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Under the Banyan Tree - Asian investors and US volatility
402 Plays12 hours ago
With uncertainty still rife in the US, Fred Neumann and Herald van der Linde consider what could happen if Asian investors were to shift their focus from US investments and start looking closer to home.
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Transcript
Introduction to Global Market Podcasts
00:00:01
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.
00:00:13
Speaker
Make sure you're subscribed to stay up to date with new episodes. Thanks for listening, and now onto today's show.
00:00:24
Speaker
This podcast was recorded for publication on the 12th of June 2025 by HSBC Global Investment Research. All the disclosures and disclaimers associated with it must be viewed on the link attached to your media player.
00:00:35
Speaker
And remember to like and subscribe to Under the Banyan Tree wherever you get your podcasts.
00:00:50
Speaker
Hello and welcome to Under the Banyan Tree, where we put Asian markets and economics in context. I'm Fred Newman, Chief Asian Economist at HSBC Global Investment Research. And I'm Harold van Linde, Head of Asian Equity Strategy. On the podcast today, we're looking at how Asian investors are viewing the US right now.
00:01:06
Speaker
That's right, plenty of volatility. Obviously, the Donald Trump-Elon Musk spat is dominating headlines as we record this. But there's a lot more to think about in terms of the US dollar market dynamics and growth.
00:01:18
Speaker
What does all of this mean for Asian investors and where they're putting their money? Let's kick off the conversation right here under the Banyard Tree.
00:01:38
Speaker
So let's take a quick look at the big macro picture and some numbers
US Borrowing and Foreign Lending
00:01:42
Speaker
here. So if the US imports capital ah to fund its budget deficit and it borrows from the rest of the world. Now last year, the US accounted for 62% of all global cross-border borrowing.
00:01:56
Speaker
That is an enormous amount. And then on the other end, you need to look where does this money come from, right? Which countries lend to the United States? yeah and And you always think, well, China is one of the largest ones because of big sex excess savings. But actually, China is only the second largest accounting for 14 percent of cross-border lending into the world economy.
00:02:17
Speaker
The largest one was actually Germany. I was going to say – 16 percent. I was say, can I make a guess here? I thought that might be Germany that is right. Because these are current account surplus countries. These are countries where there's more savings than investments. They are providers of capital to the rest of the world. Yeah.
00:02:34
Speaker
yeah And so so just to add at at some numbers. So we have um Germany 16% of total lending. We've got China 14%. Then you have actually Japan at 8%. Okay, so much smaller.
00:02:48
Speaker
So you're talking about this is now we're talking about, give or take,
Currency Impact of Repatriated Foreign Money
00:02:51
Speaker
38% of total. 38%. Then you have the Gulf countries. Okay, About 7%, slightly smaller than Japan. And then, Harold, what's the next one?
00:03:00
Speaker
Don't tell me it's the Netherlands. It's the Netherlands. The Netherlands is among the biggest providers of capital to the world. now and and So it's these countries that account for about 50% of where the US borrows from, give or take. Yes, yes. And then you can add the smaller ah Asian economies, of course Taiwan, you get Korea, you get all emerging markets, um and in Europe as well. Actually, there are other economies in Europe that are big, big savers. In fact, Europe overall is the biggest lender into the world economy.
00:03:31
Speaker
And now what what does this mean? When when we think about um foreigners being less willing to hold U.S. bonds, for example, they sell all these bonds. And where they put their money?
00:03:42
Speaker
They go back home. They go often back home. Yeah. And so that means a lot of money has gone back into Europe actually. European money probably goes back to Europe. European money goes into Europe. And Asian money goes back to Asia. A lot of goes into Asia. Some of it goes, of course, into Europe. But that's right. There's a home bias. And that's why you see ah some of the receiving currency suddenly doing better because there's money is coming on. the euro has done better against the US and and so you see some of the Asian currencies doing better against the dollar. The yen has strengthened a lot, yes. That's right, yeah. yeah
00:04:14
Speaker
Now, you could say that's just temporary, you know money flows in and out and then ultimately destabilizes, then there's not
Market Growth: US vs Asia
00:04:23
Speaker
a big difference. But if this is a permanent shift in the way investors allocate their money, and and there's some indications it may be a bit more permanent,
00:04:32
Speaker
then that has economic implications. I wanted to ask you about this because one way to think about this is that if we lend less money into the U.S., the cost of capital in the U.S. goes up because there's less – That's the higher bond yields. Higher bond yields. Yeah, because you need to make it more attractive for people to come and – give you money? That's right. It's not just the government, right? It's also the companies that borrow in the credit market that will have to pay higher interest rates because government interest rates are higher. So corporate interest rates are higher.
00:05:00
Speaker
Ultimately, that also would mean that the cost of equity capital goes up, partly because I guess there is Yeah, there's a spillover effect. So the cost of equity goes ah goes up.
00:05:13
Speaker
And net-net, that would be negative for equities in the US. But it's not the only driver of stock markets because you also have growth. So basically equities are growth and the cost of equity, as we call it now, interest rates.
00:05:25
Speaker
So interest rates go up, that's negative. But if your growth goes up, that's a positive. And that that could still mean that markets can lift up. And that's, I think, what we've seen over course of the last couple of The question, of course, is do you see growth going up permanently if the cost of capital goes up current permanently? yeah There could be an impact.
00:05:43
Speaker
That is right. And so that means that growth could slow. But the opposite could of course happen here in Asia because your cost of capital goes down, money comes here, and that allows people to borrow at lower rates than they would normally do and therefore can maybe invest a bit more and your growth can therefore go a bit higher, right?
00:06:03
Speaker
and And so my my question to you is because you look at the corporate you know funding the world ah quite quite a bit. Does that then confer a permanent competitive advantage to Asian companies in the long term? Because if you have an Asian company that can fund itself even cheaper, an American company suddenly faces higher funding costs.
00:06:22
Speaker
Over a period of two, three, four, five years, that would certainly mean that Asian companies have a competitive advantage then, don't they? It is a competitive advantage because your access to capital is improved. So if you want to grow, that's good.
00:06:37
Speaker
But for a truly competitive advantage, you need to have other elements as well, which is innovation, brand recognition, people want to like your product, um these sort of things, maybe industry consolidations.
00:06:51
Speaker
So it's in those particular pockets where these things all play together. where you can probably find interesting sort of equity stories unfolding, industries that really consolidate, ah where the innovative, think about EVs, for example, and that's a lot of attention in in Asia for exactly those reasons.
00:07:09
Speaker
And those are sometimes Chinese companies, so the Chinese story is slightly different because they, we spoke about this in previous podcasts as well, there's enormous amount of about capital that's locked up in China, but it's also for other companies across the region, of course. It's easy to get access to capital And if you're innovative, you get an interesting product to build. Think about some of the semiconductor companies across the region or branded goods. Yeah, they're in a very good position in that sense to grow their business.
00:07:35
Speaker
I think that that's fascinating. um One issue we also often hear, though, against this idea that there's a permanent relocation of
Asset Diversification Challenges
00:07:42
Speaker
capital from the U.S. into other parts of the world is that... There is ah just not enough assets to buy in the rest of the world. And that means that investors have no choice but to leave some of their money in the U.S. But maybe that's something we can discuss. When we come back, we'll look further into asset diversification out of the U.S.
00:08:10
Speaker
OK. Well, back here, folks, and we're just talking here about diversification of money out of the U.S. Yeah. and and but But here, Harold, one thing we often hear is that investors saying, look, um I got but all my money or a lot of my money in the U.S. Maybe I'd like to buy something else because i yeah know things are getting a bit – you volatile over there.
00:08:32
Speaker
But there aren't really that many alternatives. And so there's a limit to which Asian investors can really sell US assets and go somewhere else. Is right? yes and no. So for small investors like you and myself, um if you have a few dollars to move,
00:08:48
Speaker
You and I can buy Bangladeshi equities if we want, right? Or we can go to Vietnam or whatever. But if you are a very large investment fund and you got a couple of ah hundreds of billions of dollars to reallocate, yeah, then the story is completely different. You can't go to certain markets simply because there's just not enough for you to buy.
00:09:07
Speaker
Very simple. So in global equities, if you just think about it, it's as well over 100 trillion, 120, 130 trillion years dollars of capital in there. But about... 45% or so is the US.
00:09:20
Speaker
The rest of the world is is is just a little bit bigger than the US almost alone. China is a big part of that as well. So there's only so many markets where you can take money from it and move from. those So that's that's a bit of a limiting factor. That's that's right.
00:09:34
Speaker
That's right. And and I think that that's sort of kept some investments in the U.S. Just as she has scaled the liquidity, the ease of transactions forth. It remains an an incredibly innovative place as well. It is. Yes.
00:09:46
Speaker
but But then also as an economist, you know, we know that the demand tends to create supply. Ultimately, when there's demand for assets for outside. more say, I think.
Asian IPO Market Growth
00:09:56
Speaker
No, that's the other way around. Every supply creates its demand. You're confusing our listeners.
00:10:01
Speaker
Now, it's really this idea that if there's demand for a product, ultimately the supply tends to expand because of incentive to produce that. Now, we tend to think of this in terms of dolls or cars or you know semiconductors. But here the idea is if the global investment community it really wants more non-US assets, which are limited at the moment,
00:10:25
Speaker
Over time, if that demand stays, there could actually be an incentive to issue more of those assets outside of the US. I mean, a very simple example would be um interest rates go lower in Asia because of money coming back, and that means governments can issue more debt, so the debt ah pool expands. and And similarly with equities, if there's demand for it ah equity markets, equity assets in Asia, then there's an incentive for IPOs, right? And there's an incentive for for bringing more to the market, isn't it? so first of all, it would be cheaper for companies to expand their business. If you want to build another plant, it's not cheaper to do so. So there go that you grow your business. And so you can do a rights issue, for example, to obtain that capital as well.
00:11:08
Speaker
And of course, we see in certain parts of Asia, the IPO markets reviving, in particular Hong Kong has seen quite a few IPOs, and it looks like the pipeline is quite busy. for the remainder of the year as well. So this IPO market is coming back.
00:11:21
Speaker
But there are markets in Asia where we need to see more IPOs, I think as well, ASEAN in particular. These markets are still small and narrow. So there's a few large companies there that people typically invest in, and then it's getting too small for them. So we need to to see more of these sort of companies coming there. that' Sometimes it's regulatory, very difficult to to list, or there's ah it's quite an onerous process, or these sort of things.
00:11:45
Speaker
So the the most liquid and deepest equity markets in Asia would be mainland China, Hong Kong? In terms of siphon liquidity, mainland China is very big and very liquid and Hong Kong fits into that as well.
00:11:58
Speaker
India and Japan. ah come up very closely together. And how do they compare it, neck to neck, would you say? um India is quite sizable, but it's is fairly liquid as well. So that's ah that's an issue.
00:12:10
Speaker
Korea and Taiwan a bit smaller, but can also be fairly liquid. And then you have the ASEAN markets, which combined are still small and not so extremely liquid. So it's more for specialist funds that typically go there.
00:12:23
Speaker
And um we talk a lot about the Hong Kong market, for example, um and it's been one of the key Asian equity markets. There's been a lot of talk about ah more IPOs coming in which would expand the market. Is is that something that is is is likely and is this driven by this demand by investors not necessarily as being as keen on U.S. assets?
00:12:46
Speaker
Well, there's a couple of things going on. First of all, you have what we so we spoke about to be in the past, the homecoming sort of process. So we've had over the last, say, five, six, seven years, a lot of Chinese companies listed in New York relisting in in Hong Kong.
00:13:00
Speaker
Technically, they make this the primary listing eventually. So this is where they they raise most of the money. And most of the trade is taking place. We see new companies coming to the markets as well. So there's quite a pipeline.
00:13:11
Speaker
Because for the last couple of years, it was difficult to do so. So companies that planned to do so couldn't do so. I felt it was not a good time to do so, but with the market reviving, that is coming back. And the pipeline, as I mentioned earlier on, is is pretty strong.
00:13:23
Speaker
So in Hong Kong, this is very vibrant. We just need to see it in other parts of the region as well.
Conclusion on Asian Markets
00:13:28
Speaker
But this will help out. So there you have it, folks. I guess, Harold, there is still some life left in Asian markets. So that means we might still have a job in the next few years.
00:13:38
Speaker
ah We might still have a job or at least looking at markets is continuing to be very exciting. And it's important to understand that this is driven not only by the US dollar, because that's that's an ongoing process, but also but simply by the dynamics that we have in the region here. The growth, the investment, the leadership in certain technologies that that Asia has that ah that is driving that. And that money now coming back is enabling these companies to yeah to flourish even better than they've done in the past.
00:14:07
Speaker
So rebalancing of the world economy, not just in trade and investment, but also in financial markets. Absolutely. Well, we're going to have to wrap it up here, folks. A pleasure to have you with us as always. And do give us a like and subscribe if you haven't already.
00:14:21
Speaker
Under the Banyan Tree is an HSBC Global Investment Research production, as is our sister podcast, The Macro Brief from London. Do give that a like and a listen too. From all of us here in Hong Kong, take care, and we'll talk to you again next week.
00:15:03
Speaker
Thank you for joining us at HSBC Global Viewpoint. We hope you enjoyed the discussion. Make sure you're subscribed to stay up to date with new episodes.