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.
Speaker: Make sure you're subscribed to stay up to date with new episodes.
Speaker: Thanks for listening.
Speaker: And now onto today's show.
Speaker: Welcome to the Emerging Markets Spotlight, a podcast series from HSBC.
Speaker: The emerging markets landscape is more complex than ever at a time of divergent monetary policy, high commodity prices, supply chain disruptions, and geopolitical tensions.
Speaker: Join us as we speak with world's leading institutional investors, experts, policymakers, and thought leaders to explore the challenges and opportunities.
Speaker: Make sure you subscribe to HSBC Global Viewpoint and stay up to date with new episodes.
Speaker: Thanks for listening.
Speaker: And now on to today's show.
Speaker: Hello, and thank you for tuning in today.
Speaker: My name is Kerry Goodwin, and I'm Head of Institutional Sales Americas and Head of Global Debt Market Sales.
Speaker: Today, I'm going to be talking with Selena Apostolo Merrill, Portfolio Manager of Emerging Market Corporate Debt at BlackRock, and Murat Olgin, HSBC's Global Head of Emerging Market Research.
Speaker: With over 20 years of experience in the industry, Selena Pastolo Merrill is the portfolio manager for EM Corporate Credit investments across BlackRock's active flagship portfolios.
Speaker: Prior to her role at BlackRock, Selena held roles as an executive director in LATAM Corporate Credit at JPMorgan Investment Management and head of Emerging Markets Corporate Credit at VanEck Global.
Speaker: Dr. Murat Olgin joined HSBC in April of 2006 as the chief economist for Turkey,
Speaker: Before joining HSBC, he held several sell-side economists and strategist positions in London and Istanbul, covering more than 15 emerging market countries in that time zone.
Speaker: In December of 2009, Dr. Olgen was appointed HSBC's chief economist for Central and Eastern Europe and Sub-Sahara Africa, and he became HSBC's global head of emerging markets research in 2014.
Speaker: Selena, what can you share with us that led you to a professional career in emerging markets that
Speaker: we might like to hear as we get to know you to start this podcast.
Speaker: Sure.
Speaker: Thank you so much, Carrie and the HSBC team for having me here.
Speaker: Well, first, I was born and raised in El Salvador.
Speaker: So I know emerging markets, true to my heart, which is why when I started working in the US, I wanted to do distressed investing, not in emerging markets.
Speaker: But then Argentina defaulted, and I've subsequently worked on two Argentina defaults in the various corporate restructurings that followed across EM since then.
Speaker: And one of the things that I've learned that I think is a good reminder of being an emerging markets investor is how quickly things can change.
Speaker: So I was maybe eight years ago now on a due diligence trip where we traveled two hours offshore via helicopter to a drill ship operator to look at the asset, to look at the ship.
Speaker: And that was our collateral for our bonds.
Speaker: We flew back after this day trip and then
Speaker: A couple of weeks later, the contract was terminated and the bonds ended up defaulting.
Speaker: So how quickly does your collateral actually turn into a liability is something that I think we always keep in mind in emerging markets.
Speaker: That's quite the baptism by fire story, but yeah, thank you.
Speaker: And then I guess over to you, Murat.
Speaker: Love to hear sort of what attracted you to the emerging market space and how you landed in the role that you are at, at least the beginning of the journey, please.
Speaker: Thank you, Kerry, and thank you, Selena, for giving us this opportunity.
Speaker: I think it's great and great pleasure for me to be in conversation.
Speaker: and talk about emerging markets in the podcast.
Speaker: I guess on my side, it's sort of this ever-changing dynamic and at times volatile backdrop that attracted me.
Speaker: You really need to be on top of things, keep learning to understand various micro challenges.
Speaker: And also the rise of emerging markets as an artist class happened in earnest, like early 2000s, sort of when I started my own financial market career, because previously it was only hard currency, but now it's a full and rich spectrum of all financial assets.
Speaker: Actually, these days, I take even more joy of being an EM analyst because, you know, what's happening in the global landscape kind of resonates with inflation high pretty much all around the world.
Speaker: So I can apply my EM lens to understand the global macro backdrop and all the challenges.
Speaker: Thank you, Murat.
Speaker: And as an employee of HSBC, I've benefited from our approach in the space.
Speaker: We pride ourselves on being a market leader and getting to know people like yourself, Selena, and Murat over the years has been a lot of fun.
Speaker: So with that, I'm going to dive into some of these questions and hopefully we'll touch on some of the things that are on top of mind for our investors.
Speaker: So Selena, just starting with you, it's been a very challenging year with a lot of external factors affecting the markets.
Speaker: In fact, most of our recent respondents on the EM sentiment survey show that 41% of the investors have bearish expectations.
Speaker: This is the highest level since our survey started, a point that stood out when we were
Speaker: looking at this was the high cash balances.
Speaker: So we've highlighted this point on bearishness, which tends to correlate to high cash and low conviction.
Speaker: Just curious, Selena, sort of what can you share with us on that point?
Speaker: Sure.
Speaker: I mean, it's definitely been a tricky year and it continues to be tricky.
Speaker: The macro data keeps swinging back and forth.
Speaker: We're trying to, as Marat said, sort of anticipate where rates, quantitative tidying and inflation is going really in developed markets.
Speaker: I think one of the interesting things about EM is
Speaker: is that EM Central Bank started early because we've seen this story before in terms of how to react to certain inflationary shocks.
Speaker: But we have been relatively light on risk, and I don't think that's necessarily unique.
Speaker: We have had higher than usual cash balances.
Speaker: We have been looking at the more conservative parts of the capital structures, whether that's on the sovereign side or on the corporate side.
Speaker: And we have preferred the hard currency side of EM, given that we have seen and continue to expect to see a relatively strong dollar, which is generally bearish for EM.
Speaker: But I think that one of the things that we have been pretty negative about is valuations.
Speaker: And this is why we've been more cautious, is that a lot of the macro backdrop that's
Speaker: expected to continue to be negative in 2023 hadn't been reflected really in a lot of EM asset class valuations.
Speaker: But we do think that valuations are now starting to look more attractive in order to start to look at positioning our portfolios for 2023.
Speaker: And just a follow-up there on the positioning of the portfolios.
Speaker: Cash has become a much more valuable instrument in this environment.
Speaker: Curious if you see any particular part of the credit curve that's sticking out as more attractive
Speaker: Well, obviously, cash is now an alternate asset class, an alternate asset class with yield.
Speaker: And so I think we all need to take that into consideration as we manage our respective portfolios.
Speaker: But that also means that the shorter end of EM, both corporates and sovereigns, tend to be very attracted to us, especially if we look at things on a long-term horizon and as a whole to maturity horizon, how that all in yield really does look attracted to us now.
Speaker: and really acts as a ballast to the portfolio.
Speaker: That being said, we also think the long end of many curves on the hard currency side are very attractive.
Speaker: Very steep curves in high quality investment grade names, both on the corporate side and on the sovereign side, are across EM, and that's not replicated either in the US credit markets or in the European markets.
Speaker: So we think sort of a ballast and sort of back and forth part of a portfolio would be to combine short end investments with long and higher quality duration.
Speaker: Gotcha.
Speaker: Thank you.
Speaker: So, Marat, given what's going on in the world and knowing that investors are often faced with contradictory macro data, how should they approach emerging markets?
Speaker: This is a sort of catch-all question, but what do these broader challenges mean for emerging markets from your perspective, and what do they mean for asset prices in the current environment?
Speaker: Sure.
Speaker: Thanks, Gary.
Speaker: I think we have a basic macroeconomic challenge.
Speaker: It's the growth inflation mix.
Speaker: We have global economic activity decelerating emerging market economic activity, also losing altitude and momentum.
Speaker: And we have elevated inflation, in certain cases, the rising inflation.
Speaker: I think this very mixed combination of growth and inflation is quite unpleasant and unfavorable.
Speaker: And in the past, we used to have China lifting up all the boats by big credit impulse and strong recovery and rebound.
Speaker: At the moment, we're not seeing that.
Speaker: If anything, markets and ourselves will revise China growth down.
Speaker: We do expect a steady recovery next year.
Speaker: But in the immediate term, China is not lifting up global trading commodities as it used to in the past.
Speaker: And finally, we have this twin tightening coming through the Fed.
Speaker: We know one angle investors are very much focused and understandably so.
Speaker: It's the cost of funding.
Speaker: It's the Fed funds rate.
Speaker: We've recently revised them up.
Speaker: But there's another angle where I think there is relatively little discussion and it's not explored well.
Speaker: It's the quantity of funding.
Speaker: It's all these balance sheet reduction and quantitative tightening, which is actually withdrawing liquidity from the markets.
Speaker: And this gives a very challenging backdrop for emerging markets.
Speaker: For one thing, it is causing dollar strength and it's a major headwind.
Speaker: And the other thing, as Selina very rightly mentioned, you have a new financial instrument that has arisen from zero yield over the past two years, year and a half, to relatively attractive yield, that's US dollar cash, and it is becoming a major alternative.
Speaker: So this is a pretty challenging backdrop.
Speaker: But at the same time,
Speaker: I do agree with Selina on valuations as well.
Speaker: They are looking attractive now.
Speaker: Emerging markets, I mentioned about this slow growth, high inflation, sort of pseudo-stackflation backdrop, but emerging markets have been pricing this in for a very long time.
Speaker: I mean, when I look at the individual asset classes, hard currency credit, for instance, you have to go years back to find similar returns.
Speaker: I do believe certain parts of emerging market assets are looking quite attractive, in particular hard currency returns.
Speaker: I mean, you really have to go back.
Speaker: perhaps a few decades to find similar returns when you exclude this blip at the onset of the pandemic.
Speaker: Positioning is quite light, many parts of emerging market universe and cash level, cash balances are very high.
Speaker: So in a way, you are in this sort of conundrum where the fundamental backdrop is really challenging.
Speaker: from a growth and inflation perspective.
Speaker: And this twin tightening by the Fed in the background is really causing massive headwinds in terms of financial conditions for emerging market for the downside growth risk.
Speaker: But on the other hand, you have the technical picture in terms of valuations, in terms of cash positions, cash balances, and actual positioning in the market that are quite attractive.
Speaker: I mean, to me, it's still the fundamentals that overcome the technicals, but we shouldn't lose the second aspect and try to understand where actually emerging markets are paying back and paying off to hold that risk.
Speaker: Yeah, I mean, the cash balances comes up often in a lot of the client dialogue.
Speaker: And I guess it begs a couple of questions, but the one for you, Selena, is liquidity has been a challenge for everybody.
Speaker: And as I said, when I was with Murat in London at an EM dinner that we hosted just a few weeks back,
Speaker: It was evident that people had cash to put to work, but they were struggling to find the liquidity necessary to really sort of build positions.
Speaker: Love to hear any comments there.
Speaker: And then I'll have a follow on question specifically as it relates to the primary markets.
Speaker: A lot of folks had said as we entered into the fall, they were hoping to see some supply where they could redeploy some cash.
Speaker: I'm not sure that that's necessarily played out.
Speaker: Last couple of days, I've opened markets up a little bit.
Speaker: I'm curious just on liquidity and how you're finding sort of getting things that you need in the door in this environment.
Speaker: Love to hear your views.
Speaker: Well, I think liquidity has been particularly challenging.
Speaker: And so all our sell-side partners have unfortunately been very limited in terms of the kind of risk that they've been able to recycle, as we've had outflows in the asset class that are the largest we've seen in 20 years, right?
Speaker: So that risk has to go somewhere, and it's been really difficult to find at home for it.
Speaker: When looking at BlackRock's portfolios, so given the size of the portfolios that we're trying to manage and given the difficulty in the liquidity side,
Speaker: We try to be good partners and also try to be a little bit contrarian in terms of where we can find pockets of liquidity and be adding risk, sometimes when the market feels the most uncomfortable.
Speaker: But as Murat mentioned, when we find pockets of value, that's when we try to position our portfolios.
Speaker: And similarly, when there's rallies that we don't think are fundamentally driven or valuations seem to be too tight, that's when we're also contrarian and also limiting some of our risk as well.
Speaker: And Kerry, if I may add something more sort of, you know, macro top-down view in terms of what global liquidity is doing.
Speaker: So we have developed a very simple framework.
Speaker: We look at some of the balance sheet size of large global center banks in trillions of US dollars.
Speaker: which has peaked about $25 trillion earlier in the year.
Speaker: And with the Fed starting its quantitative tightening in earnest in June, now that is coming down in small clips.
Speaker: But to us, for emerging market flows, the year-on-year change of that global liquidity is a lot more relevant.
Speaker: So the pace, the first derivative.
Speaker: So when I correlate financial flows to E&B bonds and equity with that year-on-year change in liquidity, it's a very clear downward trend in both.
Speaker: Year-to-date, we've seen $66 billion of outflows from emerging market institution investors in fixed income.
Speaker: Equities saved the day a little bit, but on equities, it was mostly passive ETF investments.
Speaker: And that's the secondary market.
Speaker: And in the primary market, the issuances, which both you and Selena mentioned before, it's the same downtrend.
Speaker: And actually, the legs are much shorter.
Speaker: When I look at the sovereign issuances over the rolling four quarters, it's only 70, 75 billion dollars, which is one third of what we had late 2019.
Speaker: So this liquidity or its pace of liquidity, the year on year change is actually impacting both the secondary market and the primary market flows for emerging markets.
Speaker: For sure.
Speaker: To that point that you've both made, I have a question.
Speaker: Today, we have Philippines in the market with a multi-tranche dollar deal, the public investment fund.
Speaker: is also doing a significantly sized dollar deal.
Speaker: Just curious, we've seen sovereigns come, we know more have to come.
Speaker: But in terms of the deployment of cash and separately sort of to you, Selena, what's your view on the corporate space and EM corporates ultimately reaching a point where they can come into the market
Speaker: If there were to be a catalyst besides just flat out rate moves, what would you point to?
Speaker: Because from my perspective, from a leverage and interest coverage stance, EM credit looks pretty good.
Speaker: It's been a positive few years leading up to this point, but we've broken down clearly.
Speaker: Curious what you're thinking as it relates to supply in the corporate space.
Speaker: Yeah, absolutely.
Speaker: And this is where we wish we could see more, both on the IG side and on the high-yield side.
Speaker: But let me put that into a slightly bigger framework.
Speaker: So EM corporates are now much larger than the U.S. high-yield, for example, in terms of an asset class.
Speaker: And most CFOs worth their salt in the last two years have been turning out their capital structures and reducing their leverage.
Speaker: So when you look at corporate balance sheets as a whole, as you mentioned, leverage is at an all-time low since 2007, and interest coverage is also at an all-time high versus 2007, and looks significantly better than U.S. high yield and European high yield credit.
Speaker: So EM corporates have that luxury of not necessarily being able to issue because unfortunately, there's no M&A of size, and there's not really a lot of CapEx investment going on at the corporate level.
Speaker: Hopefully, we'll start to see that.
Speaker: But to your point about rates, some of the IRRs for some of these projects may or may not be as attractive anymore, given where rates have come.
Speaker: That being said, we are actively looking for paper.
Speaker: You know, a handful of issuers that have come with a new issue concession.
Speaker: we've been buying throughout the course of 2022.
Speaker: And we hope to see more of those.
Speaker: We hope to help companies also pre-fund some of the maturities that are coming in 2024, even if it may imply a little bit of a negative carry for a company.
Speaker: But the other point that I wanted to highlight is EM corporates, even on the high yield side, have two things going for them.
Speaker: Local markets are that much more sizable now than they were even three or four years ago.
Speaker: So there's depth and breadth, both to the local capital markets and to local banking systems so that they can refinance a lot of their debt.
Speaker: And in the high-yield side, unlike many sovereigns, there are pockets of capital offshore distressed, local, like I mentioned, investors like myself, that are willing to underwrite credits in the public or the private markets.
Speaker: I think when you compare and contrast that with some of the lower quality or lower rated high-yield sovereigns, when they lose access to the capital markets,
Speaker: then there's a little bit more difficulty and a little bit more concern in terms of where you go to for that rollover risk that you have on the fiscal side.
Speaker: Even though sovereigns, as Murat will probably mention more elegantly than I, have not committed the original sin, right?
Speaker: Offshore issuance is lower, domestic market financing is more balanced, and so the mismatch between offshore financing and local financing isn't as high for sovereigns either.
Speaker: Gotcha.
Speaker: Listen, just in terms of geography and sort of what works versus what is presenting more of a challenge, I'm curious, I guess we'll start with you, Selena.
Speaker: What geographies, parts of the world are you prioritizing versus deprioritizing?
Speaker: We can talk about this from the sector perspective, or we can talk about it from which parts of the emerging markets world you like versus not liking.
Speaker: Curious what your thoughts are there.
Speaker: Absolutely.
Speaker: And it's a little bit of both in terms of marrying our macro view and our sovereign view versus some of the corporate view.
Speaker: And some of the corporates are increasingly, like I mentioned, sort of large multinational companies that happen to be headquartered in certain places across the end.
Speaker: So it's a different type of investing that we're looking at today versus, you know, five, 10 or 20 years ago.
Speaker: But in terms of regions and types of companies that we're looking at, we really are looking for the commodity exporters with on the sovereign side with strong fiscal balance sheets that haven't necessarily overspent during the pandemic.
Speaker: time period and can withstand the macro slowdown that we think will be coming.
Speaker: And that applies still even with the commodity sell-off that we've seen most recently, because we still have supportive commodity pricing, both on oil and gas, on metals and mining, pulp and paper, sort of across the board in the commodity space that are supportive for both corporate and sovereign credits.
Speaker: So regionally, that puts us in the GCC, although valuations are a little bit tight, we think they continue to stay tight.
Speaker: But it is a relative safe haven from a fiscal perspective with high quality corporates and with a strong local market.
Speaker: It also puts us into Latin America where
Speaker: Valuations tend to be more attractive, but that is also because there's a fairly sizable political risk we're seeing across the board in terms of elections, possible changes to constitutions or proposed changes to various other sort of legal and institutional structures.
Speaker: So some of that additional risk premium is warranted.
Speaker: But we think there's a lot of opportunities, not only in the commodity space in that time, but also in a lot of regional utilities, as well as regional consumer companies that we think are strong enough to withstand, you know, these sort of slowdown that we're underwriting their cash flows to.
Speaker: So, Murad, I know in our EM survey, you highlighted some of the preferred regions.
Speaker: And in my discussions with you and clients, you've referenced LATAM.
Speaker: Just curious what your views are on the same topic, if you could share.
Speaker: Absolutely.
Speaker: So the sentiment survey was out only last week, so it's relatively fresh.
Speaker: And two regions, actually three regions that stand out.
Speaker: First, it's Asia.
Speaker: And it's quite interesting, actually.
Speaker: We've done nine surveys so far, and whenever there is...
Speaker: high volatility uncertainty in the market, we kind of see investors going back to Asia, perhaps because of its relative stability or better macroeconomic balances.
Speaker: But what stands out in Asia is actually Indonesia and India as preferred markets.
Speaker: And then in Latin America, yes, that's the second most preferred market after Asia.
Speaker: And when I say this, we look at the inclinations of investors in terms of what they favor across all asset classes and Asia and Latin America stand out as sort of, you know, those regions with
Speaker: the largest number of net favorable position across asset classes.
Speaker: LATAM is the second, the one country that stands out across the board for all asset classes, Brazil, you know, currency, rates, credit, and equities.
Speaker: And then we have Middle East, which is preferred for equities.
Speaker: And on the flip side, there is Central Eastern Europe, which is the least preferred region, possibly because of its regional proximity to the war and also the potential of a eurozone recession that is cited even more in HBC's expectation that kind of keeps Central Eastern Europe relatively lower in the preference list.
Speaker: Yes.
Speaker: Latin America definitely stands out, but that was one particular country, especially when it comes to FX is quite interesting because the general mood towards EMFX is not that great, understandably so.
Speaker: I mean, given all the headwinds and strong dollar, and actually 58% of investors are looking for further weakness in emerging market currencies in the near term.
Speaker: But when it comes to Brazilian real, there is a universal expectation that this currency stands out as one that is preferred.
Speaker: And this was even before the first round of elections when we released the survey last week.
Speaker: Clearly, Brazil has been ahead of the curve in raising rates and has oftentimes been referred to as the darling, which you touched on earlier.
Speaker: Given the recent outcome from the first round of elections between Lula and Bolsonaro, what do you expect will be the outcome going forward?
Speaker: And how do you think that will impact markets?
Speaker: I mean, I can set the stage for sort of the macro backdrop and leave the investment implications to Selena.
Speaker: Our economists and strategists, they follow it very closely.
Speaker: They publish various reports.
Speaker: They publish the report just on the heels of the first round election.
Speaker: And their interpretation is this is kind of reducing the probability of some extreme fiscal scenarios that the markets were worried about.
Speaker: So it's more about checks and balances.
Speaker: And with that, perhaps the focus of investors is on the other stronger parts of the economy, like the first mainstream large emerging economy or large economy across the globe that is actually seeing a downward momentum on inflation.
Speaker: I think that's very important.
Speaker: And you have very sizable real interest rates, which will only grow possibly over time.
Speaker: You have a balance of payment positions pretty favorable, only small current account deficit, definitely big support from earlier run-up in commodity prices.
Speaker: But when you compare to the past, when
Speaker: Brazil had large current account deficit back in taper tantrum or 2018, et cetera.
Speaker: It looks a lot more favorable and the capital account is in good shape.
Speaker: And finally, the real surprise recently is coming through growth.
Speaker: There has been upward revision in growth forecast where actually despite
Speaker: the aggressive tightening of Santa Bank of Brazil, growth is holding up a lot better.
Speaker: That perhaps reflects domestic confidence and international confidence.
Speaker: So the macro picture looks quite favorable.
Speaker: And that's no wonder why a lot of investors in our survey looked at Brazil quite favorably.
Speaker: Well, it's nice to know that we're constructive on some parts of the world.
Speaker: Selena, anything to add there?
Speaker: Yeah, I mean, you know, to follow up on Murat's point, I mean, the macro backdrop and the congressional composition really are very supportive.
Speaker: And I think back to my theme on exporters, you know, even with the real, you know, slightly stronger on a relative basis versus other currencies, commodity exporters in Brazil are generating significant cash flow.
Speaker: So it's no surprise that that's sort of an area that we like and that we don't think are exposed to any changes or surprises on a regulatory perspective.
Speaker: But I also want to highlight some other domestic names that the market had been sort of selling off as concerns about consumer consumption on the beef names, for example, on the supermarket names or other consumer names domestically.
Speaker: There's a lot of domestic infrastructure names that we think are very strong credits on a standalone basis.
Speaker: And that we think that the market is sort of overestimating this potential downturn.
Speaker: And to Marat's point, there's actual growth to the upside that we think is going to come
Speaker: domestically in Brazil that could be supported for all of these credits.
Speaker: Thank you.
Speaker: So I'm going to shift gears a little bit.
Speaker: We recently had our global emerging markets forum and Sir John Sawyer, an executive chairman of New Bridge Advisory, spoke and shared some of his ideas, specifically on China and the U.S.,
Speaker: He said, this has been a very challenging year for China with slowing growth, problems in the real estate sector, ongoing pandemic restrictions, and long-term demographic challenges.
Speaker: I guess I'll start with you, Murat.
Speaker: Curious, given what role China has played in past recessions, the buyer of last resort in some cases, how do we view China?
Speaker: How do you see them transitioning out of this
Speaker: slower growth phase.
Speaker: Absolutely.
Speaker: Thank you, Kerry.
Speaker: Clearly, China is so important for the rest of the world economy, for emerging markets.
Speaker: Just to give you one simple stat to set the stage and put it into perspective, when China first became part of WTO in early 2000, only 4% of emerging market experts were ending up in there.
Speaker: Fast forward to now, it's 16%, 17%.
Speaker: Massive increase.
Speaker: It's not only a major export destination, but also capital provider.
Speaker: And through the sentiment, China is super important.
Speaker: Yes, you're absolutely right.
Speaker: I mean, there are challenges currently.
Speaker: That's why recently we revised our growth forecast for this year, looking for only 3.5%, which is a non-consensus.
Speaker: But then there are some other good parts of the Chinese economy, economic story, one of which is actually investments, especially when it comes to infrastructure investments, especially when it comes to manufacturing investments.
Speaker: And we think over time, they will cause some moderate recovery in economic activity.
Speaker: We actually expect Chinese growth to pick up to 5.2% next year in 2023 from our forecast of 3.5, and that is a sizable recovery.
Speaker: So that actually eventually might set the stage for the world economy to benefit from China's
Speaker: I mean, there are lots of question marks, you know, whether this will cause perhaps a little bit higher inflation, you know, when China starts growing strongly through commodities and elsewhere.
Speaker: I think it really all depends on the supply side as well.
Speaker: And, you know, as we know, throughout COVID and after the war, there has been a big strain on global supply chains, which are improving over the past few months.
Speaker: But, you know, clearly China plays a key role.
Speaker: Selena, anything to add?
Speaker: Sure.
Speaker: And to add to Marat's point about the importance of China, back in the early 90s when we started talking about BRICS, it's a very different world then.
Speaker: But China was 2.5% of global GDP in the early 90s, and it's now about 18, 19%.
Speaker: for 2022.
Speaker: So even on the lower absolute GDP growth, obviously it's a bigger driver of global growth.
Speaker: And we expect that to continue to be a driver, as Murat said, sort of contributing to EM growth outside of China in 2023.
Speaker: But also I would like to add that not only in the investment in infrastructure domestically, but we expect the Chinese government to continue to invest outside of China.
Speaker: which is something that they have done quite strategically in the last 10 to 15 years, and is very supportive for infrastructure projects around the world, which in turn drives not just demand for various commodities, but also growth in other countries around the world that are more directly linked to projects and investing in FDI.
Speaker: Thank you.
Speaker: I'm going to put another one out there for you.
Speaker: In a recent discussion, a client made the comment that
Speaker: it feels like a lost year in terms of returns.
Speaker: And the trade is more what to do over the next few months to set up the portfolio for a better 2023.
Speaker: While the dollar is strong and the Fed is tightening, the fundamentals are tough.
Speaker: EM is going to have a renaissance at some point in the next few years.
Speaker: But for now, we'd rather take US credit risks.
Speaker: And I guess
Speaker: It's a tough day today, but the last few days have been positive.
Speaker: We've had a few deals get through the market.
Speaker: I was just curious if you think in the current environment, given how volatile things have been over the last few weeks slash months, are we tilting towards a renaissance moment now?
Speaker: And if not, what would be the catalyst that gets us there?
Speaker: Loaded question, but Selena, maybe we start with you.
Speaker: Sure.
Speaker: Happy to take a stab at that.
Speaker: And I think EM hasn't been the place to deploy your risk this year.
Speaker: And that's been the CIO view over the course of these few months.
Speaker: And partly it's part of our trifecta.
Speaker: Are your valuations there?
Speaker: And as I mentioned before, they're not.
Speaker: Is your fundamentals there?
Speaker: And they haven't been.
Speaker: And so we think that they will potentially be there as we recover into the next couple of years, but they certainly aren't there in the near future.
Speaker: And then the technicals, which is we know, in theory, we could have cash to deploy, but that's really sort of the trickiest and the most difficult part to predict in terms of the market.
Speaker: So when we see the trifecta functioning, then we're ready to step in with a more aggressive view.
Speaker: But it hasn't been our view right now.
Speaker: And I think at some point, as valuations do get better, are more attractive versus
Speaker: some of the developed market credit and like I mentioned before, versus US treasuries on an absolute basis, we think we'll start to playing a little bit more capital there.
Speaker: But we have been deliberately cautious for the reasons I mentioned.
Speaker: and you're not alone there.
Speaker: Murat, what's going to be our renaissance moment in your opinion?
Speaker: No, I think Serena has summed it up very well.
Speaker: And if the renaissance means there is an inflection point and emerging markets will have steady flows and a big rebound in terms of financial market sentiment and returns, that's not our expectation currently.
Speaker: We've come out with a view earlier in the summer that every now and then we might see technical bounces
Speaker: um which you know probably will be tactical in nature we actually had one throughout the summer where actually there was pivot excitement from the large center banks the expectation that growth will be the priority and inflation will take a backstage um
Speaker: or going to the back burner.
Speaker: But clearly, that wasn't the communication from the big global center banks led by the Fed.
Speaker: They reaffirmed, they worry about inflation.
Speaker: And that pivot rally, quote unquote, has fizzled out and actually returns were quite depressed in the third quarter despite the summer rally.
Speaker: To us, this is like against the fundamental challenging backdrop.
Speaker: You have these tactical and technical bounces because the technical picture is very supportive.
Speaker: depressed sentiment and low positioning so in that sense uh until the tightening in global financial conditions led by large center banks or in terms of cost of funding and quant of funding reach a level and starts reversing at least in terms of expectations i think will probably continue to remain in this challenging environment and that's why uh you know to selena's point and to your earlier called it doesn't look like the renaissance moment as yet
Speaker: Thank you.
Speaker: Now, just to bring it back to just a little bit more of a personal touch.
Speaker: Curious for those listening, are either of you listening to any podcasts or reading a book that you'd want to recommend to the audience?
Speaker: Murat, we'll start with you.
Speaker: I'm going to mention a book which actually was recommended by one of my business associates very recently.
Speaker: I've started reading it.
Speaker: Very interesting book.
Speaker: It's called The Three-Body Problem by Kaixin Liu.
Speaker: It's actually an astronomical concept.
Speaker: I have special interest in it.
Speaker: I started my education formation as an engineer and had lots of personal interest in astronomy.
Speaker: So this three-body problem is more for the celestial bodies.
Speaker: which essentially says when our two bodies, two celestial bodies, like the Earth and the Moon or the Earth and the Sun, they find the balance.
Speaker: Once a third body is introduced, you've got a problem.
Speaker: And the interesting thing about the book is actually you can take the concept and you can map it over to world affairs and to a lot of disciplines.
Speaker: So it's not astronomy.
Speaker: That is the origin, but it is quite relevant with what's happening around the world these days.
Speaker: So really, really very interesting book.
Speaker: Thank you.
Speaker: Thank you.
Speaker: Selena.
Speaker: So a book I read recently that is called Everybody Lies, and it's really about data, right?
Speaker: And how data is collected from various data sources and used, obviously, to track our behavior and to predict our behavior.
Speaker: And it is a little bit disheartening to see that all sort of consolidated into one book.
Speaker: But I mention it because we should all be more aware, I think, of how that data is being used.
Speaker: But also given all the things we've lived through in 2022 and what we see in emerging markets, I also like to mix up my reading with a few lighter notes.
Speaker: So one of the books I'm really looking forward to that's coming out in a couple of weeks, it's called Serendipity.
Speaker: It's the history of accidental culinary discoveries.
Speaker: It's written by the author of Italy here in New York City.
Speaker: And it's just about accidental discoveries and how serendipity sometimes allows you to create
Speaker: you know, delicious things in the kitchen.
Speaker: So sometimes you have to mix a little bit of negative concerning factual books that we all should read with something a little lighter.
Speaker: I love the combo.
Speaker: I'll follow on.
Speaker: I just finished up The Lost Boys of Montauk by Amanda Fairbanks, which is a factual story of a shipwreck that effectively, you know, the ship was never found and some good fishermen disappeared.
Speaker: 1984, for anybody that spent time out at the beach in Montauk, it's topical.
Speaker: And I just started Grit by Angela Duckworth.
Speaker: It's been around for a while, but I've got four children and trying to figure out how to embed the grit piece with a few of them.
Speaker: They definitely have it, but I want to understand it better so that I can talk to them and have them actually listen to me sometimes.
Speaker: But both good books and two very different stories.
Speaker: But listen, both of you, thank you so much.
Speaker: Clearly,
Speaker: of a challenging time in the markets.
Speaker: We have some very good stories specifically around Brazil, China, I think infrastructure.
Speaker: This is an attractive technical backdrop.
Speaker: Valuations are starting to get really, really interesting.
Speaker: We, Selena, appreciate the partnership.
Speaker: Murat will have to keep getting on the road and telling our story.
Speaker: But I think from my many years of doing this, we're embarking on what will be a very, very interesting time to invest.
Speaker: And there will, without any doubt, in my mind, be a lot of opportunity.
Speaker: So hopefully, we all take advantage and really appreciate you, Selena, as a client, taking the time to do this podcast.
Speaker: And thank you for those that are listening
Speaker: Thank you for joining us for this episode of Emerging Market Spotlight.
Speaker: We hope you enjoy the discussion.
Speaker: HSBC is uniquely positioned to connect investors and corporates internationally.
Speaker: To learn more about anything you heard today, visit gbm.hsbc.com or contact your HSBC representative.
Speaker: Make sure you subscribe to HSBC Global Viewpoint and stay up to date with new episodes.
Speaker: Bye.
Speaker: Thank you for joining us at HSBC Global Viewpoint.
Speaker: We hope you enjoyed the discussion.
Speaker: Make sure you're subscribed to stay up to date with new episodes.
