Transcript
Speaker: This is HSBC Global Viewpoint, your window into the thinking, trends and issues shaping global banking and markets.
Speaker: Join us as we hear from industry leaders and HSBC experts on the latest insights and opportunities for your business.
Speaker: Thank you for listening.
Speaker: You're listening to the HSBC Global Research Macro Viewpoint, a roundup of our key reports published over the past week by our economists and strategists.
Speaker: Coming up this week, we assess the implications of the Russia-Ukraine conflict on the oil and gas markets, as well as how it could exacerbate existing disruptions to global trade.
Speaker: And we find out why investors have turned more bearish on emerging market assets, even before the conflict.
Speaker: This podcast was recorded on Thursday, the 3rd of March, 2022.
Speaker: Our full disclosures and disclaimers can be found in the link attached to this podcast.
Speaker: Hello, I'm Aline van Duyn in New York.
Speaker: And I'm Piaz Butler in London.
Speaker: The conflict between Russia and Ukraine has created huge volatility in the energy markets.
Speaker: With oil and gas prices soaring, we're joined by Kim Fustier, oil and gas analyst, to look at where we could go from here.
Speaker: Kim, welcome to the podcast.
Speaker: Thanks for having me.
Speaker: So Kim, we last spoke in January when we were discussing the implications for the European gas market of rising tensions between Ukraine and Russia.
Speaker: What's happened to the gas prices then?
Speaker: So gas prices have jumped hugely from around the mid 20s before hostilities broke out to over $60 right now.
Speaker: And that's actually above the previous all time high that we saw in December 2021.
Speaker: So there's a huge element of risk premium.
Speaker: I think the market is clearly pricing in the risk of supply disruptions.
Speaker: It's priced in the cancellation of the Nord Stream 2 pipeline by Germany last week.
Speaker: But it's also pricing in the fact that Europe right now is already dealing with much lower gas flows from Russia, even without any supply disruptions so far.
Speaker: And I think prices are likely to stay incredibly volatile as long as uncertainty persists.
Speaker: And what's happened to the oil price?
Speaker: Similarly, the oil prices rallied.
Speaker: It's something like 110, 115 right now.
Speaker: In the short term, we're looking at this reconfiguration of crude flows and short term dislocations against the backdrop of uncertainty around sanctions.
Speaker: Meanwhile, OPEC plus is not really accelerating production increases.
Speaker: So it is a very, very tight market.
Speaker: Even though there's not really any disruptions to oil supply, there's a huge element of risk premium that will likely persist.
Speaker: Coming back to the gas market, how could Europe cope with lower Russian gas flows?
Speaker: So to start with, Europe gets about 35% of its natural gas from Russia.
Speaker: So it's a huge amount of gas and it's going to be very difficult to replace.
Speaker: We know that so far there are no sanctions on existing energy flows, but we cannot rule out risk of further supply disruptions for whatever reason.
Speaker: You look at the demand side, gas demand is really not elastic in the short term.
Speaker: We've only seen a modest amount of demand destruction because of higher prices.
Speaker: So we need more gas supply from elsewhere.
Speaker: We know that pipeline gas from Norway, North Africa is already maxed out.
Speaker: So that only really leaves LNG.
Speaker: Now, there is some flexible LNG that could come from the US and Qatar.
Speaker: We've already seen some of that in January when Europe imported a record amount of US LNG.
Speaker: But all of that is coming at a cost.
Speaker: So Europe will have to outbid Asia to get these LNG cargoes.
Speaker: And longer term, isn't Europe caught between a rock and a hard place in terms of putting long lasting solutions in place?
Speaker: That's absolutely right.
Speaker: I think the situation clearly has been a wake up call for Europe and Europe is now determined, I think, to reduce its dependence on Russian gas.
Speaker: But it's not easily done and it will be a multi-decade endeavor.
Speaker: I think in the medium term, what Europe needs to do is to sign more long term contracts for LNG, particularly with the US and Qatar and other providers.
Speaker: But so far,
Speaker: Europe's climate ambitions have prevented it from committing to these long-term energy contracts because of uncertainty around the role of gas as a transition fuel.
Speaker: And then in the longer term, reducing gas consumption itself, that ties in with Europe's ultimate goal of climate neutrality by 2050.
Speaker: And so we will see Europe accelerating the build out of renewables, et cetera.
Speaker: But that in itself is not going to solve all of our issues, notably because renewables are intermittent and gas is used as a base load for a lot of things, including heating and power generation.
Speaker: So it's going to be a multi-decade endeavor.
Speaker: There are no easy solutions in the short term.
Speaker: Kim, thank you very much.
Speaker: Thank you.
Speaker: Now let's turn our attention to global trade and find out how the conflict is exacerbating already stretched supply chains.
Speaker: Shanela Rajanayagam is our trade economist.
Speaker: Shanela, welcome to the podcast.
Speaker: Thank you.
Speaker: Can you put Russia and Ukraine's role in global trade into context?
Speaker: Yes, sure.
Speaker: So globally, Russia and Ukraine are quite small traders.
Speaker: Together, they comprise around 2.5% of global goods exports.
Speaker: However, they are key producers and exporters of a range of commodities.
Speaker: So for instance, Russia accounts for around 37% of global palladium production,
Speaker: and nearly 20% of world potash production.
Speaker: Both these economies are also important exporters of some agricultural products.
Speaker: For instance, Russia accounts for around 28% of global sunflower oil exports, and together both Russia and Ukraine account for around 30% of total wheat exports.
Speaker: And which economies are most exposed to the Russia-Ukraine conflict in terms of trade?
Speaker: So in terms of overall trade exposure, it's mainly emerging markets that are mainly reliant on these economies for imports and exports.
Speaker: So the likes of Belarus, Armenia and Tajikistan.
Speaker: And that means that large global traders such as mainland China, the US and EU countries
Speaker: they tend to be less reliant on imports and exports with Russia and Ukraine, again, at the aggregate level.
Speaker: So, for instance, only 2% of Chinese exports go to Russia and Ukraine, and the US sources just around 1% of its total imports from these economies.
Speaker: However, as I mentioned, there are specific exposures.
Speaker: So the US, for instance, sources that nearly 40% of its total palladium imports from Russia.
Speaker: Janela, what impact has the conflict had on shipping and air freight?
Speaker: At the moment, the impact is mainly on shipping of dry bulk commodities because Black Sea trade, which is quite important for flows of grains, has been disrupted.
Speaker: So the number of dry bulk vessels calling at Ukrainian ports is down by over 80%.
Speaker: month on month on the 1st of March, whilst calls to Russian ports were down about 26% over the same period.
Speaker: And this is causing commodity prices to surge, for example, for wheat, for palm oil, while the cost of shipping dry bulk commodities is also increasing.
Speaker: And when it comes to air cargo, the reciprocal ban on Russian and European airspace could disrupt air cargo and push air freight costs up further.
Speaker: And when it comes to container shipping, container lines comprising nearly 50% of global container shipping capacity have moved to suspend bookings with Russia.
Speaker: So again, this could make it more difficult for Russian businesses to export, but it could also serve to push up
Speaker: container freight rates.
Speaker: Going forward, what should we be looking out for?
Speaker: So looking ahead, there's the bigger risk of potential trade retaliation by Russia in response to Western sanctions.
Speaker: At the moment, gas supplies are not materially affected, especially given that this is an important source of export revenue for Russia.
Speaker: But there certainly is a risk that this could be impacted further down the line
Speaker: And in that instance, lost supply would be quite difficult to replace quickly.
Speaker: So overall, I think we're only seeing the beginning of trade disruptions caused by this conflict.
Speaker: And the ripple effects will certainly be felt for some time to come.
Speaker: Shanela, thanks very much.
Speaker: Thank you for having me.
Speaker: This week, we also released the seventh edition of the HSBC Emerging Markets Sentiment Survey.
Speaker: The survey canvassed the opinions of 105 investors from 102 institutions with over half a trillion dollars of assets under managements in emerging markets.
Speaker: Murat Olgun is Global Head of Emerging Markets Research, and he joins us now.
Speaker: Murat, there's already a cautious mood in the markets.
Speaker: What are investors saying about their approach to emerging markets?
Speaker: Thanks, Aline.
Speaker: Yes, indeed, caution reigns.
Speaker: And in this survey, we have more bears than bulls, so to speak.
Speaker: When we ask investors about their outlook for emerging markets over the next three months, there are more responses where investors are bearish than bullish, which means the net sentiment has actually turned negative.
Speaker: And it was neutral with equal number of bullish and bearish investors in the previous survey in November.
Speaker: The cash levels have also gone up.
Speaker: Now we got investors who keep more than 10% of their assets under management in cash, going up pretty significantly, 25% from 14%.
Speaker: There is indeed a lot of cautions out there.
Speaker: And in terms of what's driving that caution, what are the main risks that investors have highlighted?
Speaker: Yes, so this survey was conducted between 18th of January and 25th of February.
Speaker: So the field work coincided with a period when there was increasingly hawkish guidance by the global center banks in the face of high inflation and also obviously rising geopolitical risk.
Speaker: Well, the latest escalation between Russia and Ukraine coincided only with the tail end of the survey, but it does look like investors have already been repositioning, discounting this risk factor, broadly speaking.
Speaker: So when you ask investors about the biggest risk, it still is Fed tightening, developed market tightening, both in terms of interest rate hikes and balance sheet reduction.
Speaker: Around 60% of investors worry about these two.
Speaker: Then there's nearly half of the investors who believe Fed rate hikes would be negative, if not very negative for emerging markets.
Speaker: And in this edition, we also had a special question asking investors whether they believe inflation in the developed world in the U.S. will revert to the pre-pandemic levels.
Speaker: And only 11% said yes.
Speaker: So consistent with that, the risk appetite score on our gauge, which essentially zero is no risk in EM and 10 is full risk, has come out as 5.75 on a weighted average basis, which is the lowest since the inception of the survey.
Speaker: In terms of emerging markets themselves, what are the views on the outlook for growth and inflation?
Speaker: Yes, so investors have further paid back their expectations on EM growth.
Speaker: Now, there are more people projecting deceleration and EM activity versus acceleration over the next 12 months.
Speaker: But actually consistent with that, they've also moderated their inflation views.
Speaker: And we have investors who are expecting higher inflation across EM nearly halving in the survey compared to the previous one.
Speaker: And those who are expecting slower inflation nearly doubling.
Speaker: But when it comes to the monetary policy outlook,
Speaker: Nearly no one expects rate cuts and it's still a very hawkish guidance and still expectation of some further rate hikes across EM.
Speaker: And lastly, are there any regional differences?
Speaker: There are indeed, I mean, given all these risks we mentioned, the hawkish guidance by global central banks and geopolitics, et cetera, it does look like there have been shifts in sentiment.
Speaker: Asia is a preferred region for its relative stability, but seen as a better play when it comes to bonds, external debt, local debt, NFX.
Speaker: And now we have Latin America, which is seen as a favorite region when it comes to equities.
Speaker: And they've been happening when investors have been shifting away from Central Eastern Europe, which was in favor in the previous story in November.
Speaker: And perhaps they've been factoring in some geopolitical risks in the meantime.
Speaker: Murat, that's a great summary.
Speaker: Thank you.
Speaker: Thank you very much, Ali.
Speaker: So that's all from us today.
Speaker: Thank you to our guests, Kim Fustia, Shanela Rajanayagam, and Murat Ullgan.
Speaker: Thanks very much for listening.
Speaker: We'll be back again next week.
Speaker: Thank you for listening today.
Speaker: This has been HSBC Global Viewpoint Banking and Markets.
Speaker: For more information about anything you heard in this podcast or to learn about HSBC's global services and offerings, please visit gbm.hsbc.com.
