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: This podcast was recorded for publication on the 3rd of October 2024 by HSBC Global Research.
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Speaker: Hello, I'm Piers Butler in London, and welcome to The Macrobrief.
Speaker: Emerging markets have finally got two positive catalysts they have been waiting for.
Speaker: The start of the Fed's easing cycle and China's stimulus package.
Speaker: So is this enough for investors to turn more bullish on EM assets?
Speaker: Or are growth and inflation worries set to persist?
Speaker: To discuss this, as well as the results of our latest proprietary survey of EM investors, I'm joined by Murat Olgen, Global Head of Emerging Markets Research.
Speaker: Murat, welcome to the podcast.
Speaker: Thank you, Piers.
Speaker: So Murat, you published the 17th edition of the Emerging Market Sentiment Survey recently.
Speaker: Admittedly, the survey period may not have covered some of the most recent developments, but nevertheless, there are some important messages coming out of it.
Speaker: So perhaps you can give us a recap on that, first of all.
Speaker: Absolutely.
Speaker: It is indeed the 17th survey.
Speaker: It's been more than four years.
Speaker: And then this survey was conducted, as you said, right before we had these big announcements from China on stimulus measures.
Speaker: The exact coverage period was between 7th of August and 19th of September.
Speaker: But actually, we can trace from the survey findings that already some expectations were building up because Asia has reclaimed its place as the most preferred region across all asset classes, especially on FX.
Speaker: The survey was obviously impacted, especially the tail end of the survey fieldwork, with the first rate cut by Federal Reserve in many years and a big rate cut.
Speaker: So we could sort of trace, you know, investors repositioning away from short-term investments
Speaker: FX positions to more longer term EM local debt duration positions.
Speaker: So absolutely, you know, investors are preparing for big changes, you know, on global monetary policy, particularly, you know, US Federal Reserve monetary policy, but also expectation that, you know, further stimulus might come out of China with Asia becoming the most preferred region once again, you know, after a long episode where Latin America was actually at the top of the preference of investors.
Speaker: And what the survey also highlights is that there was some dry powder in terms of the cash balances to react to announcement like we saw in China.
Speaker: That's correct.
Speaker: So it's quite interesting because in the first half of the year, we've seen cash balances drawn down big time.
Speaker: You know, the cash balances were close to 6% of assets under management.
Speaker: And the first half of the year, they've come down to 5%.
Speaker: But then when we conducted the survey, mostly through sort of the latter part of the summer, but also up until the third week of September, we've noticed investors have been piling up some cash.
Speaker: The weighted average cash position has gone up from 5% to 5.3%.
Speaker: The net sentiment was still bullish, maybe slightly trend, but it still was bullish.
Speaker: And
Speaker: Our risk appetite score was, you know, reasonably robust, maybe margin lower from the previous June survey.
Speaker: So when we bring everything together, Piers, we see that investors have amassed a little bit of cash, but still retain a constructive view on EM and still have a relatively robust risk appetite.
Speaker: They were all telling us they were preparing for something, you know, waiting on the wings, looking for opportunities and perhaps waiting for the right moment, given all the uncertainties that still linger in the investment environment.
Speaker: So Murat, I guess until now there was a feeling that the inflation genie had been put back in a bottle.
Speaker: In fact, I asked that question to your colleague, Janet Henry, in last week's podcast.
Speaker: Looking at that, are you worried that maybe there is more uncertainty now on inflation and could that affect monetary policy?
Speaker: Well, Piers, if you go back to the survey, that probably is the feeling because emerging market investors are a lot more worried about the recession in major economies, whereas Piers,
Speaker: they do expect further disinflation across EM, which would open room for maybe more rate cuts by major EM center banks, probably also emboldened by the fact that now the US Fed is reducing rates, there is a synchronized easing cycle, et cetera.
Speaker: On our side, though, we perhaps have a slightly different view because we've been pointing to some underestimated potential risk to EM inflation, and we've been actually following up the sort of bubbling trend
Speaker: supply side pressures for a while.
Speaker: They're not as bad as they were during the COVID episode.
Speaker: But look, it's been a while, maybe six to nine months where the global supply chain pressures are picking up, especially across EM, especially in the European time zone, obviously impacted by the sad geopolitical events, Suez Canal issues, et cetera.
Speaker: We've been also looking at the manufacturing sector input prices and PMIs.
Speaker: And they were actually close to two year highs, not reflected to output prices yet, but that is an upside risk.
Speaker: Commodity prices have been more mixed and volatile, but with the recent China news, we've seen some pick up, perking up in metals prices.
Speaker: And then you've got also some demand side issues.
Speaker: perhaps more on the services sector, stickiness of inflation, unit labor costs, where actually the wage gains are higher than productivity gains.
Speaker: So everything put together were not as comfortable as the markets or the survey respondents when it comes to YAM inflation.
Speaker: Obviously, things are not as bad as they used to be two or three years ago, but there are some underestimated risks as far as I can see.
Speaker: And maybe to finish on, Murat, was there anything in the survey that surprised you?
Speaker: Often there's kind of like a response that you kind of hadn't expected.
Speaker: Was there something like that in this one?
Speaker: I think it was on the FX side of things, the currency side, that really surprised me because the sentiment has improved significantly despite the August volatility, despite what happened later on with regards to expectations at the start of the fair easing cycle because it's been really back and forth, how much for how long, etc.,
Speaker: And there are still tons of issues going into the end of the year, you know, geopolitics, etc.
Speaker: But there was a significant improvement in FX sentiment, which is quite encouraging, of course.
Speaker: But then when you go into the details, predominantly Asia, which has shown as the most preferred region of investors.
Speaker: We've seen the mood vis-a-vis Latin America continuing to deteriorate.
Speaker: This was the top region last two years, but since the beginning of it, there was like a almost progressive worsening of sentiment and now in favor of Asia.
Speaker: And I think the significant FX sentiment improvement is also probably mostly down to Asia based on the survey results.
Speaker: That's great.
Speaker: I'm sure the survey is going to continue to reveal some interesting changes given the environment that we live in.
Speaker: But for now, thank you very much for joining.
Speaker: Thanks, Piers.
Speaker: That was Murat Ulgan on the prospects of emerging markets.
Speaker: And if you've got anything you'd like to ask Murat, then why not join our next live insights on the 11th of October, where he'll be answering your questions.
Speaker: The event is open to both clients and non-clients of HSBC.
Speaker: So for details on how to sign up, please email askresearch at hsbc.com or follow us on LinkedIn, hashtag HSBCresearch.
Speaker: That's all from us today.
Speaker: Thanks very much for listening.
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