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: Welcome to Under the Banyan Tree, where we put Asian markets and economics in context.
Speaker: I'm your host, Harold van der Linde, head of Asia Equity Strategy at HSBC.
Speaker: On today's podcast, we're taking you on a whistle-stop tour across the ASEAN economies, which are commanding more and more investor attention, particularly as an alternative to mainland China.
Speaker: With me in the studio are ASEAN economists Yun Liu and Aris Dagenij.
Speaker: ASEAN is home to 600 million people across 4.5 million square kilometers, so we've got a lot of ground to cover.
Speaker: Let's get the conversation started right here, under the banyan tree.
Speaker: A little background context to begin with.
Speaker: ASEAN is a collection of 10 economies across Southeast Asia with a total GDP in a region of $3 trillion per year.
Speaker: It's a disparate economic landscape, from the factories of Vietnam to the bright lights of Singapore's financial district.
Speaker: And like everywhere else, challenges around inflation and the post-COVID recovery has hit the ASEAN economies to a varying extent.
Speaker: Trade, manufacturing, foreign investments, they're all big themes for these economies.
Speaker: Jun, let's kick off with Vietnam.
Speaker: You've been looking at that for a couple of years now.
Speaker: The story with Vietnam was all the supply chains that came out of, or the factories that came out of China, and they were moving predominantly to Vietnam.
Speaker: It was a great growth story, but somehow I got the impression it got a little bit stuck in the mud, right, Vietnam?
Speaker: What's going on there?
Speaker: Yeah, that's true.
Speaker: So Vietnam has been facing quite a lot of trade challenges since last quarter of 2022.
Speaker: And if we look at its export numbers, it declined by double digits, although now we're seeing a little bit of stabilization, but Vietnam is not out of the woods yet.
Speaker: But I guess, you know, one part of the resilience that we're seeing in Vietnam is that FDI still remains decent.
Speaker: Investments, right?
Speaker: So foreign investors are still going in there, building up factories.
Speaker: That's right, because FDI reflects a medium to long term perspective, whereas we're now facing some near term challenges on the trade.
Speaker: But where's this trade weakness then coming from?
Speaker: Because they're setting up the factories, you think they'll export all that stuff around the world.
Speaker: So it started with the electronic cycle, but then it really has broadened to different other sectors, you know, textile, foodware.
Speaker: machinery, a lot of the products that Vietnam produces, mainly because of falling orders from the West.
Speaker: I mean, of course, you know, part of the story is because of the structural changes after the pandemic eases, the demand for goods has waned.
Speaker: We're not going to see the same sort of demand that we saw.
Speaker: So it's not really a Vietnam issue, it's kind of a global issue.
Speaker: That's correct.
Speaker: Demand is a bit weaker.
Speaker: That's right.
Speaker: They're struggling with that.
Speaker: They also have some problems, I think, with the property sector there, right?
Speaker: That's right, yeah.
Speaker: So Vietnam's property market has been facing some challenges, started with some liquidity issues.
Speaker: But the good thing is that the government has been proactively addressing some of the issues with credit package.
Speaker: So hopefully we can see some stabilization in the sector.
Speaker: Well, that would be good, in particular for equities, because we've seen the stock market come off quite a lot.
Speaker: Let's fly over to the next ASEAN country, and that's the Philippines.
Speaker: Irish, you're a Filipino.
Speaker: Yes.
Speaker: What's going on there?
Speaker: I read about unbalanced growth, food inflation.
Speaker: Give me a quick rundown.
Speaker: What's going on?
Speaker: So actually, I guess to start things off, the Philippines has experienced in 2022 and even in the first quarter of 2023, very, very impressive growth.
Speaker: We grew above 7%, the highest in the past 40 years.
Speaker: And it's quite boggling in a way that we do have the highest inflation rate in ASEAN.
Speaker: We also raised rates most aggressively across ASEAN.
Speaker: So what's really fueling this growth?
Speaker: What's fueling this growth are people being very resilient, dipping into their savings to get by the very hard times, to get by the pandemic, to get by high inflation.
Speaker: So how much can savings last?
Speaker: You can't dip into your savings forever.
Speaker: You gotta have to build your savings back up.
Speaker: So you think that consumption is going to come under pressure?
Speaker: Yes, we do think that consumption will eventually need to slow down, to cool, to return the economy back to balance.
Speaker: Just quickly, so it's a consumption story, but one of the issues, I guess, in the Philippines that everybody's talking about taking factories and building them up in ASEAN and India, right?
Speaker: And they're talking about Vietnam, they're talking about Thailand, they're talking about Malaysia, they're talking about Indonesia.
Speaker: Nobody goes really to the Philippines, right?
Speaker: The FDI, the foreign investment levels are somewhat lower.
Speaker: Well, I do think it's underrated in a way that if you look at FDI as a percent of GDP, the Philippines is actually in the middle of the pack.
Speaker: Okay.
Speaker: I myself will need to buy something in the Philippines if I do want to raise a family in the years ahead.
Speaker: So you do have a lot of very consumer-related FDI flowing into the Philippines as of late.
Speaker: This maybe brings us to the next country.
Speaker: So let's go to Thailand because Thailand was the favorite investment destination in the 90s and the early 2000s.
Speaker: But now that's much less so.
Speaker: It's still there, of course.
Speaker: But Vietnam, people talk about the Philippines, they say more for consumer-related stuff.
Speaker: What's going on in Thailand?
Speaker: And of course, also touch maybe quickly upon, for example, tourism because it's a tourism place, right?
Speaker: So for example, I mean, just to relate it to the Philippines with a very favorable demographic trend, Thailand does not.
Speaker: Thailand will soon have a declining demographic trend.
Speaker: So that market base that people are looking for, it's not going to be as big in the years ahead.
Speaker: You also have high household debt.
Speaker: Household debt is around 90% of GDP today.
Speaker: So it's hard to get that consumer market.
Speaker: Now, if you're a person investing from abroad, going to Thailand, it's really hard to sell domestically.
Speaker: But I do think what they're trying to bank on is actually to bring in more people from abroad and relying and investing on tourism to actually keep the economy going.
Speaker: But so far, tourism, and that's really mainland Chinese tourists that's supposed to come, right?
Speaker: That's the big one.
Speaker: Has kind of not really lived up to the expectations, right?
Speaker: Maybe it comes in a later year?
Speaker: For 2022 and 2023, everyone was banking on this big tourism boom for Thailand, which will bring the economy above pre-pandemic levels, which it already has, but just by a meager amount.
Speaker: But nonetheless, it was expecting this boom.
Speaker: Now, the question is, how big is that boom?
Speaker: It's not as booming as people expected it to be.
Speaker: And that's because mainland Chinese tourists are not returning as what everyone expected it to be.
Speaker: It has plateaued at around 36% of pre-pandemic levels.
Speaker: And we have yet to see whether the Chinese will arrive.
Speaker: Everyone thought it was a supply issue.
Speaker: But it turns out it's really not.
Speaker: Maybe that's because Chinese New Year, they went back home to see their families first after COVID, right?
Speaker: And then maybe a bit of domestic travel is easier.
Speaker: And maybe it takes time.
Speaker: We'll have to see.
Speaker: I guess one fact that I just want to bring in is the fact that flight capacity as a percent of pre-pandemic levels is actually above the tourist arrivals.
Speaker: So it just goes to show that it's more of a demand issue.
Speaker: You can get a flight.
Speaker: Yeah.
Speaker: So one bright spot in Thailand is the export of durian, right?
Speaker: That spiky, large, extremely smelly tropical fruit.
Speaker: And either people hate it or love it.
Speaker: I'm in the love camp, but I remember Fred in the previous podcast, which was about this.
Speaker: Fred said it's not something that he can eat.
Speaker: But that seems to be, there seems to be a craze fruit from China, right?
Speaker: I like it frozen.
Speaker: I don't know how you like it.
Speaker: No, no, I like it.
Speaker: I like it.
Speaker: But for mainland China, they like it as a, they give it to their girlfriend.
Speaker: They give it to their partners as a sign of love.
Speaker: And that raised this like craze in China right now that around 1 to 3% of China trade or China exports from Thailand to China was durian.
Speaker: Now it has boomed to 15%.
Speaker: So it's like, it's as big as like electronics or oil or something like that.
Speaker: Well, it's not as big as electronics just yet.
Speaker: It's a big thing, but I guess just to put some size into it, Thailand is the second largest exporter of rice.
Speaker: Durian has exceeded rice.
Speaker: That's how big the number is.
Speaker: Durian is bigger than rice.
Speaker: Yes.
Speaker: Good.
Speaker: Let's now go a little bit further south.
Speaker: Yun, Malaysia.
Speaker: So do we see foreign investments still coming in in Malaysia?
Speaker: Oh, definitely.
Speaker: So if we look at FDI as a percentage of GDP, Malaysia has been topping the ASEAN region.
Speaker: And Malaysia has been getting a lot of the investment, actually broad-based investment.
Speaker: That's semiconductors.
Speaker: Semiconductor is definitely one.
Speaker: And a lot of the advanced semiconductor investment from the US, from Europe.
Speaker: But Malaysia has been gaining a lot of FDI share from China as well.
Speaker: But they're...
Speaker: Trade has softened as well, right?
Speaker: A bit like the Vietnam story.
Speaker: That's right.
Speaker: But Malaysia, so Malaysia is not immune to the global trade challenges.
Speaker: But if we look at its exports, it has remained resilient, more resilient than other countries.
Speaker: Malaysia has gained substantial market share in particular semiconductors.
Speaker: And a lot of the semiconductors are actually automotive chips.
Speaker: So the demand for automotive chips have remained more resilient than demand for, say, computers or smartphones.
Speaker: Okay, so a relatively better story in that sense.
Speaker: And also the new government has indicated some economic plan, right?
Speaker: That's correct.
Speaker: What's their idea in a nutshell?
Speaker: Yeah, so ANWR unveiled a very ambitious 10-year economic plan.
Speaker: And the main goal here is for Malaysia to revert back to its 6% growth, like before the Asian financial crisis.
Speaker: It has outlined a lot of the policies on FDI attraction, on infrastructure spending.
Speaker: So we're still waiting to see more details to be unveiled.
Speaker: Okay, 6% growth.
Speaker: That's where Vietnam is maybe a little bit lower, but Indonesia is 5% to 6%.
Speaker: That's where ASEAN is trending around, right?
Speaker: Some of the major countries in ASEAN, give or take.
Speaker: Good.
Speaker: And then Indonesia, that's of course the biggest one in Asia, right?
Speaker: By population, by anything.
Speaker: Again, it's battery makers coming in, the macro looks pretty good.
Speaker: I mean, it's really in a bright spot, that place, right?
Speaker: Yeah, and I think one thing about Indonesia that people need to know is the fact that it has been able to achieve macroeconomic stability the soonest across ASEAN.
Speaker: And I think it's because it's banking on its exports on EV batteries.
Speaker: So the current account deficit, which used to be around, I think, above 1% of GDP before, it's going to narrow down even further through the years ahead, giving some macroeconomic support and stability for EV.
Speaker: Basically, current account deficit means you need capital from the rest of the world or if you're in surplus, you're actually providing capital.
Speaker: Yes, so you're actually needing less capital from the rest of the world.
Speaker: And that actually gives Indonesia room to be able to cut rates earlier than everyone else across ASEAN.
Speaker: So our chief Indonesia economist has forecasted that the easing cycle will begin at the end of the year.
Speaker: Meaning in 2023, while for example in the Philippines, we forecast it to begin at maybe a third quarter of 2024.
Speaker: So that macroeconomic stability in Indonesia has been really good.
Speaker: That benefits everybody.
Speaker: No interest rates, not so much inflation and all these other things.
Speaker: Now very quickly on the last one and that's Singapore.
Speaker: It's one of the smallest ones but the most developed high income levels.
Speaker: What's going on?
Speaker: Travel seems to be weak in Thailand, but it's strong, I believe, in Singapore, right?
Speaker: Yeah, that's correct.
Speaker: So Singapore has very fortunately avoided a technical recession in the second quarter this year.
Speaker: While the trade challenges are pretty much similar to Vietnam is going through, but the travel sector actually still has a lot of momentum.
Speaker: And actually, in particular, the Chinese visitors' recovery is the highest in Singapore than, say, pure...
Speaker: tourism destinations.
Speaker: So they've gone there before Thailand.
Speaker: Yeah, so exactly.
Speaker: So Singapore, Malaysia and Vietnam, I think part of the reason is because a lot of the Chinese visitors going to these three markets are, more of them are business travelers.
Speaker: So there's a lot more interest in, say, for example, the business related activities or FDI than pure tourism.
Speaker: Very good.
Speaker: We're going to take a quick break now.
Speaker: When we come back, we'll recap what we've discussed so far and we take a quick look at the equity markets in ASEAN.
Speaker: Joon, Aris, welcome back.
Speaker: So we've made this big tour across ASEAN.
Speaker: And broadly speaking, it seems that the story of FDI inflows in the region is still valid.
Speaker: It's just a different kind of sectors and industries.
Speaker: Trade is a bit weak, I think, right?
Speaker: Yeah, that's correct.
Speaker: I mean, for the trade challenges, we're still seeing that in countries like Vietnam, Singapore, well, to a certain extent in Malaysia as well.
Speaker: But the FDI story remains right.
Speaker: It's still there.
Speaker: So that's still the case.
Speaker: But the FDI story is just a bit different in the Philippines, it sounds like.
Speaker: Yeah, it's more consumer related.
Speaker: It's not those electronic semiconductors related FDI that you see in Malaysia, that you see in Thailand.
Speaker: Yeah.
Speaker: And Indonesia in a sense because they go into the electric vehicle industry there.
Speaker: But the overall story is that actually it allows ASEAN to hum along at about 5-6% GDP and it comes with inflows in the region that allows the currencies to strengthen.
Speaker: That means they don't have to raise interest rates as much or they can even start cutting interest rates across the region.
Speaker: And that effectively benefits everybody directly or indirectly, correct?
Speaker: Yeah, that's absolutely right, Harold.
Speaker: This is the macro picture.
Speaker: But by the way, how about the equity market in ASEAN?
Speaker: Yeah, so the equity markets, you have to look at growth as well, of course.
Speaker: That's where we look at an interest rate.
Speaker: And so now we've spoken about this.
Speaker: But you have to look at position, for example, as well.
Speaker: We know, for example, a lot of funds at the moment are looking at Indonesia because of the interesting growth story there.
Speaker: But across the rest of the region, I think most funds, I'm talking about institutional funds that are investing in the region there, it's a bit more spotty.
Speaker: They pick the consumer market here, they pick the banks there and stuff.
Speaker: That's the approach.
Speaker: But generally speaking, optimism on ASEAN is great.
Speaker: It is combined a reasonably large equity market as well compared to China.
Speaker: That's just humongous, right?
Speaker: And Japan is really, really big.
Speaker: These markets are smaller, but if you clopper them all together, they become sizable enough.
Speaker: So you see that people say, oh, let me go for an Indonesian, maybe a company here, and then I'll buy a bit in Thailand, I'll buy a bit in the Philippines.
Speaker: So they spread that around.
Speaker: But broadly speaking, it follows very much the story that you've laid out here.
Speaker: And on that note, Yun, Aris, thank you very much for joining us on the Banyan Tree this week.
Speaker: Thank you very much for having us, Harold.
Speaker: Thank you, Harold.
Speaker: And that brings us to the end of another edition of Under the Banyan Tree.
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Speaker: We'll be back again next week, putting Asian markets and economics in context.
Speaker: All the best till then.
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