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 Fred Newman, Chief Asia Economist at HSBC.
Speaker: And I'm Harold van Linde, Head of Asian Equity Strategy.
Speaker: On today's show, we'll be looking at what rising U.S. bond yields mean for investors in Asia.
Speaker: That's right.
Speaker: It's a discussion that touches on virtually every asset class, from bonds to FX, and of course, equity markets and the overall economy.
Speaker: There's going to be a lot to unpack, so let's get started.
Speaker: From HSBC Global Research, this is Under the Banyan Tree.
Speaker: Let's start with some facts and figures to set the scene for today's discussion.
Speaker: We normally focus on Asia here, but you simply can't ignore the impact that rising US rates are having across the world right now.
Speaker: The yield on 10-year treasuries, which is the benchmark for US government bonds, hit a 16-year high this week.
Speaker: This tells us a few things, but what is most important is that markets are adjusting to the prospects of higher US interest rates for a longer period of time.
Speaker: Fred, why don't you kick us off here?
Speaker: What does this mean for the macro picture in Asia?
Speaker: Yeah, rates are on the move in the US again, and it's a bit of a headache for investors in Asia, for central bankers in the region.
Speaker: Now, what happened in the US is that really it looks as if the US economy is a bit stronger than expected.
Speaker: It's more resilient despite the rate hikes that we've seen.
Speaker: And so the market is repricing expectations on when the Fed will cut and is actually pushing it out into the future.
Speaker: And that's this idea of higher interest rates for longer.
Speaker: And that ultimately means if you get more money, more returns on your U.S. money, that is, you invest in the U.S., you get higher returns, higher interest rates.
Speaker: That, of course, also keeps the dollar stronger, and that has implications then for the rest of the world.
Speaker: So the Fed still sets really the price of global money.
Speaker: And with the Fed signaling in effect that it's not going to cut anytime soon and inflation being sticky in the US and the US economy doing well, that is just an expectation on rates that we're currently repricing in markets with a higher for longer expectation.
Speaker: Now, higher rates, of course, great for investors who put their money in the bank, perhaps, because they get higher interest rates.
Speaker: But what does this mean for equity markets in general?
Speaker: Surely that must have an impact on equity markets as well.
Speaker: Yeah, for equity markets in general, this is not good news.
Speaker: And we've seen equity markets coming up globally in the last, what is it, week or so, when those rates started to rise again.
Speaker: And in Asia, this is in particular, so we are more sensitive to it because
Speaker: Just as you say, it means if you can get 5% in a deposit in the US and you're not quite sure what you can get in Asia, a lot of people say, well, on the margin, I keep it there.
Speaker: So they're not willing to invest in Asian equity markets at the moment.
Speaker: And the problem, I think also for Asian equity investors, it feels as if you go hiking up a mountain and you've never hiked that mountain before and you're tired and you're getting to the top, you feel like, OK, it's two more corners and then we're there.
Speaker: And then you do two corners and then turns out there's another corner.
Speaker: And then you get to that corner, you think we're at the peak and then there's another corner.
Speaker: So there's a bit of fatigue coming in as well, in the sense that every time we think that we're at the peak of interest rate expectations and the worst is therefore over for Asian equities, it turns out that the U.S. is doing, again, is stronger than anticipated and these bond yields move.
Speaker: Another step higher.
Speaker: So you see that the appetite to buy Asian equities is just extremely limited.
Speaker: But what is important is in particular the view of the dollar.
Speaker: Now, what are we saying about that?
Speaker: I suspect stronger, right?
Speaker: Well, yeah, if we have higher U.S. interest rates or higher for longer, then that means, of course, a strong dollar.
Speaker: The dollar has appreciated, has gained in value against stocks.
Speaker: virtually all Asian currencies.
Speaker: And that, of course, is a headwind for anybody who wants to invest in Asia because if you invest in the local currencies, your investment loses value versus the US dollar.
Speaker: So not only do you get high interest rates in the US dollars, but also you essentially
Speaker: lose because there's another reason not to invest in the executive chair.
Speaker: Now, and that means there's obviously a lack of capital inflows into Asia because a stronger dollar is a bit of a hurdle then for these capital inflows to come.
Speaker: On the other hand, there's of course also this idea that a weaker local currency is good for exporters because they become more competitive.
Speaker: They sell in dollars and the costs on local currency so they should be making higher margins in effect.
Speaker: So,
Speaker: For exporting company, probably not the worst thing if the currency depreciates.
Speaker: Is that reflected then in Asian equity markets and valuations?
Speaker: To a certain extent it is.
Speaker: So you're right.
Speaker: If we talk about Asian equities, there's of course a large number of companies that all respond individually very different to this.
Speaker: say a stronger US dollar, a weaker local currency is good for exports because their products are becoming cheaper.
Speaker: And actually some of the exports have done really well this year, Taiwanese and Korean exporters and Japanese actually as well.
Speaker: Although it isn't just the dollar story, but it's also because of artificial intelligence.
Speaker: You need a lot of service and chips to run that, a lot of memory.
Speaker: So that is the underlying theme there.
Speaker: On the other hand, you also have companies that benefit from higher bond yields.
Speaker: Think about banks, for example.
Speaker: They get money in from depositors.
Speaker: They don't really do too much with that, but they lend out money to companies and they say, sorry, interest rates go up.
Speaker: We're going to raise interest rates for you as well.
Speaker: So their margins can expand.
Speaker: So this tends to be positive for all sorts of banks across the region.
Speaker: And then there are parts of Asia where, yes, it is all negative, but the underlying growth story is so good that actually, yeah, that offsets the negativity that comes from these global factors.
Speaker: India is a great example.
Speaker: So India is up, I think it's about 18% year to date.
Speaker: And Korea and Taiwan have also done very well.
Speaker: To a certain extent, you could say this has already been reflected in Asian equities.
Speaker: The other issue is, of course, what Asian central banks are going to do.
Speaker: Well, it's a bit of a double-edged sword, actually.
Speaker: The weaker Asian currency is a stronger US dollar because as you rightly say, for the exporters, it's a positive.
Speaker: And you've seen some exporting economies do well on the export side.
