Become a Creator today!Start creating today - Share your story with the world!
Start for free
00:00:00
00:00:01
The Macro Brief – Risks and equity markets
23 Plays1 year ago
Alastair Pinder, Head EM and Global Equity Strategist, looks at how we can identify which macro and geopolitical risks are priced into stocks. Disclaimer: https://www.research.hsbc.com/R/61/dDzsTqp 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.
Hosted on Acast. See acast.com/privacy for more information.
Recommended
Transcript
Introduction to Global Insights and Trends
00:00:00
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.
00:00:11
Speaker
Make sure you're subscribed to stay up to date with new episodes.
00:00:14
Speaker
Thanks for listening.
00:00:15
Speaker
And now onto today's
Podcast Recording and Disclosures
00:00:16
Speaker
show.
00:00:16
Speaker
The following podcast was recorded on the 9th of November 2023 by HSBC Global Research.
00:00:21
Speaker
All the disclosures and disclaimers associated with it must be viewed on the link attached to your media player.
Macro and Geopolitical Risks in Global Markets
00:00:26
Speaker
Hello and welcome to The Macro Brief, which is coming to you from New York.
00:00:42
Speaker
I'm your host, Aline Van Dyne, Global Managing Editor.
00:00:46
Speaker
And today we're looking at macro and geopolitical risks that are priced into global markets.
Geopolitical Tensions and Inflation Concerns
00:00:53
Speaker
Now, of course, these are a constant source of concern, but what is actually priced in and how do we know if risks that are being priced in change?
00:01:04
Speaker
So for answers, we're talking to Alastair Pinder, Head Emerging Markets and Global Equity Strategist.
00:01:11
Speaker
Alastair, welcome to the podcast.
00:01:13
Speaker
Thank you very much for having me.
00:01:14
Speaker
So let's start with the crucial information that everybody wants to know.
00:01:19
Speaker
What are the top risks that investors should be concerned about?
00:01:23
Speaker
Clearly, after the last few weeks, the top risk that we get asked about at the moment is geopolitical risks.
00:01:30
Speaker
And that obviously covers things like the tensions in the Middle East, but also US-China tensions.
00:01:38
Speaker
And bear in mind that going into next year, we have a ton of elections beginning with Taiwan in January, but also, of course, the US election in November.
00:01:48
Speaker
So geopolitical risks, there's plenty of them.
00:01:50
Speaker
That gets discussed a lot.
00:01:52
Speaker
But then, you know, one of the other big market movers and the risks for equity markets at this point is a higher for longer environment, sticky inflation, which causes Fed and bond yields to remain elevated.
00:02:04
Speaker
That could have a really detrimental impact on equities.
00:02:07
Speaker
So that is also a key risk that we're focused
Market Risk Pricing and Quantitative Methods
00:02:09
Speaker
on.
00:02:09
Speaker
And then, of course, the other one, I think, which gets discussed a lot and also, you know, concerns us is the potential for a sharper China slowdown.
00:02:18
Speaker
But there's obviously downside risks related to
00:02:20
Speaker
potential instability within the housing market and the consequences that that could have for consumption in the economy.
00:02:26
Speaker
So those are quite big issues and big questions.
00:02:30
Speaker
How do you know what the markets are pricing in around these risks?
00:02:35
Speaker
That's a great question.
00:02:35
Speaker
And, you know, I think what is priced is one of the most important things that investors have to consider when it comes to risks.
00:02:43
Speaker
Because in a lot of cases, when we consider risks, it's what is the impact of the risk going to have on equity markets?
00:02:51
Speaker
You know, that's our primary focus.
00:02:53
Speaker
And for that, you know, you think about
00:02:56
Speaker
the potential spillover effects from China, of course, a huge economy and what a slowdown could mean for the rest of the world.
00:03:01
Speaker
Again, for interest rates, we are very focused on that because of the sensitivity of valuations in the equity markets to higher bond yields.
00:03:11
Speaker
Just consider this, every 50 basis points higher in the US 10-year is a 6% hit to the US equity multiple.
00:03:19
Speaker
So big downside if bond yields continue to go up.
00:03:22
Speaker
But then when it comes to the second part of the equation is, well, what's actually price?
00:03:27
Speaker
Because if this is already reflected in the valuations or the movement in equity prices, then actually these risks might not be as big of a concern as we may initially feared.
00:03:38
Speaker
So we do a lot of work.
00:03:40
Speaker
And then it covers from looking at the impact of news on equity market performance to looking at machine learning models and trying to have more sophisticated ways to dissect valuations and the impact.
00:03:51
Speaker
We use a range of approaches to really try and tease out what is being priced by markets at this point.
00:03:57
Speaker
How reliable are some of these models in terms of working out what's priced in?
00:04:02
Speaker
We've tried to take a very quantitative approach.
00:04:04
Speaker
I think we've tried to move away from a gut instinct.
00:04:07
Speaker
And I think what we do in our approach is for every different risk that we see, we try to take a very unique and specific approach to that specific risk so that we are...
00:04:19
Speaker
using approaches which are relevant.
00:04:21
Speaker
So I think the interesting approach that we take for when we're trying to discover what's being priced in when it comes to US-China tensions, we specifically look at the performance of Chinese equities on the day of elevated news around tensions between these two major economies.
00:04:40
Speaker
And for that, it's very interesting to track over time because we get to see how the risks are being priced and are shifting during different points.
00:04:48
Speaker
How do you know when a new risk comes in that's not in your current analysis?
00:04:55
Speaker
So we actually have a number of ways to do that.
00:04:58
Speaker
One is obviously just, you know, we see the news flow.
00:05:00
Speaker
We see when there's new events coming that could be disruptive to equity markets.
00:05:05
Speaker
Something else that we have, which I think is really unique and quite interesting, is that we have a machine learning model.
00:05:11
Speaker
which basically looks and tells us what are the key drivers from a macro perspective of equity
Detecting New Risks with Technology
00:05:20
Speaker
markets.
00:05:20
Speaker
Now, this is really useful because it tells us whether economic growth or U.S. bond deals or something else is being impactful.
00:05:26
Speaker
But...
00:05:27
Speaker
What it also tells us is it also tells us what's not being explained.
00:05:31
Speaker
So what can our model, what is our model not understanding?
00:05:34
Speaker
And when we find during periods where our model is actually having difficulty explaining equity market movements, this is actually a signal to us that, hey, we may be missing something.
00:05:44
Speaker
There may be some other risk which the equity market is being focused on, which our model is not capturing.
Geopolitical Uncertainties and Market Impact
00:05:49
Speaker
And that's when we start hunting around for potential risks out there.
00:05:53
Speaker
Given the state of the global economy and global geopolitics as it is right now, where does this fit in?
00:06:02
Speaker
It feels like it's been a pretty unprecedented almost decade now to think that really from 2016, we had rising tensions between the US and China, which created a lot of risks and uncertainty there, which wasn't reflected in our model.
00:06:16
Speaker
Then of course we had COVID, that was a huge amount of risks.
00:06:19
Speaker
And now we have ongoing developments in geopolitical space.
00:06:22
Speaker
So I do think it is elevated, but compared to, you know, the last few years, it seems actually somewhat comparable.
00:06:29
Speaker
And to a certain extent, it shows that this is a new dynamic, which markets have to kind of be contending with now is just this persistent uncertainty and, you know, backdrop of heightened risks and geopolitical uncertainty.
00:06:43
Speaker
So Alastair, given all this, are there any risks that are well priced in or any that are perhaps not priced in well enough in markets at the moment?
00:06:55
Speaker
Yes, if we think specifically about what is being priced by equity markets and just focusing purely on that lens, then I think you could justify something like this.
00:07:07
Speaker
Interest rates and higher bond deals are well priced by equity markets.
00:07:11
Speaker
I think China's slowdown is not well priced and geopolitical risks is a bit of a mixed bag.
00:07:18
Speaker
So taking each in turn quickly for higher bond yields, our models think that a bond yield of your US 10 year bond yield of four and a half percent is somewhat priced in.
00:07:28
Speaker
That's somewhat in line with current levels.
00:07:30
Speaker
So that seems reasonable to us.
00:07:33
Speaker
when it comes to a China slowdown, what is interesting is that, okay, Chinese equities have underperformed pretty significantly, but EM ex-China companies, which have Chinese exposure, have actually outperformed year to day.
00:07:47
Speaker
So this is an area where we think is underpricing the risks of a China slowdown.
00:07:52
Speaker
And then when it comes to geopolitical risks, it's a bit of a mixed bag.
00:07:56
Speaker
If we take Middle East tensions, we focus on the Gulf economies and they've underperformed in line with prior episodes of heightened Middle East tensions.
00:08:05
Speaker
So that risk seems somewhat better priced.
00:08:08
Speaker
You then have the risks around US-China trade tensions.
00:08:13
Speaker
And there, what is interesting is that Chinese equities have underperformed significantly year-to-date.
00:08:19
Speaker
But compare this to emerging market ex-China companies that have Chinese exposure, they've actually outperformed year-to-date.
00:08:29
Speaker
And then you have the Taiwan elections.
Taiwanese Equities and Election Anomalies
00:08:31
Speaker
And what's interesting here is that Taiwanese equities have outperformed year to date.
00:08:36
Speaker
But historically, Taiwanese equities usually underperform going into the election season.
Global Economy Updates and Regional Elections
00:08:41
Speaker
Alistair, thank you so much.
00:08:43
Speaker
Thank you very much for having me.
00:08:48
Speaker
Before we go, here are a few things to highlight from the team at Global Research.
00:08:53
Speaker
Starting with the global economy, the latest PMI numbers have been released.
00:08:58
Speaker
October data show the global manufacturing PMI remains stuck in contractionary territory, while service sector growth is slowing.
00:09:08
Speaker
geographically europe remains the weak spot with activity looking stronger in the u s asian economies perform much better than the west again but there are some early signs of a slowdown in asia it's been a busy week for emerging market research elsewhere too david faulkner and team have taken a deep dive into external strains in sub-saharan africa
00:09:32
Speaker
Jorge Morgensen and Joseph Incalcatera have looked at the macro dynamics in Colombia following last month's regional elections.
00:09:40
Speaker
And Pranjul Bandari has previewed Indonesia's presidential election, which takes place in February 2024.
00:09:47
Speaker
For more on Indonesia, check out this week's Under the Banyan Tree podcast.
00:09:53
Speaker
And if you'd like to know more about anything we've talked about today, or for any questions, comments or feedback,
00:09:59
Speaker
please email askresearch at hsbc.com.
00:10:04
Speaker
And finally, a reminder that our UK State of Place Seminar is coming up on the 16th of November in London.
00:10:12
Speaker
The event features presentations on the outlook for the economy, sterling, gilts, credit and equity markets.
Upcoming Events and Closing Remarks
00:10:19
Speaker
So if you're an HSBC client and would like to attend, please get in touch with your HSBC sales representative.
00:10:29
Speaker
So that's all from us.
00:10:31
Speaker
Thank you very much for listening.
00:10:33
Speaker
We'll be back next week.
00:10:41
Speaker
Thank you for joining us at HSBC Global Viewpoint.
00:10:44
Speaker
We hope you enjoyed the discussion.
00:10:46
Speaker
Make sure you're subscribed to stay up to date with new episodes.