Transcript
Speaker: This is HSBC Global Viewpoint, your window into the thinking, trends and issues shaping global banking and markets.
Speaker: Join us as we hear from industry leaders and HSBC experts on the latest insights and opportunities for your business.
Speaker: Thank you for listening.
Speaker: Hello and welcome to the Macro Viewpoint from HSBC Global Research, our weekly podcast featuring the views of leading HSBC analysts on the outlook for the global economy and markets.
Speaker: I'm Piers Butler.
Speaker: Hi Piers, coming up on this week's programme, the pandemic has changed many people's view about the attractiveness of cities.
Speaker: So could urbanisation trends be heading permanently into reverse?
Speaker: We speak to James Pomeroy, Global Economist, and Steve Bramley-Jackson, Global Head of Real Estate Research.
Speaker: The ECB has begun thinking about the path towards a digital euro.
Speaker: We get the latest from Paul Mackel, Global Head of FX Research.
Speaker: And Murat Ulgan, Global Head of Emerging Markets Research, joins us to discuss the findings from our latest EM Sentiment Survey, which shows investors turning noticeably less bullish on EM prospects.
Speaker: This podcast was recorded on Thursday, the 29th of April 2021.
Speaker: Our full disclosures and disclaimers can be found in the link attached to this podcast.
Speaker: We begin this week with a focus on two of our nine key themes here at HSBC Global Research.
Speaker: First, we're going to take a look at future cities.
Speaker: James Pomeroy and Steve Bramley-Jackson coordinate our research in this area, and they join me now.
Speaker: So, James, if I can start with you, how is the future of the city being altered by the pandemic?
Speaker: Thanks, Chris.
Speaker: So there's a few things at play here, and there's a big difference between emerging markets and developed markets.
Speaker: So start with the emerging world, where actually we think the pandemic isn't doing much to change the evolution of urbanisation.
Speaker: I mean, those parts of the world, because a lot of jobs in emerging markets are not in industries which make it easy to work from home.
Speaker: Cities still have that draw in terms of infrastructure.
Speaker: So in terms of access to high speed Internet or to health care or to education, none of that has changed.
Speaker: And given the very low starting point of urbanisation rates in much of the emerging world, we think those numbers are still going to increase.
Speaker: It may be, though, that it's some smaller cities that grow more quickly than the megacities.
Speaker: In the developed world, however, things are quite different.
Speaker: You can move out from a big city almost anywhere in the world to a suburb, to a smaller city or to a town, and you still have access to those things.
Speaker: And therefore, what we're likely to see in the developed world is a changing shape of urbanisation.
Speaker: We still see people living in urban areas.
Speaker: They just may be different urban areas.
Speaker: And if these suburbs, these smaller cities and smaller towns, but we think there's much more upside potential and a lot more population growth in the coming years.
Speaker: So what does this mean for transport?
Speaker: Well, for those big cities, if more and more people are working remotely, even two or three days a week, it's going to have a transformational impact on the amount of transport that needs to be provided.
Speaker: Anyone who's got on a busy rush hour tube train or regional train or a bus anywhere in the world would appreciate that these things were running pretty close to capacity during rush hours.
Speaker: But if you cut the number of people who are doing that commute every single day because of these remote working trends,
Speaker: then suddenly you need less transport.
Speaker: And actually that becomes an interesting dilemma for cities.
Speaker: How do you manage providing this supply of transport that doesn't need to be as high with balancing the books because they still need a flow of people to pay for tickets to allow them to function.
Speaker: So what we're likely to see in many urban areas is this change in the problem
Speaker: from a capacity issue in terms of public transportation to a funding one.
Speaker: And that's something I wish a lot of urban areas are going to have to really think quite hard about.
Speaker: So, Steve, what are the implications for buildings?
Speaker: Yeah, that's a very good question, isn't it?
Speaker: And one I think the jury is still out on.
Speaker: Interesting, the last 12 months, I think the pendulum has swung.
Speaker: People thinking offices and homes were going to be mutually exclusive.
Speaker: And I think now they realise they're complementary.
Speaker: And that's a good thing.
Speaker: But clearly it will have implications for buildings and the internal spaces of buildings are going to have to be reconfigured.
Speaker: Occupiers want different density workspace ratios now, which is a complete reverse to what we've done.
Speaker: They want more communal areas.
Speaker: They want more hot desks.
Speaker: And you're seeing and you're hearing from organisations that they're not intending to have 100% of the workforce in on any particular day of the week.
Speaker: And most organisations are shedding office space.
Speaker: 40% seems to be quite a popular number.
Speaker: I think the physical redesign of buildings, I think we're going to see a bit of that happening.
Speaker: Taller buildings are going to be pretty difficult, particularly in a social distancing world.
Speaker: And I think most challenges are probably going to sit with the lifts.
Speaker: So for occupiers to use tall buildings and for landlords to configure accordingly, I think that's quite a challenge.
Speaker: Obviously, we'll get more flexible workspace.
Speaker: That's already on the increase.
Speaker: But I think the other thing we may well see in the new development cycle are shorter buildings, less tall.
Speaker: fewer stories, more mixed use.
Speaker: I think that's a good way of combating that change.
Speaker: Now, you also flag in the report that data centres are going to be very important.
Speaker: Why so?
Speaker: Yeah, look, these are vital.
Speaker: And, you know, we've said in the report that they're the cornerstones of future cities.
Speaker: Connectivity is really what it's all about.
Speaker: And IP traffic needs to be channeled and managed through data centres.
Speaker: Pretty much everything is reliant on that now.
Speaker: So we see data centers as they already are becoming increasingly sophisticated.
Speaker: They'll be running transport systems, they'll be running smart buildings and security, they'll be running the provision of power.
Speaker: So we're seeing an evolution of data center now, which is doing more and more jobs and is offering more and more capacity.
Speaker: IP traffic, we think is going to increase by in excess of 100 times over the 2010, 2030 period.
Speaker: We're seeing hyperscale centers being developed by Google and Amazon.
Speaker: increasingly sophisticated, increasingly valuable, and actually the investment returns are some of the best you can get in the real estate space.
Speaker: So James, some final thoughts from you.
Speaker: What does this mean for where cities are going to have to invest?
Speaker: I think it's actually quite interesting that you're going to have cities competing for people, because we've spoken a lot about where people are going to work.
Speaker: People still have to live somewhere.
Speaker: And I think the pandemic has accelerated people's appreciation of lots of things.
Speaker: It's open space, access to local amenities, a sense of community even.
Speaker: And I think what you're likely to see in the coming years is cities invest in trying to make themselves the best places possible for people to live and compete for that talent.
Speaker: And therefore, the summary of all of that is we may actually see urban investment increase rather than decrease in the coming years.
Speaker: And something that I think people have overlooked over the past year when thinking about how cities could look in the future.
Speaker: James and Steve, thank you very much for your time today.
Speaker: Thank you.
Speaker: Thank you.
Speaker: On to our second key theme now, digital finance, where there has been growing focus on central bank digital currencies in recent months, led by developments in countries such as China and Sweden.
Speaker: This week, Paul Mackle, global head of FX Research, has been looking at the prospects for a digital version of the euro.
Speaker: He joins us now from Hong Kong.
Speaker: So Paul, what's the ECB's main motivation for wanting a digital currency?
Speaker: Well, I think there are a few obvious considerations.
Speaker: One, like many central banks these days, they realize that there's a decline in the usage of cash as a means of payments.
Speaker: And I think that's a very important feature for the European Central Bank.
Speaker: And it's also been reflected in some of their survey evidence that they've been acquiring.
Speaker: The ECB had also suggested that the international role of the euro could weaken at the expense of other central banks' digital currencies.
Speaker: So in other words, if they were to proceed with a digital euro, then it could have the desired impact of promoting the euro's internationalization.
Speaker: On top of that though, there's another important message.
Speaker: And in my view, it relates to not being left too far behind.
Speaker: Other central banks are proceeding rather quickly with their digital currencies.
Speaker: The People's Bank of China is a very obvious example.
Speaker: It's soon to be launching the so-called ECNY, and that must be filtering through into the ECB's thinking too.
Speaker: How long would a digital euro take to roll out?
Speaker: Well, earlier this year, the ECB's Panetta had suggested that a potential formal launch of the digital euro could still take another five years.
Speaker: But nonetheless, I think ahead of that, there's still lots of planning that's required.
Speaker: And that suggests that at least another two years period of a formal investigation
Speaker: into the concept is likely.
Speaker: But still, we'd be looking at a launch of a digital euro probably not happening before 2025.
Speaker: One concern seems to be that the use of a digital currency might reinforce negative interest rates.
Speaker: What's your take on that?
Speaker: Well, with regards to the latest survey, that does seem to be one of the concerns that has popped up.
Speaker: But
Speaker: In light of the potential design of a digital Euro, we also have to look elsewhere for those digital currencies, as I said, are launching or soon to be launched.
Speaker: Now with regards to the ECNY, it's not likely to be interest rate bearing.
Speaker: And that's a very important concept or feature that could also be the same for a digital euro.
Speaker: If it's not interest rate bearing, it's going to be very difficult for negative policy rates to be put into practice.
Speaker: Paul, thanks very much for the update.
Speaker: Thank you very much.
Speaker: Another core area for us at Global Research is emerging markets.
Speaker: And this week, we released the fourth edition of our Emerging Markets Sentiment Survey.
Speaker: The survey canvassed the opinions of 164 investors from 152 institutions with over $575 billion of assets under management in EM.
Speaker: Murat Olgan is Global Head of Emerging Markets Research, and he joins us now.
Speaker: Murat, it seems that emerging market investors are noticeably less optimistic about prospects for EM than they were three months ago.
Speaker: That's correct indeed.
Speaker: Only a third of investors are now bullish on EM prospects in the near term.
Speaker: And this is done significantly from around three quarters at the turn of the year.
Speaker: But it's not like they went bearish.
Speaker: It's just a neutral stance.
Speaker: Around half of the investors, they were up to the neutral stance in this round of the survey.
Speaker: it kind of shows lack of strong conviction and hesitation about market direction.
Speaker: It also shows up in cash levels.
Speaker: The cash levels just keep on increasing.
Speaker: And those who are planning to put some cash to work, that has dropped to the lowest number since the beginning of the survey.
Speaker: And also this is confirmed by the risk appetite score.
Speaker: As we ask investors every survey, what is your risk appetite at the current juncture?
Speaker: Zero being no risk in EM and 10 full risk.
Speaker: the weighted average score dropped to 6 from 6.9 in January, which also shows them they are hesitant to add risk.
Speaker: And why do you think they are less optimistic than they were?
Speaker: This is probably because the narrative in global reflation has changed.
Speaker: It has shifted more towards inflation than growth, you know, since the beginning of the year.
Speaker: When we ask investors what's their biggest risk perception for emerging markets, in the past it used to be COVID.
Speaker: This is still relevant, but the most important risk they cite
Speaker: is higher inflation and rates in the US and globally.
Speaker: Around half of the investors are talking about that risk.
Speaker: But then COVID too.
Speaker: And this sort of manifests itself by investors paring back their expectations about growth.
Speaker: 73% now CEM activity improving over the next 12 months.
Speaker: This is a high number, but it's downsized from 89% in January.
Speaker: And also when we ask them what they think about the recovery prospects globally speaking from COVID-19, in the previous survey, it was only 8% saying this would be later than 2021.
Speaker: Now this has gone up to 19%.
Speaker: So first, it's the risk of inflation as they perceive in the US, developed world in higher rates.
Speaker: And then it's COVID, probably on the back of some resurgence in cases recently.
Speaker: You mentioned global and US inflation there.
Speaker: How are investors seeing EM inflation?
Speaker: That's also very relevant.
Speaker: 77% of investors are now thinking that EM inflation will be higher over the next 12 months.
Speaker: This ratio is the highest since the survey started.
Speaker: And that inevitably filters through to rate expectations on monetary policy.
Speaker: Now, 38% of investors are looking for higher policy rates in EM.
Speaker: This has also gone up a lot since the previous survey.
Speaker: And clearly, we've already seen some large emerging market economies
Speaker: increasing interest rates and there's expectation of more to come.
Speaker: And so what regions are investors most positive about?
Speaker: So with that rather uncertain outlook and hesitation from the side of investors, it seems like they're flocking back to the relative stability of Asia.
Speaker: So Asia once again comes to the forefront as the favorite region pretty much across all asset classes.
Speaker: And the biggest reduction in positioning happened in Latin America.
Speaker: Overweight positions have been reduced substantially and underweight positions have gone up.
Speaker: Middle East is the only region where actually overweight positioning has increased.
Speaker: But if you take the net between overweight and underweight, net sentiment is still negative there as well.
Speaker: And finally, you canvass investors on their views on ESG issues.
Speaker: Has there been any change there?
Speaker: Well, in terms of the biggest risk perception on individual ESG areas, there hasn't been any change.
Speaker: Investors still perceive climate change and extreme weather events as the biggest risk when it comes to environmental issues.
Speaker: It's the inequality on the social side, and it's the minority shareholder protection for the governance issues.
Speaker: But there's one interesting outcome in the survey, the environmental side.
Speaker: Yes, it's not the biggest risk perception, but water pollution and scarcity has really risen a lot, and it is drawing investor attention.
Speaker: So it's now the second largest cited risk when it comes to the environmental side.
Speaker: Murat, thanks very much.
Speaker: Thank you very much.
Speaker: So that's it for another week.
Speaker: Thank you to our guests, James Pomeroy, Steve Bramley-Jackson, Paul Mackle, and Murat Olgan.
Speaker: From peers and me, thanks very much for listening.
Speaker: We'll be back again next week.
Speaker: Thank you for listening today.
Speaker: This has been HSBC Global Viewpoint, Banking and Markets.
Speaker: For more information about anything you heard in this podcast or to learn about HSBC's global services and offerings, please visit gbm.hsbc.com.
