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.
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Speaker: Thanks for listening.
Speaker: And now onto today's show.
Speaker: You're listening to The Macro Viewpoint, our weekly showcase of the key views from the team here at HSBC Global Research.
Speaker: This podcast was recorded on Thursday the 12th of January 2023.
Speaker: Our full disclosures and disclaimers can be found in the link attached to this podcast.
Speaker: Hello, I'm P.S.
Speaker: Butler and a warm welcome everybody to this week's podcast.
Speaker: Today we're looking ahead to the prospects for the global economy and emerging markets in 2023.
Speaker: Will China's reopening boost economic growth beyond its own borders?
Speaker: And can investors look forward to recovering some of the deep losses in emerging market assets seen over the past two years?
Speaker: To discuss this and more, I'm joined in the studio by Janet Henry, Global Chief Economist, and Murat Organ, Global Head of Emerging Markets Research.
Speaker: Janet Murat, welcome to the podcast and Happy New Year.
Speaker: Happy New Year, Piers.
Speaker: Thank you, Piers.
Speaker: Happy New Year.
Speaker: So, Janet, if I can start with you, what are the key factors affecting your forecast for 2023?
Speaker: Well, there are lots of factors, of course, with the rise in inflation over the course of the last year and the highly expected increase in interest rates.
Speaker: The impact of monetary tightening is evidently coming through in terms of housing markets, both in terms of the stretched affordability, in terms of debt service costs and that slowdown in housing markets feeding through in related spending.
Speaker: And also there are signs that the global industrial cycle is rolling over.
Speaker: That's partly explained by the shift from service sector to goods related spending.
Speaker: So anyone dependent on exports is unlikely to see such support coming through there.
Speaker: as well as some of the other uncertainties which are weighing on the outlook for investment spending will also be impacting in terms of weak trade growth.
Speaker: But of course, we do have some potential upside at some point in 2023 to the global economy from the impact of the reopening in China.
Speaker: and the policy stimulus that's feeding through in terms of stabilising the property market.
Speaker: But the timing is obviously quite uncertain.
Speaker: In our forecast, we get the best of the rebound in China coming through probably in the second quarter and third quarter of 2023.
Speaker: And over time, there are a lot of economies, particularly in the Asian region, that are going to benefit from the tourism effect coming through from China as well.
Speaker: And that's a good opportunity to bring Murat in because that China reopening is likely to have quite a significant impact for emerging markets.
Speaker: Can you give us a view on that Murat?
Speaker: Of course.
Speaker: Well, I mean, obviously to start with emerging market financial assets, they suffered deep negative returns for two consecutive years.
Speaker: And this has been the result of a very worrisome external backdrop because of all the reasons Janet has mentioned very rightly.
Speaker: And not surprisingly, we had frequent episodes of elevated stress in financial markets and significant outflows.
Speaker: But we think a repeat of such an adverse external climate looks unlikely.
Speaker: And one of the reasons is, as you said, China reopening and obviously falling inflation as well.
Speaker: And these two should help emerging market assets to recover some part of their losses of the last two years, at least in the early phases of 2023.
Speaker: The technical picture is also favorable with better valuations, you know, lower position of securities holdings of non-resident investors and high cash levels of institutions should also help with a solid start.
Speaker: Now, we've seen in the financial headlines a lot of commentary about markets starting to discount inflation peaking and interest rates potentially coming down as things get back under control.
Speaker: Is there a risk that investors get carried away with this positive story?
Speaker: Yes, there is a possibility, clearly.
Speaker: We've seen, I think, evidence that inflation probably has peaked in most economies.
Speaker: In the US economy, we've already seen it fall from over 9% to over 7% and probably set to fall below that in December and on into January, helped by the fallback that we've seen in the oil prices and also some heavy discounting.
Speaker: by retailers.
Speaker: Inventories are at quite high levels.
Speaker: So we may continue to see some downside surprises in the coming months.
Speaker: So they may extrapolate that and obviously get excited that we're going to get not just rate cuts in the second half of 2023, but perhaps some quite aggressive ones.
Speaker: So
Speaker: where they are in danger of getting overly optimistic, is extrapolating too far.
Speaker: The fact is we are getting some good news from here as long as oil prices stay low and the current trend continues.
Speaker: But there are structural drivers of inflation too.
Speaker: And for central banks, of course, there is the ongoing concern about the impact of labour markets.
Speaker: You don't need a full wage price spiral to be concerned about inflation.
Speaker: But labour markets and wage growth can lag a bit.
Speaker: the fallback in inflation and inflation could stay stickier somewhat longer than markets seem to be expecting.
Speaker: So a peak in rates doesn't mean that they're quickly going to be cut.
Speaker: We could see interest rates on hold for quite an extended period.
Speaker: Amirat, your latest edition of the Emerging Market Sentiment Survey gave quite a positive reading, didn't it?
Speaker: I mean, it did for sure.
Speaker: And obviously, it's been a solid start for EM and this may carry on for a while as we discuss in our reports.
Speaker: But then we also don't foresee all of 2023 will be a smooth ride for EM risk appetite either.
Speaker: I mean, as the year progresses, many complications could resurface.
Speaker: For one thing, and related to what Janet said about inflation, global monetary policy could still disappoint, led by the Federal Reserve.
Speaker: Janet and the team are not looking for a rate cut from the Fed until the second quarter of 2024, which obviously matters a lot for Jan, whereas the markets are betting on a pivot in the second half of the year.
Speaker: Similarly, the global liquidity backdrop will probably get less supportive.
Speaker: and further quantitative tightening.
Speaker: And we established a pretty strong lagged correlation between the rate of change of global liquidity and financial flows to EM, which in the end dictate EM financial conditions.
Speaker: And finally, you know, Chinese recovery and rebound might be very strong.
Speaker: We've seen a lot of economies, particularly in Europe,
Speaker: They've surprised to the upside following their reopening.
Speaker: A strong rebound in China would be great news for economies that are exposed to China via commodities, manufactured goods and tourism.
Speaker: But it also caused huge complications for global disinflation efforts, especially at a time like towards the second half of the year when the base factor falls and inflation would be exhausted.
Speaker: And Janet, what keeps you up at night?
Speaker: What worries you most about your 2023 forecasts?
Speaker: Plenty, Piers, and certainly Murat touched on some of them already.
Speaker: There are risks relating to China.
Speaker: There are some big upside risks.
Speaker: Most economies in the world, when they reopen, have actually had a much stronger rebound in pent up demand than certainly we anticipated coming through.
Speaker: That could happen in China as well.
Speaker: But there are also downside risks, both from Covid and from the property sector.
Speaker: We've got the ongoing uncertainty related to Russia and Ukraine as to whether it continues in the current situation or whether there's a possible resolution or indeed whether there is some deterioration on the gas price front.
Speaker: At the moment, gas prices are now back below
Speaker: at the wholesale level, pre-invasion levels.
Speaker: We've had a mild winter, storage levels are high.
Speaker: 12 months from now, it could be a different world to the upside or the downside.
Speaker: And I think for central banks, the key risk to our forecast is obviously labour markets.
Speaker: We've got the last rate rise, one more 50 basis point rise from the Federal Reserve in February.
Speaker: But the reason we don't have them continuing to tighten into the second quarter is we expect the labour market to be loosening by then.
Speaker: If it isn't, then obviously the Fed could end up tightening considerably more.
Speaker: And would you add the dollar to your list of risks?
Speaker: Yes, I would.
Speaker: We have seen the dollar strengthen quite a lot over the last year or so.
Speaker: But recently, that dollar overvaluation seems to be reducing to some degree.
Speaker: And certainly Murat talked about some of the benefits to the emerging markets.
Speaker: if that were to continue.
Speaker: If we were to see a renewed resurgence in the dollar become increasingly overvalued, then that would start to pressurise some of the emerging economies in particular, who finally started to see some relief in terms of currency depreciation and the need to continue tightening policy.
Speaker: Murad, if some of those risks that Janet talked about materialize, what would be the impact on emerging markets?
Speaker: We see the risks to growth quite balanced in both directions.
Speaker: I mean, we talked about a strong rebound in China, which obviously would help a lot to many emerging markets that are exposed to China.
Speaker: but complicate disinflation efforts.
Speaker: The opposite is also possible.
Speaker: Namely, the soft landing hopes could be dashed in the event that aggressive monetary tightening earlier, combined with elevated policy rates for longer, or even further rate hikes, could weaken the global economic activity with a lag.
Speaker: And actually emerging markets on their part
Speaker: they have very little room to stimulate growth because the real interest rates are already low and fiscal impulses are forecast to be negative for most EM economies in 2023.
Speaker: And just to finish, Murat, the EM space is very broad.
Speaker: Where do you see the relative outperformers?
Speaker: To be honest, Piers, at the beginning of the year, we like EM risk pretty much across the board.
Speaker: I mean, as I mentioned, EM suffered substantial outflows earlier.
Speaker: I mean, last year, the bond outflows were $82 billion out of EM institutional bond funds.
Speaker: Equity inflows were $69 billion.
Speaker: So equity saved the day.
Speaker: But this was exclusively because of passive or ETF money.
Speaker: So huge outflows and two consecutive years of deep negative returns.
Speaker: Since the outlook has improved, relatively speaking, I mean, the growth inflation outlook for EM because of falling inflation in the early part of the year, because of China rebound.
Speaker: I think EM can recover part of these losses.
Speaker: The technical picture is favorable.
Speaker: The returns are more attractive and the cash levels are higher.
Speaker: So we like EM risk in the beginning of the year across the board.
Speaker: But then China rebound will probably help commodity producers also, you know, in various regions.
Speaker: It's only like in the latter part of the year when the complications we mentioned, if they were to resurface, then perhaps investors have to be a little bit more conservative.
Speaker: And our past studies suggest that emerging market external debt is a bit more defensive in a historical context.
Speaker: And the first asset to recover after prolonged bear markets.
Speaker: And we actually have lots of deep dives on it in our various reports.
Speaker: Janet Moran, thanks very much for talking to me.
Speaker: Thank you, Piers.
Speaker: Thank you, Piers.
Speaker: A few notes for your diaries for the week ahead.
Speaker: China's GDP data for the fourth quarter is due late Monday, and the U.S. markets are closed on Monday to mark Martin Luther King Day.
Speaker: Here in Europe, it's a big week for inflation data, including from Germany and Italy on Tuesday and the U.K.
Speaker: on Wednesday.
Speaker: And here at HHSBC, our Asia Outlook conference goes virtual on the 17th and 18th of January, featuring global research economists and strategists.
Speaker: If you're a global research client, you can register online at research.hsbc.com or contact your HSBC representative for more details.
Speaker: So that's it for this week's podcast.
Speaker: From all of us here, thanks for listening, and we'll be back again next week.
Speaker: Thank you for joining us at HSBC Global Viewpoint.
Speaker: We hope you enjoyed the discussion.
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