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.
Speaker: Make sure you're subscribed to stay up to date with new episodes.
Speaker: Thanks for listening.
Speaker: And now onto today's show.
Speaker: Welcome to Under the Banyan Tree, where we put Asian markets and economics in context.
Speaker: I'm Harold van der Linde, HSBC's Asian Equity Strategist.
Speaker: And I'm Fred Newman, Chief Asia Economist.
Speaker: If you've noticed a bump in stocks exposed to mainland China the past week or so, well, that's because after three years of effective isolation, the grand reopening is officially underway.
Speaker: That's right, airlines, hotels, casino operators, all of them have rallied on the back of border reopenings, meaning places like Hong Kong and Macau are once again accessible to mainland Chinese travelers.
Speaker: Domestic travel is also set to rise massively in the coming weeks as we enter the Chinese New Year period.
Speaker: COVID cases are still spiking, though, and the healthcare system is severely strained, but the reopening is progressing faster than practically anyone could imagine, and after a bumpy transition period, we expect a strong macro rebound starting in around the second quarter.
Speaker: Yeah, on the equity side, there are sectors that will respond quite immediately to this.
Speaker: And we'll talk about this in a second.
Speaker: But there are also sectors where the impact is not so visible at the moment, but will come gradually over time.
Speaker: And on the macro front, consumption, inflation and the housing market are all major talking points for investors, not to mention pro-growth government policy, which will help push up GDP in 2023.
Speaker: Well, Fred, I suspect there's going to be a busy podcast this week.
Speaker: So let's begin.
Speaker: So, Fred, we've seen the headlines in the newspapers, but how big is this really?
Speaker: Well, it's hard to overstate the importance of China's reopening.
Speaker: We're actually estimating that we'll push up GDP to 5% this year.
Speaker: That's a fairly punchy number, and it's going to be driven mostly by consumer spending, right?
Speaker: As you remove the restrictions, people are moving again across the country.
Speaker: They're confident.
Speaker: about consuming, going out, demanding services, all of that will drive up GDP growth.
Speaker: And to some extent, they also have a bit of money burning in their pockets or excess savings.
Speaker: For example, if some Chinese households have accumulated, our estimates are here.
Speaker: And it's about six and a half trillion.
Speaker: That's what they call revenge spending, I think.
Speaker: It's a revenge spending, yeah.
Speaker: But it's almost a trillion dollars in excess savings that they have and they could actually deploy.
Speaker: Now, this is not to minimize that a lot of Chinese, of course, have suffered on a health care front in recent months, recent weeks and continue to suffer.
Speaker: And of course, also a lot of hardship in terms of rising unemployment.
Speaker: But as we see in all other economies really in the world, when you do get that relaxation of restrictions, you usually see some pent up spending coming back.
Speaker: And given China's size, that's going to be quite meaningful.
Speaker: But it's already starting to become a narrative in markets.
Speaker: Have markets already traded on that particular news?
Speaker: Markets have actually anticipated this to a certain extent.
Speaker: If you look for example at some stocks that are directly benefiting from this reopening, so airliners, hotels, Macau Gaming, they started to move in late October.
Speaker: And when the announcement came, there was another spur.
Speaker: And some of these stocks have doubled, some of them have tripled already.
Speaker: So there's been a big impact already.
Speaker: But I think we just focus on the China kind of reopening story.
Speaker: There's more going on in China, right?
Speaker: There is more, right?
Speaker: So one is the consumer story, the reopening, people traveling in domestically or internationally as well.
Speaker: But there's also a clear shift in government policy.
Speaker: They're now starting to send a message that they want to stabilize the property sector, a massive, massive sector for the Chinese economy.
Speaker: enact pro-growth policies just to spur that recovery along because let's face it, China had a bit of a bumpy economic year last year and now of course the priority is delivering growth.
Speaker: And so it's not just about consumer spending coming back, but it's also about the stabilization of the housing sector and perhaps even spilling over into private sector investment, for example, manufacturing companies, the tech space, all likely to benefit from that.
Speaker: Now, those are kind of the broad brush economic factors driving this.
Speaker: You've talked about airlines benefiting, perhaps the travel sector.
Speaker: What are some of the secondary sectors that might benefit from such a Chinese economic recovery?
Speaker: Yeah.
Speaker: So because it's a broad-based recovery, domestic sectors probably going to benefit.
Speaker: But then there are, I'd say, secondary and maybe tertiary effects, derivatives, I would say, from all of this.
Speaker: If you go to Thailand and people go spend their money, they're going to go into the malls or they're going to Vietnam and they sit on the beach, they're going to stay in hotels and they're going to spend money in the malls there.
Speaker: A lot of Chinese in the past have traveled to Korea where they went to due to free stores.
Speaker: So those would be other stocks that will be impacted.
Speaker: And while the earlier stocks that I mentioned, airliners,
Speaker: the Chinese gaming stocks and Macau and the hotels, they've already rallied to a large extent.
Speaker: They need to see real proof that the earnings are going up to justify the high evaluations.
Speaker: But I think for some of those names in Thailand, Vietnam, elsewhere in the region, Korea, duty-free stores, the question there is how many people will show up and what is the earnings progression going to be throughout the year?
Speaker: And possibly we could even think about a further kind of derivative as you term it.
Speaker: So if you just mentioned Thailand, for example, in 2019, Chinese tourists spent the equivalent of 3.5% of Thailand's GDP in the country.
Speaker: That's a punchy number.
Speaker: So that spending comes back.
Speaker: Of course, hotels are going to benefit and the airlines maybe, but that puts money into the broader economy.
Speaker: Absolutely.
Speaker: So there's almost a third layer of beneficiaries.
Speaker: And a good example is Thailand here.
Speaker: You have the tourists that arrive.
Speaker: They're going to go to a local pizzeria or local Thai shop where they have
Speaker: They have dinner, they have lunches, they do some shopping.
Speaker: So these businesses flourish and it will be the banks, for example, that do businesses with them.
Speaker: The banks that have a lot of smaller mid-sized enterprises in their portfolios, that they'll see more loan growth and they get better businesses as well.
Speaker: So this will filter gradually through Thai, Vietnamese, Korean and the rest of these economies as well that are really exposed to this.
Speaker: So we mentioned Thailand, but there's, of course, one economy that really stands out, which is Hong Kong.
Speaker: Now, we still have some restrictions in terms of people coming across the borders in terms of their daily caps.
Speaker: But assuming that disappears, isn't Hong Kong then primed really to benefit quite a bit?
Speaker: Yeah, Hong Kong is the direct beneficiary.
Speaker: Korea benefits.
Speaker: Japan, of course, will benefit and Thailand and Vietnam.
Speaker: And as you go further away, you end up in, say, places like Malaysia and Indonesia.
Speaker: They will obviously benefit as well.
Speaker: And all these secondary and tertiary layers, you could say, will play out in those regions as well.
Speaker: Which reminds me, I should probably book my holiday sometime soon, because with all this resumption of Chinese travel, it might be hard to find a flight.
Speaker: Well, to be honest, I've over the weekend been trying to book some flights to Jakarta, where part of my family isn't.
Speaker: Prices are still extremely high, as you're very much aware of.
Speaker: And on that note, we're going to take a quick break and afterwards talk about the global impact of China opening and China's policies on the rest of the world.
Speaker: So, Fred, we're already looking at, say, the impact in the rest of Asia, but of course this will have global refurbations as well, right?
Speaker: It does.
Speaker: And the interesting effect here is really through the inflation channel, right?
Speaker: We had an enormous amount of inflation in the Western world, particularly last year, whether it's in Germany, US, UK, all of these markets really suffering from very high inflation.
Speaker: Now, the good news last year from inflation perspective was that China's economy was slowing, therefore capping global price pressures.
Speaker: This year, though, central banks in the West are hoping that they get a deceleration inflation just when China is accelerating, and it might actually prevent that disinflation to really come through, and that complicates
Speaker: the job for Western Central Banks because they might want to become more accommodative.
Speaker: Because if China is really driving up commodity prices, driving up inflation pressures, it makes it much harder for other central banks then to become more accommodative.
Speaker: So China's reopening, in many ways, good news for Asian economies, delivering growth, but could also complicate sort of that inflation-fighting approach by Western Central Banks.
Speaker: And that could lead to quite a bit of volatility.
Speaker: It looks like we're peeling an onion here, right?
Speaker: There are different layers of impact, and that's maybe then the fourth layer, you could say.
Speaker: So inflation could move, say, from Europe and the U.S. from last year towards Asia.
Speaker: And that will have an impact on interest rates.
Speaker: And that, again, will have an impact, of course, on equity markets as well.
Speaker: I'm thinking in particular about one group of assets, the commodity sector.
Speaker: They will be impacted as well.
Speaker: Demand for commodities will go down if the U.S. is slowing, but go up if...
Speaker: China is recovering, so that's going to be a kind of a complex story as well throughout the year.
Speaker: Very complex, and it depends on the commodities we're really talking about.
Speaker: So when it comes to crude oil, for example, China accounts for 20% of global demand, but there are other commodities where China accounts for more than 50% of global demand.
Speaker: Nickel, for example, or iron ore, China is a big, big consumer of that.
Speaker: So some commodities may benefit from China's reopening and others less so.
Speaker: So it's a much more nuanced story.
Speaker: But generally speaking, given China's size, overall, the recovery in China should benefit commodities, broadly speaking.
Speaker: And this is then how it will impact equities to an extent as well.
Speaker: Growth is recovering.
Speaker: That's positive for the equity story.
Speaker: But if we see signs that inflation is going to be stickier because of all of this and that bond yields do not decline, lower bond yields is a positive for equity.
Speaker: So that is not going to happen as quickly.
Speaker: That's a risk factor for the Asian equity universe in that sense.
Speaker: Now, we talked a little about commodities, we talked about tourism.
Speaker: One area we haven't talked that much about, it's Northeast Asia, sort of the tech trade complex.
Speaker: From an equity perspective, how do you think about the tech cycle?
Speaker: Does the reopening story carry through into those markets as well that are very tech dependent?
Speaker: Or is that really mostly a consumer tourism story that you're looking at in Asia?
Speaker: Well, the tourism story is a factor in Korea because there you have large hypermarkets that are listed on the stock exchange.
Speaker: But these markets, Korea and Japan to a lesser extent, they have a lot of exposure to global demand and China is just part of that.
Speaker: So if Europe and the US are demanding less, it will be difficult for China to really to offset that.
Speaker: So the demand outlook in those sectors
Speaker: will remain quite difficult.
Speaker: What we're looking at in that part of the world is really at sectors where supply is shrinking as well.
Speaker: That can offset that because there's certain sectors where they're cutting investments.
Speaker: That's what we're looking for.
Speaker: So, Harold, we're coming towards the end of our podcast, and we haven't done joint podcasts for a while.
Speaker: There was a stretch there in 2022 where we're flying solo for a while.
Speaker: That's right.
Speaker: I dropped the ball on this particular podcast, so I had a bit of a medical issue, literally a pain in the neck, I would say.
Speaker: That made the last months of 2022 a bit of a...
Speaker: A painful affair for myself, but I feel much better now.
Speaker: And things have, thanks to modern medicine, improved significantly.
Speaker: And so it is a little bit with Asian equities.
Speaker: They struggled in the last quarter of last year, but it seems that the sentiment has improved on that front quite considerably as well.
Speaker: Well, Harold, it's great to have you back and you look like you're in rude health again.
Speaker: So we're really thankful that you've come through this very difficult time and you're back on your feet and doing well.
Speaker: Yeah, thanks a lot.
Speaker: But Fred, our listeners can't see you sitting here in this room, but you have had a little bit of sleepless nights quite recently yourself, I believe.
Speaker: I have, yes, because my wife and I welcome the little baby boy over Christmas into our family.
Speaker: Fantastic.
Speaker: And so in the Newman household, we've been battling diapers and bottles for the last couple of weeks.
Speaker: And that, as any young parent will know, does take a little bit of your night away.
Speaker: But it's a joy.
Speaker: And, you know, I will subscribe him to this podcast as soon as he will be eligible to join.
Speaker: So for both of us, 2023 will be a new year, a new start and a whole new adventure, I would hope.
Speaker: It will be.
Speaker: And that's it for another week, folks.
Speaker: Always a pleasure to have you with us here under the Banyan Tree.
Speaker: We'll be back again next week, putting Asian markets and economics in context.
Speaker: Till then, take care and all the best.
Speaker: Thank you for joining us at HSBC Global Viewpoint.
Speaker: We hope you enjoyed the discussion.
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