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 from HSBC Hong Kong and welcome to Under the Banyan Tree, where we put Asian markets and economics in context.
Speaker: I'm Harold van der Linde, head of Asian Equity Strategy.
Speaker: And I'm Fred Newman, chief Asia economist.
Speaker: Today we're taking Asia's economic polls based on three key indicators.
Speaker: That's right, Fred.
Speaker: The strong US dollar, interest rate, uncertainty and exports are all hot topics for investors right now.
Speaker: Let's see if we can pull those trends together and gauge how Asia's looking on the macro and micro fronts.
Speaker: From HSBC Global Research, you're listening to Under the Banyan Tree.
Speaker: A little context to set the scene for today's discussion.
Speaker: The US dollar has been on the up in 2024.
Speaker: 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.
Speaker: 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.
Speaker: Until then, US interest rates remain high and deposits there remain pretty attractive.
Speaker: Meanwhile, export orders in key Asian economies like mainland China and Korea are rising.
Speaker: Fred, let's start with the US dollar.
Speaker: It's been on the run.
Speaker: 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?
Speaker: The dollar is certainly strong against virtually all Asian currencies at the moment.
Speaker: And I think you're right.
Speaker: It's partly it is the market is changing its expectations on U.S. interest rates.
Speaker: So very high U.S. interest rates, of course, make the dollar attractive.
Speaker: The dollar appreciates gains in value against other currencies.
Speaker: So that is the main story.
Speaker: But I would add there are two other factors here, quietly working in a backdrop.
Speaker: And that is...
Speaker: One is that the Chinese economy continues to be on the weak side.
Speaker: And so, remember, currencies are really price of two things.
Speaker: Dollar, expensive, because we like dollar because of high interest rates.
Speaker: But also, there's really little incentive to buy the Chinese currency at the moment because...
Speaker: investors don't have really that confidence that there's roaring growth coming through.
Speaker: And so, to some extent, the weakness in China is also helping to lift the dollar.
Speaker: And the weakness of the Chinese currency is also pulling down other Asian currencies, right?
Speaker: So that is part of the equation.
Speaker: Yeah, because they would follow that currency.
Speaker: They would follow that.
Speaker: It's a pace setter.
Speaker: Exactly.
Speaker: It's the pace setter across the region to keep competitiveness, you could say.
Speaker: That's right.
Speaker: And then there's a third factor which we shouldn't forget, and that's geopolitical risk, right?
Speaker: So we've seen, of course, events in the Middle East tragically unfold.
Speaker: We still have tensions, geopolitical tensions in Eastern Europe, certainly the war in Ukraine.
Speaker: And all of that actually benefits the U.S. dollar.
Speaker: And we sort of say it's good for risk of assets.
Speaker: Gold, for example, did very well.
Speaker: But a dollar benefits.
Speaker: Swiss franc and some of these are safe havens, right?
Speaker: And interestingly, the Japanese yen no longer is necessarily in that category.
Speaker: So traditionally, it's Japanese yen that benefits.
Speaker: At the moment, it's not really benefiting from that category.
Speaker: geopolitical risk.
Speaker: 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.
Speaker: 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?
Speaker: 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.
Speaker: Most central banks, not all of them.
Speaker: No, but broadly speaking.
Speaker: But their hands are tied to some extent from or by the strong U.S. dollar.
Speaker: If they cut now, the dollar would...
Speaker: appreciate, gain in value even more against Asian currencies.
Speaker: And so Asian-centric banks have become defensive.
Speaker: They're deferring their rate cuts.
Speaker: They're postponing their rate cuts because they want to stabilize these currencies.
Speaker: And as a result, interest rates in Asia as well are staying higher for longer.
Speaker: And that, of course, weighs on economic growth because the economies are not getting that relief from lower interest rates.
Speaker: But that's, of course, not terribly good news for economic growth.
Speaker: It's not catastrophic, but it's certainly a headwind.
Speaker: But I have a question for you here.
Speaker: How do markets kind of react to this?
Speaker: High U.S. interest rates, strong U.S. dollar.
Speaker: Does that affect market behavior in Asia?
Speaker: Surely high U.S. interest rates must be a headwind for Asian markets.
Speaker: It's a serious headwind for Asian equities.
Speaker: 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.
Speaker: And therefore, on the margin, people say, well, why would I then put my money into other parts of the world, including Asia?
Speaker: So the relative attractiveness is what we look at.
Speaker: And this is clearly a problem.
Speaker: We call that the equity discount rate and these sort of things.
Speaker: But that's basically what is taking place.
Speaker: Now, Asian equities have therefore been weak over the last couple of weeks or so for that reason.
Speaker: There is some confidence, I would say, as well, that comes out of it.
Speaker: This is a natural process that continues to happen over the years.
Speaker: But Asian markets have held up reasonably well, and particularly in the Chinese markets, quite sensitive to these movements.
Speaker: And it's held up reasonably well.
Speaker: It's come off a bit, but not as much as I would have expected, say, 12 months ago.
Speaker: Then you would have seen probably more severe sell down in Chinese equities.
Speaker: So...
Speaker: 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.
Speaker: 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.
Speaker: A lot of money is sticky here in local markets.
Speaker: You've written about this quite a bit, this idea of Asia for Asia investment.
Speaker: A lot of it is really tied down here.
Speaker: Talk to us a little bit about that and how...
Speaker: the depth of Asian markets provides some resilience, at least in this world where seemingly every investor is looking to the United States.
Speaker: But what anchors Asian markets?
Speaker: This is something we've literally written about for the last over 10 years now.
Speaker: Asia buys Asia, we call it.
Speaker: When I started as a young analyst in the 90s, I was based as an analyst in Indonesia.
Speaker: You weren't that young in the 1990s, just for the record, but yes, go on.
Speaker: Yes, I look much younger, that's for sure.
Speaker: But most of our clients were European or US-based funds.
Speaker: So your marketing was, you had to go to Europe, you had to meet these people.
Speaker: Remember, travel wasn't as common in those days.
Speaker: Information flows were very different.
Speaker: So you would meet investors there to tell them what was going on in places like Indonesia because that's where the investors were.
Speaker: That is changing now.
Speaker: You have now large funds in Korea, in Japan, of course, in Taiwan.
Speaker: In India, there are funds emerging in Thailand.
Speaker: So because Asia is aging, it has become wealthier.
Speaker: More money, more savings have been accumulated here.
Speaker: And that wealth is being reinvested around the world.
Speaker: But of course, in Asia as well, people have a home bias.
Speaker: So that's true.
Speaker: So part of the reason why we are not as sensitive anymore to
Speaker: The increase in what, of the movements of what happens in US markets is because we have domestic bias.
Speaker: So that's a positive thing.
Speaker: And I think that's an important point because, of course, you referenced the 1990s.
Speaker: I'm too young to remember that.
Speaker: Of course, you were not even born in that crisis.
Speaker: 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.
Speaker: And that kind of drew capital from Asia back into the United States and exposed that funding weakness.
Speaker: And now there is really no trace of that risk, despite the fact that we have higher US interest rates and stronger dollar.
Speaker: 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
Speaker: region that provides that buffer, if you will, against too rapid capital withdrawal.
Speaker: Exactly.
Speaker: So that's a positive for us.
Speaker: And I think a great example is India at the moment.
Speaker: There's a lot of money that comes from local retail investors that
Speaker: Sometimes invest themselves, sometimes through funds, of course.
Speaker: But what you see is that these people are more acquainted with, say, mid-sized companies.
Speaker: 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.
Speaker: But in India, you might know the local retailer in, I don't know, Tamil Nadu, that it happens to be listed.
Speaker: And you feel confident investing in it because you see it as well.
Speaker: So you see that these people are much more willing to go into midsize and smaller companies in their respective markets.
Speaker: And that's good for these companies, right?
Speaker: It broadens access to capital to a lot of these sort of companies.
Speaker: Yeah, and we call this home bias, right?
Speaker: This is familiarity with local companies, local markets, and that's why there is still a sizable investment pool within Asia.
Speaker: But I think this is a great point to actually take a quick break.
Speaker: And I think when we come back, we should also talk about the positives of dollar strength for Asian growth at the moment.
Speaker: We highlighted some of the headwinds, but there are also some positives.
Speaker: So when we come back, let's talk about that.
Speaker: Interesting.
Speaker: So Fred, you said there was something positive to the dollar, so I'm eager to know what that may be.
Speaker: Well, you know, the instinct of a sell-side analyst always to find that silver lining in the positive story.
Speaker: But here, indeed, when we think about currency depreciation in Asia, it is ultimately good for exporters.
Speaker: And ultimately, a stronger dollar, higher US interest rates than expected, suggests that the US economy is doing better than expected.
Speaker: And the US is still a big market for Asian exporters.
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.
Speaker: And that's ultimately the positive story.
Speaker: Now, there's a slight silver lining or slight, I'd say, cloud on the horizon here.
Speaker: It's not blue sky.
Speaker: And that is, of course, there's a relative game within Asia.
Speaker: That is, you know, China is gaining a lot of competitiveness because of falling cost pressures domestically.
Speaker: So other Asian economies have to offset that problem.
Speaker: price competitiveness from China, for example.
Speaker: But by and large, weaker Asian currencies ultimately mean more export revenues and therefore stronger growth ultimately.
Speaker: But the question is, do you see that already when you think about companies?
Speaker: Does it affect how we think about allocation within equity markets?
Speaker: Does it mean exporters are in a more favorable position at the moment?
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.
Speaker: So that's good for exporters.
Speaker: So you see a shift towards exporters that happens.
Speaker: But of course, then it depends on what you export.
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.
Speaker: So you have a relative kind of cost advantage that's good.
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.
Speaker: They need your chip anyway.
Speaker: So then it doesn't matter too much.
Speaker: In other sectors, thinking about the Chinese EVs, electric vehicles, they can export more, but they do it already.
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.
Speaker: So...
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.
Speaker: But you've seen some green shoots, I think, in Asian exports, right?
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.
Speaker: It does at the margin.
Speaker: So despite a relatively weak global growth backdrop, remember in Europe, still things a bit soggy.
Speaker: Chinese economy, not quite where we want it to be.
Speaker: US is doing better, of course.
Speaker: But what's surprising is that actually the manufacturing cycle has turned up in recent months across Asia.
Speaker: So we see positive export momentum, particularly from these high
Speaker: highly cyclical economies like Korea, Taiwan, they see the shipment numbers improve.
Speaker: We see record container throughput in global ports at the moment.
Speaker: We see close to record Chinese export volumes at the moment.
Speaker: So that suggests that some of the dollar strength is starting to translate into support for the Asian industrial cycle.
Speaker: That's a positive thing, and that's ultimately positive for growth.
Speaker: It's also in economics, there's this concept of a J-curve effect.
Speaker: That is, you have weaker currencies within the first phase.
Speaker: It's not terribly helpful because central banks are defensive, keep interest rates higher to defend the currencies.
Speaker: But after a while, ultimately, the benefits of a weaker currency start to come through.
Speaker: And I think we're just at the beginning of those benefits starting to percolate through.
Speaker: And so that's then the positive aspect ultimately of weaker currencies.
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?
Speaker: And does that then mean there's a differentiation between economies?
Speaker: No, absolutely right.
Speaker: And this is further exacerbated by something you mentioned earlier.
Speaker: So you've got the Koreans and the Taiwanese, Singapore maybe as well.
Speaker: They're really export oriented sort of markets, stock markets.
Speaker: Indonesia and India are much more domestic oriented.
Speaker: But also because Korea, Taiwan and Singapore are what we call small exporters, they try to keep their currency...
Speaker: at par or not move too much with the US dollar because that's really important, the export sector for them.
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.
Speaker: In Indonesia and India, that's very different, right?
Speaker: They're much more domestic oriented economies.
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.
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?
Speaker: What does that do to the currency and these sort of things?
Speaker: But broadly speaking, Korea, Taiwan, Singapore, Japan, to a large extent, those are the key exporters, China, India, Indonesia.
Speaker: Those are the real big domestic markets.
Speaker: And that reminds me, that's the joy of our job, Harold, is one dollar, but many Asians.
Speaker: And sussing out those nuances, of course, is what we do.
Speaker: And that's part of the joy of covering the Asia region.
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.
Speaker: So anything that has irked your interest in the last few weeks?
Speaker: Well, there's one story I can't let go of, and that ties into what we just discussed, which is Asian exports.
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.
Speaker: Fences?
Speaker: You mean between houses?
Speaker: Between houses, apparently.
Speaker: Separate gardens.
Speaker: Yeah, to separate their gardens and keep their dog in their compound.
Speaker: Mm-hmm.
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.
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.
Speaker: And that, of course, leads to price declines.
Speaker: Now, the resulting question of this is, of course, this is a good thing in many ways.
Speaker: It's good for two ways, because not only do you have a solar panel and you go, therefore, green, right?
Speaker: But also you don't have to cut down the tree to get the wood for the fence that you normally have, right?
Speaker: That's the point, yes.
Speaker: It works in both ways.
Speaker: It works in both ways.
Speaker: I'm not sure environmentalists would entirely agree with that.
Speaker: No, maybe not.
Speaker: But...
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?
Speaker: Because it seems to me it's a cheap form of energy, it's one of the cheapest ones around.
Speaker: And why do we not see more solar insulation?
Speaker: Why is that excess capacity not being soaked up by a world?
Speaker: It seems to me a golden opportunity to actually accelerate the energy transition.
Speaker: Good question.
Speaker: I actually don't know exactly the answer.
Speaker: Maybe we should put it out there for anybody who has an answer to this.
Speaker: Why aren't people buying more solar panels and put it everywhere?
Speaker: And get in touch with us on LinkedIn if you have any good suggestion on this.
Speaker: And that brings us to the end of today's podcast.
Speaker: Thanks as always for joining us.
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