Speakers: Harold Van Der Linde (Head of Asian Equity Strategy, HSBC) & Prrena Garg (Asian Equity Strategist, HSBC)
[00:00:00] The Global Macro Tug-of-War: Yields vs. Growth
The Core Paradox: Global equity markets have pushed toward exceptional highs despite persistent structural headwinds, creating a visible disconnect between surging stock prices and uneven underlying economic indicators.
The Explanatory Mechanism: This disconnect is driven by a macro "tug-of-war" between two opposing forces:
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Rising Bond Yields: The steady drift higher in US Treasury yields represents a fundamental negative for equity market valuations on the margin by raising the cost of capital and the equity discount rate.
Secular Tech Earnings: The secular structural growth engine of Artificial Intelligence (AI) has delivered corporate earnings so robust that they have easily absorbed the valuation pressure from higher discount rates.
The Shifting Equilibrium: While the AI secular growth narrative has successfully insulated the performance of equity markets so far, the macroeconomic balance is actively shifting as bond yields solidify at higher levels.
[00:01:12] The Yield Danger Zone and the 1999 Analogy
The Current Regime: Over recent weeks, US bond yields have drifted steadily higher. The 10-year US Treasury yield has broken cleanly through the key macro "danger zone" of 4.5%.
The Parallel to 1999: This current rate environment mirrors the late 1990s macro setup. By 1999, the 10-year US Treasury yield had marched past 6.0%.
Speculative Tech Euphoria: Throughout the late 1990s, retail and institutional capital continuously plowed into the stock market despite the rising yield environment. This aggressive capital allocation was fueled entirely by intense market optimism surrounding a revolutionary, emerging technology: the internet and e-commerce.
The Tipping Point: This historical tech-driven cycle culminated in the bursting of the dot-com bubble in March 2000. The correction was not triggered by a single cataclysmic macro event; rather, the market naturally rolled over and peaked because the mathematical weight of restrictive bond yields finally overwhelmed the underlying corporate growth outlook.
Disjunction from Reality: Macro factors that would historically damage equity valuations—including sticky inflation, elevated global oil prices, and an escalating Middle Eastern crisis—have failed to derail major equity indices.
Index Construction Reality: This resilience occurs because major global equity indices are fundamentally not a direct reflection of the broad, everyday economy. Instead, the largest, most heavily weighted sectors in the major indices (particularly in the US and North Asia) are concentrated entirely within the AI value chain.
The Isolation Layer: Because the secular AI spending cycle is structural and capital-intensive, its short-to-medium-term momentum remains mostly decoupled from broader macroeconomic vulnerabilities or regional slowdowns.
[00:04:51] The Non-Linear Impact of the Starting Yield Base
The Baseline Delta: A critical structural point is the absolute starting level of interest rates when a central bank tightening cycle or yield breakout occurs.
The 10-Year Contrast: A decade ago, global markets operated within an ultra-low or zero-percent yield regime. In that environment, a minor upward shift in yields (e.g., from 0% to 0.5%) kept absolute rates historically low, exerting a negligible impact on equity valuations.
The Present Base: Today, the starting baseline sits at a restrictive 4.0% to 4.5%. Moving upward from this elevated base toward 5.0% triggers a highly non-linear, mathematically severe contraction in equity valuation multiples. Consequently, Asian equity markets are reacting far more negatively to marginal shifts in the bond market today than they did a decade ago.
[00:05:29] The Asian Bipolarity: North Asia vs. South/Southeast Asia
The interaction of higher global discount rates and structural growth splits the Asian equity landscape into two distinct regions:
1. North Asia (The AI Beneficiaries)
Key Markets: South Korea and Taiwan.
Dynamics: These markets have performed phenomenally well. Their high index concentration in semiconductor manufacturing and AI hardware infrastructure allows them to easily outrun the negative valuation drag of rising US Treasury yields.
2. South and Southeast Asia (The Yield Vulnerabilities)
Key Markets: India and Indonesia.
Dynamics: In these economies, near-term growth catalysts are less exciting to global markets, tilting the balance heavily toward downside risks from elevated global yields.
The Indian Transmission Vector:
Energy Import Dependency: The Indian economy is structurally exposed to the Middle East, importing the vast majority of its crude oil and natural gas requirements.
Consumption Basket Weighting: A typical Indian domestic consumption basket features a significantly higher direct weighting toward oil and energy costs than developed markets like Japan.
The Domestic Tax Effect: Rising global oil prices act as an immediate tax on domestic consumers, directly draining household discretionary spending power, compressing corporate margins, and reducing the immediate attractiveness of the domestic equity market.
Remittance Risks: The domestic economic framework remains highly dependent on critical capital remittance corridors originating directly from the Middle East.
The North Asian Concentration: While South Korea and Taiwan are performing strongly, their earnings profiles are highly concentrated and exposed to a single structural vertical (hardware/semiconductor infrastructure).
The US Breadth: In contrast, corporate earnings growth in the United States is fundamentally broader. The AI spend is driving an expanded corporate ecosystem:
Big Tech: Deploying massive capital expenditures into foundational models and software infrastructure.
Energy Infrastructure: Energy companies are scaling capital expenditure to meet the immense, unprecedented power requirements of next-generation data centers.
Utilities: Utility providers are experiencing a structural demand re-rating to support grid expansion for AI data processing centers.
[00:08:03] Anecdotes and the Reality of Technological Evolution
The 1995–1999 Speculative Peak: Between 1995 and 1999, the NASDAQ Composite Index experienced a staggering 500% ascent, driven by intense e-commerce and internet hype.
The Retail Anecdote: Van Der Linde recalls a pervasive market narrative from the late 1990s predicting that by the year 2025, modern cities would completely lack physical, brick-and-mortar storefronts due to the absolute dominance of online shopping.
The Nuanced Reality: While digital commerce did scale massively over the subsequent 25 years (evidenced by early pioneers like Amazon starting with online book sales), physical retail spaces survived in major historical centers like Rome. This highlights that while the core thesis of a transformational technology is often correct, the market's initial timeline, adoption path, and valuation pricing are frequently distorted by extreme optimism.
[00:09:27] Divergent Rate Hike Cycles: 1999 vs. Modern History
Historical Comparison Points: The analysts contrast the current macro environment against the three major historical US Federal Reserve rate-hiking cycles: 2004, 2015, and 2022.
The Pre-Hike Stagnation Rule: In 2004, 2015, and 2022, global equity markets consistently underperformed or consolidated sideways in the months leading up to the first official Federal Reserve interest rate hike. This occurred because markets feared that incoming monetary tightening would quickly cause a broad-based economic growth slowdown.
The 1999 Exception: In 1999, equities defied incoming Fed rate hikes and continued to rally aggressively because the perceived multi-decade growth profile of the tech sector entirely overwhelmed interest rate anxieties.
The Present Expectation Shock: A key divergence in the current market cycle is the sudden unwinding of investor expectations. Heading into January, global financial markets had fully priced in aggressive, sequential interest rate cuts. Today, the macro reality has forced participants to pivot entirely, with the market actively forced to toy with the structural necessity of potential rate hikes.
[00:10:54] Structural Insulation: The Microstructure of "Asia Buys Asia"
The analysts identify two profound structural shifts that prevent a direct repetition of the 2000 dot-com market collapse within the Asian region:
1. The Maturation of the Institutional Investor Base
The 2000 Baseline: During the 1999–2000 crash, local institutional and retail capital inside Asian equity markets was virtually non-existent. Regional asset classes were completely reliant on highly volatile "hot money" flowing from foreign US and European institutional asset managers. When the bubble burst, sudden foreign capital flight devastated local asset prices.
The Modern Paradigm ("Asia Buys Asia"): Today, domestic Asian institutional investors, regional pension funds, and local retail networks have evolved into the dominant capital blocks in their respective domestic markets. This deep pool of internal liquidity isolates local asset classes from sudden western capital flight, providing immense structural maturity and market stability.
2. The Currency Transmission Mechanism and Real Returns
The FX Friction Point: In a high-yield US environment, the US Dollar structurally strengthens, placing intense downward pressure on local Asian currencies (such as the Indian Rupee, Indonesian Rupiah, Japanese Yen, and Korean Won).
The Impact on Foreign Capital: For a foreign or US Dollar-denominated investor, local currency depreciation severely erodes absolute, unhedged US Dollar total returns. This routinely triggers mechanical, panic-driven sell-offs from global mandates.
The Insulation of Local Capital: This currency depreciation has zero negative impact on the real returns of local domestic investors. Local participants measure asset performance exclusively within their native currencies (Rupees, Yen, Won). Because they are completely insulated from this FX friction, the risk of a synchronized, panic-driven domestic capital flight is heavily mitigated.
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