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Under the Banyan Tree – Shades of '99?
1 Plays2 seconds ago
With US bond yields spiking, Herald van der Linde and Prerna Garg discuss how a shift in the rates vs growth balance could play out for Asian equities, which are being buoyed by the AI surge.
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Transcript
Impact of Bond Yields on Markets
00:00:00
Speaker
On the margin, that increase in bond yields is a negative for the markets, but the growth story so far has been so good that it hasn't dented the performance of equity markets yet. But the balance is shifting, and that's of importance here.
00:00:22
Speaker
Welcome to Under the Banyard Tree, where we put Asian markets and economics in context. I'm your host, Harold van der Linde, Head of Asian Equity Strategy here at HSBC. Well, on today's show, we're going to look at how the drift higher in US bond yields could play out for equities, especially those in Asia where AI stocks remain front and center.
00:00:41
Speaker
What could a shift in balance mean for these markets and what can we learn from the dot-com days of 1999 and 2000?
Introducing the Podcast and Guests
00:00:49
Speaker
Joining me to help answer those questions is my fellow Asian equity strategist, Pranagak.
00:00:54
Speaker
Let's get the conversation started right here under the banyan tree.
00:01:12
Speaker
A bit of background info to start for anyone who might need it. US bond yields have actually drifted highly over the last couple of weeks with a 10-year treasury yield now over 4.5%. That's actually levels that we also saw in the late 90s, and they kept rising at the time. and That's important because by 1999 they were above 6% and all the while investors were plowing money in a stock market fueled by excitement over new technology, specifically the internet. Now you can see the comparisons here. Well, eventually that led to the bursting of the so-called dot-com bubble. We saw a major market correction. Now, we're not here to make guesses about how things are going to play out in the markets today. But it is interesting to note that the story started with a shift in the balance between bond yields and the growth outlook for equities. And that's what we really wanted to focus on today.
00:02:02
Speaker
Well, Pruna, welcome to the podcast. Thanks for having me here, Haru. Pruna, there's a couple of things happening in markets. We have a new technology. We have inflation, a central bank, or at least markets now toying with the idea that instead of cutting rates, they have to hike interest rates. We have enormous growth in a new sector
Market Conditions vs. Dot-Com Bubble
00:02:21
Speaker
that's emerging. To me, ah it sounds a little bit like what happened in 1999. I know you were still a very, very young lady in those days, I suspect. I was, and back then I had no idea what equities were or what internet was. Yeah, so I was an Indonesian analyst, and Indonesia and Asia it was coming out of a very difficult period at the time. But there are some really good comparisons, I think, to be made between now and that particular period in time. ah Right, Heddle. But before we talk about that, you know, you and Fred recently recorded this, I would say one of my favorite Under the Banyan Tree podcast, where you spoke about the dichotomy between equities, you know equities are going through the roof right now, but the economies are not doing that well. Yeah.
00:03:03
Speaker
That's right. what Was there a similar picture back then? Yeah, so let's take a step back. So Fred said, listen, you have a Middle Eastern crisis, you have inflation and higher oil
AI's Influence on Markets
00:03:14
Speaker
prices. This is bad. And the equity market is doing well. Why is there this sort of disjunction? And my response was that equity markets, first of all, are not a reflection of the overall economy. Secondly, the largest sectors that are listed in in, let's say, the U.S. market at the moment are are actually all related to AI. So it's an AI story.
00:03:36
Speaker
And even if the economy would be impacted, it might well be that the AI story is is different of nature, and that it will go on. And I also presented him with this idea of tug of war between growth. That's what I just spoke about, ai and stuff, and bond yields. So if bond yields go higher, that's negative. But if growth is even stronger, then it actually can go on. But looks like the story has changed a bit since then. The bond yields have increased. They've gone through the so-called danger zone of 4.5 percent.
Bond Yields Entering 'Danger Zone'
00:04:03
Speaker
And generally, that's not supportive for equity market. So has your view changed now?
00:04:07
Speaker
Yeah, in a sense, my view on the approach is exactly the same. So we still have very strong growth coming through in the U.S., but also in parts of Asia. But you're right, the bond yields are now substantially higher than me and Fred spoke a few weeks back. few weeks back, exactly. So on the margin, that increase in bond yields is a negative for the markets. But the growth story so far has been so good that it hasn't dented the performance of equity markets yet. But the balance is shifting. And that's of importance here, very much so. Right. ah but ah But does it matter, like, you know, back in probably like, you know, 10 years back, we were talking about very low bond yields. We were talking about like bond yields at 0%. And now we're talking about the starting ranges around 4%. So does the starting level of bond yields make any difference for the equity market? This is a really important point you're bringing up, Pruner, here, because if bond yields go up, that's negative for markets. But if they go from 0 to 0.5, wow.
00:05:03
Speaker
We still consider that to be really low. But if you're at four or four and a half and you go from four and a half to five, for example, that's much higher. And the impact, therefore, is much bigger as well. So there is a difference now between, say, 10 years ago. And you can see in Asian markets that the way we respond to these things is very different now than also 10 years ago. Movements in bond markets are much more negative now than they were, say, 10 years
Regional Growth Challenges
00:05:28
Speaker
ago as well.
00:05:28
Speaker
Right. But hero there are ah these pockets and there are these markets in Asia where the growth is not so exciting. And there are markets that are clearly exposed to elevated high energy prices or potential increase in inflation. Think about India, Indonesia, parts of mainland China.
00:05:46
Speaker
There, the growth is not that exciting. So you think there the balance is more tilted towards the downside risks from higher yields than to towards a positive scenario coming from higher growth rate? Absolutely.
00:05:57
Speaker
And I'm going to pose this question back to you, Pranant, because you look at India in in considerable detail. That market has not done so well. why Why is that the case? That's because, like, you know, Indian economy is highly exposed to Middle East. India imports a large part of oil and gas from Middle East. Remittances coming from Middle East are really crucial for ah the economy. And a typical consumption basket in India has much higher weight of oil in it than probably we see it India. Some parts of developed world. So when oil prices increase, it really brings down the discretionary or the spending power of a household. And um this impacts the growth. And when the growth is weaker, it takes attractiveness out of the equity market.
00:06:42
Speaker
So back to this sort of tug of war that we have, we have bond yields go up for all markets, but there and there are markets such as India and Indonesia is maybe another one where growth is at the moment not so exciting it so
Market Performance Across Regions
00:06:54
Speaker
exciting. And therefore, for them, everything moves in the wrong direction. These markets have not done so well. But on the other hand, in North Asia, actually, that growth is super exciting. And these markets have done, I believe, very well. Phenomenally well. Exactly. So in Asia, you see this dichotomy, and I think you've looked also at the US market. You see that there as well, is that right? ah Yes, in the US s as well. But again, like, you know, in US, the growth is much broader. Of course, it's the big tech companies that are spending into building the AI infrastructure. But again, the energy companies are ah spending to build out the energy that is required to run those AI data centers. Utility companies are coming in. Of course, the story is very strong in Korea and Taiwan, but
00:07:35
Speaker
the earnings in US are much stronger and much broader than some parts of Asia. Yeah, oh, that's fair to say, I think. And that means, therefore, it is the dichotomy that you see in markets whereby parts of the market do really well, and they happen to be the larger parts, in particular in the US, and in Asia, North Asia, that is doing really well. And yes, the bond increases in bond yields is negative for them, but it's easily offset by growth, while other parts of Asia, it's actually the opposite way around.
00:08:03
Speaker
Now, going back to your original question or original comment on like, you know, we saw similar types of dynamics play out in 1999. If I remember reading it correctly, I think the NASDAQ Composite Index back then, I think between 1995 and 1999, it grew by some 500
Insights from the 1999 Tech Bubble
00:08:22
Speaker
percent. yeah that so That's probably. right. So there was a new technology and and in those days it was the internet and e-commerce. I remember somebody telling me that by 2025 or something cities won't have shops anymore because everybody you can order online. They're right because we do order a lot online but they're also Rome still goes to shops so the reality turned out to be slightly different but it doesn't matter. There was a new technology you can go online and yet new companies that started to lead that process. Amazon was was one of these things they started to sell books online.
00:08:53
Speaker
So there was a lot of optimism about growth and the growth of these companies was really good. But what we then saw also that the economy started to overheat and central banks started to raise interest rates. That happened in 1999. So that was a negative for the market, but the growth was still very strong. But it was only in 2000, March that...
00:09:13
Speaker
It worked the other way around and the market started to peak. And if you look back, what happened that caused the market to peak? There was no big single event. It was just that the balance between bond yields and growth moved in the opposite direction and the market started to roll over. and they I think this is a little different from the other Fed rate hike cycles we've seen since then. I remember like, you know, there are three main hiking cycles in the US. It was back in 2004, 2015 and recently 2022. But fifteen and recently two thousand twenty two yeah but In all these three periods, the markets actually did not perform that well in the period leading to the first rate hike. But you're saying back in 1999, the markets continued to do pretty well yeah because the growth story was one The growth story was very good. but and And in the other rate hikes, markets said, oh, there is the potential that growth is going to slow. So the dynamics were very, very different. I think one more difference would be the expectations, ah ah ah like, you know, what what are the expectation markets have leading to the rate
Current Market Expectations
00:10:10
Speaker
hike cycle. For example, back in 2022 2015, we were coming from very, very low rates. Like, you know, 2022, we're talking about almost 0% rates in the US. But this time around, towards January, market was actually looking for Fed to further cut rates. And now we're talking about potential rates hike. Yeah, the the market is toying with this idea. So you're right. There's a couple of differences now between say now and 1989.
00:10:37
Speaker
One, the expectations is is distinct is different and that's important. What do we expect of growth? And at the moment, the expectations are very high. Secondly, the level of ah where bond yields are. If they're incredibly low and they go up, we say that's okay. But if they're really high already and they go up, that's that's ah another issue. And I think there's a third difference. In around 2000, the local investor in Asia was almost nonexistent. the The larger investor was the foreign investor that came from Europe and the US and invested in Asia. Now, we've spoken about this in the podcast as well. Asia buys Asia. Asia buys Asia. We have a lot of local investors, and actually they are the biggest one. So if something happens in the world, they respond to this differently. And probably our markets are more mature and more stable on the back of that as well. So what happened in 1999, 2000 doesn't have to be repeated this time Right. right And again, I think probably ah the currency impact is also notable, different for foreign investors versus the local investors, because when bond yields are going down, it's generally negative for Asian currencies. This means the US dollar return for foreign investor come down during high yield environment. Yeah.
00:11:49
Speaker
if the If the yield in the U.S. is high, interest rates are high there, people want to buy the U.S. dollar, and therefore they sell the local currency, it gets weaker. And if you're a foreign investor, that means that, yeah, if you invest, for example, in in India or Indonesia, your currency weakens, that your U.S. dollar return is and this does not really impact the returns of local investors. No, they don't care about it because they look at their returns in rupees or or or Japanese yen or in Korean won. That's right. So the situation is very different at the moment. We have local investors. We have a different level of bond yields. We have a new sort of growth story. So we can't always say what happened in the past will happen, but it gives us guidance. And I think for me, at least, the guidance is always look at growth, look at bond yields. ah How is the balance between the two? So we do need to listen to people like Fred. He's not around now. But we do need to listen to people like Fred. Not always because of what the growth story is, but really what the outlook is for central banks and interest rates and bond yields. Because that's as important to equities as the growth story of the companies is itself.
Conclusion and Farewell
00:12:52
Speaker
And on that note, a thanks and goodbye from all of us here in Hong Kong. Under the Banyan Tree is an HSBC Global Investment Research podcast. Our producer is Graham Mackay. You can find us wherever you get your podcasts, including on YouTube.
00:13:07
Speaker
Talk to you again next week.