Transcript
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Speaker: Welcome to Under the Banyan Tree, where we put Asian markets and economics in context. I'm Harold van der Linde, head of Asia Equity Strategy. And I'm Fred Newman, chief Asia economist. A warm welcome to the show.
Speaker: This week, we're tackling a topic with big implications for the macro and micro picture here in Asia. After all the talk about China's role in the AI boom, we're putting the spotlight on two other big players, Korea and Taiwan.
Speaker: That's right. What does the AI story mean for these markets and how is their outlook changing as that story unfolds? That's what we're here to talk about under the Banyan Tree.
Speaker: So, Harold, you've been writing a lot about the, you know, slightly widening cracks in the AI hardware story here. Of course, there was a big boom on like demand for servers and chips and so forth. And a lot of this came from Korea and Taiwan. And these economies have really ridden that boom. But is there a crack forming now in that sense that maybe there's less demand coming through for AI hardware? And would that an impact how we think about Korea and Taiwan?
Speaker: Yeah. So first of all, when we talk about AI, we're talking about kind of global trends in AI. In mainland China, of course, we had DeepSeek. This is a kind of a new AI model that runs differently. And that has added a bit of an element to that and excitement in certain stocks in mainland China.
Speaker: But let's focus on Taiwan and Korea here in in particular. Have we seen cracks? Yes, absolutely. Because some of the key stocks that are very much exposed to this in Taiwan and Korea, but in particular in Taiwan, um they haven't really gone anywhere over the last six months or so. They peaked probably in the summer of last year when AI was a real big sort of theme in the market.
Speaker: And since then, they flatlined or maybe on a margin, some of them have come off. So the the excitement in the stock market about AI is really, yeah, it's coming off. that's That's interesting you say that because um from an economic perspective, we still see very strong shipment numbers. So when you think about Korea is really about high bandwidth memory chips.
Speaker: That's right. Those are DRAM chips that are configured to work with AI servers. Exactly. And yeah supercomputers. Yeah. And and and so theyve they've still been actually quite strong.
Speaker: ah When we think about Taiwan, we think more about CPUs, the graphic chips that really go into the heart of the processing itself, not the memory, but the processing. And of course, the entire supply chain around this in in Taiwan. and And broadly speaking, the shipment numbers have been actually still quite robust. So what is the equity market seeing that economists obviously are not seeing in their data yet? Yeah, so first of all, yes. So the shipments remain quite robust. It's not that they've collapsed or anything like that.
Speaker: The worry we have in markets is probably twofold. First of all, an enormous amount of investments have gone into AI. I think globally we're talking over a trillion US dollars, although you've got to take these numbers with a grain of salt. so A lot of people have made intentions to invest, but doesn't really mean that they're going to do so. But we know that a lot of investments are being made.
Speaker: So what is the profitability? In the end, that's a key metric for us. You can ship something out, but if you don't make money on it, well, then from an equity point of view, that's not so interesting. So that's ah that that is one thing.
Speaker: The second thing is that there are simply rising risks to AI as well. AI, say six, nine months ago, people talked about how it would be implemented, but The implementation is probably a little bit slower than anticipated. We see regulators coming out and saying, hey, hey, hey, you can't just use AI. There's all kinds of IP issues related to using AI and processing it.
Speaker: So some of the global mobile phone producers would want to sell into Europe. And Europe he said, you can't put that AI onto the phones yet because the regulations are not here yet. So that dampens demand or delays demand and these sort of things. So other issues have been at play.
Speaker: Yeah, it's it's a key issue also for the economies of of Korea and and Taiwan. And that is because really that sector has been driving growth.
Speaker: um If you look at Korean exports, for example, outside of high-end semiconductors, especially these high bandwidth memory chips, there hasn't been much growth coming through. And now with tariffs coming in, particularly Korean car exports to the US might come under pressure.
Speaker: There is pressure on chemical exports, steel exports from Korea. So if if that were to really start to materially slow, it would just expose the underlying weakness of Korean exports.
Speaker: If you look at Taiwan, similarly, actually Taiwan's economy is even more dependent on this AI hardware boom. It's a smaller economy and and much more geared towards... More geared towards the tech and servers and chip making, as you said. And and there, it's it's also actually... Taiwan has been very well domestically in part because...
Speaker: All the wealth that was created from the boom in equities has lifted ah wealth among consumers. It has led to more domestic spending, for example.
Speaker: And so if that were to come under pressure, that would also be a headwind for for Taiwan. Yeah, and this is further amplified, I would say, in stock markets. So while technology is a big part of the Taiwanese economy, it is an even bigger part of the Taiwanese stock markets.
Speaker: Probably around 60, maybe even close to 70% of total profits generated in the market, maybe even more of overall growth. in the market this year in Taiwan. It's probably growing about 18% this year. 14% just comes from one or two companies that make these chips.
Speaker: So it is the ultimate driver there. Were there too slow, there's in Taiwan actually not so much else. There are, of course, individual companies, but the actual contribution to the market growth is not so big. So does that mean that an equity strategist like you, usually perennially bullish, but if you look at Korea then, and if the AI hardware boom is starting to fizzle a little bit, does that mean you ignore Korea? Is there nothing else really of interest?
Speaker: No. So actually, Korea is slightly different than the story that I laid out for Taiwan, because the tech sector is dominant there, but not as dominant as in Taiwan. And in Korea, there's a couple of other themes, I would say, that are quite interesting from an equity point of view. First of all, there's the so-called value up program.
Speaker: But also Korea has other industries that are suddenly seeing a surge in order. So, for example, shipbuilding is a big thing. And there's commercial orders, but also military orders starting to come in.
Speaker: There are a couple of other drivers there that are sufficiently large to support the market. Well, in Taiwan, this is much less so the case. It actually reminds me of of things you wouldn't have thought about. um Because of the U.S. kind of turn away from green energy investment and the current administration, at least the slowing down of these investments,
Speaker: there's actually a kind of a positive element for Asian green energy investments because a lot of these big companies that are investing in this area, they now have built up expertise, they have an interest in the sector, and they're looking now for opportunities. so And so what we see a little bit is interest by companies who were going to invest in the U.S. now looking for projects in Asia. Now, why why do I mention this in the context of of Korea and Taiwan? It's because Korea and Taiwan are massive net energy importers. They don't have yeah any fossil fuels on their own. They need to import a lot of energy. Oil guys, you know. And so any move towards green energy, that is solar, or wind or hydro, would of course hydro is obviously question whether it's green. and I'll leave that for others to debate. But um the point is here that that would lead to a lot of savings for these economies. Now, what we have seen in Korea is there's very little offshore wind, for example, at the moment, even though Korea is a massive coastline.
Speaker: And it's only now suddenly that the sector is becoming coming alive. They're now tendering these massive fields. They're going to bring in this investment. Same in Taiwan, actually, in the Taiwanese Strait um that is between the coast of island of Taiwan and and mainland China.
Speaker: you have now these enormous offshore wind farms that are being built. And so um i just want to mention that because that in itself then helps local GDP. And one wouldn't have thought of that being a byproduct of the U.S. change in policies, which accelerated some of these moves in Asia.
Speaker: Yeah, I think that's an interesting point because maybe you can even make a broader point. These countries are kind of reinventing themselves the way the world is changing. So you're giving a nice example of this.
Speaker: Another nice example is Korea, this value up program. So a year ago, some of the regulators said, ah listen, we should. Our companies, our Korean companies, they don't pay a lot of dividends.
Speaker: They should pay more dividends, do more share buybacks, and actually a lot of crossholdings that a lot of these chables, these industrial groups have, should be um dismantled, unwind, or something like that.
Speaker: Now, there was a sort of lukewarm response to that the at the very beginning, but we see actually that more and more companies are following this. They're not investing as much, and they're starting to return cash back to shareholders.
Speaker: And that is something we haven't seen in Korea. So there's a change in corporate behavior here. And even the larger groups starting to to pay more dividends have announced more share buybacks and returning cash to their shareholders. when when you shift in yeah it's It's interesting. So that and we saw in Japan how that really helped the market. Yeah, it was a big driver of the Japanese equities. And it's one of the reasons why the Koreans, I think, looking at this because, hey,
Speaker: They've seen this happening in Japan and corporates say, well, if if I do this, there's clearly a reward for me as well in terms of share price performance. Now, you mentioned other sectors are starting to be interesting as well. Now, you're you're the hippest equity strategist I know. i'm not sure that means a lot, but you're certainly a very hip for an equity strategist. against a very low bar, I would probably say Now, the cultural sector.
Speaker: Yes. um We hear a lot about the Korean wave. ah Taiwan was actually a powerhouse, or maybe still is, actually, in in pop music, yeah in dramas.
Speaker: Korea, of course, as well. How much is there? Is that an investable universe for an equity strategy? that's absolutely investable universe. So you have... movie production companies, but even music bands and organizers of events and these sort of things that are listed in Korea. So it's an investable universe and it is doing very, very well.
Speaker: And that's not just because Koreans like to watch it. it As you know, I go regularly to Indonesia. Korean drama is is is is an enormously yeah big thing. So Korea is exporting what they call Hallyu, a sort of ah soft commodity, you would almost say, right? A Korean image.
Speaker: People therefore also go to travel to Korea to see the places that they've seen in the museum in these movies. So it's not just export people buying these products Korean products, but also they want to go there. And actually, was thinking cosmetics are feeding them off of that kind of you know image of Korea. And then obviously the cosmetic industry in Korea can sell off of that. Cosmetics should should be taken in a very broad definition. It's not just only the products, the makeup stuff, ah you would say, because there are companies who done pretty well. They're actually penetrating into the U.S. But also plastic surgery is is a really big thing in in Korea.
Speaker: That's becoming a big export product as well. Which is, again, a great reminder that these are not just manufacturing-based economies. These are actually economies that are broadening out. And also, I think there is another lesson here, and that is that that's true for all of Asia in the sense that despite all the headwinds on growth and the uncertainties in mainland China over the cycle and and tariffs and so forth,
Speaker: We are witnessing still ah creation of a genuine domestic Asian consumer force, which is still growing in the backdrop, right? And we're moving slightly away gradually from just being overly dependent on exports, manufacturing exports,
Speaker: And so internal Asian travel is picking up based off of what you say, movies. So Thailand is featuring there and and and so forth. So my question for you is, you're an author, Harold, not just when it comes to equity strategy, but you've also written a book on the Machapahit Empire. yes Shouldn't you write a a screenplay here, a soap opera on Machapahit, and maybe we could turn that into a...
Speaker: you know Indonesian cultural export. Well, it's funny you say so because last night I actually had a meeting with a production company that works for Netflix. And they are looking at this and say maybe part of the book should be made into, they're thinking more about a short series or something like that.
Speaker: And the funny thing is, although they are an Indonesian slash Singaporean company, from what I understand, the bigger investor behind it is the Korean production companies, these drama companies who have done so well in Korea and are exporting that to other markets and say, hey, we can maybe do something else with other materials. Well, now, if this is really going to happen, I don't know. And this takes a long time. well I don't really actually think it's going to happen. Well, Harold, we know things usually tend to happen in in Harold van der Linde world. And so here you have it, ladies and gentlemen. This may be the last podcast with Harold van der Linde. You'll see him next time on the Golden Globes Red Carpets in Los Angeles. I don't really think I have that star allure, unfortunately.
Speaker: But it is interesting that these Asian production companies, like you just said, we spoke about cosmetics, but it's the same in media, of course, looking for Asian content. And Indonesia is, of course, a growing market for all the reasons that we've spoken about.
Speaker: And that is the sort of new Asia that is emerging. As New Asia, end and to go back to the original point, it is Korea and Taiwan are big players in this area. And so it's not just an AI hardware story. It's a good story, but it's not the only one. then And I think we need to increasingly focus on that aspect of Asia because, you know, if we struggle with slowing global trade and terrors and tensions here and there, we shouldn't forget that there's this whole other burgeoning kind of Asia that's still developing and that's just going from strength to strength. Absolutely.
Speaker: That's the domestic side. That's in China, Indonesia, India, Korea, everywhere this is developing.
Speaker: And that brings us to the end of this week's podcast. Thank you very much for joining us. and Do give us a like and follow wherever you get your podcast if you haven't already. We'll be back again next week putting Asian markets and economics in context.
Speaker: Talk to you then.
Speaker: Thank you for joining us at HSBC Global Viewpoint. We hope you enjoyed the discussion. Make sure you're subscribed to stay up to date with new episodes.
