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: And now onto today's show.
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Speaker: Welcome to Under the Banyan Tree, where we put Asian markets and economics in context.
Speaker: I'm Fred Newman, Head of Asian Economics Research at HSBC.
Speaker: And I'm Harold van der Linde, Head of Asian Equity Strategy at exactly the same bank.
Speaker: Fred, what are we talking about today?
Speaker: Well, Harold, I'm definitely going to have some questions for you on the equity side because today's chat is all about what's bugging Asian markets.
Speaker: Yes, markets are broadly down around the world right now, but we're going to look at Asia specifically.
Speaker: Is it global issues that are casting doubt on investors' minds or are there more region-specific macro factors at play?
Speaker: That's a very good question.
Speaker: I suspect that the answer is pretty much on both sides.
Speaker: Let's get the conversation underway.
Speaker: From HGPC's Global Research, you're listening to Under the Banyan Tree.
Speaker: Here's some figures to put things in context.
Speaker: The FTSE Main Asia Stock Index is down around 3% year-to-date at the time of recording, and that includes some significant losses in mainland China.
Speaker: For comparison, the US index, the S&P 500, is up about 7% since the start of the year, despite losing a fair bit of ground since July or August.
Speaker: It was even higher than that.
Speaker: Now, there are two major factors behind the sell-off.
Speaker: Investors seem to be worried about Chinese growth, that's the first factor.
Speaker: And on the other hand, also the issue is US interest rates.
Speaker: So, Fritz, let's start in the US.
Speaker: What's going on over there?
Speaker: Well, the rise in US interest rates has markets rattled across the world, not just in the US.
Speaker: And that filters back into Asia, of course.
Speaker: And what's going on here is that investors expected a nice deceleration in US growth and easing of inflation pressures.
Speaker: But it turns out the US economy is quite resilient.
Speaker: And so interest rates are higher than expected.
Speaker: And there's even the risk that the Federal Reserve might raise interest rates further.
Speaker: At least that is what the market pricing suggests.
Speaker: But some of the Fed commentators, it seems that they are kind of also thinking, well, these rise in market interest rates in itself is already a tightening, right?
Speaker: That's right.
Speaker: So what some Fed speakers have said is that maybe we don't have to raise interest rates because the market interest rates have already increased and is doing it for us.
Speaker: On the other hand, it's a bit of a chicken and egg issue here, right?
Speaker: So if market rates were to come down, then maybe the Fed would have to raise interest rates if they want to maintain that.
Speaker: monetary tightening.
Speaker: So this has really rattled markets because it sets the price of money for the global economy and really transmits itself into Asia through the exchange rate channel because the dollar is strong.
Speaker: Local currencies have weakened in recent months and that means higher import costs for local economies.
Speaker: And it might also mean that some of the local central banks will have to raise rates in order to protect
Speaker: their exchange rates.
Speaker: And so that has direct implications for Asia.
Speaker: And I think we've seen this already, right?
Speaker: If I'm not mistaken, Indonesia and the Philippines.
Speaker: We've seen two central banks already surprisingly raise interest rates against expectations.
Speaker: One is the Indonesian central bank, the other one is the Philippine central bank.
Speaker: But of course, it
Speaker: It's not just about Asian central banks raising interest rates, but also they could just delay their interest rate cuts, which would also be a form of delaying the accommodation that's coming through.
Speaker: But speaking of, as an economist, we obviously focus on exchange rate markets and policy rates, but you focus more on the equity market side.
Speaker: The exciting stuff.
Speaker: Yes, yes, as some people say.
Speaker: Okay.
Speaker: But then rising US yields, why does that interest equity investors in Asia?
Speaker: Why would that matter if government bond yields in the US rise?
Speaker: Why is that important for Asian equity investors?
Speaker: You think, what do we have to do with this, right?
Speaker: We have our own money here in Asia, and to a certain extent that's right, actually.
Speaker: The thing is that the size of the US market is so big that it sets the standards.
Speaker: As you say, it is the price of money pretty much around the world.
Speaker: Everybody follows that because it's just by far the largest market.
Speaker: not only in the stock market but also in bond markets.
Speaker: So what happens there will be translated into what happens here.
Speaker: Now, rising interest rates is just not good news for equities.
Speaker: Why not?
Speaker: Think about it in two ways.
Speaker: If I can buy stock or I can put my money into a deposit and I get a nice higher interest rate in deposit, why would I buy stock?
Speaker: It's relatively more interesting to put it in a deposit.
Speaker: That's one way of thinking about it.
Speaker: Another way of thinking about it, which is quite important but a bit technical, is simply that
Speaker: We buy a future stream of earnings.
Speaker: You just don't buy a company now.
Speaker: You buy a company because you think over the next 10 years it will do good, right?
Speaker: But the profits in 10 years is not as important to it as now.
Speaker: And you have to discount that.
Speaker: So it's a discount rate that we use.
Speaker: And high discount rates lower the value.
Speaker: The thing is that for some markets that's good.
Speaker: For some markets, not good.
Speaker: So particularly Chinese equities, for example, are quite sensitive to this.
Speaker: Higher bond yields is really bad for them.
Speaker: But there are markets where things are slightly different.
Speaker: Japanese equities respond very differently again.
Speaker: Let me ask you, you said sort of interest rates matter for equity investors, partly because it's an alternative investment.
Speaker: You could put your money in cash while in the equity markets.
Speaker: And then, of course, you said a technical argument was discounting future earnings.
Speaker: And I'll leave that to, you know, the eggheads among equity strategists to explain us how that works.
Speaker: Is there another, a third channel?
Speaker: And that is, we've seen a lot of companies raise debt, increase in debt, and so if interest rates rise, that should hurt their earnings?
Speaker: Or is that something that the market doesn't look at?
Speaker: No, that is the case.
Speaker: So, you're right.
Speaker: A lot of companies, and I'm looking at listed companies, right?
Speaker: So I'm not looking at undistled companies.
Speaker: If you look at, if you talk about corporates in the economy, you mean all the companies.
Speaker: I just look at the ones that are listed.
Speaker: Yes, high interest rates means higher interest costs.
Speaker: However,
Speaker: A lot of Asian companies have not invested a lot over the last couple of years because of COVID and all sorts of other things.
Speaker: And therefore, they have a lot of cash on the balance sheet as well.
Speaker: So higher interest rates also increases interest income for these companies.
Speaker: So it doesn't seem to have a major issue at the moment.
Speaker: What is probably more important for the earnings is simply what happens with the dollar, what you're alluded to, and import cost and oil and these sort of things that impact earnings.
Speaker: And of course, from an economic perspective also, what higher US interest rates mean is that capital is flowing from Asia into the United States.
Speaker: Because as you say, you receive more on your money in US dollars than locally.
Speaker: And so we've seen quite a bit of outflow out of fixed income markets.
Speaker: For example, we've seen as a result weaker currencies.
Speaker: And that just means the investment thesis for investing in emerging markets has been quite challenging because the dollar sucks the money back.
Speaker: Why go into emerging markets if you get high returns?
Speaker: But is that something you see as well on equity flows?
Speaker: Yeah, there's something really interesting going on here.
Speaker: So you are right.
Speaker: Net-net, money flows out.
Speaker: But within Asia, we also see flows.
Speaker: So Asian funds, so funds that are dedicated to invest in Asia, they focus at the beginning of the year really on the reopening story in mainland China.
Speaker: While the global funds were not really big buyers of it, but they looked and realized that actually the US economy was doing better than expected.
Speaker: That's why interest rates in the US have gone up and said, we try to build exposure to those markets that benefit from that.
Speaker: That's Korea, Japan and Taiwan.
Speaker: What we then saw later in the year is that these global funds started to move to India because it actually turns out to be a good story as well.
Speaker: And the Asian funds had realized that the reopening story is not so good.
Speaker: They were still moving to Korea, Taiwan and Japan as well, followed to India.
Speaker: But now we've seen actually in the last month that those global funds have moved back and moved money back to mainland China.
Speaker: And I think that's an area we should pick up on because that's the other thing that's bugging global markets, which is obviously the growth worries in mainland China.
Speaker: And after a quick break, we'll be back and discuss the prospects for the mainland Chinese economy and markets.
Speaker: So, Fred, we've spoken about interest rates in the U.S. that really kind of a dampering effect on global stock markets.
Speaker: The other issue, as we said, is growth in China.
Speaker: And there's been a lot of pessimism about that.
Speaker: We've seen economies cutting their forecast.
Speaker: But quite recently, some of the numbers that came up were a little bit better than expected.
Speaker: Is that correct?
Speaker: That's right.
Speaker: So there are some green shoots that we would call them.
Speaker: They still need to be watered and grown into sturdy trees.
Speaker: Turn into green.
Speaker: That's right.
Speaker: And turn into green, you know.
Speaker: But it's clear that things are a little bit better, I think, than some, you know, many investors had feared, many economists had feared.
Speaker: So, for example, if you look at third quarter GDP growth came in at 4.9%.
Speaker: That was above expectations.
Speaker: That means Chinese economy is in striking distance of delivering
Speaker: the growth target, which is around 5% GDP growth.
Speaker: And it's also, we always point out that not everything is, you know, turning south in China.
Speaker: You've seen, for example, quite robust infrastructure spending.
Speaker: You've seen quite robust manufacturing investment come through, quite robust consumer services demand come through.
Speaker: So there are pockets of growth still despite some of these very challenging headlines.
Speaker: It also, because the issue is then in the markets there was a feeling that there should be more stimulus because growth is weakening and they haven't stimulated.
Speaker: But this is to a certain extent supports that view that the policymakers shouldn't have done too much over the summer, right?
Speaker: Yeah, that's right.
Speaker: I mean, they have done quite a bit, but not the big, big stimulus that some investors had hoped for.
Speaker: They have done a little bit, particularly on the housing market front, for example.
Speaker: But here's a question for you, Harold.
Speaker: And I'll never understand the psychology of an equity investor, so that's where we have you here.
Speaker: Yeah, that's why I have people like myself coming.
Speaker: So, you know, when the government announced that GDP in the third quarter was actually better than expected, 4.9%, pretty respectable,
Speaker: The equity markets actually didn't seem to be overjoyed by the news and the suspicion is here that their equity investors are saying, well, if the numbers are this decent, then there's no longer an urgency to actually add stimulus.
Speaker: And so explain this to me because, you know, you can't have your cake and eat it too.
Speaker: I mean, one thing's got to give.
Speaker: Yes, the market was looking for stimulus and these numbers suggested that that might not be as big as they were hoping for.
Speaker: And that's why the market sell off.
Speaker: But I think the bigger issue is also what happens with earnings.
Speaker: You got to first understand that an equity investor or a fund that buys equities, buys companies.
Speaker: They don't buy an economy.
Speaker: You can't buy mainland China.
Speaker: That is not for sale.
Speaker: That is just not, it doesn't work like that.
Speaker: But you can buy a stake in a bank or insurance company or an airliner or whatever that might be.
Speaker: So we have to look at what the earnings of all these companies in the stock market is to understand what happens there.
Speaker: The funny thing is that these earnings have not come off.
Speaker: They were at the beginning of the year around, for China, about 24% growth.
Speaker: The analysts cut it a bit, 21%, 20%.
Speaker: Actually, it's gone up again to 22%.
Speaker: That's a very reasonable earnings growth number that comes through.
Speaker: We're already in October this year.
Speaker: So we have quite some sense of what's going on.
Speaker: So the earnings are holding up reasonably well.
Speaker: Isn't then the answer that one of the worries, because we're talking here about what's bugging markets, we said yields and then worries about Chinese growth.
Speaker: So despite the better earnings, is then one of the issues for equity investors
Speaker: questions over the durability of these earnings.
Speaker: That maybe next year it might be 10% earnings, not 22%.
Speaker: Is that what's kind of really overhanging everything?
Speaker: Yeah, clearly investors are worried about the durability of growth.
Speaker: And growth is slowing down into 2024, but still it's about 16% earnings growth.
Speaker: And these are consensus estimates made by all the analysts on the street that look at these earnings.
Speaker: So there is a slowdown in growth, but it's not dramatic.
Speaker: What the investment community believes is that these numbers will have to be cut, that the analysts are overly optimistic.
Speaker: And we will see in the course of the next three weeks, four weeks or so, when the companies will come through with results, if that is realistic or not.
Speaker: But even if we see cuts, we've already pending quite some decent numbers for the first, say, six, seven months of the year.
Speaker: So that would then suggest that there's a confidence issue here to some extent.
Speaker: Now, when we think about the Chinese market, we read headlines about foreign investors pulling out.
Speaker: And that's actually consistent with what we said about other markets in Asia, that because of the high U.S. interest rates, money is flowing back in the U.S., not just out of China, but out of China.
Speaker: many other economies in Asia.
Speaker: So that could be an impact.
Speaker: But, and I think you've told me that, that actually the Chinese equity market is predominantly driven not by foreigners buying, but by local retail buyers.
Speaker: Yeah, that's correct.
Speaker: So there's a couple of issues you're touching upon here.
Speaker: So you're right, there is a confidence issue that explains that the market has performed as it has.
Speaker: That is one issue.
Speaker: And we'll have to see if that confidence is correct or not.
Speaker: You are right that retailers drive that, but that is really the Asian market.
Speaker: So if we talk about the mainland Chinese stock markets, you have Beijing is actually really small.
Speaker: So you got Shanghai and Shenzhen.
Speaker: And then you, of course, have the Chinese companies listed in Hong Kong as well.
Speaker: The dynamics of these markets are really different.
Speaker: So the retail participation rate, say, in Hong Kong is much lower in Shanghai.
Speaker: It is really, really high.
Speaker: So the dynamics are really different.
Speaker: What is the case, if you take it a little bit further, is that increasingly these stock markets, not only the Chinese, but also the other ones in the whole of the region, are driven by Asian money, Asian wealth that's been generated.
Speaker: And we're becoming a little bit less dependent on flows from outside of Asia to drive these markets.
Speaker: That is correct.
Speaker: So to bring it back to the two issues we were discussing today, the what's bugging markets.
Speaker: One issue was rising US interest rates.
Speaker: The other one is weaker Chinese growth or concerns about the durability of that growth.
Speaker: It seems to me, and correct me if I'm wrong, you know, can't really make predictions here, but...
Speaker: It would almost require a reversal of these two issues for then things to improve again, for sentiment to improve.
Speaker: And we could kind of see it next year.
Speaker: And there's a possibility that China's economy might actually be on a stronger footing.
Speaker: We might see U.S. interest rates come down.
Speaker: So it's not quite all doom and gloom if you turn the look at the picture.
Speaker: Yeah, that's absolutely right.
Speaker: I think if we look for Chinese equities now into, say, 2024, I almost see only two scenarios whereby either these two issues move in the opposite direction, meaning bond yields come down, Chinese growth is better than expected.
Speaker: And then you can actually see that's really positive for Chinese equities or they don't.
Speaker: And then you probably linger around where we are at the moment.
Speaker: And I almost find it difficult to see that there's hardly anything in between here.
Speaker: So you get a very kind of binary outcome for Chinese equities.
Speaker: There you have it.
Speaker: The whole world financial system distilled to two factors.
Speaker: We just now have to figure out which way they're going to trend in 2024.
Speaker: That's right.
Speaker: So, Harold, aside from topsy-turvy markets, I hear you're packing your bags again.
Speaker: You're headed for Paris.
Speaker: That's right, Fred, yes.
Speaker: What's going on there?
Speaker: It's going to be early next year, so it's a bit of time off.
Speaker: But I've been asked to talk about the city of Jakarta, out of all things.
Speaker: So nothing about banyan trees and stock markets or interest rates, but about the city of Jakarta.
Speaker: And as you know, I've written a book about the history of that city.
Speaker: And this is a conference for urban planners.
Speaker: Wait, let me stop you right here.
Speaker: So I know you've written a book on this, and it's a fantastic book, by the way.
Speaker: Thank you.
Speaker: But surely an urban planning conference in Paris, even though it's in Paris, can't be the most exciting thing to do in general.
Speaker: I completely disagree, Fratia.
Speaker: It's called Organic Cities.
Speaker: And it's about how cities deal with big challenges.
Speaker: Now, there's a few cities around the world that get big challenges, and Jakarta is one of them.
Speaker: The city is sinking, the sea is coming in, all kinds of sort of challenges.
Speaker: And Jakarta has got a unique way of dealing with this.
Speaker: People make individual projects to deal with this, and that all combined together allows that city to respond.
Speaker: But that's what they apparently, what the conference is about.
Speaker: And I'm glad to see that they've asked me to talk about Jakarta for an hour or something like that.
Speaker: I'm looking forward to that.
Speaker: So you're going to be the keynote speaker for an event on urban planning.
Speaker: That was probably an overstatement because I'm slotted in between a minister for housing of a country and a mayor of a very prominent US city.
Speaker: I suspect that if the room is full, it might not be because of my presence there, but more the people that...
Speaker: speak before me and after me but anyway I will have dinner with them and I'm sure if you have dinner with them they won't get a word in edgeways one request I would have though is that you get them to sign up to the Banyan tree I think that's a good idea yes and ladies and gentlemen of course not just ministers and famous mayors can sign up to the Banyan tree so so can you you can sign up on Apple you can sign up on Spotify or anywhere where you get your podcast and that's also where you find other HSBC podcasts such as the Macrobrief and the ESG podcast
Speaker: From all of us here in Hong Kong, thanks again for listening.
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