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The Essential Podcast, Episode 51: From the Ground Up — Understanding Asian Markets from Dangdut to Dama


The Essential Podcast, Episode 57: A Machine for Manufacturing Courage — Venture Capital and the Power Law


The Essential Podcast, Libsyn Test


The Essential Podcast, Episode 56: The Myth of Growth — Sustainability, Equality, and the Search for a Post-Growth Economy


The Essential Podcast, Episode 55: Investing in Culture — Communication and Retention in Companies

Listen: The Essential Podcast, Episode 51: From the Ground Up — Understanding Asian Markets from Dangdut to Dama

About this Episode

Herald van der Linde, Head of Asian Equity Strategy at HSBC, joins the Essential Podcast to discuss Asian stock markets, the importance of financial literacy, and his new book, "Asia's Stock Markets From the Ground Up."

The Essential Podcast from S&P Global is dedicated to sharing essential intelligence with those working in and affected by financial markets. Host Nathan Hunt focuses on those issues of immediate importance to global financial markets—macroeconomic trends, the credit cycle, climate risk, ESG, global trade, and more—in interviews with subject matter experts from around the world.

Listen and subscribe to this podcast on Apple PodcastsSpotifyGoogle Podcasts, and Deezer.

Show Notes

The Essential Podcast is edited and produced by Molly Mintz.

Nathan Hunt: This is The Essential Podcast from S&P Global. My name is Nathan Hunt.

Nathan Hunt: Asian stock markets tend to be poorly understood in the west. Oh, we have our simple explanations. Japan is stagnant. China is a big opportunity, but exposed to government regulators. Indonesia, Thailand, and everywhere else is one debt crisis away from being wiped off the map. But these ways of thinking about Asian stock markets are simplistic at best, and deeply inaccurate at worst.

Nathan Hunt: Asian stock markets vary greatly in their size and complexity and an industry that looks like a good investment in one market can be a weak investment in another. If you want to understand these markets in detail, it's best to find an expert, preferably someone with deep experience across all of Asia and get them to write you a book on the topic.

Herald van der Linde: My name is Harold van der Linde. I'm HSBC's chief Asian equity strategist. So it is my job to determine in which Asian stock markets we should be looking at, which ones go up and down. That includes the big ones, China, India, Korea, but also includes some of the less known ones like Bangladesh and Vietnam. But I think there is demand among retailers for knowledge about Asian stock markets in a very non-jargon, easy to access way, Well therefore, written this book, "Asia Stock Markets- From the Ground Up".

Nathan Hunt: Harold, the last time you and I spoke was last summer before your book had come out. Now that I have had a chance to read "Asia's Stock Markets- From the Ground Up, I enjoyed it so much. Tell me a bit about what motivated you to write this book.

Herald van der Linde: Well, I'm very glad to hear you enjoyed it because that's actually very important that you read the book and actually enjoy it so that you feel at the end of the book you've learned something in in a very easy way.

Herald van der Linde: But the way it actually came along is that here in Hong Kong, over a dinner, I had friends over and one of them was a pilot. He had saved some money and I think he had inherited a little bit of money and asked on the table, he said, "What do you think I should do with this?" Now, the discussion went, people gave all sorts of ideas, and at the end of the evening, I wanted to actually talk with him about this. But it didn't really work out. He said very quickly, "What are your suggestion?" I said, you should buy an ETF, and a day after he called me and said, "What's an ETF?".

Herald van der Linde: So here we have somebody who's very knowledgeable about flying Boeing and planes around the world, but doesn't know the very basics of finance and exchange traded fund. So I explained to him how it works. Now, he wanted to invest in Asia as well, and I told him," Listen, you can buy ETF. You can buy stocks," thinking a bit about how to do that.

Herald van der Linde: We started to talk about this and I realized that he, and so of course, there many other, not only airplane pilots, but it could be dentists, school teachers, and 18 year old students out there, who similarly don't want a very technical way of talking about these markets, but a very non-technical way to understand just the basics of how do these markets look like, how do they behave. What are they? What kind of stocks maybe you should take a look at. So I sat down with him and talked a bit through it. From that, I came with the idea maybe I should write a book about this. Voila, here we are, and I'm glad to hear you enjoyed reading it.

Nathan Hunt: Harold, when people think about Asian stock markets, they tend to think of China first, China second, and maybe Japan or South Korea after that. Your focus has been much broader and it comes through in the book. Tell me a bit about your experience in some of these other markets, Indonesia, Vietnam, India. You seem to have spent a lot of time on airplanes.

Herald van der Linde: That is correct. So let's just kick off with Indonesia, for example. It was the first stock market that I started to look at. I was backpacking in Asia in 1990, through China and through Indonesia and was lucky actually to meet a family that took me in. I Lived in Jakarta with a family for, I think it was about six, seven months, learned Indonesia and eventually decided this is a really nice place. I want to go work here. After I graduated from university, found a job there as a stockbroker and started to look at that market. So I learned to look at that particular market first.

Herald van der Linde: I think Indonesia was a very good start for me because we actually had a crisis in '97-'98. So I learned the ups, but I also learned how deep the downs can be, but also, how companies adjust in that particular crisis. The interesting thing I think with Indonesia that's changing a little bit is that it's actually made up of mostly kind of stable companies. They sell noodles, they do telecom services. A lot of them are doing banks. Indonesia or large parts of Asia are surprisingly under-banked, there's literally millions of people who don't really have bank accounts yet. So there's a lot of growth coming through, and these are stable businesses. But That stock market turned out to be quite volatile because there's all sorts of other things that impacted global flows, money going in and out of Asia, movements in the currency, movements in bond yields. They actually hammer that market around.

Herald van der Linde: Over time, I realized that you have to understand with Indonesia that actually the underlying corporates are very stable. Their businesses can continue to do quite well even in that crisis that was there in '97-'98. Some of these companies generate a decent amount of profits. But it is the global factors that really sometimes whack that market around, if you can say it like that. That particular knowledge allows you then to understand that market much better. It means, for example, if global movements are against Asian equities and against Indonesia, so let's say bond yields go higher, the dollar strengthening, and these sort of things, that market can get sold off because of global factors. But that's where then the opportunity comes in because you know that the underlying profits of these companies actually do well. So you can buy those profits at much lower multiple. So Indonesia is a market that you have to approach in that kind of fashion.

Herald van der Linde: The interesting thing is that if you know that you can see other countries in other markets going through a very similar kind of stage, in particular, some of the smaller markets. So Vietnam is really interesting. I think Bangladesh is a really interesting market that very few people look at. It's an economy with 200 million people. It's growing very fast. So if you really want to go for something new, that's a market to look at.

Herald van der Linde: But the process, what is unfolding in Bangladesh and Vietnam, is very similar to what happened to Indonesia in the 1990s. If you buy good quality companies in these markets, over the long run, you can actually do very good. So that's how, for example, understanding Indonesia allows you to understand Vietnam and Bangladesh, and some other markets as well.

Nathan Hunt: Harold, I expected to learn a lot about China from your book, which I did. But what shocked me, was that the really fascinating markets and opportunities seem to be in Southeast Asia. In the book, you have this wonderful point you make about, forgive my pronunciation here, dangdut, which I gather is a form of popular music in Java and how responses in the society to dangdut, mirrors the contradictions in Java and in Southeast Asia in general.

Herald van der Linde: Yes. So the way to pronounce it in Bahasa, Indonesia is dangdut. Dangdut is a kind of, I would say for most people, probably a bit of a strange, usual type of music. It's a bit of Bollywood with a bit of Arab music thrown in. It seems to be offbeat. But somehow, it really isn't. It all comes together very nicely. That is extremely popular in Indonesia. Now, most people, if they think about Indonesia, it's the largest Muslim country in the world. Very often, they consider that to be a very conservative society. But if you then look at dangdut, that gives you a very different picture of what actually happens in Indonesia, in a particular, in Java. Dangdut is pretty much performed by women, and also the music is about love and all sorts of other things.

Herald van der Linde: The way they move, very often, funnily enough, they apologize on TV or in their concerts first and say, "Listen, sorry, if you don't like what I'm going to do, be careful. You can still go away because I'm going to do some kind of sensual dancing here." What it shows to a certain extent that is extremely popular, even among the Muslim crowds, the younger Muslim crowds, in particular, I would even say so. What it shows that some of these countries are extremely complex. Indonesia is a very nice example, but you can talk in a similar fashion about Bangladesh.

Herald van der Linde: What we see and hear from policy makers is not always what there really is. What I mean with that is that don't take just the simple sound bites on these markets for granted. There is much more going on underneath in these markets than what some of these sound bites suggest. It's not certain ministers or policy to makers come out and say certain things, very often, it's an aspiration they look for, but it's not necessarily the policies that they can implement or that will be accepted in broader society.

Herald van der Linde: So there is a contrast going on a struggle, I would say between village and city conservatism, and let's call a modernism in a sense that contrast, that fight, that struggle that these countries are going through is somewhat replicated in stock markets. Funnily enough. A little bit, as I said earlier on Indonesia, stock market is a lot of you could say somewhat traditional companies that grow quite well and actually are relatively stable, more stable than for example, Korean companies in general. Their earnings profile is much more stable. But that market is quite volatile because of all sorts of global things going on. So yeah, that contrast between stability and volatility, between village and city, between modern and traditional, in a sense, is reflected in stock markets, if you want to put it like that.

Nathan Hunt: Some western investors are skittish about Asian markets because of the experience of the Asian financial crisis. You used in your book. One of my favorite Hemingway quotes to describe the crisis, the one about going bankrupt gradually, and then suddenly. Tell me about how us dollar debt went bad in Indonesia and Thailand gradually, and then suddenly.

Herald van der Linde: Yes. I was paid in Indonesia. So I suddenly realized that my salary, for example, one day had gone down by about 80%. In those days, in the 1990s, what was an additional risk factor, which is much less of a case these days is that we just didn't know how much debt there was outstanding. Companies issued debt and raised debt and borrowed money left, right and center. But very often we couldn't see that, it was maybe in a holding company that wasn't listed, or they had debt throughout the year, but by the time they reported it, they quickly repaid it. Corporates very often were part of a larger conglomerate, which had bank debt, so they moved money a little bit around between the conglomerate and the bank.

Herald van der Linde: So when the crisis hit initially, and it started in Bangkok, the initial feeling was well Indonesia's numbers look okay, so Indonesia will be fine, but Thailand doesn't look good. But then gradually companies started to struggle with payments and the realization hit that there was actually much more debt outstanding and things from there on deteriorated very rapidly. People were scared. They sold the rupees. A lot of the debt was in US dollars, so they had to have an enormous amount of rupee has to repay that US dollar debt. Most companies simply didn't have it, and Indonesia went through a massive restructuring.

Herald van der Linde: But in the late 1990s, Indonesia was given up as an investment kind of market. Quite recently, we've heard this in China, people saying it's an un-investible market. I've heard this before in Asia. In the late 90s, they said like, "Indonesia, you can't invest in it. It's gone." But those were the times, and those were the days, that actually it was really good to buy into Indonesia. Restructuring was taking place.

Herald van der Linde: The central banks, gobbled all sorts of banks together. Corporates were allowed to default and restructure, and Indonesia came out of it much stronger. Indeed, you could argue that the Indonesian banking system, at the moment, is one of the strongest, if not only in Asia, it may be globally Most of these companies are extremely well capitalized, very profitable because they've learned the bad lessons in the 90s and have taken all of the bad loans out of their balance sheets as well. So it actually helped Indonesia to grow, but it was an enormously good investment opportunity as well.

Nathan Hunt: I recently interviewed a professor at the University of Toronto who had written a book on regional innovations centers and innovation, and resilience, in general, after reading your book, I'm tempted to call him up and recommend he look at the resilience of banks in Southeast Asia. Why have these banks managed to do so well over time?

Herald van der Linde: Yes. I think in hindsight, the Asian crisis that took place in 1997 was a major reset for the whole of Southeast Asia. Some of that was really negative. They were the largest stock markets in the 90s in Asia., They're now much smaller and other bigger ones like China, have obviously emerged. But these banks learned banking the very hard way. So they effectively went bankrupt, had to restructure their business, and Indonesia chewed the away, but some of the other countries, as well as taking all the bad loans out of these banks. These banks became much smaller, therefore, and the Indonesians then tried to in a kind of different agency, restructure those loans and sell them back to whoever was interested. Part of the money was simply paid through taxes. So everybody in Indonesia as a taxpayer had to pay for that partially as well.

Herald van der Linde: But the banks cleaned up their businesses. Now, that took a couple of years. It's a very painful process. Part of the process also means that some of the companies that you've extended your loans to, of course, they're out of business, they don't exist anymore. But some of these banks ended up with very strong balance sheets and then they had the benefit that large parts of Southeast Asia was simply under-banked. It is still incredible to imagine that in India, but also Indonesia, the Philippines, and even Thailand, there are millions and millions of people who don't have a bank account and just lit from one day to another. They are smaller farmers, and whatever. But as their incomes rise, a lot of them of course, started to open up bank accounts. That meant that these banks suddenly could swell the deposits again and use that to extend loans. So that allowed them to start from scratch, start with a clean slate, and suddenly get new money and fresh money, and manage that under much more stringent regulation.

Herald van der Linde: So some of these banks have become, as I mentioned earlier, some of the most profitable banks in Asia, if maybe not the world. Some banks generate returns that are three times as high as an average American or European bank would do. Growth is there for the taking for that. They have a local brand name. As I said, a lot of people just are new to opening bank accounts and the ones that have a bank account and do actually a little bit better, and as the middle class in Asia emerges, they want to have insurance products, or a mutual fund, or some other product saving for the education of your children. There's plenty of fairly traditional, straightforward sort of businesses that they can grow, and that has made them such interesting companies to look at.

Nathan Hunt: When you and I were younger men, the expectation was that Japan was going to take over the world. I've heard many theories about why things went sideways. A lot of people say it's simple demographics. Your interpretation in the book seems to have a lot more to do with how industries and companies are structured in Japan, and to an equal extent, in South Korea.

Herald van der Linde: The way I think we have to look at the Japanese stock market is in taking two or three angles, and I'll put this back to what you referred to earlier on what happened in the 80s in Japan, when it looked like Japan was going to take over and then it all fell apart or fell like a fallen souffle. The market deflated. The way to look at that market is that there's a lot of global companies that are well known brand names that sell cars or TVs, et cetera. So they do very well when the global economy does very well. Then there are domestic companies that really cater to aging population and these sort of things, companies that make mobility products, for example, for people that when they get older struggle with mobility. So there's an interesting company that for example, has kind of a dress you put and allows you to walk better, it aids in walking. It means that people that are older can remain active.

Herald van der Linde: Then there are lots of companies that are really good at making specialized products, and automation components very often are global leaders into that. So you have to approach that market from that way. But if you then go back to the 1990s, Japan was deemed as the new leader in the world. That stock market, at one point in time, was bigger than all other stock markets in the world all together in 1989, and for a variety of reasons that we don't really have to go into. But that stock market then deflate it. It came down considerably, and that meant that Japanese companies had to seriously restructure. The banks went bankrupt and these companies had to find ways out. The domestic economy was weak. So they started to look abroad. The company said, "Well we need to focus on something that we're really good at, so let's make this particular component," or they tried to explore new industries that were emerging, automation, for example, and try to go there. The traditional growth drivers of the 80s were gone. In the 90s, it all fell apart, and they needed to, like Southeast Asia, start from scratch again.

Herald van der Linde: From 2009 onwards, you see that stock market has started to behave better and better. The government is pushing also more pressure on these larger groups that are still listed in Japan to restructure, to throw off a lot of the companies that they sometimes cross-invest in. But it allowed for the emergence of three sorts of companies, so globally cyclical companies. Cyclical, meaning it was the global economy that's really the US and Europe, if it does well, they will benefit, so the car companies, amongst others. Domestic companies that have really gone for unique situations in Japan, aging, is a big thing there.

Herald van der Linde: So as I mentioned, you got companies who, aid, for example, people in navigating their way the city, but for older people or the mobility products that they create, as I mentioned earlier. Then you have companies that have shat all the layers of clothing that they had to say, "Listen, we're going to laser focus on one thing that we're really good at, this particular component." One of them, for example, makes simply bicycle gears and is the best maker of that in the world, and have become extremely profitable. Those tend to be smaller midcap companies. So if you are an an investor that likes to identify these kind of hidden companies, Japan is a fantastic hunting ground to identify those companies.

Nathan Hunt: Moving to China, before I get to a topical question, I wanted to get you talking about again, forgive my pronunciation here, the dama army. I feel like this is a crucial factor that we just don't hear about in the west.

Herald van der Linde: Absolutely true. So the dama, you should say dama, means large mother, aunt is the traditional translation, you would say. But there's a little bit more going on. We know that China is aging. The average Chinese is just below 40 at the moment. So if you think of about it, it means there's a large sort of people that go into their 40s and are 40 or 50. We also know that China has a one child policy, so a lot of these people are married and have one child. Now, what happens if you're in your late 40s? Very often, you've got a child that's about say 20, or so, and these children leave home. So you have an empty nest. A situation whereby the parents remain, the child is gone. A lot of these people have done very, very well. Very often the wife works in China, much more often than in other parts of Asia or even the world. Women very often work. These people have benefited from the growth in China and quite a few of these people have done really well and are well off.

Herald van der Linde: They are keen to invest. We saw the first glimpses of the influence of, in particularly, these ladies actually, that are very eager to trade. They have investment clubs, they meet over tea. They come together to discuss stocks. But it's not only stocks, it's also gold. When in, I think it was 2013, gold prices came off for some reason, somehow in China, people went and bought a lot of gold and a lot of them were these 45 to 55 year old aunts who were in these small investment clubs. Because there were so many of them, with so much money that they could bring, that they moved to gold markets. That was the first glimpse of the power.

Herald van der Linde: I think actually this group of damas, but if you're talking bit broad about these empty nests in China, it's probably one of the biggest, most important demographics that's going to unfold over the course of the next 10 years. A lot of people, Chinese, in the 40s and 50s that have accumulated wealth in property, just savings, need to prepare their pensions, are investing in the market and driving these markets, and I think they will eventually also go into the US markets in very large numbers.

Herald van der Linde: So yeah, these damas, you can see them actually on the street. Very often, if you walk around in China, very often, they enjoy dancing, kind of ballroom dancing in parks in the evenings. They also take care of their grandchildren, if they have emerged. If you then are in China, you see a brokerage company somewhere, you can just walk, you see a lot of them sitting around round tables looking at the screens with phone in hand doing their day trading. It's a really big thing in China,

Nathan Hunt: A topical question about China, you've probably expected a question, something like this, the Chinese authorities' response to the ongoing ever grand crisis seems to indicate that there is a growing willingness to, let's say de-lever with less gentleness than we might once have expected. Is this the beginning of a trend, do you think? Or do you expect that at a certain point, the safety nets will be restored underneath the real estate sector in China?

Herald van der Linde: No, I think it's not even the beginning of a trend, it is a trend. Before Xi Jinping was appointed in what was it, 2012, as the new party secretary, a big research report came out. It was actually written in conjunction with the World Bank at the time and the Research Bureau of the Politburo of Communist party. It looked at the economic restructure that needed to be put in place and the sequencing of policies in order create what they said at the time, in harmonious and middle income China by 2030. It's 600 pages. There's a lot of technicalities in it. A part of it was leverage in China needs to change. It needs to come down and the way governments borrow needs to change as well. Now, whole sequence of policies have been put in place, interest rate, liberalization development of a municipal bond market, et cetera, et cetera, over the last couple of years, actually since 2013.

Herald van der Linde: So that by 2018, the government started to say, say, listen, these bond markets and the domestic markets, which we basically channels for banks to give money to the government to do projects in the past, they said they're going to change. We've liberalized interest rates. We've allowed governments to start to borrow in this market. But everybody assumes that if you buy into certain companies that eventually the local government of Beijing will bail them out. That is a wrong assumption. They made it very clear, I think it was 2018, that if you buy and invest in companies that are not proper or over-leveraged, that is a reach that you as an investing need to take.

Herald van der Linde: Over the course 2018 and '19, there were a few companies that defaulted and they did this quite in a kind of controlled way. Very often they defaulted on a Friday afternoon, there was a bit of panic over the weekend. But by the time the markets closed, somebody had come in, stepped in, says, "Okay, we're going to buy this company. We are going to restructure, and the debt will be paid". But I think those were small steps and signals to the market whereby China said, these bold markets you're investing in, it's going to change. We've now had a small company and then it bankrupt, and you had to take it a little bit of the pain, and they did that a couple of times.

Herald van der Linde: I think we're now at a stage whereby a larger property company is about to default, or very close to default, and the market is really worried about that. I would say that is actually just simply a larger step after that is taking a couple of smaller steps. It is something that has been going on for some time and it signals to the market that yes, if you invest in some of these companies and you think the returns are very high and probably safe now, that probably safe part might not be as much as what you think. You need to do your own homework and figure out which other companies you are going to invest in.

Herald van der Linde: So I think it's an ongoing process of actually allowing these bond markets within China to function more properly. That is a very painful process. If you are an investor in some of these companies that are about to default or where prices for these bonds have literally collapsed. But it's, I think, a necessary step for them to have better functioning bond markets over the course of next decade or so.

Nathan Hunt: One final question, Harold. You've written this fascinating book. When we talked last summer, you had an idea about what you wanted to do with the proceeds from the book. Can you tell me about that? What you have planned, and why?

Herald van der Linde: Well, the whole idea of this book came to tell my friend, Andrew is his name, a pilot about how he should invest his money. I realized that there's a lot of people out there that would like to invest. Let's put like this, they would like to achieve something like financial freedom, financial independence. But in order to get there, you need to invest. But how to invest, what to do, what to buy, is something that is very difficult. If you go very often to a bank or a financial advisor, you might get thrown all sorts of jargon at you and you're not, quite sure what to do.

Herald van der Linde: So I have a lot of people, friends who keep their money in cash, and I think that's the wrong thing to do. You need to invest. So this book was written to promote, you could say, financial literacy, allowing people to get accustomed with Asian stock markets in a very easy way, and hopefully allowing them to take a ... I don't think sometimes the risks are as high as people perceive them to be when investing in stocks in Asia. So hopefully, they become more comfortable to make those investments.

Herald van der Linde: So the idea is that the proceeds, and I'm talking about my own proceeds, not the publisher's proceeds, but my own proceeds, to use that and give that to a charity for financial literacy. There are a few charities that I am in touch with and the ideas, one of them for example, helps domestic helpers here in Asia, who combined with a small salary and eventually, very often want to go back to the Philippines, or in Indonesia, or India, wherever they come from. The time that they are, for example, in Hong Kong or Singapore, to save and put some money aside, and do something sensible with them. We're not going to tell them to buy some Chinese property companies, or something like that, but at least make the first step to save. Secondly, put that in a bank. Thirdly, maybe if you have saved a little bit, put it in maybe an ETF, could be also a US ETF, it doesn't matter. But allow these people to understand what they need to do. So the idea is to help some charities that are really busy into this to build out their business and create that awareness of financial literacy in the hope that some people out of it achieve something like financial independence at some point in time.

Nathan Hunt: Harold, thank you so much for joining me.

Herald van der Linde: Thank you. Nathan. Pleasure to join.

Nathan Hunt: The Essential Podcast is produced by Molly Mintz with assistance from Kirk Berger and Camille McManus. At S&P Global we accelerate progress in the world by providing intelligence that is essential for companies, governments, and individuals to make decisions with conviction. From the majestic heights of 55 Water Street in Manhattan, I am Nathan Hunt. Thank you for listening.