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Under the Banyan Tree - What can history tell us about Asia's AI rally?
31 Plays10 months ago
Herald van der Linde and Fred Neumann take a deep dive into the Asia AI boom, where stocks from software development to energy are riding the wave of 2024's major market story. Disclaimer: https://www.research.hsbc.com/R/101/lsBBrGn . Stay connected and access free to view reports and videos from HSBC Global Research follow us on LinkedIn https://www.linkedin.com/feed/hashtag/hsbcresearch/ or click here: https://www.gbm.hsbc.com/insights/global-research.
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Transcript
Introduction to the Podcast Series
00:00:02
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
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00:00:16
Speaker
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00:00:17
Speaker
And now onto today's show.
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Speaker
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Speaker
However you're listening, analyst notifications, disclosures and disclaimers must be viewed on the link attached to your media player.
Meet the Hosts
00:00:45
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Hello from Hong Kong, I'm Harold van der Linde, Head of Asia Equity Strategy here at HSBC.
00:00:51
Speaker
And I'm Fred Newman, Chief Asia Economist.
00:00:53
Speaker
You're listening to Under the Banyan Tree, where we put Asian markets and economics in context.
00:00:57
Speaker
Absolutely, and on today's show, we're going to look at the rally in AI stocks in Asia.
00:01:02
Speaker
And we're going to try to put a little bit of historical context around it.
00:01:06
Speaker
Stocks have been on a tear, but every run has succumbed to an end sometime.
AI Stock Rally in Asia
00:01:10
Speaker
We're not here to tell you when that will exactly happen, but history has a thing or two to tell us about what to watch out for.
00:01:16
Speaker
Exactly.
00:01:17
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Demand, competition, regulation, they all play a part, and they're all part of the discussion right here under the Banyan tree.
00:01:34
Speaker
Let's start with some numbers to set the scene.
00:01:37
Speaker
HSBC's Asia AI Index, which tracks the performance of the key AI stocks in the Asian region, is up 200% since November 2022.
00:01:49
Speaker
Since the start of 2023, Taiwanese stocks have rallied 70%, led by TSMC, the chip maker that manufactures components for AI devices all over the world.
00:01:58
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TSMC itself is up about 110% in that time.
00:02:02
Speaker
Now, Harold, we talk a lot about AI.
00:02:05
Speaker
TSMC is, of course, a big company that's very well known.
00:02:08
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It's one of the producers of these advanced chips that go into actually doing AI in these massive server centers.
00:02:15
Speaker
But what other companies are involved?
00:02:18
Speaker
What are we talking here?
00:02:19
Speaker
Is it the guys who actually write the software?
00:02:22
Speaker
Is it the hardware?
00:02:23
Speaker
What are some of these companies and sectors that are really affected by the AI boom?
00:02:29
Speaker
There are companies who do the software and stuff, but it's really hardware that we're talking about.
00:02:33
Speaker
So it's the nuts and bolts of AI, if you want to put it like that.
00:02:36
Speaker
Now, you already mentioned the chips.
00:02:38
Speaker
So they do the fast computing, if you want to keep it very simple.
00:02:42
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But AI uses enormous amounts of data that's stored on servers.
00:02:46
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So people have to run these servers.
00:02:48
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So there are companies that build these servers or components for these servers, or they build components for the chips that...
00:02:55
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that are being used as well.
00:02:56
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You need, for example, particularly laminates and these sort of things.
00:02:59
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And you can go even further and say these servers, AI, use an enormous amount of energy.
00:03:05
Speaker
So we've seen actually stocks in, for example, Malaysia, energy stocks rallying because the demand of energy for these servers is so enormous that...
00:03:16
Speaker
that business is going to double.
00:03:17
Speaker
And that reminds me actually, I think on a previous podcast with your great statistics, we actually did mention that about a dozen servers, data servers or centers being built in Malaysia right now.
00:03:29
Speaker
Yeah, it was 40%, I think, of existing power capacity would be needed in order to service those data centers.
00:03:36
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To run those servers, yeah, which means that the Malaysian grid would have to expand by 40% capacity.
00:03:41
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in order to just run these data
Investor Expectations and Reality
00:03:43
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servers.
00:03:43
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So when we talk then about the AI boom, is it really just those advanced semiconductor companies that are benefiting from this?
00:03:52
Speaker
Everybody heard about NVIDIA and TSMC.
00:03:55
Speaker
Or do you also see this already being reflected in rallying stock prices of these other more esoteric companies that really provide the electricity or the data centers or the lamination or the chemicals or the software?
00:04:07
Speaker
What exactly is that?
00:04:09
Speaker
All of these stocks have gone up.
00:04:10
Speaker
All of these stocks have gone up.
00:04:11
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Nvidia has gone up, I think, seven times already since AI and JetGPT was announced.
00:04:18
Speaker
TSMC, you just mentioned, has gone up a lot.
00:04:19
Speaker
Some of the other stocks have gone up even more because they're even more exposed to it.
00:04:25
Speaker
And of course, you have some of these power stocks.
00:04:26
Speaker
They haven't gone up as much, but they've rallied as well.
00:04:29
Speaker
Now, when we say stocks rally, right, so they rise in price, what does this really signify?
00:04:36
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You're an equity strategist.
00:04:37
Speaker
Does that signify that investors expect, therefore, enormous profits in the future and that's reflected in the price today?
00:04:47
Speaker
And is that the way to think about this, that maybe some of the profits have not necessarily come through, but investors are rebuying the expectation of a big, big shift in profits?
00:04:56
Speaker
Yeah, Fred, you're becoming a strategist here.
00:04:58
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I learned from the best.
00:04:59
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There you go.
00:05:01
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No, but that's absolutely right.
00:05:02
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And I'm going to pose a question to you on how realistic that is in a second, because we have these expectations that these earnings are going to grow significantly.
00:05:12
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And we know that there is demand for, for example, chips, right?
00:05:15
Speaker
So we know that the order books are full.
00:05:17
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We know that these data servers are being built.
00:05:19
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We know that the power capacity is going up.
00:05:21
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The question is, how long will that then continue?
00:05:24
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How big will that eventually be?
00:05:25
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And...
00:05:26
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That's something then the markets don't know over time.
00:05:29
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So these stocks can rally up, but they can at some point in time also come down and have a bit of a reality check.
00:05:35
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We can talk about this maybe a little bit later, but let's take a step back.
00:05:38
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You as an economist, how then do you think about how new technology in general, maybe AI impacts the economies?
AI Infrastructure's Economic Impact
00:05:46
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So I think there are two ways of looking at this, and I'm going to come back to you with a follow-up question actually on this.
00:05:51
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One is that when you have such a boom, it's about the investment that's being spent.
00:05:57
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It's about building the data centers.
00:06:00
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It's about building the infrastructure, and that often drives economic growth.
00:06:04
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And you see that with...
00:06:06
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exports from Taiwan and for South Korea doing extremely well because people buy these semiconductors.
00:06:12
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That's what we can see at the moment, right?
00:06:14
Speaker
And that's what you can see now.
00:06:15
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And that's, I guess, to some extent reflected then in the profits of the companies that build the hardware already.
00:06:21
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They're already seeing the order books increase.
00:06:23
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And of course, that's economic activity.
00:06:26
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And that is, as long as that boom lasts, that's positive for growth.
00:06:30
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The question from the economic perspective is, does that investment over time yield a return?
00:06:37
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That is, can these data centers actually drive further activity?
00:06:41
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So is it not just building the data center itself, but is there something, once we use AI, is it actually profitable?
00:06:46
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Are we going to be more productive, for example?
00:06:48
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Are we going to be more productive?
00:06:49
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Are companies going to make more money in other fields?
00:06:52
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Are we going to revolutionize how we do retail, how we do finance, how we do research, right?
00:06:57
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All of that.
00:06:58
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And to some extent, it feels from an economic perspective, the proof is yet to come whether AI is really that transformative for all other industries and therefore whether the investment is ultimately justified.
00:07:13
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And from an economic perspective, what it's all about is the rise in productivity.
00:07:17
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Can AI drive productivity?
00:07:19
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And the answer as of now is we don't know.
00:07:22
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We have to see the use cases.
00:07:24
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We have to see the improvement in corporate profitability in sectors that are not building the AI infrastructure but are using the AI.
00:07:32
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And that only time will tell.
00:07:34
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That we'll see in the future.
00:07:35
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But for you then, I want to draw a parallel.
00:07:38
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We touched on this already earlier.
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in previous episodes, which is during the gold boom in California in the 19th century, it wasn't necessarily the gold miners who made a lot of money because in the end there wasn't that much gold in the ground.
00:07:53
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It was the people who sold the gold miners to shovels who made the big bucks, the infrastructure for it.
00:07:59
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So what I wanted to ask you is whether there's a similar analogy here for the equity market where
00:08:06
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the companies who've built the infrastructure are the ones who are now primarily the benefactors and the ones who will actually use AI.
00:08:14
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Well, we haven't really kind of seen the use case yet and therefore there is not yet a clear case to be made.
00:08:21
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I'll give you a nice example.
00:08:22
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I have on my phone an app, which is an AI app.
00:08:26
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And sometimes I put in questions and see what comes out of it.
00:08:29
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Sometimes, to be honest, it's a bit gibberish.
00:08:30
Speaker
I think sometimes it's quite interesting.
00:08:32
Speaker
So I use it as a sort of fast way of getting access to data.
00:08:36
Speaker
I've also subscribed at home to an OpenAI sort of website and I can put a document in there and I'm asking to give me a summary or something like that just for me to get to know this.
00:08:47
Speaker
So I spent nothing on the app and 30 US dollars a year on that website.
00:08:53
Speaker
On the other hand, we have billions of dollars going into these investments.
00:08:57
Speaker
So there seems to me a kind of somewhere along the chain, I wonder who's making the money at this point in time, because I'm not really putting a lot of money in.
00:09:06
Speaker
So somebody's providing some of these services even for free on my iPhone, right?
00:09:12
Speaker
You're right.
00:09:13
Speaker
Is it the AI company that's providing it, that's making the money, or is it the picks and shovel kind of guy?
00:09:18
Speaker
And that's the chip maker and the server builder at the moment.
00:09:22
Speaker
Now, these stocks are rallying, so clearly that's the case.
00:09:24
Speaker
But in how far that will then lead to the profits that will be made, for example, by the companies that provide AI,
00:09:32
Speaker
That's open.
00:09:33
Speaker
That comes back to your productivity thing is how much of the work that we do will be basically done by AI in the next 10 years.
00:09:41
Speaker
And if that's 50%, that's a lot.
00:09:43
Speaker
So there's a lot of business there.
00:09:44
Speaker
But if that's only 5% of what we do, then that's maybe a bit of a disappointment.
00:09:49
Speaker
And then people will struggle.
00:09:50
Speaker
So the potential is certainly there, but we get to see the actual implementation, the returns on the investment to come through on that.
Historical Market Cycles and AI's Future
00:09:58
Speaker
But we should probably also not forget that the AI craze, quote unquote, has only started about 18 months ago.
00:10:06
Speaker
So we're very early in the process.
00:10:08
Speaker
Yeah.
00:10:08
Speaker
And there is a bit of an analogy with other cycles that we've looked at since about 2000 with other sort of, we call them big market cycles.
00:10:17
Speaker
We've had, for example, e-commerce rise in 2000.
00:10:19
Speaker
We had the Chinese consumer stocks rising and banks in 2006 and 2007.
00:10:23
Speaker
I mean, they also went up a lot on the expectation of that would be a lot of future profits, right?
00:10:29
Speaker
But they fizzled at one point in time.
00:10:32
Speaker
And that was because sometimes there's a couple of common factors that seem to be a place.
00:10:37
Speaker
If it's a really big market, what we very often misunderstand that other companies are coming in and compete.
00:10:42
Speaker
Everybody says, I want to do AI.
00:10:44
Speaker
So it might become more competitive in a crowded space.
00:10:48
Speaker
Or governments come in and say, I'm going to regulate this.
00:10:52
Speaker
This is an important market now.
00:10:53
Speaker
It needs to be properly regulated.
00:10:55
Speaker
That happened amongst others with China Internet, for example.
00:11:00
Speaker
There are these sort of curve balls that can come to these rallies that suddenly change the dynamics, sometimes even overnight.
00:11:07
Speaker
So we need to be a little bit careful.
00:11:08
Speaker
So is it fair to say there are two uncertainties or three uncertainties?
00:11:11
Speaker
One is how profitable the technology will be, how good it actually is.
00:11:16
Speaker
That's of course still the question.
00:11:17
Speaker
Then the second one is presumably what the timeframe is, how long of these benefits it takes to come through, even though they're to come through, is it three or four years?
00:11:26
Speaker
Is it 20 years or 30 years?
00:11:28
Speaker
And then I guess the third one is that is the companies that investors think about today also the ones who will gain actually in the future?
00:11:36
Speaker
Because if you think about the internet rally, for example, in 2000s, some of the companies that rallied back then don't exist anymore.
00:11:45
Speaker
No.
00:11:46
Speaker
And companies like Facebook, for example, only emerged five or six years after the e-commerce platforms was established in the late 90s.
00:11:54
Speaker
So...
00:11:56
Speaker
Yeah, the ones who dominate the industry now might not be the ones who dominated in the future.
00:12:01
Speaker
So we sometimes see companies making the wrong decision in certain places.
00:12:05
Speaker
We've seen this in China.
00:12:07
Speaker
For example, China consumers stocks had a big rally in 2007 and 2008, but some of them really didn't have the right, they grew too fast and stumbled literally over themselves.
00:12:18
Speaker
So, yeah, we've got to be careful just to make very easy sort of comparisons in this rally.
00:12:25
Speaker
So clearly an impressive rally so far, but a lot of uncertainty associated with that.
00:12:30
Speaker
Maybe it's time to take a quick break.
00:12:32
Speaker
And when I come back, I want to ask Harold how this current rally compares to one of the last big run-ups, which was the China Internet rally that we saw only a few years ago.
00:12:54
Speaker
So, Harold, before the break, we discussed, you know, the rally in AI stocks.
00:12:59
Speaker
We highlighted some of these examples in Asia that rallied quite a bit.
00:13:04
Speaker
We also had a big rally in Chinese internet stocks a few years ago, which is kind of reminiscent of what we see now in markets.
00:13:11
Speaker
How does that compare?
00:13:12
Speaker
You did some analysis on that.
00:13:14
Speaker
Yeah, so the China Internet kind of rally that we saw 2016, 17, 18, 19 really, really rallied up is actually a very nice comparison.
00:13:23
Speaker
But it was more of a, you could say, a nearly traditional sort of rally that builds because it takes time for these market rallies normally to build as more and more people get convinced that, hey, there's a big market or a big growth opportunity.
00:13:38
Speaker
opportunity here.
00:13:39
Speaker
So these rallies build very slowly and then they gain momentum and as they get a momentum these stocks go up more and more and more.
00:13:45
Speaker
What that happened with China internet is that regulations came in place but also these companies started to compete with each other.
00:13:51
Speaker
So all these factors I mentioned earlier started to come in play and that then eventually turned the markets and if you go back and say what happened on that particular day that that peaked nothing particularly happened.
00:14:02
Speaker
It's the same with the 2001
00:14:04
Speaker
internet bubble.
00:14:05
Speaker
Nothing happened on that particular peak.
00:14:07
Speaker
It was just a kind of confluence of factors that started to put gravity to these stocks.
00:14:12
Speaker
Now what is different this time around is that we don't have a slow build.
00:14:17
Speaker
We had a moment whereby ChatGPT was announced.
00:14:20
Speaker
That was in November 2022.
00:14:23
Speaker
A couple of weeks prior to that you saw the stocks already moving because there was talk about something was happening.
00:14:29
Speaker
But there was a clear moment and the stock bang went off.
00:14:32
Speaker
But the rally we've seen now, although it's been much faster, is about the same magnitude of the rally that we've seen in China Internet.
00:14:39
Speaker
So we're getting now, if history is any guidance, to a limit whereby we say, hey, we've seen the same sort of ascend up the mountain.
00:14:48
Speaker
Yeah, of course, though one might also say that this is potentially much more transformative technology than maybe the Chinese Internet space, which was really just, you know, a consumer play, different companies coming through.
00:15:01
Speaker
So, you know, one doesn't necessarily imply that the other is not just the thing.
00:15:05
Speaker
We know that now.
00:15:07
Speaker
But at that time, the feeling was, wow, this is really big, right?
00:15:11
Speaker
So we know over time.
00:15:12
Speaker
And you and I might have a podcast in five years' time.
00:15:15
Speaker
And we say, well, you remember we talked about AI and everybody thought it was transformative, but actually it hasn't.
00:15:20
Speaker
Maybe that is going to be the outcome as well.
00:15:22
Speaker
That will be obvious at that time, but it's not obvious to us at the moment.
00:15:25
Speaker
Now, it's always, in hindsight, always easy to identify bubbles and then they burst because you can see it run up and it collapses.
00:15:33
Speaker
But we should also be mindful that not every rally ends up in a collapse.
00:15:38
Speaker
Sometimes it is justified, right?
00:15:40
Speaker
So we see some companies who maybe go down over the course of their lifetime, but really ultimately over 20, 30 year period, those rallies are justified, the valuations that investors put into them.
00:15:53
Speaker
What are some of these examples that you can think of with companies that have actually endured such tremendous rallies and were ultimately turned out to be justified?
Sustained Growth of Market Leaders
00:16:02
Speaker
Yeah, in Asia, I think there are two sets of companies that, broadly speaking, have been able to do so.
00:16:09
Speaker
It is companies that have become global leaders and therefore have an enormous scale to benefit from.
00:16:14
Speaker
And actually, TSMC is a nice example.
00:16:16
Speaker
In the internet bubble in 2001, it peaked.
00:16:20
Speaker
TSMC rallied and then it came down a lot.
00:16:23
Speaker
And then over the years thereafter, it continued to recover.
00:16:28
Speaker
I think it was three years later, it was back at its peak and then now we are way beyond that multiple times.
00:16:34
Speaker
So that stock is actually a very nice example and it's a company, an Asian company that has gone completely global.
00:16:40
Speaker
Or you have companies that become domestic dominant players.
00:16:44
Speaker
So there's also scale, but in large economies.
00:16:46
Speaker
So for example,
00:16:47
Speaker
Indian shampoo makers or Indian toothpaste makers, they've had a really nice rally over the last 20 years because they were able to dominate a particular market.
00:16:57
Speaker
So it's that dominance in substantial markets and you come from a small base that really allows that to happen.
00:17:04
Speaker
And that reminds me when we had in one of the recent episodes where we talked about amazing statistics that you collected.
00:17:10
Speaker
They're actually companies that outperformed even some of the big AI players today.
00:17:15
Speaker
Exactly.
00:17:15
Speaker
And those were stocks that you wouldn't think that was a company that did motorcycle financing in India, for example, and has done phenomenally well over the last 20 years.
00:17:24
Speaker
It's a phenomenal track record that outpaces NVIDIA.
00:17:27
Speaker
Now, of course, the trick is always to know it before it rallies, not after it rallied.
00:17:32
Speaker
That's the job of the strategist.
00:17:33
Speaker
That's the job of the strategist, exactly.
00:17:35
Speaker
But Fred, I know you're reading a book about spices and spices, Asia.
Comparing Historical Bubbles to AI
00:17:42
Speaker
There was a bubble there somewhere in the distant past as well, right?
00:17:45
Speaker
There was, yes.
00:17:46
Speaker
There was the Spice Islands, of course.
00:17:48
Speaker
You know, this is the Malukkus in Indonesia, Banda, Indonesia.
00:17:53
Speaker
for example, where we saw nutmeg, for example, or clove, being spices that were really in the 16th century were desired by Europeans.
00:18:03
Speaker
And there was a real bubble in the sense that Europeans invested in kind of bringing these spices back to Europe.
00:18:11
Speaker
And these spices fetched enormously high prices.
00:18:15
Speaker
because that added flavor to the European cuisine and so forth.
00:18:21
Speaker
But during the spice trade, one of the products that was brought back from the East was actually tulip bulbs.
00:18:29
Speaker
And you being Dutch, I'm sure you know one or two things about tulips.
00:18:33
Speaker
That is absolutely right.
00:18:34
Speaker
Actually, look into this one.
00:18:36
Speaker
At one point in time, there was so much of a craze in tulip bowls that the price of a tulip bowl equaled the price of a small house in the city of Amsterdam.
00:18:45
Speaker
But imagine that.
00:18:46
Speaker
There must have been somebody who sold his house and got a tulip bowl for it.
00:18:51
Speaker
Now, the tulip bowl probably, I don't know, five years later would have been kind of...
00:18:56
Speaker
defunct and not dead.
00:18:58
Speaker
But even if that tulip ball would still grow a tulip today, what's the price of a tulip?
00:19:02
Speaker
It's maybe two euros.
00:19:04
Speaker
The price of a small house in Amsterdam, you're talking about half a million euros, if not more.
00:19:08
Speaker
So clearly, that was not always the right thing to go to, to follow the rally and the
00:19:14
Speaker
And of course at that time, that was the real market for tulips in the Netherlands in the 17th century.
00:19:20
Speaker
They bred different tulip varieties, different varieties, fetch higher prices.
00:19:25
Speaker
People were crazy about all the differences and people had an enormous amount of knowledge about the differences in tulip balls and these sort of things.
00:19:31
Speaker
But again, it is wealth that was created because of that trade with Asia that allowed these kind of accesses to emerge in consumption, right?
00:19:42
Speaker
We've seen this a bit in China 15 years ago in consumer stocks as well.
00:19:45
Speaker
So things haven't changed that much.
00:19:47
Speaker
One of the differences we should keep in mind is that the tulip bubble, as it's known famously in the 17th century Netherlands, that was purely on a product that was a luxury good.
00:19:57
Speaker
That is, people bought these tulips really to decorate their house.
00:20:00
Speaker
It was the first time when people actually brought flowers into the house for decoration.
00:20:05
Speaker
Fetch, you know, led to this speculative bubble.
00:20:07
Speaker
Social standing.
00:20:08
Speaker
You don't have a children in the house.
00:20:10
Speaker
That's right.
00:20:10
Speaker
Today it's maybe a handbag or it might be something else.
00:20:14
Speaker
Yeah, exactly.
00:20:15
Speaker
The difference, just bringing it back to AI, is that here, of course, it's not necessarily a luxury good.
00:20:22
Speaker
It's the belief that this is a transformative technology that will deliver economic returns over time and improve productivity.
00:20:31
Speaker
And that's why it's so powerful, I think.
00:20:33
Speaker
That is right.
00:20:34
Speaker
And that seems to be more likely with AI than it was with Chullibub.
Conclusion and Listener Engagement
00:20:37
Speaker
So maybe this is not going to be a Chullibub rally, but this is going to be a different sort of rally.
00:20:43
Speaker
Well, Harold, this is definitely a story we could keep talking about for hours, but I think it's time to wrap up the podcast for today.
00:20:50
Speaker
Indeed.
00:20:50
Speaker
But if you do want to read more and you're an HSBC client, head to the research website and check out our report.
00:20:56
Speaker
It's called Peak AI in Asia with a question mark at the end.
00:21:00
Speaker
I hasten to say...
00:21:01
Speaker
Remember to follow Under the Banyan Tree if you haven't already.
00:21:04
Speaker
We're on Apple, Spotify, or wherever you get your podcasts.
00:21:07
Speaker
And while you're there, listen, like, and subscribe to our other HSBC research podcast, The Macro Brief.
00:21:14
Speaker
Thanks for joining us and talk to you again soon.
00:21:40
Speaker
Thank you for joining us at HSBC Global Viewpoint.
00:21:43
Speaker
We hope you enjoyed the discussion.
00:21:46
Speaker
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