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Under the Banyan Tree – Reading the tea leaves in 2026
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Fred and Herald kick off 2026 with a round-up of what we think could be the highlights for Asian markets and economics in 2026.
Click here for appropriate Disclosures, including analyst certifications, and Disclaimers that must be viewed with this podcast: https://www.research.hsbc.com/R/101/7XdVKcJ
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Transcript
Introduction to the Podcast Series
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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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Make sure you're subscribed to stay up to date with new episodes. Thanks for listening, and now onto to today's show.
2026 Asian Markets & Economy Outlook
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Hello and a warm welcome to the first podcast of 2026. You're listening to Under the Banyan Tree with me, Fred Newman, Chief Asia Economist at HSBC. And me, Harold van der Linde, Head of Asian Equity Strategy. The holidays are over, people are back at their desk and of course, big questions on everybody's lips is, what do Asian markets and economics have in store for us in 2026. Lucky for you, dear listeners, we're here to answer that question. Plenty to discuss on the show today.
AI, Chinese Spending, & US Interest Rates
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Will it be boom or bust for AI? Will the Chinese consumers step up? And do we need the US to move first before interest rates change in Asia?
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Plus yoga, astronomy and a Mayan language. Why are we talking about those you ask? Well, keep listening and find out. From HSBC Global Investment Research, you're listening to Under the Banyan Tree.
00:01:22
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So, Harold, it's 2026 already. We're already a few days into the new year. And here's a question. What are the big themes for this year that investors are talking about? And what is sort of the number one question you're asking yourself as you sort of gaze into 2026? I think for me is very clear what is going on with AI. Is this rally going to continue? Is there going to be a lot of productivity gain? It's going to change the the way we interact? Or are these stocks are going to roll over and people say, well, it's all nice. as Well, but we've invested a bit too much in here. There's some problems here and there. We've got to look for something else. So you're saying in in some ways, AI is going to be the story of 2026, regardless of what happens. Either it's going to go up or like a rocket, or if not, then it's actually going go down. And then it has massive repercussions for where does the money go and et cetera, et cetera. That also implies that that it can't really go sideways.
00:02:18
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It can't sort of trickle away into the sunset and we forget about the whole AI story. Either it's a boom or a bust. It's true. It's almost binary. It either is a great story or not. And we we are pricing in a lot of growth and now we have to see. And it's going to be a yes or a no sort of moment. but What about you as an economist? It dominates the economic conversation as well. If you think about what drove growth in 2025 across much much of the region, it was exports and it was often tech exports. And the entire AI you know ecosystem from semiconductors to, as we discussed on this podcast many, many times, it's cooling systems, energy systems, everything that goes into building these data centers, still motivation that was driving the manufacturing cycle in much of emerging Asia. and And so if that continues, then obviously we have another kind of growth driver. um But if it were to reverse, suddenly these orders dry up, then very, very quickly –
00:03:18
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ah Not only would trade suffer, but also the related investment would suffer. And and you could see things unravel. so I agree with you from an economic perspective. One of the key drivers of the cyclical outlook this year for Asia is going to be whether AI boom or bust. um I don't know whether you want to venture ah an answer to this question, but whether AI is boom or bust.
00:03:41
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how things look to shape up at the beginning of the year, at the end of the year, it very often turns out to be very different. Like we saw in the beginning of last year, right? It was trades and and the tariffs is going hurt trade. And actually there was a boom in trade. So things can often play out very differently than you expect. But my question is, if there is...
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a sort of realization that maybe we have to look a little bit beyond the AI. What are the growth stories out there in the region?
Impact of Chinese Spending on Global Economy
00:04:07
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yeah Look, that there's one missing piece if you look at Asia's economic performance, really, if you want to bring it down. It's it's the absence of the Chinese consumer.
00:04:16
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ah in terms of its spending power. And it's not just important for the Chinese economy. It is also important for the regional and the global economy because that absence of 1.5 billion consumer spending you know um is is being felt across borders, ah across supply chains globally. And so I think one of the key questions that's going to be over the coming year is whether we're going to see finally the Chinese consumer step up accelerate spending. And um there's not much evidence as of now that there will. But but that that would be the big story if that were to come through.
00:04:55
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But there's a lot of talk about this, right? And it's saying, there's talk about that they would like to stimulate that. those Policy measures are coming out. So we'll we'll have to see if this is going to bend out. But you're right, per capita consumption in China, I believe, is about on par with Colombia and Cuba and these other countries. so which Which implies that there's a lot of catch-up to be had because the economy is much richer in per capita terms. And therefore, the consumption, it's under-consuming in um many measures. And so if you had the Chinese consumer reduce its saving rate, spend more. That would be felt in terms of Chinese economy, become less export dependent, but other economies would benefit as well. That's a key component. And so that's something we're watching very closely, although really it's not clear that that will really happen in 2026. Yeah.
00:05:44
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um But then another question I think for this year that is important, at least in the economic realm, is what's happening with monetary policy?
Speculation on Interest Rate Cuts
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Because we had, you know, our markets had forecast that the Federal Reserve will cut interest rates and those expectations have quietly been reduced of late. Well, you've got to answer this particular question because, i mean, the market is saying that there is a little bit further rate cuts coming through in the U.S., but it's not that much. It's not that we're going to go back to levels that we were two or three years ago. So even if the Fed doesn't really cut rates, can actually Asian central bankers cut interest rates? They they could. They could. and and it's not clear the Federal Reserve will cut interest rates ah at all. um It's not inconceivable, though, that if the Fed doesn't move, that Asian central banks will decide to cut rates further. Because ultimately, we're not all entirely beholden to the Fed, right? It depends on what's happening in terms of local inflation. And if you look at economies like China... If you look at Korea, yeah if you look at some of the Southeast Asian economies, there's not much in terms of inflation. Even India is not generating inflation at the moment. It's the lowest inflation numbers I've seen in my career.
00:06:54
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and Exactly. And so is there a case for further interest rate cuts? Certainly on this side of the Pacific. In the U.S., maybe, maybe not. And so there is there is certainly in the economic realm, we're watching very closely this idea of a divergence in monetary policy whereby many Asian central banks continue to cut interest rates. But the Fed actually does nothing because the US economy continues to take along. Well, this is important. So if we go back to it the very beginning, we talked about AI. That's Korea, Taiwan, mainland China. Japan, that is a North Asian story.
00:07:29
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If the market would start to look beyond it, as we said earlier on, that might happen, then one of the markets that would come up is India. So the question is, can India really cut interest rates? And could we see therefore also a sort of revival or a recovery in domestic demand in India? And do we need lower interest rates for that in in India?
00:07:50
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Well, it does appear that India still has space to cut interest rates given that the inflation is so low. And so unless we see food prices rebound or oil prices rebound, probably there's enough room for the Indian Central Bank along with other central banks in Asia to continue to cut rates very, very gently. But um the question is, does that really matter though for the equity markets? um You know, you tell me as an equity strategist that generally you tend to ignore what happens on the economic side. And do do policy rates really matter for Indian equities? No, they do. They do. I mean, um I say we're we're ignoring ah sometimes the economic stuff. But what I mean with that is to large extent is that we got to understand what makes the companies in the stock markets tick. And that is not always the economy in Asia.
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But India is an exception. What these local companies are doing, the banks, the consumer companies, the auto companies, you name it, is very much tied to what happens in the domestic economy. So it will be important. But it it also tells me that even if AI doesn't rally that much further and the central bank in the U.S. is not cutting interest rate,
00:09:00
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They could still do this in India, cut interest rates, and demand could maybe therefore recover into 2026. So it it creates a sort of of potentially viable alternative growth story in Asia versus what happens in North Asia at the moment. But is it is is it necessary for Indian equities to do better for the AI ah boom to kind of fizzle out for then investors to start to say, oh, maybe I now focus on India? Is that – do you need to have a deflation of the AI bubble before other markets that aren't really, you know, AI markets start benefit? I would love to say that you – no, it doesn't need to be, that India would be judged on its own. But to be honest –
00:09:41
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Probably, yes. If the appetite for AI investments just continues to grow, then it it might be difficult for India just to gain their particular attraction. Which brings us back to AI being very important.
00:09:51
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Yes. Yeah, the number one question. So instead of saying, what are the top five questions this year, there's actually run one really important question that is AI. How is it going to develop? That drives to a large extent what happens with the other issues. in the world Now, this is a great place to quickly take a break. And when we come back, let's talk about Japan because Japan is always a little bit ignored, put to one side. But there are interesting stories there for 2026 well.
00:10:26
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So let's focus rightly as you highlighted, Fred, on
Japan's Unique Inflation & Interest Rate Strategy
00:10:29
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Japan. um Why don't you kick it off? It's two logics in the macro story. They seem to be raising interest rates and there's some fiscal stimulus going on as well, correct? So, yeah. So so Japan is is different from other Asian economies in the sense that the central bank is actually tightening monetary policy. And it's doing so because suddenly after decades of deflation, you now have – inflation as rising prices. Now that's already puts Japan in a little bit in different bucket and the question this year is how far can the Bank of Japan push interest rate hikes. But there's another reason I think why Japan is so unique and interesting to watch at the moment because it is also a huge bond market. And if you see rising inflation in Japan, you see a widening budget deficit, you see a weaker currency,
00:11:19
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There is a risk here that government bond yields, that is the interest rate that the government pays on its debt, continue to rise. and now why is this important? It's because we have a lot of public debt across the world. And if Japan sees suddenly volatility in its government bond market and global investors saying, oh, Japan is just too risky to invest and interest rates start to go up, then that could send jitters across global bond markets. You could see U.S. Treasury yields rise. I was just thinking, listening to you, Fred, I think, hey, is isn't this the story the same in the U.S.?
00:11:55
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Maybe Europe to a certain extent, right? This is a developed market story to a large extent. It is a developed market story. It could be something that's a sort of … But it is important for emerging markets as well. Absolutely. So in the sense that if you see suddenly um volatility in major government bond markets, of which Japan is obviously clearly one, and it's it's the one that's closest to us here in Asia … then there could be a spillover effect to other emerging markets because they still borrow internationally. And so global funding costs would increase. And so that's why… and all that story about cutting rates and these sort of things might suddenly change. It might change. um kind We might have to raise rates. It might mean risk aversion by investors starting to take money off the table, so to speak. And so that's why it's it's an interesting story because it's slightly different from the rest of Asia, but it's also very important and for what's happening global macro trends, what's happening in global bond markets. um And that has obviously effects us all. And that's why 2026 is going to be very, very important to watch. So it's not just an AI story for 2026, but also fiscal dominance or fiscal prudency in in the developed market and the impact that that has Well, let's put it this way. AI excites you, Harold, in the equity world. And, you know, the interest rates in Japan excite me in the economics bond world. and that's where we're just fundamentally differently wired.
Harold's Personal Resolutions & Goals
00:13:33
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So, Harold, before I let you go, we got to talk about 2026 New Year resolutions here. And I know you're you're famous for every single year having one resolution you actually stick to and deliver. i know but um a few years ago, you actually, your New Year resolution was to be able to do the splits.
00:13:49
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um Yes, that's right. And you managed to do that, hiring a ah yoga guru to get you um essentially to and do the splits within 12 months. And i managed to do that. Yeah, it was actually seven months. I think I did it on my balcony around somewhere in July, if I'm not mistaken, starting in January. And the funny thing was,
00:14:12
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That was it. So my son made a picture. I did it. And I stopped inviting the yoga teacher along. And that was it. but And that was it. whoa Well, at least achieved. Yeah, it's been some time ago. the other one was The other one I remember, one year you you learned an Aztec language.
00:14:28
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ah Mayan language. Mayan language. Yeah, that's right. yeah my But um we are planning to go to Mexico and I wanted to see Mayan temples, but I also wanted to learn the Mayan glyphs. So that's right. There was a New Year's resolution, not very useful in ah in normal day-to-day life, I would say.
00:14:44
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But quite exciting if you go there, you can actually read the Mayan glyphs. And it sounds very difficult. Now, can I ask you, how many people in the world speak that Mayan language that you learn? Nobody speaks it because we have no idea how it's been spoken. But there is a, I mean, there's ah there's a course, I believe, at the University of Austin, Texas, that that teaches Mayan g lives.
00:15:05
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But there's a fantastic little book written about it. And with that, you can actually learn how it works. It's very interesting. They have, for example, an incredibly efficient counting system. They only got three numbers, but with that, they can express all numbers in the whole world. So it's, the Mayans had some good ideas in those days. Yeah. Which brings us to 2026. Is it going to be is it going to be here an Inuit language or what was it going to be this year? No, but it's equally geeky, I would say. um I always wanted to study astronomy and I was very close to decide to go and study physics and astronomy at university.
00:15:38
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But I went for economics and mathematics recently somehow got interested in again, but I don't know how I'm going to tackle this. So I've decided that I'm not going to decide that immediately. i'm First, I'm going to go back to my high school math, because if I want to take it seriously in in physics, I've got to do my math. So I'm going to go back to understanding siners and cosiners and these sort of things and and see if I enjoy that and if that would then put me on.
00:16:03
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So, 2026 is going to be the year Harold van der Linde picks up his high school math books again. Yes. Is that what you're telling me? Yeah. And if the resolution is that it works, then I go for it. But if I don't like it, then I'm not going to study astronomy. But probably stick with popular sort of astronomy books. I'm going to read those. Well, Harold, have to say, I find it reassuring that, you know, HSBC's head Asian equity strategist finally decided to learn math.
00:16:27
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Yes, because in the end, equity strategy is an art. Not matter a science.
00:16:34
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And on that note, we're going to wrap things up here under the Banyan Tree. Great having you with us. And we're looking forward to landing wherever you get your podcast every Thursday in 2026. And for anyone attending the HSBC Asian Outlook conferences next week, Harold and I look forward to seeing you there alongside our colleagues from Global Economics, Equities and FX. Under the Banyan Tree is an HSBC Global Investment Research production. Our producer is Graham Mackay.
00:17:02
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Take care and talk to you again soon.
00:17:39
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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.