Transcript
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Speaker: Welcome to 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 HSPC.
Speaker: And I'm Fred Newman, chief Asia economist.
Speaker: Today's podcast comes off the back of news that mainland Chinese exports fell last month at their fastest pace in three years.
Speaker: And it's not just Asia's biggest economy that's seeing shipping numbers drop off a cliff.
Speaker: That's right, exports are falling across the board.
Speaker: This is a story that touches various parts of the region's economy, not to mention equity markets.
Speaker: Let's kick off the conversation right here under the Banyan Tree.
Speaker: Let's start with some customary facts and figures to get us underway.
Speaker: Globally, export volumes plummeted in the early days of COVID, then massively spiked in 2021 and most of 2022.
Speaker: But since then, the numbers have dropped off dramatically.
Speaker: We'll get to why that is in just a moment.
Speaker: That's right.
Speaker: Asia has traditionally been an export powerhouse, but even here, shipments to key destinations like the US and Europe are falling at double-digit rates.
Speaker: Chinese exports were down more than 12% year-on-year in June.
Speaker: That follows a 7.5% drop in May.
Speaker: So Fred, let's start with the macro overview.
Speaker: What's happening with exports in Asia?
Speaker: Well, the trade cycle is clearly slowing.
Speaker: We have shipments down year over year, volumes are declining as well.
Speaker: So it's not just shipment prices, but volumes are down as well.
Speaker: And that's, of course, the big hangover.
Speaker: You could term that because during the pandemic, there was a surge in goods demand, particularly in the US and Europe, but really globally.
Speaker: And that meant Asian producers had to churn out goods to satisfy that demand, got all shipped to big consumer markets in the world.
Speaker: And now we see the hangover of that.
Speaker: So not only is the global economy slowing down, but consumers are shifting from goods demand to services demand.
Speaker: So it's a double whammy, if you will, for goods demand.
Speaker: So instead of buying a new computer, they're going to a restaurant, sir?
Speaker: They go in a restaurant and they just bought a computer two years ago.
Speaker: So really you see that enormous decline come through.
Speaker: Shipping rates, for example, back down to where they were pre-pandemic.
Speaker: And they might even fall further, given that there's a lot of capacity coming on stream as well in the shipping industry.
Speaker: But broadly speaking, that's, of course, a headwind for Asian growth because many of the economies across the region really need that export fuel to run their economies.
Speaker: Yeah.
Speaker: So that's weaker demand from the US and Europe, but there must be some challenges here in Asia as well, right?
Speaker: I mean, China is slowing.
Speaker: Does that impact the export cycle as well?
Speaker: Yeah, so that's where the story gets even more complicated and interesting.
Speaker: And that is because China's had a very disappointing reopening on the economic side.
Speaker: We actually see Chinese manufacturers competing with exporters elsewhere in Asia.
Speaker: So think about this.
Speaker: China, second biggest economy in the world.
Speaker: Rather than importing goods, the manufacturers in China are looking to sell more goods.
Speaker: They can't sell them domestically.
Speaker: They're selling them overseas.
Speaker: The Chinese currency is down.
Speaker: And suddenly they're competing against Vietnamese producers, against Korean producers in the global market, where there's already lower demand for export.
Speaker: So the Chinese slowdown is, in that sense, a further challenge for Asian exporters.
Speaker: I guess a nice example of that is the electric vehicle industry we've been talking about over the last couple of weeks.
Speaker: They are big in China.
Speaker: And now, I mean, I've seen some of these EV companies from China selling their product in India, in the Netherlands, in Germany.
Speaker: That's an example of that, right?
Speaker: They can't find a demand domestically, so they go and...
Speaker: It is an example, although I would say it's more of a structural change in trade.
Speaker: And what really the currently we have a cyclical problem that is China's economy is weak.
Speaker: And so China exports more steel than is using it domestically.
Speaker: The electric vehicle stuff is interesting because there you see structural changes happening where suddenly Chinese producers are very competitive.
Speaker: China never was a big car exporter.
Speaker: And now they're competing against Japanese and Korean and German oil.
Speaker: And that's going to be a long term issue.
Speaker: Even if China's economy recovers, their EV export prowess is not suddenly going to disappear.
Speaker: So if we extend that a little bit, is then the export story changing in the region as well?
Speaker: Are there new sort of exporting powerhouses, if you want to put it like that, emerging in the region?
Speaker: Yeah, that's right.
Speaker: But again, we have to distinguish a little bit between the cyclical headwinds.
Speaker: Everybody's trade is down, even China's trade is down.
Speaker: But of course, the pain from a weaker Chinese demand is kind of spreading across the region.
Speaker: That's cyclical.
Speaker: And then there's structural stories.
Speaker: One, we already mentioned electric vehicles.
Speaker: Another great structural story would be, for example, the tech exports from India, both services and
Speaker: And, you know, high-tech goods that are coming out of India, for example, 7% of global iPhones are now produced in India, for example.
Speaker: That's a new trend, and that's structural as well.
Speaker: And then, of course, Indonesia, electric vehicle battery components, the nickel, refining nickel, for example.
Speaker: You've been keeping a close eye on that one, Harold.
Speaker: No, absolutely.
Speaker: I mean, it's very important for the Indonesian equity market, of course, and it comes with all sorts of benefits.
Speaker: It means FDI comes into that country, stronger currency, the interest rates don't have to go up.
Speaker: All these things are really good for the equity markets.
Speaker: So it changes the dynamics of the stock markets in the region to a very large extent as well.
Speaker: So we talked about the challenging outlook for exports across the region.
Speaker: New orders are still down, new export orders.
Speaker: So we just had new electronics indicators for the world.
Speaker: Actually, we see both consumer electronics, new orders, and industrial electronics, new orders, being down.
Speaker: From an equity strategy perspective, how important is the export cycle for regional equity markets in the first place?
Speaker: Well, it is important.
Speaker: But again, I think we spoke about in the past about the difference between the micro and the macro.
Speaker: And that comes a little bit back here as well.
Speaker: So, yes, the export cycle is important for two reasons.
Speaker: First of all, it tells us something what happens globally with interest rates.
Speaker: Strong global demand might mean interest rates go up and that's bad for equities in general.
Speaker: And of course, there are markets, in particular Korea and Taiwan, that are really geared.
Speaker: Singapore, to a certain extent, but really Korea and Taiwan, that are really geared to exports.
Speaker: I mean, 60, 70, 80% of these markets are really companies that export their products.
Speaker: So the domestic economy, what happens there is not so relevant, in particular in Taiwan.
Speaker: But then again, there are these idiosyncrasies, these peculiar cases that we have to look at from a micro point of view.
Speaker: For example, in Korea, the largest exporters are memory chip makers.
Speaker: And the dynamics there are different.
Speaker: People have been holding back on investments.
Speaker: Therefore, there's not enough supply.
Speaker: Suddenly we have AI surging back.
Speaker: We need service, we need therefore memory chips and therefore demand for that is stronger than supply.
Speaker: You see that prices are starting to move higher or at least that is what has been anticipated in markets if you look at some of the contract prices in the market.
Speaker: So the DRAM sector has performed very strong on the back of that.
Speaker: In Taiwan it's very much related to foundry so that's making specialized chips, not so much commodity chips if you want to put it like that.
Speaker: There the opposite is taking place.
Speaker: There's a bit too much inventory, but maybe that will wash through the system and next year we recover.
Speaker: So you have these different stories that we need to understand how that then translates into equities as well.
Speaker: And this is why these equity markets, Korea and Taiwan, have performed fairly strong here today.
Speaker: But the risk is, of course, that ultimately, yeah, what you're talking about, weak global demand, is going to create an overnight.
Speaker: So you mentioned Korea and Taiwan, which are very export-oriented economies, where, of course, tech plays a big role also in the index, the equity index.
Speaker: But how important would exports be for mainland Chinese stocks, for example, or for Southeast Asian equity markets or the Indian equity market?
Speaker: Aren't domestic companies usually more represented on the indices?
Speaker: So the export sector used to be really big in that market, we're talking about 20 years ago.
Speaker: At the moment, that is not.
Speaker: The largest sectors in mainland Chinese equities are basically tech names, banks, insurance, consumer companies, retailers, all these sort of things.
Speaker: And they are really geared to what happens domestically.
Speaker: It's consumption and domestic investments that drive that.
Speaker: Not so much the export sector.
Speaker: Mainland Chinese equities, India and Indonesia, are not...
Speaker: really impacted as much.
Speaker: The impact comes sometimes secondary.
Speaker: For example, if the currency is weak or interest rates need to go up because of a swing in exports, then that might impact the equity story.
Speaker: But for most of the companies listed there, they're really domestic stories.
Speaker: So we need to understand the domestic side.
Speaker: Well, one thing I think we should keep in mind about the broader story here is that the exports are under pressure at the moment for cyclical reasons and there are structural shifts as we discussed.
Speaker: Mainland Chinese EV exports, for example.
Speaker: But at the same time, the data clearly shows that Asia continues to gain global export market share.
Speaker: that more and more production is moving into this region, that even mainland China's export share in global exports has continued to climb in the last few years.
Speaker: So it's not as if the region is losing its mojo as a production hub of the world.
Speaker: It's just that these subtle shifts are coming through.
Speaker: And some of the supply chain movements, of course, moving from mainland China to Southeast Asia.
Speaker: But that doesn't mean that mainland China becomes less important of a trade hub, really, for the global economy.
Speaker: So the simplified view that we sometimes get presented is that the world is decoupling, that actually the West and the East are going on their own ways and there's less trade is actually not completely correct.
Speaker: Is that the right conclusion to draw?
Speaker: That's absolutely right.
Speaker: In fact, there's new foreign direct investment data that was just recently released that clearly shows globally foreign direct investment is down already for about five years running.
Speaker: But Asian foreign direct investment inflows hit another record high last year.
Speaker: So there's still a sense that really, yes, globalization may be fraying at the edges, but the center of gravity of global manufacturing really is space and stays in this part of the world.
Speaker: Yeah, and this is what makes the job of an equity strategy so exciting, right?
Speaker: Divergent trends on the macro side.
Speaker: And then you have these, the DRAM goes here, batteries isn't going in another direction.
Speaker: It changes the dynamics of these markets.
Speaker: So it keeps us busy for quite some time to come, I suspect, Fred.
Speaker: Yeah.
Speaker: And despite all the headlines, again, you know, numbers are down.
Speaker: There's plenty to keep us entertained and excited about this region.
Speaker: So Harold, you've been in Asia for decades now and there's always a test for somebody who's come to Asia and lived here for many years to see whether they're truly adopted regional culture and that is, do you like durian?
Speaker: That smelly fruit, of course, that people love or hate?
Speaker: Well, I really have no choice, Fred, because my wife is an absolute crazy durian.
Speaker: It's a typical Southeast Asian fruit, right?
Speaker: It's smelly, it's pungent.
Speaker: So I've actually, over the years, learned to enjoy it.
Speaker: So I'm a big fan of durian.
Speaker: What about you?
Speaker: I haven't quite adopted the taste just yet.
Speaker: Maybe it needs another couple of decades or so.
Speaker: But there's a lot of people in China that have just gotten… And it's booming.
Speaker: In fact, demand is booming.
Speaker: And we get some interesting numbers out of Thailand, in fact, which is, of course, a big durian agricultural goods producer.
Speaker: So Thailand is now exporting more durian to the rest of the world than it's exporting rice.
Speaker: And remember, Thailand is among the top three rice exporters in the world.
Speaker: So it's a lot of smelly fruit being exported of Thailand.
Speaker: In fact, also just from Thailand to China, 42 percent of exports from Thailand going into mainland China are
Speaker: in April were actually durian fruit, 42%.
Speaker: It's almost half the shipments that Thailand sent.
Speaker: Imagine that.
Speaker: More durians being exported than car components or something like that.
Speaker: Probably, yes.
Speaker: I wonder how they do that because it's a big, heavy fruit and you have to break it open and the skin is, of course,
Speaker: I mean, you can't just hold it.
Speaker: It's a duri, they call it in Malay, the spikes.
Speaker: That's where the name comes from.
Speaker: And it's really only grown in real deep tropical climates because you need a long ripening season to get there, which is why very often at the start of the rainy season, that's when durian is ripened and sold.
Speaker: But for example, in the northern Philippines, it's already not warm enough to grow durian.
Speaker: So specific regions, but you always know when it's durian season, because even here in Hong Kong, if you drive with a car or bus past the supermarket and it's durian period, you can actually smell outside on the road the whiff of durian coming out of the supermarket.
Speaker: And in Southeast Asia, often the hotel rooms, they have a no smoking sign and no durian sign as well.
Speaker: That is right.
Speaker: It is a pungent fruit, but over the years I've really come to appreciate it and I hope that you soon will become a fan of it too.
Speaker: Well, Harold, you're a true Asian now.
Speaker: That's right.
Speaker: And on that note, we're going to wrap up the show here.
Speaker: Thanks for joining us on The Banyan Tree.
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Speaker: Well, that's lots of dots on HSBCs from all of us here in Hong Kong.
Speaker: Take care, and we'll speak to you again next week.
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