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: 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, and today's podcast is all about fund flows.
Speaker: Last year, it was a tricky one for Asia, but for now, the feel-good factor is back for 2023.
Speaker: We're going to look both at the foreign exchange and equity markets, both of them are big flow markets, to see how trading has changed, what's driving the money back into the region, and also how long it can stay here.
Speaker: With me today are Head of Asian Foreign Exchange Research, Joey Chu, and my fellow equity strategist, Perna Gark.
Speaker: Join us for the next 15 minutes, Under the Banyan Tree.
Speaker: Well, welcome Joey and Prerna to the podcast.
Speaker: Last year we've seen significant outflows of the Asian region, right?
Speaker: Twelve months ago we were talking about supply chain issues that people couldn't get their products around the world.
Speaker: Covid was still a big thing in China.
Speaker: People worried about growth.
Speaker: The central bank in the US was actually trying to take money out of markets.
Speaker: All of that wasn't really good news for Asia.
Speaker: But this time around the whole picture is quite different.
Speaker: Central banks seem to be very close to a peak in raising interest rates, meaning they're not going to take that much more money out of markets, if you want to put it like that.
Speaker: Interest rates might stay kind of high for some time, but there is now an anticipation that they will have to come down.
Speaker: China is reopening.
Speaker: So the story has really changed to a large extent.
Speaker: That optimism, do we see that in the currency markets as well, Joey?
Speaker: Yeah, definitely we do.
Speaker: So we're seeing across the board a recovery in all currencies against the dollar.
Speaker: So the dollar had a really good run, you know, between the middle of 2021 up until October 2022.
Speaker: And then thereafter, I think there's been this reassessment that maybe the peak Fed funds rate is near.
Speaker: And so the dollar has suffered a demise.
Speaker: And we realized that dollar Asia, so Asian currencies against the dollar, has actually depreciated even more than other currencies against the dollar.
Speaker: And that is really because of the China reopening theme as well.
Speaker: So if you say dollar Asia, you mean the Asian currencies have appreciated more versus the dollar than, for example, Latin America or European currency or anything like that?
Speaker: Yes, that is what we have noticed over the last two to three months, not just Latin, but also, you know, like the G10 currencies, for example.
Speaker: So Asian currencies have additional momentum aside from just the broad dollar, aside from the Fed.
Speaker: Yeah, so that optimism is here.
Speaker: So let's unpack that a little bit.
Speaker: Within Asia, have you seen still that some currencies have done very well and other ones much less so?
Speaker: Yeah, so within Asia, as mentioned, because additional momentum is driven by China reopening and recovery theme,
Speaker: So naturally, a lot of the currencies that are more correlated to China has done better.
Speaker: So for example, Korean won, Taibag because of the tourism angle, ringgit, singh dollar, Taiwan dollar, this has outperformed, say, the INR and the IDR.
Speaker: INR is the Indian rupee and the IDR is the Indonesian rupee, right?
Speaker: That is correct.
Speaker: Okay, so we've seen some divergence.
Speaker: Now, one currency that people always look at but you haven't mentioned yet is the Japanese yen.
Speaker: There are some particular dynamics going on in that market, correct?
Speaker: Yeah, that is right.
Speaker: So the Japanese yen is slightly different from the rest of Asia in that it does not really benefit directly from the China reopening theme.
Speaker: However, there's been a lot of speculation about the Bank of Japan's policy changes.
Speaker: So the Bank of Japan did want...
Speaker: policy change in December to basically allow bond yields to rise a little bit more than they were able to in the past.
Speaker: And I think some people are thinking there could be another of such similar change this year.
Speaker: So that has driven, you know, dollar-yen a little bit lower as well.
Speaker: Okay, dollar-yen lower, meaning the yen is getting a little bit stronger versus the US dollar.
Speaker: That's right.
Speaker: I suspect that if the story is that interest rates in the US are going to continue to decline, or the market expectation is that we're close to a peak and it's going to decline, that story might well continue, that the currency strength could be here for longer.
Speaker: But there's always something in the markets that happens that fears us off from a particular course.
Speaker: What are the risks to this particular scenario?
Speaker: Yeah, so I think we see three risks.
Speaker: The first risk is exactly about this rates, lower rates view.
Speaker: So it could be possible that markets might have gone a little bit too far ahead of itself over the last three months in trying to price in the peak rates, trying to price in rates, rates.
Speaker: cuts later this year because the US economy is still holding up quite well.
Speaker: So it might be that rates stay higher for longer, at least for the next few months, rather than immediately rates going down.
Speaker: So that could be some near-term risk.
Speaker: If the market realized that, it would probably mean that the dollar is more attractive and then the currencies were weak against them.
Speaker: I think it would just mean like a temporary consolidation or a temporary rebound in the dollar against some of the other currencies, right?
Speaker: Before another leg lower when market is more certain that rates are going down.
Speaker: It could be like a near-term reassessment.
Speaker: So that's the first risk.
Speaker: The second risk is that markets might have overlooked some China-related risk.
Speaker: So it's true that reopening is happening, recovery is happening, but the magnitude of that is still subject to debate.
Speaker: We need to see more policy stimulus and impetus that could come after March when there's some important political meetings happening.
Speaker: And the third risk is related to equity flows.
Speaker: So equity flows were driving a lot of the currency strength, especially those related to RMB like Korean won, Taiwan dollar in January.
Speaker: But, you know, recently we've seen some sort of slowdown in equity inflows into China.
Speaker: So it suggests that some of this reallocation, rebalancing might have already run its course.
Speaker: So I think that's the third risk that we are watching out for.
Speaker: So speaking of that, you know, what is your take on the equity flow situation?
Speaker: Yeah, that's right.
Speaker: I mean, that's my turf.
Speaker: We look at that in quite some detail.
Speaker: What we've seen is that most funds, equity funds that invest in Asian stocks, were significantly underweight China last year.
Speaker: And when then the reopening happened was a bit of a surprise reset.
Speaker: So a lot of funds have been trying to catch up with the market.
Speaker: And we know that in December and until say early January that they've been really trying to catch up, but they were not really where they wanted to be.
Speaker: But if you extrapolate that a little bit, and we're now a good month later at least, it looks like particularly Asian-centric funds, funds that have to invest in Asia, are probably close to a neutral position.
Speaker: Maybe some of them have gone overweight.
Speaker: So they're getting into a comfort zone.
Speaker: So the additional flow from those funds would be a little bit more limited, while the global funds are still quite underweight.
Speaker: So I still think there is more money to be reallocated, but they will be a bit more slow.
Speaker: Global funds are funds that don't have to invest in Asia.
Speaker: They can invest anywhere on the planet, but they can opt to do so.
Speaker: So I still think money will come into the region, but the pace of that will slow.
Speaker: And a little bit of what you mentioned as well, that we've seen that because money went to China, it had to be taken somewhere else from.
Speaker: So we've seen outflows or we've seen at least reallocations in portfolios with regards to Brazil, for example.
Speaker: Money has been taken out of India and has gone into China as well.
Speaker: So, yeah, broadly speaking, massive flows.
Speaker: In January alone, we have $25 billion coming into Asian equities.
Speaker: But a lot of that was just purely to rebalance China.
Speaker: Now, that is institutional flows.
Speaker: Those are flows that professional portfolio managers do.
Speaker: But the big player actually in Asian markets, in particular over the last couple of years, has been the retail investor.
Speaker: And my colleague Perna Gag has looked at that in quite some details.
Speaker: So let's take a break here and then we get back to have a chat with Perna now.
Speaker: So now we're going to look at retail flows in stock markets across Asia.
Speaker: Over the last couple of years, retail investors have become really big investors in these markets.
Speaker: And for that purpose, we have here Pranagag from the strategy team.
Speaker: Thank you for coming on to the podcast, Pranag.
Speaker: Thanks for having me, Harald.
Speaker: Before we're going to talk about numbers and trends, what is a retail investor?
Speaker: So retail investors are these mom and pop investors.
Speaker: They are not the professional licensed investors and they generally invest in small amount into stock markets.
Speaker: Yeah, they don't invest a lot, but they've really become as a group, a very big investor.
Speaker: Is that correct?
Speaker: That's correct.
Speaker: They have grown multifold in last couple of years.
Speaker: They've become a prominent investor in Asian markets.
Speaker: If I have to put some perspective using numbers around it,
Speaker: in markets like Korea and Taiwan, they accounted for more than 70% of the total activity in stock markets in 2021.
Speaker: So you can see they were bigger than the institutional investors like mutual funds or foreign investors combined.
Speaker: So yeah, they have become pretty big in Asian markets.
Speaker: How much do they own?
Speaker: Because we look at, you say how much they trade, right?
Speaker: But you can buy and then you can sell something, you can trade a lot.
Speaker: How much do they own of Asian stock markets?
Speaker: So typically, the domestic investors in Asia, they account for around two-thirds of the total market share in Asian markets right now.
Speaker: This really wasn't the case a couple of years back when they were much smaller.
Speaker: So I have a question here.
Speaker: Where do you think these investors get their money from?
Speaker: Well, that's a good one.
Speaker: Basically, across Asia, people are getting older and we don't really have the social security schemes like pension schemes and education funds that you have in many developed markets.
Speaker: So people have to save for health care, for their retirement, for children's education themselves.
Speaker: So they put a lot of money aside in order to do so.
Speaker: So that's where the health comes from.
Speaker: And as societies get older, older people just have been able to accumulate that wealth as well.
Speaker: So that helps as well to a certain extent.
Speaker: So that's where this comes from.
Speaker: It's always a demographic trend.
Speaker: That also means that it will probably continue for some time.
Speaker: In which markets in Asia are retail investors the biggest and in which ones are they still quite small?
Speaker: So we have to divide it into two baskets.
Speaker: In markets like Korea and Taiwan and maybe in India, these retail investors are really big already.
Speaker: But in ASEAN markets, say Indonesia or Thailand or Philippines, they are picking up.
Speaker: They are still small, but they're growing at a really high pace now.
Speaker: And what is the situation in China, actually?
Speaker: That's a bit unique, right?
Speaker: Yeah.
Speaker: So China markets are a bit different.
Speaker: And here I'm talking about the mainland China markets.
Speaker: mainland China was already known to be a big retail market.
Speaker: Like, you know, more than 90% of the volumes used to come from retail investors at a point of time.
Speaker: But here we see that now mutual funds are getting bigger and households.
Speaker: Now, instead of investing directly, these households invest in mutual fund industry.
Speaker: And this industry is growing at more than 15-20% per annum in China.
Speaker: Yeah, and I guess what you also have in China is that people used to buy property, but given the difficulties in the property sectors, they're now more inclined to buy funds, as you say.
Speaker: That could be called one of the big catalysts for China markets.
Speaker: Yeah, that's right.
Speaker: So what are these retail investors doing in markets now these days?
Speaker: So 2022 was a weak and volatile year.
Speaker: And we've seen these retail investors cut back a bit on their activity.
Speaker: From the surface, this gives an impression that maybe these investors are exiting.
Speaker: But that's not really the case.
Speaker: Like, you know, in India, there's something called SIPs that is picking up.
Speaker: SIPs are the systematic investment plans.
Speaker: So these are the saving plans where investors on a monthly or quarterly basis, they invest their money instead of putting one big lump sum amount.
Speaker: Right.
Speaker: Monthly investment plans, basically.
Speaker: So we see that these SIPs are becoming a big source of getting into stock markets.
Speaker: So like, you know, in last one year, the purchases via these SIPs were so big that it could offset the big outflows that we had seen from foreign investors.
Speaker: In Taiwan and Korea, retail investors are increasingly investing via ETFs, the exchange traded products.
Speaker: In mainland China, as we discussed, the purchases via mutual funds are,
Speaker: picking up.
Speaker: So what we really see is like, you know, unlike in 2020 or 2021, where these retail investors were directly investing into Asian markets, now they are investing indirectly via funds or ETFs.
Speaker: So to summarize this, what you tell me, Prona, is that the retail investors are actually the biggest investors in Asia.
Speaker: They are still investing, but they're not doing it in the same way.
Speaker: They are doing it more through giving it to professional managers, you could say.
Speaker: While at the same time, we see that institutional fund managers globally are allocating money to Asia as well, to a large extent that is driven by optimism on China, of course, what happens with US interest rates.
Speaker: But the
Speaker: pace of these purchases seems to be starting to slow from here on.
Speaker: And that's something that we just need to keep in mind.
Speaker: That's right.
Speaker: That's how we see in Asian markets right now.
Speaker: So let's just tie these two conversations together.
Speaker: What we see globally is a reassessment of where people want to invest their money.
Speaker: And that is to a large extent driven by the expectations that maybe the US interest rates are peaking and might eventually come down.
Speaker: While at the same time, the growth environment in China and the rest of Asia looks really strong.
Speaker: And that means that if you invest in Asian assets, yeah, those currencies will appreciate
Speaker: as well.
Speaker: So that is a positive.
Speaker: We've seen a lot of that already taking place.
Speaker: This is likely to continue, but as Joey highlighted, there are some risks to that.
Speaker: But we should not ignore, actually, the largest investor in Asia, which over the last few years has become the retail investor.
Speaker: And although it looks like they're not around anymore, they are actually investing now through funds and ETFs increasingly as well, and their monthly contributions to some
Speaker: savings plan they have seem to be in aggregate so big that that drives market as well.
Speaker: And that brings us to the end of this week's podcast.
Speaker: Many thanks to Joey and Perna for their insights.
Speaker: And thank you, as always, for listening.
Speaker: I'll be back next week with my partner in podcasting, Fred Newman.
Speaker: Take care and all the best until then.
Speaker: Thank you for joining us at HSBC Global Viewpoint.
Speaker: We hope you enjoyed the discussion.
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