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.
Speaker: Make sure you're subscribed to stay up to date with new episodes.
Speaker: Thanks for listening.
Speaker: And now onto today's show.
Speaker: This is a podcast from HSBC Global Research, available on Apple Podcasts and Spotify.
Speaker: Search for HSBC Global Viewpoint or join us via the HSBC Global Banking and Markets page on LinkedIn.
Speaker: However you're listening, analyst notifications, disclosures and disclaimers must be viewed on the link attached to your media player.
Speaker: Hello and welcome to Under the Banyan Tree, where we put Asian markets and economics in context.
Speaker: I'm Fred Newman, Chief Asia Economist at HSBC.
Speaker: And I'm Harold van der Linde, Chief Asian Equity Strategist.
Speaker: The two of us are fresh back from the 10th annual HSBC China Conference in Shenzhen.
Speaker: And we're here to discuss key takeaways from that particular conference.
Speaker: We saw investors, there were corporates there, and a lot of our fellow analysts as well.
Speaker: That's right.
Speaker: We had hundreds of clients, colleagues and China experts coming together to exchange thoughts and ideas on the Chinese economy, financial markets and the outlook for individual sectors.
Speaker: Stay tuned for the highlights right here under the Banyan tree.
Speaker: So Fred, both of us popped across the border.
Speaker: First time back in China for, I think, what is it, three, almost four years maybe.
Speaker: For a lot of our clients, exactly the same.
Speaker: It's a short drive to the border here.
Speaker: You get down into Shenzhen, it was really crowded.
Speaker: We got stuck in the traffic jam, into the hotel, lots of rooms there where corporates are doing their presentation, but there were, I think, two ballrooms where...
Speaker: Big format presentations were there and there were, particularly on the first day, a couple of key macro speakers, policy makers, etc.
Speaker: I was there, Fred, you were sitting there as well.
Speaker: What were the key takeaways, the high level takeaways from those sessions?
Speaker: I think it's fair to say that among investors and the analysts, there was a bit of disappointment about how the recovery has played out year to date.
Speaker: In fact, while we were there, we get new numbers for April.
Speaker: And it showed, for example, that private investment contracted year over year during the month.
Speaker: We get disappointing retail sales, for example.
Speaker: broader economic indicators like industrial production really weakened during the month of April.
Speaker: And so that kind of set the scene a little bit, the atmosphere.
Speaker: So it's challenging, but it's not, you know, without promise because many speakers made the argument that some of the policy measures are yet to gain traction.
Speaker: That's one thing.
Speaker: And there's an argument to be said that we're only three months into this recovery.
Speaker: So
Speaker: Let's not get too carried away.
Speaker: The other thing which I thought was interesting is that many experts are now looking towards the third-party plenum in the fall.
Speaker: That's where the leadership comes together and discusses the economic reforms for the next several years.
Speaker: And that might be sort of a key turning point in terms of seeing
Speaker: what exactly is the underlying reform prospect?
Speaker: And so investors are looking for signals there in terms of what we might need to focus on in the next several years.
Speaker: So it's a bit of a wait-and-see attitude, I think, from investors at the moment.
Speaker: Yeah, no, I completely agree, Fred.
Speaker: So we have a bit of, hopefully, a recovery this year, but there was also talk about kind of slower growth in the next couple of years, right?
Speaker: What would be the implications of that?
Speaker: So there's broad agreement that the economy is structurally slowing for various reasons, demographics and debt and so forth.
Speaker: Of course, there's some debate how much that slowdown will be.
Speaker: Is China going to slow down to 5% to 5.5% or is it 4% to 4.5% or even lower?
Speaker: So that's certainly debatable, but it is going to slow.
Speaker: The second thing is, and I think that was an important point that was made, is that we shouldn't in investment terms not necessarily think of China as one China story anymore.
Speaker: It used to be any sector in China did very well.
Speaker: The economy is going double digits.
Speaker: Everything went up.
Speaker: And now we should think of China as a giant economy and we don't buy the US just because we buy the US economy.
Speaker: We'd select individual sectors within the US that might do better or worse.
Speaker: And so that's how investors allocate.
Speaker: And China, maybe we should think about that in similar terms.
Speaker: There are some geographic areas that continue to extraordinarily well.
Speaker: The Greater Bay Area, for example, where Shenzhen is a key hub around Shanghai, for example.
Speaker: And there are other areas which are lagging behind and maybe that divergence will persist.
Speaker: Similarly, we might see less of a growth in heavy industry, for example, in the years to come.
Speaker: And we might see more focus on services, healthcare, for example, or electric vehicles or whatever it might be.
Speaker: And so it's that, you know, digging a little bit deeper into the individual sectors or geographies, I think it's kind of how we should think about the China story.
Speaker: And there's, of course, still enormous potential, even if the overall growth
Speaker: rate tends to slow.
Speaker: But Harold, what does this mean for the equity market?
Speaker: There were a lot of equity investors there.
Speaker: How would you pick up in terms of atmosphere, in terms of sentiment?
Speaker: And what are some of the key takeaways for equity markets?
Speaker: Yeah, I think people very often look at equity markets top down.
Speaker: So they say, oh, the GDP growth this year, it looks like hopefully it will recover.
Speaker: That might provide support.
Speaker: But in the longer run, if GDP trend growth is a bit lower, is that not going to be bad for the equity market?
Speaker: The funny thing is that the equity market did not do very well when GDP growth were really high.
Speaker: So maybe we should be very careful of making that particular link.
Speaker: And that might mean that if GDP growth goes weaker, maybe the equity market does better.
Speaker: And I think the way to think about that is to not just look at GDP, but look at the profitability in sectors.
Speaker: Now, the profitability in sectors is driven by a variety of factors, the pricing power you have, how many players are there in industries that are competitive.
Speaker: And lots of Chinese industries over the last decade, because the growth was good,
Speaker: were incredibly competitive.
Speaker: But what we now see in certain industries, that is changing.
Speaker: And I'm going to give you an example from completely the other part of the region, India.
Speaker: The Indian telcom industry, the mobile phone industry, performed very well.
Speaker: Good growth from 2008 to 2018, good growth.
Speaker: Demand for people upgrading better phones, use more data, etc.
Speaker: You look at some of the telecom share prices, they flatlined for 10 years, from 2008 to 2018, they're absolutely flatlined.
Speaker: Then a new player came in the industry, there was massive price war going on, and some companies couldn't survive and said, we're out, done.
Speaker: We closed shop literally, we sell our assets, you can go on in telecom, we're going to focus on something completely different that we do as well.
Speaker: So suddenly you only had three survivors.
Speaker: And these survivors, they have done very well since then.
Speaker: Not because the growth has accelerated, no, because maybe the pie has shrunk, but the amount of people that carve up their pie is even less.
Speaker: And the share price of some of these survivors, one of them has tripled since then.
Speaker: Now, what is there to say that didn't happen in China?
Speaker: And we see certain industries starting to respond.
Speaker: You see real estate, there are companies down 60, 70, 80 percent over the last one or two years share prices.
Speaker: We know that real estate demand is going to be weak, there's oversupply.
Speaker: But we also see that the market says, hey, there are some companies that are going to survive and they're going to do well.
Speaker: So, for example, the sheer price of China Resources Land over the last year or so has flatlined.
Speaker: I'm not saying that that should be a buy or sell, but it's interesting that it's done so much better than the rest of the industry.
Speaker: So a long-term trend could be industry consolidation, which helps the survivors, if you will, improve their profit margins and their pricing power then.
Speaker: But that seems to be more of a long-term trend.
Speaker: And yes, there are some promises, but why hasn't the market performed better than year-to-date?
Speaker: It really hasn't been a stellar kind of market opening.
Speaker: What do you attribute that to?
Speaker: I think the reason for that comes back a little bit to what you said in the beginning.
Speaker: At the beginning of the year, in particular, a lot of the Asian funds positioned themselves for a clear recovery in Chinese growth.
Speaker: But as you highlighted, the macro data now suggests that that is either a slower process than initially anticipated or a more uneven process.
Speaker: Because we know that certain sectors, think about luxury companies, they've come out and said, hey, things are really going good in China.
Speaker: But a lot of other sectors, we see that this is not taking place.
Speaker: And investments are down, confidence is down.
Speaker: The private sector is not really investing yet.
Speaker: And people say, well, if that's the case, how do I invest in this?
Speaker: They're still looking at it from a top-down perspective.
Speaker: But again, I think you need to go a little bit deeper.
Speaker: But yeah, that confidence is not there yet in equity markets.
Speaker: We take a step back.
Speaker: Is there an argument to be made that, and you and I have seen these cycles before, that maybe we've become a bit too bearish on China?
Speaker: You know, the headlines are challenging globally and domestically.
Speaker: Growth has disappointed.
Speaker: The market hasn't performed well.
Speaker: But we've been here before, haven't we?
Speaker: There were episodes over the last five to ten years when we thought, whoa, the growth story is running out of steam.
Speaker: Is this just one of these, you know, the pendulum has swung too far to the bearer side, or do you think there's something fundamentally going on that might kind of change the way we should think about the behavior of the Chinese equity market?
Speaker: I think a little bit of both.
Speaker: So yes, sentiment is poor.
Speaker: And in the past, we've had in these situations before, I think about 2015, for example,
Speaker: And when that sentiment changed and the global macro was positive to Chinese equities, that market 2016 rallied a lot.
Speaker: But at that point in time, we always believed that the Chinese policymakers would come in and say, listen, we're going to build more bridges.
Speaker: Investment is there.
Speaker: So there was a recipe at hand to deal with the problem.
Speaker: Now it looks like the policymakers are saying, no, we don't want to use that recipe anymore.
Speaker: We need to change the way we are dealing with these issues and we need to go through a transformational process in China, which might take years.
Speaker: And that gives uncertainty.
Speaker: And I think that is where some of that sentiment also comes through.
Speaker: If you, again, as I say, if you look up in sectors, electric vehicles, real estate, I'm not saying that these sectors are really interesting to buy today, but we see the processes of adjustment taking place and we start to identify companies that come out as winners.
Speaker: We just don't know how long it takes.
Speaker: And if we go back to telecom in India, it took some time, a long time, but eventually the returns in those sectors were really good as well.
Speaker: Which, again, goes to your first point, which is that it's not just about the headline growth, but it's still a highly, highly dynamic market.
Speaker: And even if China slows down, the incremental generation of GDP is still going to be much larger than anywhere else we see in the world.
Speaker: And of course, unleashes spending power.
Speaker: So maybe that's a glass half full kind of view on the Chinese economy, which, of course, here under the banyan tree, we like to...
Speaker: you know, to be slightly more optimistic than those challenging headlines out there.
Speaker: But it was wonderful to be again among clients.
Speaker: It was wonderful to be among clients, and I think also it was really nice to be back in China, popping over the border.
Speaker: Yeah, nobody had been there.
Speaker: At least most of us had not been there, right, for quite some time.
Speaker: It was a level of excitement.
Speaker: And there was a hunger, a thirst for information, and so it was great to be there.
Speaker: Absolutely.
Speaker: So Harold, apart from traveling in China, what else have you been up to lately?
Speaker: I have actually, over the last couple of months, I've been quite busy lecturing at HKUST, Hong Kong University of Science and Technology, about Asian equities.
Speaker: And it's a completely different class than what
Speaker: they would normally get.
Speaker: It's not about theory, but it's really about what goes on in Asia and how do you build a portfolio out of this, a little bit what we do here.
Speaker: And last night, the last class was there and there were about 11 groups, I think, and they all had to present a portfolio that they had picked and they had to sell it to the other classmates.
Speaker: Everybody was given a bit of money and said, OK, I put some money in this fund, I put some money in that fund.
Speaker: And I was really pleasantly surprised by some of the ideas that people came up with, the approaches they took.
Speaker: Yeah, it was really, these people come from university and go into finance soon.
Speaker: But it was really enjoyable to teach.
Speaker: It took a lot of time to put the whole course together, but I really enjoyed it.
Speaker: That sounds like fun, but I venture to guess that the easy part here is to allocate the money.
Speaker: The hard part is to actually generate returns.
Speaker: Are you going to measure then how these portfolios perform over the course of the semester?
Speaker: You're right.
Speaker: And funnily enough, that's not what we do in the class because they have other classes where they look at performance analysis, these sort of things.
Speaker: Here it is really trying to see what goes on in the world, right?
Speaker: Geopolitics, interest rate, bond yields, GDP growth, profitability, industry restructure, all the stuff that we talk about in this podcast.
Speaker: And try then to distill that and say, I want to be in this market.
Speaker: I want to be in that market at the moment.
Speaker: These are the sectors I want to be in.
Speaker: This is the winner.
Speaker: I'm going to take a long-term view here, short-term view there.
Speaker: Very kind of real-life attitude to that.
Speaker: So it was really good, actually, I think.
Speaker: And I think I have the impression they enjoyed it as well.
Speaker: And I imagine part of the course is then also they need to devise the disclosures and disclaimers like we all do before they then start to jump in.
Speaker: No, I skipped over all of that.
Speaker: Yeah, they can do that in another class.
Speaker: That's right.
Speaker: Well, that's a wrap for another edition of the Banyan Tree.
Speaker: It's been great having you with us.
Speaker: Thank you also for the many guests, colleagues and industry insiders who joined us at the China Conference.
Speaker: We look forward to welcoming you all and many others again next year.
Speaker: As for us, we'll be back again next week.
Speaker: Look forward to catching up with you then.
Speaker: Thank you for joining us at HSBC Global Viewpoint.
Speaker: We hope you enjoyed the discussion.
Speaker: Make sure you're subscribed to stay up to date with new episodes.
