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Under the Banyan Tree - State of the Region: King dollar, interest rates and trade
23 Plays1 year ago
Fred Neumann and Herald van der Linde take a look at Asian markets and economics through the lens of three key topics making headlines in the investor community. Disclaimer: https://www.research.hsbc.com/R/101/zP6bqHz. Stay connected and access free to view reports and videos from HSBC Global Research follow us on LinkedIn https://www.linkedin.com/feed/hashtag/hsbcresearch/ or click here: https://www.gbm.hsbc.com/insights/global-research.
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Transcript
Introduction to Podcast Series
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.
00:00:16
Speaker
Thanks for listening.
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Speaker
And now onto today's show.
Key Indicators in Asian Markets
00:00:24
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This is a podcast from HSBC Global Research, available on Apple Podcasts and Spotify.
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However you're listening, analyst notifications, disclosures and disclaimers must be viewed on the link attached to your media player.
00:00:46
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Hello from HSBC Hong Kong and welcome to Under the Banyan Tree, where we put Asian markets and economics in context.
00:00:53
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I'm Harold van der Linde, head of Asian Equity Strategy.
00:00:56
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And I'm Fred Newman, chief Asia economist.
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Today we're taking Asia's economic polls based on three key indicators.
00:01:02
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That's right, Fred.
00:01:03
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The strong US dollar, interest rate, uncertainty and exports are all hot topics for investors right now.
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Let's see if we can pull those trends together and gauge how Asia's looking on the macro and micro fronts.
00:01:15
Speaker
From HSBC Global Research, you're listening to Under the Banyan Tree.
Implications of Rising US Dollar
00:01:34
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A little context to set the scene for today's discussion.
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The US dollar has been on the up in 2024.
00:01:40
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Since the start of the year, it gained about 8% against the Japanese yen, 6% versus the Korean won, and about 2% against the Chinese renminbi.
00:01:49
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On the policy side, most of Asia and the rest of the world is waiting for that first rate cut from the Federal Reserve in the US.
00:01:56
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Until then, US interest rates remain high and deposits there remain pretty attractive.
00:02:01
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Meanwhile, export orders in key Asian economies like mainland China and Korea are rising.
00:02:06
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Fred, let's start with the US dollar.
00:02:08
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It's been on the run.
00:02:10
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Is this the same old story of inflation back in the US and interest rates maybe going high there, people putting money back in the US and there for the stronger dollar?
00:02:20
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The dollar is certainly strong against virtually all Asian currencies at the moment.
00:02:24
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And I think you're right.
00:02:25
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It's partly it is the market is changing its expectations on U.S. interest rates.
00:02:30
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So very high U.S. interest rates, of course, make the dollar attractive.
00:02:34
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The dollar appreciates gains in value against other currencies.
00:02:38
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So that is the main story.
00:02:40
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But I would add there are two other factors here, quietly working in a backdrop.
00:02:44
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And that is...
00:02:44
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One is that the Chinese economy continues to be on the weak side.
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And so, remember, currencies are really price of two things.
00:02:53
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Dollar, expensive, because we like dollar because of high interest rates.
00:02:57
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But also, there's really little incentive to buy the Chinese currency at the moment because...
00:03:03
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investors don't have really that confidence that there's roaring growth coming through.
00:03:07
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And so, to some extent, the weakness in China is also helping to lift the dollar.
00:03:15
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And the weakness of the Chinese currency is also pulling down other Asian currencies,
Challenges for Asian Central Banks
00:03:19
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right?
00:03:19
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So that is part of the equation.
00:03:20
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Yeah, because they would follow that currency.
00:03:22
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They would follow that.
00:03:23
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It's a pace setter.
00:03:24
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Exactly.
00:03:24
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It's the pace setter across the region to keep competitiveness, you could say.
00:03:27
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That's right.
00:03:28
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And then there's a third factor which we shouldn't forget, and that's geopolitical risk, right?
00:03:32
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So we've seen, of course, events in the Middle East tragically unfold.
00:03:37
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We still have tensions, geopolitical tensions in Eastern Europe, certainly the war in Ukraine.
00:03:43
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And all of that actually benefits the U.S. dollar.
00:03:46
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And we sort of say it's good for risk of assets.
00:03:50
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Gold, for example, did very well.
00:03:53
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But a dollar benefits.
00:03:54
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Swiss franc and some of these are safe havens, right?
00:03:56
Speaker
And interestingly, the Japanese yen no longer is necessarily in that category.
00:04:01
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So traditionally, it's Japanese yen that benefits.
00:04:04
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At the moment, it's not really benefiting from that category.
00:04:07
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geopolitical risk.
00:04:08
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So the dollar is still the king of the currency world and so that's why it rallies and of course that then has implications for Asian financial markets and Asian economies for example.
00:04:18
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Well let's go there right I mean what are the implications for rates here so central banks were talking about cutting interest rates across the region but if there's inflation in the US and they might not be cutting in the US I guess they have to kind of meet again and scratch their hats and say are we going to do it now or are we going to delay it?
00:04:36
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Well, they're scratching their heads quite a bit because actually central banks in Asia would like to cut possibly interest rates because inflation has come down.
00:04:45
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Most central banks, not all of them.
00:04:46
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No, but broadly speaking.
00:04:48
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But their hands are tied to some extent from or by the strong U.S. dollar.
00:04:54
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If they cut now, the dollar would...
00:04:57
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appreciate, gain in value even more against Asian currencies.
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And so Asian-centric banks have become defensive.
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They're deferring their rate cuts.
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They're postponing their rate cuts because they want to stabilize these currencies.
00:05:11
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And as a result, interest rates in Asia as well are staying higher for longer.
00:05:17
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And that, of course, weighs on economic growth because the economies are not getting that relief from lower interest rates.
00:05:24
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But that's, of course, not terribly good news for economic growth.
00:05:28
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It's not catastrophic, but it's certainly a headwind.
00:05:31
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But I have a question for you here.
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How do markets kind of react to this?
00:05:37
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High U.S. interest rates, strong U.S. dollar.
00:05:41
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Does that affect market behavior in Asia?
Impact of US Interest Rates on Investments
00:05:45
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Surely high U.S. interest rates must be a headwind for Asian markets.
00:05:50
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It's a serious headwind for Asian equities.
00:05:53
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The issue is very simply that it is more attractive to keep your money in the US because the deposit rate that you can get there is now higher than you thought it to be a month ago.
00:06:06
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And therefore, on the margin, people say, well, why would I then put my money into other parts of the world, including Asia?
00:06:12
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So the relative attractiveness is what we look at.
00:06:14
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And this is clearly a problem.
00:06:16
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We call that the equity discount rate and these sort of things.
00:06:19
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But that's basically what is taking place.
00:06:22
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Now, Asian equities have therefore been weak over the last couple of weeks or so for that reason.
00:06:28
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There is some confidence, I would say, as well, that comes out of it.
00:06:31
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This is a natural process that continues to happen over the years.
00:06:36
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But Asian markets have held up reasonably well, and particularly in the Chinese markets, quite sensitive to these movements.
00:06:42
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And it's held up reasonably well.
00:06:43
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It's come off a bit, but not as much as I would have expected, say, 12 months ago.
00:06:48
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Then you would have seen probably more severe sell down in Chinese equities.
00:06:52
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So...
00:06:54
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Yeah, it is true that money flows to the US, but it seems that people have been somewhat reluctant in doing so, if you want to put it like that.
00:07:01
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And of course, we shouldn't forget that it's not just money flowing to the US, but Asia has a lot of money itself to invest.
00:07:08
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A lot of money is sticky here in local markets.
Asia's Internal Investment Resilience
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You've written about this quite a bit, this idea of Asia for Asia investment.
00:07:15
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A lot of it is really tied down here.
00:07:18
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Talk to us a little bit about that and how...
00:07:21
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the depth of Asian markets provides some resilience, at least in this world where seemingly every investor is looking to the United States.
00:07:30
Speaker
But what anchors Asian markets?
00:07:31
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This is something we've literally written about for the last over 10 years now.
00:07:36
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Asia buys Asia, we call it.
00:07:39
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When I started as a young analyst in the 90s, I was based as an analyst in Indonesia.
00:07:44
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You weren't that young in the 1990s, just for the record, but yes, go on.
00:07:48
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Yes, I look much younger, that's for sure.
00:07:51
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But most of our clients were European or US-based funds.
00:07:57
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So your marketing was, you had to go to Europe, you had to meet these people.
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Remember, travel wasn't as common in those days.
00:08:04
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Information flows were very different.
00:08:06
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So you would meet investors there to tell them what was going on in places like Indonesia because that's where the investors were.
00:08:13
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That is changing now.
00:08:14
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You have now large funds in Korea, in Japan, of course, in Taiwan.
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In India, there are funds emerging in Thailand.
00:08:23
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So because Asia is aging, it has become wealthier.
00:08:27
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More money, more savings have been accumulated here.
00:08:30
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And that wealth is being reinvested around the world.
00:08:32
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But of course, in Asia as well, people have a home bias.
00:08:35
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So that's true.
00:08:35
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So part of the reason why we are not as sensitive anymore to
00:08:40
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The increase in what, of the movements of what happens in US markets is because we have domestic bias.
00:08:45
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So that's a positive thing.
00:08:46
Speaker
And I think that's an important point because, of course, you referenced the 1990s.
00:08:51
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I'm too young to remember that.
00:08:53
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Of course, you were not even born in that crisis.
00:08:54
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But I read from history books that there was something called the Asian Financial Crisis, which got triggered in part by the Federal Reserve raising interest rates and the dollar being strong.
00:09:04
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And that kind of drew capital from Asia back into the United States and exposed that funding weakness.
00:09:10
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And now there is really no trace of that risk, despite the fact that we have higher US interest rates and stronger dollar.
00:09:18
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And that is, of course, because the fundamentals are better, but also because financial markets have decoupled to some extent in the sense of there being much deeper pools of liquidity within Asia being invested by Asians within their own
00:09:34
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region that provides that buffer, if you will, against too rapid capital withdrawal.
00:09:39
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Exactly.
00:09:40
Speaker
So that's a positive for us.
00:09:42
Speaker
And I think a great example is India at the moment.
00:09:45
Speaker
There's a lot of money that comes from local retail investors
Benefits of Weak Asian Currencies
00:09:49
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that
00:09:49
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Sometimes invest themselves, sometimes through funds, of course.
00:09:52
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But what you see is that these people are more acquainted with, say, mid-sized companies.
00:09:57
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If you sit in New York and you travel to Asia once, maybe twice a year, you see some companies, but most of the companies you see will be the large caps that most people know, and that's where you focus on.
00:10:09
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But in India, you might know the local retailer in, I don't know, Tamil Nadu, that it happens to be listed.
00:10:15
Speaker
And you feel confident investing in it because you see it as well.
00:10:19
Speaker
So you see that these people are much more willing to go into midsize and smaller companies in their respective markets.
00:10:25
Speaker
And that's good for these companies, right?
00:10:27
Speaker
It broadens access to capital to a lot of these sort of companies.
00:10:31
Speaker
Yeah, and we call this home bias, right?
00:10:33
Speaker
This is familiarity with local companies, local markets, and that's why there is still a sizable investment pool within Asia.
00:10:41
Speaker
But I think this is a great point to actually take a quick break.
00:10:45
Speaker
And I think when we come back, we should also talk about the positives of dollar strength for Asian growth at the moment.
00:10:52
Speaker
We highlighted some of the headwinds, but there are also some positives.
00:10:55
Speaker
So when we come back, let's talk about that.
00:10:57
Speaker
Interesting.
00:11:08
Speaker
So Fred, you said there was something positive to the dollar, so I'm eager to know what that may be.
00:11:14
Speaker
Well, you know, the instinct of a sell-side analyst always to find that silver lining in the positive story.
00:11:20
Speaker
But here, indeed, when we think about currency depreciation in Asia, it is ultimately good for exporters.
00:11:29
Speaker
And ultimately, a stronger dollar, higher US interest rates than expected, suggests that the US economy is doing better than expected.
00:11:38
Speaker
And the US is still a big market for Asian exporters.
00:11:41
Speaker
So we not only does it reflect stronger growth and demand in the US, but also the fact that the dollar is stronger translates these export revenues into higher local currency revenues for Asian exporters.
00:11:53
Speaker
And that's ultimately the positive story.
00:11:55
Speaker
Now, there's a slight silver lining or slight, I'd say, cloud on the horizon here.
00:12:01
Speaker
It's not blue sky.
00:12:05
Speaker
And that is, of course, there's a relative game within Asia.
00:12:08
Speaker
That is, you know, China is gaining a lot of competitiveness because of falling cost pressures domestically.
00:12:14
Speaker
So other Asian economies have to offset that problem.
00:12:17
Speaker
price competitiveness from China, for example.
00:12:20
Speaker
But by and large, weaker Asian currencies ultimately mean more export revenues and therefore stronger growth ultimately.
00:12:28
Speaker
But the question is, do you see that already when you think about companies?
00:12:33
Speaker
Does it affect how we think about allocation within equity markets?
00:12:39
Speaker
Does it mean exporters are in a more favorable position at the moment?
00:12:43
Speaker
Yeah, broadly speaking, where you start off with, of course, if these currencies are weaker, they are relatively cheaper producers than the US counterpart in this case, or anybody who's in a dollar counterpart.
00:12:54
Speaker
So that's good for exporters.
00:12:56
Speaker
So you see a shift towards exporters that happens.
00:12:58
Speaker
But of course, then it depends on what you export.
00:13:01
Speaker
Now, if you export a microphone, something I'm looking at at the moment, then there's a lot of companies that do that around the region.
00:13:09
Speaker
So you have a relative kind of cost advantage that's good.
00:13:12
Speaker
But if you make extremely complex chips, for example, for using computers and for military applications or for space applications, really advanced stuff, yeah, you might have a bit of a cost advantage, but people don't really care about that.
00:13:27
Speaker
They need your chip anyway.
00:13:29
Speaker
So then it doesn't matter too much.
00:13:31
Speaker
In other sectors, thinking about the Chinese EVs, electric vehicles, they can export more, but they do it already.
00:13:39
Speaker
And the other dynamic is there are so many electric vehicles being made in China now that can't be sold domestically, so they've got to find a way out.
00:13:46
Speaker
So...
00:13:47
Speaker
Within the exporter's stories, yes, the dollar is important, but there's a lot of other stories as well, very often depending on the competitiveness or the product or the industry dynamics that are important as well.
00:13:57
Speaker
But you've seen some green shoots, I think, in Asian exports, right?
00:14:02
Speaker
So this should be, from a kind of a macro point of view at least, give it a little bit more kind of warmth and light to those industries.
00:14:08
Speaker
It does at the margin.
00:14:09
Speaker
So despite a relatively weak global growth backdrop, remember in Europe, still things a bit soggy.
00:14:17
Speaker
Chinese economy, not quite where we want it to be.
00:14:20
Speaker
US is doing better, of course.
00:14:22
Speaker
But what's surprising is that actually the manufacturing cycle has turned up in recent months across Asia.
00:14:29
Speaker
So we see positive export momentum, particularly from these high
00:14:33
Speaker
highly cyclical economies like Korea, Taiwan, they see the shipment numbers improve.
00:14:40
Speaker
We see record container throughput in global ports at the moment.
00:14:44
Speaker
We see close to record Chinese export volumes at the moment.
00:14:50
Speaker
So that suggests that some of the dollar strength is starting to translate into support for the Asian industrial cycle.
00:14:59
Speaker
That's a positive thing, and that's ultimately positive for growth.
00:15:04
Speaker
It's also in economics, there's this concept of a J-curve effect.
00:15:08
Speaker
That is, you have weaker currencies within the first phase.
00:15:12
Speaker
It's not terribly helpful because central banks are defensive, keep interest rates higher to defend the currencies.
00:15:18
Speaker
But after a while, ultimately, the benefits of a weaker currency start to come through.
00:15:24
Speaker
And I think we're just at the beginning of those benefits starting to percolate through.
00:15:28
Speaker
And so that's then the positive aspect ultimately of weaker currencies.
00:15:34
Speaker
But if you still think about Asian markets though from an equity perspective, is it fair to say that some are much more export exposed and other much more domestic demand exposed?
00:15:46
Speaker
And does that then mean there's a differentiation between economies?
00:15:51
Speaker
No, absolutely right.
00:15:52
Speaker
And this is further exacerbated by something you mentioned earlier.
00:15:55
Speaker
So you've got the Koreans and the Taiwanese, Singapore maybe as well.
00:15:58
Speaker
They're really export oriented sort of markets, stock markets.
00:16:02
Speaker
Indonesia and India are much more domestic oriented.
00:16:05
Speaker
But also because Korea, Taiwan and Singapore are what we call small exporters, they try to keep their currency...
00:16:13
Speaker
at par or not move too much with the US dollar because that's really important, the export sector for them.
00:16:20
Speaker
And therefore they have to follow what the US dollar does in interest rates to keep their relative attractiveness of the currencies in line.
00:16:27
Speaker
In Indonesia and India, that's very different, right?
00:16:31
Speaker
They're much more domestic oriented economies.
00:16:33
Speaker
And the currency that they sometimes allow it to let it go because they want to focus on what happens domestically and maybe they have to lower these interest rates.
00:16:42
Speaker
So the sort of monetary policies that you guys very often talk about are very important for us to figure out, yeah, what do they do with these interest rates?
00:16:51
Speaker
What does that do to the currency and these sort of things?
00:16:53
Speaker
But broadly speaking, Korea, Taiwan, Singapore, Japan, to a large extent, those are the key exporters, China, India, Indonesia.
00:17:00
Speaker
Those are the real big domestic markets.
00:17:02
Speaker
And that reminds me, that's the joy of our job, Harold, is one dollar, but many Asians.
00:17:07
Speaker
And sussing out those nuances, of course, is what we do.
00:17:10
Speaker
And that's part of the joy of covering the Asia region.
Solar Energy Investment Dilemma
00:17:25
Speaker
So Fred, once in a while, at the end of the podcast, we're talking about something that you've seen or that you've been reading or something that's been on your mind.
00:17:34
Speaker
So anything that has irked your interest in the last few weeks?
00:17:38
Speaker
Well, there's one story I can't let go of, and that ties into what we just discussed, which is Asian exports.
00:17:45
Speaker
There was a story in the Financial Times recently that suggested that solar panels have become so cheap now that in Germany, people are using solar panels as fences.
00:17:58
Speaker
Fences?
00:17:58
Speaker
You mean between houses?
00:18:00
Speaker
Between houses, apparently.
00:18:01
Speaker
Separate gardens.
00:18:01
Speaker
Yeah, to separate their gardens and keep their dog in their compound.
00:18:06
Speaker
Mm-hmm.
00:18:07
Speaker
And that suggests actually that we do have enormous price declines in solar panels because, of course, China is vastly productive in this field.
00:18:16
Speaker
And there's also other statistics that suggest that China has at the moment twice the capacity on solar panel production than there is global demand this year.
00:18:28
Speaker
And that, of course, leads to price declines.
00:18:30
Speaker
Now, the resulting question of this is, of course, this is a good thing in many ways.
00:18:34
Speaker
It's good for two ways, because not only do you have a solar panel and you go, therefore, green, right?
00:18:40
Speaker
But also you don't have to cut down the tree to get the wood for the fence that you normally have, right?
00:18:46
Speaker
That's the point, yes.
00:18:47
Speaker
It works in both ways.
00:18:48
Speaker
It works in both ways.
00:18:49
Speaker
I'm not sure environmentalists would entirely agree with that.
00:18:52
Speaker
No, maybe not.
00:18:53
Speaker
But...
00:18:54
Speaker
One of the questions I generally have and don't know the answer to this is if solar panels are so cheap at the moment, why doesn't the world not invest more in solar energy?
00:19:05
Speaker
Because it seems to me it's a cheap form of energy, it's one of the cheapest ones around.
00:19:09
Speaker
And why do we not see more solar insulation?
00:19:12
Speaker
Why is that excess capacity not being soaked up by a world?
00:19:15
Speaker
It seems to me a golden opportunity to actually accelerate the energy transition.
00:19:19
Speaker
Good question.
00:19:19
Speaker
I actually don't know exactly the answer.
00:19:22
Speaker
Maybe we should put it out there for anybody who has an answer to this.
00:19:26
Speaker
Why aren't people buying more solar panels and put it everywhere?
00:19:29
Speaker
And get in touch with us on LinkedIn if you have any good suggestion on this.
00:19:35
Speaker
And that brings us to the end of today's podcast.
00:19:37
Speaker
Thanks as always for joining us.
00:19:39
Speaker
Under the Banyan Tree is an HSBC Global Research production, as is our sister podcast, The Macro Brief.
00:19:46
Speaker
You can listen and subscribe to both on Apple, Spotify, or wherever you get your podcasts.
00:19:52
Speaker
Take care, and we'll be back again next week.
00:20:14
Speaker
Thank you for joining us at HSBC Global Viewpoint.
00:20:18
Speaker
We hope you enjoyed the discussion.
00:20:20
Speaker
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