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Under the Banyan Tree – Herald's equities outlook for 2026
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Herald takes on the role of interviewee this week, as he and Fred look at what's driven Asian equity markets in 2025, and what investors are likely to be watching in the year ahead.
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Transcript
Introduction and HSBC Voting
00:00:01
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. Thanks for listening, and now onto to today's show.
00:00:24
Speaker
Hey, everybody, Fred and Harold here. Before we start this episode of Under the Banyan Tree, we've got a very quick message for you. The 2026 Asia Extel vote is upon us. would be very grateful if you could keep HSBC in mind when casting your vote.
00:00:39
Speaker
We would indeed. You can cast your vote at www.extelinsights.com forward slash voting. Thank you very much. Now on with the podcast.
Hosts and Discussion Preview
00:00:59
Speaker
Hello and welcome to Under the Banyan Tree, where we put Asian markets and economics in context. I'm Fred Newman, Chief Asia Economist here at HSBC. And I'm Harold van der Linde, Head of Asian Equity Strategy. And today we get to talk all about my world, that is of course, stock markets here in Asia.
00:01:15
Speaker
That's right. I think it's pretty much a case of me interviewing you today, Harold, because you're the guy who just published his outlook for 2026. I have indeed, Fred, and there's a lot to talk about. Will the AI boom continue?
00:01:27
Speaker
Will mainland China keep putting those savings into the stock markets? And what could be the risks as we head into the new year? Stay with us to find out from HSBC Global Investment Research. This is Under the Banyan Tree.
2025 Asian Market Performance
00:01:47
Speaker
So, Harold, we want to talk equity markets this week because there's so much going on. We have talk about economics all the time. knew that would please you because also you just published your latest outlook for 2026.
00:01:59
Speaker
twenty twenty six I can't believe we're already talking about 2026. But before talking about the outlook, ah let's just review the Asian year in equities. And it's not quite the end of the year yet, so we don't know where we exactly end up. But broadly speaking,
00:02:15
Speaker
How did Asian equity markets perform? um So basically, last year in Asian stock markets, in Asian equities, there were two stories. One story was AI. Anything that had to do with AI has done phenomenally well. And it rotated. We had initially people looking in Taiwan to chip makers. Then they looked at memory makers because you need the data centers. They need the memory to process all of this. That went then to Korea. So these stocks have done very well. That's the first story. The second story really was the recovery in mainland Chinese equity stocks. They've done pretty good in particular in the first half of the year. And there's been incredible buying by mainland Chinese investors buying stocks actually in Hong Kong. That was the the other big story.
00:03:01
Speaker
um But those are sort of the highlights. You mentioned AI, mainland Chinese equities. What are some of the laggards over the past years? What has sort of surprised you maybe were the performances not been that great because the headlines are all full of, wow, these AI companies and chip companies. We think about Korean and Taiwanese companies. But are there corners of the Asian equity universe where actually you know not much has happened?
00:03:27
Speaker
Absolutely. It's been a very skewed performance. So we have markets like Korea up over, say, 60% at the moment. But other parts of Asia have struggled to perform. And I think the biggest among those is really India has not done so well. And ASEAN markets actually have not done so well good as well. And to be honest, that's a bit of surprise to me. I thought at the beginning of the year, that some of the Asian markets would do better, but they haven't. um India is is a different story altogether. But yeah, so it's it's been really a North Asia story versus South-Southeast Asian story.
00:04:00
Speaker
So that obviously brings us partly to this idea of technology, AI-related technology driving some of these
AI's Impact on Asian Markets
00:04:07
Speaker
markets. Now, we've seen these also run in the US quite a bit. is there Is this where we think of that as a spillover from this enthusiasm in the US about AI, then kind of coming into Asia investors and waking up to Asian names? Or is is there something more kind of intrinsic going on within Asia? is Is that sort of where you say, actually, Asia has independent technology and there's a kind of an underlying reason to invest here? Well, that's a very good way of phrasing it because I think, Fred, it's it's a bit of both, to be honest. So there is an enthusiasm that probably started in the US s because they were the first with JetGPT and probably in AI are still leading this particular process as well. now
00:04:51
Speaker
Artificial intelligence, a better word somebody told me is maybe artificial inference. It is not really intelligence, it's just incredible fast processing of a lot of data and calculating that data to come up with an answer. So if you ask, can you give me a recipe for making a carrot soup, AI can give you that by just going through all the recipes in the whole world. finding out a carrot one, and then tailoring it for for you. That's just processing a enormous amount of data and speed. And this is what the Asians do. this is for that You need chips and chipset, particular high bandwidth memory chipsets. That is made in Asia. So there's something very intrinsic to this.
00:05:30
Speaker
But also mainland China, of course, has their own... AI models and their own chipsets. So it's not just been a story of Taiwan and Korea and and Japan. There is something really intrinsic going on in the region. We make our chipsets and our own AI models.
00:05:46
Speaker
Now, you also mentioned that so AI and and related hardware was, of course, one of the drivers of the equity market rally this year. The other one you said is really the Chinese mainland market coming to life.
00:06:00
Speaker
What has sparked that? Because you know for many, many years, you and I sat here under the banyan tree pondering the you know the lack of – Chinese equity buying and now suddenly
Chinese Market Revival
00:06:12
Speaker
they're they're here. What happened this year specifically that led to this awakening of the local buying interest in in equity that drove the the Chinese equity market? Funny enough, I don't think there was anything specifically that happened that triggered this. I think it was a gradual change.
00:06:29
Speaker
Improvement in confidence in China. And I'm saying improvement in confidence. Confidence in China about their own job prospects and their career or the housing market is still not fantastic. But it is better than it was 12 to 18 months ago.
00:06:45
Speaker
So what is now happening that is a lot of Chinese households have been sitting hoarding cash, thinking, I just need cash. If I lose my job, I at least have some money on the end. Also, if I'm not making money in the property market, I don't want to invest in stocks, they went down. So they've hoarded an enormous amount of cash. Confidence has come back like, well, maybe I'm not going to lose my job. And it looks like they're doing something on the housing market. So maybe the worst is over.
00:07:13
Speaker
So I'm having maybe too much cash. So what do I do with it? And if I put it in a bank, I get less, in some banks now, less than 1% on a yearly basis. In interest. In interest. yeah So that's not a lot. So you can put it and keep it in a bank, but yeah you're not going to make any particular money there.
00:07:30
Speaker
So why not put a little bit in the stock market? And this is exactly what happened. So there's a bit of confidence come back. People put in the stock market, the stock market performed, and that creates confidence. Hey, you bought stocks, and yeah maybe I should do as well. And that has triggered that. The funny thing is that there is so much cash, and we've seen hundreds of billions of US dollars flying into Hong Kong to buy stocks here. Then they also did this in in Shanghai. This can continue for some time because they have too much cash on hands.
00:07:59
Speaker
Now, in the past, we've often seen global investors driving Asian equity markets, being big players there, US funds, European funds coming in buying Asian
Investor Influence on Markets
00:08:11
Speaker
equities. They often accelerated the rally or or and drove the cycle. This year, was it a similar year um whereby you saw a lot of foreign buying of Asian equities or was it more driven by locals? you saying, for example, in mainland China, if i understand you correctly, it's more the locals that have bought, maybe foreigners less so? this is thought I would actually say we have not seen meaningful foreign buying.
00:08:36
Speaker
There has been foreign buying, but it has not driven the markets. That's the mainland Chinese. We're talking about the mainland Chinese stocks in Hong Kong. Because most of the foreign funds have gone to Korea and Taiwan and played the AI story. They've been reluctant to play the mainland Chinese story. And it's the mainland Chinese that have played that story. They went initially to buy stocks in Hong Kong. And then when Hong Kong rallied, they said, well, actually on the margin, I can also buy it in Shanghai. And they went to Shanghai.
00:09:02
Speaker
So that's the the, yeah, I would say the China story has been a China story and the foreigners have really gone to North Asia. And and as a follow-up, why do you think that is? Why haven't foreign investors not yet really bought into the mainland Chinese rally? Because that's by far in a way the largest equity exchange. universe in Asia is sort of the Chinese equities. why Why have sort of foreign investors nibbled around the edges, if you will, going to the Koreas and the Taiwans, but mainland China really hasn't been as much interest
Unexpected 2025 Outcomes
00:09:34
Speaker
as we saw in the past? That is right. So i think this is there's a couple of reasons for this, but I think the key issue is really that they are worried about about growth in China. Where is it coming from? Is there growth? And this is your territory to a large extent, Fred, as well.
00:09:50
Speaker
Because the underlying drivers of growth are there. 20% of the economy is doing well, and that's high-end tech and EVs and these sort of things. But there's a large part of the economy that's really struggling.
00:10:00
Speaker
Our unemployment rates are very high and we still have debt problems and the property market hasn't really recovered yet, only in particular pockets. So I think there's a worry about growth in China and that is very valid. If you look at consensus estimates for this year in China, it only grows 2% earnings growth and not GDP growth, but the corporate sector grows only 2%.
00:10:21
Speaker
And that is cute. There's a couple of companies in the in the tech space that do very well. and They grow 15, 20, 25%. And there's a lot of companies that hardly grow at all or actually still see their earnings coming down. So I think it's that sort of risk that made them say, I see more opportunities in Korea and Taiwan. Now, the last question for 2025 before we turn to 2026. What surprised you the most when you think about 2025? What is something you haven't really expected when you're doing your outlook for 2025 this time last year? What does Harold say, wow, i I kind of missed out?
00:11:00
Speaker
I actually took my outlook for last year and read it. And the China story, I would say, we anticipated that to a large extent, but not the amount of money that came in. We thought that growth would be better and that would people would be more convinced that things would be OK. um But the amount of money that the mainland Chinese actually put into it, that was a surprise. That's the first one.
00:11:23
Speaker
We actually liked Korea and Taiwan. But the rally in particular in Korea went on much longer and was much sharper than what we anticipated. So that was a surprise. And I think the third surprise is ASEAN. We thought there was good value in ASEAN, but it hasn't really performed.
00:11:43
Speaker
And we need to go back and and realize why is that the case and what does that tell us that about that market and that group of stocks. And mainland China is like a big melon, very sizable. Korea, Japan, Taiwan, they're like apples. and These companies are really, I would say. Blueberries. Blueberries. That's a nice one. um They're much smaller. So I think maybe it just takes time for the attention to go to those markets. They're just not really driving the stories. Yeah.
00:12:11
Speaker
Errol, this is a great overview of of the past year that we just had, but we want to take a quick break now. And when we come back, let's talk about 2026 and some of the themes that investors might be thinking about going into into next year.
2026 Growth Areas Beyond AI
00:12:34
Speaker
Well, welcome back, everybody. And Harold, before the break, we talked about some of the surprises in equities, in Asian equities for the past year. ah Now we really want to talk about 2026 because you just published your Outlook report. and And what do you think are some of the themes that investors will be thinking about going into next year? i imagine the AI hardware boom rally globally is still forefront in everybody's mind. Is that that could continue? But is there anything else that is is sort of investors' radar? Well, I think you hit the nail on the head, Fred. I think in 2026, the story, I suspect, is going to be what is there beyond AI? We've now well invested in AI. In Asia, in in some of these markets, people have invested really accumulated large positions. Now, the AI story can continue. There might be more growth and these sort of things.
00:13:26
Speaker
But on the margin, I think it's going to be about what other growth stories are there in nature. And do you speak about other technology stories or other stories in general? Are we sort of talking about maybe...
00:13:37
Speaker
talking about biotechnology? Are we talking about robotics? Are we talking about EVs? Is that sort what you have in mind or do you think even bigger than that? I think even bigger than that. So, yes, biotechnology and EVs, they would be on that particular list as well. But I think in 2026, we're going to look beyond that. And I'm going to give you maybe three examples here.
00:13:55
Speaker
In large parts of Asia, we see that the formal retail sector is just growing over the informal retail sectors. there's still a lot of mom-and-pop stores, but they can't compete with the malls and convenience stores. So that's a growth story. I think another growth story is in kind of luxury spending. And we spoke in one of the previous podcasts with our luxury expert, Erwin Rambo, about this. We see a lot of luxury spending at a very top level. and That might well continue because I think in in some of the markets, people want to spend more on themselves and less on their children because their children have grown up and have now a job on for themselves.
00:14:31
Speaker
I think in the financial sector across the whole region, yeah, interest rates go lower. That means corporates want to take up maybe more loans and that offers opportunities here and there across the region as well. So I think there are these sort of Asia-specific growth drivers that will come to the surface.
00:14:48
Speaker
so So, Harold, you you you highlight a lot of the opportunities for next year that maybe there are other growth drivers outside of artificial intelligence, et cetera, that that people might focus on.
00:14:59
Speaker
But – and I hate to press you on this because you're an equity guy. But yes what might be some of the downside risk, you know? We always talk about opportunities and growth and you talk about you know retail sector consumption and and so forth. But is there something that you might worry about that could actually be also a bit of a headwind for Asian equities?
Risks for 2026 Asian Equities
00:15:19
Speaker
This year we've clearly had trade tensions, for example. There's always geopolitical tensions in the background. um But is there something specifically you might think that for 2026 could maybe be a headwind for Asian equity markets? yeah If I think about headwinds for the Asian markets, I'm not thinking about the tariffs too much. And I'm not thinking about the bigger macroeconomic issues too much.
00:15:41
Speaker
I think it comes back to what we spoke about earlier on. So, for example, mainland Chinese have bought mainland equities because their confidence has improved. What if that confidence gets shattered?
00:15:53
Speaker
And they're worried again. Something happens in China and people think they're going to lose their job. What they're going to do is to sell their stocks and go back to that default cash position. I think that is that is a risk.
00:16:04
Speaker
A second risk, I think, is everybody's looked at the same corners. If we see an exit from these corners, for for whatever reason that might be, that could be ah disruptive. It could be a normal process over the next three, four months. People sell A and buy B, for example. There can be a gradual process. But if that happens in one or two days, then you get a lot of volatility. And that in itself can create damage in markets as well. So there are these sort of risks that are very equity specific that we are looking at.
Conclusion and Year of the Horse
00:16:35
Speaker
Harold, thanks a lot for sharing you know your views on on the Asian equity markets, both in 25 and 26. I should highlight, though, next year is the year of the horse in East Asia. And the year of the horse is known to be energetic, optimistic, and independent. What that means for equity markets, I have no idea. It's galloping forward. Let's see what happens. But thank you very much, Harold. Thanks, Fred.
00:16:59
Speaker
And that's a wrap for this week's episodes of Under the Banyan Tree. Great to be back in the studio with you, Harold. And big thank you as ever to our listeners for joining us. Great to be with you, Fred. And as a reminder that you can vote in the 2026 Asia Excel Survey at www.excelinsights.com forward slash voting.
00:17:19
Speaker
Voting is open till the 5th of December and we'll be back with you before then for the next episode of Under the Banyan Tree. Take care until then.
00:17:57
Speaker
Thank you for joining us at HSBC Global Viewpoint. We hope you enjoyed the discussion. Make sure you're subscribed to stay up to date with new episodes.