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Under the Banyan Tree - Predictability in an unpredictable world
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Herald van der Linde welcomes Global Head of Transport Research Parash Jain and Asia Equity Strategist Prerna Garg into the studio for a discussion on the impact of Middle East tensions on Asian markets, economics and global shipping.
Disclaimer: https://www.research.hsbc.com/R/101/Rc9xgDh.
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Transcript
Introduction to HSBC Global Viewpoint Podcast
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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 today's show.
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This podcast was recorded for publication on the 19th of June 2025 by HSBC Global Investment Research. Disclosures and disclaimers must be viewed on the link attached to your media player.
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And remember, you can listen, like and subscribe wherever you get your podcasts.
Focus on Asian Markets and Global Events
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Just search for Under the Banyan Tree.
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Hello from Hong Kong and welcome to Under the Banyan Tree. I'm your host Harold van der Linde, Head of Asian Equity Strategy here at HSBC.
Impact of Middle East Tensions on Asian Markets
00:00:58
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Well, tensions are clearly running high in the Middle East right now with ripple effects being felt globally, but we're not here to talk politics.
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I'm joined today by my fellow equity strategist, Prun Agar and Global Head of Transport Research, Paras Jain. We're going to discuss how sensitive Asian markets are to global events and rising oil prices and take a look at the impact on tankers and container shipping and these sort of things.
00:01:21
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We'll also try to answer the question, is unpredictability the only thing we can safely predict right now? And if so, how are your investors positioned to deal with it? From HSBC's Asian headquarters, you're listening to Under the Banyan Tree.
00:01:39
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A little context that might be useful before we begin. Tensions between Israel and Iran have sent oil prices above $70 a barrel this week. Iran is of course a major oil producing nation and recent events have caused some concern over supply.
00:01:54
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That is a worry for major economies including China, which buys a lot of Iranian oil. On top of that, shipping routes can be affected by geopolitical tensions as companies wear whether or not it's safe to send their fleets across certain routes.
00:02:07
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On that note, let's kick off the conversation. Paras and Pruna, welcome. Thanks, Haral. It's great to be back here. yu Thanks, Haral. Good. So, Pruna, want to kick
Oil Price Dynamics in Asia
00:02:16
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off with you. um Oil prices have gone up, gold has gone up a little bit, actually bond yields and Asian markets have held up reasonably well until so far.
00:02:24
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But which markets are most exposed to oil prices? Harold, if we go purely by numbers and if we look at the historical correlation, in Asia, Taiwan and Korea generally, they have performed well during rising oil prices in the past. And it's India and Indonesia that generally tend to underperform during rising prices. Right. And Indonesia and India are both buyers of oil, right? They are both buyers. In fact, India is the biggest importer in the world.
00:02:51
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yeah So if ah the oil prices increase it, of course, it enlarges the import basket and it's not really good for the macro of the market. And Malaysia, I think, is an exporter, right? Malaysia is an interesting case. Malaysia is the only oil exporter in Asia. So ideally, you would expect Malaysian equities or a Malaysian economy to do well because a large part of the government's budget is sponsored by these crude exports.
00:03:16
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However, from equity perspective, we don't see a very strong correlation between oil prices and oil market. This is because, as you often say, economy is not equity market or equity market is not economy.
00:03:27
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So yes, high oil prices, high crude prices can be good for Malaysia. But the equity market structure of Malaysia is very different from the economy. It's generally banks, which are not very sensitive. So in general, we don't see very high sensitivity of Malaysian equities to crude prices.
Renewable Energy's Role in Reducing Oil Dependency
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That's right. And you said you did this by the numbers. And that's also the weakness here, right? Because Korea and Taiwan come up. But that's because they tend to do well if oil prices go up because the world economy is humming along and people need to open up their factories and they need oil.
00:03:58
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So higher oil prices are healthy in the case in that sense. And that's why Korea Taiwan. So it's important to see whether the oil prices are increasing because of high demand or it's coming because of low supply. If oil prices are high because of strong demand, this can be good for export-oriented markets like Korea and Taiwan. yeah What about China? Is this is very sensitive to oil?
00:04:18
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Before we go on China, there's just one general trend I want to highlight, and that is, in general, the sensitivity of oil. Equity markets in Asia to oil prices is coming down over time.
00:04:29
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And that is because the dependency of the economy is coming down. And that's because of the larger share of renewable. yeah So ah they tend to be the shock absorber. um That might explain a little bit why actually Asian markets haven't really done so much. Yes, so because it's not as sensitive as it used to in in the past. And in mainland China, I think the indirect impact of oil prices much stronger than the direct impact.
00:04:52
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And that is like, you know, how does it impact US dollar? no If increase in uncertainty associated with any escalation in conflict or because of tariff. At least it's stronger dollar, which is typically bad, right? Which is generally bad for markets like mainland China. Yeah. So for China, it's really indirect impact, right?
Shipping and Geopolitical Risks
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That's right. Now, Paras, you always tell me that uncertainty and disruptions is good for the companies that you look at, all the biggest shipping companies. So is that the case again? Yeah, indeed. I mean, all else being equal, generally the trade of goods flow through the most seamless way. And as and when we see a disruption, whether it's geopolitical or climate related, yeah the normal flow of goods disrupt, which means you need more capacity worship to handle the same amount of volume.
00:05:41
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And as a result, you see a reflection on the freight. Yeah, because then these shippers can say, well, if you want my ship, you need to be a higher price for it, right? Or ah in in this case, for example, if the oil flow disrupts out of Iran or out of state of Hermes, then naturally that oil needs to be supplied by either U.S. or OPEC, which means that everybody... There's another a tanker that you need somewhere, yeah. ah you You make a distinction here between tankers and container shipers, right? Because tankers do oil, container shipers do goods. So this doesn't really impact actually trade flows that much, is it?
00:06:17
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Yes and no. I mean, if you see, since President Trump came into power and in the last few weeks, the talks that Hamas has agreed not to attack non-Israeli vessels, some of the container shipping lines have indeed started to bring some of their India Mediterranean service through the Red Sea. i say and back to the red seat yeah They were thinking, few of them did, but after what has happened over the weekend, probably that will also push ahead by couple of months. Because there's just more risk to it, right? But that means they're got to go all the way around South Africa again, and that's more costly.
00:06:51
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Which is what they are doing now for almost 15, 16 months. So the impact on trade is probably not so big immediately. Not on the container. Not on the container, that's what I mean, yeah. So if you ship shoes and computers and these sort of things around.
00:07:04
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ah But oil for oil tankers, it means it's going to be probably good for them for the for the time being. Yes, I mean, despite as attractive as the freight it would be, I mean, some of the ship owners are still hesitant to actually deploy their vessels because you are talking about hundreds of millions of dollars worth of vessels. So I think the insurance companies will pretty much show us the path of how cheap or expensive it is to sail through those routes. And is it easy to say that if they cut off the Strait of Hormuzo, they could cut off the Gulf, then China is a big buyer of that oil, right?
00:07:37
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So it it ships it, I presume, ah through the Gulf and Sri Lanka and then through the South China Sea into China, right? yeah Where can they go? I think there are two things, right? So with respect to Iranian production, um I think one and a half million barrels per day is what they export.
00:07:54
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And predominantly majority of that export goes to China. When if Strait of Harmas is disrupted, then even lot of the Middle Eastern countries, oil also flow through Strait of Harmas.
00:08:05
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Yeah. I don't think the world has seen anything like that since 1970s. So, a state of Harmer's disruption means almost quarter of global oil flow disrupts.
00:08:17
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that That probably will be quite disruptive. That will be very disruptive. And this is this a serious risk for China that it can't get its Iranian oil maybe anymore? I mean, Iranian oil in a grand scheme of things is one and a half million barrel per day.
00:08:29
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So, I mean, OPEC has a six million barrel per day of surplus capacity. But implication on shipping is quite high because today a lot of this Iranian oil goes in a shadow fleet or a dark fleet, as we say.
00:08:44
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So as soon as the oil flow moves from Iran to, let's say, OPEC, then that oil needs to flow through the mainframe lines or mainframe oil tankers, yeah yeah and which probably means that there's a more demand for the large vessels like VLCCs compared to the supply. Okay, okay. But in a sense, size-wise, it means that China could easily say, well, we if we can't get access to Iranian oil, we'll just buy it from, say, Brazil or somewhere else, right?
00:09:12
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Yes, I mean, um mean if if you look back, what happened during the Russia-Ukraine crisis, right? When Europe stops taking oil from Russia, that oil started to flow to China and India. Yeah, and okay.
Investment Strategies in Unpredictable Markets
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So we're going to take a very quick break here, and then when we're going to come back, I believe you've got a question for me, right? Sure.
00:09:39
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Harold, I have a question for you. yeah I mean, in in our world, it seems like ah you can safely predict the unpredictability. Yes. Is that what you're seeing in the market also, that uncertainties become a norm and therefore market is not reacting as widely as it would have been couple of years back?
00:09:59
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Yeah, I mean, for you, Parash, this is actually positive, right? Because your shipping sector, for a long time, nobody looked at it. And now, with all the uncertainty that we've had over the last five, six, seven years, every time shipping comes back into focus. So it's a very different sort of dynamic for you as an analyst, right?
00:10:15
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But yeah, we've had a lot of uncertainty. So um pandemic, we've had, of course, disruptions in trade flows quite recently. That was the Red Sea you were referring to. Now we have oil, we have had a trade war, and you can go on and on and on. So there seems to be more sort of big events that suddenly hit us.
00:10:32
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There's ah maybe a couple of things that are important to understand here. First of all, we might get conditioned to that. You are right. we We know that that uncertainty is here. So we we deal with it as it comes. And we've maybe learned a little bit better to deal with it as well.
00:10:45
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Secondly, most investors in Asia are relatively defensively positioned. If you look at all the flows that we see in the region, a lot of people look for income generating equities, high dividend yield. And those companies that they've invested in, the exposure to say higher oil prices, very minimal.
00:10:59
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So it's the second round effects that Pernod was talking about. And probably these sectors are now much smaller weight in the index than they were in the past. Exactly. So most of these dividend flows are relatively stable and therefore people are not so much worried about it. That's the third thing.
00:11:13
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I also think this comes at a time when Asia is starting to look a little bit better. China clearly is signs of improvements in the property sector. Demand is still weak in China, but at least it seems to try to improve. Let's put it like that.
00:11:26
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Interest rates are high in the region that coming down, India, Indonesia, for example.
Resilience of Asian Economies to Global Disruptions
00:11:31
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So the sort of buffers that we've built up, if this would have happened three years ago when the Chinese economy was much weaker, then yeah maybe the dynamics would have been very different as well. And that means that the region is maybe a little bit better attuned to this. And if I really go back to say my own history in the 1990s, when I was junior analyst, I looked at Indonesia and their banking system was at that particular point in time really, really weak. So when you had a wobble in the world, all these Asian banks started to wobble very easily, but now they're really solid.
00:12:02
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So you have a banking system that's very important, that that's much stronger across the region and can deal with these sort of stresses.
00:12:17
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So Paras Prunna, we've covered a lot of grounds, looked at it on all sides. Any final thoughts you have on on this situation? I mean, I think we are firmly predictably unpredictable terrain. yeah and time will tell what happens and what are the events likely to unfold.
00:12:32
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But ah from from our perspective, beyond Israel and Iran conflict, we'll take a keen interest to see how the ongoing trade negotiations with the U.S. will play out. well A lot of deadlines are approaching while we will be in the summer break, yeah whether it's a July 9th, whether it's August 9th.
00:12:49
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Is it kick the can down the road? so yes, there will be plenty of things to to look at during the summer. Plenty of unpredictability coming your way. Absolutely. Predictable unpredictability. and And let me use that word again. And given all the unpredictability, I believe that investors would be looking for the so-called hiding spaces where they see more predictability. Yeah.
00:13:09
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Yeah, and I think when you say that, you go back to what is predictable. And there are certain trends in Asia that we know will go on irrespective of what happens with the macro or with oil.
00:13:20
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For example, Asia continues to age. So we know that consumer demand
Future Outlook and Opportunities in Asia
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is going to change. We also know that in India, for example, Indonesia, as people age, that healthcare demand is going to go up. So looking at these longer term themes, such as demographics and development of new technologies and robotics and AI and these sort of things can give you a sense of,
00:13:40
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predictability in an unpredictable world.
00:13:45
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And on that note, we're going to wrap up the podcast here. Pruna, Paras, a pleasure having you both on. A big thank you as always to our listeners for tuning in. Do remember to download and listen to our sister podcast, The Macro Brief, your one-stop shop for the major economic discussions shaping investments around the globe.
00:14:04
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Under the Banyan Tree is an HSBC Global Investment Research Production. We'll be back again next week.
00:14:34
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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.