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The Macro Brief – EM cash looking for catalysts
23 Plays1 year ago
Murat Ulgen, Global Head of Emerging Markets Research, assesses the results from our latest survey of EM investors and examines why they are seemingly undecided about the prospects for emerging market assets. Disclaimer: https://www.research.hsbc.com/R/61/fh9LTXb 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 HSBC Global Viewpoint
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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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Thanks for listening.
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And now onto today's show.
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The following podcast was recorded on the 14th of December 2023 by HSBC Global Research.
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All the disclosures and disclaimers associated with it must be viewed on the link attached to your media player.
Host Introduction and Access Information
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And don't forget that you can follow this weekly podcast on Apple and Spotify, or wherever you get your podcasts, just search for The Macro Brief.
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Hello and welcome to the final edition of the Macrobrief this year.
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I'm your host, Piers Butler.
Emerging Markets Sentiment Survey Overview
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This week, we're assessing the mood among emerging market investors as we look at the results of our latest quarterly EM Sentiment Survey.
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We canvass the views of major investors responsible for over $400 billion of assets under management in emerging markets to find out what's on their minds as we head into the new year.
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We're joined by Murat Olgan, Global Head of EM Research, who's been analysing the findings.
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So Murat, our 14th Emerging Markets Sentiment Survey.
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I can't believe we've got to that stage.
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Feels like only yesterday when we started.
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When was the survey taken for this one?
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Yes, indeed, Piers, almost four years, unbelievable indeed.
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So this survey was conducted mostly in November, but also early December.
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And you might argue there was generally a positive mood in global financial markets and pricing in of some sort of a Goldilocks outlook for major economies, whereby growth seems to be holding up, inflation is coming down, and central banks are approaching their rate cutting cycle.
Investor Sentiment Trends
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But from my take anyway, it seems like a big fat neutral.
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I mean, are investors confused and they don't know what to do?
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I mean, there is.
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It's interesting because the neutral responses have shot up to 55%.
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That is the highest in surveys near four-year history.
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and it's up from 43% in the previous September survey.
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But then when you take the net of bullish versus bearish sentiment, it's actually positive and it has improved to 24% from 17% in the earlier survey.
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So that kind of argues that investors still have a constructive bias.
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Their cash levels are still high.
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They haven't come down much.
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and they also retain a fairly solid risk appetite score which is on a weighted average basis 6.3 where zero is no risk in EM and 10 is highest risk and that was the same level in the September survey so when I look at this emergence of neutral camp together with net positive constructive sentiment large cash piles and a solid risk appetite our conclusion is they're still looking for opportunities across EM but they're not yet ready to take action perhaps
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because of a crowded election cycle coming up in 2024.
Central Banks and Economic Concerns
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So ripe for a catalyst, what could the catalyst be on the bullish side?
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I think the catalyst probably could be rate cuts by major centre banks, because we ask investors both upside risk and downside risk on the Yamaha outlook over the next three months.
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And the biggest upside risk is seen to be potential rate cuts by major centre banks.
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Also, unlike in the previous September survey, they seem to be a bit less worried about the upside risk on food inflation, which is actually a good development.
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But competitive, they're a bit worried about upside risk on oil prices.
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Obviously, it is finely poised, so it could go the other way.
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What would be the catalyst on the negative side?
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Is it really to do with recession risks?
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It is a recession risk.
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That's the major downside risk based on investor perception.
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Even though the share has come down a little bit, that's still the biggest risk, downside risk on the EMA outlook.
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And then it's followed by interest rates staying higher for longer.
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Although consistent with the music in the market, the share of responses on this risk has been retreating.
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So fewer investors see high interest rates for longer as a major risk.
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But then against that, geopolitical risks are rising in prominence.
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And finally, for the first time, we are seeing fiscal deterioration in major economies as a risk coming on the radar of investors.
Investment Preferences and Regional Focus
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Now, in your report, you mentioned this idea of the scarcity of global flows.
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There is a shortage of flows into a market, so you have to sort of compete for those flows.
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What would be the sort of conditions that a country would need to satisfy in order to start attracting equity flows?
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Correct.
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Our framework has evolved throughout the year because we started to think, well, this is a durably challenging environment when you have a top-down view on emerging markets.
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And it has to be a lot more nuanced and selective, a lot more bottom-up.
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It's kind of a stock-selecting process when it comes to EM economies.
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So we've been thinking that there will be scarcity of global capital because even the developed world needs financing of its large budget deficit.
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And emerging markets should tick certain boxes to be able to compete for this global funding and attract them to finance their deficits and growth.
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And we think there have to be three major factors that should satisfy or conditions they should meet.
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Strong fundamentals and or structural stories and or sizable risk premium.
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So they should meet at least but preferably more of these three conditions in order to compete for global capital.
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So interestingly, in a survey, in terms of country preferences, LATAM still seems to come on top.
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Do they meet the conditions that you've just cited?
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Well, it's a good question.
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Broadly speaking, yes.
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And actually, the ranking of investors of the regions hasn't changed much throughout the year.
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So even in this survey as well, the Latin America still remains a top choice.
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And the way we gauge it, we look at the net sentiment score across all asset classes, and it's positive for all asset classes in Latin America.
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But then Asia actually stands out when it comes to equities.
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It's a more preferred region on the equity front.
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But Latin America still tops rankings, broadly speaking.
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What about China, Murat?
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That seems to have had a big shift on the sort of negative side.
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Actually, in terms of China's own growth, investors seem to be fairly comfortable.
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But it's more about the linkages and spillover to the rest of the EM universe.
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Because in the past, during the year, when we asked investors what's the upside risk for the EM outlook, many of them were answering it's a strong rebound in China.
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But now fewer investors are responding in that way.
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And instead, they see these rate cuts by major global center banks is the biggest upside risk for the Yemma outlook.
Currency and ESG Investment Trends
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I mentioned equities in terms of flows earlier, but in terms of debt, currencies matter, and it seems to be a preference for local versus hard currency debt.
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What's driving that?
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That's correct.
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Well, EM investors have actually dampened their EMFX outlook, and that's despite of a relatively soft US dollar environment during the survey, but consistent with our own FX team, buoyant US dollar outlook.
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But then they still prefer local currency debt over hard currency, and that's perhaps based on the expectations of rate cuts.
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But there's also another interesting finding in this survey.
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So in September, there were zero responses preferring both local currency and hard currency, and this has shut up to 26% in the survey.
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So yes, at the margin, local currency debt is preferred, but there are more investors who like both.
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But more specifically, when it comes to local debt, the countries that top their choices are Brazil, Mexico, followed by Turkey and India.
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Now, one other survey response that's fallen quite a lot is on ESG in terms of ESG funds managed.
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I know you've spoken to our colleagues on the ESG team to try and get a sense of why that's happened.
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Yeah, it's an interesting outcome because the share of responses that say they're running an ESG portfolio directly has gone up.
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But then the other share says we're running an ESG portfolio indirectly or partly has actually come down a lot.
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And I think the best explanation is coming from our ESG teams.
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They are saying that there is more enforcement of anti-greenwashing rules which are leading to the survey results.
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I mean, it's good to see a bit more transparency, perhaps.
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And there are clearly more investors who are running an ESG portfolio directly.
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But this enforcement of rules will probably change this landscape a bit.
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Right, let's hope that some of these positive catalysts come through in early 2024.
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Thank you for joining us today.
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Thank you very much indeed.
Central Bank Meetings and Research Highlights
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Now, we may be heading towards the holiday season, but there's still lots going on here at Global Research.
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It's been a busy week with three major central banks holding meetings.
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Interest rates were kept on hold in the US, Europe and the UK.
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The team set out their views on the prospect for rates in 2024 in the new Global Economics Quarterly, which is just out.
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We've also just published the December edition of our Nine Themes Talking Points report.
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From automation and demographics to the future consumer, the report rounds up the key thematic reports that we've put out over the last year.
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Highlights include our work on generative AI, the future of food, and hydrogen and energy transition.
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And this week, our trade economist, Shanela Rajanagam, published the latest edition of her trade tracker.
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World trade growth has been subdued this year.
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It is set to recover modestly in 2024, but will remain weak by historical standards.
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In addition, we've outlined our views on the outlook for bond yields, looked at what's next for global equities, and given our reaction to the COP28 discussions.
Conclusion and Contact Information
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To find out more about those reports or the EM Sentiment Survey that we discussed earlier with Murat, please email askresearch at hsbc.com.
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So that's it for this week and indeed for this year.
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We'll be back early in January.
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So until then, thanks for listening to the Macrobrief.
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Thank you for joining us at HSBC Global Viewpoint.
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We hope you enjoyed the discussion.
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Make sure you're subscribed to stay up to date with new episodes.