Pay attention to digitalisation, sustainability and South-east Asia: Panellists
Yong Jun Yuan
Panellists:
- James Cheo, chief investment officer, South-east Asia, HSBC global private banking and wealth
- Tan Kee Wee, founder and principal economist, Waveney Economics
- Saurabh Dhingra, partner and Asean financial services strategy leader, EY-Parthenon
- Anita Gabriel, BT senior correspondent
Anita: Some major central banks have been accused of being behind the curve and hence the need to aggressively front load the rate hikes given the spiralling inflation. How are the Asian central bankers doing? Are they tightening appropriately or should we expect more bitter medicine down the road? And do you think they can engineer soft lending because Asia really is very much in the early stages of economic recovery?
Kee Wee: Most central banks are behind, but that is expected. All central banks will have to be cautious. In the case of the European Union, the United Kingdom and the United States, inflation is at about 8-9 per cent and interest rates are around 2 per cent or less, so they have a lot to catch up on, provided they want to go up near 9 per cent.
For the Asian banks, the Philippines, Thailand, Indonesia, they are also slightly behind, but their interest rates are about 2 to 3 per cent and inflation is at about 6 per cent so they will have to catch up, but their growth is also quite good. Of course, even in the EU, the first quarter growth is still good so it is very dangerous for the central banker to raise interest rates, they will be more reluctant to do that.
Singapore does not use interest rates, they use exchange rate. Our inflation rate is about 6.7 per cent and our overnight interest rate is about 1.6 per cent so there's a 5 per cent gap. If we take the view that MAS (Monetary Authority of Singapore) wants to close that 5 per cent gap, then (taking) today's US dollar to Singdollar rate of 1.39, we would be looking at (appreciating to) 1.32.
Anita: What every crisis presents is a chance to reframe reality and create new opportunities. For example, the pandemic led to the hyper-digitalisation of many industries. From healthcare, finance, communications to consumer services, the world of e-commerce continues to be reshaped with further digitalisation and emergence of new commerce models, including the metaverse. How do you expect the gears to shift further on this digital transformation?
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Saurabh: In the last 2 years, we've seen significant acceleration of the digitalisation transformation, which probably started across the industries 3 to 4 years ago. It's still in the early stages, I would say there is a lot more to happen and I hope what we started over the last 15 to 18 months, will continue. Recently, we have done a study and seen that companies which actually transformed themselves digitally have seen much higher returns by 3 to 5 times compared to the companies which have not.
There are a lot more opportunities to continue driving that transformation with the emergence of new technologies. We talk about the metaverse, digital assets, the blockchain as the underlying technology will create a lot more opportunities to drive this further. Given that we are in such a high inflationary environment, digitalisation will actually help the companies as well as the industry really manage the cost much more effectively and therefore, we believe that this journey will continue.
James: I think the trend towards the metaverse relies on a confluence of technologies. You need the blockchain, software that is much more engaging in terms of digital content creation, 5G, cloud computing and the Internet of Things. We sort of have a convergence of these technologies right now. It's about bringing (everything) together, and I think that there is a chance that in the years ahead, the metaverse could also be that disrupter like what we saw back in 2007 (with the iPhone). I think that's a space that investors should actually think about and seriously put on their radars in the years ahead.
Anita: Global demand for critical minerals and clean energy technologies is set to grow rapidly, providing a big opportunity for South-east Asia to make the most of its large mineral resources. Could we see a time when the region turns into a manufacturing hub in this whole sustainability revolution? And which countries do you think are at the forefront of these transformations?
Saurabh: What's happening in Russia creates a lot more opportunity for us in this region. I'll also mention geothermal energy. Indonesia and the Philippines are the second and third-largest markets after the US, and we expect a lot more investment to go in that. We have seen a lot of capability being built up similarly with solar energy. Vietnam is investing heavily into solar energy, we have seen 10 gigawatts of capacity built over the last few years. The other area I would think about is wind energy where we have a long shoreline. With alternative energy sources, I think South-east Asia can play a leading role in what the global economy needs.
James: I think South-east Asia is interesting because this year is when the Regional Comprehensive Economic Partnership is implemented and South-east Asia is at the heart of it. So that ties the entire region together through trade and investments. You have Singapore and Malaysia, with their electronic chip manufacturing capabilities. You have Indonesia with its nickel and natural resources and you have Thailand with its automotive industry that is extremely strong. Through the free trade agreement, we have one big region that could potentially ride the whole sustainability revolution and also become the manufacturing hub of the future that's built on AI (artificial intelligence) automation.
The destination as a whole is going to be very interesting for multinational companies which want to diversify operations out of certain regions to be closer to their customers. Clearly, South-east Asia, with 650 million consumers and a US$3.2 trillion economy, sits at the crossroads of US$3.4 trillion of trade. I think that's going to be extremely attractive to multinationals, a very good proposition for investors in the years ahead.
Anita: The prices of fuel has skyrocketed as a result of the Russia-Ukraine war and worsening tight market conditions owing to Western sanctions. The resultant energy crunch is also challenging nations’ commitments to provide clean, secure and affordable energy. How could this hurt the complex energy green transition in South-east Asia? Do you foresee a slowing economy and rising rates to choke the much-needed renewables funding and pose more hurdles in the region's energy and sustainable development goals?
Saurabh: There's a lot of investment that's already gone in to building renewable capability across South-east Asia and hopefully that journey continues. Obviously, we will see how the macro-economy plays out over the next few months but given the (climate) commitments that have been made, we expect the journey has to continue. Especially with growing oil prices, I think this is the long term solution that the economies have to look at. The sustainability investment might have to slow but I am still very positive on the investments that have to continue to happen. We will see a lot more of the private-public partnerships here where the industry will come together with the government enabling it and therefore driving further growth in sustainability investments.
James: The current oil price is a reflection of supply and demand imbalances but to me, it is just a short term aberration. We are already seeing oil price starting to level off. The transition from fossil fuels to renewable energy is an enduring trend. There will be bumps along the way but that trend is clear. Higher oil price is a speed bump but it will not derail that whole transition. In fact, in some areas, it's going to accelerate the transition because of the price differences. So I think that with huge amounts of investments going into renewables, it will reduce its costs. We have seen how battery prices have fallen significantly over the last 10 years.
Anita: How are we going to end the year? What are some bright spots that deserve our attention as we shift our focus to 2023?
Saurabh: I think the next few months are going to be choppy and volatile given the inflationary pressure. Hopefully, and some of the optimists here believe, it will be just a couple of quarters and as we enter 2023, we will be back onto the growth trajectory across the globe. Sustainability, the digital transformation, and especially picking some of the right business models, would be great investment opportunities as well. There is light at the end of the tunnel.
Kee Wee: Even though I’m pessimistic (about the markets), I’m optimistic because humans are very adaptive. Remember when Covid-19 first hit, we got stuck, we couldn't go out. But after a few months, we got used to it. We found that Zoom was actually better than going for meetings. And so even in the next few months, I see a lot of volatility, but we will get used to it.
James: There's lots of noise that is going to come with data in the next few months. But if you remove all the noise, to me, one trend really stands out and I think that is the sustainability revolution. You have to embrace it as an opportunity, you have to think about it as you construct your investment portfolio. As much as climate change is going to be our biggest threat, it’s also going to become one of our biggest opportunities.
This is an excerpt of the panel discussion at the HSBC Premier event
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