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.
Speaker: Make sure you're subscribed to stay up to date with new episodes.
Speaker: Thanks for listening.
Speaker: And now onto today's show.
Speaker: Welcome everyone to this HSBC Global Research live event.
Speaker: I'm Piaz Butler, Head of Global Research Direct, and I'm delighted to welcome my guest for today's session, Dr. Murat Organ, Global Head of Emerging Markets Research.
Speaker: Murat, welcome.
Speaker: Murat has been a guest on the live previously, and I think we've got a lot to talk about, as we said in our teaser on LinkedIn, on emerging markets, but two or three quick admin notes before we get going.
Speaker: Firstly, as a reminder, this session is to give you the opportunity to ask Murat your questions.
Speaker: So please input in the dialog box on your screen and they'll be relayed to me and I'll be able to put them to Murat.
Speaker: We have less than 30 minutes, so don't hang about.
Speaker: Secondly, follow us on LinkedIn.
Speaker: It's hashtag HSPC research.
Speaker: or follow Murat who posts regularly.
Speaker: And also, if at any point you have a question about HSBC Global Research, there's a great email address that you should use.
Speaker: It's askresearch at HSBC.com.
Speaker: And after the live, don't hesitate to use it if you have questions on HSBC research.
Speaker: And then finally, and importantly, this year's
Speaker: HHBC Global Emerging Markets Forum is about to take place.
Speaker: This is our annual forum where we cover all aspects of emerging markets.
Speaker: It's going to be online for three weeks from the 13th of September, and it will have over 150 companies presenting and 45 macro thematic and sector panels.
Speaker: It's open to clients.
Speaker: Contact your HHBC representative if you want to attend any or all of the sessions.
Speaker: All right, let's get the show on the road.
Speaker: Marat, whilst we wait for the questions to come through, let me ask you a couple.
Speaker: Obviously, since the last time that we did a live with you in April, quite a lot has happened.
Speaker: And I'm thinking in particular, let's start right at the top with the Fed raising rates in response to inflationary pressures.
Speaker: It's obviously not great for U.S. markets, but traditionally the impact has tended to be amplified significantly.
Speaker: in emerging markets.
Speaker: In a way you could put it, how would I put it, if the Fed sneezes, emerging markets catch a cold.
Speaker: Is that the case this time around?
Speaker: Thank you, Peele.
Speaker: As you said, since April a lot has happened and I think it's fair to say that the headwinds facing emerging markets are getting stronger.
Speaker: We have global center banks getting more hawkish in the face of persistent high inflation, in certain cases even higher inflation.
Speaker: We got an important meeting today by the European Center Bank.
Speaker: You know, let's see what happens.
Speaker: And the Fed has come up with pretty substantial rate hikes.
Speaker: You know, the magnitude we haven't seen in decades.
Speaker: So there is an element of global cost of funding rising, and it is a major headwind for emerging markets, especially those who are in deficit and require fiscal and current account financing.
Speaker: But I think there is also an area which I think is a little bit overlooked or maybe not enough discussion around it.
Speaker: I mean, we understandably focus a lot on the Fed rate hikes, you know, ECB, global center banks.
Speaker: But in the background, there is also a balance sheet reduction, quantitative tightening, which started in earnest by the by the US Fed in June.
Speaker: They've started slow and they will size it up.
Speaker: So essentially, they're reducing the balance sheet, which has increased and expanded over the years.
Speaker: There have been a few ways since global financial crisis and the latest we saw post pandemic pretty significant balance sheet expansion.
Speaker: We went through the taper and now the balance sheet is in an outright reduction mode.
Speaker: As I said, the Fed started relatively small and they're not outright selling assets.
Speaker: They just let the maturing assets run off of the balance sheet.
Speaker: by about nearly $50 billion per month.
Speaker: But this is going to go up according to the plans if nothing changes towards the end of the year to around $100 billion, which is $1.2 trillion per year.
Speaker: That is a pretty substantial amount.
Speaker: So what it means in practice is we proxy global liquidity by summing up the balance sheets of large global centre banks, starting with the Fed.
Speaker: at the ECB Bank of Japan, Bank of England.
Speaker: As of June, the annual change in the size of balance sheet of these large global center banks went into the negative territory.
Speaker: So the year on year growth rate is now negative.
Speaker: which means in plain English terms, global liquidity is falling.
Speaker: It's being withdrawn from the financial system.
Speaker: And we've established pretty substantial strong correlations in the past.
Speaker: There's a lagged impact between changes in global liquidity in annual terms and financial flows to emerging markets, bonds and equities.
Speaker: which in turn determine and dictate financial conditions.
Speaker: So yes, coming back to your original question, unfortunately this impacts emerging markets.
Speaker: I call it twin tightening by the Fed, not only higher rates, but also smaller balance sheet and lower global liquidity, which is impacting flows.
Speaker: As a matter of fact, we've seen pretty significant outflows, especially from the fixed income funds covering emerging markets year to date.
Speaker: So let's talk about sentiment.
Speaker: We are waiting for the next edition, the ninth edition of your emerging market sentiment survey, but already the last one that we saw in July recorded some pretty negative readings in terms of sentiment, risk aversion, very high cash balances.
Speaker: Do you sense from your discussions with clients and what you're seeing out there that it has continued to get worse,
Speaker: And how worse can it get, given that it was already in pretty negative readings?
Speaker: I mean, you're absolutely right.
Speaker: Just to cite a few numbers from the previous emerging market sentiment survey, you know, we asked lots of questions, but the first and foremost question we asked to institutional investors is, what is your view about emerging markets?
Speaker: What's the outlook over the next three months?
Speaker: And those who say they were bullish sank to the lowest since the start of the survey, only 15%.
Speaker: It's quite striking.
Speaker: We take the net of the bullish and bearish.
Speaker: That is also the lowest.
Speaker: We ask investors their appetite to take a young risk from zero to ten, zero, no risk and ten fully young risk.
Speaker: It sank to its lowest level since the inception of the survey, only 5.2 on the average basis.
Speaker: And more strikingly, cash levels are huge.
Speaker: I mean, the levels I've never seen in my own humble career.
Speaker: where actually in the previous survey, one third of the investors had more than 10% cash as a ratio of assets under management in their portfolio.
Speaker: So already very different sentiment, Piers, you're absolutely right.
Speaker: And clearly, since the previous survey, things haven't improved much as we discussed at the beginning.
Speaker: But ironically, I might also argue this might be good for emerging markets in the sense that it's already very depressed sentiment.
Speaker: Positioning is already very low.
Speaker: And you might argue in certain cases, the return profiles have improved across the asset classes.
Speaker: And more importantly, there is so much cash that could be put into work if conditions stabilize, if the outlook improves.
Speaker: So you can look at it both ways.
Speaker: And I would say this is probably
Speaker: a better part of the emerging market story we discussed about the headwinds with regards to global financial conditions but i think the better story is it's already really depressed sentiment and very very high cash that institution investors who invest in em they spare at the moment and they can put them put them at work so that really begs the question murat of what could be the catalyst for all that cash coming back into the uh into the system
Speaker: I think that's the million dollar question.
Speaker: I mean, of all my career, I always thought emerging markets having a stable macro background with growth, preferably, of course, and better growth than the yen, but at the same time, relatively small imbalances, contained inflation, financing needs lower.
Speaker: When you have that stable macro background, investors get really interested.
Speaker: And I think there are certain parts of the emerging market universe you can see that.
Speaker: I mean, yes, clearly it is a very challenging environment.
Speaker: But I mean, if you look at GCC, for instance, it's not only high oil prices, but also, you know, real policy change, counter-cyclical policies, fiscal reform, the competition in the region to attract business and capital.
Speaker: I think that part of the world is where we are still pretty constructive.
Speaker: I mean, the likes of UAE, Saudi and other parts of GCC, we are quite constructive.
Speaker: And then there is Latin America, which, you know, obviously has seen huge inflation pressures early on.
Speaker: But they did tighten monetary policy a lot earlier as well.
Speaker: I mean, they started hiking rates one year earlier than the Fed.
Speaker: And some countries, particularly Brazil, you might argue, is maybe a little bit ahead of the curve.
Speaker: I mean, we do expect monetary tightening cycle to finish pretty soon.
Speaker: And this is one of the rare parts of emerging markets where actually inflation momentum has turned around.
Speaker: and already falling and you have pretty significant real risk premium.
Speaker: So I think certain parts of emerging markets are showing signs of stabilization, improving macro background.
Speaker: And yes, you know, we are hearing investors are interested in such stories, especially with so much cash on the sidelines.
Speaker: So just to remind everyone to put your questions to Murat in the dialog box that you have on your screen, just sling them in there and they'll come through to me and I'll put them to Murat.
Speaker: We have a couple already.
Speaker: Can you elaborate on FedQT, how it should impact emerging markets?
Speaker: Yes, definitely.
Speaker: I think that's important.
Speaker: Again, you know, to me, the debate surrounding interest rates are clearly very, very important and crucial for YAM misses the point that global liquidity is equally important.
Speaker: So what we do in our studies, we look at the total size of the balance sheet of large global central banks in dollar terms.
Speaker: We sum them up and we track them over the years or decades, actually.
Speaker: But more importantly, we believe it's the rate of change that matters a lot more.
Speaker: It's the annual change or the first derivative of global liquidity, not the level, but the rate of change, because the rate of change
Speaker: The annual pace correlates very, very well with financial flows, inflows and outflows for emerging markets, bonds and equities combined.
Speaker: There are some lags.
Speaker: It may take up to a year between changes in global liquidity having an impact on financial flows.
Speaker: And, you know, just to cite you a few numbers, year to date, we have actually seen nearly $57 billion of outflows from young fixed income.
Speaker: And against that, there has been actually, there have been inflows into equities, but net, net, we actually have outflows from emerging market funds.
Speaker: And we think this correlates or this stems from the fact that global liquidity is not falling, the annual change is declining.
Speaker: Then we take it one step further,
Speaker: we look at this financial force, how they impact domestic credit conditions across various emerging markets, like 15 of them, large emerging markets, and we aggregate them into financial conditions.
Speaker: As of the second quarter of this year, and obviously, you know, the third quarter is yet to be finished, it's a quarterly series, as of the second quarter, financial conditions for emerging markets have tightened pretty significantly.
Speaker: because of higher domestic rates, because of wider borrowing spreads, because of weaker equity markets, but more importantly, the reason I mentioned, because of slower credit growth or falling credit growth that is impacted by financial growth.
Speaker: So this is sort of the chain of the analysis, how we drill it down, this global liquidity or quantitative tightening or quantitative easing, vice versa, to financial conditions per year.
Speaker: And we have also established
Speaker: a study we've done a few years ago that actually the financial conditions eventually dictate the growth outlook for emerging markets.
Speaker: And coming back to my original point, you know, what could be the catalyst, Piers, you said growth is important.
Speaker: Unfortunately, with that tightening of financial conditions, the risk for growth still is to the downside, at least in the near term.
Speaker: Okay, a few more questions coming through.
Speaker: There has been a lot of talk of decoupling in the past, but it hasn't really happened.
Speaker: Can you elaborate on that?
Speaker: And I'd like to tack on to that an earlier point that we were chatting about before the call, which is that actually there is a danger when you talk about emerging markets of over simplifying the topic because there are actually some quite strong regional differences, in particular recently with the rise of commodity prices.
Speaker: Correct.
Speaker: You might argue there are a few areas of decoupling.
Speaker: I don't think there is a decoupling when it comes to financial conditions, as mentioned, you know, pretty much all emerging markets to varying degrees, but at least in terms of direction, are impacted by higher global cost of funding and lower global liquidity.
Speaker: But then you might argue there is a bit of a decoupling or divergence is maybe a better word.
Speaker: when it comes to the inflation outlook, when it comes to monetary policy, and when it comes to the external balances, which are impacted by commodity prices, you said, Piers.
Speaker: I mean, obviously, higher commodity prices or lower commodity prices, they create winners and losers with regards to emerging markets.
Speaker: who are exporting and producing commodities versus those who are consuming and importing commodities.
Speaker: But to me, the real divergence is happening more on the inflation side in the sense that Asia is a bit of a laggard because last year, Asia grew more with external demand and exports and the economies were broadly closed because of the pandemic, or at least to, you know, there were certain mobility restrictions, but this year they're opening up
Speaker: In many parts of Asia, I actually traveled to Singapore a couple of weeks ago and I've observed with my very own eyes, lots of parts in Asia are now opening up and, you know, they are eliminating restrictions or they're reducing restrictions, lessening restrictions, which actually means that domestic demand is coming back.
Speaker: And there's a pickup in inflation, not as bad as EMEA and Latam previously, but there clearly is a pickup and Asian center banks have embarked on a tightening rate hike series, excluding China, of course.
Speaker: Whereas when you look at Latin America, as mentioned earlier,
Speaker: This is the part of emerging markets where actually inflationary impact was a lot earlier, more forceful, and the central banks started to tighten a lot earlier than the others compared to the Fed as well.
Speaker: And they're about to actually arrest inflationary pressures.
Speaker: in certain cases we are already there like in Brazil that we already mentioned but you know these center banks have seen you know and relatively earlier in a more aggressive cycle and inflation is about to turn and lose momentum so I think
Speaker: This is the big divergence, at least when I look at emerging markets universe.
Speaker: You know, you've got one part, which is Asia, where inflation is rising only with a lag and delay, and the center banks are now tightening.
Speaker: But as Latin America, this has happened earlier.
Speaker: And actually, the PPI producing inflation has fallen a lot in Latin America, and center banks are about to finish their tightening cycle, as the markets expect.
Speaker: Next question is on supply chain disruptions.
Speaker: And I know you work closely with our trade economist, Shanela Rajanayagam.
Speaker: What are your thoughts on the impact of supply chain disruptions and the broader topic of are we really witnessing deglobalization?
Speaker: On supply chains, there are good news.
Speaker: I can say that over the past few months, the pressure or the stress on supply chains have started to ease a lot.
Speaker: You may have seen since the beginning of this year, the US Fed has started to disclose what they call global supply chain pressure or stress index.
Speaker: That's for the whole global economy.
Speaker: And, you know, we've looked at it for individual regions, Asia, India, and Latin America.
Speaker: There was a genuine decline late last year since September, up until February, especially in Asia, which really encouraged us in the beginning of the year.
Speaker: But then unfortunately, this was interrupted by the war between Russia and Ukraine, and the supply chain pressure has intensified.
Speaker: at least through the spring months and into the summer months.
Speaker: But late summer, we are seeing some easing of that pressure.
Speaker: I mean, obviously, one important gauge is the Baltic Dry Index, which is a daily series that we follow, has fallen a lot very recently.
Speaker: So in that sense, there are good news.
Speaker: that supply chain pressure is improving, which with a lag should impact producer inflation, cost side inflation, and that itself with a lag should actually reduce consumer inflation.
Speaker: So there are definitely good news there.
Speaker: Now, the topic of deglobalization or, you know,
Speaker: perhaps, maybe I should say, reversal of gains from earlier globalization.
Speaker: I think it's a serious topic.
Speaker: And I think this is something that is unfortunately leaving some unwanted cost layers on inflation.
Speaker: And this is a long running issue.
Speaker: And actually this hasn't started with the pandemic or the war.
Speaker: We already had some trade frictions even early on, you know, import tariffs, you know, which has been causing some, you know, changes and rejiggings in global supply chains, regionalization or reassuring.
Speaker: Then we had several waves of disruption due to COVID.
Speaker: which came in waves, you know, different variants caused, you know, restrictions on mobility, on, you know, shipments, you know, ships leaving the ports, you know, trucks driving or trains, etc.
Speaker: Obviously, there was a series over the last three years, a series of disruption of global supply chains.
Speaker: And obviously, then, there was unfortunately this war, which is
Speaker: impacting supply chains even further.
Speaker: So I think you can make a case that over the past five, six years, we've seen a lot of reversal of previous integration and improvement in global supply chains.
Speaker: And that's important because in our work, in our analysis, we've looked at emerging markets inflation versus trade openness.
Speaker: As emerging markets become more open to global trade, exports, imports, there's a ratio of GDP rising.
Speaker: As emerging markets take a bigger part from global trade, and global trade itself is a bigger part, or a multiple of global GDP, there is a fall in inflation, which is very intuitive.
Speaker: Lowest cost producer, ship things around quickly, flexibly, reduces cost and inflation everywhere.
Speaker: I think what we are seeing, Piers, over the past few years is a bit of a reversal of that.
Speaker: That is why inflation picture is so challenging.
Speaker: A couple of questions on currency.
Speaker: U.S. dollar shows roughly 10 to 20 percent gain against emerging market effects.
Speaker: Where are you going there?
Speaker: And then also, how is the currency risk of emerging markets in the background of Fed rate hike and tightening liquidity?
Speaker: Yes, so I think it's quite well known and publicized as a house.
Speaker: We're still on the strong dollar camp.
Speaker: We have been, our FX strategists have been arguing this for more than a year, and they still argue US dollar should stay in the front foot, should remain strong globally speaking.
Speaker: You know, we can make an argument that US economy will slow in the coming term, but then when you look at the rest of the world, the challenges are even bigger.
Speaker: So in that regard, US Fed has probably have a more open and clear pathway to tighten monetary policy in terms of balance reduction and in terms of rate hikes compared to other large big economies, which should keep dollar stronger than the others.
Speaker: So that is our directional call.
Speaker: It clearly is not great news for emerging markets when you're in a strong dollar environment, although
Speaker: you might argue the impact really varies.
Speaker: I mean, you refer to what the question fits tightening and strong dollar, how this would impact emerging markets.
Speaker: I think, generally speaking, it's not great news, but then you have to look at individual regions and countries where the financing requirements are large or not.
Speaker: I mean, depending on the macro stability and the financing needs of current account deficit or fiscal deficits,
Speaker: tightening of global liquidity and higher rates, they may have varying impacts.
Speaker: I think generally I should say that the bias is towards a stronger dollar, but it's not like every emerging market currency should be impacted to the same degree.
Speaker: I mean, I'll give you an example.
Speaker: South Africa, for instance, we had current account surplus in 2020, with current account surplus in 2021.
Speaker: This year we're looking for current account surplus, and next year we're looking
Speaker: for a QN account surplus, maybe a smaller QN account surplus, but still.
Speaker: Four consecutive years of QN account surplus, we probably sold last time in South Africa like 50 years ago.
Speaker: So it's a big change.
Speaker: And clearly there is a strong support from
Speaker: commodity price gains previously, and that reduces South Africa's external financing requirements.
Speaker: I mean, it doesn't mean that South African rent won't be impacted from strong dollar, but clearly it's a better position compared to the previous current account deficits.
Speaker: So I think one has to make a distinction
Speaker: across countries where there are financing needs and there are macro stability or not.
Speaker: But stronger dollar generally is unfortunately another headwind for emerging markets, adding up to this whole list of headwinds that we discussed in the beginning.
Speaker: We're sort of, my God, the time flies.
Speaker: Five minutes left.
Speaker: So you're going to have to make these ones reasonably quick.
Speaker: And it's going to be a challenge because there are questions of specific countries.
Speaker: It's a question on Vietnam, Egypt and India.
Speaker: So some quick thoughts on each of those.
Speaker: oh okay um i think you know we we have num is probably one of the beneficiaries of rejigging and shifting of global supply chains and and you know it clearly is an economy with better macro balances significant amount of fdi inflows so obviously you know uh lots of potential to improve it's quite interesting
Speaker: You brought that up, Piers, because we have done a broad study for emerging markets looking at the gains of total factor productivity over the previous decades.
Speaker: And total factor productivity is this sort of the efficiency component.
Speaker: It's, you know, it's what the economy generates beyond of what you input into the economy, beyond labor and capital.
Speaker: These are your efficiency gains, right?
Speaker: You know, strong capital inflows, you know, rules, regulations, improving business environment, et cetera.
Speaker: When we looked at emerging markets over several decades, after the global financial crisis, until the pandemic, total factor of productivity fell pretty much everywhere.
Speaker: The only country where it actually went up was Vietnam.
Speaker: And then the other country where actually it didn't fall, it didn't rise, but it didn't fall was India.
Speaker: And that was your other question.
Speaker: we're actually over the medium to long term, we're very constructive.
Speaker: I mean, you have demographics, you have, you know, substantial reform, you know, introduced earlier to make India, you know, a lot more efficient in terms of, you know, goods and services tax and banking sector reform, you know, changing sort of, you know, monetary parameters and components.
Speaker: And now, you know,
Speaker: There are more and more signs that inflation is coming under control.
Speaker: I think India definitely remains one of our sort of, you know, favorite choices or the medium to long term.
Speaker: Now, Egypt, you know, clearly the most important, you know, news or the announcement that everybody's expecting in the near term is a potential IMF program that the authorities are still in discussion with.
Speaker: So I think, you know, once we have an IMF program or once we know the parameters of Egypt, we can probably have a better outlook into the future.
Speaker: There has been some pressure, some volatility in the markets.
Speaker: You know, there has been a devaluation of the currency and rate hikes.
Speaker: There is still a current account deficit.
Speaker: Budget deficit has come down a lot.
Speaker: but there is still some financing and needless to say, Egypt has been impacted by higher food prices, which have been coming in lower over the past three, four months.
Speaker: You know, I think going forward, once we have news about the AMF program, we know the details and obviously there's very strong support from the Gulf partners for Egypt.
Speaker: I think we may have a better idea and better outlook and things may become a lot more stable going forward.
Speaker: Now, maybe to finish on, because we have really been talking about fairly short term cyclical factors associated with emerging markets.
Speaker: But two of your colleagues have written recently, Fred Newman on Asia wealth and James Comroy on the next generation of spenders.
Speaker: And isn't there a very bullish secular trend regarding the rise of Asian wealth, the rise of middle class, both in Asia and other emerging markets?
Speaker: And is that something that you should be betting on?
Speaker: No, absolutely.
Speaker: Look, both you and I, we've seen ups and downs in emerging markets that are cycles.
Speaker: But if you try to look through the cycle over the medium to long term, there are secular dynamics which actually should make emerging markets perform much better.
Speaker: I mean, one of them you mentioned, the catch up potential on spending based on increasing income and wealth.
Speaker: And that ties in with demographics, which is still strong in various parts of emerging markets.
Speaker: I can add one more, it's urbanization.
Speaker: You know, colleagues, the colleagues you mentioned, like James in particular, he has written a lot about this, that in, you know, developed markets, maybe around three quarters of people live in urban cities, but in emerging markets, only like 50% or something.
Speaker: And with urbanization comes significant job potential and also infrastructure investments.
Speaker: So there is a massive cash-out potential there.
Speaker: And emerging markets can still drive long-term growth.
Speaker: And maybe just to give you one striking statistic just before we close, emerging markets at the moment make up more than
Speaker: 60 percent of world gdp and they contribute probably more to world gdp maybe not very recently but you know if you take an average over the last 10 years or so but they're only 20 percent of equity market capitalization and only 10 of global world bond indices so there is a massive room for a catch-up
Speaker: Murat, we've run out of time.
Speaker: As ever, it's been a real pleasure to have you on this live.
Speaker: Always a fascinating topic, inexhaustible really, and difficult to cover in half an hour, but I hope we've given an update to our listeners about your thoughts.
Speaker: Do remember to follow Murat on LinkedIn because he posts regularly.
Speaker: And as a reminder, our next live actually will continue the discussion on this point about rising wealth and spending.
Speaker: It'll be on the 19th of October,
Speaker: with James Pomeroy on demographics.
Speaker: James Pomeroy, our global economist.
Speaker: So with that, thank you all for joining.
Speaker: Don't forget, askresearch at hgspc.com.
Speaker: If you didn't get a chance to ask your questions or you have any other questions about HSBC Global Research.
Speaker: Many thanks.
Speaker: Thank you, Piers.
Speaker: Really appreciate it.
Speaker: And maybe one final reminder, obviously you mentioned in the beginning that we have our Global Emerging Markets Forum starting next week on 13th of September until the end of the month, 40 plus virtual panels.
Speaker: So we really look forward to seeing you there.
Speaker: If you want to join to any or all of the sessions, speak to your HSBC representative.
Speaker: We also have a physical in-person session
Speaker: For those who are in London, which is next week on Thursday on the 15th in the afternoon.
Speaker: So please do speak with your HSBC representative and we look forward to seeing you all there.
Speaker: Thank you.
Speaker: Thank you for joining us at HSBC Global Viewpoint.
Speaker: We hope you enjoyed the discussion.
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