Transcript
Speaker: You and I are old enough to remember that you took July and August off, not literally two months, but you could use that time to you know do some basic research because markets were quiet. Politicians were going on a holiday. And here we are. we are July and August are the hottest months of the year, not just temperature-wise, but in terms of markets as well.
Speaker: Welcome to Under the Banyan Tree, where we put Asian markets and economics in context. I'm Fred Newman, chief Asia economist, back in Hong Kong post-summer and reunited at long last with my co-host and head of Asian equity strategy, Harold van der Linde. That's right, Fred.
Speaker: Normal service has resumed Under the Banyan Tree. Great to have you back. We've got a lot to catch up on. We have indeed. We had a big equity market wobble. I think that's fair to say. The AI shakeout. We talk a bit about flows. Yes, there's a bit of a regime change in in terms of flows across the region. And then also, you know, things around the Gulf are still bubbling away. And that's certainly preoccupying markets. I have a couple of questions for you about that.
Speaker: Well, let's get to it. Let's dive into it. From HSBC Global Investment Research in Hong Kong, you're listening to Under the Banyan Tree.
Speaker: All right, Harold, let's jump right in. yeah The equity world has been a bit wobbly to say the least, particularly the big AI boom that we saw in that semiconductor names, these phenomenal rallies. yeah There was a bit of a shakeout at some point this summer, a bit of a pullback. Can you can you kind of put that a little bit into context? What happened here So the market that really came off the most, Korea, was down 40%. It's probably, as we speak, it down, it recovered little bit. 40%. The market was down 40%. That would be in normal times considered b a deep, deep... Basically a bear market. A bear market. But what bear market starts at minus 20%. Minus 20 normally in a condition. And here is this is double that. This is a big drawdown. A double bear.
Speaker: A double bear. It lost one of its bears because it's now probably a minus 30. But we've seen a complete reset in in Korea. We've seen that a little bit in Taiwan as well. But Taiwan has been much more resilient. So not as much. So part of this is the AI story. People asking about are we investing too much in AI globally? We see a bit of a a pushback in certain places on AI. Certain places in New York, I think, has now said we don't want a data center at least for the next year or something like that. You mean the state of New York? The state of New York, yeah. Reducing data center demand. And that matters for Korean firms and Taiwanese firms because of their, course, producer semiconductors that would go and would be used into that into the data centers, yeah. But when you're going to just stop you there, if you say um the Korean market is down 40 percent. Now, the Korean market is lots of companies. But, of course, the index is dominated by probably two semiconductor names. sum panasska highlightsion and and And they were down by more than or less than? Yeah. So most of the sell-off was led by these companies. And the thing here is there's two important things here because it's not just an AI story. There's something specific in Korea as well. So the Koreans had introduced single stock leveraged ETF. So that means you could buy an ETF on the market. that that means it so yeah An ETF is an exchange traded fund. So you can buy... It's like a stock fund, but the fund would only invest in one stock. And then say, well, why would you buy the stock then? But the addition to that is that they had leverage. So that stock, that ETF would go up twice as much as Hynix. And of course, it would go down twice as much as well. So it was a way for people to, when they thought the rally was going up, to really leverage into this. So this is the first thing and that led to a rally in that market as well. And what we also saw in Korea is that people were borrowing money.
Speaker: from their brokers margin lending in order to invest. The market then peaked and our question was really, now, how is that going to unfold? Because if you borrow money to invest and your investments go down, that's a very nasty sort of situation. and that caused some of that volatility in the market. But what we've seen is that that borrowing now has come down. The appetite for the leveraged ETFs has come down as well. Also, the government's come up with some regulations to limit the amount of funds that go into that.
Speaker: And the volatility in that market seems to come down a little bit now as well. It seems to settle a little bit. So what do you seem to suggest is that in Korea in particular, there was a lot of leverage that built up because the the market had done very well. So people were borrowing money through different ways to buy stocks and that accentuated the volatility. And you're saying also now that's being flushed out and you see a bit more stability as a result. But but let me ask you, um is that type of leverage buildup unique to the Korean market or have we seen that in Taiwan? Have we seen it in Japan? Have we seen it in Hong Kong? Have we seen it in the U.S. market as well? How unique is Korea in that regard?
Speaker: It is not unique in the sense that people borrowed to participate in a rally, but magnitude of what was borrowed. And the availability of these leveraged products, whereby you would go up twice as much as the stock would go up, that is fairly unique that we haven't seen in other countries, although in some places they've spoken about it. But they were not the first ones to do it. The Koreans would do it. And by the time the market came down, lot of the regulators in the other countries who thought maybe we should do this as well said maybe we shouldn't do this at all. Because if your market is down 40% or your stock is down 40% and you put money in, two times leverage, that means you're down 80%.
Speaker: you've lost a lot of their money. that That's the risk of leverage. That is absolutely the risk of leverage. So um there are individual cases where this is going to be very very, very painful. But for the overall market, what we've now seen that the appetite for these products come down, people, the borrowing that they do in order to invest in stocks has come down from, say, 25 to 20 billion US dollars or So and tur it's still elevated, but it's come down. So we see that that market and the the people that invest in that market, the retail investors, are really responding now. So so certainly leverage played a big role in Korea. um
Speaker: Is it then fair to say that Korea has seen the largest adjustment in the level of of equity indices compared to other markets because they had more leverage? So put in context. So how is Taiwan, for example, trade? How much up and down was it? The U.S. indices and Hong Kong, et cetera. what What have you seen in terms of these um other indices, how they perform? The other markets, it depends on which you were a little bit where you look at. So Taiwan has actually been fairly resilient, hasn't gone down that much, ah a couple of percentage points.
Speaker: The US has been down a bit and then went back up, but hasn't really moved too much over the summer. So the Korean market in that regard stands really out.
Speaker: And what we've seen is that this led to a shift in flows in the region, because in the first half of the year, you just needed to be in Korea. You wanted to be in Korea, that was the market was going up. It might be down 40%, but it was up like 200% in the last year or something like that. So that was the game to play.
Speaker: and what we've seen is that that is now shifting and is allowing money to go into other parts of the region. and I think that's a fascinating story. And of course, the market has been focused particularly on the AI story, what happened in Korea over the summer. Maybe this is great place to take a quick break. But when we come back, I want to talk about the implications of that for other markets across the region. And we want to widen out the discussion a little bit to what investors are looking at as well.
Speaker: So Harold, we talked a lot about the AI story, in particularly the Korean market, which obviously captured investors' attention this summer. But as you see kind of an adjustment in those markets, particularly Korea, which was so AI dominated, to what extent does that impact on other markets across Asia? Because it felt for a while that AI sucked the oxygen out of the room for everybody else.
Speaker: And does that that mean when you see an adjustment in Korea, for example, and other AI kind of related themes, that other markets then benefit that weren't as tied into the AI boom? Is that something we've seen? Yeah, but that's not the complete picture because we've seen flows coming, say, from Korea. Some of that has left the region. But we've seen flows coming back into Hong Kong and mainland China. Yeah.
Speaker: as well as India. Now, the money that's gone into mainland China and Hong Kong, some of that has gone also into AI-related stories, but that's the Chinese AI story. So we have a listing of a company, CXMT, one of the new kits on the block, if you want to put it like that. a memory chip memory chip maker. That ultimately competes in the same space as Samsung SK Hynix, maybe not quite at the high-tech level. Exactly, but not at the high-tech, but at the, say, lower nodes.
Speaker: But the the stories that 10 years ago, they didn't do anything at all. So who knows in maybe five years' time. wasn't there also news about new Chinese AI, mainland Chinese AI coming out like Moonshot, for example, Kemi3. So new models have come out, et cetera. We've seen quite a few listings coming through in also in the Hong Kong market. There are about 400 companies waiting for it to get a sign-off to listing Hong Kong. So there's ah a massive boom. And this is exactly what I think what the way China would like to use the equity market. You have a new technology. It needs funding to grow these businesses. And the equity market is a great way to do so. There's a lot of cash in China. It's not just a Chinese preference. is this That's how... you know, innovation financing works in the US, right? It's a capital market that channels risk capital to absolutely these new sectors. And it does strike us that there's been a preference in terms of when they sign off these IPOs that they allow those companies that need that to grow AI to list before, let's say, another company that just, I don't know, makes ah milk products or something like that, right? So there seems to be a priority because we've seen a lot of these language model companies and, of course, the CXMT
Speaker: They've listed in either Shanghai or Hong Kong. But what about a market like India, for example, yeah where you haven't had necessarily local AI hardware players listed, right? yeah in not Not a significant extent. Where also you had arguably some questions over how AI might impact services exports, for example. So... India has struggled a little bit over the past year, particularly against that global AI theme. have Has India benefited a little bit yes in terms flows? We've seen some money coming back into the India market as well.
Speaker: That has got nothing to do with AI. That is just sort of India story. And people left India, so they don't really have a lot of holdings in India anymore. India's economy has been relatively resilient, at least, the and the earnings have been relatively resilient recently, particularly in light of, say, in the higher oil prices, which normally impacts India quite a lot. We've also seen that worries about the the currency ah in the equity markets have gone a little bit away. So that allowed money to come back into India.
Speaker: And that's seen as a sort of a non-AI dynamic to this to this whole story. And again, in India, just like is in Hong Kong, there's a lot of IPOs coming through a lot of companies there. So we need that foreign money to come in to absorb that demand that there is for companies to list on that stock exchange.
Speaker: Now, talking about inflation, one of the things that happened over the summer of the year, we've seen bond yields come up. Oil prices have been a little bit all over the place, I would say. um Is that something still you you worry about in the second half of this year, Fred?
Speaker: Yeah, look, look the the macro backdrop remains pretty uncertain. I mean, the underlying numbers are still pretty healthy. Global e economy is growing. There are pockets of weakness, particularly mainland China, where datas data is disappointed. But yep second quarter GDP numbers generally quite good. Trade is still going strong. But if you look at energy markets, for example, right, there was a story – six, seven weeks ago that oil was tumbling and we thought, well, you know people were adjusting downward the prices of of crude oil. Well, now were we're shot back up because actually there's still supply disruptions coming out of the Gulf, which are quite significant. We still have refinery shortages globally, which means actually that the oil price itself doesn't fully capture the price of energy at the pump because, of course, we have limited refinery
Speaker: capacity and that means prices for diesel and gasoline and kerosene remain much higher than the oil price implies. um So that is a worry and and that means that there's still probably more inflationary pressures building up in some pockets of the world economy. We also still have uncertainty around the trajectory of the Federal Reserve. We have a new chair. Some of the unemployment data in the US has been – unemployment has actually declined, but the job creation the US has has weakened. But on the other hand, we still have a lot of core inflation pressures coming through in the US as well. So um the macro backdrop is fairly uncertain. There's very little visibility.
Speaker: And of course, that's then reflected in bond yields generally pushing higher. Of course, I should also add that we had tremendous news in the FX markets. um We saw intervention, for example, or at least ah perceived intervention by the market around the Japanese yen.
Speaker: So you can see tensions building up in the macro sphere that could ultimately, i think, be a bit of a headwind um to the global economy, despite the good numbers now. going to year end, higher interest rates always means money is more expensive and hence there's a marginal drag on growth. Absolutely. Yeah. If you would have told me at the beginning of the year, hey, one year, 10 years would be ah about, what is 4.7 something now? Then I would say that's really negative for equities. But we've seen simply good growth in equities in Asia. But that was the AI story. So there's a lot sort of moving parts going on here. But by that story is changing, the inflation story is changing. So no doubt we've got to come back and talk about these issues again on a future under the Banyan Tree for podcast, Fred.
Speaker: I don't think we're going to be escaping the SAI theme anytime through soon, Harold. Great catching up with you after the summer. good to see you back as well. We'll take it up again next week. Excellent.
Speaker: By the way, listeners, the HSBC China Conference is right around the corner. It's happening on the 1st and 2nd of September in Shenzhen in mainland China. The two of us will be there alongside many of our colleagues at the Ask Research Analyst Cafe.
Speaker: To receive an invitation, please reach out to your HSBC sales representative. That's a wrap from us. Talk to you again next week.
