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Under the Banyan Tree - Are we a little too fixated on tariffs?
907 Plays22 days ago
Herald van der Linde is joined by Co-Head of Asia Research Eliot Camplisson to discuss the state of Asian markets since ‘Liberation Day’ and if we might be missing the bigger picture when it comes to global headlines.
Disclaimer: https://www.research.hsbc.com/R/101/DVljlqd. Stay connected and access free to view reports and videos from HSBC Global Research follow us on LinkedIn https://www.linkedin.com/feed/hashtag/hsbcresearch/or click here: https://www.gbm.hsbc.com/insights/global-research.
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Transcript
Introduction to HSBC Global Viewpoint
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
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00:00:24
Speaker
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US Tariffs and Asian Market Drivers
00:00:46
Speaker
Hello and welcome to Under the Banya Tree where we put Asian markets and economics in context. I'm Harold van Linde, the head of Asian equity strategy here at HSBC in Hong Kong. Fred's traveling this week, I believe he's in Europe, but I'm very happy to be joined by his co-head of research here in Asia and gentleman named Elliot Campbellsen, who heads up our equities coverage in the region.
00:01:07
Speaker
Now, Unless you've been living under a rock, you're probably aware that US terrorists have been completely dominated discussions markets and economics around the world for at least the past month or so. And make no mistake, this is the biggest story to play out in the global business stage in years.
00:01:22
Speaker
But are we missing the bigger picture? Have we become so fixated on terrorists and all the numbers, this is this going to be this much or that much, that we've lost sight of some of the macro and micro drivers in Asia that give them our economy so much promise and resilience?
00:01:37
Speaker
Well, we think so, otherwise we wouldn't dedicate a podcast to it. ah So that's what we're going to discuss here today. Without further ado, let's get the conversation started under the banyan tree.
00:01:54
Speaker
Well, since our resident chief economist is away and Elliot and I are here, I think we should start with a look at the markets for some context.
US-China Tariffs Impact on Markets
00:02:03
Speaker
The two economies front and center of the trade discussions, of course, are the US and China.
00:02:08
Speaker
Unsurprisingly, they've fallen, but actually not by a huge amount. At the time of recording, the Hang Seng China Enterprises Index, it's abbreviated to HSESI, and it's basically the mainland Chinese companies listed here in Hong Kong, and the S&P 500, the index for the broader market in the U.S., are down around 4% and 3% respectively, since the U.S. tariffs came into play on Liberation Day, April 2nd.
00:02:33
Speaker
But it's a very different story for much of the rest of Asia. Korea is up 6%, Japan is up 5%, India is up 4%, and Indonesia is up 3%. So at this point, I want to bring in Elliot.
00:02:45
Speaker
ah Welcome, Elliot, to Under the Banyan Tree. Thank you very much. Now, Elliot, if I would have asked you last year, what do you think is going to happen with the Chinese stock market if the US is going to impose 125% tariffs on what would you have what would you have said I would have said exactly what happened in the first four or five days after the announcement came out of the United States, which was a very fast, very dramatic fall.
00:03:10
Speaker
i'm I would obviously have listened to you to stay calm. And what's been incredible is, you know, we've bounced back a long way. and And I think just to go back to your points, you were saying about, you know, let's let's just talk about the US s and the HSCEI, because I think they're a nice, reliable...
00:03:26
Speaker
liquid proxies for this kind of opinion coming out of the market. um And you said, you know, HSEI is down four, US is down three. But don't forget where we were before. The US had already been rolling over and Hong Kong had been very strong going into that event.
00:03:40
Speaker
So actually, if we look at year to date, including the whole thing, Hang Seng is up 10, roughly, and S&P is down six. So we've ridden out the storm way better than even I, an optimist, would have expected.
00:03:56
Speaker
And to put in context what you were just saying, you know, you asked me that question this time last year. This time last year, you and I were in China. Actually, we were in China. That's right. Seeing clients. And at the time... You know, the feeling when we went to see investors there, I think if we'd have told people, listen, we've got a crystal ball tariffs April 2nd, I think they would have run for the hills. They would have been so scared because things were so tough. So the way we've written this out, I think is really a surprise, even to an optimist, let alone to people who were pessimists in April of last year.
Regional Investment Trends in Asia
00:04:25
Speaker
Yeah.
00:04:26
Speaker
Now, there's one thing that's interesting from but which came up from last year. And you actually brought this up in a meeting we had earlier this week, is that when we were in China last year, we were traveling, seeing clients in Beijing and Shanghai. And they say, you know, what is the foreign investor doing? When are they coming back? And what is their opinion on China? Right. And yeah, and ah we weren't very popular because we said we don't think they're coming back. Yeah, exactly.
00:04:48
Speaker
But what we've seen is that they've been looking for the wrong investor to arrive. It's the local regional investors. So it's it's been southbound flows that have been incredibly strong in Hong Kong. You and I have done this a long time.
00:05:02
Speaker
you know What's so exciting, what's happening at the moment is I feel like genuinely in in a really structural way that Asia is buying Asia. Yes. We don't need to wait for the rest of the world to come in. you know From Asia financial crisis in 97 where every you know foreign investors leaving precipitated that terrible fall and bouncing back from 2008, we needed the US s market to recover.
00:05:23
Speaker
What we're seeing now is the US can be down. And Asia can run on its own steam and under its own energy. And you've talked so much about the pile of cash that's sitting in Chinese current accounts. 22 trillion US dollars, yes. Amazing. yeah And, you know, the pension funds growing in Malaysia, for instance, or, you know, Singapore's own longstanding funds. Yeah.
00:05:44
Speaker
And they are the ones who are coming in. And i I don't know the exact numbers, but I think the numbers of U.S. investors in China markets is still very low. It's very low. And we've held up. And I think this is being missed in the bigger picture is there is a strong capital base here. That's right. And actually, this could only be further amplified because if the Asians, in the households that have put money into the U.S. s over the last couple of years – particularly Japanese and Korean households as far as we've seen data, they're bringing this back. So this is going to come back into Asia.
00:06:14
Speaker
It means that there's more capital available and that's going to be supportive to market. So that's that's good. That means for us, for example, the clients that we talk to is going to change as well. And I think the other exciting, you know, know we're here to talk about, you know, riding out the tariff storm, but something that we really do need to talk about is, again, something that was very difficult to talk about this time last year, which was the number one question before we're all talking about trade now, which was property.
00:06:38
Speaker
And this was, you know, this was going to end the Chinese economy and there was no way to come back for it. And the pictures in the magazines of thousands of empty apartments and that's it's all over, done, finished. Yeah. Okay. So I'm just looking at some of our most recent work in China property. ye So 14 out of 80 major cities, inventories are down more than 20% in the last 12 months. I think inventories in Shenzhen are down by 50% and are down below eight months of sales. Yeah.
00:07:06
Speaker
This is a huge, huge change. you know This was the driver of the economy. This is what brought us down. And what we want is a stabilization. And that's where we that's what we're getting. And that has a huge knock-on impact to confidence. And like you say – And that goes into people being willing to take on risk to buy either a bit of property or equities or bonds or whatever it is.
00:07:28
Speaker
So that gives that confidence. um But I think there's a bigger thing going on as well.
China's Strategic Industry Growth
00:07:33
Speaker
There's a lot of focus on these tariffs, but it misses ah kind of the picture to a certain extent. If you would have had in the U.S. a policy whereby they say on Monday we're going to impose tariffs on Chinese products because we want to have production being based in the U.S.,
00:07:48
Speaker
That's good, but then what on Tuesday you should have done is to say, okay, anybody wants to produce these sort of products, and I think what are the key products that's going to define the rest of our lives? It's going to be AI, robotics, EVs, certain high-end health care.
00:08:02
Speaker
ah You say to all of these sort of industries, you invest in the US, you get all kinds of tax breaks, and we make it easy. We're going to set up a national research ah department that is going to help you out, all that kind of stuff, right?
00:08:14
Speaker
Then you say, okay, now you have something really powerful, but that so far hasn't happened yet. Meanwhile, China has done that. Over the weekend, they had a big meeting about AI, was chaired by xi Jinping himself. so And what I now see is that in those industries that I just mentioned, we actually see China starting to take a lead in EVs as leading.
00:08:35
Speaker
In robots, not in humanoid robots, but in industrial robots. In AI, not really yet. Deepsea came later than GTP. But we're talking about couple of months difference here. And in healthcare, we see companies emerging as well that are globally competitive. So I think China is almost using this as an opportunity to rise.
00:08:54
Speaker
And maybe what we can even say is that this has been an c incredibly costly way for China to do so. It had overcapacity in all these industries. The local governments financed that. There's a lot of debt there.
00:09:07
Speaker
We're talking about six, seven trillion used dollars of debt. But now they have some companies that are globally competitive, right? um We know they are in EVs. We know CATL dominate in batteries and BYD do their own batteries.
00:09:21
Speaker
Just today we published something. I'm going to read this out. Neither of us are going to understand it, but it it sounds really good. okay Baidu introduced Ernie 4.5 Turbo. Baidu revealed that Ernie 4.5 Turbo's multimodal capabilities are on a par with GPT 4.1, but priced at only 0.2% of GPT 4.5.
00:09:39
Speaker
naught point two percent ah gp t four point five Now, that's a technical sounding way of saying China can do this very, very cheaply and help companies deploy AI at scale very quickly without as much cost of subscription.
00:09:55
Speaker
We can get into a different argument about monetization for these things, but they're just going to run and you're going to see it in what you're doing. We've we've done other work where we're looking at real life examples of photo editing suites for um apps where you're buying clothes and then you can see yourself in the clothes. You take a picture of yourself and it AIs those clothes onto you, but not just in some sketchy, looks terrible way. So we're seeing this monetization happen already. So it's, you know, we know it's already happened in EV. It is going to happen in AI.
00:10:22
Speaker
And we're seeing it everywhere. and And like I say, I want to stress this again. If we see property hold a base and that confidence comes back, we know what they can achieve in China. And it's impressive.
00:10:37
Speaker
And they have the capital to do so because we just spoke about this as well. So these Chinese companies, they are going to be world-class leaders in their respective industries and will be able to head-on compete with anybody else that's ah around the world there.
00:10:51
Speaker
The question then is for the rest of the region, what what can these companies do there? And we're going to talk about that right after the break.
Asian Companies and Regional Capital Markets
00:11:07
Speaker
Elliot, while we were having this break, you actually pointed out something I actually forgot about, something interesting, and did the listing of these stocks. So, yeah, so there's been a lot of concern from clients been coming to you, been coming to us, ah worried about mainland China companies that are listed in the US having to repatriate and that this could be very disruptive to the market.
00:11:28
Speaker
Actually, underlying that is a really is a really positive thing. So Alibaba, 2014, think biggest IPO in the world the time? At the time it was the biggest IPO the world, yes. And listed in the US. Correct. Now, what's the underlying message there is if you want to do something big, if you need a lot of capital, if you want a lot of liquidity in a stock, you've got to go to the US. And in 2014, that was clearly true.
00:11:50
Speaker
yeah Okay. So, in 2019, Alibaba do a secondary listing in Hong Kong. And what's interesting about that is, as of today, and this is, you know, don't forget at the beginning when it just listed in 2019, we had all the mess of COVID.
00:12:06
Speaker
As of today, almost half, about 40% of the trading value of Alibaba is now in Hong Kong. Yes. That was 100% in 2014. 100% in 2014. It's now 40% in Hong Kong. If you look at a company like Netties, it's almost half.
00:12:23
Speaker
If you look at Trip.com, it's almost half. Lee Auto, it's now more in Hong Kong than it is in the US. Again, why does this matter? To go back to the point about Asia can look after Asia. And that really is something very, very different to the last cycle. Yeah, yeah. Asia is buying Asia.
00:12:39
Speaker
Asia is buying Asia and we can provide the liquidity. So, you know, it's interesting. Everyone's worried about this delisting thing. And actually what they're missing, I think, is a really important underlying trend is the liquidity is here.
00:12:51
Speaker
The capital markets are big enough here. and You know, you and I don't talk a huge amount about bonds, but throughout the last year or so, China bond spreads have been incredibly tight yeah because there is so much capital in that market looking for opportunity. yeah And with the property companies gone, in a sense, they're no longer raising or...
00:13:10
Speaker
They're not at risk anymore in that sense as they were 12 months ago. But this is very important. They're also not what they were 36 months ago or three years ago. They're not sucking up all the excess capital in the system. Remember those huge property companies, you know, they just release bonds, release bonds, made flats, released.
00:13:26
Speaker
That's not going to happen now. So that capital's got to go somewhere else. And so, you know, that's a really important underlying trend that's kind of hard to miss in the daily noise about
Asia's Independent Economic Growth
00:13:35
Speaker
tariffs. So look that's very exciting.
00:13:38
Speaker
Let's try and sort of walk away a little bit from China. Just I want to ask you, we've seen this in previous cycles where China just hoovers up all the investor interest and kind of hoovers up all the opportunity.
00:13:49
Speaker
You know, we'd we'd rather have a much more broader broader recovery in the region or we're already recovering. But So, you know, when you look around, let's start in ASEAN India, what can the south of Asia do to not be ignored again?
00:14:04
Speaker
Well, I think there's two things they can do. And India does this, I think, already pretty good. But ASEAN could do, it I think, a better job in that as a group is that they need more homegrown companies to list.
00:14:16
Speaker
And in India, we've had... many, many IPOs and in Asia. That level is much, much lower. But you need to broaden these markets out because the capital is available. You need to suck that up and and then bring that back into the market. That's the first thing.
00:14:30
Speaker
But I also think these companies need to go and sit down and think, hey, Asia is reshaping. There are some globally competitive companies coming out of China. And if you are going to heads on compete with, say, in EVs with the Chinese or with in say, industrial robots with some of them, or some of the other companies we mentioned that are on the industries in AI.
00:14:49
Speaker
You're competing with some really, very competitive companies that are highly innovative, highly cost efficient, and have run massive operations. So I think you need to see that these companies need to rethink what they do.
00:15:03
Speaker
ah For the Indian companies, I just think what they can do is, in general, to sell product that the Chinese can't sell in into the US. And they already do that. There's IT services. They're big in pharma, maybe other sort of medical services they can think of. or some of the companies might say, hey, we make a unique product that the Chinese don't have.
00:15:20
Speaker
The consumer market is going to grow there. So we try to sell something to that consumer. And in ASEAN, I think um they could try to do so as well. But I think that that's a bit more difficult, actually, for for them.
00:15:32
Speaker
um I think that's going to be a market that buys products from China that China wants to export. It's sizable, that whole region. And they want to maybe become become part of that sort of industry supply chain. So China makes the EV, but already we know that the Indonesians are trying to make the nickel and process and try to do battery making and these sort of things. So they try to hook on to that. And we already know a lot of capacity has moved out of China into Vietnam. Yeah, Vietnam and some of the Malaysia in semiconductors, for example.
00:15:59
Speaker
So we see the early sort of contours of that new sort of, ah yeah, new Asia starts to emerge and new trading routes and these sort of things, are connections. And the equity markets in in in those countries tends to be more domestic demand focused, local consumer, where you've yeah you've written about in the past in India.
00:16:16
Speaker
It's actually very hard for outsiders to get into the Indian consumer market because distribution can be challenging, local tastes change very quickly. So those markets internally, they've still got a long way to go to fulfill all the demands of the people in those countries.
00:16:30
Speaker
Now, what about Korea and Taiwan? Well, Korea and Taiwan is slightly different. and And you could throw Japan in there as well, because of of course, being very US centric in selling their product or very global, and they will remain to be.
00:16:43
Speaker
But they have this sort of competitive edge in certain products, right? We know in Taiwanese making making particular sort of chips and and the Koreans in memory and and other tech products and ah cars and these sort of things. so So I think that's where they can compete and still remain incredibly competitive.
00:17:01
Speaker
But they have to they have to look around their neck he said look around their shoulder, right? Because mainland Chinese are emerging. So they've got to try to stay ahead. But they have technical expertise that clearly it is very difficult for mainland China to catch up.
00:17:14
Speaker
So the region is reshaping um and a new sort of Asia emerges that is partially, as we said, financed by Asia as well. And it what really gets me is that the surface discussion is trade tension, tradesh heads and trade tension, trade tension.
00:17:29
Speaker
And we've tried, and all of us, to consistently say, yeah, but markets are actually different. Listed corporate Asia is in a very different place. The capital base is in a very different place to where it was either in previous cycles We did GFC, very different environment yeah back then.
00:17:47
Speaker
um And it's like this story is being lost with this daily obsession. Oh, is it 92%? Is 136? Will it go in nine months? And of course, I don't want to say, oh, you know, we don't care. Of course we care. And it's hugely impactful for for many people and many businesses.
00:18:03
Speaker
But if anything, it's going to accelerate this. Yes, because the competition between the two giants is going to further intensify. And these companies will be in the in the crossfire.
00:18:14
Speaker
And sometimes they will be good, sometimes they will be bad. But they are strong enough to withstand that. They are innovative. and i you know That's exactly where we came in, is remarkable strength in this market, either year to date or since the worst of these things were announced.
00:18:32
Speaker
We're okay. exactly and Exactly.
Conclusion: The Emergence of a New Asia
00:18:34
Speaker
And this is what we said in the very beginning, right? So the Chinese market is down actually only 4% since the beginning of this month. The US is down. Similar. Exactly. And actually the rest of Asia is up. So the markets are seeing this, understanding this to a large extent. That's good.
00:18:50
Speaker
Fantastic. I think this is a really interesting sort of topic that we need to revisit at some point in time because it's a new sort of Asia that is is being built up from from the bottom and we're right here in the midst of it. Thanks a lot for being on, Elliot. Thanks, Harold.
00:19:03
Speaker
and That's a wrap for today's episode, ladies and gentlemen. a pleasure having you with us here under the Banyan Tree. Please do listen, like and subscribe if you haven't done so already. You can also find the Macro Brief wherever you get your podcast. That's our sister podcast focusing on the week's key global economic talking points.
00:19:21
Speaker
Under the Banyan Tree is an HSBC Global Research production. We'll be back again next week.
00:19:49
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.