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, my name is Fred Neumann.
Speaker: I'm the Chief Asia Economist at HSBC in Hong Kong, and I'm joined today by the inimitable Harold.
Speaker: Harold van der Linde, indeed, that's me.
Speaker: I am the Chief Asian Equity Strategist, so I look at all the stock markets across the region.
Speaker: And we're here to talk in a podcast called Under the Banyan Tree.
Speaker: That was your title you came up with, Fred.
Speaker: Why?
Speaker: Well, under the banyan tree, because a banyan tree is a beautiful tree, of course, it's a symbol across Asia.
Speaker: And it's really the tree where historically the elders in the village met to discuss politics and commerce, but also markets.
Speaker: Absolutely.
Speaker: The first stock market in Asia was set up officially in Mumbai in the 1880s.
Speaker: But before that, people met under a banyan tree to trade stocks.
Speaker: Eventually, there were so many people that didn't fit in the shade, I presume, anymore.
Speaker: And they moved to a street called Dallal Street.
Speaker: And that street is still now like Wall Street in the US.
Speaker: If you refer to Dallal Street, you talk about finance.
Speaker: So it's very appropriate for that.
Speaker: So markets have evolved a little bit since then, Harold.
Speaker: And looking at equity markets to date, how have we done here in Asia?
Speaker: It's a sea of red.
Speaker: Is it really that bad?
Speaker: Yeah, it doesn't look so good at the moment, at least if you look at what has happened since the beginning of the year.
Speaker: Asian stock markets are down.
Speaker: The broader index is down 10 percent.
Speaker: Some of these stock markets were down over 20 to 25 percent until March, April or so.
Speaker: But since then, we've seen a bit of a recovery led by China to a certain extent because the lockdowns were maybe coming to an end.
Speaker: And also some of the global macro factors started to help Asian equities, the dollar strength,
Speaker: is still strong, but not as much.
Speaker: And there's a belief that maybe the inflation story in the US is over.
Speaker: And on the macro side, the markets, of course, have suffered as well, right?
Speaker: We saw currencies weaken quite a bit against the dollar in the last few months.
Speaker: We saw in the bond market, of course, yields rise very sharply.
Speaker: That means the bonds lost value.
Speaker: So even in macro side, a lot of volatility, as we would characterize
Speaker: And one thing that plagues market, of course, is inflation rising U.S. rates.
Speaker: How big a challenge is that really for equity markets across the region?
Speaker: Yeah, that's just not very good news.
Speaker: And I'm really talking about central banks rising interest rates, in particular in the West at the moment, right, in the U.S. That is just not good.
Speaker: But the market is looking at it slightly differently.
Speaker: And that's what we have to look at, what bond markets are pricing in.
Speaker: And they're saying we're at peak inflation at the moment and maybe peak dollar.
Speaker: Well, the macro side as well, you hear a lot of talk about peak inflation, but we've been talking about this for three months.
Speaker: You'd be very careful to call the peak on inflation.
Speaker: But having said that, there are signs of that things are cooling.
Speaker: Commodity prices, for example, have sold off quite a bit.
Speaker: Exactly.
Speaker: Oil in particular and also food.
Speaker: You mentioned wheat, for example.
Speaker: It matters, of course, for Asian CPI baskets.
Speaker: Now, central banks are still raising rates, but look a little bit further out.
Speaker: And the expectation is that those interest rate hikes will start to slow down.
Speaker: And that, of course, could be, I suppose, then also a turning point.
Speaker: Yeah, they could be a bit supportive for the Asian equity universe in general, I must say.
Speaker: What we've done, of course, is that maybe central banks in Asia seem to be starting to raise interest rates.
Speaker: Is that correct?
Speaker: Yeah, they've really just hit their stride a little bit later.
Speaker: They moved later than in other parts of the world, raising interest rates.
Speaker: But of course, there are two central banks in Asia who are not raising interest rates.
Speaker: There's a Chinese central bank and the Bank of Japan.
Speaker: They're not doing anything.
Speaker: Those are the two stock markets that actually have done quite well quite recently, somewhat related to those factors as well.
Speaker: Yeah.
Speaker: Is that because of lower interest rates or other factors driving the markets in Japan and China?
Speaker: Well, for example, in China, it's not just the interest rate.
Speaker: They are stimulating because growth is weak.
Speaker: And Chinese equities have been weak over the last, what is it, 18 months now.
Speaker: But we do see things picking up.
Speaker: There's more traffic jams on the roads.
Speaker: People are coming out of their lockdown.
Speaker: But we also see that some kind of stimulus is there to revive the property sector.
Speaker: And we're going to later on talk with our specialist on Chinese property or Asian property, Michel,
Speaker: And she has some really interesting insights there.
Speaker: But that sector seems to be driving the Chinese stock market higher after being ignored, I would say, by investors for a good 12, 18 months now.
Speaker: So from an economic perspective, when we think about Asian growth, there are two big cycles we tend to worry about.
Speaker: One is a trade cycle and then there's a property cycle.
Speaker: Now, trade looks like it's going to weaken because of weaker global growth.
Speaker: Property also looks a bit wobbly in some of the markets.
Speaker: How much does that matter for equity markets, these two big cycles, trade and property in general?
Speaker: Well, if you think about some of the equity markets, trade was really important 10, 15 years ago.
Speaker: But take, for example, the Chinese equity market, but you can say Indonesia, India would be the same.
Speaker: They are really now domestic equity markets.
Speaker: So what happens with trade is important in currencies, but what happens with the domestic consumer, what happens with property very often is important because property is a large part of that.
Speaker: that market, but also of course a large part of people's wealth, right?
Speaker: And property comes always in cycles that gives all kinds of new complexities to the stock market, you could say.
Speaker: Well, and seeing some of the headlines from China around the property market, I'm reminded of these big historical property market cycles we had.
Speaker: Remember Japan in the 1980s with really property going through a massive bubble and then a correction, but we see then elsewhere too.
Speaker: Singapore, Hong Kong, Korea,
Speaker: So I was in Jakarta in the late 90s.
Speaker: There was the Asian crisis going on.
Speaker: It wasn't just a property bust, but property went bust as well.
Speaker: I remember a colleague of mine whose monthly interest payments were about as big as the whole mortgage that he had borrowed to buy his household.
Speaker: So, yeah, that fell onto the banks.
Speaker: We have these worries a bit in China now as well, right?
Speaker: We've had people saying, I can't service that debt.
Speaker: And that is a problem for the banks.
Speaker: And we should ask Michelle about what she thinks about that.
Speaker: So these cycles come quite often in Asia, properly.
Speaker: They do come often.
Speaker: The one thing we should say is that generally speaking, the financial systems are much more robust in this cycle.
Speaker: So even though there are some property market wobbles in Asia, probably we're not going to face the same financial stress issues we had, for example, during a global financial crisis.
Speaker: in the in the u.s um but still weaker property weighs on the economy overall weaker construction weaker consumer spending of course that's something that china may face but and and i guess china is talking about a new growth model whereby they want to go for high-end tech as as a new growth model but that is presumably still too small to overtake the role that that property has in the economy correct
Speaker: That's probably right.
Speaker: Property still matters, 25% of GDP.
Speaker: But given the headlines, we should really bring in Michel Kwok here, our head of Asia Real Estate, to get the real expert take on what's going on there.
Speaker: Good.
Speaker: Let's do that.
Speaker: Michelle Kwok, welcome to Under the Banyan Tree.
Speaker: Hi, Harold.
Speaker: Hi, Fred.
Speaker: Michelle and I have a bit of history.
Speaker: We used to look at the real estate sector in China in 2007, I think it was, or something like that.
Speaker: Yeah, time flies.
Speaker: It's been 10, 15 years.
Speaker: It's been 10, 15 years.
Speaker: Exactly, yeah.
Speaker: Well, a lot has changed because in those days, it was the glorious sector.
Speaker: Everybody wanted to invest in it.
Speaker: It was growing.
Speaker: And now you're talking about that this decade, the coming years, is kind of a lost decade.
Speaker: Right.
Speaker: Yeah, it's a tough time for the China property market.
Speaker: 10, 15 years ago, everybody grew.
Speaker: All developers, wherever you are, everybody land bank.
Speaker: Everybody were able to borrow very cheap funds, either in the bond market, in the form of syndicated loan, and really just through banks and construction loans.
Speaker: Funding, access to funding, no issue.
Speaker: But since last year, we had default out from Evergrande.
Speaker: Defaults followed.
Speaker: 20-odd developers defaulted.
Speaker: And I think the market looked at China property with really a different perspective today.
Speaker: So it's a lost decade in the next 10 years.
Speaker: So, Michelle, how challenging are things really on the ground today?
Speaker: We see a lot of headlines, but give us a sense of how much are sales down compared to previous peaks and the average city in China.
Speaker: How do things look at just like empty construction sites or how should we picture it?
Speaker: So it's really tough.
Speaker: Sales are down on the company level anywhere from 30, 40, 50 to even 70, 80% year in year.
Speaker: But what I think is more challenging is if we look at the land sales data, it's really now at a new trough level.
Speaker: The first six months of the year, I think it's down 46% year in year.
Speaker: That's a new low.
Speaker: That's worrying because that also leads to the question as to how local governments are funding projects and how we are to revive the market.
Speaker: But the sector has started to perform recently again.
Speaker: So is that because of stimulus from the government?
Speaker: What is going on?
Speaker: Yeah, so our view is that the government has got to do something.
Speaker: And one option out of this is to think about a property fund whereby the government or banks can step in to help fund projects or help developers think about financing channels.
Speaker: So you mentioned a government-led property fund as one option here.
Speaker: What are some of the other policies you'd like to see or sort of think would help to turn market sentiment around?
Speaker: You're highlighting really that it's partly a confidence issue, isn't it?
Speaker: Yeah, so I think here we like to think about the large-scale shantytown project that was implemented back in 2016, 17, 18.
Speaker: Effectively, back then, the government handed out cash.
Speaker: It was a cash compensation mechanism that really helped reinstall the market's confidence and also helped the market think about purchasing a flat and helping them on the affordability fund.
Speaker: Michel, another issue seems to be that a lot of people are not willing to service their mortgages or cannot do that.
Speaker: Now, that's bad for banks, but also for property developers, correct?
Speaker: Yeah, so it's actually been brewing in the background.
Speaker: It's not new news, but it's been really reported in the media.
Speaker: I think what this caused is really a confidence crisis.
Speaker: We had a confidence crisis.
Speaker: Market recovered a bit.
Speaker: It felt better when we saw it picked up in the June sales numbers.
Speaker: And now we see this in the news.
Speaker: And so this confidence crisis effectively has been extended.
Speaker: So, Michel, you've seen a lot of cycles here as well.
Speaker: Is there ever going to be growth left in China's property?
Speaker: We have a shrinking population potentially.
Speaker: You've oversupply, etc.
Speaker: How do you think long term about the sector?
Speaker: Is it really looking here at 10 years of another lost decade?
Speaker: Yeah, so the sector will shrink in our view, pretty much starting from this year.
Speaker: Last year was really the peak of the market.
Speaker: And from here onwards, we're looking at a shrinking industry.
Speaker: Some companies have staying power, but, you know, broadly speaking, the sector will struggle the next 10 years.
Speaker: Well, thanks for all those insights, Michel.
Speaker: Yeah, thanks for stopping by, Michel.
Speaker: Thank you very much for having me.
Speaker: Well, it's great to have Michelle on, a little bit further expertise from our real estate specialist here.
Speaker: It was interesting also the long-term prospect don't seem to be that encouraging.
Speaker: And she really looks at it as a market share game from now on rather than an expanding sector overall.
Speaker: I thought that was very interesting.
Speaker: Yeah.
Speaker: But we're here on the Banyan tree.
Speaker: People talk about politics, markets, but they also talk about all sorts of other things.
Speaker: Fred, anything interesting on your mind?
Speaker: Well, it's hard to peel yourself away from markets these days, but I'm reading a fantastic book by Simon Winchester.
Speaker: It's a travel impression along the Yangtze River.
Speaker: He wrote that in the 1990s, but of course, historical context there as well.
Speaker: And that preamble has this very nice kind of anecdote where he describes how the Yangtze River is flowing through a massive horseshoe bend really upstream.
Speaker: And the reason why there's a horseshoe bend is because there's a massive mountain around
Speaker: in the way of the Yangtze River.
Speaker: And if that mountain hadn't been there, the Yangtze River would have, instead of flowing through China, would have flown through Vietnam.
Speaker: And that would have changed the course of history, certainly for Lower China.
Speaker: And he was traveling there in the 1990s when you and I were backpacking across the region as well, right?
Speaker: We were, and that's actually nice memories also and a reminder of how far China really has come, even from the 1990s in terms of development and so forth.
Speaker: But Harold, what's on your mind?
Speaker: Well, I am traveling to Indonesia in about two weeks' time.
Speaker: There's a family reunion.
Speaker: But I also want to go to East Java and visit a bunch of temples there.
Speaker: And I've decided to pick up my photography skills, or at least to sharpen them up.
Speaker: So I've signed up with a photography course, got myself a new camera, and just want to make sure that when I get there, I can make some nice pictures of these old temples.
Speaker: Well, and I hope you find a banyan tree that you can take a picture of.
Speaker: I will see.
Speaker: I'm going to look for one and see if we can use that one.
Speaker: That would be a good idea.
Speaker: Well, thanks, Harold, and thanks, everybody, for listening in this week.
Speaker: We'll be back next week, same time.
Speaker: Absolutely.
Speaker: Talk to you next week, Fred.
Speaker: Thank you very much.
Speaker: Thank you for joining us at HSBC Global Viewpoint.
Speaker: We hope you enjoyed the discussion.
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