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The Macro Viewpoint - What’s new in EM, and nine game-changing investment themes
32 Plays2 years ago
Murat Ulgen assesses the prospects for EM assets against an even more complicated global backdrop and James Pomeroy looks at the potential impact of HSBC's nine key themes on the global economic picture.
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Transcript
Introduction to HSBC Global Viewpoint
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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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Make sure you're subscribed to stay up to date with new episodes.
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Thanks for listening, and now onto today's show.
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The following podcast was recorded for publication by HSBC Global Research.
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All the disclosures and disclaimers associated with it must be viewed on the link attached to your media player.
Emerging Markets Investment Landscape
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Hello, I'm P.S.
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Butler in London.
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And I'm Aline Van Dyne in New York.
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Coming up on today's programme, we assess the investment landscape for emerging markets and find out how global challenges are making the outlook even more complicated.
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And we assess how seismic shifts in technology, population and energy are transforming the way the economy works.
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We begin the podcast with emerging markets.
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The first few months of 2023 have thrown up plenty of challenges for the global economy, not least recent problems in the US and European banking sector.
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Yet emerging market assets have held up remarkably well in the first quarter.
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Is this set to last?
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Murat Ulgan, Global Head of Emerging Markets Research, can tell us.
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Murat, welcome to the podcast.
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Thank you very much.
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So Murat, it's been a rocky few weeks in financial markets with investors concerned about banking sector stresses.
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How have emerging markets assets performed?
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Indeed, I think the last couple of weeks have been a sobering reminder of the need to remain vigilant when investing in risk assets, including emerging markets, because the outlook of the global economy and markets has shifted dramatically following the strains in US and European banking systems.
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But emerging markets have actually held up remarkably well.
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which echoes the findings and improving investor appetite in our latest EM Sentiment survey.
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When you look at performances across the board, they are positive, particularly local debt markets, up nearly 5% in the first quarter, helped by currency returns on spot basis by about 2%.
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These are quite impressive, all things considered.
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The Fed has been hiking rates aggressively.
US and Europe Banking Challenges vs Emerging Markets
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What impact is this having on emerging markets?
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Yes, the Fed has hiked rates to levels that were unthinkable as recently as the middle of last year, while simultaneously withdrawing liquidity.
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Now, the banking sector was potentially are going to add some extra amount of tightening.
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And there are probably even longer lags in monetary policy, given all sorts of supply side fluctuations.
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I think the question...
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for the US and obviously for the global financial markets and EM that is most relevant is are we going to see a hard landing?
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This is not the forecast of our economists.
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There is also inconsistency in what the rates, credit and equity markets are telling us.
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They do not look coherent.
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Perhaps this is best illustrated what our economists are calling partial or rolling recession in the US.
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Now, but obviously there are financial stability concerns that are quite palpable, but at the same time, sticky core inflation on either side of the pond.
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So the question is, what is the right balance on interest rates?
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Now, as HSBC, we actually forecast fewer and later rate cuts until the end of 2024 compared to the markets.
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And that can actually cause some disappointment given renewed expectations of a Fed pivot by the markets in the latter part of the year.
China's Reopening and Macro Environment Influence
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So China's reopening is surely good news for emerging markets.
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What does this mean for the growth outlook?
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It definitely is good news.
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And this was also reflected in improving sentiment by investors in our EM sentiment survey.
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We kind of argue that there is a shift of relative growth momentum for a rebounding China and also surprisingly resilient Europe.
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And EM central banks are generally not that constrained by financial stability issues, and they focus on inflation, which actually means a similar disappointment in monetary policy is also probably valid across emerging markets as well, given how many rate cuts are all deprised in EM rate curves.
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And so how are you viewing emerging market assets going forward?
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Well, bringing everything together, we think we're in a trendless and convoluted macro environment.
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And in such an environment, when you have high front-end rates, both in nominal and real terms, compared to the developed world, and a benign US dollar outlook, as we argue, the best strategy, we think, is to be in the EM carry trade.
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But we focus on EM carry more in the positive real rate stories, which can also act as a buffer with an extra risk premium.
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Elsewhere, we selectively extend duration and also pick and choose some equity stories too.
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Finally, Murat, what if we see further macro uncertainty and volatility?
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Well, I still expect this year to be a lot better than the last two years and emerging markets to perform all right.
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You know, for one thing, emerging markets will benefit from this shift in relative growth momentum, a rebounding China and a surprisingly resilient Europe.
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And then the other thing is emerging markets are not generally that constrained, broadly speaking of course, when it comes to financial stability, and they still focus on inflation.
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And that gives the sense of credibility and relatively high front-end rates, a good buffer in nominal and real terms as an added risk premium, and everything combined together with a benign US dollar outlook.
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We think that emerging markets should do all right and much better than the last two years.
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Right.
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Thanks very much for joining us.
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Thanks for having me.
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I'm Harold van der Linde.
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And I'm Fred Newman.
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And you can find us under the banyan tree.
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Join us weekly where we bring Asian markets and macroeconomics into context with special insight from our regional experts here at HSBC Global Research.
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Search for HSBC Global Viewpoint on Apple Podcasts or Spotify or join us via the HSBC Global Banking and Markets page on LinkedIn.
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Enjoy the rest of your podcast and we'll see you under the banyan tree.
Key Themes in Investment Outlook
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Now here at HSBC Global Research, we pay particular attention to nine key themes that we think will be critical to the long-term investment outlook.
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And this week, James Pomeroy, global economist, has been looking at how these themes could shape the world economy.
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James, thanks so much for joining us.
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Thanks for having me.
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So let's start with a very high level view of the themes.
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Just remind us, what are the nine themes?
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Why do they matter?
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So at HSBC Global Research we have nine key themes.
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So automation, demographics, digital finance, disruptive technology, energy transition, future cities, future consumer, future transport and finally lower for longer.
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And the key thing about these themes is taking a step back and thinking about the underlying drivers of the global economy.
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The things that are happening every single day, not just what's in the news today.
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And these themes are really important because they continue to evolve.
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They continue to drive certain parts of the economy.
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And their evolution is going to make winners and losers within the global economy, be it economies themselves, who will grow more quickly or more slowly because of some of the evolutions of these themes.
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They will impact which sectors are going to be winners and they'll impact individuals who are going to be winners as well.
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Well, very impressive that you know all the themes off by heart, so well done.
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So in terms of the impact, James, which of these themes have the most potential impact on the growth outlook?
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Underpinning it all is demographics.
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So if you've got a rapidly ageing population, that can be a potential problem.
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If you've got a rapidly growing working age population, that's an extremely good thing in terms of lifting potential growth.
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But also, I think it's really important to look at some of the technological improvements and how this could really change things
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in the emerging world.
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And this could be across the board of many of these themes.
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So we could see in the coming years, the influence of people just being connected and having access to new available technologies.
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It's also worth thinking about what's going to happen in terms of cities and transportation.
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One of the biggest challenges in a lot of emerging market cities is urban congestion.
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And if cities can be built better, designed better, if we can invest in the right sorts of transport, then those problems could go away too.
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And finally, just thinking about some of the consumer trends here, some of the work we've done looks at how people's tastes change as they get richer.
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And if you look across
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parts of the emerging world, you have this sort of hat trick of qualities, you have the growing population of the right ages, you have income growth, that's looking to be relatively sustainable over a longer period of time.
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And you have these taste changes as people get richer.
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And so they start buying different things.
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You put all of those things together and suddenly you look at things like recreation, leisure spending, hotels, those sorts of parts of the economy that look like they've got a pretty solid foundation in terms of spending growth, particularly in the emerging world and even more particularly in parts of Asia.
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So James, what about the inflation impact?
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Because of course, we're so used to looking at the headline figures, especially in the last couple of years, but looking out what could change the trajectory, either in terms of higher inflation or lower inflation.
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A lot of these themes almost fight against each other when it comes to inflation.
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So if you look at some of the pieces that have been written about demographics and people talk about a shrinking working age population in a world where you've got an older population who keeps spending,
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Well, actually, what you could get is a lot of wage bargaining power for workers if there's a smaller pool of workers, and therefore you could see inflation be a little bit higher.
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But at the same time, you've got the risk from automation and disruptive technologies that could pull down costs for a lot of businesses.
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They could also take away some of the requirements for some of those jobs.
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So you may not see inflation.
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any inflationary impact from these demographic changes.
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And actually, you could see quite the opposite.
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You could see quite a deflationary situation that comes through from some of these technological changes.
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It's also worth thinking about the energy transition here.
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Energy prices have played such a key role in inflation over the course of the last year or so.
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And here, the transition is likely to be messy, it's likely to be expensive, there's a lot of investment that's needed, and that could help to keep inflation slightly higher in the medium term.
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But I'm a reasonably optimistic person.
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I think if you take a step beyond that sort of transition, and you think about a world where much more of our energy comes from renewable sources, where the cost of that energy is just permanently coming down faster than
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most people
Demographics and Technological Impact
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expect.
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Well, actually, it's not out of the realms of possibilities that we're at a stage where the cost of energy, electricity in particular, is continually falling.
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Is any of this reassuring for policymakers at the moment, especially now that they're juggling plenty of risks?
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There's risks in every direction from a lot of these themes.
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I think there's a good chance, I think, that in unison, these themes make me slightly more optimistic about long-term potential growth, particularly in the emerging world.
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They make me maybe slightly more optimistic that inflation could come down over the longer term.
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I'm a big believer in
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the role that technology will play in providing a more disinflationary force into the global economy.
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But this doesn't make life easy for policymakers.
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There's a whole ton of other challenges that are out there.
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That energy transition I mentioned is going to be messy.
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It's going to be fraught with all sorts of challenges and policy is going to have a key role to play in managing that.
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We've also got to think about
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some of the issues around cities and transportation and the investment that's needed there.
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How do we design urban areas to work effectively?
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In digital finance, we have to think about payment systems and how we're going to evolve those.
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Central banks will have to think about how they're going to design central bank digital currencies.
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But the biggest hurdles in terms of policy will all come back to where we started this conversation, which is with demographics.
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We're going through a period today of the fastest rate of demographic change in history.
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Now we've got a huge growth rate in terms of the number of pensioners in the world and that fastest growth rate ever over the course of the last few years.
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This clearly is going to create some huge fundamental challenges
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for policymakers, thinking about how big tax take needs to be, thinking about retirement ages, migration policy, and how you can encourage people to have more children.
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And I think that these policy challenges are only going to get greater.
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They may be slightly different ones to what we faced in the course of the last few years.
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James, very interesting.
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Thank you so much.
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Thank you very much.
The Future of Hydrogen in Transport
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Sticking with those key themes, we'd like to highlight a new report we've just published on hydrogen and its role in the energy transition.
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The author, Sean McLaughlin, says that hydrogen in passenger cars looks an increasingly distant prospect as manufacturers push electric vehicles.
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However, Sean thinks that hydrogen has greater traction and more compelling long-term potential in several heavy-duty transport segments, such as trucks, buses, ships and trains.
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There is a long way to go, though, and the success rests on policy support and steady supply of hydrogen and the rollout of refueling infrastructure.
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For more information on the report or any of the other themes that we cover, please contact us at askresearch at hsbc.com.
Conclusion and Farewell
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So that wraps things up for another week.
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Special thanks to our guests, Murat Ilgan and James Pomeroy.
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And from all of us here, thanks for listening.
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We hope you have a good long weekend and we'll be back again next week.
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Thank you for joining us at HSBC Global Viewpoint.
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We hope you enjoyed the discussion.
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Make sure you're subscribed to stay up to date with new episodes.