Distinguished Speakers and Expert Moderation
The event shared profound insights into the economy and capital markets, thanks to a lineup of speakers from renowned Swiss financial institutions, including Ms. Eva Lee, Head Greater China Equities at UBS Global Wealth Management; Mr. Carlos Casanova, Senior Economist Asia, Union Bancaire Privée; Mr. Stefan Hofer, Chief Investment Strategist, LGT Bank and Mr. Richard Tang, Executive Director, Head Research Hong Kong, Julius Baer.
Mr. Bassam Salem, Chairman of the Financial Services Committee and Board Member at the Swiss Chamber of Commerce in Hong Kong and Dr. Daniel Brunner, Chairman of the Finance Sub-Committee at the Swiss Chamber of Commerce in Singapore, moderated the panel discussion with some excellent thought-provoking questions.
As one of the Gold Sponsors, UBS graciously provided the venue for the event, hosting it at the prestigious Financial Finance Tower in Hong Kong. The atmosphere in this iconic setting was one of professionalism, expertise, and anticipation as attendees gathered for an evening of insightful discussions on the economic landscape.
Proceedings of the panel discussion
Throughout the event, the panelists were individually addressed and responded one by one. Dr. Brunner opened the discussion by inviting each of the panels to provide a short personal or house market overview. This introduction followed detailed questions concerning the latest economic trends and insights that are currently shaping our world.
Will the recession be soft in the US?
Mr. Hofer highlights the current market obsession: WillThis question is particularly interesting because there have only been seven recessions in the last 50 years, which is not very often. The market seems to be a bit obsessed with when the next recession will come and how it will affect individual portfolios. Therefore, Mr. Hofer and LGT envisage the prospect of a soft landing as more likely, mainly because of the strong labour market. While a recession is unlikely, it remains an important topic to be observed over the next 6-9 months.
Strategic Bond Investments
Ms. Lee recommends positioning in bonds despite the million-dollar question of a potential interest rate cut next year. Furthermore, UBS sees India as an emerging market with potential, considering it as a “China plus one” strategy. However, they have not abandoned China.
Global Economic Challenges
Mr. Tang expresses concerns about the Chinese economy and its market, which has also led to some signs of weakness in Europe. He is worried that the European Central Bank (ECB) its monetary policy for too long, while inflation in Europe is rising. Furthermore, a reference is made to the US markets and highlights the increased fund positioning. Furthermore, he agrees with Ms. Lee regarding Asia markets and favours India in the long term. As a short-term option for the end of the year, he mentions Japan, mainly because of its improvement in corporate buybacks.
Mr. Casanova acknowledges the points made by his colleagues. Furthermore, he emphasizes that the current world situation differs significantly from the initial projection at the beginning of 2023. Contrary to expectations, the US is not in a recession, and the Federal Reserve is not cutting interest rates. This can represent a challenge to Asian Asset classes because the rates are expected to remain at 4.5% to 5% for an extended period of time.
Despite some positive aspects, the year 2023 has been challenging for Asian markets. The initial reopening was strong but short-lived, but the authorities did not take sufficient measures to ensure a sustained economic recovery. This led to a slowdown in the second quarter, and the market sentiment is cautious regarding China. Mr. Casanova does not expect a massive support package from China but rather a gradual and sector-specific recovery. While the housing sector remains contracted, consumption is expected to recover first. Despite this rather unfavourable news, Mr. Casanova suggests that the actual situation might not be as dire as reported by international news.
High Interest Rates and the Absence of Recession
The pace of US interest rate hikes is faster than at any time in recent history. Statistically, this should have led to a recession. However, the post-COVID period is influenced by a surge in excess savings, perhaps caused by the recovery policies. During COVID-19, policymakers worldwide adopted an attitude of preventing job losses due to the virus.
The US policy measures differ from the approach Europe has chosen. However, the panel does not judge the specific policy measures but rather analysed a few of their implications. The US government distributed checks to stimulate consumption, which led to the US having a federal deposit of around 30 trillion to date. The presence of such substantial fiscal stimuli challenges the idea of an imminent hard landing, which statistically should have already occurred but has taken a different turn this time. The full impact of the latter will only become apparent in the following year.
The current Situation of the US Dollar
Mr. Hofer anticipates a moderate depreciation of the dollar but disagrees with the idea of massive dedollarization. He questions the availability of a viable alternative to the US dollar and does not foresee a drastic collapse in its value.
Mr. Casanova expresses a similar view, suggesting that the US dollar will maintain its strength throughout the year or at least until the Fed might begin to cut interest rates in the second quarter of the following year. He expects pressure on Asian currencies and anticipates a strengthening of the US dollar against the yen, possibly reaching the exchange rate of 150. This example shows that the yen is under significant pressure, which indicates, among other things, that the dedollarization trend might be overplayed. Furthermore, the high upfront cost of shorting the dollar limits a further depreciation driven by speculative forces.
Both Mr. Hofer and Mr. Casanova cast doubt on the hypothesis that the will replace the US dollar, highlighting its limited use in cross-border payments and foreign exchange transactions. They suggest that for the RMB to play a more significant global role, China would need to fully open its capital account, a process expected to take many years.
Swiss Outlook: Interest rate and Swiss franc
The panel does not consider the current situation of Swiss inflation to be threatening. However, they expect the Swiss Franc to depreciate slightly against the dollar.
China’s Economic Dynamics
The panel analyses China’s shifting economic dynamics. They highlight how China, a global economic powerhouse, has experienced a significant transformation with declining economic growth. China’s expected GDP growth is currently below the target of 5%. Looking ahead, even with a more conservative estimate of 4.5% for the next year, this would mark the third consecutive year with growth below 5%. This shift implies a new growth paradigm for China, which comes with the need to balance conflicting objectives, such as industrial upgrading and developing into a consumption-driven economy. This development will particularly affect trade compositions. Mr. Casanova emphasizes that even with slower growth projections, China is expected to contribute substantially to global GDP growth.
Ms. Lee and Mr. Tang express cautious optimism, suggesting a 4.2% growth rate for China. Mr. Tang points out two critical challenges: the intent to stimulate the economy and the effectiveness of such measures. They speculate that geopolitical concerns, such as the Taiwan and U.S. elections in the coming year, may influence China’s economic policies. Additionally, they stress the difficulty of addressing China’s current demand-side issues, which include property market concerns, business investments and consumer confidence. The consensus is that the Chinese economy is changing, with a recent downward revision of the GDP growth .
Furthermore, the panel underlines how this situation is characterised by urgency, considering unemployment rates, particularly among the youth, and property market challenges. Ms Lee noted that China primarily addresses cyclical challenges, while there is awareness of the structural problems. She expects China to focus on domestic consumption and highlights the need for investors to identify specific niches or companies that align with China’s evolving policies and economic landscape.
Caution Regarding the “Japanization“ of China
Recently, there has been a lot of discussion regarding the comparison between China and Japan’s economy, which is often referred to as “Japanification.” The concern is that China might face a prolonged period of stagnation similar to Japan. Japan’s economy faced decades of policy errors and deflation but was eventually able to achieve positive results with Abenomics. The country achieved sustainable inflation and an improved corporate governance structure. The panel highlights further structural differences between the Chinese and Japanese economies and is cautious against worrying about the Japanification of China’s economy.
AI Landscape and Industrial Automatization
The panel highlights the challenges posed by an aging population and the lessons learned from the COVID-19 pandemic, emphasizing the need for robotics support in addition to human labour. Furthermore, they identified contrasting dynamics between the Chinese and the US artificial intelligence (AI) markets. China operates within a different regulatory framework for AI, which presents more challenges for Chinese companies compared to their US counterparts. The cost of implementing AI remains high in general. Additionally, the panel referred to other technology trends like cloud computing and 3D printing.
Outlook Hong Kong Economy: Focus Real Estate
The panel expects Hong Kong to have GDP growth of 4% this year, primarily driven by consumption, particularly due to the return of cross-border travel. However, other significant variables of the economy, namely financial services and real estate, are still experiencing contractions. Some concerns were raised about the sustainability of this consumption-driven growth and emphasizes the need for recovery in financial services and real estate to ensure a stable economic outlook for Hong Kong. Additionally, the speaker highlights the impact of Hong Kong’s exchange rate being pegged to the US dollar, leading to higher interest rates and potential challenges due to weaker demand from China in the future. Property holders, Hong Kong Residents and Investors should also be mindful of additional downward pressure on Hong Kong home prices.
Hong Kong Dollar Peg against the US-Dollar
The last topic prompts a discussion on the sustainability of the HK dollar peg on the US dollar. Since 1983, the Hong Kong currency, known as Hong Kong Dollar (HKD) has been pegged to the US dollar, meaning that the exchange rate between HKD and USD is fixed at approximately 7.8 HKD to 1 USD. This peg is actively maintained the Hong Kong Monetary Authority (HKMA).
Mr. Casanova suggests that a transition of this peg might become plausible in several decades when the RMB attains greater convertibility. However, for the time being, the peg to the US dollar seems to be firmly in place. This conviction is also supported by the fact that the Hong Kong government demonstrates a strong commitment to upholding the peg and maintains significant foreign exchange reserves, double the amount mandated by the currency board, to ensure its stability.
Focus on India
The Indian GDP is expected to grow by 6% next year, making it an attractive market for investors. Despite concerns about the country’s protectionist policies, there is optimism regarding India’s growth potential. India’s reputation in the tech sector and significant infrastructure development efforts contribute to its appeal. The panel discusses India as the most favourable option as “China plus one” and if projected government plans materialize, anticipating even higher structural growth by 2025.
Analysing ASEAN Economies and their Stock Markets
ASEAN countries have been performing well economically. However, the traditional trading model used for ASEAN stock markets relies on the dollar regime and may not be as accurate for the expected economic development. Overall, the panel sees the potential for several ASEAN countries to become “China plus one”, whereas they identified the quality of infrastructure as a critical factor.
The European Economic Landscape
The future outlook for Europe is not particularly positive, as the declining demand from China will be clearly felt. Germany, known for its export-oriented economy, has already entered a recession, and Italy is following a similar path. Both are highly dependent on international trade. At least Europe benefits from relatively low unemployment rates, which could mitigate the impact of these recessions, making them potentially short-lived and less painful.
Primary Concerns for the time being
For now, the panel mainly worries about the Chinese Economy. However, they acknowledge the financial world’s dynamic nature and refer to other challenges. Further concerns were raised regarding of market expectation, particularly the soft landing in the US, ongoing geopolitical issues like the 2024 elections and the continuing Ukrainian war. Ms. Lee empathizes the importance of diversification in investment strategies to mitigate risks.
Conclusion
The event mainly addressed the art of navigating recent geopolitical tensions, explored key megatrends like the rise of generative AI, and delved into the consequences of aging demographics and the shift towards a low-carbon transition. Additionally, the panel closely examined central bank policies as a response to inflationary pressures and supply constraints. It delved into innovative investment strategies within the context of China’s challenges, pondered the potential shift away from US dollar dominance, assessed the resurgence of bonds, and explored the significance of the Big Seven tech stocks.
Q&A and Goodbye
Last but not least, the experts answered all open questions with great patience. The panel mainly shared insight on investing strategies, concerns about gold, Chinese tech equities, economic deflation, energy and inflation, European market potential, and the impact of higher interest rates on the dollar. The panellists provided diverse perspectives on these financial matters and offered some valuable insights to the audience. The event concludes with thanks to the panel and its moderation and an invitation for an apéro and networking. All guests spoke of an exciting and intellectually enriching event and are looking forward to the next event of the Swiss Chamber of Commerce.
