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: Hello and welcome to Under the Banyan Tree, where we put Asian markets and economics in context.
Speaker: I'm your host, Harold van der Linde, head of Asian Equity Strategy, and what a week it's been in equities.
Speaker: If you follow markets at all, you don't need me to tell you that we've seen some wild swings in Asia in the past few days.
Speaker: And today we're going to focus on why that's been the case.
Speaker: Joining me for a look at what lies behind this wave of volatility is my fellow equity strategist, Brunner Gag.
Speaker: Let's get the conversation started right here, under the banyan tree.
Speaker: For the benefit of anyone who hasn't been following markets this week, here are some stats to help paint the picture.
Speaker: Japanese stocks dropped by 12% on Monday, only to recover nearly half of those losses the following day.
Speaker: By the way, we are recording this on Wednesday the 7th of August.
Speaker: The VIX index, which measures market volatility, hit levels we haven't seen since the COVID years.
Speaker: Meanwhile, U.S. bond yields fell to their lowest level in a year, and the Taiwan Stock Exchange saw its worst performance since 1967.
Speaker: So there's been a lot of volatility in markets and I want to bring in Prona.
Speaker: Prona, welcome to the podcast.
Speaker: Thanks, Cyril.
Speaker: Thanks for having me.
Speaker: Prona works with me.
Speaker: We sit actually next to each other in Hong Kong and we look at the screens where we can see the markets unfolding in real time.
Speaker: Turning red together.
Speaker: Turning red together.
Speaker: Exactly.
Speaker: So Prona, all that volatility suddenly hitting the markets.
Speaker: Why is this happening right now?
Speaker: There are majorly two factors that have caused all this volatility.
Speaker: So let me take a step back.
Speaker: In US, markets were happy.
Speaker: The GDP prints that came out a week back, it showed that growth has been resilient.
Speaker: Inflation was slowly coming down.
Speaker: So markets were happy that the rate hikes that the Fed had induced over the last two years that are doing well, they're bringing the inflation under control without really having the collateral damage to the economy.
Speaker: However, last week on Thursday and Friday, a few surprising data points came out.
Speaker: The manufacturing PMI came much lower than what the market was anticipating.
Speaker: That means the factories are not really running up full speed anymore.
Speaker: That's what market would have wanted to see.
Speaker: And at the same time, the labor data came out much weaker.
Speaker: And suddenly market got worried if the Fed has kept these rates way too higher for longer.
Speaker: And it has started to impact the economic growth in the US.
Speaker: At the same time, in the other part of the world, in Japan, the central bank of Japan, to market surprise, had increased the central bank rates, the policy rates.
Speaker: And because of that, like, you know, everybody was taken by surprise and we saw a massive selling taking place in Japan.
Speaker: So these are the two major reasons that have caused a lot of volatility in global equities in the last few days.
Speaker: Yeah, so you're saying the market sort of says, hey, the Fed needs to lower its interest rates.
Speaker: Japan is raising interest rates more than expected.
Speaker: And suddenly, it probably means that, hey, on a relative basis, you might not want to be in the US.
Speaker: You want to maybe put that money into the yen, right?
Speaker: And there have been a lot of surprises.
Speaker: Like, you know, market was expecting that would happen a bit later.
Speaker: But the impact could also be seen in Asia.
Speaker: In Asia, we've seen a lot of sell-off on Monday.
Speaker: What exactly was happening in Asia, Haru?
Speaker: Well, I think there are four factors at play in Asian equities.
Speaker: And these are concentrated sort of positions in markets.
Speaker: There's something going on with the artificial intelligence rally in stocks.
Speaker: I think there's the bond yields we need to discuss about.
Speaker: But there's also earnings seasons.
Speaker: And not all of these factors are important now, but might become important over the next couple of weeks.
Speaker: So let's take them one by one.
Speaker: What we've seen is that there were a couple of stories in the region.
Speaker: Probably the most important one is that a lot of people had very concentrated positions in a couple of sort of growth stories in the region.
Speaker: So the expectation was the yen was weakening.
Speaker: A lot of funds have gone build up positions in Japanese equities because the exports have benefited from that.
Speaker: And we've seen that the holdings of Japanese equities in foreign portfolio is at more than a decade high.
Speaker: Yeah, exactly.
Speaker: So a lot of funds had the same sort of view on Japanese equities.
Speaker: And actually, if you look, for example, at other equity markets, such as mainland China, they're also fairly concentrated.
Speaker: In general, they've been cutting their exposure to mainland China.
Speaker: But within mainland China, the concentration is there.
Speaker: Like, you know, a lot of money has just gone into internet names or the high yield defensive names.
Speaker: And yes, there are fairly concentrated bets across Asia for these investors.
Speaker: And actually,
Speaker: India, you could argue.
Speaker: India is interesting because like, you know, in general, the rally Indian equities have seen over the last few years, a lot of it has come from domestic investors.
Speaker: But then, like, you know, the small caps and mid caps, a lot of fresh money from portfolio investors, both foreign and domestic, has just gone into these two themes.
Speaker: And with that, we've seen that the exposure that these portfolio investors have to the big stocks, that has come to a 16-year loaner.
Speaker: Yeah.
Speaker: So you have across the region for a variety of reasons, a couple of corners where investors have put their money here.
Speaker: You could put it like that.
Speaker: And suddenly the macro story changes.
Speaker: Hey, the yen might not weaken.
Speaker: It might suddenly strengthen from here.
Speaker: That's not good for equities.
Speaker: And then it feels like everybody wants to exit the door at the same time.
Speaker: And of course, you have also automated trading systems that sometimes can kind of accelerate that whole process.
Speaker: Makes sense.
Speaker: And we saw something similar and turning with artificial intelligence over the last three weeks, three, four weeks.
Speaker: We've been talking about it, that there is a general sense that market is getting a little worried about, like, you know, if there's been too much of rally in artificial intelligence, there's a lot of capex happening.
Speaker: And now the investors are questioning what type of returns these huge investments could translate into.
Speaker: I think globally, there's about $1 trillion being invested in artificial intelligence.
Speaker: And the question is, can we make a trillion dollars of profits out of it?
Speaker: Maybe yes, maybe no, but where is it?
Speaker: And that creates a sense of uncertainty and that has led to a sort of weakening in that whole AI rally.
Speaker: Absolutely right.
Speaker: And I think, Pruna, you've looked at this as well, right?
Speaker: In some of the key Taiwanese stocks, we've seen also very concentrated.
Speaker: Really concentrated.
Speaker: There are stocks where like, you know, investors have more than 10% of their portfolio is invested into just one single stock.
Speaker: So yeah, like the positionings have been very concentrated and AI has...
Speaker: played a key role in that concentration play.
Speaker: So these are the first two factors that we mentioned.
Speaker: These are domestic factors that have impacted the performance, but there are these global factors in play as well.
Speaker: We've seen the U.S. bond yields have come down dramatically over the last three, four days.
Speaker: How do you think it impacts the performance of equities in Asia?
Speaker: Yeah, when you say domestic, you mean regional factors.
Speaker: Regional factors, yeah.
Speaker: Exactly.
Speaker: That's right.
Speaker: So we now have these bond yields in the U.S. coming lower.
Speaker: Now, when bond yields go lower, that's good for equities, yes?
Speaker: There's an inverse relationship there.
Speaker: So this should be supportive, but it is more supportive for some markets than others.
Speaker: So if the bond yields come down because we're worried about what you mentioned earlier, the manufacturing, the factories are not running so good,
Speaker: Maybe the demand for products in the U.S. is not so good.
Speaker: Well, that's typically not so good for your exporters.
Speaker: But the lower bond yields and the lower interest rates in the U.S. is good for those economies that are domestic oriented.
Speaker: Exactly.
Speaker: They had interest rates.
Speaker: They have to keep interest rates high.
Speaker: They can lower interest rates now.
Speaker: I can think of markets like mainland China, India, Indonesia, which are largely domestic.
Speaker: Those are really large domestic oriented markets.
Speaker: sort of stock markets, right?
Speaker: Where consumer companies and banks and telecom companies and these sort of things dominate.
Speaker: So there's a room for these markets then to see also lower interest rates.
Speaker: That's good for them as well.
Speaker: But also there are other sectors like, for example, China internet.
Speaker: We've already said there's a concentrated sort of positioning there, but they tend to also benefit from that.
Speaker: So there are certain markets that respond differently.
Speaker: So that's a second sort of layer of dynamics that plays okay.
Speaker: And we could see that like on Monday when these export oriented markets you spoke about, like Japan and Taiwan, they saw heavy selling.
Speaker: The domestic markets like India and mainland China were fairly more resilient.
Speaker: We didn't see that massive sell off from these markets.
Speaker: So it wasn't just the concentrated bets or the concentrated positionings that was the story there.
Speaker: But the bond yield seemed to play a role.
Speaker: So we've discussed basically the concentrated positionings, the AI rally and the bond yields as kind of three dynamics that play across the region.
Speaker: There's a fourth dynamic and that's what's happening with earnings across the region.
Speaker: But let's take a quick break here and then come back and take a look at that in more detail.
Speaker: So we're back here with Pruna.
Speaker: Pruna, of course, it's earnings season in Asia now.
Speaker: So that means that a lot of companies have the obligation before the end of August to report what their first half earnings were.
Speaker: And then, well, I always say we, but to be honest, it's you really.
Speaker: You aggregate all these numbers and you look at the bigger trends.
Speaker: Let's take a first look at mainland China.
Speaker: How are the earnings looking there?
Speaker: So, Haral, in general, earnings in mainland China have been weak, majorly because of two factors.
Speaker: The sentiment is weak, so households are not spending as much, the consumption is weak.
Speaker: And as we know, there's like literally oversupply in most of the sectors.
Speaker: And these two factors combined put pressure on earnings.
Speaker: Makes sense.
Speaker: The earnings in Q1, they barely grew by 2%.
Speaker: The earnings expectation for the current quarter are not very high.
Speaker: But if you look at the earnings expectation for the whole year, consensus is still expecting that earnings in mainland China in 2024 could grow by somewhere 15 to 16%.
Speaker: There's a lot of optimism.
Speaker: And if you dive deeper, there are two factors that I think I would like to bring to notice.
Speaker: First is a lot of this in earnings growth is expected to come from Q4.
Speaker: So that induces risk.
Speaker: The expectations are that earnings will get better.
Speaker: The analysts have pushed all the good stuff to the very back.
Speaker: And the second thing is a lot of growth is coming just from the internet sector that is doing relatively better.
Speaker: So most of these mainland Chinese companies will start to report in a few days.
Speaker: Maximum earnings come towards the end of this month.
Speaker: So the market would very closely be looking at this earnings season to see if the earnings are really on track.
Speaker: Yeah, yeah, yeah.
Speaker: And also, I guess the guidance will be important because then we get an impression if that big bump in Q4 really is going to come through or not.
Speaker: And this also explains the concentrators sort of positionings, right?
Speaker: Because all the earnings, you say, come from the internet.
Speaker: Selective names, yes.
Speaker: Okay, so we looked at mainland Chinese earnings, a lot of expectations built in.
Speaker: Let's see if that works out.
Speaker: What about India?
Speaker: The story is almost the opposite there, right?
Speaker: It's quite the opposite.
Speaker: Indian markets have seen really good performance in the last few years, and that's just because the earnings story in India is pretty good.
Speaker: Last year was 25%.
Speaker: This year is close to 20%, I think.
Speaker: That's right.
Speaker: But there is another type of worry when it comes to Indian equities, and that's on the valuation front.
Speaker: The Indian equities are one of the most expensive equities in the world.
Speaker: And investors worry that if these valuations are assigning to optimistic earnings growth, then what could actually come through?
Speaker: So you say the expectations are high.
Speaker: They've actually been met in the past by good growth.
Speaker: And now we need to see that that continues.
Speaker: Otherwise, these valuations will become an issue.
Speaker: That is one factor.
Speaker: But at the same time, we feel like, you know, that there are multiple reasons why valuations for Indian equities are high.
Speaker: One, yes, we spoke about the earnings growth being strong, double digit for multiple years.
Speaker: I think also Indian companies belong to the most profitable companies on the planet.
Speaker: And in general, Indian equities have been pretty, the volatility in Indian equities have been very, very low for the last few years.
Speaker: domestic buying and these domestic investors they don't just sell off because of what's happening in the u.s or other related to that whatsoever so in general because of strong earnings because of high profitability and domestic nature of the market investors tend to assign high valuations to indian markets and we think that these valuations are going to stay for some time yeah that's right so this was about in mainland china india in ajean the story is quite the opposite
Speaker: Yeah, no, the growth has not been really good in ASEAN markets.
Speaker: Take Indonesia, for example, you're talking about 2% or 3% growth so far this year.
Speaker: The thing is, of course, that in those places, they had to keep interest rates quite high because to follow the US, but now, as you mentioned earlier, the Fed might be changing that.
Speaker: And if the interest rates come down, allows them to do so as well.
Speaker: So maybe we see a sort of slow acceleration of growth in those markets, domestic oriented markets, Indonesia, Philippines as well, Thailand to a certain extent.
Speaker: as we go into 2025 and yeah it takes some time.
Speaker: It looks like investors have already started to prepare on it.
Speaker: We've seen that these markets are doing better in last few weeks.
Speaker: We've seen money flowing back into these markets and people seem to be from the data that we see repositioning themselves in ASEAN to a certain extent but I think that comes back to yeah looking at some of the domestic markets across the region as we mentioned earlier that seems to be the theme
Speaker: So putting this all together, we got basically concentrated bets that are being unwind and that might take a bit of time.
Speaker: We have the AI rally that seems to fizzle or sputter to a certain extent.
Speaker: People questioning it now much more than they did one or two months ago.
Speaker: We have that interest rates in the world are going to go lower, which is good for equities and more good for some markets.
Speaker: And then, of course, we have this sort of uneven earnings growth in the region.
Speaker: And that makes it a strategy for you and I. As I said, we look at these screens every day, right?
Speaker: We sit next to each other.
Speaker: It makes it exciting sort of game, right?
Speaker: It does, Errol.
Speaker: So maybe we'll have to talk about this again in the near future, Perna.
Speaker: Thanks for coming on to the podcast.
Speaker: Thanks, Errol.
Speaker: We had a great discussion.
Speaker: And that's a wrap for now, everybody.
Speaker: Thanks as always for joining me.
Speaker: And we will, of course, be keeping a very close eye on those market developments here in Asia.
Speaker: Make sure you join us at the same time next week.
Speaker: And remember to listen to our sister podcast, The Macro Brief, for HSBC's latest view on global economics.
Speaker: Take care for now, and we'll talk to you again soon.
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