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: Hello and welcome to another episode of Under the Banyan Tree.
Speaker: I'm Harold van der Linde, HSBC's Head of Asian Equity Strategy, coming to you this week from Stockholm, Sweden.
Speaker: And I'm Fred Newman, Chief Asia Economist and still in Switzerland.
Speaker: Harold, what's coming up on the podcast today?
Speaker: This week we're going to be looking at growth and corporate earnings.
Speaker: Result season has wound down for the quarter in Asia and we want to see what we can take away from the most recent numbers.
Speaker: Plus, we'll bring our usual dose of context to the table, helping you understand what those numbers mean in terms of markets and economics.
Speaker: And with that, let's get the show on the way.
Speaker: Harold, earnings season across Asia has just come to an end.
Speaker: How are earnings going?
Speaker: Are companies really suffering from these global economic challenges or have we seen some upside surprises?
Speaker: Well, we've seen some upside surprises, but overall, companies have had to lower their numbers or have not met the expectations that the market has set.
Speaker: What we've seen is that earnings estimates have come down.
Speaker: In January, consensus was still looking for close to 10% earnings growth across the region, and consensus is now looking at 4.4% earnings growth for 2022.
Speaker: So the 4.4% earnings growth, just to put this a little bit in context, we've had some wild swings in earnings in 2020, 2021 because of COVID.
Speaker: But if you compare that to an average over the last 10 years, that's been around, say, 5 to 6%.
Speaker: So the 4.4% is just below what I would call a 10-year average in Asia.
Speaker: So these numbers have come down.
Speaker: And the overriding issue, the overriding theme, I would even say, across the whole region has been margin pressure.
Speaker: because of higher commodity prices, higher oil prices, higher input prices.
Speaker: A lot of companies have not been able to increase their sales prices yet or maybe struggle to do so, and their margins have come down.
Speaker: So disappointing earnings perhaps on average for Asia, but how important are earnings really in driving equity markets over time?
Speaker: Does everything come down to earnings or are there other factors of driving markets?
Speaker: Well, during earnings season,
Speaker: It really dominates the discussion, but you're going to be careful not to assume that a fast growing market or a fast growing stock is also a stock that you want to have an investment in.
Speaker: There's many other things that you need to take into consideration as well.
Speaker: Think about valuations, think about the movement of interest rates, think about how markets are positioned.
Speaker: But earnings and earnings growth are important, not so much of what actually happened over the last quarter.
Speaker: but what that tells us about the earnings over the coming quarters and over the coming years for individual companies and markets.
Speaker: Now, you've talked about challenges to earnings right now because of weaker pricing power, perhaps rising commodity prices.
Speaker: But on the other hand, we still see rising earnings, despite all the headlines about global economic volatility.
Speaker: Is there a degree of resilience in Asian earnings growth?
Speaker: What do you say?
Speaker: Yeah, I believe so.
Speaker: Broadly speaking, the resilience and that recovery comes from four different reasons.
Speaker: First of all, some economies are still coming out of COVID, so there's a bit of a lag defect in terms of consumption coming through.
Speaker: But what we also see, for example, is that premiumization in the consumer sector, particularly in China, is still taking place.
Speaker: So people buying higher price products, higher margin products.
Speaker: So you see in liquor, for example, or in footwear and
Speaker: sportswear in China, you see margins still expanding for some companies.
Speaker: Another issue that's important is industry consolidation.
Speaker: In the previous podcast, we spoke about the difficulties in the China property sector, but actually some of the Chinese property companies have had really good earnings results because everybody who wants to buy property is trying to focus on those particular property developers that will survive the ongoing difficulties in that particular sector.
Speaker: And the last thing that is really important is that some companies, given the difficult circumstances, have really become leaner.
Speaker: They've cut costs and are much more efficient and looked at monetizing the product that they have much, much better than they did in the past.
Speaker: So it's these factors that allow for some resilience and earnings.
Speaker: Thanks, Harold.
Speaker: So when we come back, we're going to take a broader economics look at earnings and profits and how they drive economic growth.
Speaker: First, a quick message, though, on HSBC's Global Emerging Markets Forum, which is underway right now and runs until the 30th of September.
Speaker: Policymakers, thought leaders, corporates, and our very own experts from global research will all be sharing their views on the outlook for emerging markets.
Speaker: It's purely an online event, and it's not too late to sign up.
Speaker: Reach out to your local HSBC representative for more details.
Speaker: Welcome back.
Speaker: Fred, we've spoken about earnings results of the listed equities, but that is only a small part of the overall economy.
Speaker: What do you see when it comes to earnings growth and profit growth from a broader perspective?
Speaker: Yes, I think that's a key point, Harold.
Speaker: That is, we often talk about earnings with regards to the listed universe, but of course, many companies, small and medium-sized enterprises, are not listed.
Speaker: And
Speaker: Their profit generation is also important for economic growth.
Speaker: But what you've really seen for Asian economies overall is that small and medium-sized enterprises have really suffered much more than large listed companies during the pandemic.
Speaker: And therefore, their profits are really lagging behind.
Speaker: And that's part of this scarring that economists often talk about, which is,
Speaker: Yes, on the surface, when you look at equity markets, things look relatively resilient, as you mentioned.
Speaker: But beneath the surface, small enterprises still struggling to recoup the lost revenues that they had over recent years, generate those profits and hire back some of those workers.
Speaker: And that's really holding back a little bit broader economic growth.
Speaker: Well, that's important, right?
Speaker: Because...
Speaker: economic growth and earnings growth.
Speaker: The earnings growth that I look at from an equity point of view can therefore diverge quite considerably for exactly the reasons that you just mentioned.
Speaker: Another way of looking at growth is to look at what we call nominal growth and real economic growth.
Speaker: Can you explain a bit what the differences and what the trends here are?
Speaker: Yeah, nominal GDP growth really includes changes in prices and that is held up quite well, not surprisingly, because we have a lot of inflation.
Speaker: So nominal GDP growth
Speaker: is quite strong, and that tends to flatter earnings a little bit.
Speaker: It flatters tax revenues.
Speaker: It flatters profits by companies.
Speaker: But it's really not a true measure of economic growth.
Speaker: When we adjust for inflation, we see a weaker real GDP growth.
Speaker: And that difference is, I think, very important because you might see strong profit growth for a while because of strong normal GDP growth.
Speaker: But if underlying volumes, that is real GDP growth, is not picking up, then it's not really a sustainable proposition.
Speaker: It means that companies are not hiring more workers.
Speaker: They're not producing more goods.
Speaker: They're just charging higher prices.
Speaker: And that difference, I think, is very important in terms of thinking about the sustainability of economic growth, of earnings, of pricing power going forward.
Speaker: It's really important to see real GDP growth remain resilient as well.
Speaker: Well, that's important, I guess, because that links also back to what I was talking about, the margin pressure that we see across the region, right?
Speaker: Companies that have to deal with higher prices and these sort of things.
Speaker: If you look across the whole region, are there particular trends or economies that stand out, Fred?
Speaker: Yeah, outside of mainland China, where growth has sort of disappointed quite a bit in recent months, we've actually seen quite decent economic growth so far this year.
Speaker: In fact, the second quarter, most economists beat expectations.
Speaker: But that is because of upside surprises on the domestic front, because of a reopening in many economies of the economies.
Speaker: Consumers are spending again, investments coming through.
Speaker: So any sector that's really tied into this is seeing then, of course, also
Speaker: increased profits, whether listed or unlisted companies.
Speaker: The challenge really for Asia over the coming two or three quarters will be on the external side, will be what's happening to export growth because we see weakening demand in Europe.
Speaker: We see the electronic cycle, for example, globally start to weaken.
Speaker: And that may mean actually that really economic growth, particularly in export dependent economies, think of Korea, think of the Taiwanese economy, for example,
Speaker: there might be stiffer headwinds coming for economic growth.
Speaker: Well, all of this has got implications for interest rates across the region as well, Fred.
Speaker: What do you expect to see on that particular front?
Speaker: Because that's one of the key inputs that I as an equity strategist look at as well.
Speaker: It's not just earnings growth, as I mentioned earlier, but also, for example, movements in interest rates.
Speaker: Yeah, actually, the market had sort of expected a few months ago, very sharp rises in interest rates across Asia as well, because we had this big inflation shock.
Speaker: But now the market is starting to look a bit more at the risk to economic growth, particularly from weaker trade.
Speaker: And that's why perhaps the rise in interest rates in many Asian markets, policy rates in particular, may not be as sharp as we saw
Speaker: or we had expected a few months ago.
Speaker: And that's because economic growth worries are starting to dominate.
Speaker: And that may kind of dampen the increase in interest rates to some extent.
Speaker: And perhaps then, you know, that's a question for you again, Harold.
Speaker: If interest rates do not rise as quickly because of weaker economic growth, would that then be positive for equity markets?
Speaker: Yes, interest rates are really important for us.
Speaker: And if we see weaker than expected growth,
Speaker: That is a negative for equities in general, depending on all sorts of other factors as well.
Speaker: But if that, for example, that means that interest rates are not going to go up as much as we initially anticipated, that would offset that to a certain extent.
Speaker: And this is where the volatility in equities come from.
Speaker: There are multiple factors we look at, earnings growth, interest rates, positioning, valuations, and they all move and are somewhat linked to each other.
Speaker: And that creates some of the volatility in equities over time.
Speaker: But what we've seen so far basically is that it's a complex story with regards to earnings and economic growth across the region.
Speaker: That from a top-down point of view, maybe some of the numbers have weakened, but that we also see signs of resilience in certain industries and sectors doing reasonably well.
Speaker: And also that there has an impact on how policymakers might behave going forward.
Speaker: But now it's time to take a quick break.
Speaker: When we come back, we'll have a little bit of a chat about what else has kept us busy over the last couple of days.
Speaker: Harold, you're still on the road and you're seeing clients, but apart from talking shop all day long, what keeps you busy?
Speaker: Well, Fred, as I mentioned in previous podcasts, my plan was to read
Speaker: a translation of a 14th century Buddhist monk's writings.
Speaker: Turns out my weekend was completely different from that.
Speaker: There's a photography museum here in Stockholm.
Speaker: So I went there.
Speaker: It was really nice to see pictures and portraits and interviews with photographers.
Speaker: But what was really nice actually, when I walked out, this is late afternoon, early evening, and there was this phenomenal big moon that was rising.
Speaker: It's a full moon.
Speaker: And it really stood out just over the Stockholm was kind of an archipelago with all sorts of islands and lights.
Speaker: It was a really fantastic view.
Speaker: So I was lucky to make a picture of that as well.
Speaker: You know, it reminds me your story about the importance of light in photography.
Speaker: And I think that is called the golden hour where the sun sets and photographers go out.
Speaker: Are you using digital photography these days?
Speaker: Yeah, I'm using a digital camera and I got my tripod with me so I can actually do low exposure shots as well.
Speaker: That's really nice.
Speaker: But Fred, I think you asked that because you've been into photography as well in the past.
Speaker: Yeah, but Harold, now I'm beginning to show my age here because I did photography, abstract photography in my student days.
Speaker: But I used film and it's particularly a very special type of film called Ilphochrome, which is actually printed on polyester rather than paper.
Speaker: But even that is not made anymore today.
Speaker: That was stopped being produced in 2012.
Speaker: And so I've never really made the jump to the digital part, Harold.
Speaker: So I think I'll need to get some tips from you on our next outing in Hong Kong.
Speaker: Yeah, photography has moved on from those analog days.
Speaker: So I'm very happy to sit down to you and show you how it works these days.
Speaker: But I suspect when it comes to really making a good composition and picture, you know exactly what to do.
Speaker: That sounds great.
Speaker: We do that when we're back in Hong Kong.
Speaker: But before that, we'll still have a few Banyan Tree podcasts to record.
Speaker: We'll see you again next week with another topic.
Speaker: And until then, take care.
Speaker: See you next week.
Speaker: Thank you for joining us at HSBC Global Viewpoint.
Speaker: We hope you enjoyed the discussion.
Speaker: Make sure you're subscribed to stay up to date with new episodes.
