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Under the Banyan Tree – The unintended consequences of conflict
844 Plays19 days ago
As the world's eyes remain on the Middle East, Fred and Herald discuss the second round economic effects of events and how they reverberate in Asia.
Click here for appropriate Disclosures, including analyst certifications, and Disclaimers that must be viewed with this podcast: https://www.research.hsbc.com/R/101/b6LJQSV
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Transcript
Introduction to HSBC Global Viewpoint Podcast
00:00:02
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.
00:00:13
Speaker
Make sure you're subscribed to stay up to date with new episodes. Thanks for listening, and now onto today's show.
Impact of Middle East Events on Asian Markets
00:00:33
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Hello from HSBC Hong Kong, I'm Fred Neumann. And I'm Harold van der Linde. You're listening to Under the Banyan Tree, where we put Asian markets and economics in context. The eyes of the world remain on the Middle East this week, and that continues to shape a lot of our thinking here in Asia as well. Last week we talked about the immediate effects of a volatile oil market on Asian economies, and this week we're looking a step beyond that.
00:00:58
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Today's focus on the second round effects of the conflict. What happens further down the line, if you will? This affects companies, consumers, policy makers and touches on key global investment themes from energy to artificial intelligence.
00:01:11
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Plenty to get through, so let's get the conversation started from HSBC Global Investment Research. This is Under the Banyan Tree.
Beyond Oil: Raw Material Consequences
00:01:22
Speaker
So Harold, last week we talked about the impact of higher oil and gas prices in Asian economies, and that's kind of the obvious economic consequence of the conflict that we're witnessing right now, the tragic conflict in the Middle East. But we also wanted to tease out some of the other implications, and you've written a very interesting report on some of the secondary consequences on this. And one thing you mentioned is other raw materials, actually. The Middle East is known for exporting gas and and oil, but other raw materials are playing a role as well. Well, as you know, Fred, oil and gas are inputs. There are all sorts of derivatives that came out of the crack, the oil, you could say. And that goes down to fibers, that goes down to plastics. So, for example, packaging cost for some food and beverage companies is about 30, 35 percent of overall direct cost, not the marketing cost. We call that cost of goods sold. So the product cost, the making of the of that particular product. So these are your plastic wrappers, your cardboard boxes. boxes.
Sector Impact: Cement and Agriculture
00:02:24
Speaker
Yeah, but also bottles, PET bottles. Of course, yes. And these sort of things. Now, these prices will go up and down as well. They will be volatile as well, right? So companies have to deal with that. So that's that's one of these consequences. But also think about, for example, cement companies. Cement is an incredibly energy-intensive sort of business. So they will have to deal with that as well. That might mean that cement prices go up. So raw materials and these input costs are very important. One in particular as well, natural gas accounts for 70 to 80% of making of urea, which is a a product that goes into fertilizer. So fertilizer costs can go up and of course that has impact for the agricultural sector. That's right. And and I think that's where, at least on on the economic side, we're starting to worry a little bit about the potential impact on food prices globally. Now, the Middle East itself is not a big food exporting kind of region of the world. um
00:03:20
Speaker
But if energy costs go up and fertilizer costs go up, then there is an indirect link to the cost of food production. Exactly.
Food Prices and Social Impact
00:03:30
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And that then raises essentially the cost of food. And of course, always when we saw in the last few decades big spikes in prices, the most dangerous, if you will, was always the concurrent price spike of energy and food prices. That happened, for example, in 2008 where there was a big inflation shock across the region. Of course, and the challenge is that tends to hit some of the poorer population in the region. and it impacts lot of people and, of course, also, unfortunately, lower incomes, very often more because their exposure to food expenditure is higher than people who have more money to spend, right? Yeah. So what we have here is clearly, it's not just about oil for transportation or for heating, gas, but it's also some of the feedstock chemicals go in there. You mentioned cement, for example. We mentioned fertilizer and the impact on food costs as well as transportation of food, of course. Nylon, I think, is in there as well. The fibers for clothing come from that as well. You mentioned packaging for food. So It's a whole kind of range of products that are impacted. And often people don't think immediately about those. those are these sort of unintended consequences, second-round effects that only become apparent very often to us in markets when these prices shoot up. Or a company says, hey, our costs have gone up. And then we realize these linkages that are not always easy to identify
Tourism and Economic Dependency
00:04:56
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in the beginning. Now, another, if you will, unintended consequence or another kind of byproduct of this is the impact on tourism.
00:05:03
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And there's several channels, I think. One is, of course, if there is risk across the world, people who are reluctant to travel long distances. Then you have higher jet fuel prices. Exactly. So the ticket price second prices are going up. But there's a second sort of way that that impacts companies in Asia. Medical tourism is a big thing. So India, Thai hospitals, and Singapore as well, some of them have a lot of exposure. Some of the Thai hospitals are specialized in this. So about two-thirds of their overall business is medical tourism. People who come to Thailand do a checkup and these sort of things. The Middle East and patients, if you want to call it, travelers, are a big component of that. So some of these companies are really... exposed quite a lot. It's 20-25% of their overall business.
00:05:49
Speaker
So these are wealthy kind of Middle Eastern residents coming to Asia for medical treatment. So it's a form of tourism. Yeah, it doesn't even have to be wealthy because some of these people just go on a holiday in Thailand and and say, listen, why don't we just take two days to do a a health check or something like that? So that happens as well.
00:06:07
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The Indian hospitals do this as well, but this is a much smaller business for them. So they're not exposed. Really, the Thai hospitals are probably most exposed to this. And as I said, this could be a fifth to a quarter of their overall business. Yeah, and and that's ah that's an interesting niche is medical tourism. But on a broader scale, you also have the impact on general tourism, right? So economies like Sri Lanka, for example, it rely a lot on European travelers often via the Middle East to Sri Lanka. Same in Thailand. Same in Vietnam, for example. So the European visitors coming to Asia have bigger hurdles to bypass you know capacity constraints in terms of travel, higher ticket costs to come to this region. And that's not always easily offset by regional tourism. So there is certainly going to be an impact there as
Remittances and Economic Stability
00:06:54
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well. Absolutely.
00:06:55
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Now, speaking of travel, and another interesting consequence is actually the impact on remittances. You have some economies in Asia where remittances, that is domestic workers going overseas to work in another country and sending back money is big business. So in the Philippines, you know it depends on what numbers you use, but it could be up to 10%, 12% of GDP in terms of money that's being sent back. It drives domestic consumption. It drives domestic housing construction even. but I'm also thinking India and Bangladesh, I presume, right? India, Bangladesh, of course, certainly. Bangladesh, very important. And so apart from the Philippines and Bangladesh and India, it's also Sri Lanka, a big kind of overseas community. But even even Thai workers are found in in the Middle East working and are sending money home. And so now the question is, of course, first of all, what's happening to them security-wise in the Mays. They're obviously at personal risk. But also, you can't deploy into into the region anymore. You can't really travel there as easily. But also, to the extent that businesses there are ground to a halt, for example, in the energy sector, there's a lot of foreign workers. Yeah, these people don't get paid.
00:08:06
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But this will have a knock-on effect if they don't remit their earnings back to, say, Bangladesh. Families that are dependent on it in terms of their consumption, right? So that has knock-on effect on consumption. Immediately a knock-on effect on on consumption. So yeah I think already from the discussion here, we see quite a few consequences that people don't pay that much attention to. So from plastic bottles to food costs, fertilizer to tourism, medical tourism, but also to remittances. And maybe there's a great... We'll take a quick break. And when we come back, I want to ask you about what all of this has to do with
Energy Costs and the Tech Industry
00:08:41
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AI. And is there a parallel or at least a risk we can draw from events in the Middle East to AI?
00:08:58
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So Harold, um big story last year was AI, continues to be a big story. um What does this conflict have to do with AI? Well, from a purely Asian point of view, think about it. um The tech companies in large parts of Asia, so Taiwan, Korea, mainland China, many of them provide, we've spoken about this before, components to US companies that are building out AI data centers, hyperscalers in the US or in Europe.
00:09:26
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um These data centers are highly energy intensive. They are sometimes being funded by, for example, Middle Eastern investors. So you can see that there are a couple of touch points here with that industry that might mean that the appetite to spend money in here is going to be reduced and that will have an impact on the order flow. So you're saying that one of the consequences here is, of course, if there's a permanent increase in the cost of energy globally as a result of this conflict, then it's also to be more costly to run some of these data centers because they're very, very energy intensive. But you're also saying that potentially some Middle Eastern investments might be disrupted to the extent that Middle East is a source of global capital. And so that would, of course, disrupt it as well. Absolutely. And that might have an implication on the order flow for the very components that are made in this part of the world. The servers, the coolers, the chips, all the other components that Asia has done so well over the last 12, 18 months in exporting there. That might diminish. It's something that we need to keep a close eye on. And of course, then there is another potential linkage here, and that is through interest rates. That is, if we see this conflict being inflationary, and if that means central banks will have to raise interest rates, that would raise the cost of funding. And of course, any borrowing will become more expensive, and that could then have implications for global investments. Absolutely. And that is, I think, already priced into markets to certain extent. We've seen an increase in bond yields. say over the last week and 10 days or so, to reflect the possibility that, yeah, there will be more inflation and potentially higher interest rates than what they initially thought, say, two weeks ago. And all of that needs to go into the spreadsheets of the people that have investments to make around the world, say, are we going to make this investment or not?
00:11:15
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Yeah.
Global Interdependencies and Asian Livelihoods
00:11:16
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So, you know, as we as we record this podcast, of course, tragic, tragic events unfolding still in the Middle East. We shouldn't gloss over the fact that a lot of lives are being affected by this. um But in some ways, as we discussed with food prices, for example, fertilizer prices, with tourism remittances, it affects lives also in many parts of Asia. Well, a lot of livelihoods depend on on sort of a healthy economic relationship with the Middle East. Yeah, there's all sorts of unintended consequences. Very difficult to see them at the moment, but that might suddenly arise. And it's important to think about that.
00:11:55
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Well, that's all we've got time for on this episode of Under the Banyan Tree. A big thanks to all of our listeners for tuning in. Indeed, this is an unpredictable situation, but we will be following developments very closely in the coming days and weeks. Clients can, of course, see all our Middle East reports on the Research Mobile app and at research.hsbc.com.
00:12:16
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Under the Banyan Tree is HSBC Global Investment Research production produced by Graham Mackay. Take care till next week.
00:12:30
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.
00:12:42
Speaker
Make sure you're subscribed to stay up to date with new episodes. Thanks for listening, and now onto today's show.