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Under the Banyan Tree – Is a generational investment shift upon us?
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Fred and Herald sit down to discuss the idea that there could be a fundamental shift happening in global investment patterns. The question is, if investors are looking beyond the US market, what could that mean for Asia?
Disclaimer: https://www.research.hsbc.com/R/101/7WnBPrD
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Transcript
Introduction to HSBC Global Viewpoint
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
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This podcast was recorded for publication on the 11th of September 2025 by HSBC Global Investment Research. Analyst certifications, disclosures and disclaimers must be viewed on the link attached to your media player.
Generational Shift in Investment Patterns
00:00:44
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Welcome to Under the Banyant Tree from HSBC Global Investment Research. I'm Fred Newman, Chief Asia Economist. Well, hello, Fred. I'm Harold van der Linde, Head of Asian Equity Strategy. On the podcast today, is there a generational shift taking place in global investment? And if so, what does that mean for Asia?
00:01:03
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Structural changes, supply and demand, and a possible rethinking of entire markets and economies. All that and more coming up right here on Under the Banyant Tree.
00:01:25
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So, Harold, we've talked to many clients in recent weeks. And one theme that comes up, I think, is this idea that, you know, most of the investment funds have, at least in decades, really flown to the U.S. An Asian investor might look at U.S. markets as being very attractive. A lot of the fund managers, the retail investors here in Asia buy American equities. yeah That's what gets people excited, right? That's what we see in newspaper headlines in Hong Kong and elsewhere is Things about U.S. stocks. Now, the question is, is there a shift potentially happening where maybe the rest of the world, particularly savers in Asia, say, well, look, we have bought so many U.S. assets.
00:02:09
Speaker
Let's start to take money back into Asia, invest it here. In fact, Chinese equities have done very well. Other markets, Korean markets have done very well. Is this just a blip or do you sense something more fundamental going on? No, I think you're absolutely right, Fred. there has been a shift in how people look at US markets.
00:02:29
Speaker
Since in the last couple of months, everybody's talked about, well, maybe maybe the additional dollar that they get, they feel like they want to put somewhere else, Europe, Asia, and these sort of things. so And it feels that this is not a blip. It feels like this is the beginning of something that will go on over the next couple of years.
00:02:44
Speaker
It is a diversification away from the US because the feeling is that the US s dollar is going to weaken and therefore non-US dollar assets are going to perform relatively better. yeah But it's interesting you say you say the weakening of the US dollar. Now that of course makes sense if the US dollar weakens and is actually weakened this year against most currencies. It makes sense you want to sell that and buy other assets. but that's a more of a cyclical argument because a dollar has weakened in the past and people buy and sell dollars. But is there something more fundamental going on whereby um the world is sort of saying we have
Impact of US Debt on Investment Choices
00:03:20
Speaker
too many assets. We want to structurally move away from the U.S. dollar. And I think that's where
00:03:26
Speaker
Interestingly, the debate is headed. For example, there are concerns over the U.S. ah debt. Apparently, it's now approaching a trillion dollars a year in just interest payments. And so ah foreign investors are looking at this. And of course, they're lending a lot of money to the U.S. government and probably will require, at the very least, a higher interest rate to...
00:03:50
Speaker
offset their risk lending to the U.S. government. and Or that also means you might buy other assets where you have lower debt levels. I mean, some Asian countries, we have lower debt levels, public debt levels than in the U.S. And this is the other case. While this is an issue in the U.S., in general, just purely from an economic point of view, it looks like these debt levels are much lower, for example, in Asia, right? So the alternative that you say, well, if I don't want to put that particular dollar in the U.S., s The alternative doesn't look too bad either.
00:04:18
Speaker
Asia, their levels are low. Most of the economies are humming along okay. Interest rates can still lower. That's fair to say, right? That's right. And that's why you would want to maybe if you were an investor is looking for you know theyre reducing your risk, yeah ah you would want to move some money into other economies were because you have lower risk there, lower debt levels. It's also the world is saying incredibly skewed. If you just look at the stock markets, the U.S. is not just the biggest stock market.
00:04:45
Speaker
It accounts for, depends on how you measure these things, but something like three quarters of all. stock market size. So it is just incredibly dominant in many of these investable universes that investors have.
00:04:56
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And some sort of normalization is quite healthy. I'll give you another statistic. say You mentioned stock markets, but for example, in 2024, the U.S. sucked in or imported about two-thirds of all net global capital flows.
00:05:13
Speaker
That is two thirds of all the cross border lending that on a net basis that went on went into the United States, even though the United States economy makes up, it depends on you measure it, maybe a quarter of the world's GDP or less than a quarter.
00:05:27
Speaker
So it's receiving much more capital than its size would warrant. So there's that's skewed. That is very skewed. And there's two angles here from from my point of view. First of all, there's a good reason for it, because the latest technologies come from the US. And if you want to buy the company that is going to grow very rapidly, and that was in EVs, but also in AI, that happened to be US company.
00:05:50
Speaker
So that's one thing. And all that money going into the US means that the cost of capital, as we call it, that the availability or liquidity in the US is just very strong. But it also means if that then gets sucked out and that money goes here, it means that the availability of capital in Asia is improving, right?
00:06:06
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The cost of capital, as we say, is is going to go lower. That's good for Asia. Yeah, I was going to ask you exactly. So you framed it in terms of cost of capital, and I think that's that's very intuitive. so One way to look at this is that um the government borrowing sets the baseline of capital costs in an economy.
00:06:23
Speaker
Yeah, um because it's the safest entity that the country borrows. yes Therefore, it says if you can borrow at 5%, then any corporate will be 5% plus on that something. Plus something, so So if ah in the U.S. s there is a higher risk associated lending to the U.S. government because there is more debt, then the risk-free rate in the U.S. would actually increase.
00:06:45
Speaker
That would also mean that the cost of capital for U.S. companies increases, which should reduce the return on capital. That should be negative for equities, shouldn't it?
00:06:57
Speaker
ah That could be negative for equities. That's right. Because you're right. It's it's the the amount, how how much does it cost to get capital and what kind of return do I get if if I invested in a company?
00:07:08
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ah So unless these returns also go up for some reason, that would be negative for equities. That's right. But the converse is also the case in Exactly. Yeah. I was going to get to that. so So that also means that if globally investors buy fewer U.S. bonds and then the interest rates rise in the U.S., they probably retain more of the the capital in their own countries, which might buy local government bonds. And so reduce the the risk-free rate outside the U.S., reducing the cost of capital, which would be good for equities outside of the u s Exactly. This is good for Asian equities, amongst others. China is a bit of a special case because the money doesn't automatically flow to China's capital controls.
Benefits for Asian Markets
00:07:46
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But for the rest of Asia, that's absolutely the case. so And in addition to that, there's an argument to be made that actually things are improving as well in terms of investment wise, that profits could improve.
00:07:57
Speaker
Because we've had a couple of really bad years in Asia. COVID, slowdown in China, slowdown some of the other economies. But if interest rates go lower, companies can invest again at a cheaper rate ah that creates maybe employment and all these other things, profits go up, then you have two things certainly working positively for equities, right?
00:08:16
Speaker
There's more capital available and they can expand again and grow. I think that's interesting. And these are structural trends we're talking about, which is really would be generational in the sense that ah the US has been the primary import of capital for decades. And if that process now slows down, and I think we have to be careful to say it reverses or collapses, it's probably more of a slowdown, a rebalancing.
00:08:41
Speaker
If that then occurs, and it's really a generational shift of some capital back into emerging markets into other parts of the world. What you hear a lot though is that global investors say,
00:08:54
Speaker
that's not enough to buy outside the US. The US market is so large that actually, you know, I can't really sell it out because it's not enough to buy. I'll give you one statistic here.
00:09:05
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u s The US Treasury market alone, that is debt issued by the US government, is 40 trillion US dollars. Now, we always think Europe is very indebted. Oh, look at the French and Italians and in Spanish, all that debt.
00:09:19
Speaker
If you add all of the European Union public debt together, it's only 15 trillion. So it's less than half, way less than half what the U.S. has in all of Europe. So that suggests already. So you can't just say let's sell all the debt that you can you us s in the U.S. because it's just not enough. And our equities would be the same, would imagine. Yeah, as I mentioned already, if you sell all the equities, of course, it comes with common kinds of consequences, we're not going talk about. it If you would get be able to get rid of all of it, then the rest of the the global market would not be big enough to absorb that. thats That is right.
00:09:50
Speaker
But on the other hand, this could be a slow process. You don't sell the u ah all the U.S. equities in overnight, of course. And it could be that... If there's more liquidity in the Asian markets that more companies want to list and that these markets continue to grow.
00:10:04
Speaker
We've already had a phenomenal year in Hong Kong with IPO companies that are waiting to list and say, great, liquidity is good. It's actually, yeah you're an equity strategist. So let me bring it, I'll bring you up to the level of economics. It's demand and supply. So yes, there is right now too little supply of non-US assets. Mm-hmm.
00:10:25
Speaker
But if the demand for these assets increases, so there will be every supply response. And that is over time. It might take a while. But if the world investment community demands more non-US assets, there will be more IPOs coming in rest of the world. There will be more debt issuers. Isn't that something like the law say that all supply creates demand or something like that?
00:10:46
Speaker
Well, here it's the other way around, Harold. It's a demand that creates a supply. Supply, that's right, yeah. But nice try. but But yeah, you
Capital Flow and Market Resilience
00:10:53
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could get an honorary economics degree at some point. um But I think maybe it's a good good point to take a quick break. and And when we come back, I wanted to talk a bit more about the implications, what it means for Asia. So we have established that there is a move of capital, maybe gradually out of the US into the rest of the world, particularly into Asia.
00:11:11
Speaker
But what does this really mean for Asian economies and markets? Let's delve into that. plan.
00:11:24
Speaker
Welcome back everybody. um Now before the break, Harold, we discussed this idea that there might be a generational shift in global capital flow patterns whereby at the margin, less might be flowing to the United States and more might be retained in the rest of the world, particularly Asia, which saves a lot. now We wanted to delve a little bit deeper into what this means for Asia specifically. So when you think about Asian markets, what would this marginal shift, still important, generational yeah marginal shift, really mean for for Asian capital markets and equity markets in particular? No, you just put a number out there and said the U.S. Treasury market is about 40 trillion, right?
00:12:07
Speaker
So let's assume one out of 40, it gets sold, one trillion. know If that would come to Asia, that's enormous for Asia. So small changes in this investment behavior in the U.S. can have big implications here. That's the first thing. Secondly, if that money then comes in, it can broaden these markets. A lot of...
00:12:25
Speaker
emerging markets, this is why they're emerging, are still not balanced. The US s market's got a lot of different companies and the S&P 500's got 500 big companies in it. A lot of markets in Asia are still skewed towards a few large ones, but this could fuel growth. New companies could emerge, new companies could list, so you have broader markets.
00:12:43
Speaker
And what is important as well, if this happens, what we've seen in some of these markets, it means that the locals are going to participate as well. They very often go into companies that even you and I don't, never heard of. So it creates deeper and broader markets.
00:12:56
Speaker
And that is very important, I think, for an economist as well. I'm going to put this back to you. Because it creates a sense of financial resilience. These markets are not just dependent on a few drops that come in here and there and can leave again.
00:13:08
Speaker
There's a sort of dynamic and sort of money that flows around yeah that creates resilience. It means if there's a crisis, it doesn't all fall apart so quickly. I think that has um economic implications, as you imply. It creates financial resilience, and that helps long-term development. It will lower funding costs, helping long-term growth. But there's something else here, and that is it requires a fundamental rethink of the structure of Asian economies because – If we're lending less to the United States, ah the United States will buy fewer of our goods because essentially the US at the moment borrows money from Asia to buy Asian goods. That's essentially the flow.
00:13:52
Speaker
And so if the US is going to borrow less, well, we're going to sell less into the United States, crudely speaking. and And that means then we actually have to focus more on our own domestic
Shifts in Asian Economic Strategies
00:14:04
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markets. And something that was maybe neglected in terms of the Asian development story, development ah history, is that we've always looked to exports to fuel economic growth, and that worked really well.
00:14:17
Speaker
But that model might be coming to an end, and there has to be a rethink about how do we actually unleash local growth drivers. And that's not easily done. as we, for example, are experience in China at the moment, but other economies as well. If you think about the enormous domestic potential of an Indonesia, of the Philippines, Vietnam, vietnam India. and And so there is a fundamental ah rupture in the global economic trajectory away from centricity, by the US buys goods and borrows money, towards a more balanced structure, but that's gonna be a multi-year process, but that comes with
00:14:59
Speaker
opportunities, not just challenges, particularly opportunities for investors. Yeah, and I think also from my point of view, there are other sort of challenges. If you want to continue to attract that capital, you need to also make sure that investors feel comfortable to invest here, right?
Corporate Governance and Regulation in Asia
00:15:14
Speaker
So your disclosure rules need to be good. If there's companies that actually the numbers don't end up, on corporate governance issues, that needs to be addressed.
00:15:22
Speaker
These markets need to grow up in that particular sense. They need to mature also in the regulatory framework And um yeah, issues like disclosure and government. think it's a great point to end with because you can say Asia can avail itself of cheaper funding as a result as more capital gets recycled here.
00:15:41
Speaker
But cheap money in itself doesn't deliver prosperity. It's the usage, the efficient use of that capital and that, as you rightly say, disclosure standards, corporate governance, education, infrastructure, and regulation, all of this above comes comes back in. But that's why we're so excited about being here in Asia, Harold.
00:16:01
Speaker
Fantastic. That's right. And it's a very nice sort of summary you made, Fred.
Conclusion and Podcast Subscription
00:16:05
Speaker
And on that note, we're going to wrap up today's episode. Thanks very much for joining us. And please do listen, like and subscribe to both Under the Banyan Tree and our sister podcast, The Macrobrief.
00:16:14
Speaker
Both are out every week on Apple, Spotify, on YouTube, basically wherever you get your podcast. From all of us here in Hong Kong, have a great rest of the week. Talk to you soon.
00:16:50
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.