Transcript
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Speaker: Hello and 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 here at HSBC in Hong Kong.
Speaker: My name is Fred Newman, I'm the Chief Asia Economist here as well at HSBC and today we're going to look at geopolitics and what that really means for the region.
Speaker: It's an ongoing story with big implications across major supply chains and we're going to break it down into a few key segments for you today.
Speaker: So whether you're running a business, thinking about where to put your money or just eyeing up an electric vehicle or a smartphone upgrade, you're going to want to listen in right here under the banyan tree.
Speaker: So Harold, we need to talk about geopolitics.
Speaker: There's certainly a lot in the headlines, has been for many years already, and that inevitably has an impact on economics, on financial markets in Asia, which is really a region that's very sensitive to geopolitical risk.
Speaker: Now, we have, of course, growing friction, I think it's fair to say, between China and the United States, and that's playing itself out in different realms.
Speaker: And we really want to look at how that impacts various aspects across the Asian economies and markets.
Speaker: Yeah, Fred, I think that's a really good idea.
Speaker: But it's such a broad topic that I think we need to cut it into pieces.
Speaker: My suggestion is we do it in four pieces.
Speaker: First of all, we're looking at something that's grabbed the headlines in the past few years, and that is trade and trade tariffs.
Speaker: So we'll talk about that.
Speaker: I think another issue we should be focusing on is how that impacts shifts in supply chains across the region.
Speaker: So that's important.
Speaker: And the third one, somewhat related to this, I guess, is the technology sector, because that is in the spotlight in this regard.
Speaker: And the fourth one, I think, is we should be looking at the implications on capital flows.
Speaker: And with that, let's go to the first one.
Speaker: So tariffs and trade.
Speaker: Brett, you've looked at that, right?
Speaker: Yeah, a few years ago, big news.
Speaker: The United States imposed tariffs on imports from China.
Speaker: And of course, it was very disruptive because we hadn't seen such a big rise in tariffs for many, many years.
Speaker: Now, a few years later, it's interesting if you look at the impact of those tariffs.
Speaker: And what we find is that, yes, the United States reduced the share of its purchases from mainland China.
Speaker: and actually is buying more from other economies, Mexico, for example, economies in Southeast Asia.
Speaker: However, and this is interesting, the Europeans have done the opposite.
Speaker: They're buying fewer goods from ASEAN or Southeast Asia, and they're buying more goods from China.
Speaker: So the bottom line here is actually as far as Asian trade is concerned,
Speaker: We really have seen a shift in trade flows rather than overall reduction in China's exports, for example.
Speaker: And so it is distortive in the sense that redirects things, but it's not necessarily has disrupted overall trade in aggregate.
Speaker: Now, of course, that's kind of how the tariffs impacted on the macro level.
Speaker: How do equity investors, how did they digest the announcement of the tariffs and what did it mean for companies on the ground?
Speaker: Yeah, it's very interesting that you say this, Fred, because I would say for equities, for stock markets, there are two issues at play.
Speaker: First of all,
Speaker: most large stock markets, and I'm thinking about the, say, the mainland Chinese market, is mostly a domestic market.
Speaker: So the number of exporters listed on these markets is not really big.
Speaker: So the overall market impact is not really that significant.
Speaker: But even keeping that in mind, if you look at the individual companies that do export, you would think, well, they have to pay these tariffs now, will be bad, their margins will be under pressure.
Speaker: We haven't always seen this.
Speaker: So somebody has paid for this, but it's not always the Asian exporters that have paid for it.
Speaker: It's a very mixed story.
Speaker: Some companies struggled with that.
Speaker: And in fact, there are some studies that suggest that as a result of the tariffs, for example, the import costs in some of these markets, including the United States, have gone up.
Speaker: And of course, that is in some ways a contributing impact factor for the inflation we're seeing currently.
Speaker: We cannot divorce the global inflation problem that we have from some of the restrictions we see in the trade realm.
Speaker: And I think that's an important lesson here.
Speaker: for the years to come.
Speaker: Now, Ere, you mentioned a second area and that's supply chains.
Speaker: Now, we talked about tariffs, supply chains broadly.
Speaker: What do you see there on the company level?
Speaker: On the company level, we do see that companies are investing or looking to invest in certain areas.
Speaker: And there are certain industries that are really reshaping itself.
Speaker: I think the electric vehicle industry is a very nice example.
Speaker: Electrovehicles is a really big industry in China.
Speaker: Battery makers are dominant.
Speaker: Almost half of all the batteries made in the world are made by two Chinese companies.
Speaker: They need resources to do that.
Speaker: So they've gone to Indonesia, but they're also going to Thailand.
Speaker: EVs are now being produced in India as well, or they're planning to do so.
Speaker: So
Speaker: It's an industry you can see that becomes really an Asian supply chain is being rebuilt and ASEAN and India play an important role in that.
Speaker: And in other industries we see this as well and that is of course important for us because that tickles through on employment, that tickles through to wages and salaries and people buying stuff and that is good for convenience stores in say Indonesia, Thailand, India.
Speaker: as well.
Speaker: So on the bottom up, we see this moving.
Speaker: But if you look at the bigger numbers, Fred, is there something you see replicated there?
Speaker: FDI trends across the region?
Speaker: Absolutely.
Speaker: We're essentially retooling factory Asia.
Speaker: We see a readjustment of these very complex supply chains.
Speaker: And there are really two broader themes that stand out.
Speaker: One is that
Speaker: The shift of supply chains has nothing to do with geopolitics.
Speaker: It's actually a reflection of wage differentials across countries.
Speaker: Now, in China, wages have increased so sharply that for lower-end industries, labor-intensive industries, it makes sense to move to other producing countries, namely in Southeast Asia.
Speaker: Vietnam is often mentioned.
Speaker: Bangladesh is coming up.
Speaker: Malaysia is coming up.
Speaker: India, because they're becoming wage competitive on a relative basis versus China.
Speaker: So that's a secular trend.
Speaker: At the same time, and this is the second big trend, China, and you just hinted at that, is moving up the value added chain.
Speaker: It's essentially then capturing other types of industries and it's becoming more of a competitive trend.
Speaker: threat, if you will, to a place like Korea or Japan or Germany, right?
Speaker: So you have China essentially moving from one end of the spectrum to the other, and that leads to the rejigging of the supply chains.
Speaker: And of course, at that higher end, technology sector plays an important role.
Speaker: And you see, I believe, also investments in Malaysia and Thailand.
Speaker: Is that correct?
Speaker: That's right, and it's here where geopolitics comes back in, right?
Speaker: Because in the tech sector, you have probably geopolitics having the biggest impact on supply chain readjustments.
Speaker: And you mentioned investment going into Malaysia, the semiconductor space, for example, or Vietnam.
Speaker: partly because big companies are worried about being caught up in that tension between the large economic powers which set different regulations for technology, their export restrictions that come into play.
Speaker: And so you want to take some of these supply chains out and so we not be caught up in that.
Speaker: And that of course is a global issue, right?
Speaker: It does impact Japan and the United States as well.
Speaker: Yeah, and what is interesting, I think, is that you see, if you look at the individual companies, you see that certain companies have to make a choice.
Speaker: So we know some of the Taiwanese semiconductor companies, for example, they've said, okay, we need to have a factory here that deals with Asian demand, but we're also going to build one in the U.S. to deal with American demand.
Speaker: And we keep it completely separated so that they don't get caught up in these tensions and issues.
Speaker: On the other hand, so American, for example, can say you need to have a factory in the U.S. with these semiconductor companies.
Speaker: But on the other hand, there are also industries, like I mentioned earlier on, the Chinese are really big in making batteries for electric vehicles.
Speaker: Half of the world's supply comes from two Chinese companies.
Speaker: So it's very difficult for the rest of the world to say, well, we don't want that anymore.
Speaker: So you see that there's collaboration between companies, American auto companies that need technology,
Speaker: Chinese batteries, but then they have to think about how they construct themselves.
Speaker: Do they want a joint venture or just a licensing agreement?
Speaker: How is that going to work out?
Speaker: And then, of course, you get into the legal issues of exchange of information and technology, these sort of things.
Speaker: Very complex, but fascinating, of course.
Speaker: to look at it.
Speaker: It's fascinating though as an economist my heart bleeds a little bit because of course that reduces overall efficiency for the world economy right you build up two different ecosystems for technology we have two different standards that develop and we're doubling up on investment really the history of the world economy and for Asia was really that the integration of Asia into a global economy led to prosperity and the risk is here we see that unravel at the margin if we really go into this full-blown
Speaker: Absolutely.
Speaker: I understand your heart is bleeding as an economist there, but as an equity strategist, I also look at it from another side because it creates opportunities for engineers that live in Malaysia or car component workers who live in Thailand and Indonesian consumers that work in nickel mines or are getting involved in the EV supply chain as well.
Speaker: And there are opportunities for growth in those markets as well.
Speaker: It allows these markets to become part of the regional sector
Speaker: ecosystem.
Speaker: And that's why, Harold, economists are glass half empty people and equity strategists are glass half full people.
Speaker: And this is, I think, a good example.
Speaker: Absolutely right.
Speaker: There's also, of course, a fourth dimension here where geopolitics impacts economics, finance, and that's capital flows potentially.
Speaker: And, you know, we are in a region where we import a lot of capital, we export a lot of capital, of course, matters.
Speaker: How does it impact equity markets?
Speaker: Well, it has an important impact on equity markets.
Speaker: I think we've seen capital flows starting to shift, in particular with regards to equity markets, stepwise.
Speaker: Initially, certain American companies were not allowed to invest in certain Chinese companies anymore.
Speaker: So pension funds could not allow you to invest in a list of Chinese companies anymore.
Speaker: Certain investments cannot be made.
Speaker: We spoke about this to a certain extent already.
Speaker: You can't invest in
Speaker: for example in manufacturing and chip production in china but what we now also see is that some of the larger pension funds in the us are basically reducing their exposure to china not because they don't want to be there but say structurally china is a large part over the of the overall universe that we invest in but we're only going to invest in half of
Speaker: what it normally would be.
Speaker: So they're down weighting China in their, even their future investment flows.
Speaker: That is, you could say, negative.
Speaker: I mean, these people are not investing in China as much anymore.
Speaker: But on the other hand, there will be other investors around the world, Middle Eastern investors, for example, that are coming in.
Speaker: So it's also shifting these capital flows across the Asian equity markets.
Speaker: And that is difficult for us to understand what the new sort of equilibrium will be, what sort of
Speaker: dynamics that will have impact on the dynamics in the stock markets will have.
Speaker: So we have to take a close look at that.
Speaker: And here's perhaps the biggest risk that we see geopolitics impact capital flows in the future, because we have seen the impact on trade.
Speaker: We have seen the impact on technology.
Speaker: But I think it's fair to say that on the capital flow side, it's not yet been that disruptive.
Speaker: And of course, that might be a risk that we need to monitor, I think, very, very closely.
Speaker: I believe so, because we don't know how this relationship will further unfold, but yes, in capital flows we could see more.
Speaker: And then there could be other industries that we haven't even spoken about and are not on the radar screen yet.
Speaker: Think about food, think about biotech, where regulations could come out in the future as well.
Speaker: And we'll just have to wait and see how they will develop.
Speaker: And that means for you and me as analysts that we'll have plenty to do in years to come.
Speaker: Absolutely.
Speaker: So Harold, when you're not thinking about geopolitics and financial markets, what's on your mind these days?
Speaker: Well, funnily enough, it is a bit of geopolitics, I'll tell you.
Speaker: So, as you know, Fred, one of my hobbies is Indonesian history.
Speaker: I'm actually going to take a day off.
Speaker: I want to really dive deep in a particular episode of Indonesian history in the 14th century.
Speaker: There was an empire that grew, Majapahit Empire.
Speaker: There was a particular king that ruled, Kertanagara was his name.
Speaker: And he needed to defend what is now called Indonesia.
Speaker: That idea didn't exist yet, but maybe actually sprung from that particular moment because geopolitics was on his mind.
Speaker: Kublai Khan was moving into Southeast Asia and he was wondering, are they going to go into Sumatra?
Speaker: Are they going to come to Java?
Speaker: How are we going to defend?
Speaker: How are we going to help the Vietnamese?
Speaker: We're now the Vietnamese and the Thai.
Speaker: So it's a very interesting episode
Speaker: Yeah, and for me to understand how these people lived, as you know, I went there to see these temples and the art to get a bit of an idea, what they dressed, what they ate and stuff like that.
Speaker: And for that, you need just to sit down and take a look at the pictures that I made to understand what went on in those centuries.
Speaker: What about you, Fred?
Speaker: Well, for you, it's 14th century Javanese art that's on your mind.
Speaker: For me, it's a more modern version of that.
Speaker: So generative AI still makes headlines.
Speaker: You can't escape that.
Speaker: Most modern technology.
Speaker: In fact, one of our colleagues, Mark McDonald, published a fantastic report on the sector over the years.
Speaker: But what got me really excited is apparently you can now use it as well.
Speaker: When you look at a piece of art, it can tell you whether it's objectively high quality art or not.
Speaker: And I just look forward to the day when I walked through a museum with my wife, we argue over painting and just pull up my camera and the AI would tell me whether this is indeed a piece of art that's worth, you know, hanging on your wall or not.
Speaker: And that's it for another week, folks.
Speaker: Always a pleasure to have you with us here under the Banyan Tree.
Speaker: We'll be back again next week putting Asian markets and economics in context.
Speaker: Till then, take care and all the best.
Speaker: Cheers.
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Speaker: We hope you enjoyed the discussion.
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