Transcript
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.
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Speaker: And now onto today's show.
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Speaker: Hello and Happy New Year from Hong Kong.
Speaker: I'm Fred Newman, Chief Asia Economist here at HSBC.
Speaker: And I'm Harold Vindelinde, Head of Asian Equity Strategy at exactly the same bank.
Speaker: You're listening to Under the Banyan Tree, where we put Asian markets and economics in context.
Speaker: It's a new year and we're kicking off 2025 with a roundup of everything you need to keep an eye on here in Asia for the year ahead.
Speaker: Looking forward to it.
Speaker: From HSBC Global Research, this is Under the Banyan Tree.
Speaker: So, Fred, here we are in the New York calendar year 2025.
Speaker: Sounds almost futuristic for me.
Speaker: I had to make drawings at school.
Speaker: You probably did it as well.
Speaker: Yeah, I thought we had flying cars by now.
Speaker: What happened?
Speaker: What happened?
Speaker: This is it.
Speaker: I'm still driving.
Speaker: Well, there are flying cars.
Speaker: Aren't they doing delivery services in certain places?
Speaker: Yes, but I think, you know, it's not the flying car you and I dreamed of when we grew up.
Speaker: That was actually 2000.
Speaker: You had to make a picture of how the world would look like in 2000.
Speaker: So we're 25 years late on that flying car.
Speaker: But there's got to be quite a momentous year.
Speaker: Every year is, of course, important.
Speaker: But this year we have a new U.S. president coming in.
Speaker: So the relationship between the U.S. and China will somehow evolve this year.
Speaker: I believe Mr. Trump will be installed as the new president on the 20th of January.
Speaker: So the 21st of January, big tariffs on trade.
Speaker: Strictly speaking, he will become the new president around noon on the 20th.
Speaker: And so he's reportedly already promised some executive action within a few hours of being in office.
Speaker: So we'll see.
Speaker: I think it's no exaggeration to say that this year will partly be dominated in economic terms by what the new administration will decide.
Speaker: Having said that, there are really two components.
Speaker: One is domestic policy in the US and the other one is international policy.
Speaker: And of course, domestic policy has only an indirect impact on Asia.
Speaker: It's the international policy, the terror stuff.
Speaker: which is going to have a direct impact on this region in particular.
Speaker: Now, we have seen this obviously during the first Trump administration, already heightened tariff and trade tensions.
Speaker: We saw significantly supply chain rejigging on the back of this, changes of FDI flows, for example.
Speaker: But the region still managed to continue to grow.
Speaker: Our question is, is this going to be
Speaker: further kind of higher impact event, if you will.
Speaker: So – but let me ask you, Harold.
Speaker: We talk a lot about tariffs and the impact on trade.
Speaker: And we can talk more about this on what it means in economics terms.
Speaker: But in terms of financial markets, equity markets in particular, how important actually is the tariff story?
Speaker: Yeah.
Speaker: Yeah, it's important and it's not important.
Speaker: That sounds like a way of getting out of this question, but it is not important if you look at the numbers.
Speaker: So about 1% to 2% of the actual earnings of the listed companies in China is generated from exports to the US.
Speaker: So you put a 50% tariff on that, let's say it's 2%, you put a 50% tariff on that, you assume in a worst case scenario that the Chinese have to pay for that,
Speaker: which by the way in the past wasn't the case, that means you have a 1% impact on earnings.
Speaker: That is not a lot.
Speaker: So in that sense, it is not a big equity story.
Speaker: It's probably a bigger economic story.
Speaker: And this is maybe my question to you.
Speaker: What is that economic story?
Speaker: Because the impact on the equities will probably more come through second round effects.
Speaker: supply chain reshuffle that of course continues and that impacts other markets but also maybe the way the renminbi is being managed in China or whatever they do on their own sort of growth so I'm actually posing you the question again how do you think China will respond to this from an economic point of view?
Speaker: Well, if you talk about the economic impact, it's obviously the wide range of outcomes that we could use.
Speaker: Famously in a campaign trail, Donald Trump suggested that the US might impose an additional 60% tariff on imports from China.
Speaker: If that really came to pass, that could knock back GDP growth in China by about one and a half to two percentage points, which is quite significant, right?
Speaker: Now, that, though, suggests, A, that these tariffs come in immediately and automatically.
Speaker: all goods, which isn't quite likely, might be more staggered.
Speaker: The other thing is that really the Chinese can offset the impact to some extent because they could bring in stimulus that kind of offsets that.
Speaker: So the net impact is not necessarily going to be that large.
Speaker: It might be half a percentage point or so.
Speaker: But we've seen that the Chinese have put some stimulus in place already, at least over the last, I would actually say since the summer.
Speaker: They've come up with rules on the property market.
Speaker: They've come on rules with government financing and local government financing issues.
Speaker: So it looks like they've done a lot of stimulus already.
Speaker: Do you think there's much more room for them to do that?
Speaker: So there's probably much more room to actually pump money into the economy.
Speaker: So far, it's been changes to rules, regulations, a bit of monetary easing, a lot of plans, but not necessarily new money being put into the economy, at least on a larger scale.
Speaker: That might happen this year, particularly if the US does come in with higher tariffs because that would raise a pressure on the Chinese government to actually then
Speaker: stimulate the economy.
Speaker: So there's this theory out there that maybe the Chinese are waiting a little bit to see what happens.
Speaker: In fact, everybody is waiting.
Speaker: You and I are waiting.
Speaker: Yeah, exactly.
Speaker: Nobody knows what it is.
Speaker: We don't know.
Speaker: So that's a fair approach.
Speaker: And so we might actually not just get clarity on –
Speaker: the tariffs and tariff strategy in the coming weeks by the US, but we also concurrently might get more clarity on the Chinese stimulus policies in response to them because one is a little bit affected by the other.
Speaker: Now, when you look at financial markets, though, equity markets in particular, is there a sense that maybe a big stimulus is needed to revive the economy?
Speaker: Investors waiting for that stimulus or is it kind of, well, you know, stimulus come or may not come.
Speaker: It's really about
Speaker: fundamentals.
Speaker: How is the expectation in the market?
Speaker: The word I would use here is confidence.
Speaker: So we've had over the last years multiple times and multiple announcements with regards to stimulus and the market has responded to that.
Speaker: That's all nice and well.
Speaker: But just having one big stimulus is probably going to help the market, but only in the very near term.
Speaker: What we need to see is that the kind of a lot of the industries, the companies that are listed, the industries aren't just in a very bad shape.
Speaker: There's too much produced or competition is too high, demand is too weak or you name it, right?
Speaker: And we need to have those industries work through that.
Speaker: We see this in certain industries, companies.
Speaker: real estate, for example.
Speaker: The story in real estate now is so much different than it was, say, one and a half, two years ago.
Speaker: Things are – improving is not maybe the right word, but things are getting on the margin a little bit better.
Speaker: And two years ago, it was all about prices and nobody wanted to buy something, et cetera.
Speaker: It's interesting you say that.
Speaker: Is then – we always talk about, oh, trade tensions with the US and
Speaker: There's a housing bust in China which might be holding back maybe confidence.
Speaker: But is it fair to say that maybe there's another cycle going on in China, like a Schumpeterian cycle to bring in Schumpeter, the famous economist, who says there are cycles of creative destruction where really industries need to restructure, where excess capacity needs to come out.
Speaker: Some players need to exit.
Speaker: There needs to be consolidation.
Speaker: And then –
Speaker: things kind of revive again.
Speaker: Is that kind of what you're getting at here?
Speaker: Yeah.
Speaker: No, I think Shunbita was 1950s or so.
Speaker: But that 1950s… And he didn't cover China, we should say.
Speaker: No, no.
Speaker: He didn't look at stock markets in China either.
Speaker: They were actually close to that time anyway.
Speaker: But I think you're absolutely right.
Speaker: What we need to see in China from an equities point of view…
Speaker: is that we deal with some of the problems that we have.
Speaker: And that is a destructive process.
Speaker: As we've seen in real estate, that means that certain companies need to be closed down.
Speaker: And that has happened.
Speaker: What we see in electric vehicles is that certain companies need to be closed down.
Speaker: And that is going to be a very painful process for the ones that do close down.
Speaker: But the funds who survive, it gives them opportunities to gain market share, to grow, reinvest in their businesses, etc.
Speaker: And we see this happening in a few industries.
Speaker: We see this in parts of healthcare, travel, real estate, EV.
Speaker: There's a few other industries as well.
Speaker: So I think that's a very nice comparison that you make, a Schumpeterian sort of cycle.
Speaker: But that's a slow cycle.
Speaker: But it could mean that, for example, the story on equities in 2025 for China is slightly different than the economic story.
Speaker: You're talking about stimulus and tariffs.
Speaker: We might be talking about, yeah, okay, that's all not so good.
Speaker: But actually, there are benefits coming through from that consolidation that we see in industries.
Speaker: And I suspect actually in 2025, we're going to see the early benefits of that start to come through in actual numbers of companies.
Speaker: Yes.
Speaker: Which technically means that profit growth could be faster than GDP growth.
Speaker: We always tend to think that profit growth is related to GDP growth, but really in reality can be slower or faster depending on the cycle because the profit cycle is not perfectly matched with the GDP cycle, right?
Speaker: Absolutely.
Speaker: And this is, I think, why you have a job, Harold.
Speaker: Absolutely.
Speaker: And I actually tell people do not listen to economists because… And I tell them they don't listen to strategists.
Speaker: So we were both on the same page.
Speaker: Because the story is that we need to understand what you guys say, of course, but we need to make also a distinction what that means for the listed companies.
Speaker: Profit growth tends to be faster than economic growth because economic growth is kind of sales.
Speaker: But if you have margin expansion, these sort of things, the profits can go faster.
Speaker: But in particular, in this case, there will be companies whose margins are now 2% or 3%, hardly making any money on the product they sell.
Speaker: But if their competitors are leaving, in about a year's time, their margins might go to 4% or 5% or 6% or 7%, maybe even higher.
Speaker: And that means that suddenly the profit growth is going to be much faster, despite the fact that they might not be selling that much more.
Speaker: But it's just because they have pricing power coming back.
Speaker: So there is this big distinction between economic growth and earnings growth.
Speaker: And in China, I think we're going to see that becoming a bigger story over the next one.
Speaker: So that might actually mean that all the other noise, trade tension, stimulus, et cetera, is...
Speaker: part of the story but there's an underlying cycle.
Speaker: You mentioned this consolidation, profit growth, independent cycle.
Speaker: Does that apply to Japan as well because we read a lot about the Japanese market being backed.
Speaker: you know, in terms of investor attention.
Speaker: And we've seen consolidation there coming through as well, haven't we?
Speaker: Yeah, there's actually consolidation not only in China but in many other industries as well.
Speaker: I mean, actually, a nice example of this in North Asia is actually, for example, DRAM and tech and these sort of things.
Speaker: Ten years ago, there were many producers...
Speaker: But it became so unprofitable to do so that now we have a few big producers who make this in Korea, for example, in the DRAM space.
Speaker: They're two large producers.
Speaker: So we've seen this in Japan as well.
Speaker: In Japan, of course, it's also how then companies make the next step in terms of corporate governance.
Speaker: Do they then share these benefits with themselves, with the
Speaker: the companies in their group, or do they share that with minority shareholders?
Speaker: And we see increasingly that that's exactly what they're doing.
Speaker: They're paying dividends.
Speaker: They're doing share buybacks and these sort of things.
Speaker: So you and I, as small investors, we benefit from that.
Speaker: Absolutely.
Speaker: Harold, every time I talk to you, I learn that it's not just about economics.
Speaker: There are other things that are apparently important as well in financial markets.
Speaker: But maybe this is a great time to take a quick break.
Speaker: And when we come back, we should also look at some of the other markets in Asia and how they –
Speaker: you know, what the outlook is in this topsy-turvy world we're in as we head into 2025.
Speaker: Good idea.
Speaker: Welcome back, everybody.
Speaker: We're here with Harold van der Linde and myself talking about 2025, and we can't believe it's already 2025.
Speaker: That's a bit of a cliche to say this, but then again...
Speaker: It came up very early.
Speaker: As you get older, it just happens faster and faster.
Speaker: Now, we talked about China.
Speaker: We talked about trade tensions with the US, Japan.
Speaker: One market we haven't talked about is India.
Speaker: And India is interesting because, of course, it is a giant economy.
Speaker: It's done very well in recent few years but it kind of started to lose its mojo a little bit in the second half of last year, at least in economic terms.
Speaker: It slowed down at the margin.
Speaker: A bit of food inflation is starting to fade as well.
Speaker: Central Bank can't really cut rates that quickly as it maybe would like to because there's still sticky inflation.
Speaker: So there's a sense that actually growth is kind of normalizing.
Speaker: So it was –
Speaker: You know, back to trend.
Speaker: It was for a couple of years a much, much stronger growth.
Speaker: But it's kind of coming back to earth a little bit.
Speaker: Now, that's at least from an economic perspective looks like what's going to happen in 2025 as well more or less.
Speaker: Not a terrible performance but – No, but still pretty decent growth rates.
Speaker: Still decent.
Speaker: It just comes from a hell of us.
Speaker: Here's a question for you.
Speaker: Equity markets have been red hot, right, for a while there in India.
Speaker: Is it sort of that gone out?
Speaker: This is one of the problems, actually, at least for the companies that we look at.
Speaker: So you've got an economic environment whereby things are normalizing.
Speaker: Okay, that's nice and well.
Speaker: But what we've also seen is that so many people are putting money into the stock market that banks, in order to get capital, to get money in, to lend it out to companies, had to raise their deposit rates or be creative.
Speaker: Because everybody said, why would I put my money in a bank if I only get 5% but I am guaranteed, that's how the retail story is,
Speaker: guaranteed my head was 25%.
Speaker: You're talking about local investors, right?
Speaker: I'm talking about local investors.
Speaker: Because international investors have become a bit – They pulled money out.
Speaker: They pulled money out.
Speaker: They were a bit more cautious on India, right?
Speaker: After being very, very enthusiastic for a while, they've pulled back.
Speaker: Yeah.
Speaker: And that is partially because India is still shining bright, but the light is a little bit less.
Speaker: So, things are normalizing.
Speaker: Partially also because all of the attention of the local investors went to the mid-cap companies and the
Speaker: The foreign investors typically play in the larger names and they haven't performed as well.
Speaker: Those were the banks that, for example, saw their margin squeeze as they struggled to get money.
Speaker: And partially because suddenly China, the story in China has changed.
Speaker: I was going to ask you because, you know, truth be told, every three years or so I learn something from you.
Speaker: You once told me.
Speaker: I'm not quite sure what you were in three years, but okay.
Speaker: You once told me that really if you think about equity capital in Asia,
Speaker: It's really a giant – emerging Asia, we should say.
Speaker: There's a giant pendulum, if you will.
Speaker: You get the Indian market very big, the Chinese market very big.
Speaker: And there was a sense that when the Chinese market didn't do well, that money kind of flowed into the other big market, which is India.
Speaker: Is there now a sucking sound that if really things look better in China –
Speaker: still to be determined by the way, but if that happens, that actually then people could take more money out of India.
Speaker: Is that still apply or can both markets actually receive capital?
Speaker: Both markets can receive capital, but then we need to get money coming from the rest of the world to Asia.
Speaker: And that is a story of how attractive it is to put money into the US and that's a bond yield story and these sort of things, a dollar story.
Speaker: But taking that aside, the money normally then gets reallocated within Asia.
Speaker: And yeah, China just started to look a little bit better when India was normalizing, using the word normalizing because it's still growing as fast as China on earnings.
Speaker: But the big risk really is that the local investor, which had been so enthusiastic investing in Indian markets, is...
Speaker: If they start to lose their appetite, some of that is kind of continuing.
Speaker: They have saving plans every month, so people don't close that.
Speaker: They will continue.
Speaker: But the additional money that came into the market was very often people just saying, oh, I'm going to make money in the equity markets I want to be in.
Speaker: Everybody, all my friends are in.
Speaker: If that changes, then suddenly the whole dynamics in that market change.
Speaker: It's interesting also because from an economic perspective, we tend to think of India as being less exposed to global trends.
Speaker: So US-China trade tensions doesn't impact India as much.
Speaker: It's mostly a domestically driven economy.
Speaker: Apart from oil prices matter a lot for India.
Speaker: But what you're saying is that actually to some extent economically, India may be a bit more insulated from these global trends.
Speaker: But from a financial market perspective, there is a sensitivity there that if China did really, really well, maybe that would come at the expense of the Indian stock market.
Speaker: Yeah, and that might have other consequences if that were to be the case.
Speaker: That's absolutely right.
Speaker: And those are the big markets, so they are dependent on each other.
Speaker: Although the economic connections are not always directly visible.
Speaker: It's just because if you've got a billion dollars to invest, there's only so many markets you can go to in Asia.
Speaker: That's right.
Speaker: Now, where the economic connections are very visible is actually in Southeast Asia, right?
Speaker: So we're talking about Vietnam.
Speaker: We're talking about Malaysia, Thailand, Singapore, Indonesia, and the Philippines.
Speaker: And there we've seen, though, there's an interesting dynamic that I think matters for 2025.
Speaker: These are very open economies.
Speaker: So, I think it's very trade exposed, maybe Indonesia, Philippines less so, but generally quite trade exposed, where US-China trade tensions could actually have an impact on their growth as well.
Speaker: It could be positive or it could be negative.
Speaker: And so, the risk that from a financial market perspective going to this year is actually quite large for these markets or at least the uncertainty is quite high because we don't know exactly how
Speaker: US-China trade tensions will play out.
Speaker: Absolutely right.
Speaker: And I have a question for you here.
Speaker: So first of all, these markets, because they're smaller, they are more sensitive to global flows in general.
Speaker: So if global flows are being dictated, let's say, by US bond yields, if that's the benchmark, they are more sensitive to that for the very simple reason that they don't have enough money domestically to invest.
Speaker: So they're dependent on foreign capital.
Speaker: And then the question really is in how far can these countries, and this is my question to you, put policies in place so that they actually become either less dependent on trade or benefit from these shifts in supply chains.
Speaker: And it looks to me certain countries seem to be more active in this than others.
Speaker: Is that fair to say?
Speaker: Yeah, it's quite complex, right?
Speaker: You want to have good infrastructure to attract companies to manufacture in your economy.
Speaker: So there's been a lot of emphasis on infrastructure, particularly trade infrastructure, ports, connectivity that helped economies like Vietnam, for example, like Malaysia to attract more investment, therefore trade.
Speaker: But there's also this other school of thought that says actually –
Speaker: Because the trade environment is so uncertain, you also want to develop a second leg to stand on, which is a domestic economy.
Speaker: And so how do you get that going?
Speaker: Well, that is just to your homework, right?
Speaker: Do domestic infrastructure, investment education, social services, better governance standards, education.
Speaker: and so forth.
Speaker: And there obviously there's some differences within Southeast Asia, right, that we see across many emerging market economies.
Speaker: But by and large, Southeast Asia has done quite well.
Speaker: One economy stands out actually with having had that step change in that kind of domestic growth potential is the Philippines.
Speaker: where you've seen much smaller budget deficits and much bigger allocation to infrastructure investment, which helps growth then.
Speaker: And so you really see that being reflected, therefore, in a higher trend growth rate.
Speaker: And in fact, arguably, the Philippines has now, with Vietnam, probably the highest trend growth rate in Southeast Asia.
Speaker: It's often not talked about.
Speaker: Everybody talks about Vietnam and so forth.
Speaker: But the Philippines has sort of quietly come up there
Speaker: It is interesting because I know that the new Indonesian president wants to do this as well.
Speaker: So he's actively talking, I want much higher GDP growth rates.
Speaker: Now, if they're going to put the policies in place to get there is a question that we'll have to answer in 2025 as well.
Speaker: But you can see within the region that this is possible.
Speaker: Absolutely right.
Speaker: Yeah.
Speaker: And I guess for Indonesia, the advantage is they're not as exposed to US-China trade tensions.
Speaker: But if they want to raise the growth potential, they still need to have the right domestic policies.
Speaker: And of course, we'll see whether no president is able to enact these reforms that are needed.
Speaker: So, Harold, big tour around the region.
Speaker: We could obviously talk much longer than that.
Speaker: You're a strategist.
Speaker: I'm an economist.
Speaker: We could talk for hours and never reach a conclusion.
Speaker: But maybe, you know, for the sake of the audience, we'll just cut it here.
Speaker: I'm sure many of these themes we will revisit over the course of this year.
Speaker: And, you know, the risk is that obviously some of the conclusions we drew today are already obsolete by next week.
Speaker: That might well be.
Speaker: Let's see what happens over the next couple of weeks.
Speaker: Which is one reason actually why listeners should subscribe to this podcast because things change every single week.
Speaker: Absolutely.
Speaker: That's a fantastic note to finish on.
Speaker: Thank you very much, Fred.
Speaker: Thank you.
Speaker: That's a wrap, folks.
Speaker: Thank you for joining us on our first podcast for 2025.
Speaker: It's been great having you with us.
Speaker: Indeed, and there'll be many more to come.
Speaker: Make sure you join us and also give our sister podcast, The Macrobrief, a listen for your weekly global economics fix.
Speaker: We'll be back same time next Thursday.
Speaker: Talk to you then.
Speaker: Thank you for joining us at HSBC Global Viewpoint.
Speaker: We hope you enjoyed the discussion.
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