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: Hello and welcome to Under the Banyan Tree.
Speaker: We're back after the Lunar New Year break and ready to put Asian markets and economics in context.
Speaker: I'm Fred Newman, Chief Asian Economist at HSBC.
Speaker: And I'm Harold van der Linde, Head of Asian Equity Strategy.
Speaker: Markets are in much better shape than they were for a large part of last year.
Speaker: We'll discuss why that is and if this momentum can continue over the course of the next couple of months or quarters.
Speaker: And we'll be talking to Paul Bloxham, our chief economist down under, about the macro outlook for Australia and New Zealand.
Speaker: Two economies that are worth keeping an eye on because they really reflect trends in the global economy and certainly what's going on in commodity markets.
Speaker: That definitely warrants our attention.
Speaker: All that and more coming up right here on The Banyan Tree.
Speaker: So Fred, we're now a month into 2023.
Speaker: Let's just take a look back at what happened with markets and economies since the beginning of this year.
Speaker: And let's really start with the global picture here.
Speaker: What is the big thing that's happened as an economist?
Speaker: So it feels like a big sigh of relief globally, partly because we've seen some of these inflation numbers finally come down, right?
Speaker: In particularly advanced economies, US, Europe, you see the first signs of cooling price pressures.
Speaker: And so the market is...
Speaker: kind of breathing a sigh of relief because we expect now the Federal Reserve not necessarily to slam the brakes further, to kind of ease off the tightening.
Speaker: And that, of course, provides some relief for hard-pressed markets.
Speaker: And whether the Fed then really can...
Speaker: hold raising interest rates, it really comes down to wage pressures, for example, in the US.
Speaker: But I think that's been one of the key stabilizing factors that the market is now saying, you know what, the price surge that we've seen last year is gradually coming to an end.
Speaker: So what does that mean, for example, for bond yields?
Speaker: That's something that I look at.
Speaker: That's a discount rate, as we call it in equities, but that's important to us.
Speaker: What is the market's expectation of interest rates?
Speaker: And what does that mean, for example, for the dollar as well?
Speaker: So in terms of the market interest rates, long-term interest rates have actually come down over recent months, and the market is pricing in almost a recession in the U.S. We have an inverted yield curve that has long-term interest rates below short-term interest rates.
Speaker: But of course, the market is looking at the long-term funding costs when it comes to markets, and I think that decline helps perhaps the equity space.
Speaker: Now, what's important for global financial markets is the fact that the U.S. dollar is no longer surging.
Speaker: In fact, we've seen it weaken
Speaker: against some key currencies because the moment you expect the Fed to go on hold, you actually see a stabilization in the US dollar and that provides tremendous relief to particularly emerging markets where there's been hard pressed because of capital outflows over the past year and you see some of these flows now trickling back.
Speaker: So
Speaker: Yes, there's a lot of talk about China's reopening, but really, if you think about from a global market's perspective, the fact that the dollar is now stabilizing, that certainly provides stability and anchor for global financial markets.
Speaker: Yeah, so to keep it very simple, effectively, we're saying, listen...
Speaker: interest rates won't go that much higher, probably in the US.
Speaker: So the dollar is not as attractive anymore.
Speaker: And therefore, relatively speaking, Asian currencies are a little bit more attractive, right?
Speaker: Now, of course, the big story in the region is the reopening of China.
Speaker: We've spoken about this already, but how is that impacting the story that you just mentioned?
Speaker: Well, the China reopening actually, of course, is positive in the sense that it provides economic growth at a time when the global economy is decelerating.
Speaker: So at least it's one area where you see demand coming back gradually over the course of this year.
Speaker: Now, that's the positive.
Speaker: Slightly on the more challenging aspect is that China's reopening could also increase the demand for commodities.
Speaker: For example, and Paul Bloxham, our chief global economist for commodities, we'll talk a bit more about that later in the podcast.
Speaker: But really the basic story here is that the demand for commodities could change.
Speaker: slow down the disinflation process in other parts of the world and thereby prevent these central banks from cutting interest rates.
Speaker: That way it complicates the exit strategy for the Fed, for the ECB and other major central banks.
Speaker: And that, of course, is something we need to weigh as well.
Speaker: yes, positive, we get growth, but also it makes the inflation story a bit more tricky over the course of the year.
Speaker: And therefore, you know, don't just discount volatility quite yet.
Speaker: It might still be a bit of a bumpy year.
Speaker: But Harold, we've seen obviously a lot of talk of reopening.
Speaker: We talked about this on the podcast here.
Speaker: How was that reflected at the start of the year and how equity markets in Greater China traded?
Speaker: Well, it's good to start at Greater China.
Speaker: The best equity market in the Asian region, by the way, is Laos.
Speaker: It's a very tiny market, it's up almost 30%.
Speaker: The big market, of course, is China.
Speaker: The mainland Chinese stocks listed here in Hong Kong
Speaker: they have performed the best.
Speaker: That market is up almost 15%, just around 40% as we speak.
Speaker: And that makes sense if I listen to your story, because those stocks benefit from the lower interest rates in the US, that's filter-free here in Hong Kong.
Speaker: The main Chinese companies listed in Shanghai, they're up about, say, 6% or so.
Speaker: So that's...
Speaker: Good performance, but not as good as those listed here in Hong Kong.
Speaker: So there's a bit of a difference there.
Speaker: And if you go deeper into that market, the sectors that have done well is consumer sectors.
Speaker: It is healthcare and it is tech because tech names, large internet names, they benefit from lower interest rates.
Speaker: They're very sensitive to that.
Speaker: So yeah, it's what you've told us filters through in the Chinese equity markets very nicely.
Speaker: Now, the equity markets in Greater China, of course, one thing.
Speaker: What about outside the region?
Speaker: Now, you mentioned Laos, and I must confess, I didn't keep my eye on Laos Stock Exchange, but it's very impressive, 30% increase here today.
Speaker: But what happened in the rest of the region?
Speaker: We have large equity markets from Korea to India to Southeast Asia.
Speaker: What happened there over at the start of the year?
Speaker: So you mentioned earlier on that the risk of recession in the U.S. is maybe not as big anymore or maybe something that markets are playing with.
Speaker: That's positive for Korea.
Speaker: So the Korean market has responded very positive to that.
Speaker: Korea is up 10% year to date.
Speaker: So it's a big move.
Speaker: But then the rest of the region has not performed as well.
Speaker: India is actually down 1% and most Asian markets are up 1% to 2%, not so much either.
Speaker: And that was the part of the region last year that has performed so well.
Speaker: So what is happening is that because of the reopening story and because of
Speaker: What happens with global interest rates?
Speaker: People say we need to get more exposure to those mainland Chinese companies listed in Hong Kong.
Speaker: And what do they do?
Speaker: They sell the ending exposure.
Speaker: They sell, for example, the Indonesia exposure.
Speaker: So you see kind of institutional funds reshuffling their portfolios here.
Speaker: You mentioned institutional funds.
Speaker: How do we think about investor funds globally?
Speaker: Are they coming back into Asia?
Speaker: Because last year, because a strong dollar kind of sucked capital back into the United States, is that now coming back as the dollar weakens?
Speaker: What do you see on fund flows?
Speaker: And also, is there a retail investor that's starting to come back as well in some of these markets?
Speaker: Well, yeah, the retail investor is interesting.
Speaker: But before I go there, let me answer the first part of your question.
Speaker: It does appear that new money is coming into the region.
Speaker: So there's additional money allocated to Asia.
Speaker: Disproportioned large amount of money go to, say, the mainland Chinese companies listed in Hong Kong.
Speaker: Because the problem for these funds is that as that market goes up, it's up 15%.
Speaker: If you were only a couple of days late, you get caught out.
Speaker: You need to...
Speaker: In order to really benefit from that, you need to have more than what the average benchmark rating is, as we call it, in that market.
Speaker: So people are really trying to catch up.
Speaker: That's why they're also within Asia trying to reallocate as much as possible to mainland Chinese.
Speaker: So that is happening with the global institutional funds.
Speaker: The retail investor, something very different is going on.
Speaker: They were massive big traders across the whole of the region in 2022.
Speaker: But in the latter part of last year, they really cut down on trading.
Speaker: In some markets, it went down 50, 60 percent.
Speaker: In Malaysia, even 80 percent.
Speaker: So they moved out of the market, at least on their own.
Speaker: They didn't trade as much on their own.
Speaker: What they did is they gave it to the fund managers, the institutional fund managers, or they bought ETFs.
Speaker: So they are reallocating more money to the professional fund management industry.
Speaker: Maybe having figured out that actually selecting stocks is not as easy as they thought.
Speaker: But as the markets come back, they might well reshuffle it again.
Speaker: So there's a lot of moving parts in the whole of the region that is impacting all these markets at the moment.
Speaker: It's really fascinating to look at.
Speaker: Yeah, and of course, in Asia, the retail investor is still a key, key potent force in a lot of these markets.
Speaker: Over 60% of all holdings, they are the biggest investor.
Speaker: Yeah.
Speaker: In the region.
Speaker: And they're often quite savvy and quick on their feet in Asia.
Speaker: I think we're going to take a quick break here.
Speaker: It's a good time to take a break.
Speaker: And when we return, we'll be joined by Paul Bloxham, our chief economist for Australia, New Zealand and global commodities.
Speaker: Well, welcome, Paul, back to the podcast Under the Banyan Tree.
Speaker: I gather it's sunny in Australia and everyone is heading to the beach.
Speaker: G'day.
Speaker: It's great to be here.
Speaker: Thanks, Fred.
Speaker: And yes, it's summer down here and rather warm in Sydney at the moment.
Speaker: Well, from Chile, Hong Kong, we wish it was warm here as well.
Speaker: But Paul, talking about mainland China's reopening, it's a big theme in markets right now.
Speaker: How is that going to impact the Australian economy?
Speaker: How much of a boost is that going to deliver to Australia, do you think, over the coming year?
Speaker: Well, it's definitely a positive story.
Speaker: The reopening of mainland China is definitely supportive of demand for commodities, particularly the stabilization we're expecting to see in the housing market there.
Speaker: And in addition to that, of course, the reopened border means that we're likely to see a pickup in services exports, more students, more tourists coming to Australia.
Speaker: And that should be somewhat supportive of the traded side of the Australian economy.
Speaker: But the offset for Australia is that we've got a pretty decent sized inflation challenge.
Speaker: The RBA is leaning into that by lifting its interest rates, and we think they've probably got to lift them a little bit further yet.
Speaker: And, of course, that's weakening the domestic side of the economy, cooling the housing market, and we think it's likely to weaken the consumer as well.
Speaker: So we've got both of these things running in different directions.
Speaker: I think the China story is one of the key reasons why we think Australia will get through without a recession, even though we are expecting that growth will slow this year.
Speaker: The RBA needs growth to slow to get inflation to head back to target.
Speaker: Hey, Paul, Harold here.
Speaker: Quick question.
Speaker: Are there Australians out there buying houses or is that that housing market?
Speaker: Is that is that gone from boom to bust?
Speaker: The housing market is definitely cooling quite rapidly.
Speaker: And in fact, it really turned around as soon as the RBA started to lift its policy rate around May of last year, May of 22.
Speaker: House prices started to come down even at that point in time.
Speaker: So
Speaker: We're down nationally by almost 10% for house prices from the peak.
Speaker: The biggest declines are in Sydney and in Melbourne, the two big cities.
Speaker: The smaller cities have fared a bit better.
Speaker: But I don't think the full effect yet, even of the tightening the RBA has already delivered, the 300 basis points, has fed through to the housing market.
Speaker: Yet there's more of that to come.
Speaker: And we do expect the RBA is likely to deliver a little bit more tightening as well.
Speaker: So peak to trough, we've got in mind house prices will come down about 15% or 16%.
Speaker: That's what we've got in mind.
Speaker: So there's a bit more yet to come, a bit more housing cooling.
Speaker: We don't think this is going to be something that really tests
Speaker: Financial stability.
Speaker: We think the Australian banking system is really super strong.
Speaker: But we are looking at this as one of the channels, the key channels that will slow the economy down.
Speaker: And as I said earlier, that's what the RBA needs.
Speaker: They need the economy to slow down.
Speaker: If we're going to get inflation down from 7.8, where it is right now, back down towards the RBA's 2% to 3% target over time.
Speaker: So, Paul, you already referenced the Reserve Bank of Australia, the Central Bank.
Speaker: They have a tough job ahead, don't they?
Speaker: You referenced an inflation challenge on the one hand.
Speaker: You then also referenced the fact that the housing market is cooling in response to higher interest rates.
Speaker: How much can the RBA still push on interest rates?
Speaker: How much would you expect them perhaps to tighten further?
Speaker: And then also next door, New Zealand, massive housing boom and bust as well, right?
Speaker: Absolutely.
Speaker: Both these central banks have got really big challenges and it's about high inflation and what to do about it.
Speaker: They've taken a lot of action already, as we've already discussed, but we think they've both got to lift interest rates further yet.
Speaker: We think the RBA will go a couple more times.
Speaker: We think the RBNZ has got another rate hike ahead of it.
Speaker: And that is going to, in Australia,
Speaker: slow the economy down.
Speaker: And unfortunately, in New Zealand, we think they've had such a big inflation challenge and it's gotten so embedded in the wage setting process and in inflation expectations that we think the RBNZ is going to have to deliver a recession.
Speaker: And that's what we've got in mind for this year.
Speaker: We think the New Zealand economy will tip into a recession this year.
Speaker: largely led by a very large correction in the housing market that's going on.
Speaker: And with that in mind, they were the first central bank, certainly the first in the G10 countries, to have lifted interest rates back in 2021.
Speaker: We think they will also be one of the first to start cutting interest rates too.
Speaker: Paul, I know you're looking at the economies down under, but you're also looking at global commodities.
Speaker: What is the reopening of China?
Speaker: How does that impact global commodities, generally speaking?
Speaker: Well, again, it's certainly a positive force.
Speaker: China is a dominant driver of demand for a whole range of commodities.
Speaker: For a lot of the metals, it consumes over half of global supply of those commodities.
Speaker: As the mainland China reopens, it'll lift demand for those things.
Speaker: And that's already being seen in some of the spot prices for those metals prices.
Speaker: And as we know,
Speaker: commodity prices were already very high.
Speaker: They've risen over the past couple of years.
Speaker: A lot of the reason for that was to do with limited supply.
Speaker: What we've been talking about is a super squeeze on the supply side.
Speaker: The Russia-Ukraine event and the constraint that's delivered in terms of global supply of commodities, but also, and importantly, the energy transition.
Speaker: We are not investing as much in capacity to produce oil, gas and coal.
Speaker: And so that's constraining the supply of those products on purpose, of course, to make the energy transition.
Speaker: But of course, that also means the prices of those products are remaining higher.
Speaker: So there's a whole collection of forces at work to think that commodity prices, although they've come down a little bit from their peaks, probably aren't going to fall away particularly quickly.
Speaker: They're going to stay fairly elevated for quite some time because of the supply squeeze, but also because of the demand that comes from the reopening of China.
Speaker: And Paul, just listening to you, I'm kind of struck with, you know, we talked about the year of the rabbit and everybody's hoping for kind of a steady progress after the turbulence of the year of the tiger.
Speaker: The way you describe this, central banks tightening further than maybe easing this year.
Speaker: We see commodity prices potentially a bid coming through there as well.
Speaker: The China was opening.
Speaker: Is there more volatility in the works here?
Speaker: Are you worried about volatility from your perch, macroeconomic volatility for this year, or do you think we're kind of over the hump?
Speaker: I think that this year could very well turn out to be quite a volatile year yet.
Speaker: We're still yet to see the full effect of the tightening of monetary policy that's been delivered globally.
Speaker: And of course, in the two countries that I cover, there's more tightening yet to come.
Speaker: So we've still got the risk there that that tightening or the tightening that's already been delivered weakens the macro economy, but also delivers some financial shocks that we, you know, we just can't predict very easily.
Speaker: That's certainly on the cards.
Speaker: And then inflation, well, inflation starting to ease back as we've been discussing, but the reopening of mainland China is going to be a supportive force for demand, certainly for commodities it is.
Speaker: So how quickly inflation actually retraces all the way back to central bank's targets
Speaker: Well, that's a big open question, and that's going to make it harder for those central banks to be able to be reactive if the economy does weaken more, to be able to cut rates.
Speaker: And in fact, if we look across the world, we've got very few countries cutting rates because inflation is just too elevated.
Speaker: And so that's going to create other challenges too.
Speaker: So that was Paul Bloxham, our chief economist for Australia, New Zealand, and for global commodities as well.
Speaker: Harold, it's the start of the year of the rabbit.
Speaker: We're just coming out of the Lunar New Year holidays here in the region.
Speaker: It's always a nice time of the year.
Speaker: A lot of tradition, of course.
Speaker: You meet family members.
Speaker: in Hong Kong here where we currently record the podcast, of course, the city almost grinds to a halt for a couple of days.
Speaker: Shops are even closed.
Speaker: But it's a year of the rabbit.
Speaker: Actually, technically speaking, it's the year of the water rabbit.
Speaker: There are actually five different rabbits a year, five different ones.
Speaker: Yeah.
Speaker: And the last one we had a water rabbit year was 1963.
Speaker: So that was the year when Lawrence of Arabia won the Oscars.
Speaker: Funny, I've just been watching that movie with myself.
Speaker: You just watched that, yes.
Speaker: It's a fantastic movie even after what is now 40, 60 years later, right?
Speaker: Yeah, and it's a year where many other things occurred.
Speaker: 1963 was a key year for global politics, of course.
Speaker: Charles de Gaulle actually vetoed the UK entry into the European Union.
Speaker: I don't know whether he saw Brexit coming already in 1963.
Speaker: And then, of course, also, it was actually a year when Malaysia and Singapore joined in a federation, became actually one state.
Speaker: Of course, a couple of years later, then Singapore drifted into its own lane again.
Speaker: But it was also quite an eventful year here in Asia.
Speaker: So for the Year of the Rabbit, we hope somewhat less eventful politically, but hopefully, you know, steady year for markets and the economy.
Speaker: And hopefully good movies as well, as we've seen in 1963.
Speaker: Good movies, indeed.
Speaker: We're going to have to leave it there, ladies and gents.
Speaker: Thanks, as always, for joining us here under the banyan tree.
Speaker: Remember, you can catch our sister podcast, The Macro Viewpoint and The ESG Brief, wherever you're listening to this podcast.
Speaker: We'll be back again next week, putting Asian markets and economics in context.
Speaker: All the best till then.
Speaker: Thank you for joining us at HSBC Global Viewpoint.
Speaker: We hope you enjoyed the discussion.
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