Transcript
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Speaker: Hello and welcome to another episode of Under the Banyan Tree.
Speaker: I'm Fred Newman, Chief Asia Economist at HSBC, coming to you this week from a quarantine room back in Hong Kong.
Speaker: And I'm Harold van der Linde, HSBC's Chief Asian Equity Strategist, currently in Abu Dhabi in the United Arab Emirates, which is actually quite appropriate because on this week's podcast, we're putting the spotlight on energy markets.
Speaker: This is no doubt something you will have heard and read a lot about in recent weeks, especially if you're in the UK or Europe.
Speaker: But we wanted to take a look at the story from an Asian perspective.
Speaker: We'll be discussing how sharply rising energy costs in the West are impacting the region's economies and financial markets.
Speaker: Joining us to help tackle those questions is Head of European Oil and Gas Research, Kim Frustier in London.
Speaker: We'll be welcoming her onto the podcast in a moment.
Speaker: And on that note, let's grab a spot under the banyan tree.
Speaker: As Herald just mentioned, we're going to start with the thoughts of Kim Faustier, our head of European oil and gas research, to set the scene for today's discussion.
Speaker: I caught up with Kim earlier and began by asking her how far Europe's gas supply issues are spilling over into global markets, including Asia's major gas importers.
Speaker: Europe is really the epicenter of the global gas market tightness.
Speaker: So far, Europe has managed to offset much of the loss in Russian gas through LNG, but this increase in European LNG demand has come at the expense of Asian importers, largely China, India, Pakistan, and Bangladesh, which have fewer long-term contracts than the likes of Japan and Korea.
Speaker: And so China, India are very exposed to those high gas prices.
Speaker: The consequences for some of these countries have been dramatic.
Speaker: For example, the shortage of gas in Pakistan has triggered rolling blackouts for the past few months.
Speaker: But unfortunately, it's hard to see much of that situation changing in 2023 since Russia continues to squeeze Europe.
Speaker: So a lot of pain on the gas side at the moment, but at the same time, we've also seen a pullback in oil prices actually from the peak earlier
Speaker: this year.
Speaker: So what's driving this?
Speaker: Why are oil prices down while gas prices are still very, very high?
Speaker: You're right.
Speaker: Oil prices have slid to around $90 in the past few weeks.
Speaker: Those are the lowest levels we've seen since January before the invasion of Ukraine.
Speaker: We think the two main reasons for this are firstly, the resilience of Russian oil exports so far.
Speaker: which are pretty much where they were before the war.
Speaker: And the second and most important reason is the concerns around oil demand against a backdrop of recession risks and rate hikes.
Speaker: Now, we think oil demand is still likely to grow next year, even with an OECD recession baked in.
Speaker: So we don't subscribe to the most bearish views out there that oil prices are headed further down.
Speaker: We think they could recover towards the end because of the EU embargo on Russian oil kicking in and the end of the US strategic reserve releases.
Speaker: So if you have a reviving Chinese economic growth, say Chinese economic growth, of course, now is struggling to make headway.
Speaker: But assuming there is a big acceleration in Chinese growth,
Speaker: Would that be enough to kind of drive up oil prices?
Speaker: That's a good question.
Speaker: China's very important to the global oil market picture.
Speaker: Oil demand in China has been pretty sluggish this year, especially in the second quarter due to the lockdowns, and these have persisted for longer than we expected.
Speaker: China is around two thirds of our global oil demand growth forecast next year, based on the assumption that the zero COVID policy is somewhat eased into next year.
Speaker: So if Chinese demand disappoints for whatever reason,
Speaker: then the oil markets may well be oversupplied.
Speaker: But just to add a little bit of nuance here, China is also important to the oil market because it will become a crucial destination for Russian oil after the EU embargo kicks in.
Speaker: So strong economic growth in China will mean both higher oil demand, but some of that will be offset by more resilient Russian oil exports too.
Speaker: So we therefore have really only a bit of upside on oil prices, it sounds like just from China's economic growth because of that Russian offset.
Speaker: But there's another issue, I guess, going on in the background here, and that is we have seen increased investment in alternative energy sources across the world, including in Asia.
Speaker: How much is the current rise in gas and oil prices really accelerating that shift into alternative energy investments?
Speaker: We've seen a very swift response to the crisis from both the European Union and the US.
Speaker: For example, the 300 billion euro repower EU plan and the $369 billion inflation reduction act in the US.
Speaker: The EU in particular sees this crisis as an opportunity to simultaneously accelerate its energy transition and decarbonize while strengthening its energy security post Ukraine.
Speaker: We think, however, there are two problems with this approach.
Speaker: Firstly, doubling down on renewables cannot be the full answer to the crisis, simply because wind and solar power is intermittent, obviously, and doesn't provide the reliability that natural gas and oil offer.
Speaker: And we just don't know how to deal with that intermittency right now.
Speaker: Secondly, it's not clear to us whether the existing renewables targets can be accelerated much against already very ambitious timeframes to begin with.
Speaker: So we would say yes, in a nutshell, the crisis is leading to an accelerated investment into alternative energy, but then equally high oil and gas prices are also leading to higher investment in hydrocarbons.
Speaker: We need more energy of all kinds, both fossil fuels, in the short term at least, as well as renewable energy.
Speaker: Kim, thank you very much for all these insights.
Speaker: And we very much hope to bring you back on our podcast sometime in the future.
Speaker: Thanks for having me.
Speaker: So Fred, you had a good discussion with Kim there and she was referring to the impact of increased gas demand from Europe and Asian economies and those rolling power cuts in Pakistan and so on.
Speaker: But I want to bring it back to numbers.
Speaker: What's your take as an economist on the impact of high energy prices when it comes to things like economic growth in the Asian region?
Speaker: So the rise in global energy prices certainly has a negative impact on economic growth in Asia.
Speaker: If you take oil at loan
Speaker: probably the drag on GDP growth for emerging Asia is about 0.75 percentage points, three quarters of a percentage point in reduction economic growth alone.
Speaker: And of course, that comes because of higher import costs, higher prices squeeze the purchasing power of consumers, corporations have to pay more for energy, and that's reducing economic growth.
Speaker: But there's a second impact here as well, and that is
Speaker: that higher energy price, of course, push up inflation, thereby force central banks to hike rates as well, and then higher interest rates, in turn, slow down economic growth as well.
Speaker: But the impact on a net basis really is around three quarters of a percentage point or so on average for the region.
Speaker: So it's pretty substantial.
Speaker: But then that's the impact on economies, of course, Harold, what's the impact on markets and especially equity markets?
Speaker: Should we assume it's all negative for equity markets?
Speaker: No, no, it's not always negative.
Speaker: The impact on equities comes through three channels.
Speaker: The first is a direct hit on earnings for companies that have raw materials that are either chemicals or plastics that are linked to the oil price.
Speaker: And the oil price goes up and that's bad for them.
Speaker: And we've seen margin pressure across the region throughout the first half of 2022 for exactly that reason.
Speaker: But of course there are also companies that sell oil or do oil exploration.
Speaker: We find those companies in particular in Thailand, but also in Korea.
Speaker: There are some companies that have an oil link and Chinese companies and they will see their earnings go up.
Speaker: And indeed the energy sector in the first half of 2022 in Asia has seen earnings actually rise while everybody else saw the earnings decline.
Speaker: That is a first channel.
Speaker: A second channel is basically
Speaker: a sort of indirect effect on overall demand.
Speaker: If oil prices go up globally, global demand might weaken, and that is bad for exporters.
Speaker: And we find them in Korea, Taiwan, and Singapore in particular.
Speaker: So that's something we need to keep in mind as well.
Speaker: But it's not just global demand, but also domestic demand, in particular India, for example, oil prices go up, they import a lot of oil, and that might impact domestic demand in India.
Speaker: So India is in particular quite sensitive to oil price movements as well.
Speaker: But as Kim mentioned earlier, oil prices have come down a bit.
Speaker: Does that reverse the impact on Asian economies?
Speaker: Well, of course, lower oil prices should be somewhat beneficial for Asian economies that are net importers.
Speaker: It should help alleviate some of the cost pressures, for example.
Speaker: It should revive economic growth and demand.
Speaker: But it's important to keep in mind a couple of things here.
Speaker: The first important thing to note is that it's not just about oil prices.
Speaker: What matters also for the energy mix is gas, for example, gas prices and coal.
Speaker: And on both cases, prices are still extremely elevated.
Speaker: And so the overall energy bill hasn't declined as much as the fall in oil prices implies.
Speaker: So that's the first thing to say.
Speaker: And the second thing, of course, is that some governments have started to remove subsidies for energy, in particular for oil and petrol, for example,
Speaker: And that means that despite the falling crude prices, the pump prices are not falling quite as rapidly.
Speaker: Indonesia is a great case in point.
Speaker: Just a few days ago, Indonesia actually announced a removal of subsidies on petrol.
Speaker: And that means that consumers may actually face higher prices going forward rather than lower prices because of the adjustment in subsidy policy.
Speaker: And that, of course, prolongs the impact
Speaker: than in terms of the depressing effect on consumer spending.
Speaker: But what does that mean for equity markets?
Speaker: How much has the recent pullback in oil prices really mattered for equity markets or have equity markets completely shrugged that off?
Speaker: Well, Fred, earlier I spoke about those three channels.
Speaker: So a lower oil price is bad for, say, producers of oil or the refiners.
Speaker: It's good for the companies that
Speaker: use oil and chemicals.
Speaker: So we might see that margins stabilize a little bit across the region.
Speaker: And it is also good for market choices in India, as I mentioned earlier on.
Speaker: But what is quite important here is another channel that I haven't discussed yet.
Speaker: Oil prices impact inflation, impact interest rates, and therefore bond yields.
Speaker: And that is what we call the cost of equity, what we call the discount rate in equity markets.
Speaker: That's really important to us.
Speaker: So if oil prices come down,
Speaker: We need to see those discount rates come down, the bond yields, the US bond yields to come down.
Speaker: That hasn't really happened yet.
Speaker: So the impact on equity markets is so far from lower oil prices has so far not been so positive yet.
Speaker: All right.
Speaker: Well, let's take a quick breather there, Harold.
Speaker: We'll have more on the macro and market implications of energy prices when we come back, including how this paves the way for more investment in renewables here in Asia.
Speaker: First, though,
Speaker: We wanted to remind you that HSBC's Global Emerging Markets Forum is underway right now and runs until the 30th of September.
Speaker: It's an online event featuring policymakers, thought leaders, corporates, and our own experts from global research, all sharing their views on the outlook for emerging markets.
Speaker: If you're interested in signing up, reach out to your local HSBC representative, who will be happy to provide further details.
Speaker: Errol, you've highlighted the impact of rising energy prices on equity markets across Asia.
Speaker: But one sector that presumably should benefit over time is alternative energy.
Speaker: How big is that sector really in the listed universe?
Speaker: And how big is it across different economies?
Speaker: So as a sector, it is growing in size, but it's not extremely big yet.
Speaker: And this is one of the issues, I think,
Speaker: particularly in China, also for the economy, I suspect, that it can't really drive earnings and growth forward yet, overall earnings and growth.
Speaker: So that sector is not big enough to carry the whole market at this particular point in time.
Speaker: But yes, investments in alternative energy plays is big and there's two reasons for it.
Speaker: We just spoke about oil prices going up and down, so higher oil prices means
Speaker: that it makes sense to invest in alternative sources of energy.
Speaker: But I think there's a longer term structural story that is important here as well, in that a lot of Asian countries, despite the size of these countries, they just don't have enough oil reserves or gas reserves domestically.
Speaker: So they need to import it.
Speaker: And as I already mentioned with India, that if oil prices go up, that increases their import bill.
Speaker: knock-on effects for domestic demand.
Speaker: So they would like to build out domestic sources of energy, and that is solar, that is wind energy, amongst others.
Speaker: So policies in these countries are being put in place to grow those sectors.
Speaker: And in the equity market, you see that we benefit from that, although there's a bit of volatility sometimes in these sectors, depending on the raw materials that these companies need to buy, for example, copper or steel and these sort of things.
Speaker: But the structural outlook
Speaker: for those sectors should be quite good, not just in China, but also in India and Indonesia, although there are not too many listed companies there.
Speaker: And I think electric vehicles fit in here as well, because that means you also reduce your fuel import bill.
Speaker: But Fred, talking about investments in alternative energy, how much of a buffer has this offered to Asian economies?
Speaker: Well, alternative energy is not yet big enough in terms of electricity generation to really offset the rise in fossil fuel prices.
Speaker: So that's why we still have a negative impact.
Speaker: But I think the big story here is, and you touched on this, Harold, is that really the fossil fuel price shock that we've seen over the past year really highlights the importance to build alternative energy systems
Speaker: across the region just to reduce the reliance on fossil fuels.
Speaker: Of course, there's a climate change angle to this, but there's also just an economic angle to this, that is to reduce the impact of volatile fossil fuel prices on consumer household income, spending and so forth.
Speaker: So that would really point towards a need to shift much more capital into investment in alternative energy,
Speaker: And that's starting to happen, but we have to admit that it's not yet big enough to really move us in a direction fast enough, at least in order to really curb sufficiently greenhouse gas emissions.
Speaker: So a very complex issue, but I think overall the message here is that this year has yet further highlighted the enormous need for investment in alternative energy systems.
Speaker: Well, Harold, speaking of energy, you're currently in Abu Dhabi and spent the weekend there.
Speaker: How does one go about spending a weekend in the desert?
Speaker: Well, that's exactly what I've done, Fred, actually.
Speaker: I flew in on Saturday, so it was a short weekend for me.
Speaker: But as I mentioned to you in previous podcasts, I'm a little bit into photography.
Speaker: Turns out about 130 kilometers outside of Abu Dhabi in the middle of the desert is a fantastic spot to make pictures of the Milky Way.
Speaker: So I took a taxi
Speaker: All the way out in the middle of the night, it was, I think we left maybe, it was a friend of mine who lives here who joined me.
Speaker: We left at about 8, 8.30 or something like that.
Speaker: He brought a torch with him.
Speaker: It was an hour and a half's drive.
Speaker: Then you end up literally in the middle of nowhere.
Speaker: It's pitch dark.
Speaker: And then the Milky Way starts to appear.
Speaker: It's fantastic.
Speaker: So I made a couple of pictures and drove all the way back to Abu Dhabi.
Speaker: So that stargazing was my weekend activity, Fred.
Speaker: Something you can't do in Hong Kong.
Speaker: No, it's hard to do this out of the quarantine window in Hong Kong.
Speaker: But, you know, it reminds me of an author that I occasionally come back to, Bob Berman, who is a
Speaker: science writer and he writes books about sort of the galaxy and one of the books is actually about the sun and you know the kind of the physics of the sun and how it came to be and this impact on Earth and one you know just to link it back to our energy discussion one point about the sun is that really in a matter of 90 minutes the sun
Speaker: kind of radiates Earth with enough sunlight to produce electricity that would really be sufficient to power the entire Earth for one full year.
Speaker: So perhaps with all the energy shocks we're currently experiencing here is therefore a slight light at the end of the tunnel, if you will, for potentially solving the energy woes that we currently experience.
Speaker: There is enough energy around.
Speaker: We just need to figure out how to grab it, basically.
Speaker: Well, Harold, I wish you a nice few more days of stargazing in the desert in Abu Dhabi.
Speaker: And we'll catch you again next week for our next episode of Under the Banyan Tree.
Speaker: Thanks, everybody, for listening.
Speaker: And yes, Fred, talk to you next week.
Speaker: Thank you for joining us at HSBC Global Viewpoint.
Speaker: We hope you enjoyed the discussion.
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