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.
Speaker: Make sure you're subscribed to stay up to date with new episodes.
Speaker: Thanks for listening.
Speaker: And now onto today's show.
Speaker: This is a podcast from HSBC Global Research, available on Apple Podcasts and Spotify.
Speaker: Search for HSBC Global Viewpoint or join us via the HSBC Global Banking and Markets page on LinkedIn.
Speaker: However you're listening, analyst notifications, disclosures and disclaimers must be viewed on the link attached to your media player.
Speaker: Hello, Happy New Year and a very warm welcome to Under the Banyan Tree, where we put Asian markets and economics in context.
Speaker: I'm Fred Newman, Chief Asia Economist here at HSBC.
Speaker: And I'm Harold van der Linde, Head of Asian Equity Strategy.
Speaker: 2023 is shaping up to be an important year for the region, not least because of mainland China's grand reopening, including the border with Hong Kong, which is just a few days away.
Speaker: Inflation and the export cycle also remain key talking points for investors at the moment.
Speaker: We're here to discuss those and many other issues shaping the Asian economics and equities landscape in the year of the rabbit.
Speaker: With that, let's get the conversation going right here under the banyan tree.
Speaker: Fred, I propose that we take a walk through the region.
Speaker: It's the beginning of the year, so we can see what is unfolding across the whole of Asia.
Speaker: So let's look at China, North Asia, ASEAN and India in particular.
Speaker: But of course, we kick off with China.
Speaker: The big news there is the grand reopening.
Speaker: That must be good news for consumers and the economic outlook there, correct?
Speaker: It's likely to be good news.
Speaker: Of course, China is relaxing a lot of the restrictions, the control measures that imposed over the past year.
Speaker: But it's going to be a bumpy ride.
Speaker: So the next few months, we actually expect the economy to contract first because of the spike in infections that we're seeing.
Speaker: Before you see then, by sort of mid-year, a strong recovery unfolds, most of the economic growth is actually going to be back loaded towards the second half of the year.
Speaker: And growth drivers, you mentioned consumer spending, of course, very strong, especially services, is something...
Speaker: We've seen in other economies, right, when we get that reopening, it's particularly the services sector that benefits.
Speaker: But in China as well, you might see even other growth drivers like housing construction coming back because there have been a lot of measures being unveiled to support the housing market as well.
Speaker: So a dual, really, recovery, both in terms of reopening and in terms of the housing construction market.
Speaker: But that means about 5% growth this year on average.
Speaker: Surely it must be good news for equities then?
Speaker: Well, in a sense, this is good news for equities.
Speaker: And I think what we see here is that you talk about a kind of delayed response in the economic numbers in the second half of the year in China.
Speaker: What we see in the equity space already is that we see analysts starting to upgrade earnings in China.
Speaker: So it's very minor, but this is a big shift over last year when throughout actually the last almost 18 months, we've seen a continuous downgrading in earnings expectations across China.
Speaker: So earnings upgrades are obviously quite positive for equity.
Speaker: So that's one thing.
Speaker: The other issue that's of importance to the Chinese equity market simply is positioning.
Speaker: Most funds, either regional funds or global funds, are just heavily on the weight on China.
Speaker: They came in last year being very cautious on China for all the reasons we discussed in the podcast last year.
Speaker: But yeah, now they might get caught in that on the weight position.
Speaker: So we've seen inflows in China going up
Speaker: quite substantially, but because the market has gone up, they need to buy more in order to move neutral or if they want to overweight.
Speaker: So I think there's a flow dynamic that will unfold in Chinese equities as well that adds further complexity to the whole story.
Speaker: So the way you described it almost reminds me a little bit in global context.
Speaker: Last year, broadly speaking, U.S. was looking relatively strong to the growth terms, at least for part of the year.
Speaker: Maybe equities holding up a little bit better in the U.S. than in mainland China.
Speaker: This year, it might be the other way around, perhaps?
Speaker: It could well be the other way around.
Speaker: The important other dynamic here is, of course, what happens in the U.S., not just with growth, but also with inflation and interest rates.
Speaker: Were those interest rates to come down throughout 2023, that's an additional positive factor in China.
Speaker: So we have the economic recovery, the earnings recovery, we have the positioning, and maybe the global macro is going to help this particular equity market as well.
Speaker: So that's really positive.
Speaker: And of course, one other aspect of China's reopening, quote unquote, is the international dimension.
Speaker: More tourists, probably Chinese tourists venturing abroad.
Speaker: We have a lot of connectivity among Asian economies.
Speaker: If we move to Northeast Asia, how would you think about the equity markets in that particular context in Northeast Asia, which of course includes Japan, Korea and Taiwan as well?
Speaker: Yeah, that's right.
Speaker: I think there's a couple of interesting dynamics going on in those particular markets.
Speaker: There's one issue I'm going to ask you a question about in a second.
Speaker: The first issue is what you refer to the grand reopening of mainland China.
Speaker: That means potentially that more business and tourist travel.
Speaker: Korea seems to be the obvious choice.
Speaker: That's at least where they've gone mostly in the past.
Speaker: That would benefit local companies there.
Speaker: That's anything from confectionary companies, companies that sell cookies to theme parks to domestic consumption.
Speaker: Some of the supermarkets and hypermarkets that are in Korea.
Speaker: So that is a first impact.
Speaker: The other issue in those markets is really what happens with the global economy.
Speaker: These are large technology markets.
Speaker: They sell computers and memory sticks and cars and these sort of things.
Speaker: So global demand is really an issue.
Speaker: It's probably more of a worry, I would say.
Speaker: So on the exporters, you've got to be probably careful there.
Speaker: If you really want to go for some of these markets, don't look at what the demand is, but really what happens with the supply in these markets.
Speaker: There are certain tech industries where we see cuts in consumption, often in CAPEX and investments and these sort of things.
Speaker: But the other bigger thing is, of course, what's going on in those economies, in particular Japan.
Speaker: We've seen some changes in interest rates there.
Speaker: What is your view on that?
Speaker: Well, Japan is certainly an interesting story in 2023.
Speaker: And we just had big news about a change in the Bank of Japan's monetary policy, at least a bit of a tweak, a widening of that yield curve control that they had introduced.
Speaker: And that is read by some people, perhaps as a signal that they're
Speaker: think about changing monetary policy, but we probably don't think so because there's not really an inflation problem in Japan.
Speaker: In fact, Japan, still the outlook is somewhat challenging.
Speaker: It's partly just like elsewhere in Northeast Asia, there's a challenge of weaker exports coming through.
Speaker: You mentioned
Speaker: You already hinted at the tech cycle, for example, the export cycle being a bit of a headwind for Korea and Taiwan.
Speaker: It's true also for Japan, right?
Speaker: The new orders for electronics are contracting.
Speaker: We're seeing still weaker demand for consumer and industrial electronics come through.
Speaker: And that kind of weighs on the export performance and hence the overall economic performance of Northeast Asia, including Japan.
Speaker: And that's why the Bank of Japan will probably not really engage into a
Speaker: monetary tightening cycle even if inflation is a little bit elevated in Japan.
Speaker: Well, we're going to take a closer look at the outlook for Southeast Asia and India in a moment.
Speaker: First, though, we want to let you know that you can catch the two of us at HSBC's Asian Outlook Conference, which kicks off here in Hong Kong on Tuesday, January 10th.
Speaker: We'll be taken to the stage in person alongside global research colleagues from our economics, equities, fixed income and FX teams to discuss this year's topic, inflation, recession and beyond.
Speaker: The conference then heads to Singapore on January 12th.
Speaker: So if you happen to be there, please join us.
Speaker: And if you can't make it to Hong Kong or Singapore, you can also participate in an online session a week later.
Speaker: If you're a global research client, you can register online at research.hsbc.com or reach out to your HBC representative for more details.
Speaker: Good Fred, we've spoken so far about China, we've looked at North Asia.
Speaker: Let's move to Southeast Asia.
Speaker: What are the economic dynamics in that part of the region?
Speaker: Well, overall, the ASEAN region has been extraordinarily resilient over the past year.
Speaker: Growth is still relatively robust, but we're likely going to see a slowdown coming through during the year of the rabbit.
Speaker: And that's partly because what we just mentioned, the export cycle is weakening.
Speaker: Tech also matters for some of the Southeast Asian economies.
Speaker: Think Vietnam, think Singapore, think Malaysia.
Speaker: But then there's also the issue that we had fairly elevated inflation readings there, and that's biting into consumers purchasing power.
Speaker: We saw higher interest rates, for example, as well.
Speaker: And with a lag, that's going to slow down consumer spending, investment spending by companies.
Speaker: Now, it's going to be a mild slowdown.
Speaker: But still, the region overall is enormously resilient.
Speaker: If you just look at foreign direct investment, for example, still pouring in at record levels into the region, partly because of supply chain rejigging, partly because global companies are looking at very promising domestic consumer markets.
Speaker: Now, some of the equity markets have actually outperformed, I think, global peers over the past year.
Speaker: So what are your thoughts on the equity side here in Southeast Asia?
Speaker: You're correct.
Speaker: Some of the ASEAN markets have done really well in 2022.
Speaker: For the reasons you've mentioned, supply chains have reshuffled.
Speaker: So that means more employment for people there.
Speaker: That means more consumption as well.
Speaker: That's a positive.
Speaker: And of course, the grand reopening of mainland China suggests that we could submit tourism going to places like Phuket or Bali or the Philippines.
Speaker: in the course of 2023 as well.
Speaker: That's a positive as well.
Speaker: The issue really for Southeast Asia is how people are positioned in it.
Speaker: Last year, most funds were underweight on China.
Speaker: They needed to go somewhere else in the region.
Speaker: And markets such as Indonesia were the preferred destination in 2022.
Speaker: The issue really is that most funds have already bought therefore into that story and most of them actually are starting to reduce that at the expense of maybe going somewhere else in the region.
Speaker: We see outflows actually of some of the ASEAN markets and inflows in China at the moment.
Speaker: Now, there will be a greater differentiation.
Speaker: The supply chain story and employment story is good for most markets.
Speaker: Thailand, Malaysia, Indonesia, I would say.
Speaker: The grand reopening of mainland China is probably more positive for Thailand.
Speaker: That's what most tourists are going to go for.
Speaker: So there will, I think, also be a greater differentiation across the ASEAN markets as we go deeper into 2023.
Speaker: The other big economy, of course, in the region is India.
Speaker: The dynamics there seem to be completely different than in the rest of Asia.
Speaker: Is that fair to say, Fred?
Speaker: It is.
Speaker: And India is an economy that is perhaps less affected by some of the vagaries of the global economy that we've seen elsewhere.
Speaker: So we talked about Northeast Asia is very open, right?
Speaker: Sensitive to global trade cycle.
Speaker: Southeast Asia, of course, as well.
Speaker: India is more domestically focused in many ways and has therefore also delivered surprisingly resilient growth, actually, over the past year.
Speaker: Now, that's likely to slow again over the coming year.
Speaker: The
Speaker: Central Bank has raised interest rates.
Speaker: We need to see some fiscal consolidation probably on the government side.
Speaker: But broadly speaking, slow down by still fairly elevated growth levels.
Speaker: And that reflects partly that structural improvement in India's growth profile.
Speaker: So we see productivity improvements coming through very,
Speaker: via some government policies.
Speaker: If you take, for example, the electronification of bank records, for example, it gives lots more Indians access to the financial system.
Speaker: We're seeing much more capex coming through by large companies, foreign direct investment pouring in, lots of investment going to attack.
Speaker: All of that is really lifting India onto a higher growth plane.
Speaker: So yes, the economy is flowing, but it's remarkably, remarkably resilient.
Speaker: But of course, the question is how do investors look at India these days?
Speaker: Yeah, well, from the equity point of view, the story is actually very similar.
Speaker: The earnings growth story in India
Speaker: is very resilient, just healthy.
Speaker: We see good earnings growth across a wide range of sectors.
Speaker: In line with your kind of economic outlook, you also see that very high growth numbers are moderating, but still pretty decent numbers.
Speaker: High teens, maybe even early 20s this year, earnings growth in India.
Speaker: So that is really positive.
Speaker: The issue really is valuations in India.
Speaker: It is by far the most expensive market across the region.
Speaker: It is one of the best stories, but it's also one of the most expensive stories in the region.
Speaker: So as an investor, you really have to ask yourself what type of investor you are.
Speaker: If you're looking for long-term structural growth that is highly visible, India is the great story.
Speaker: But if you say, I want to buy stocks when they're really cheap, I'm a value investor, then India is a very difficult market for yourself.
Speaker: The other thing is that the electrification of all sorts of records creates new business opportunities in India.
Speaker: These companies are growing rapidly.
Speaker: They need money.
Speaker: Therefore, they go to the equity markets, a lot of IPOs of all sorts of new tech companies in India.
Speaker: That means a further diversification of what is available in that market.
Speaker: Yeah, the Indian story is just really, really healthy, very good, just really expensive.
Speaker: That's what you have to ask yourself.
Speaker: Are you willing to pay these multiples for Indian equities?
Speaker: Always difficult questions to answer for investors, of course.
Speaker: But Harold, here we are at the start of 2023, I think.
Speaker: it'd be fair to say that none of us would have predicted really the turbulence that the year of the tiger brought last year to the region.
Speaker: Now, as we look into the year of the rabbit, what are some of the things that we should really worry about?
Speaker: One thing that comes to mind from the economic side, for example, is
Speaker: potentially a very much deeper than expected slowdown in the Western world, which we'd like to highlight Asia's resilience, but we're still tied to the hip, right, to the Western world.
Speaker: Exports, for example, matter enormously for this region.
Speaker: So I would highlight potentially a risk of a recession in the U.S. and Europe would certainly take some of the shine off of growth
Speaker: in Asia as well.
Speaker: But from a market side, how do you look at the global risks here impacting us in Asia?
Speaker: Weaker growth is not good for equity, so that is obviously a risk.
Speaker: But on the other hand, you could argue we have the grand reopening of mainland China that offsets some of that weakness that might come from the US or Europe.
Speaker: And the other important factor to look at is simply what would happen with interest rates.
Speaker: If there would be much weaker than expected growth in, say, the US, it might well be that the central banks there start to cut interest rates.
Speaker: And that's actually a positive for us as well.
Speaker: So we have maybe a few buffers here in Asia that could help us out in such a difficult kind of global growth environment.
Speaker: Hopefully that's going to play out in 2023.
Speaker: Well, Harold, according to the Chinese zodiac, people who were born in the year of the rabbit have sort of that soft and tender characteristic.
Speaker: And let's hope that after the wild ride of the year of the tiger, that that's indeed what markets and economics will deliver for the next 12 months.
Speaker: Well, that would be very much welcome, I think, after what we've seen in 2022.
Speaker: Soft and tender sounds a hopeful theme for 2023.
Speaker: Fred, so I'll be seeing you at the Asia Outlook Conference here in Hong Kong next week.
Speaker: And for any of the listeners who will be there as well, please come and approach us, tap us on the shoulder, have a chat with us about what you think about markets or economies.
Speaker: And on that note, I'd like to wish all of our listeners a very happy new year 2023.
Speaker: Happy new year.
Speaker: Thank you for joining us at HSBC Global Viewpoint.
Speaker: We hope you enjoyed the discussion.
Speaker: Make sure you're subscribed to stay up to date with new episodes.
