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The Macro Brief - Looking beyond Hormuz
203 Plays5 hours ago
Janet Henry, Global Chief Economist, looks at some of the powerful forces affecting the world economy, while Ali Cakiroglu, Emerging Markets Strategist, assesses the implications for EM investors.
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Transcript
Introduction and Macro Brief Overview
00:00:09
Speaker
This is the Macro Brief from HSBC Global Investment Research, where we look at the issues driving financial markets across the world. I'm Peter Stegall, coming to you from a very hot London.
Global Economy and Oil Price Impacts
00:00:19
Speaker
Now, after months of disruption in the Middle East, the global economy finally has some respite following the reopening of the Strait of Hormuz.
00:00:26
Speaker
Oil prices have fallen, helping to curb some of the risks to growth inflation. But as we're about to find out, it's not just risks in the Gulf that policymakers are wary of. We'll also be looking at the implications for emerging markets as we comb through the latest findings of our proprietary survey of EM investors.
00:00:42
Speaker
To help me do all this, I'm joined in the studio by Janet Henry, Global Chief Economist and Ali Chakaroglu, Emerging Market Strategist.
Emerging Markets and Economic Impacts
00:00:49
Speaker
Janet and Ali, welcome back to The Macro Brief. Pleasure to be here, Peter. It's great to be back.
00:00:54
Speaker
So, Janet, perhaps we can start with you. The US s and Iran have signed a deal. The Strait of Hormuz seems to be reopening gradually. That's good news for the global economy, surely. How does it affect your outlook?
00:01:04
Speaker
Well, our oil analysts had given us a scenario to work with, which was that the strait would start to reopen in the course of June. So they certainly got that right. and Perhaps what they underestimated is something that surprised us all, is the speed with which the oil price has actually fallen. As of today, it's pretty much where it was when the hostilities first began at the end of February. So A lot needs to go right. It will take some time to get back to normality in terms of replenishing all of those reserves that were dropped down, getting the production on stream, getting the supply ah ah flowing again.
AI, Trade, and Global Economic Factors
00:01:42
Speaker
But lower oil prices, yeah, reduces some of the downside risks to growth and reduces some of the upside risks towards inflation. a few weeks ago, we were getting quite worried that our base case scenario was wildly optimistic. Now we we certainly didn't have to revise our global growth forecast down.
00:01:59
Speaker
But in your report, which you called cross-currents, yes you said that this is not the only game in town when it comes to assessing the risks and opportunities on the horizon around the world. What are some of those other factors? Absolutely. I mean, the the flow of vessels and oil and refined products and all of the other things that we've been talking about, um from from sulphur to helium to naphtha and all these different things, um it will take you know a few months. And obviously, it does need to be sustainable. And if we go out next year... We don't know what the new normal in the straight actually looks like. um But yes, cross-currents. I was basically talking about all of the major influences in the global economy that are flowing in different directions and having a very uneven impact on different countries from a growth and an inflation perspective. So the key one, it won't surprise you to know, is the whole AI boom. the export and the investment story. And the two extremes in terms of beneficiaries, at least in terms of headline GDP, are the US. It's driving more and more of US growth in terms of the enormous AI CapEx story. and And that's also helping in terms of the wealth gains coming through, particularly to the um Over 55 is part of the population that own most of the equities within
Emerging Markets: El Nino and Inflation Concerns
00:03:19
Speaker
the US. And then from the trade perspective, Taiwan. you know Taiwan is a very advanced economy and it grew by 14 percent year on year in the first quarter of this year. And about 80% of that was net exports. And once again, um it absolutely is the the tech story that is supporting that. but But broadly speaking, on the trade side, Asia, the big beneficiary, maybe a bit in Latin America because the commodity perspective of Mexico being... a bit of a tech exporter as well. There are bits and pieces of growth boost elsewhere, but trade, it's mainly Asia. Growth, it's mainly um the US. s But the key point I would make about the AI story is that it's boosting growth in quite a concentrated way. it certainly hasn't helped pretty dismal export performance in Europe, um but some of the inflationary effects could be a bit more widespread. you know We've seen some of the metals effects, the memory chip prices were already feeding through. The other factor you talk about in the report is the El Nino effect. Can you say a bit more about that?
00:04:20
Speaker
Yes, there is a growing prospect by all the scientists that look at these things very closely that this is going to be what they call a super El Nino. For super, read severe.
00:04:31
Speaker
ah We are already starting to see some evidence of this coming through, so that severe effect. weather phenomenon that that will impact most heavily on emerging economies and particularly some of the lower income emerging economies, not just in in in Asia, but also, you know, parts of Latin America, maybe Brazil will one of the more um affected. So that will like most likely impact on agricultural output and on prices. And in a lot of countries, food inflation has actually been quite low.
00:05:02
Speaker
So food inflation picks up to 5%, 6%, 7%, 8%, 10%. Consumers spend a lot more on food than they do on energy. That would be another squeeze on real incomes. that could potentially come through.
00:05:14
Speaker
Less affected are the um the advanced economies. ah But of course, you know, a lot of what we buy in food um in the West is actually plastic packaging. And plastic packaging costs are actually going up um to some degree as well. So there are still some risks and and potentially a bit more negative um rather than being less, you know still uneven like the AI story, but still adding to some of the inflation risks.
Investor Focus and Currency Concerns
00:05:38
Speaker
Maybe that's a good point to bring Ali in. From a macro perspective, ah many of these cross currents that Janet's talking about particularly affect emerging markets. And you've just completed your latest EM sentiment survey, which explores what investors are thinking about EM as an asset class.
00:05:52
Speaker
So what's the mood like at the moment? Well, I would say that the investors haven't turned their back on emerging markets, but they have definitely become much more cautious. So in each survey, we ask investors about their thinking on emerging markets. Are they bullish, bearish or neutral?
00:06:09
Speaker
And when we look at the bullish views, they have actually moderated only slightly from 68% 60%. But what's more important, bearish views were absent for the third consecutive survey. So the net sentiment, which is the difference between the bullish and bearish views, actually stayed at elevated levels at 60%. But having said that, the caution was also visible. Investors de-risked across all emerging market assets. When we look at the net positioning, we have seen reduction decline pretty much across all assets.
00:06:41
Speaker
EM equities are still the most favorite asset class, but even there, the net positioning have moderated to 35% from 57%. And especially, as Janet mentioned about the risk on inflation and repricing on the monetary policy, local currency that is now much more severely underweight across investors with And net positioning at minus 32%. And when it comes to regional preferences and positioning, what patterns are you seeing there?
00:07:06
Speaker
Well, in terms of the regional positioning, I would say that investors seems to have switched their focus more on Asia, ah where we have seen actually ah current positioning picking up.
00:07:17
Speaker
And I guess that to some extent also reflects the AI story because because when you look at what has happened in the Asian markets in the likes of Korea or Taiwan, their equity markets have performed quite strongly. And ah to to some extent, investors seems to position across those markets. So Asian net position has picked up. But apart from Asia, we have also seen some pickup in the Central and Eastern Europe, which was quite interesting as well, because Central Eastern Europe was also the region which, to some extent, affected more negatively from the Middle East conflict.
00:07:52
Speaker
And Ali, on the um the slight moderation in the optimism um from emerging market investors, did did the dollar, the firming of the dollar feature in some of that reduced um optimism? It did, actually, because we also asked investors about their views on the possible risk on the emerging market outlook. And in this survey, the return of a stronger dollar was cited as the top concern among investors. So investors are definitely concerned about the US dollar, but at the same time, for instance, as a catalyst, they still believe that a reallocation of capital out of the US and into emerging markets can still, you know, help with the overall positive sentiment. So yes, dollar worries is there, but investors also see a reallocation of capital out of the US as a possible catalyst.
00:08:42
Speaker
Perhaps that's a good point to take a quick break. We'll be back with more from Janet and Ali shortly.
00:08:50
Speaker
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00:09:04
Speaker
Now, back to today's episode.
00:09:09
Speaker
So Ali, when it comes to the growth and inflation outlook for emerging markets, what are investors thinking? Well, investors are definitely much more concerned on the inflation. More than 80% of survey respondents now see ah inflation to accelerate over the next 12 months, which is a significant increase compared to the March survey. And I guess that to a large extent reflects the spike in oil prices and commodity prices and all these you know impacts over the medium to long term. But at the same time, when we look at the growth expectations, yes, we have seen some moderation compared to the previous survey, but investors still see EM economic activity to accelerate over the next 12 months. So in a way, we we are seeing still strong economic activity or expectations of a decent economic activity, but at the same time, inflation creeping higher over the next 12 months.
Global Growth Forecasts and Central Bank Actions
00:10:01
Speaker
Janet, can I ask you, how does that fit with your view?
00:10:04
Speaker
well Well, broadly, it's not too different, although it's interesting. In our latest report, the forecast revisions we made for the world, an aggregate, were were unchanged. yeah Our global growth forecasts for this year and next were unchanged, but there were some moving parts within that, particularly actually for 2027. So for both years, we revised up the US, but actually some of our bigger downward revisions for 2027 were to emerging markets and some big ones, India and Brazil in particular. It's the carryover from some lagged effects of what we've already seen in terms of yeah the fallout of the Strait of Hormuz and still weighing on real incomes as we go into next year. And then both countries will probably be impacted by El Nino in particular. And on the inflation side, yeah, again, broadly similar, and because even if the oil price stays at these levels, and and clearly we still think the risk premium will be on oil, actually, it could still stabilise over the next year, even if and a sustainable reopening at maybe 75 or even closer to 80.
00:11:06
Speaker
But you've still got the lagged effects. So inflation is not going to start coming down, even in the best possible world, really. until materially the second quarter of of next year. But that would be a good outcome. It would mean no second round effects and it would also start to take some of the pressure off central banks.
00:11:23
Speaker
Well, sticking with central banks, Janet, it's been an extraordinary few months for them. What do you think they're likely to do next? Well, you're absolutely right. And, you know, markets always price in what central banks are going to do before they actually do it themselves. And that tightening in financial conditions that we saw through the second quarter already impacted on a lot of people, not financial markets, but anyone that's got a mortgage or a small business dependent on on bank finance in particular. So I think that this fallback in the oil price and obviously market pricing has already shifted.
00:11:54
Speaker
For the G10 and the major economies within the G10 that certainly were tightening and the ECB did raise rates in June, we now think that that's the last one. If oil prices stay at these levels or around these levels, then the ECB, they won't tell us anytime soon, their communication won't shift, but we suspect they will not be raising interest rates again. And actually, while they'll still say there's a risk of second round effects and food, etc., It could be that they start to become a bit more neutral. And where we differ from the market is we've actually got them taking out that rate rise that they already delivered. So we've got a rate cut in the second half of the year. And on the Bank of England, we think they may well get away with not raising interest rates at all, especially given the better news recently on the inflation side. And actually, the Bank of England could also be cutting next year. So where there's the big uncertainty is clearly on the Fed under the new chair. It is clear that he wants to undertake quite a lot of institutional reforms. We've heard about all of these task forces, but nothing will change as a consequence of those task forces before 2027. So what happens to rates in the second half this year, it's all about the data. What happens to unemployment and what happens to inflation? If the labour market tightens, then that could force the hand of the Fed, particularly with inflation staying close to, you know, certainly well above the 2% target, still in the 3.5% to 4% range inflation.
00:13:21
Speaker
But um it's a very, very close call for the Fed. But we've we've always been a bit more hawkish than the market. But now the market's gone beyond us. So we were never looking for rate cuts. We're not currently looking for rate rises. We've got the Fed on hold this year and next.
00:13:36
Speaker
And Ali, how has the central bank outlook affected investor views in the EM survey? Well, pretty much how Janet described, because when we look at the survey's results, 56% of survey respondents actually see policy rates creeping higher over the next three months. So they're also factoring in some tightening in the monetary policy because of the increase in inflation. But at the same time, compared to the previous survey, there are now less investors who are willing to or who are seeing policy rates coming lower. I guess that to a large extent also be a function of how oil prices move going forward because a large part of the increase in monetary policy pricing that you have seen in the market reflects the oil prices increasing. And if we see you know oil prices stabilizing at the current levels, I think that should imply some of those rate hikes that are already in the price being priced out, at least in the near term. Well, no, and certainly, you know, I didn't really mention the emerging market forecast we've got, but it's a very divergent one, isn't it, Ali? Because we actually think, particularly if the dollar does stay firm and some of the Asian currencies continue to come under pressure, you could still get some tightening in Asia and the likes of India, Indonesia, um Philippines. And whereas actually, certainly in 2027, we think Brazil will be back to cutting after quite an extended pause.
Upside Risks and Future Prospects
00:14:58
Speaker
And it would be helped by that oil price coming down.
00:15:01
Speaker
And finally, what's one big upside risk that you'll be watching over the next few months? Ali, perhaps we could start with you. Well, investors, as I mentioned previously, seed a reallocation of capital out of the US into emerging markets.
00:15:15
Speaker
But for me, the biggest upside risk would be a durable easing of the geopolitical risks, along with the proper opening of the Strait of Hormuz. Yeah, it's hard to argue um with that one, Peter. A sustainable reopening and the the new normal in the Strait of Hormuz is the same as the old normal in the Strait of Hormuz. That would certainly be an upside surprise. And if the oil price and all related products come down swiftly, you know, a lot of them are still elevated. The sulfur, the fertilizer prices, they'll
Conclusion and Feedback
00:15:46
Speaker
still be feeding through. But if we get that quicker reopening, a whole raft of other prices um would be coming down a bit more swiftly. And that is certainly better for growth.
00:15:55
Speaker
Fingers crossed. Janet, Ali, thank you very much. Thank you. Thank you, Peter.
00:16:05
Speaker
So that's it from us today. a reminder to check out our sister podcast, Under the Banyan Tree, where hosts Fred Newman and Harold van der Linde put Asia's economics and markets into context. And if you'd like to get in touch, please contact us at askresearch at hsbc.com.
00:16:21
Speaker
Today's episode was hosted by me, Peter Stegall, and produced by Tom Barton. Please like and subscribe to The Macro Brief wherever you get your podcasts. Thanks very much for listening. We'll be back next week.