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: However you're listening, analyst notifications, disclosures and disclaimers must be viewed on the link attached to your media player.
Speaker: Welcome to Under the Banyan Tree, where we put Asian markets and economics in context.
Speaker: I'm Harold van der Linde, Head of Asian Equity Strategy here at HSBC, and I'm delighted to welcome back my regular co-host, Head of Asian Economics Research, Fred Newman.
Speaker: Well, thank you very much, Harold.
Speaker: It's good to be back here with you in Hong Kong.
Speaker: And I've been out of town for a few weeks talking to clients, and we thought it'd be a great idea to do a podcast on what clients really wanted to know about Asian markets and the Asian economic landscape.
Speaker: So without further ado, let's start the show.
Speaker: From HSB Global Research, this is Under the Banyan Tree.
Speaker: Fred, welcome back in Hong Kong.
Speaker: You've been to the HSBC Asia Conference in New York.
Speaker: Am I right?
Speaker: That's right, Harold.
Speaker: Still feeling the jet lag doesn't get easier with age, of course.
Speaker: People can't see you.
Speaker: I can, but I can see the jet lag.
Speaker: You can probably see it written in my face.
Speaker: That's right.
Speaker: But it was a wonderful conference with the HSBC Asia Investment Forum.
Speaker: They've been running it well over a decade now.
Speaker: And great keynote speakers.
Speaker: One of them, by the way, was Chris Miller, who is the author of Chip Wars, which is a book.
Speaker: about the semiconductor industry, the history, and really brings it up to date, talk about geopolitical tensions when it comes to the semiconductor industry.
Speaker: And we also had Michael Pettis there, professor at Peking University, for example, who talked about China's outlook, for example.
Speaker: One of the interesting things is talking to investors in the U.S. is that investment in Asia, broadly speaking, is still very light.
Speaker: That is, you know, the problem really is for many investors is U.S. interest rates are so high and that provides a hurdle for investing in other regions, right?
Speaker: If you receive 5% of your return and U.S. dollars on your money, then why go to other
Speaker: economies and so you can really feel that high US interest rates are kind of restraining investments.
Speaker: This has been the story over the last say year right rates in the US are high money goes into the US it strengthens the dollar why would you put money into a risky asset if you can get relatively safely something like 5% on the deposit at a bank right so that's not been good for for Asian markets in general but the tone is shifting here right now
Speaker: It's shifting.
Speaker: And in fact, we see now U.S. interest rates come down very gradually.
Speaker: And so the market is starting to then look at alternatives and maybe emerging markets are becoming attractive again.
Speaker: And within that, where are we going to invest?
Speaker: We've been there a little bit before.
Speaker: In the middle of the year, we also had a feeling that, hey, maybe interest rates are going to come down in the U.S. But then CPI numbers, inflation numbers in the U.S. came out and it looked like maybe Fed has got to do more.
Speaker: But given the tone of Fed talk, it really looks like we've turned a corner, I have the impression.
Speaker: It feels like we've turned a corner a little bit.
Speaker: The U.S. dollar had also weakened the last two or three weeks just a little bit.
Speaker: So that, of course, matters as well.
Speaker: And there's some investors who are now looking at 2024 and thinking, is this a year where maybe investing in emerging markets is coming back?
Speaker: And of course, one of the key words, of course, mainland China, where are we going there?
Speaker: And that's the anchor, right, in many ways for investing in Asia.
Speaker: Must have come up in your conversations all the time.
Speaker: Come up all the time.
Speaker: What's the mood there in Asia?
Speaker: Well, it's interesting, right?
Speaker: Because it's too big to ignore in many ways.
Speaker: Even if you're not directly invested in mainland China, China is still so large it matters for the global economy.
Speaker: So investors are certainly very keen to hear what's going on there.
Speaker: But I'm also sensing that everybody says, well, you know, now it's too risky at the moment.
Speaker: We don't have visibility.
Speaker: But I almost wonder whether if things improve in mainland China, and it's the second largest economy in
Speaker: the world, whether it won't warrant another look then.
Speaker: It's still a big investment class, isn't it, particularly on the equity side?
Speaker: Yeah.
Speaker: So we know that some US investors have said we do not want to have a lot of exposure to China.
Speaker: They publicly stated that.
Speaker: And it's mostly pension funds.
Speaker: They're quite big.
Speaker: I mean, that's something like 35, 36 trillion dollars in pension funds in the US.
Speaker: Of course, not everything goes to China.
Speaker: That goes around the world and into the US.
Speaker: So they're a big investor.
Speaker: And then, of course, you have all sorts of other investors as well.
Speaker: And we've seen over the last year and a half, two years, graduate their exposure to China being cut to significantly underweight positions.
Speaker: That means they have much less than what the benchmarks, the stock market sizes would imply.
Speaker: But if you then take a look at Chinese equities, actually the earnings that are coming through is not too bad.
Speaker: We're still somewhere...
Speaker: in kind of three quarters through the year, but the Chinese earnings are growing at about 18% consensus forecast at the moment for 2023, something like 16 for 2024.
Speaker: That's not bad growth, right?
Speaker: If you invest in something.
Speaker: It's not bad growth.
Speaker: And of course, the other part of the conversation that keeps coming up is when we talk about Asia investment is India.
Speaker: And I think there is a broad agreement that India's fundamentals have improved growth is very strong.
Speaker: Of course, on the fixed income side, we have now bond index inclusion next year that might need to inflow.
Speaker: So it's also opening up more as a market.
Speaker: But on the equity side... Yeah, Indian companies, in particular some of the large caps, belong to the most profitable companies on the planet, I'm even willing to say.
Speaker: Some of the straightforward food companies or companies that sell stuff like shampoo and toothpaste and so on.
Speaker: Basic products, they can be very, very profitable in India for a variety of reasons.
Speaker: It's got to do with limited competition, difficulties in distribution and all these sort of things.
Speaker: And if you're profitable, yeah, you should be trading at a higher multiple, right?
Speaker: So that's one of the reasons why it looks really expensive.
Speaker: But what we've seen in markets more recently is that people have been going into India throughout this year, but more recently some of the money has been taken away from India and has flown into China initially.
Speaker: People rebuild positions in China.
Speaker: They're actually, funnily enough, cutting that a little bit again and moving it into the tech companies in Korea and Japan.
Speaker: So the flows have gone up there.
Speaker: We're going to take a quick break here.
Speaker: And when we come back, Fred, I want to talk about the electronic cycle in Asia.
Speaker: Fred, Northern Asian markets are really driven by tech, right?
Speaker: When you were traveling, did you discuss the electronic cycle in the region?
Speaker: Yes, it started to come up.
Speaker: And I think this is where you have a divergence between micro and macro.
Speaker: So in the micro sense, a lot of investors are getting excited about the green shoots we're seeing in the electronics sector.
Speaker: For example, DRM prices are lifting.
Speaker: Korean exports have actually started to pick up a bit.
Speaker: And so there are signs that the electronics sector is recovering tentatively.
Speaker: On the other hand, the macro indicators suggest, well, there's still a lot of headwinds coming through.
Speaker: And so that's been a subject of discussion to what extent are the macro headwinds going to restrain the upside on the electronics side.
Speaker: But, of course, that's something that's very dear to the heart of equity investors.
Speaker: And I imagine some of the tech names, the tech sector generally has performed quite well of late.
Speaker: Yeah, so what we've seen in equities is an anticipation that in particular memory prices, so that's the chip if you do something and you open up your phone again, it goes to the same website, right?
Speaker: That these memory prices, that they would go up.
Speaker: This has been talked about for quite some months now, and we've seen the share prices move over up and down in anticipation of it.
Speaker: But over the last, say, six months, actually, since the beginning of the year, these stocks, in particular Korean stocks, are exposed to this.
Speaker: They've really gone up.
Speaker: And we now also see that DRAM prices are moving higher.
Speaker: The issue here is that you need more memory if you have servers that run, for example, large data sets for AI.
Speaker: So that's a sort of new trend that comes into it.
Speaker: But also the inventory levels is rather low.
Speaker: So you see, for example, that the order flows can be pretty good.
Speaker: even though maybe demand, ultimately global demand is going to be weaker.
Speaker: So that's a near-term sort of issue that plays a role as well.
Speaker: And I think that's one of the big questions.
Speaker: To what extent are there near-term inventory adjustments and to what extent do you have a lasting pickup?
Speaker: Because some of the indicators we would watch from the macro level, for example,
Speaker: it's unlikely that we see a dramatic pickup in global GDP growth next year.
Speaker: The second one is if we look at global new orders of consumer electronics, of industrial electronics, they're still deeply contracting.
Speaker: And so that suggests there are headwinds.
Speaker: some of the things that are from micro level that get people more excited about it.
Speaker: You mentioned AI, of course, that's a secular trend that's new.
Speaker: And the other thing is, is there a potential upgrading cycle coming through?
Speaker: Because people bought a new mobile phone and a laptop in 2020, 2021.
Speaker: And so by 2024, are we then getting into a global upgrade cycle where you could see strong consumer demand for electronics?
Speaker: even if global GDP is not doing well.
Speaker: And that's one of the, some of the key questions that are being asked.
Speaker: Well, that's the exciting job of an equity strategist, Fred, whereby you can listen to economists and figure out what happens with demand.
Speaker: But there's so many other factors that play a role in the outlook for these individual companies that make these chips.
Speaker: But for the moment, it seems like, yeah, these prices for memory chips are moving higher.
Speaker: Yeah, I was going to say, and that's why strategists and economists rarely agree.
Speaker: And that's why we like to give our audience two opinions.
Speaker: That's right.
Speaker: So one of us is always right.
Speaker: At the end of the day, yes.
Speaker: So Fred, you've just come back to Hong Kong.
Speaker: You've been traveling for a couple of weeks.
Speaker: I know you've got a little boy at home.
Speaker: So for him, if you go on the road for two or three weeks, that's like 10% of his life already, right?
Speaker: Did he remember you when you came back?
Speaker: Well, you're right, Harold.
Speaker: He's 11 months now.
Speaker: And so when I walk in the door after being away, he has a strange look on his face and looking at his mom and saying, Mom, who's that strange man who came in the door?
Speaker: So it's a shame because you miss a lot, right?
Speaker: In these two weeks, he made a big jump.
Speaker: He's now waving.
Speaker: And then, of course, any parents will get exceedingly excited when he waves his hands.
Speaker: Yeah, exactly.
Speaker: But these are the small things, of course, you miss.
Speaker: But Harold, you're at the other end of the spectrum.
Speaker: Your son also just had a big, marked a big occasion, didn't he?
Speaker: Absolutely.
Speaker: He graduated from the University of Amsterdam.
Speaker: He studied something called communication sciences, which is like statistics and social media.
Speaker: Wait, he didn't want to become an equity strategist like his dad?
Speaker: No.
Speaker: Actually, funny enough, when he was like eight years old or so, he was once here in the bank with me.
Speaker: I had to do something on a Saturday.
Speaker: So I brought him into the office and he looked around and says, well, what are these people doing here?
Speaker: So I explained how the office layout worked and these people do this and that.
Speaker: And he looked at me and says, I don't want to do that.
Speaker: And he was already eight years old.
Speaker: I said, oh, that's good.
Speaker: Don't do that.
Speaker: Eight years already, quite a smart boy.
Speaker: Absolutely.
Speaker: So he's going his own way now.
Speaker: But yeah, the great advantage of this, Fred, and you might have a different view on this, but I don't really have to pay tuition fees too much anymore.
Speaker: You're an empty nester now.
Speaker: I'm an empty nester.
Speaker: You're an empty nester.
Speaker: Unfortunately, I'm overjoyed having a son, but it also means I'll be paying college tuition in my 70s.
Speaker: So I fear this podcast will have to run for a couple of decades in order for me to fund the tuition at some point.
Speaker: Well, good for you, Dan.
Speaker: Congratulations.
Speaker: Yes, it was always a joy coming back and to see a kid.
Speaker: And so I wouldn't miss it for the world.
Speaker: And on that tender note, ladies and gentlemen, we're going to say goodbye for another week.
Speaker: We hope you enjoyed the podcast as much as we did.
Speaker: And we look forward to talking to you again soon.
Speaker: In the meantime, you can get your global economics fix from our sister podcast, The Macro Brief.
Speaker: Thanks again for tuning in.
Speaker: Take care till next week.
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.
