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Under the Banyan Tree - A post-summer whip round the region
26 Plays9 months ago
Fred Neumann and Herald van der Linde are reunited after the summer break and have a lot to catch up on after an eventful few weeks in Asian markets and economics. Disclaimer: https://www.research.hsbc.com/R/101/np7bjfk. 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 Global Business Insights
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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Make sure you're subscribed to stay up to date with new episodes.
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Speaker
Thanks for listening.
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And now onto today's show.
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This is a podcast from HSBC Global Research, available on Apple Podcasts and Spotify.
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However you're listening, analyst notifications, disclosures and disclaimers must be viewed on the link attached to your media player.
Asian Markets Overview
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Welcome to Under the Banyan Tree, where we put Asian markets and economics in context.
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I'm Fred Newman, Chief Asia Economist here at HSBC, back in the studio with my original partner in podcasting, Head of Asian Equity Strategy, and known as the flying Dutchman, Harold van der Linde.
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That's right, Fred.
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Welcome back, and a warm welcome to all our listeners.
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It's been a long summer break, and we've got a lot of catching up to do, because you've been on a holiday.
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From wild swings in Japanese equities to ripples from central banks and leadership changes, and of course some niche historical knowledge from my ever-passionate co-host, we've got a lot to get through in the next 20 minutes.
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From HSBC Global Research in Hong Kong, you're listening to Under the Banyard Tree.
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So, Fred, over the last three weeks, I've been really hard at work here in Hong Kong.
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It's been hot here, but we have a lot of reports out.
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What have you been doing over the last three weeks, Fred?
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Well, Harold, hard at work.
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I want to see that.
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But regardless, I was around.
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I was traveling.
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And I'm quite glad I was able to switch off the phone occasionally.
Impact of Bank of Japan's Interest Rate Hike
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And I was glad because looking at financial markets, Harold, it seems like it was a bit of an event for a few weeks.
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Yeah, that's right.
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You were on a holiday, of course, when, for example, Japan was all over the place, that markets had this big wobble on a Monday and a Tuesday.
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But it went to the US, we had a US market adjustment, we had FX market adjustments.
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The yen is trading at levels that you had not seen, well, from before your holiday.
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So, yeah, a lot of things have happened.
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So what might be a good idea to actually recap where we are here at the end of summer, because you won't be the only one who's coming back from holiday.
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And let's make a tour across the region.
00:02:38
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So I know you're just back, but the yen is, what is it now?
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145?
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It's significantly stronger.
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So by the time this podcast is out, it might have moved again.
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But the main story here is the Bank of Japan came in and surprisingly to the market, though not to yours truly under the Banyan tree, actually raised interest rates.
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You were right for it, Janet.
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For a change, I was right.
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And so that surprised the market that the Bank of Japan was raising interest rates.
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And that, of course, is something that shocked the market or at least, you know, people hadn't expected that.
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The currency then gained in value very rapidly.
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And the equity market actually lost a lot of ground.
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Right.
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We saw a big, sharp correction in the equity market.
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Yeah, very odd correction, I must say.
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And I suspect that maybe some sort of automatic trading has amplified that.
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You had it on one Monday.
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The Monday, the market came back a lot.
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And then it bounced back again very quickly thereafter.
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So there's been big movements in the Japanese market.
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And then that went to the US market.
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The US market.
00:03:48
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So what's going on in the US,
Potential Fed Rate Cuts and U.S. Dollar Implications
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Fred?
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Well, here, too, you had a bit of a central bank-led story, if you will.
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Not that the Federal Reserve made a decision, but there was economic data that came out in the U.S. that suggested that the Fed may, after all, cut interest rates, or at least the likelihood was rising.
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And that, of course, impacted the U.S. dollar and led to quite a bit of volatility then across markets.
00:04:16
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But I gather also the equity market in the U.S. took it on the chin a little bit.
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Yeah, that's right.
00:04:21
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But there's something going on in the U.S. market, which I think is important for Asia as well.
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And that is that the AI stocks, the artificial intelligence stocks, they were already trending lower.
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We've seen that some of the leading companies in the U.S., they came up with results that's already like a couple of weeks or maybe a month or over a month ago or so, or with indications.
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And the market didn't respond to that.
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So that added in Asia to that sort of
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I would say a bit of malaise that we've had in the artificial intelligence talks.
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And that's, of course, in particular in Taiwan and in Korea.
AI Stocks Performance in Asia
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So these markets had another additional dynamic at play here.
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So they struggled a little bit as well.
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So that was an eventful three weeks, Harold.
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I'm glad you were entertained while I was away.
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Yeah, yeah.
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But I guess today we're on a slightly firmer footing in markets.
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At least we've seen a stabilization of that volatility.
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What caused then, I guess, in the equity space, things to calm down again?
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You mentioned AI.
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Some concerns already were creeping in about the outlook for growth.
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Have investors now determined that?
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Well, things are fine, that the AI will continue to evolve.
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We don't know.
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So investors, I think what amplified that initial situation also that a lot of people were positioned in a particular markets and particular stocks, so everybody was in the same corners.
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So if a few investors start to move, that amplified the situation.
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But what we've now seen is that some of the pricing has reset.
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So for example, the yen is much stronger now than it was, say, five weeks ago.
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Secondly, I would say is that we're in a kind of a wait and see mode in AI.
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Most people I talk to give me the impression, yeah, maybe AI is done for the moment.
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So we need to see results from the AI companies to assess what sort of growth profile there really is developing in the industry.
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And we're in the midst of the reporting season.
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So that's something we're waiting for.
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The other thing is, of course, that the feeling is that although markets have been wobbly, central banks, and particularly in the US, can cut interest rates.
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There is room to cut.
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And that wasn't the case maybe some time ago.
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So the feeling is that as long as that happens, and I'm going to ask you the question, are they going to do that?
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But as long as that happens, then that feels that that softens the outlook for the market again, or strengthens the outlook for the market even, yeah.
00:06:41
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Well, of course, that's a stabilizing factor, right?
00:06:43
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You have now signs that globally inflation is coming down, that we've seen commodity prices also kind of settling down a little bit.
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And that opens the room for central banks then to say, well, growth is slowing, inflation is down, let's cut interest rates.
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Part of the financial markets are responding positively to that.
00:07:05
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Having said that, there are still some structural headwinds in Asia as well.
00:07:11
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What about mainland China?
Property Market Sentiment and Economic Confidence
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We saw clearly volatility in Japan.
00:07:15
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We saw volatility in the U.S. Any good news in those three weeks that was away out of mainland China?
00:07:22
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Unfortunately, no, not a lot of additional or any good particular news, not necessarily bad news either.
00:07:28
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What we've seen in China is that some of the green shoots in the property market have started to wilter a little bit again.
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So those green shoots are not really moving.
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And that is required for that confidence to come back.
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There's an enormous amount of cash held by corporates, by insurance companies, by households in deposits in China or sometimes in bond funds, but then unwilling to take on additional risk
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such as buying, for example, equities or something like that.
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And that's because that confidence is just very low.
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And for that, we really need to see the property market coming back.
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Mainland China is a little bit in a wait and see mode, I would say.
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And we're in reporting season, so the earnings numbers are starting to come through.
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And yeah, we need to tally those up.
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And it's very early days, and some companies have beat expectations.
00:08:12
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So it sounds like the story hasn't changed too much in mainland China.
00:08:15
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At least the high frequency economic data is still a little bit soggy.
00:08:19
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We get still incremental stimulus coming through.
00:08:21
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Nothing game changer.
00:08:22
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It's sort of ticking along.
00:08:24
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There is something on the equity side, but let's talk about this at the very end because they'll become a natural conclusion if we go on the other part of the region that that's of importance.
00:08:31
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Okay, what a teaser.
00:08:33
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What a teaser.
00:08:33
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I'm sure our podcast listeners are sitting on the edge of the seat.
00:08:38
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Yes.
00:08:39
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Yeah.
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But knowing you, don't forget what you're going to say.
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I might do that.
00:08:43
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But anyways, moving to the other markets in Asia, Korea, Taiwan, often tech-related markets, were they caught up in this AI, big AI tech wobble that came out of the U.S.?
00:08:54
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Was that something that you saw?
00:08:56
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Yeah, we've seen wobbles in those markets and we've seen some of the key leading stocks in those markets starting to underperform as well.
00:09:03
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Despite the fact that these companies earnings and guidance from these companies has continued to be unchanged or pretty strong.
00:09:10
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So sentiment on AI is being reflected in those markets.
00:09:15
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So now you have a situation whereby Japan, the dynamics in Japan have changed from an equity point of view.
00:09:21
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It's not as attractive anymore.
00:09:22
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The yen is strengthening.
00:09:23
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It's not good for the exporters.
00:09:25
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And in Taiwan and Korea, you have the AI story a little bit unsettled for the moment.
00:09:30
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That's maybe the right wording.
00:09:31
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We don't know where it's going to go, so it's softened a bit.
00:09:34
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But if we see good numbers coming through, maybe that revives again.
00:09:37
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So then the intention is going to shift somewhere else.
00:09:39
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We just said in China, nothing has changed.
00:09:41
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So then it comes to India.
00:09:43
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Now, let's take a look at India, for example, from a top-down point of view.
00:09:47
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What's
Economic Slowdown and Inflation Factors
00:09:48
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going on there?
00:09:48
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Yeah.
00:09:48
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Well, there's some signs of these economies slowing ever so slightly at the margin.
00:09:53
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Credit growth is coming off a little bit.
00:09:56
Speaker
It looks like consumer spending is slowing at the margin.
00:10:00
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Maybe not too surprising because if you think about in an economy, we had an election, national election, the first half of the year, and that usually tends to give a bump a little bit to spending and that then comes out again.
00:10:13
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I think one of the interesting stories in India from a macro perspective actually is that we had fairly decent rains.
00:10:20
Speaker
Now, you might ask yourself, why does this matter?
00:10:23
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It matters because you might get, as a result, fairly good harvests.
00:10:28
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And that will finally bring down food inflation, which obviously provides relief to millions and millions of
00:10:34
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consumers in India, but also to the central bankers who then may be seen opening for rate cuts later in the year.
00:10:41
Speaker
And that, of course, as we discussed, should then cushion economic growth and hopefully financial markets as well.
00:10:47
Speaker
But how do you look at it from an Indian perspective, Indian equity market perspective?
00:10:52
Speaker
Because I know it's one of the investor darlings judging from flows in the past couple of years.
00:10:59
Speaker
Actually, it's more judging from conversations.
00:11:01
Speaker
So out of the conversations I have, everybody likes the Indian growth story for the reasons that you just mentioned.
00:11:07
Speaker
And also the fact that over the last couple of years, that market has just seen very good growth, GDP growth, but also earnings growth.
00:11:17
Speaker
If you then look at the positioning in India, a lot of foreign funds are underweight.
00:11:22
Speaker
And that is because they're being crowded out.
00:11:24
Speaker
It's not that they're not willing to buy more.
00:11:26
Speaker
The fact is that the domestic buyer, the retail investor, is just much more aggressive in buying Indian stocks.
00:11:33
Speaker
So they buy this up in particular smaller mid-caps.
00:11:36
Speaker
So they've been really aggressive on that front.
00:11:38
Speaker
And that has created a whole new dynamic in that Indian market.
00:11:42
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That is...
00:11:42
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Positive in one sense.
00:11:45
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The market is driving up on that sense, but it comes, of course, with risks as well.
00:11:50
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And if things turn the other way around, you never know, they might pull
Leadership Changes in Thailand and Vietnam
00:11:54
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back very quickly as well.
00:11:55
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Yeah.
00:11:56
Speaker
And of course, one of the perhaps biggest surprising stories of the last three, four weeks in Asia was actually Bangladesh.
00:12:03
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where we've seen quite a bit of political change.
00:12:06
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And certainly it's an economy that you and I have covered in the past.
00:12:11
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Quite some time.
00:12:12
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And it has an incredible success story in recent decades.
00:12:18
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And so here, I mean, we have to see how things evolve.
00:12:22
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But...
00:12:24
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I remain somewhat optimistic on Bangladesh.
00:12:26
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You would hope that this is a sort of moment for Bangladesh.
00:12:30
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I look at it from a sort of, as you know, I used to live in Indonesia in 1998.
00:12:35
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And there was a sort of similar dynamic maybe at play in Indonesia in those days.
00:12:39
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You had a change in government and a change in direction of the country as well.
00:12:43
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It became a full-fledged democracy at the time.
00:12:47
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And that led eventually to companies investing in the development of the oil economy.
00:12:52
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And you would hope that something similar would come out of what's happening in Bangladesh at the moment.
00:13:07
Speaker
So, Harold, we talked about some of the changes in the last few weeks, and Bangladesh, of course, comes into mind.
00:13:12
Speaker
But then also, if you look at Southeast Asia, Thailand, we have a new prime minister now.
00:13:18
Speaker
There's a new prime minister in Thailand.
00:13:20
Speaker
From the same party, though, which is interesting.
00:13:22
Speaker
Exactly, from the same party.
00:13:23
Speaker
So there's been a reshuffle in the politics there.
00:13:26
Speaker
We have a new leadership in Vietnam.
00:13:28
Speaker
So there's been a political change there as well.
00:13:30
Speaker
So we've got to see what the implications are there.
00:13:33
Speaker
And we have a new president in Indonesia in the not-too-distant future.
00:13:39
Speaker
But there have been protests and political issues in Indonesia the last couple of days as well.
00:13:44
Speaker
So there's actually in Southeast Asia, there's a lot of changes taking place in that sense.
00:13:49
Speaker
And we've got to see over time if that impacts policies or not, right?
00:13:53
Speaker
Yeah, and that's just a reminder that in many emerging markets, of course, political uncertainty is still, you know, a driver of investor decisions.
00:14:03
Speaker
And more so than at the beginning of the year, we thought elections are very important.
00:14:07
Speaker
And we actually said not too long ago, well, most elections are behind us.
00:14:10
Speaker
So political risk is probably coming off.
00:14:12
Speaker
But it's actually these sort of unexpected issues that suddenly come to the fore.
00:14:17
Speaker
Yeah.
00:14:18
Speaker
Now, Harold, you said a while ago there was a very important point you wanted to make about China.
00:14:24
Speaker
What was it?
00:14:25
Speaker
Remind us what the context was, because it was a long time ago.
00:14:29
Speaker
Yeah, that is right.
Japan's Economic Narrative and China's Fund Positioning
00:14:30
Speaker
About three minutes.
00:14:30
Speaker
Anyway, we have Japan was the market that absorbed a lot of capital that came into Asia last year.
00:14:38
Speaker
That story has now in the last couple of weeks really changed and that Japanese market has been under pressure, right?
00:14:45
Speaker
The other story that was really interesting in Asia was therefore the AI story.
00:14:50
Speaker
But as we mentioned as well, that seems to be at least for the moment taking a breather and we're going to get confirmation which way we're going to go as we are in reporting season.
00:15:01
Speaker
India, we actually see that people, investors like India, but get crowded out to a large extent because domestic investors very prominent and ASEAN has its own sort of dynamics at play.
00:15:12
Speaker
So what we now see is that actually if you look at the data that a lot of funds are neutral on China.
00:15:19
Speaker
But if you talk to people, you get the feeling that they're worried about China.
00:15:23
Speaker
But the fund positioning in China is pretty much neutral.
00:15:26
Speaker
And I think that's a reflection of the sort of lack of clear stories that are unfolding across the region.
00:15:33
Speaker
There's not a lot of easily identifiable investment themes or stories that have not yet completely played out.
00:15:40
Speaker
Most of it's played out.
00:15:41
Speaker
We're waiting for something new in the region.
00:15:44
Speaker
Well, coming back from holiday, I think there's plenty of new catalysts that we can think over the second half of the year, not least the U.S. presidential election still lurking in the background.
00:15:53
Speaker
And even Asia will throw up interesting stories from Bangladesh to Indonesia to Japan and Korea.
00:16:01
Speaker
Actually, in Japan, we're also looking at a change of government later.
00:16:05
Speaker
But I'm sure we'll cover all of these under the banyette tree.
00:16:18
Speaker
So, Harold, I may have been on holiday for a while, thankfully, but you claim to have been working the whole time.
00:16:26
Speaker
But I know you're always up to two different things.
00:16:29
Speaker
What did you experience in the last few weeks?
00:16:31
Speaker
Yeah, I have a completely new undertaking.
00:16:34
Speaker
So I'm going through 7th, 8th and 9th century Javanese stone inscriptions.
00:16:40
Speaker
Do you bring them home and then read them in your bedroom?
00:16:43
Speaker
That would be fantastic if I could bring it home, but all of them are basically a musea.
00:16:47
Speaker
And these are big blocks of stone, like a meter high and probably 20 centimeters thick.
00:16:52
Speaker
And kings had stories engraved on them.
00:16:55
Speaker
And normally it's about some tax free lands that they give.
00:16:59
Speaker
And normally the structure is a bit like on this particular day, the 55th day of the reign of this king under the full moon of the circumcycler of the sun, blah, blah, blah, stuff like that.
00:17:10
Speaker
But the most beautiful part of these engravings, if you go to the very bottom, they say, okay, this land is tax free.
00:17:15
Speaker
We put this stone in here so everybody knows.
00:17:17
Speaker
And anybody who fails to grant this tax-free status to this land in the future, future kings, will be reincarnated as either something like brain dead or you become the village idiot.
00:17:29
Speaker
That's literally being put on stone there.
00:17:32
Speaker
So I think it's really enjoyable to read.
00:17:33
Speaker
And you can see a little bit what happened in those days.
00:17:36
Speaker
Maybe nowadays we should take a page out of that.
00:17:38
Speaker
When we run tax cuts, you know, that should be the promise.
00:17:41
Speaker
Unless you cut taxes, you know, that should be the punishment.
00:17:46
Speaker
There you go, Harold.
00:17:46
Speaker
I think nobody can beat your obscure hobbies.
00:17:49
Speaker
Enjoy reading 7th century Japanese tablets.
00:17:53
Speaker
Tablets in stone.
00:17:54
Speaker
In stone.
00:17:57
Speaker
Well, ladies and gentlemen, we've covered a lot of ground and it's been great to be back with you under the banyan tree.
00:18:03
Speaker
Thanks for joining us.
00:18:04
Speaker
And remember, our sister podcast, The Macro Brief, is back from this Friday, bringing you the top economic story from all around the world every week.
00:18:12
Speaker
The two of us will be at the annual HSBC China Conference on the 2nd and 3rd of September in Shenzhen.
00:18:18
Speaker
We'll no doubt see some of you there.
00:18:19
Speaker
And for everyone else, we'll be back in the studio same time next week.
00:18:43
Speaker
Thank you for joining us at HSBC Global Viewpoint.
00:18:46
Speaker
We hope you enjoyed the discussion.
00:18:48
Speaker
Make sure you're subscribed to stay up to date with new episodes.