You're listening to Asia Centric from Bloomberg Intelligence, the podcast that pulls back the curtain non global business so you can invest better across the Pacific Rim. I'm Tom Corbett in Hong Kong.
And I'm John Lee. Southeast Asia's economic rise is one of the world's most underrated success stories.
The nations that call this corner of the world home have become a leading growth market, powering China, the US and much of the world with trade, manufacturing, digital know how, and a wealth of natural resources.
Its progress is rual, but the most exciting part of Southeast Asia's growth story is yet to come. What lies ahead and how can invest his tap into the region's potential.
Let's bring in James Chio, chief investment Officer at HSBC Private Bank.
I think the potential and the economic opportunities for Southeast Asia remains extremely exciting and that's why we are seeing much more interest in Southeast Asia in the years ahead.
And Rina Qualk Asia's financial credit analysts with Lumberg Intelligence.
The trust in the banking system is important and no bank can actually survive a bank right now.
Both joining us from Singapore, James and Rena Welcome.
Hi, Tom and Joan.
Good to be here, pleasure to be here, James.
Why are investors getting excited about Southeast Asia right now?
Well, I think Southeast Asia is on the cusp of a major transformation, and clearly, I think when you look at the market performance of Southeast Asia at least over the last one and a half years, it exhibits a lot of resilience, especially in twenty twenty two. But really
I think some underlying economic currents are happening. For one, the digital economy in Southeast Asia is actually growing very very fast, and of course that's aiding and helping that whole middle class consumption story that's going to be very strong in the years ahead. But also at the same time, what we are having is also a green transformation that's
happening in Southeast Asia. Many parts of the economy in Southeast Asia, it's going to become much more reliant on renewable energy as well as of course electrification of its transportation system and making its cities much smarter in terms of using electricity and energy. So I think the potential and the economic opportunities for Southeast Asia remains extremely exciting, and that's why we are seeing much more interest in Southeast Asia in the years ahead.
James, you discussed the digital revolution that's going on in Southeast Asia. Can you mention some names, some companies, some countries that are really benefiting from this trend?
Clearly, I think what the pandemic did was to kind of digitize a lot of our activities, whether it's e commerce, whether it's travel, whether it's how we buy goods and services. And I think that digital transformation is extremely powerful, especially for Southeast Asia, and that the size of Southeast Asia's digital economy is expected to grow in an exponential rate
in the ahead. So what you could expect is, of course a change in consumption patterns, and many big digital platforms have already been present in many of the Southeast Asian markets.
James, I saw one statistic that Southeast Asia has nine hundred and fifteen million active mobile connections. That's about one and a half times its population. How did Southeast Asia get from there?
To hear?
What is it about Southeast Asia that made it such a digital growth market?
Southeast Asia sort of lead from the entire evolution of salts because many of Southeast Asian consumers or households do not have desktops or even laptops, but everyone has a mobile. So in that sense, a huge adoption of mobile of technology and apps on the mobile does create that sort
of mobile connections that the Southeast Asia has. Traffic jams are issue in many cities like Jakata or even Bangkok or even a Manila, but in order for people to order their food deliveries, sometimes are delivering on the app max It faster because a lot of the deliveries are on two wheelers which actually can cut through the traffic
and it's all done to the app application. So I think that whole digitization of Southeast Asia became so fast and so quick really because of the use of mobile phones. There wasn't a sort of an age where people were on laptops or desktops. It's almost everyone was on mobiles immediately. And also second the ease and convenience of using it in their daily lives, which makes the rise of the digital economy much much faster than in many parts of the world.
And you mentioned ride hailing apps food delivery. Are they the most popular usages of you know, the digital mobile phones and the digital revolution that's going on.
Well, I think that is kind of at the margin the first the way how people transact in their day to day activity. So what you could see is that more and more of whatever transactions that were done previously on the physical level, it's being done on a digital level. So whether it's taking a cab, whether it's ordering food, whether it's to kind of purchase big items, it's been transferred in many of activities into being done on the
digital economy. So I think there is a broadening of activity slowly as digital apps or even the digital economy become much more sophisticated to deal with the changing needs of the consumers.
James ch Oh, You've just talked a lot about the digital economy in Southeast Asia, but let's talk a little bit about the banking side. We've seen banking failures in the US and Europe recently, what about Asia in particular in Southeast Asia and some of the liquidity challenges, Rina Quark, what do you have to add about that?
Thanks for having me, Tom. Now, we actually believe for most of their substation banks, they are unlikely to actually face the deposits like scenario that actually topple of the overseas bank that we have seen recently. Given a relatively
healthy liquidity profile and make the writing interest rate. For most of the lenders in Southeast Asia, they are largely funded by stable and diversified deposits locally and a lot of these deposits are actually invested in loans, with most of the lenders loans to deposit ratio well below one hundred percent, and this actually suggests that there are sufficient liquidity to meet the loans. And of course you know that regulatory liquidity ratios are also well above the minimum hurdles.
But at the end of the day, more importantly, the trust in the banking system is important, and no bank can actually survive a bank run.
You know, there's been banking families in the US and Europe, including Silicon Valley Bank, First Republic recently credits WISS. It hasn't impacted Asia yet, Asian banks and the ones in particular in Southeast Asia in a stronger position.
Sure, I think there are a couple of areas to focus on as we look into a rising interest reate environment. I think definitely, with all the reason turmoil that we've seen in a global banking sector, what we care asset light management is key. What we call are their mismatches
between the asset and libilities and interest rate management. Now, speaking of interest rate management, we have talked about, you know, unrealized losses that we have seen in some of their overseas banks and taking that closer to home where you know, West southast Asian banks are. We believe that for most of the suvis Asian banks, the extent of unrealized losses are manageable, even as interest rate rice.
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As strange as it may sound, can Southeast Asia almost be considered a safe haven?
Oh? While I wouldn't go as far as to say that Southeast Asia will become a safe haven, Southeast Asia very much learned from its lessons from the past, the ninety seven ninety eight Asian financial crisis, where many banks face US problems as we're seeing now with the current
banking situation in US and Europe. But because of that, many of those banks went through significant de leveraging, they went through better capital management, and of course business model had to become a much more robust especially through the cycle. Certainly from that perspective there is a sort of resilience in the banking system as a result. So these things
are going very well for Southeast Asia. It is an opportunity, but clearly I wouldn't say it's a safe haven as yet, but nevertheless there will be bumps and risks down the road, just like any risk assets out there.
James Chio, how much of a challenge is infrastructure investment in Southeast Asia?
Would you say?
And how do you see that unfolding over the next five to seven years.
Well, I think infrastructure is going to be a very interesting team, and I think on various dimensions. I think one of the most important infrastructure bending that has occurred over the last few years it's really to improve on the existing roads, airports, trained connections, and I think those have been going very well, especially if you look at
countries like Indonesia for example. To link up the entire country, which is an archipelago of many islands, you have to improve the ports, you have to improve the airport's train linkages, roads rails. It's a significant project, but I think on many fronts those things have improved quite a fair bit in Southeast Asia, and there is due scope for improvements
in many parts of the region. But also I think there is an increasing focus on energy infrastructure in Southeast Asia, especially as the region is going to transit into much
more renewable energies. And so if you think about Southeast Asia as a region, Thailand has its automotive industry, Indonesia with its nickel deposit and perhaps improved manufacturing of Lincoln batteries, And if you connect all these countries, and of course Malaysia with its manufacturing of semiconductor chips, if you can combine this region as a whole through the free trade agreement, is quite an interesting manufacturing hub all the electric vehicle ecosystem.
That's going to be quite a significant in the years ahead.
James, you mentioned quite a few countries there. Which countries in Southeast Asia do you think are the most appealing right now?
Will? I think from a near term perspective, I think we want to look at perhaps Indonesia and Thailand, for example, because, for one, the global economy is going to be slowing down generally, and of course Indonesia has a large domestic population and a big middle class and that could buffer
some of the volatility associated with slower growth. But also I think you want to play into that whole China's reopening which is ongoing, and if you look at the data as faster and expected, so as Chinese consumers buy more goods and services, particularly commodities from Indonesia as well as Thailand, whether it's agriculture produce or fossil fuel related produce, you will see Indonesia and Thailand benefiting from that China reopening.
James chio Rena, We've seen some Western companies start to distance themselves a bit from China. Some are a little uneasy with a shift in tone there since the pandemic Apple is already decoupling, maybe shifting some manufacturing the India and Elswhere can Southeast Asia benefit from this new wariness about China or is the region's chariot hits too tightly the China Star.
Your take, well, I think that whole trend of deglobalization, and of course it is something that many big multinational or big global companies are making. That decision. Southeast Asia clearly is a destination alongside India as well, and of course it has to be taken into account the entire
kind of criterias. Of course, certain countries have lower labor costs and a labor market that's very competitive for a multinational company, of course, they want to look at where to make production lines, perhaps more resilient southeas Asia is a destination, but also don't forget that Southeast Asia it has also a large population to be consumers, so six hundred and eighty million people as consumers for smartphones, for electronic goods, for electric vehicles, So that also means that
it's nearer to the customers. So I think in a way, I would say the demand for these groups are going to be very important, and I think that's why it's a key destination to look at for many of global companies looking to set up shop in the region.
Rina Quank with Bloomberg Intelligence, any thoughts, Yeah, And I may.
Just add to what James has mentioned. We have actually seen for some of the lenders in this region, they've actually tapped on what we call the Arsian cross border trade flots and this actually helped the banks as we you know, some of the countries actually face rising macro heat wins that could actually tampen some of the don't growth outlook that we see for some of the major
banks here. And as simple banks continue to tap on the don't growth that you know, a major macro heat wins, the daversification that we see in this broader region could help the banks boster earning to momentum. As you know, we see of the macro heatments this year.
Earlier this year, China's population was overtaken by India. A lot of Northeast Asian countries like China, Japan, Korea facing a demographic headwind with an aging population. How is Southeast Asia placed in this regard.
It has a younger population, and of course that will be a tailwind for many parts of Southeast Asia in the next decade or so. And that's why if you think about how economics and growth is, it is primarily about population increasing labor force participation as well as productivity growth. And I think on that count in terms of growth of population, you're going to see quite a fair bit from Southeast Asia, where there's Indonesia, where there's Philippines, et cetera.
So I think that's why that whole demographic division is a very powerful story, one of rising population as well as rising income for Southeast Asia.
Rina there's a lot of financial pundits talking about commercial real estate loans. Some are saying that this is going to be the next shoe to drop. Is this a risk for Southeast Asia and in particular Singapore.
I think that's a very good question joined as we look into what could be the possible trigger points of stress globally. I think Simple Banks commercial realistate notes could face very measurable credit losses despite the rising micro heat with and of course their annulated interest rate risk, as most of their exposures are actually two good polity companies
relatively low the FAULD risk. Now, most of the Simple Banks commercial reistic exposures are in Singapore, where we do believe that SEP veristic sector could remain resilient this year given the fundamentals that are supporting the office and retail segments.
And relating to this question, Singapore just raised stamp duty for foreigners buying real estate from thirty percent to sixty percent. That's by far the biggest in the world. Just how hot is the property market.
Over there for the real estate sector has always been I think one of the hottest market in Nasure and I think if you see for the past many years, how housing loans has always been a dominant loan book or say path of the loan book for Simpole banks. And the next question we may have is that were that actually civilly dampened the housing loans growth that we see for the simple banks. Now, just to take a
step back, firstly, this reason matches. They're impacting more of the foreigners, so for most of the housing loans and the Simpboard banks loan book that mostly for the first time buyers. So that being said, the impact could be more manageable. But of course with the rising interest rates and of course some of the new measures that kick in recently, it might actually dampened the growth a little and moderate, but it's unlikely to collapse.
James Geo, you sound like a Southeast Asia ball am I right.
Well, that's right. I mean from a long term perspective, definitely, because of all these criterias, and I've coined the term Southeast Asian tigers TEA for technology, I for the rising income of the middle class, G for green transformation, E for energy, infrastructure and our our sets. So if you remember Southeast Asia tigers, I think you have many reasons to kind of be bullish for Southeast Asia for the next decade.
That's very clever. Now, at the risk of putting you on the spot, as investors, we like to look up and down. Where would the landmines lurk? In other words, what could go wrong? What are the investment risks in Southeast Asia and where might they be hiding.
Yeah, well, I think for one, southeas Asia is not a meal to the global economy, that's very clear. And also southeas Asia is not a meal to global risk sentiment. So if you do get a pullback or a shop decline in global risk appetite, Southeast Asia can face the them pullbacks because of that. So that's kind of a near term risk. But in terms of the fundamental growth story, I think it's very much intact and it takes quite
a big shock to kind of de risk it. I think, to manage and mitigate the effects of climate change from many parts of Southeast Asia, I think it's going to be both at risk as well as an opportunity. So there are big of course facing Southeast Asia, and I think these are the things that kind of one should watch out for, both for the near term as well as the longer term.
James, for investors focused on ESG, how attractive is Southeast Asia, Well, I think.
That there are a few ways investors could think about it. Of course, you first and foremost want to look at companies within Southeast Asia that does well on these three dimensions ESMNG and clearly I think companies that usually are the best managed or high quality companies usually have good scores on that front. But also I think another way to think about that is also the thing of it
as a tematic opportunity. So whether it's the energy transition within Southeast Asia, I think that's an opportunity, whether it's companies or even corporations that are pushing ahead in the electrification of Southeast Asia's transportation system, and so I think there are many interesting kind of thematics that's going on in Southeast Asia, and I think many times investors fils who realize that these teams are actually moving in the right direction and there's quite a lot of kind of
opportunities out there for this region.
Our guests are James Chio, Chief Investment officer at HSBC Private Bank and Rina Quark Asia financials credit analysts with Bloomberg Intelligence. James, you just spoke at link about ESG, Environmental, Social and governance. There's been a perception that ESG has been slowly gained traction in this part of the world as opposed to the West, perhaps the UK, Europe, the United States. Is that a fair assessment and if so, why do you think that's the case?
Well, I think people are recognizing the importance of that, whether it's from companies, whether it's from governments, or even from households and consumers or even general investors. And it's clear that there is no other way to in fact solve the whole climate change issue and SVIs it's a big part of this whole equation. So we have many governments in Southeast Asia coming out kind of net zero pledges. Many companies within Southeast Asia have also came out with
their net zero plans as well. And also consumers generally now are becoming much more aware of how they consume and what they look out for when they buy certain products. And I can say that also for general investors as well, demanding more of companies when it comes to ESG standards and disclosures. So I think we have a sort of alignment of stars in that sense, and things are moving
in the right direction. While it might not be as quick as most people hope for, but at least I think the direction is moving in the right way.
James, if you're pullish on Southeast Asia as an investor, how would you play this thing?
I think in the near term, some of the equity markets within Southeast Asia, such as Indonesia, Thailand looks interesting, and you want to pick the companies that could benefit from China's reopening, for example. So of course there are a few ways to play where there's to buy some of the consumer companies within these markets, some of the commodity players, or even to look at some of the well managed banks that could benefit from the whole recovery
of the region. Over the longer term, you want to look for some of the longer term dynamics, whether it's technology, whether it's middle class, rising income, middle class, green transformation, energy, infrastructure, or the trade they are set the tigers that I've talked about, there are many companies that are geared towards
growing that whole Asian Southeast Asian tigers stories. The longer term, I think those companies that well positioned on these big structural trends I think can do very well in the years.
A hit and RAINA.
What about your space here, I think in my space, I think probably one of their most recent Kinney wash upon as the AP wants. You know, are we still comfortable with the AP wants issued by most of the self Is Asian banks? I think in this rising issues spreate environment, one of the key rists to watch is what we call the potential non chor risk for the AP ones that are issue for most of the self is Asian banks. And on that front, we believe that
for most of the dollar eighty ones. Now, firstly, let me just take a step back to you know, to talk about what AT wants. Now, this eighty one, this tree letter was it is a form of hybrid debt that comes to wards the bank's regulatory capital. Right. Eighty ones are actually subordinated in the bank's capital structure.
Like contingent convertibles, right rina or more like a cross between a stock and a bond.
Yeah, So they are like a hybrid debt that comes towards the bank's regulatory capital right, and as mentioned earlier, it's subordinated in the bank's capital structure, making it a more riskier kind of that product as compared to the rest of the banks ponds.
So they're hot when times are good, but its holders are at the head of the line of sacrificial lands, if you will, when the walls start crumbling, because at ones are often the first domino to fall. Do I have that right?
So directly, if we look into the bank's capital structure, eighty one's definitely are formed below what we call the benks capital structure, and they only have ranked above what we call the common equity, so they are definitely among the riskier kind of step instruments. And that being said, and that explains why it's higher youth and of course lower ratings.
Yeah, I think equities was traditionally the first line to fall, but the Swiss regulator had a few comments to say about that Rena quad.
Do you think what happened with credit Sweez's eighty ones changed perceptions of the security or did it just expose risk that was already there but investors didn't recognize it.
I think definitely for an investor, as we buy into a riskier high yielding instrument. Is always key to read the bond's terms. I think all the terms and conditions are usually stated in the bond prospected, so it's definitely key for investor to, you know, read all the details closely. Now,
what's next for really banks eighty one's going forward? Definitely we know that banks funding via eighty ones will be more expensive going forward as investor price and such risks as question whether the seniority of claims are still being respected by the rarest jurisdictions. Now, the next question we asked is that are eighty one still a viable funding too for the banks? Now, for most of the Southeast Asian banks, they can still tap on the eighty one
market as a possible funding thought for tailman capital. If you quied, it's remain cheaper to feel their eighty one requirements for eighty one capital instead of common equity.
James Chio Rina quark. I'm a US investor or, a Western investor. Maybe I don't know Southeast Asia that well, maybe I've never traveled here, but I'm looking for exposure to Southeast Asia as a growth market. Where do I look.
Well, I think as an investor, you have to kind of think of Southeast Asia from a global divestication perspective. So I won't say you want to invest everything you have in Southeast Asia, but it has to be part
of your portfolio from a global diveistication perspective. So I think first step, of course, is to kind of do your own research, learn about where the region's opportunities are, look at the past performance of how the region has performed, and ultimately, once you are comfortable with the growth story and opportunity, you could always allocate a percentage into the easiest way, of course, is to look at exchange traded funds, but also you could also consider mutual funds to get
a divers fight holding and exposure to the region. And I think that's usually how investors get the first kind of a step into Southeast Asia.
Rina quark any thoughts, Yeah, If I may.
Just add, if we look into what we call the capital bonds, they are issued by most of the South as Asian Banks's key to look into what is the increment that you pick up as we move down a bank capital structure. Now, as Jase pointed out, you know Thailand placed on the reopening plan in China, so as they look into the dollar capital bonds that issue by tie banks. Here twos could offer relative value for most of the tie banks. Now, if we look into eighty one,
as mentioned, there are some key to watch. What is the possibility of non chorus and of course the bank's underlying credit fundamentals, and we have to look while we look into potential relative value opportunities, we have to be cognistant of each eighty one bond structure as well as
the bank fundamentals. And we have mentioned that for simple banks dollar eighty one they could be quite resilient, and I've actually seen a much lower set of as competitive globe appears amid the whole banking Tomoid Lately.
James Geo, chief investment Officer at HSBC Private Bank, and Rina Quark Asia Financials credit analysts with Bloomberg Intelligence, thank you both very much for shedding some light on what's really remarkable economic growth story in Southeast Asia.
Thank you, thank you for having us.
Thanks Dorman, John.
I'm Tom Corbett in Hong Kong.
And I'm John Lee. This podcast was edited by Clara Chan and thank you for listening to the Asia Centric podcast