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Under the Banyan Tree - Navigating inflation as markets move upwards
31 Plays2 years ago
Fred and Herald discuss how expectations of lower US interest rates are supporting Asian equities. Paul Bloxham joins the conversation from Sydney to talk inflation challenges in Australia and New Zealand, as well as the global commodities outlook. Disclaimer: https://www.research.hsbc.com/R/51/TFTC7pF 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 and Subscription Encouragement
00:00:00
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.
00:00:11
Speaker
Make sure you're subscribed to stay up to date with new episodes.
00:00:14
Speaker
Thanks for listening.
00:00:15
Speaker
And now onto today's show.
Introduction to Fred Newman and Harold van der Linde
00:00:26
Speaker
Hello and welcome to Under the Banyan Tree.
00:00:28
Speaker
We're back after the Lunar New Year break and ready to put Asian markets and economics in context.
00:00:33
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I'm Fred Newman, Chief Asian Economist at HSBC.
00:00:36
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And I'm Harold van der Linde, Head of Asian Equity Strategy.
Market Improvements and Macro Outlook for Australia and New Zealand
00:00:39
Speaker
Markets are in much better shape than they were for a large part of last year.
00:00:44
Speaker
We'll discuss why that is and if this momentum can continue over the course of the next couple of months or quarters.
00:00:49
Speaker
And we'll be talking to Paul Bloxham, our chief economist down under, about the macro outlook for Australia and New Zealand.
00:00:55
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.
00:01:03
Speaker
That definitely warrants our attention.
00:01:06
Speaker
All that and more coming up right here on The Banyan Tree.
00:01:15
Speaker
So Fred, we're now a month into 2023.
00:01:19
Speaker
Let's just take a look back at what happened with markets and economies since the beginning of this year.
00:01:23
Speaker
And let's really start with the global picture here.
Inflation Trends and Federal Reserve's Decisions
00:01:26
Speaker
What is the big thing that's happened as an economist?
00:01:28
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?
00:01:36
Speaker
In particularly advanced economies, US, Europe, you see the first signs of cooling price pressures.
00:01:43
Speaker
And so the market is...
00:01:45
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.
00:01:55
Speaker
And that, of course, provides some relief for hard-pressed markets.
00:02:01
Speaker
And whether the Fed then really can...
00:02:03
Speaker
hold raising interest rates, it really comes down to wage pressures, for example, in the US.
00:02:09
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.
00:02:17
Speaker
So what does that mean, for example, for
US Interest Rate Pause and Emerging Markets Benefits
00:02:20
Speaker
bond yields?
00:02:20
Speaker
That's something that I look at.
00:02:22
Speaker
That's a discount rate, as we call it in equities, but that's important to us.
00:02:25
Speaker
What is the market's expectation of interest rates?
00:02:28
Speaker
And what does that mean, for example, for the dollar as well?
00:02:31
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.
00:02:44
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.
00:02:52
Speaker
Now, what's important for global financial markets is the fact that the U.S. dollar is no longer surging.
00:02:58
Speaker
In fact, we've seen it weaken
00:03:00
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.
00:03:19
Speaker
So
00:03:19
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.
00:03:32
Speaker
Yeah, so to keep it very simple, effectively, we're saying, listen...
00:03:35
Speaker
interest rates won't go that much higher, probably in the US.
00:03:38
Speaker
So the dollar is not as attractive anymore.
00:03:40
Speaker
And therefore, relatively speaking, Asian currencies are a little bit more attractive, right?
China's Economic Reopening and Global Impact
00:03:45
Speaker
Now, of course, the big story in the region is the reopening of China.
00:03:48
Speaker
We've spoken about this already, but how is that impacting the story that you just mentioned?
00:03:53
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.
00:04:02
Speaker
So at least it's one area where you see demand coming back gradually over the course of this year.
00:04:08
Speaker
Now, that's the positive.
00:04:09
Speaker
Slightly on the more challenging aspect is that China's reopening could also increase the demand for commodities.
00:04:16
Speaker
For example, and Paul Bloxham, our chief global economist for commodities, we'll talk a bit more about that later in the podcast.
00:04:22
Speaker
But really the basic story here is that the demand for commodities could change.
00:04:28
Speaker
slow down the disinflation process in other parts of the world and thereby prevent these central banks from cutting interest rates.
00:04:37
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That way it complicates the exit strategy for the Fed, for the ECB and other major central banks.
00:04:42
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And that, of course, is something we need to weigh as well.
00:04:46
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yes, positive, we get growth, but also it makes the inflation story a bit more tricky over the course of the year.
00:04:52
Speaker
And therefore, you know, don't just discount volatility quite yet.
00:04:56
Speaker
It might still be a bit of a bumpy year.
00:04:59
Speaker
But Harold, we've seen obviously a lot of talk of reopening.
00:05:03
Speaker
We talked about this on the podcast here.
00:05:06
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How was that reflected at the start of the year and how equity markets in Greater China traded?
Asian Equity Market Dynamics
00:05:11
Speaker
Well, it's good to start at Greater China.
00:05:14
Speaker
The best equity market in the Asian region, by the way, is Laos.
00:05:18
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It's a very tiny market, it's up almost 30%.
00:05:21
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The big market, of course, is China.
00:05:24
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The mainland Chinese stocks listed here in Hong Kong
00:05:27
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they have performed the best.
00:05:29
Speaker
That market is up almost 15%, just around 40% as we speak.
00:05:33
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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.
00:05:42
Speaker
The main Chinese companies listed in Shanghai, they're up about, say, 6% or so.
00:05:46
Speaker
So that's...
00:05:48
Speaker
Good performance, but not as good as those listed here in Hong Kong.
00:05:52
Speaker
So there's a bit of a difference there.
00:05:53
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And if you go deeper into that market, the sectors that have done well is consumer sectors.
00:05:59
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It is healthcare and it is tech because tech names, large internet names, they benefit from lower interest rates.
00:06:06
Speaker
They're very sensitive to that.
00:06:08
Speaker
So yeah, it's what you've told us filters through in the Chinese equity markets very nicely.
00:06:14
Speaker
Now, the equity markets in Greater China, of course, one thing.
00:06:17
Speaker
What about outside the region?
00:06:18
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.
00:06:27
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But what happened in the rest of the region?
00:06:29
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We have large equity markets from Korea to India to Southeast Asia.
00:06:34
Speaker
What happened there over at the start of the year?
Investment Shifts to Mainland Chinese Companies
00:06:36
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.
00:06:46
Speaker
That's positive for Korea.
00:06:47
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So the Korean market has responded very positive to that.
00:06:50
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Korea is up 10% year to date.
00:06:52
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So it's a big move.
00:06:53
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But then the rest of the region has not performed as well.
00:06:58
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India is actually down 1% and most Asian markets are up 1% to 2%, not so much either.
00:07:05
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And that was the part of the region last year that has performed so well.
00:07:09
Speaker
So what is happening is that because of the reopening story and because of
00:07:13
Speaker
What happens with global interest rates?
00:07:15
Speaker
People say we need to get more exposure to those mainland Chinese companies listed in Hong Kong.
00:07:20
Speaker
And what do they do?
00:07:21
Speaker
They sell the ending exposure.
00:07:23
Speaker
They sell, for example, the Indonesia exposure.
00:07:25
Speaker
So you see kind of institutional funds reshuffling their portfolios here.
00:07:29
Speaker
You mentioned institutional funds.
00:07:32
Speaker
How do we think about investor funds globally?
00:07:35
Speaker
Are they coming back into Asia?
US Dollar Weakness and Capital Flow into Asian Markets
00:07:38
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?
00:07:46
Speaker
What do you see on fund flows?
00:07:48
Speaker
And also, is there a retail investor that's starting to come back as well in some of these markets?
00:07:52
Speaker
Well, yeah, the retail investor is interesting.
00:07:54
Speaker
But before I go there, let me answer the first part of your question.
00:07:58
Speaker
It does appear that new money is coming into the region.
00:08:02
Speaker
So there's additional money allocated to Asia.
00:08:06
Speaker
Disproportioned large amount of money go to, say, the mainland Chinese companies listed in Hong Kong.
00:08:11
Speaker
Because the problem for these funds is that as that market goes up, it's up 15%.
00:08:16
Speaker
If you were only a couple of days late, you get caught out.
00:08:20
Speaker
You need to...
00:08:21
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.
00:08:29
Speaker
So people are really trying to catch up.
00:08:31
Speaker
That's why they're also within Asia trying to reallocate as much as possible to mainland Chinese.
00:08:35
Speaker
So that is happening with the global institutional funds.
00:08:38
Speaker
The retail investor, something very different is going on.
00:08:43
Speaker
They were massive big traders across the whole of the region in 2022.
00:08:48
Speaker
But in the latter part of last year, they really cut down on trading.
00:08:53
Speaker
In some markets, it went down 50, 60 percent.
00:08:56
Speaker
In Malaysia, even 80 percent.
00:08:58
Speaker
So they moved out of the market, at least on their own.
00:09:02
Speaker
They didn't trade as much on their own.
00:09:03
Speaker
What they did is they gave it to the fund managers, the institutional fund managers, or they bought ETFs.
00:09:08
Speaker
So they are reallocating more money to the professional fund management industry.
00:09:12
Speaker
Maybe having figured out that actually selecting stocks is not as easy as they thought.
00:09:17
Speaker
But as the markets come back, they might well reshuffle it again.
00:09:20
Speaker
So there's a lot of moving parts in the whole of the region that is impacting all these markets at the moment.
00:09:25
Speaker
It's really fascinating to look at.
00:09:26
Speaker
Yeah, and of course, in Asia, the retail investor is still a key, key potent force in a lot of these markets.
00:09:32
Speaker
Over 60% of all holdings, they are the biggest investor.
00:09:35
Speaker
Yeah.
00:09:35
Speaker
In the region.
00:09:36
Speaker
And they're often quite savvy and quick on their feet in Asia.
00:09:40
Speaker
I think we're going to take a quick break here.
00:09:42
Speaker
It's a good time to take a break.
00:09:44
Speaker
And when we return, we'll be joined by Paul Bloxham, our chief economist for Australia, New Zealand and global commodities.
Australia's Economic Gains from China Reopening
00:10:00
Speaker
Well, welcome, Paul, back to the podcast Under the Banyan Tree.
00:10:03
Speaker
I gather it's sunny in Australia and everyone is heading to the beach.
00:10:08
Speaker
G'day.
00:10:08
Speaker
It's great to be here.
00:10:09
Speaker
Thanks, Fred.
00:10:10
Speaker
And yes, it's summer down here and rather warm in Sydney at the moment.
00:10:14
Speaker
Well, from Chile, Hong Kong, we wish it was warm here as well.
00:10:18
Speaker
But Paul, talking about mainland China's reopening, it's a big theme in markets right now.
00:10:25
Speaker
How is that going to impact the Australian economy?
00:10:28
Speaker
How much of a boost is that going to deliver to Australia, do you think, over the coming year?
00:10:33
Speaker
Well, it's definitely a positive story.
00:10:35
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.
00:10:44
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.
00:10:53
Speaker
And that should be somewhat supportive of the traded side of the Australian economy.
00:10:57
Speaker
But the offset for Australia is that we've got a pretty decent sized inflation challenge.
00:11:02
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.
00:11:08
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.
00:11:16
Speaker
So we've got both of these things running in different directions.
00:11:18
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.
00:11:28
Speaker
The RBA needs growth to slow to get inflation to head back to target.
00:11:32
Speaker
Hey, Paul, Harold here.
00:11:35
Speaker
Quick question.
00:11:35
Speaker
Are there Australians out there buying houses or is that that housing market?
00:11:39
Speaker
Is that is that gone from boom to bust?
00:11:43
Speaker
The housing market is definitely cooling quite rapidly.
00:11:45
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.
00:11:53
Speaker
House prices started to come down even at that point in time.
00:11:55
Speaker
So
00:11:56
Speaker
We're down nationally by almost 10% for house prices from the peak.
00:12:01
Speaker
The biggest declines are in Sydney and in Melbourne, the two big cities.
00:12:04
Speaker
The smaller cities have fared a bit better.
00:12:06
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.
00:12:14
Speaker
Yet there's more of that to come.
00:12:15
Speaker
And we do expect the RBA is likely to deliver a little bit more tightening as well.
00:12:20
Speaker
So peak to trough, we've got in mind house prices will come down about 15% or 16%.
00:12:24
Speaker
That's what we've got in mind.
00:12:27
Speaker
So there's a bit more yet to come, a bit more housing cooling.
00:12:30
Speaker
We don't think this is going to be something that really tests
00:12:33
Speaker
Financial stability.
00:12:34
Speaker
We think the Australian banking system is really super strong.
00:12:37
Speaker
But we are looking at this as one of the channels, the key channels that will slow the economy down.
00:12:43
Speaker
And as I said earlier, that's what the RBA needs.
00:12:45
Speaker
They need the economy to slow down.
00:12:47
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.
00:12:56
Speaker
So, Paul, you already referenced the Reserve Bank of Australia, the Central Bank.
00:13:01
Speaker
They have a tough job ahead, don't they?
00:13:03
Speaker
You referenced an inflation challenge on the one hand.
00:13:06
Speaker
You then also referenced the fact that the housing market is cooling in response to higher interest rates.
00:13:11
Speaker
How much can the RBA still push on interest rates?
00:13:15
Speaker
How much would you expect them perhaps to tighten further?
00:13:19
Speaker
And then also next door,
New Zealand's Inflation and Potential Recession
00:13:21
Speaker
New Zealand, massive housing boom and bust as well, right?
00:13:25
Speaker
Absolutely.
00:13:26
Speaker
Both these central banks have got really big challenges and it's about high inflation and what to do about it.
00:13:31
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.
00:13:37
Speaker
We think the RBA will go a couple more times.
00:13:39
Speaker
We think the RBNZ has got another rate hike ahead of it.
00:13:43
Speaker
And that is going to, in Australia,
00:13:45
Speaker
slow the economy down.
00:13:46
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.
00:13:58
Speaker
And that's what we've got in mind for this year.
00:13:59
Speaker
We think the New Zealand economy will tip into a recession this year.
00:14:03
Speaker
largely led by a very large correction in the housing market that's going on.
00:14:07
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.
00:14:16
Speaker
We think they will also be one of the first to start cutting interest rates too.
00:14:20
Speaker
Paul, I know you're looking at the economies down under, but you're also looking at global commodities.
00:14:27
Speaker
What is the reopening of China?
00:14:29
Speaker
How does that impact global commodities, generally speaking?
Commodity Demand and Price Supports from China
00:14:33
Speaker
Well, again, it's certainly a positive force.
00:14:35
Speaker
China is a dominant driver of demand for a whole range of commodities.
00:14:38
Speaker
For a lot of the metals, it consumes over half of global supply of those commodities.
00:14:44
Speaker
As the mainland China reopens, it'll lift demand for those things.
00:14:47
Speaker
And that's already being seen in some of the spot prices for those metals prices.
00:14:51
Speaker
And as we know,
00:14:53
Speaker
commodity prices were already very high.
00:14:55
Speaker
They've risen over the past couple of years.
00:14:57
Speaker
A lot of the reason for that was to do with limited supply.
00:15:01
Speaker
What we've been talking about is a super squeeze on the supply side.
00:15:06
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.
00:15:14
Speaker
We are not investing as much in capacity to produce oil, gas and coal.
00:15:19
Speaker
And so that's constraining the supply of those products on purpose, of course, to make the energy transition.
00:15:25
Speaker
But of course, that also means the prices of those products are remaining higher.
00:15:29
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.
00:15:37
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.
00:15:47
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.
00:15:58
Speaker
The way you describe this, central banks tightening further than maybe easing this year.
00:16:04
Speaker
We see commodity prices potentially a bid coming through there as well.
00:16:08
Speaker
The China was opening.
00:16:10
Speaker
Is there more volatility in the works here?
00:16:13
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?
00:16:21
Speaker
I think that this year could very well turn out to be quite a volatile year yet.
00:16:26
Speaker
We're still yet to see the full effect of the tightening of monetary policy that's been delivered globally.
00:16:32
Speaker
And of course, in the two countries that I cover, there's more tightening yet to come.
00:16:36
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.
00:16:46
Speaker
That's certainly on the cards.
00:16:48
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.
00:16:59
Speaker
So how quickly inflation actually retraces all the way back to central bank's targets
00:17:04
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.
Global Interest Rate Challenges
00:17:13
Speaker
And in fact, if we look across the world, we've got very few countries cutting rates because inflation is just too elevated.
00:17:18
Speaker
And so that's going to create other challenges too.
00:17:30
Speaker
So that was Paul Bloxham, our chief economist for Australia, New Zealand, and for global commodities as well.
00:17:37
Speaker
Harold, it's the start of the year of the rabbit.
00:17:39
Speaker
We're just coming out of the Lunar New Year holidays here in the region.
00:17:43
Speaker
It's always a nice time of the year.
00:17:45
Speaker
A lot of tradition, of course.
00:17:47
Speaker
You meet family members.
00:17:49
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.
00:17:55
Speaker
Shops are even closed.
00:17:57
Speaker
But it's a year of the rabbit.
00:17:59
Speaker
Actually, technically speaking, it's the year of the water rabbit.
00:18:01
Speaker
There are actually five different rabbits a year, five different ones.
00:18:06
Speaker
Yeah.
00:18:07
Speaker
And the last one we had a water rabbit year was 1963.
00:18:12
Speaker
So that was the year when Lawrence of Arabia won the Oscars.
00:18:16
Speaker
Funny, I've just been watching that movie with myself.
00:18:18
Speaker
You just watched that, yes.
00:18:19
Speaker
It's a fantastic movie even after what is now 40, 60 years later, right?
00:18:24
Speaker
Yeah, and it's a year where many other things occurred.
00:18:27
Speaker
1963 was a key year for global politics, of course.
00:18:30
Speaker
Charles de Gaulle actually vetoed the UK entry into the European Union.
00:18:34
Speaker
I don't know whether he saw Brexit coming already in 1963.
00:18:39
Speaker
And then, of course, also, it was actually a year when Malaysia and Singapore joined in a federation, became actually one state.
00:18:47
Speaker
Of course, a couple of years later, then Singapore drifted into its own lane again.
00:18:52
Speaker
But it was also quite an eventful year here in Asia.
00:18:57
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.
00:19:05
Speaker
And hopefully good movies as well, as we've seen in 1963.
00:19:08
Speaker
Good movies, indeed.
Conclusion and Subscription Promotion
00:19:10
Speaker
We're going to have to leave it there, ladies and gents.
00:19:13
Speaker
Thanks, as always, for joining us here under the banyan tree.
00:19:16
Speaker
Remember, you can catch our sister podcast, The Macro Viewpoint and The ESG Brief, wherever you're listening to this podcast.
00:19:23
Speaker
We'll be back again next week, putting Asian markets and economics in context.
00:19:27
Speaker
All the best till then.
00:19:34
Speaker
Thank you for joining us at HSBC Global Viewpoint.
00:19:37
Speaker
We hope you enjoyed the discussion.
00:19:39
Speaker
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