors.
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And hard currency debt has actually fallen out of favor.
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And a lot of Latin American countries, they have a high carry-on offer.
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So definitely there is interest in local currency debt, NFX, and the next region after Latin America is Asia.
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and investors are bullish on EMFX, now 70% expects EM currencies to appreciate against the US dollar in the next three months.
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And consistent with the interest in local currency denominated assets, I should also mention about equities because the sentiment has improved very visibly.
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Now 60% of investors see EM equities rising over the next three months, doing well, and 73% think that actually EM equities will outperform EM equities over the same time horizon.
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An emerging market cocktail, shaken but not stirred.
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Murat, thank you very much for joining us today.
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Thanks for having me.
Central Bank Policies and Expectations
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Before we move on, a few central bank updates.
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The Fed held its latest meeting this week, where it kept rates on hold for the first time in over a year.
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However, it signaled more action ahead given elevated inflation.
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And Ryan Wang, our US economist, expects one more 25 basis point rate hike at the July meeting.
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the ecb also met this week and continued its tightening cycle with a twenty five basis point rise taking the deposit rate to three point five per cent our european economics team led by simon wells expect further rate rises at the july and september meetings
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And here in the UK, anticipation is building ahead of the Bank of England's meeting next week.
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Liz Martin, senior UK economist, thinks a 25 basis point rise is most likely, but upcoming labour market and inflation data tilt the risk towards a 50 basis point rise.
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Just a reminder that the Macro Brief is now available on its own channel on Apple and Spotify and wherever you find your podcasts.
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So you can click to subscribe and get the latest editions as soon as they're available.
The Rise of Drones
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We head to the world of disruptive technology now and the rise of commercial and consumer drones.
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Drones are already used in a number of industries, but as Davy Joes, thematic analyst for disruptive technologies, can tell us, their application is set to accelerate.
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Davy is here to tell us more.
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Davy, thanks for joining us.
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Thank you for having me here, Piers.
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David, great new report on drones.
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And I have to admit, sort of reading it ahead of this call, that I was surprised by the size of the drone market as it currently stands today.
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So perhaps we could start with that.
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What is the size of the market and how does it break down?
00:07:37
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Sure thing, Piers.
00:07:39
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Look, Piers, we think that the total drone market today is valued about $29 billion.
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And so this $29 billion is comprised of three different moving parts within the drone ecosystem.
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So the first bit is the commercial drones.
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The second is consumer-oriented drones.
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The third is something called e-VTOLs, electric vertical takeoff and landing vehicles which can take human passengers and also cargo.
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And at the moment, we think that the commercial element is the largest at 54% of the drone market.
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So let's drill down on the commercial drone part of the market.
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Give us some illustrations of the uses that commercial drones are already
Drone Applications and Market Growth
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being put to.
00:08:26
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Sure, Piers.
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Look, there are lots of applications happening already within industry with drones.
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You know, a really interesting example is within the insurance sector.
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So in the insurance sector, they have been using drones to inspect regions and areas after storms and natural disasters.
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to analyse the situation better, analyse the damage and process the claims faster.
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And also on the other side of things, for example, within the mining industry, which is an early adopter of technologies, they use drones to inspect the mines to increase safety and increase productivity.
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And it's not just about the actual flying machine.
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There's a lot of elements that have to occur in order to allow a drone, so to speak, to fly in an area.
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We're talking here about regulation and the sort of challenges of ensuring a drone.
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Can you tell us a bit more about that?
00:09:28
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Yeah, absolutely.
00:09:29
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Good point about the infrastructure, Piers.
00:09:31
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Look,
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When you look at a drone, there are two types of infrastructure, essentially.
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One is the technological enablers, which is on the drone, like the chips, the cameras, and all those things.
00:09:42
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And the other element, which you were alluding to, is more of the supporting infrastructure, which is behind the scenes you need to enable the functioning of a drone.
00:09:50
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For example, for drones, because they orbit the skies,
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and have many risks associated with that and safety issues.
00:09:58
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You have to have the regulators behind you.
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So there are different regulations all over the world for companies to negotiate and governments to do.
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And sort of the other infrastructure is some of the insurance sort of frameworks that have to be put into place for these drones to fly safely.
00:10:17
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Putting all that together and looking at the future of drones, your report is forecasting some pretty impressive growth.
00:10:26
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What sort of forecast do you have and what is behind that really strong growth?
00:10:32
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Yes, P.S., look at the beginning of the podcast, we said that we think drones are about $29 billion today.
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And we expect this to grow tenfold in our base case scenario.
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to about $290 billion.
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And even in our bull case, we expect it to nearly $500 billion.
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So there are a few key reasons we think that this growth is going to happen.
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One of the things is that we live in an era of sort of remote adoption technologies, such as Zoom, such as online shopping and telemedicine.
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And we think drones is going to ride on this super technology
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mega trend of remote technologies.
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The other aspect is that a lot of these technologies are becoming cheaper and more advanced, such as things like batteries, artificial intelligence, sensors and chips.
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So these things will drive this mega trend in the adoption of these drone technologies.
00:11:33
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Yeah.
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And just to be clear, that was 290 billion over the next 10 years.
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So that's a tenfold increase over the next 10 years.
00:11:41
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That's right, Piers, yeah.
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Which is pretty impressive.
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What are the obstacles to achieving that kind of growth?
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I mean, I'm thinking about developed markets.
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Isn't it actually quite difficult to get the flying rights to allow these drones to go and deliver your Amazon order?
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So that's a really interesting question, Piers.
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So interestingly enough, drones have had an easier life of getting to the skies in the emerging markets and the developed world.
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Because in the emerging markets, because
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of these infrastructure and rules are not so tight and maybe less built up in terms of spaces.
00:12:15
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Companies like Zipline, which deliver medical products around, have been doing this to countries in Africa for a number of years now.
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But this is still yet to take place more widely in the developed world.
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But as the regulators sort of understand the risks and the pros and the cons, it will become easier to adopt going forwards.
00:12:36
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Well, it's been fascinating to talk to you, David.
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Thank you very much for joining us today.
00:12:39
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Thank you for having me, Piers.
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So that's it from us.
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Thanks to our guests, Murat Organ and Davy Joes.
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Don't forget to subscribe to The Macro Brief wherever you get your podcasts.
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And we'll be back again next week.