Transcript
Speaker: Hello from Hong Kong and a very warm welcome to Under the Banyan Tree. I'm Harold van der Linde, Head of Asian Equity Strategy. And I'm Fred Newman, Chief Asia Economist. Central banks around the world have had a week to digest the news of the US first rate hike in more than three years. Today we're asking the question, what does this mean for Asia?
Speaker: Indeed, policymakers have a history of reacting when effect changes cause, but this is a big region and those responses can be varied. We're going to discuss the policy path for key Asian economies with but a particular focus on Japan and mainland China.
Speaker: Plenty to get through, so let's begin. From HSBC Global Investment Research, you're listening to Under the Banyan Tree.
Speaker: So, Fred, the Fed has raised interest rates. Can we put this a little bit in context before we look at Asia? Why are they doing this now? What's the context in which they do so? Can we expect more to come?
Speaker: Yeah, so so the Federal Reserve was fairly hawkish. And his message last week when it raised interest rates was, you know, left the impression that maybe they'll do more. And why is that? It's because there are still inflation risks in the economy. Just think about energy prices have gone up again, for example, diesel price prices at the time we record now, it's record in the US, record globally, that matters for the whole economy. So if you have inflation already very high, at some point, the central bank has to say, okay, We need to now work harder to bring inflation down. And that's where they hiked interest rates and actually hinted at potentially doing more. Certainly, the fin investors are pricing in more interest rate hikes by the federal reserve. And that is valid, right? Because typically, if they start to raise interest rates, they do this um a couple of times. That's right. We never really had when the Fed stops or less the last time they cut interest rates. And then when they go to hiking interest rates, they never just do it once. They do it at least twice or three times. So that's why it's sort of, yes, you just tied interest rates, but the market says, OK, probably there's going to be one or two more. yeah and And so this is – you always think about not just a one-off adjustment. 25 basis points or a quarter of a percentage point doesn't make a big difference. So you really need to go a bit further. And that's why there is this expectation from financial markets as things stand that that probably the Fed might deliver more. so But that that because matters globally, right? Because the Fed, now we we sit in Asia, we look at the Fed, but even here, talking to investors and colleagues, it's all about the Fed. Why? Because the Fed sets the global price of money. So what what do you think the Asian central banks can do?
Speaker: Well, here too, they're they're usually... They have to follow very often. Yeah, they often follow. um And they follow because, A, of course, the Fed, it's the Federal Reserve is itself important. It's the most important currency, yeah you the U.S. dollar. But it's also because you know the Fed reflects global trends. And the global trend at the moment is inflation is going up in many, many economies.
Speaker: Again, it's largely oil prices and energy prices, diesel, for example... But it's also specifically in Asia the risk that the El Niño climate phenomenon that's brewing in the Southern Pacific, which is sort of the warming of temperatures, you know lack of rain in certain parts. It might impact food inflation. It might impact food inflation. And that matters a lot in many Asian economies because we spend a lot on food. And so many Asian-centered banks in Asia are now following suit with hikes. if Some of them have already raised interest rates, but others are going to raise Japan in particular. Japan is now somewhat surprisingly, you would always say, if you've looked at Japan for more than, say, 10 years, is leading the charge here, right?
Speaker: Yeah, Japan, interestingly, because we're never really used to Japan raising interest rates, at least in the last couple of decades. um Two days after Federal Reserve met, and the Bank of Japan said, OK, we we're going to raise interest rates as well. at Is that also inflation there? That's the same sort of story? It's the same story. There is inflation there, and it's food. There's less energy because in Japan, and energy prices subsidized, but wages are rising strongly, and prices are going up. And so the Bank of Japan has to raise interest rates. But it doesn't stop there. There is... ah In Australia, we have the central bank hinting that it will probably tighten policy. You have place like Korea, you have inflation that's elevated. You have even Indonesia still in the Philippines. So you look across Asia, including India, everywhere central banks are mostly looking at raising interest rates as well. Yeah, well there's one exception I want to go to, but just before we go there, if you don't, the problem is that your currency could weaken, right?
Speaker: So very often if you have the Federal Reserve raising interest rates, but you sit in Asia and you don't raise interest rates as well, then often that can lead to the fact that the dollar strengthens against your currency. And why is that important? It's important because if your currency weakens, the import costs are more expensive, which fuels local inflation. So unless you match the Fed, you might end up with more inflation your economy because your currency weakens and the imports become more expensive. And also for big exporters, thinking about Korea, i mean, the the tech story is a bit different now, but Taiwan traditionally, yeah you didn't want to have your currency move too much away from the US dollar because that's where you sold your product, right? Yeah. Yeah, I mean, for some, if you export, a weaker currency is good, you export maybe more, but there's also a thing of too much of a good thing, and that is that if it weakens too much, then you have too much inflation. So that's why you want to keep it roughly stable, not too strong against the dollar, not too weak. And so it's not that you're specifically focusing your interest rates on the currency. It's more that you're focusing your interest rates on the inflation consequences of currency moves. And that's why central banks need to keep an eye on what the Fed's doing. Well, the odd one out here is mainland China.
Speaker: What are they doing? Absolutely. In monetary policy terms, it's it's almost on a so on a separate trajectory. Most of the economies in the world are seeing rising inflation and rising interest rates as a result.
Speaker: Mainland China has very little inflation. In fact, you could argue it's sort of a disinflation. Still disinflation or yeah deflation. Technically inflation is positive, so not deflation, but it's low enough that you could say, well, you know, it's hardly any inflations it's hardly an inflation. And that's, of course, partly because there's very little consumption going through right now at the moment. Investment is quite weak. Now, that means that actually for the Chinese central bank, the mainland Chinese central bank, that they don't really have any urgency to tighten monetary policy at all. So even if the rest of the world is saying, oh, we need higher interest rates, in mainland China, they're saying, oh, no, actually, we might, if anything, probably need lower interest rates to stimulate the economy. then the renminbi should weaken, you think, right?
Speaker: Yes, that that's of course what you you think. know Normally when you have this divergence of interest rates that has impact on the exchange rates. But it's not always as simple, um partly because mainland China runs large export surpluses. you know That means that the currency tends to strengthen. We have a very good strategy team and in in-house, and you know their view is that for the moment, actually, the RMB is very well. And they get also capital control. So it's not that you can say, I take my money out of China, put it in the US, because I can get a better deposit rate over there. It's captured, right? That's right. So there's limited capital inflows and outflows out of China. And that means that you can have a divergence of monetary policy between China and rest of the world, which is not the case in most other economies where money flows freely across borders and immediately chases higher interest rates around the world. And there's no impediment to that. um Here, it doesn't work quite as well. but So that is that is where we are right now.
Speaker: Federal Reserve for saying higher interest rates. Most Asian-centric banks except for mainland China are saying higher interest rates. But what does the equity investor think about that? Because I've got to be honest with you, Harold. um You know, if I look at kind of my nest egg here, keeping for retirement, um I have to say rising interest rates look quite enticing for me and because there's less risk associated to that. You know, yes is ah the fixed income market, the the the interest rate market, time deposit, is that more attractive? Does that mean it's negative for equities? That's a very good question, Fred, because if you can get, say, I'm just making up a number here, but you can say 5% a deposit or 4% deposit.
Speaker: Well, that's pretty good. And that money you can get back. So does that mean that at times of rising interest rates, you generally see equities then struggling? Equities would typically struggle. And actually, you can argue that has already happened in Asia. If you look at the valuations of Asian markets, they've actually come down. That's what you normally would expect.
Speaker: However, One of the reasons why interest rates are rising in the U.S. is also because the AI industry is investing so much. They're borrowing a lot of money. They're competing for funds, raising interest rates in in the markets. But that that then translates into good order flow for the Asian companies who feed that industry. So there's a growth story here as well. And that growth story has been pretty good. Although, arguably, if you look at earnings growth, they're being upgraded by analysts across the yeah across the street, but not so fast anymore. So we're now in a situation we've priced in that some rate hikes will come in into Asian equities. And the growth story is still OK, but not so fantastic. So it makes it a little bit yeah more kind of tricky for Asian equities for ah for the moment. That's right. And and we would that mean that, so in economies where you're very exposed to AI, the equity market is less sensitive to interest rate changes than in economies where interest rates might have a bigger impact on local growth? Yeah, so the economies where the pure impact from higher interest rates in the US is the biggest in those economies where your sectors are really interest rate sensitive. Think about property, think about banks. Banks benefit from higher interest rates, probably not.
Speaker: Or where your local interest rate has to follow the U.S. interest rate more than in other markets, in particular Hong Kong, where we've backed the Hong Kong dollar to the U.S. It means high interest rates there because to keep the pack, we have to follow.
Speaker: um So hong ko Hong Kong is very sensitive. But on the other hand, for example, other markets, mainland China, for example, is is much less sensitive. That's a good question. just ah you know This is maybe going a little bit in the weeds here, but when you say the Hong Kong stock market, isn't the Hong Kong stock market, doesn't it reflect a lot of mainland companies? Because you have, ah you said, higher interest rates, not necessarily great for property, interest rate sensitive, has a different impact on banks, but isn't the Hong Kong market increasingly a reflection of big mainland Chinese AI companies, etc.? So how how does that mean? yeah what is that that That is correct. And you can therefore have a sort of very unique, different pricing whereby a stock is trading in Shanghai and one in Hong Kong. And in Shanghai, yeah, the money doesn't flow out. So stock can go up, for example. But in Hong Kong, because interest rates moving higher, the stock can go down. It's the same company listed on two different exchanges, but the pricing can can differ. That happens.
Speaker: So, Fred, I'd like to finish this podcast with something they haven't done before. I'm going to name an economy, five of them. They're all relevant for me as a strategist. And you're going to tell me that over the next, say, six months or so, will they raise interest rates or not?
Speaker: Okay. Yes. I have to say, you know, we have a team of fantastic economists that follow each central bank in Asia. So, of course, I'm up to the challenge. Good. First of all, India.
Speaker: Ah, higher. Higher. Because we have inflation. a Food inflation, that's right. Yes. Two, China. Well, mainland China is going to probably stay on hold because there just is no inflation. And so we don't really see are they staying down Central Bank doing anything. Korea.
Speaker: While Korea higher because there is still, even if parts of the economy is struggling, the AI boom is so strong that it still drives the economy and warrants the central bank tightening. po Two more to go, Fred. Two more to go. Number four, Indonesia.
Speaker: Well, Indonesia might still tweak interest rates a little bit higher, actually. Now, they have done a lot quite a lot this year already. But there the question is what happens to the currency, which has been quite volatile. And so that might on the margin bit higher. Last one.
Speaker: Taiwan. Taiwan, also a bit higher because same as in Korea, there is still a lot of positive coming through from the AI boomers driving the economy. and of course, if growth is strong, well, central banks have a tendency to raise interest rates. i like Now, I like this game because also we don't know the answer immediately. In six months, you will have forgotten to check whether my answers were correct or not precious recordings of all of this and I'm going to over the weekend re-listen and see I Well, that's the case. Harold, then I'm going to challenge you to a quiz next time to see where equity markets are going in all of these economies. The challenge is on.
Speaker: Okay.
Speaker: And that's all we've got time for on this episode of Under the Banyan Tree. Many thanks for tuning in. I hope you enjoyed the game. And if you've just discovered us, please do hit the subscribe button on your podcast platform of choice.
Speaker: And while you're there, do give our sister podcast, The Macrobrief, a listen as well. It's your one-stop shop for the story shaping markets around the world. From the two of us and our producer Graham here in Hong Kong. Bye for now.
