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: Hello from Hong Kong and a very happy 2024 to all our listeners.
Speaker: This is Under the Banyan Tree, where we put Asian markets and economics in context.
Speaker: I'm Harold van der Linde, Head of Asian Equity Strategy at HSBC.
Speaker: And I'm Fred Newman, Chief Asia Economist.
Speaker: We're here to talk about what 2024 has in store for markets and the macro landscape in Asia, economics, earnings, elections, and much more coming up right here on the podcast.
Speaker: Plus details of our flagship regional conference, the HSBC Asian Outlook, taking place later this month.
Speaker: We've got a whole year to get through in the next 20 minutes, so let's get the conversation underway.
Speaker: From HSBC Global Research, you're listening to Under the Banyan Tree.
Speaker: So, Harold, the Year of the Dragon is upon us.
Speaker: Of course, a dragon known as being powerful and charismatic and intelligent, I guess, is something you get excited about.
Speaker: I think there's a lot of things to get excited about, Fred.
Speaker: But hold your horses for a moment, because I think for us to talk about 2024, let's first just quickly recap what happened in 2023.
Speaker: So in your economics universe, what was the big story in 2024?
Speaker: Well, it was the year of the rabbit, if you remember.
Speaker: Not too bad overall, but we haven't quite seen that big resurgence in Chinese growth that was expected beginning of the year of the rabbit.
Speaker: Remember, we came out of these lockdowns.
Speaker: So it was still decent growth, but certainly disappointment in terms of expectations.
Speaker: And across the rest of the region, okay-ish growth, trades slowed a little bit.
Speaker: We, of course, saw rising interest rates, which was a headwind.
Speaker: We still saw fairly high commodity prices, sticky inflation.
Speaker: So I think the year of the rabbit was sort of a middling year, if you will.
Speaker: But how about markets?
Speaker: How did markets fare in 2023?
Speaker: Yeah, I'm trying to think about some sort of rabbit analogy here, but I can't find one.
Speaker: We've had markets that have done reasonably well.
Speaker: We've had good earnings growth.
Speaker: Remember, you look at economics growth before equities.
Speaker: Stock markets, it's earnings growth that count, the profits that these companies generate.
Speaker: In parts of the region, that has been pretty good.
Speaker: Now, we're not completely out of the reporting season yet.
Speaker: I know this is 2024, but the actual 2023 numbers will come in the next couple of months or so.
Speaker: So we'll see how they stack up.
Speaker: But in China, they were holding up reasonably well.
Speaker: In India, they surprised on the upside.
Speaker: So that's been OK.
Speaker: Sentiment and market performance, though, is a completely different story.
Speaker: We've seen very weak mainland Chinese equities and Hong Kong equities.
Speaker: The Indian market has performed very well.
Speaker: So there's been very wide divergence in performance.
Speaker: And there's a couple of issues at play, I think.
Speaker: For example, we've seen announcements of U.S. pension funds withdrawing from mainland Chinese equities and Hong Kong equities.
Speaker: So these have kind of hang over the market as well.
Speaker: So those were the key issues in equities in 2023.
Speaker: But, Fred, what do you expect for this particular year?
Speaker: Well, we wish we could say the year of the dragon, we're roaring back in Asia, fire-breathing economic growth.
Speaker: But it's not going to be quite that.
Speaker: For China, for example, it's going to be a slight tick down in growth.
Speaker: We have about 4.9% or so expectations for the coming year in mainland China.
Speaker: That's not bad.
Speaker: at all considered, but of course, it's not that high growth rate that we're accustomed to in mainland China.
Speaker: Now, if you look at some of the smaller Asian economies in Southeast Asia in particular, there might actually be a bit of a pickup in growth, partly because trade might stabilize.
Speaker: There was a big drag last year.
Speaker: But she continued investment flows in the region.
Speaker: She continued investment flows, for example.
Speaker: And India, of course, continues to do very well indeed.
Speaker: So it's a mixed picture.
Speaker: Overall, the region, of course, still outperforming much of the rest of the world in terms of growth.
Speaker: But we're just slightly below.
Speaker: But it's not the level that counts, right?
Speaker: It's where we're coming from.
Speaker: Where are we coming from?
Speaker: And pre-pandemic, we obviously still had higher growth rates.
Speaker: So not bad, but probably year of the dragon is going to be a transition year to then a full normalization and better growth numbers later on.
Speaker: But how do you think that will play out in markets and financial markets?
Speaker: Well, let's first look at earnings growth and the expectations, consensus expectations of earnings growth.
Speaker: They are, with the exception of one market, that's Korea, and I'll take that aside for a moment, they're slowing in all markets.
Speaker: So we're coming from high growth and we're also slowing.
Speaker: But this is across pretty much all markets in Asia.
Speaker: A sort of normalization after a bit of sudden resurgence in profits after COVID, you could say.
Speaker: But the overall numbers are still pretty good.
Speaker: Again, taking Korea out.
Speaker: Because I'll talk about Korea in a second.
Speaker: Broadly across Asia, consensus earnings estimates are for 10 to 12 percent earnings growth.
Speaker: That is not flaming, dragon flaming hot numbers, but that's still pretty reasonable kind of growth numbers.
Speaker: India could surprise on the upside as it has done in 2023 last year because there's some real earnings momentum coming through.
Speaker: Now the Korea story is completely different.
Speaker: In Korea, consensus earnings estimates are for over 60%.
Speaker: That's really high, but that's a bit of a special story.
Speaker: It's got everything to do with the recovery in DRAM.
Speaker: So you see DRAM produced, so DRAM is memory chips, right, in computers and all kinds of devices.
Speaker: As these prices tick up, the profits of these companies just get blown out of the water.
Speaker: But the market is anticipating that to a large extent already.
Speaker: So that's a slightly different story.
Speaker: But broadly across Asia, weaker earnings growth, but not too bad.
Speaker: And China is not a particular exception to that.
Speaker: China's consensus earnings growth are looking for something like 14, 15 percent.
Speaker: That is not bad.
Speaker: So it's not bad.
Speaker: Let's talk about some of the downside risks.
Speaker: Of course, we have to talk about those.
Speaker: Where in financial markets would you look at a downside risk?
Speaker: What sort of could go wrong, if you will?
Speaker: I think for my universe, there are a couple of downsides.
Speaker: I would say, broadly speaking, three downside risks, financial risks.
Speaker: The first one, and I'm going to ask you about this, is simply that we've been in this stage of, hey, U.S. inflation has peaked, bond yields are coming off, we are past the peak, and then suddenly there's a resurgence in numbers and we have to recalibrate and bond yields go higher.
Speaker: So the global macro backdrop that looks very supportive for Asian equities
Speaker: could change.
Speaker: We had that actually in 2023 as well.
Speaker: The second risk is really that these consensus earnings estimates prove to be too high and that we get some shockers coming through, that the slowdown in earnings is suddenly accelerating to the downside.
Speaker: in particular in China.
Speaker: So that's something that we have to take a look at as well.
Speaker: And there's a third, I would say, kind of unique risk in particular mainland Chinese and Hong Kong equities is that we have these U.S. pension funds that have probably stated we want to significantly reduce our exposure to those markets and or not at all.
Speaker: We don't know exactly, because it's not publicly disclosed, how much they have.
Speaker: In some of our reports, we've made all sorts of estimates, but there might be an overhang.
Speaker: And looking at some of the share price performances in late 2023 and early this year, some high-quality companies have really been sold off.
Speaker: So I think there's still an overhang there that's very difficult for me to see when that is fully digested.
Speaker: But what is it for you, Fred?
Speaker: What sort of risks are you looking at?
Speaker: Well, there are a few risks out there.
Speaker: One is, for example, we see on the trade side, which is enormously important for Asia, right?
Speaker: These economies are really highly geared towards exports.
Speaker: There's some green shoots that have come through of late suggesting stabilization.
Speaker: You mentioned DRAM, for example, out of Korea, those memory chips.
Speaker: That's also reflected in export numbers out of Korea, for example.
Speaker: Now, one of the risks could be that some of these green shoots, as we call them, these first indications that things are stabilizing, that that's basically a misleading signal, that actually that was just an inventory correction and that because global demand is so weak that you see exports come down again.
Speaker: over the course of the year of the dragon.
Speaker: And that would, of course, knock out quite a bit of growth from particularly smaller open economies.
Speaker: So that's one risk.
Speaker: How good are things on the export side, really?
Speaker: A second risk would be in mainland China.
Speaker: It's still an important, important economy, not just in its own right, but for the region overall.
Speaker: Yeah.
Speaker: And here in the property sector, there's still signs of a bit of stress coming through, not sort of that quick stabilization people had hoped for.
Speaker: And is there a risk that things could continue to kind of sag and get weaker?
Speaker: And how much is that going to impact overall economic growth in mainland China?
Speaker: There are countermeasures that the government is obviously pushing hard, but how quickly will they get traction?
Speaker: Is it going to be three months or another year before that we really see that stabilization?
Speaker: That's a policy risk in the sense in terms of what they're going to do and how much, but also then how effective it will be as well.
Speaker: How effective it will be, yeah.
Speaker: So those are two key Asia-centric risks and of course the global risks that you mentioned as well.
Speaker: The interest rates could go up.
Speaker: We see oil prices, for example, spike again.
Speaker: But those are risks that usually in a normal year we have anyways.
Speaker: So those are some of the downside risks for 2024.
Speaker: In a moment, we're going to discuss the positives that could surprise us.
Speaker: But before we do that, we want to bring you some details on our HSBC Asian Outlook Conference.
Speaker: Indeed, this is our flagship Asian conference held in person with colleagues and guests from around the world.
Speaker: It includes presentations on economics, forex, bonds and of course equities and much more as well as macro outlooks on the regional and the global scale.
Speaker: The event kicks off in Beijing and Shanghai on the 15th and 16th of January respectively and after that it's Hong Kong on the 17th and Singapore on the 18th.
Speaker: By the way, the two of us will be among the speakers in both those locations.
Speaker: And if you're an HSBC client, please contact your representative for more info or visit hsbcscheduling.com.
Speaker: So, Fred, we've looked at the downside risk, but things could also surprise us on the upside in Asia in 2024.
Speaker: Where do you see maybe positive surprises coming through this year?
Speaker: Well, one area is inflation.
Speaker: There are signs that inflation is coming down, and it might come down later.
Speaker: maybe a little bit faster than expected.
Speaker: And that would help to stabilize things because it gives households much more purchasing power and you get that relief from inflation coming through.
Speaker: Central banks can purely... Maybe central banks can ease interest rates and that will give us extra growth coming through, for example.
Speaker: So a lot depends on
Speaker: where we land on inflation, how quickly it actually comes down.
Speaker: That would be a big upside risk, or at least a positive.
Speaker: We say upside risk in the business.
Speaker: Of course, it means something that's positive.
Speaker: And then when we look at mainland China, for example, some of the fundamentals are not too bad, actually.
Speaker: Some of the headlines are too negative out there.
Speaker: So if you look at consumer spending, it's still fairly decent.
Speaker: If you look at the manufacturing investment coming through, it's fairly decent.
Speaker: If you look at infrastructure spending, it could still be positive.
Speaker: So as long as the housing market stabilizes, we could very quickly get much stronger growth numbers coming through in China, and that would reverberate across the region.
Speaker: So as cautious as the market right now is around China, we should be taking
Speaker: careful, right?
Speaker: The Chinese economy is still very dynamic fundamentally.
Speaker: And so there could be relative to expectations, certainly a bit of better sentiment to come through, better numbers come through.
Speaker: But in financial markets, Harold, is there a catalyst that you can think of where investors would say, you know, if that happens, then really things are going to look much better?
Speaker: We like to have catalysts because it's an easy way to frame things.
Speaker: It would be fantastic if we can say on this and this particular date, the government will come out, make these announcements, and from there on stock markets should be moving higher.
Speaker: That's just not the way it very often works.
Speaker: If I think about mainland Chinese equities performance, we've now had a couple of years of pretty dismal performance, year-on-year, every year down.
Speaker: A lot of funds have clearly withdrawn from the market.
Speaker: As I said, some of them have publicly stated so.
Speaker: If the earnings are holding up and the macro environment improves, then suddenly you could have a resurgence in that market that could really be a positive surprise to Asian equity markets.
Speaker: How important are exchange rates for you then in that context, if you think about equity markets?
Speaker: Because the year of the rabbit, we don't really want to think about it too much as investors, but the year of the rabbit was also characterized by a fairly strong US dollar against Asian currencies.
Speaker: Now, if that were to reverse, is that important for equity markets?
Speaker: Yeah, that is very important, yes.
Speaker: In what sense?
Speaker: A weaker dollar suggests that people are selling dollar assets, right?
Speaker: So they're buying, if you sell a dollar asset, you have to buy something else.
Speaker: So Asian equities would be one of the options available to you.
Speaker: So generally speaking, a weaker dollar is very positive for Asian equities in general.
Speaker: And mainland Chinese equities in particular, that has just historically so been the relation, has been the most sensitive to this.
Speaker: So if that were to materialize, that could suddenly then change that picture.
Speaker: If we see a significantly, for example, weaker dollar coming through, it's one of these things that could suddenly lead to a resurgence in interest in mainland Chinese equities.
Speaker: And I think one other thing to watch in the Year of the Dragon are elections.
Speaker: We've talked about this quite a bit, right?
Speaker: And there's quite a few coming through again.
Speaker: Correct me if I'm wrong, but we have Taiwan still coming very soon, actually.
Speaker: We have Indonesia.
Speaker: Indonesia is the next one, I think.
Speaker: Yeah, Indonesia and India.
Speaker: Korea is up there as well.
Speaker: Correct.
Speaker: Plenty happening.
Speaker: In fact, 2024 is going to be a year when the largest number of people in a long time in the world vote.
Speaker: Vote, yeah.
Speaker: If you take Indonesia and India together.
Speaker: And of course, US as well and other parts of the world.
Speaker: So we could see real big shifts in leadership in terms of politics.
Speaker: the direction they want to go for, right?
Speaker: So that will be something of course... And even if these elections don't necessarily lead to leadership changes, often what happens if you have a new government and reinvigorates the reform processes, the government comes in with new mandates, you know, they swap out some of the officials, fresh energy, and that can be quite positive at times.
Speaker: Is that something that equity markets you think will be watching?
Speaker: Yeah, equity markets will obviously be watching on it.
Speaker: And again, for us, very often, the question is really, what is the outcome of this election?
Speaker: But what does that mean for the profits of these companies?
Speaker: And sometimes the simple answer is not so much, because you can have new leadership in a country, but it doesn't mean that people are not going to buy shampoo, for example.
Speaker: But for other companies, of course, it can have dramatic influences.
Speaker: If a new government says, we're going to build out...
Speaker: I don't know, a high-end tech semiconductor business.
Speaker: Now, that means for the equipment makers, this could lead to massive growth.
Speaker: So you have to then distill a little bit further what the implications on equities are.
Speaker: That comes very often afterwards.
Speaker: And of course, it has implications for fiscal policy, monetary policy, and that's really your territory, right?
Speaker: That's where you'll be.
Speaker: Yeah, so for economics it matters, of course, as well.
Speaker: There's really two aspects to this.
Speaker: One is big elections.
Speaker: It's often very good for consumption in that year.
Speaker: And so we tend to all adds equals.
Speaker: We bump up your consumption expectations for that year.
Speaker: There's a lot of money being spent during campaigning.
Speaker: And then the second issue is that, yeah, if a new government comes in, even if the same government, but with a new agenda, maybe it might be good for investment for certain sectors.
Speaker: Right.
Speaker: If there's new reforms coming through, there might be a bit of tweak to the fiscal sense.
Speaker: Usually the fiscal side contracts a little bit after elections because it's usually more generous before the election and less generous after elections.
Speaker: But.
Speaker: So, yeah, you factor that in.
Speaker: But it'll be interesting to watch after a long time.
Speaker: We have really a sequence of elections across Asia, which I think will be market attention grabbing for, say, the least.
Speaker: Yeah.
Speaker: So just putting this all a little bit then together, we have a year in which the global macro, at least from my side, starts to move in the right direction to be supportive to Asian equities.
Speaker: The growth outlook is a bit more.
Speaker: weaker than in the previous calendar year, but not alarmingly so.
Speaker: But there's still sentiment issues and flow issues in equities that could really, yes, lead to a continued dispersion in performance across the region, as we've seen in 2023.
Speaker: And also from the global perspective, there might be sort of the chance that you see maybe slightly weaker growth in the US, maybe not quite the growth you would like in Europe.
Speaker: But if Asia does a bit better, it's sort of the pendulum swinging back into this region.
Speaker: But for that to happen, we really need China to do well.
Speaker: And that's going to be key.
Speaker: But Harold, Year of the Dragon, intelligent, charismatic and powerful.
Speaker: One might think to talk about you, but, you know, the dragon is good for it.
Speaker: It's good for wealth.
Speaker: It makes money.
Speaker: Well, then on that thought, maybe we should wish all our listeners a happy 2024 and a prosperous one.
Speaker: Indeed.
Speaker: Happy Year of the Dragon, everyone.
Speaker: I will speak to you all again very soon.
Speaker: Thank you for joining us at HSBC Global Viewpoint.
Speaker: We hope you enjoyed the discussion.
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