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: And now onto today's show.
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Speaker: Hello from HSBC Hong Kong and welcome to Under the Banyan Tree.
Speaker: I'm Harold van der Linde, head of Asian Equity Strategy.
Speaker: And I'm Fred Newman, chief Asia economist.
Speaker: Good to be back in the studio with you, Harold.
Speaker: Indeed, it's been a while, Fred.
Speaker: It feels like a good old-fashioned catch-up is needed.
Speaker: All right, let's do what we do from HSBC Global Research.
Speaker: This is Under the Banyan Tree, where we put Asian markets and economics in context.
Speaker: Yes, you're Fred Newman, right?
Speaker: I mean, how long haven't I seen you?
Speaker: Last time I checked, yes.
Speaker: I think it was somewhere in January maybe where we sat together.
Speaker: The last time we were together in the studio.
Speaker: You were running some episodes solo.
Speaker: I have done that.
Speaker: And now finally...
Speaker: Well, we've been traveling.
Speaker: We had some holidays in between at some point in time.
Speaker: Well, more you than me.
Speaker: Yeah, yeah.
Speaker: I'm running through my holiday kind of quota.
Speaker: I'm very fast this year.
Speaker: Yeah, but this is not about holidays anymore, Harold.
Speaker: No.
Speaker: I'd like to talk maybe a podcast about Mayan ruins.
Speaker: That's hard work.
Speaker: That's hard work for the audience.
Speaker: That's not holidays.
Speaker: But in any case, from HSBC Global Research, this is under the banyan tree.
Speaker: So, Harold, you've been on the road for the last few weeks or so.
Speaker: What is the sentiment around Chinese equities at the moment?
Speaker: There was, if you think back last year, a lot of challenges.
Speaker: Yeah.
Speaker: Then we had, you know, even coming into this year, things were a bit shaky.
Speaker: How are things in the last couple of months?
Speaker: How did that kind of evolve?
Speaker: There is definitely a shift, Fred, in sentiment.
Speaker: Last year, you saw a relentless selldown.
Speaker: Now, the market then flattened a bit out and it's gone up a little bit.
Speaker: But to be honest, it's too early to say it's a strong recovery or anything like that.
Speaker: But if you dig a little bit deeper into the market, you see that things are changing a bit.
Speaker: I'll give you two examples.
Speaker: First of all, most people have very few Chinese stocks in their portfolios.
Speaker: What you see is that they're starting to add a little bit.
Speaker: It doesn't mean that they have a lot, but if you have very little or none at all, you say, well, you know, the market's down so much, maybe I'll buy a little bit more of X, Y or Z.
Speaker: Secondly, what we also see is that last year, if you were a Chinese company, you came up with any statement or you released your earnings, your profit numbers, if they were good, you were sold down.
Speaker: If they were bad, you were sold down even more.
Speaker: Now this year, that's shifted.
Speaker: If you were bad numbers coming out, you don't get sold down anymore.
Speaker: Everybody says, well, it's what we expected maybe.
Speaker: But if you were good, some of these stocks, boom, suddenly go up.
Speaker: We've had stocks that came out with the numbers and within the day were up 20% because the expectations are so low that anything that is a little bit higher, the market says, hey, we have gone too far here.
Speaker: So that's really a bit of a shift.
Speaker: So when you look closely, the market trades better.
Speaker: The market trades better.
Speaker: Fundamentals.
Speaker: But that's, of course, a far cry from saying that sentiment has fundamentally shifted.
Speaker: The selling may exhaust itself, but it's not necessarily an indication that we're going to be off to the races again.
Speaker: No, no, no.
Speaker: So what would it take to really see further gains to come through?
Speaker: Yeah, I think we need to see a couple of things.
Speaker: First of all, we've had in the last year, particularly late last year, a couple of policy announcements from the government that were confusing to the market.
Speaker: If we just have a period where buy this doesn't happen, that's a good thing.
Speaker: We also need to see that actually the earnings growth of companies is not as bad as what some people believe it to be.
Speaker: Most people, if I would ask them, do you think, what was earnings growth last year in China?
Speaker: They'd say, earnings growth, there wasn't even any earnings growth, probably fell.
Speaker: Now, we actually found that there was some earnings growth, but we need to get through the reporting season and then get guidance from companies that they say, actually, you know, it's not as bad.
Speaker: So that would give us a confidence as well.
Speaker: But I think it's not just that we can rely on the companies.
Speaker: We need to have other things helping that market as well.
Speaker: And then it actually comes a little bit back to kind of your expertise here, Fred.
Speaker: We've seen shifts in talk about the macro in China, but what is actually happening?
Speaker: And is there anything that we can get some comfort out of?
Speaker: Well, we had, of course, the National People's Congress in early March.
Speaker: It was a big event.
Speaker: And there was nothing in there that kind of said, we're going to stimulate the economy.
Speaker: We're going to really be off to the races like we've seen in previous cycles.
Speaker: But if you dig through the numbers a little bit, there's more fiscal stimulus coming through this year, mildly, but there are some coming through.
Speaker: There's also perhaps a sense that we're now two years into this big real estate adjustment in China, and at some point, that will have run its course.
Speaker: And maybe it's a bit too early to think about that just yet, but... But the negative drag from that is probably not as much as two years ago.
Speaker: It's not as large, yeah.
Speaker: So we were over two percentage point drag on growth two years ago.
Speaker: 2 percentage points.
Speaker: So if you would grow GDP by 5%, but because of the 2% drag on growth, actually GDP only grew 3%.
Speaker: That's right.
Speaker: And that was two years ago.
Speaker: And then last year, the drag was only 1.5%.
Speaker: And so this year, it might be even lower.
Speaker: And so you can see gradually, gradually, the drag is starting to disappear.
Speaker: Now, it doesn't mean that, you know, we have a booming economy, but certainly it allows macro investors to look slightly beyond the immediate impact of the deflating property market.
Speaker: And that, of course, then puts the side at other sectors.
Speaker: And here there are some sectors, of course, some areas we see more infrastructure spending coming through.
Speaker: We see, you know, of course, a lot of investment in the
Speaker: manufacturing space.
Speaker: So there is areas of growth and so that gives us a slightly more nuanced picture.
Speaker: We no longer just sort of panicked at the big real estate market is looking shaky.
Speaker: So I think there is a bit of a more nuanced perspective among macro investors when we look at China per se.
Speaker: Again, not super strong growth necessarily.
Speaker: All the problems have vanished, but it allows us to kind of look at a bit of differentiating.
Speaker: Yeah, a little bit beyond the bigger numbers.
Speaker: What about interest rates?
Speaker: Are they making it easier for people to borrow money and maybe make it cheaper to borrow money?
Speaker: That's another thing that helps.
Speaker: So fiscal stimulus is part of what they announced in the National People's Congress, for example, bigger fiscal support for the economy.
Speaker: But they're still nudging interest rates lower a little bit.
Speaker: For example, mortgage rates in Europe.
Speaker: China fell at the beginning of the year, and there is still a sense that the Chinese authorities are keeping monetary policy relatively easy relative to other parts of the global economy.
Speaker: And so that should, in theory, ultimately help Chinese companies, Chinese borrowers, for example.
Speaker: But it's not a big stimulus, right?
Speaker: So we have to differentiate between
Speaker: They're helping the economy, but not necessarily like in previous cycles.
Speaker: And what does this do, for example, then to the renminbi?
Speaker: I mean, if interest rates go lower, you would expect the renminbi to weaken a bit from here on?
Speaker: And that's exactly what we see, is that the renminbi is slightly on the weaker side still.
Speaker: Now, the dollar is itself stronger against other currencies, so it's not just a renminbi story, it's also a U.S. dollar story.
Speaker: But yeah, the RMB is slightly on the weaker side, and that reflects, of course, the expectation of the market that Chinese interest rates will not rise sharply over the coming year.
Speaker: And perhaps also, though, the expectation that the economy will do slightly better, but not dramatically better over the coming year.
Speaker: So all of that, and I'm listening to you, Fred, that's all good for sentiment, but...
Speaker: it's not that sentiment is going to change.
Speaker: It's not that you walk into a room and suddenly there's a big party going on.
Speaker: Well, that brings me back to equity, Cyril.
Speaker: The biggest party is usually among the equity boys and girls.
Speaker: So is it time to celebrate yet in China?
Speaker: I think this explains a little bit what we see.
Speaker: A lot of people do not have a lot of stocks in China.
Speaker: They haven't bought so much.
Speaker: Technically, we call that they're underweight against the benchmark.
Speaker: But you see that they are reducing that on the way, so they're buying a little bit more.
Speaker: They say, well, listen, we only have two stocks in China.
Speaker: Normally we got 10 or 15.
Speaker: Why don't we buy another two?
Speaker: Because there are these pockets, travel, some consumer companies, some liquor companies, they do actually pretty okay.
Speaker: So people say, well, why don't we focus on that and buy something there?
Speaker: So very often it's just like you said with the economy, there are pockets.
Speaker: You're going to go beyond the numbers to find where these pockets are.
Speaker: So it is inequities.
Speaker: So it's very specific buying, I think, that's taking place.
Speaker: And that then shifts that sentiment because last year the sentiment was whatever happens, it doesn't matter.
Speaker: I need to get out of China.
Speaker: That has changed.
Speaker: That's very different this year.
Speaker: So I think this is a great time to then take a brief break.
Speaker: And when we come back, I wanted to ask you about sentiment across Asia, how that has evolved in the last couple of months or so.
Speaker: Good plan.
Speaker: So Harold, we talked a lot about China in the first part of the show.
Speaker: Let me ask you about the rest of the region.
Speaker: How has investor sentiment evolved there?
Speaker: India was very much in focus.
Speaker: Japan was in focus over the past year.
Speaker: How has, in the last couple of months, when you talk to investors, when you're on the road, how does sentiment now seem to you when it comes to Asia ex-China?
Speaker: Yeah, there's a couple of interesting things going on.
Speaker: So maybe we kick off with India because you just highlighted that.
Speaker: And India has performed very well.
Speaker: And we see shifts.
Speaker: We had, for example, in India, in a small and mid-cap space, some of the stocks go up 50, 60, 70, 80, 100%.
Speaker: So even the regulator in India said, well, hey, maybe if you're an Indian and you want to buy these stocks, you have to be very careful.
Speaker: The regulator is trying to dampen that sentiment a little bit.
Speaker: So you see the Indian market starting to roll over, in particular in a small and mid-cap space.
Speaker: But the general feeling with a lot of people is that the Indian growth story, we've spoken about this in the past, is a good one.
Speaker: So let it roll over.
Speaker: At some point in time, people believe that's probably a market they want to buy into.
Speaker: If you then go to ASEAN, the sentiment is actually fairly, I would say, muted.
Speaker: The point that does come up is actually further north.
Speaker: And I wanted to ask you exactly about that, because Japan has obviously been in the headlines, certainly for the equity world, but for other reasons as well.
Speaker: So what's the sentiment around Japan?
Speaker: So that is mixed, I would say.
Speaker: There are a couple of things going on in Japan.
Speaker: First of all, it is the yen.
Speaker: And the feeling that maybe if they raise interest rates that could strengthen the yen, that's not good for Japanese equities.
Speaker: So some people say, wow, the Japanese market's done very good, but on the margin there's risk, I take it out.
Speaker: So maybe some money there.
Speaker: And the second issue that's been driving Japanese stocks is changes with corporates.
Speaker: They've sold their subsidiaries, they pay more dividends, they do share buybacks, all stuff that they didn't do in the past.
Speaker: Now that, we call that corporate governance, that's a big change as well.
Speaker: And a lot of people have found
Speaker: They felt that that's a key driver of the market.
Speaker: And now they're looking at Korea because Korea's now talking about doing this as well.
Speaker: So there's a positive vibe about Japan, but the feeling that for some people is like, maybe this is run a little bit.
Speaker: Hey, maybe I should look at Korea because something else is happening.
Speaker: And then when you do look at Korea, we have Taiwan as well.
Speaker: That's very tech exposed.
Speaker: What's the feeling there?
Speaker: I mean, in the US we saw the entire artificial intelligence names do very, very well.
Speaker: Is that starting to kind of color how people think about these very tech exposed economies?
Speaker: Yes, but I think there is more going on.
Speaker: But broadly speaking, yes, people look at artificial intelligence, say, how can I play this in Asia, Korea, Taiwan, and the obvious choices.
Speaker: But
Speaker: Some stocks in some of the largest semiconductor stocks, for example, in Taiwan, they've performed very well.
Speaker: But it's then too easy to say that's because of AI, because I think they just have more advanced products out there.
Speaker: Many more companies say, I need this for my equipment that I built or for my iPhones or my...
Speaker: computers or cars that I built.
Speaker: So there's something else just going on that is not so much AI driven, that is just that they have more advanced chips that are available on the market now for all sorts of other users.
Speaker: In Korea, it's more memory chips, that's the story there, but really the story is will there be these corporate governance changes?
Speaker: Will these Koreans pay more dividends, share buybacks, and these sort of things?
Speaker: So that drives that market a little bit there as well.
Speaker: So the dynamics are a little bit different.
Speaker: But a lot of that comes then also back
Speaker: will the yen strengthen and will people take money out of Japan and go somewhere else?
Speaker: And some people say, well, I think even if the yen strengthens, maybe I stay with Japan.
Speaker: So as I said in the beginning, sentiment is muted on that, some positives, some negatives on the stocks.
Speaker: But a lot depends on the yen.
Speaker: What are you saying about that one?
Speaker: Well, the big story really has been that the Bank of Japan finally, finally raised interest rates.
Speaker: And there's two remarkable things here.
Speaker: One is that it's, at the moment, one of the few banks that's actually raising interest rates globally, whereas most other banks are looking to ease.
Speaker: I'm not aware of any other major central bank.
Speaker: Yeah.
Speaker: Now, you would think that a central bank that raises interest rates would be negative for the economy because it slows down the economy.
Speaker: It would strengthen the currency.
Speaker: But it's not what we've seen in Japan, actually.
Speaker: A Japanese central bank tightened policy, but the yen...
Speaker: didn't strengthen on the back of this, partly because investors are now looking forward as thinking, what's the next step from the Bank of Japan?
Speaker: And here, it's not clear that they can do all that much.
Speaker: And so the good news, I guess, from the equity perspective is that the yen hasn't so far really strengthened all that much.
Speaker: And you would think that it benefits the equity market in Japan because there are exporters, for example.
Speaker: I think the broader issue here when it comes to the macro world is that actually
Speaker: over the last couple of months, the market has also reduced expectations that the Federal Reserve will ease interest rates.
Speaker: And that has meant the dollar has been strong.
Speaker: You go from three cuts to maybe two.
Speaker: Some people talk about only one cut this year.
Speaker: Yeah, at some point we had five cuts in there.
Speaker: Yeah, exactly.
Speaker: And so the dollar has actually been… It means money flows to the U.S. It flows to the U.S. It has been quite strong.
Speaker: And so that's usually a headwind for particularly emerging Asia because it means, well, at the margin,
Speaker: investors prefer to leave their investments in dollar, and that, of course, strengthens the US dollar.
Speaker: I think it's less relevant for equities, maybe.
Speaker: It is somewhat relevant, but not as much, for example, for Forex, of course, for currencies.
Speaker: But, yeah, it takes it up.
Speaker: But it is encouraging to see that despite the fact that the attractiveness to stay in the US because of high interest rates there...
Speaker: that despite that, actually people have allocated money to Asia.
Speaker: And this comes back to the changes in Japan that you just spoke about, Korea, and that sentiment change that's happening in China.
Speaker: Because one thing also, we have a Federal Reserve debt is perhaps not quite as...
Speaker: poised to ease as initially expected, but also because the US economy has done better than expected, and that does benefit Asia as well.
Speaker: So if we look at indicators on the industrial cycle globally, the global manufacturing PMI is above 50, we see exports starting to pick up as well.
Speaker: So there's that part as well.
Speaker: Actually, yes, interest rates may not come down quite as quickly, but the global growth outlook at the margin looks a little bit better, and that's of course good for Asian exports.
Speaker: Well, folks, if you know the two of us, you know we could be going on for this for quite some time, but we've got the producer here waving his hands and we're running out of time, so we're going to have to wrap it up.
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