WEBVTT - Finding Opportunities in Emerging Markets

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<v Speaker 1>Bloomberg Audio Studios, Podcasts, Radio News. Welcome to the Bloomberg

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<v Speaker 1>Daybreak Asia podcast time Doug Chrisner. Following today's print on

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<v Speaker 1>producer prices here in the US, markets in Asia are

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<v Speaker 1>bracing for tomorrow's report on US consumer inflation. We'll be

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<v Speaker 1>hearing from Rob Hayworth. He is with US Bank Wealth Management.

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<v Speaker 1>We'll do that in a bit, but let's begin in

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<v Speaker 1>Hong Kong. That's where we find Raoul Chatta, founder and

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<v Speaker 1>CIO of Shikarra Investment Management. I think we can agree

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<v Speaker 1>you and I that twenty twenty four was especially challenging

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<v Speaker 1>for many em markets across the Asia Pacific. We know

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<v Speaker 1>that China was very much a big part of that

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<v Speaker 1>story as it continued to struggle, and whether or not

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<v Speaker 1>the theme of US exceptionalism was a factor, we can

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<v Speaker 1>debate that. But I'm wondering, if you look out this

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<v Speaker 1>year twenty twenty five, how does the APAC and look

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<v Speaker 1>to you?

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<v Speaker 2>So, Doug, I'm more hopeful than what the markets are

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<v Speaker 2>baking in today for the Asian region. And the reason

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<v Speaker 2>for being more hopeful is I don't think the worst

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<v Speaker 2>case scenario for tariffs plays out for Asia because look,

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<v Speaker 2>the inflation is going to impact US those tariffs. Eventually

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<v Speaker 2>the price is going to be worn by the US

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<v Speaker 2>Conjua and I live in New York and trust me,

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<v Speaker 2>it's the inflation is literally killing us. Over there, things

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<v Speaker 2>are super super expensive, and when you travel around the

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<v Speaker 2>world you realize how outrageously priced things in the US are.

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<v Speaker 2>So clearly the worst case Ontaris doesn't play out. What

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<v Speaker 2>we're seeing is x US. Some of this disinflation coming

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<v Speaker 2>through that was coming in product prices until Q three

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<v Speaker 2>of last year, is coming in services also, so somewhere

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<v Speaker 2>that kind of comes through. Dollar strength is a form

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<v Speaker 2>of tightening. Raids have moved up to nearly four point

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<v Speaker 2>eight percent, so that slows down the economy. So I

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<v Speaker 2>think clearly we've seen the worst for Asian markets.

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<v Speaker 1>I'm wondering what you're hearing about this situation in China.

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<v Speaker 1>We had credit data the other day that was a

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<v Speaker 1>little disappointing. New loans in China for twenty twenty four

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<v Speaker 1>declined for the first time in thirteen years. Now, we

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<v Speaker 1>know that the government is taking steps. We can talk

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<v Speaker 1>more about that in a moment, but I'm curious as

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<v Speaker 1>to what you're hearing from people in Hong Kong about

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<v Speaker 1>the situation on the mainland.

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<v Speaker 2>So clearly what's going to get used to China growing

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<v Speaker 2>at about slower levels. The numbers are going to be

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<v Speaker 2>somewhere around three percent, and that's how we build our portfolio.

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<v Speaker 2>Our portfolio for China is Chinese companies in the custotic

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<v Speaker 2>sectors like Proya gaining share from the multinational corporations. Our

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<v Speaker 2>portfolio China is Chinese companies who are extending their global footprints. So,

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<v Speaker 2>whether it's Evy or the other parts of the change,

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<v Speaker 2>I think that's the interesting proposition as investors. We've going

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<v Speaker 2>to get used to this new world, which is China's slowing.

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<v Speaker 2>What has changed at the margin is over the last

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<v Speaker 2>twelve months, the Chinese governments become a lot more positive

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<v Speaker 2>towards businesses. They want to get the animal spirits back

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<v Speaker 2>from a business investment perspective, from a consumer confidence perspective.

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<v Speaker 2>But all these things are going to take time. I mean,

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<v Speaker 2>for those of us who've been in markets long enough

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<v Speaker 2>know that exorcist take their own time to clear up,

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<v Speaker 2>and we're going through one of those processes in China.

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<v Speaker 1>Yeah, So the consumer confidence perspective I think is key

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<v Speaker 1>where sentiment is concerned. Obviously, that's been one of the

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<v Speaker 1>missing pieces, right And yesterday we had one of the

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<v Speaker 1>security regulators in China pledging more support for the equity market,

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<v Speaker 1>and we know that officials also reiterated support for both

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<v Speaker 1>the currency and the Chinese bond markets as well. It

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<v Speaker 1>seems like there have been very conscious steps taken to

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<v Speaker 1>try to address this issue of sentiment weak sentiment at

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<v Speaker 1>the retail level. Do you think it's been enough.

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<v Speaker 2>See again, idly one would have wanted ten percent of

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<v Speaker 2>GDP as a stimulus to take care of all these things.

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<v Speaker 2>I think the number which one is hitting from China

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<v Speaker 2>is somewhere around three to four percent, so that's much lower.

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<v Speaker 2>That's their different style. They don't want to do what

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<v Speaker 2>was done in two thousand and eight and a repeat

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<v Speaker 2>of that. Their mindful of the dead GDPI ratios, which

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<v Speaker 2>I hear. But clearly, if you put all these events

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<v Speaker 2>over last twelve bunths, whether it's asking the local governments

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<v Speaker 2>not to change the entrepreneurs for unnecessary tax liabilities, et cetera,

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<v Speaker 2>whether it is kind of an trying to have an

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<v Speaker 2>amakable relationship with the US, So yesterday they were news

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<v Speaker 2>of China looking to say the TikTok us business. To

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<v Speaker 2>Elon muss, I think that should be positive. Earlier China

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<v Speaker 2>was like that business cannot be sold. So I think

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<v Speaker 2>a lot of these positive ref sprints are coming through.

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<v Speaker 2>You see a lot of countries getting visa free access

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<v Speaker 2>to China. So what happened around COVID was China's contact

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<v Speaker 2>for the rest of the world almost went to negligible.

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<v Speaker 2>So I think that is now getting resumed. So all

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<v Speaker 2>these are little positives to to add up. I mean funding,

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<v Speaker 2>the funding the local governments so that they can pay

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<v Speaker 2>their employees and so that they do not kind of

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<v Speaker 2>miss on the salary payments is clearly big postive.

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<v Speaker 1>What other markets right now look attractive to you? In

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<v Speaker 1>the Asia Pacific, I'm curious about Indonesia. I'm also curious

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<v Speaker 1>about your take on Vietnam.

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<v Speaker 2>So I think Azen is clearly attractive. Though Azen gets

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<v Speaker 2>impacted all the more Vietnam from these tariffs coming through,

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<v Speaker 2>which is why if you see Vietnam's not gone anywhere.

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<v Speaker 2>But look that market has been littlely flatlined for last

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<v Speaker 2>five years. Valuations are super attractive, so once some of

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<v Speaker 2>these tariffs are biked in two. In terms of the

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<v Speaker 2>market participlaate, s centible, et cetera, that is a market

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<v Speaker 2>one would like to add. India is a market we've

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<v Speaker 2>liked for a while. It's structurally a strong story in

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<v Speaker 2>this world of slow growth. India will continue to show

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<v Speaker 2>five to six percent growth and last three four months

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<v Speaker 2>because of the cyclical downtown we are having in India

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<v Speaker 2>is providing a good entry opportunity, particularly for small medcaps

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<v Speaker 2>et cetera. So right now, what we're doing in India

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<v Speaker 2>is adding to our large caps. But I think another

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<v Speaker 2>fifteen percent down for small medcaps they become attractive again.

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<v Speaker 1>So Rao, Well, you're having meetings with clients Nasia right now.

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<v Speaker 1>I'm curious about the one question that you're being asked

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<v Speaker 1>most frequently. What is it?

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<v Speaker 2>So I think the tariffs are on minds of everybody.

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<v Speaker 2>What happens in terms of rates is the question commonly asked,

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<v Speaker 2>and which is which is where our point is? Incoming months,

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<v Speaker 2>we'll get clarity on both and we are lot most sanguine.

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<v Speaker 2>Then the markets on this and a view is a

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<v Speaker 2>lot of negatives up priced in them, so almost everybody

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<v Speaker 2>is positioned in US, whereas what we believe is things

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<v Speaker 2>should improve, particularly in the Asian part of EAMs, and

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<v Speaker 2>that should be positive for investors who are positioned for that.

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<v Speaker 1>Raoul, We'll leave it there, thank you so much? Or

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<v Speaker 1>who will chat? A founder and CIO of Chikara Investment

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<v Speaker 1>Management joining us from Hong Kong here on the Daybreak

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<v Speaker 1>Asia podcast. Welcome back to the Daybreak Asia Podcast. I'm

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<v Speaker 1>Doug Prisoner. State side markets seem to be unwilling to

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<v Speaker 1>make any big bets in front of tomorrow's report on

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<v Speaker 1>US retail inflation. Today's report on wholesale inflation was a

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<v Speaker 1>bit cooler than forecast. The Producer Price Index up two

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<v Speaker 1>tents of one percent from the month before. That was

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<v Speaker 1>half expectations. Perhaps more importantly, the core PPI was unchanged.

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<v Speaker 1>Big question now, how will these data play into the

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<v Speaker 1>FED and it's thinking on the path forward with radcuts.

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<v Speaker 1>To answer that question, I'm joined by Rob Hayworth. He

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<v Speaker 1>is senior investment strategist at US Bank Wealth Management. Rob

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<v Speaker 1>joins us from Seattle. Thanks for making time to chat

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<v Speaker 1>with us. What's your sense of where we stand right

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<v Speaker 1>now in the fight against inflation? Here in the US.

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<v Speaker 3>Yeah, Doug, great to be with you. The fighting against

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<v Speaker 3>inflation is going okay, but it certainly could be better.

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<v Speaker 3>We were certainly seeing that inflation probably remains elevated somewhat

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<v Speaker 3>this year, even though we don't foresee an acceleration. We

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<v Speaker 3>think it's going to be hard to get that last

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<v Speaker 3>smile down to the federal reserve. But certainly what we're

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<v Speaker 3>seeing in the short term is higher fuel costs, higher

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<v Speaker 3>energy costs, higher food costs because we're seeing shortages right

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<v Speaker 3>We're seeing some supply challenges when it comes to eggs,

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<v Speaker 3>for example, due to the ABM flu. We're seeing low

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<v Speaker 3>inventories in the US for energy, so we're seeing some

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<v Speaker 3>pressure there. And then we'll have to see if the

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<v Speaker 3>labor market can loosen up and let wages keep creeping

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<v Speaker 3>lower to help push down on those core inflation prints

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<v Speaker 3>later in the year. But for now, it looks like

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<v Speaker 3>it's going to be kind of stubbornly elevated.

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<v Speaker 1>How big unknown is whether some of those economic policies

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<v Speaker 1>from the incoming Trump administration will be inflation arey. And

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<v Speaker 1>I'm thinking primarily of the tariff story. What's your sense

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<v Speaker 1>of that.

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<v Speaker 3>Well, we're certainly seeing the market react a bit to

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<v Speaker 3>that every day as news comes out. First and foremost,

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<v Speaker 3>it's coming down to tariffs and how much, how quickly,

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<v Speaker 3>how soon. The good news it seemed like this morning

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<v Speaker 3>was that it's going to be a more extended implementation

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<v Speaker 3>rather than a rapid implementation of tariffs, which I think

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<v Speaker 3>would be helpful to the market so that they're not

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<v Speaker 3>seeing that inflationary pressure right away. It's just hard for

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<v Speaker 3>us to handicap what the policies are going to be

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<v Speaker 3>as they come out fairly quickly, but that's certainly a

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<v Speaker 3>risk to the market that could push prices higher if

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<v Speaker 3>we see significant tariffs, especially early on. I think the

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<v Speaker 3>other challenge remains the labor market. If we see a

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<v Speaker 3>significant trinkage in the labor market because of deportations, that's

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<v Speaker 3>also inflationary from a wage perspective, that could be a

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<v Speaker 3>challenge too, And I think we're all just kind of

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<v Speaker 3>waiting to see what's really enacted. As we get into

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<v Speaker 3>the first couple of weeks of President Electrump's new term.

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<v Speaker 1>Very little movement in the bond market today. We've got

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<v Speaker 1>a tenure with a yield that is sub for eighty.

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<v Speaker 1>Do you think it's likely that we could test five

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<v Speaker 1>percent this year in twenty twenty five.

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<v Speaker 3>I think that's absolutely a risk, and that's a risk

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<v Speaker 3>that would be concerning to the equity market from a

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<v Speaker 3>valuation perspective. We saw this earlier last year when we

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<v Speaker 3>tested five percent on the tenure and we had a

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<v Speaker 3>pretty decent decline in the equity market. I think it's

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<v Speaker 3>a concern when it comes to borrowing costs and the

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<v Speaker 3>ability of especially smaller companies to refinance. And I think

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<v Speaker 3>it's a concern for valuation multiples as you're really getting

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<v Speaker 3>into some attractive levels where investors may start to think

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<v Speaker 3>they're better off in bonds than stocks at that point.

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<v Speaker 3>So that's certainly an area we're watching closely. We think

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<v Speaker 3>it remains a risk to the equity market if we

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<v Speaker 3>start to see those levels.

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<v Speaker 1>And I'm wondering about whether any shift in the yield

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<v Speaker 1>curve could either help or hurt some of the big banks.

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<v Speaker 1>We're going to hear tomorrow from a City Group along

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<v Speaker 1>with Goldman, Wells, Fargo and JP Morgan in terms of

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<v Speaker 1>their latest earnings. Do you have a sense of what

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<v Speaker 1>we're going to get in terms of guidance going forward.

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<v Speaker 3>We don't have a great sense of what we're going

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<v Speaker 3>to get in terms of guidance, but what we're certainly

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<v Speaker 3>looking for, Doug is what's going on with the consumer

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<v Speaker 3>and business spending and loan trends. Our banks still easing

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<v Speaker 3>up on lending terms. That's something we heard from the

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<v Speaker 3>Senior Loan Officer survey that that would be helpful for

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<v Speaker 3>the economy and what's happening with net interest income, and

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<v Speaker 3>certainly a steeper yield curve is often helpful when it

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<v Speaker 3>comes to these companies. So that's certainly something we're looking

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<v Speaker 3>very closely at over the next couple of days as

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<v Speaker 3>we get an awful lot of financial firms reporting very quickly.

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<v Speaker 1>Here, what about fewer regulations? Would that be helpful as well?

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<v Speaker 3>Generally it would be well, I know, there's a lot

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<v Speaker 3>of talk about easing regulations across a number of industries,

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<v Speaker 3>including the financial services industry. That could certainly be helpful

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<v Speaker 3>to companies as we move forward, but that's probably a

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<v Speaker 3>longer term issue compared to what we're seeing. What we'd

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<v Speaker 3>like to see right now in terms of loan growth

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<v Speaker 3>and how is the consumer progressing after such a such

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<v Speaker 3>a strong expansion Already, we've.

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<v Speaker 1>Got crude oil and this is New York Crew WTI

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<v Speaker 1>just under eighty dollars a barrel. We know that the

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<v Speaker 1>president elect is committed to increasing domestic production. Is the

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<v Speaker 1>energy space something that you want to be exposed to

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<v Speaker 1>this year in a major way?

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<v Speaker 3>No, we're probably We're probably a little mixed on that

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<v Speaker 3>in that one. Yes, we may be able to get

0:12:23.480 --> 0:12:27.800
<v Speaker 3>more output, but these companies have been very adept at

0:12:27.920 --> 0:12:30.600
<v Speaker 3>managing their balance sheet over the past year and figuring

0:12:30.640 --> 0:12:35.000
<v Speaker 3>out how to return capital to shareholders without overinvesting, and

0:12:35.040 --> 0:12:37.920
<v Speaker 3>so we haven't had the boom bust cycles of oil

0:12:37.960 --> 0:12:41.160
<v Speaker 3>output that we've had in the past. And I think

0:12:41.200 --> 0:12:46.559
<v Speaker 3>that companies are still on that path of strong financial management,

0:12:47.000 --> 0:12:50.520
<v Speaker 3>which we as shareholders certainly applaud. But I think it's

0:12:50.640 --> 0:12:53.200
<v Speaker 3>tough to say that oil prices are going to break

0:12:53.200 --> 0:12:56.680
<v Speaker 3>out and really cause a big run here in oil prices,

0:12:56.720 --> 0:12:59.920
<v Speaker 3>and I think it's tough to see them fall apart here.

0:13:00.080 --> 0:13:00.400
<v Speaker 2>One.

0:13:00.960 --> 0:13:04.240
<v Speaker 3>US inventories are quite low too. OPEC still has a

0:13:04.280 --> 0:13:05.920
<v Speaker 3>couple of million barrels a day it would like to

0:13:05.960 --> 0:13:07.720
<v Speaker 3>add to the global market, so that kind of puts

0:13:07.760 --> 0:13:11.800
<v Speaker 3>aus ceiling on prices, and then from a floor perspective,

0:13:11.840 --> 0:13:15.600
<v Speaker 3>we're still refilling the strategic petroleum reserve, so this is

0:13:15.720 --> 0:13:18.120
<v Speaker 3>probably more of a range bound price market as we

0:13:18.160 --> 0:13:19.320
<v Speaker 3>look into the rest of the year.

0:13:19.440 --> 0:13:22.840
<v Speaker 1>So you're talking about returning capital to shareholders, I'm wondering

0:13:22.840 --> 0:13:25.880
<v Speaker 1>about dividend plays. Is there a lot of attraction right

0:13:25.920 --> 0:13:27.240
<v Speaker 1>now in the dividend space for you?

0:13:28.080 --> 0:13:30.600
<v Speaker 3>We really probably have a two pronged approach to this,

0:13:30.840 --> 0:13:34.559
<v Speaker 3>where where one we'd say for the longer term, technology

0:13:34.760 --> 0:13:38.199
<v Speaker 3>is vital to own from the growth perspective and the

0:13:38.200 --> 0:13:41.000
<v Speaker 3>portfolio and the revenue growth perspective. It is garnering a

0:13:41.040 --> 0:13:45.160
<v Speaker 3>lot of investment by companies and that should continue and too,

0:13:45.160 --> 0:13:48.720
<v Speaker 3>You're right we are looking at income plays. Energy would

0:13:48.720 --> 0:13:50.800
<v Speaker 3>be a part of that, but utilities really as well,

0:13:50.800 --> 0:13:56.439
<v Speaker 3>particularly because we're seeing utilities needing to invest more money

0:13:56.480 --> 0:14:01.280
<v Speaker 3>to develop facilities, to create more electricity to support this

0:14:01.400 --> 0:14:05.240
<v Speaker 3>artificial intelligence investment boom. So we think there's room for

0:14:05.280 --> 0:14:06.640
<v Speaker 3>both those in your portfolio.

0:14:06.840 --> 0:14:08.400
<v Speaker 1>Before I let you go, Rob, I got to get

0:14:08.440 --> 0:14:11.079
<v Speaker 1>your take as to whether or not you're seeing opportunities

0:14:11.120 --> 0:14:15.200
<v Speaker 1>offshore right now, particularly in emerging markets. Is there value

0:14:15.240 --> 0:14:16.080
<v Speaker 1>there still.

0:14:16.800 --> 0:14:19.640
<v Speaker 3>Yeah, We certainly think there is value in global markets,

0:14:19.680 --> 0:14:22.720
<v Speaker 3>and part of that is driven by the elevated valuations

0:14:22.760 --> 0:14:26.560
<v Speaker 3>we have here in the US. Really US growth, the

0:14:26.960 --> 0:14:28.960
<v Speaker 3>US performance over the rest of this year we think

0:14:29.040 --> 0:14:33.360
<v Speaker 3>requires significant earnings growth rather than multiple expansion again this year,

0:14:33.360 --> 0:14:37.040
<v Speaker 3>and that means we're seeing that it's somewhat attractive to

0:14:37.120 --> 0:14:40.160
<v Speaker 3>look offshore, particularly given the recent strength in the US

0:14:40.200 --> 0:14:44.480
<v Speaker 3>dollar that may not be replicated. So you know, it's

0:14:44.520 --> 0:14:47.080
<v Speaker 3>not the same growth story outside the US that it

0:14:47.120 --> 0:14:50.800
<v Speaker 3>is inside the US, but we think there is reason

0:14:50.880 --> 0:14:54.680
<v Speaker 3>to consider some of those value plays outside the US.

0:14:55.040 --> 0:14:57.280
<v Speaker 1>Rob, thanks for being with us. Great insights from Rob

0:14:57.320 --> 0:15:00.800
<v Speaker 1>Hayworth there. He is the senior investment strategist at US

0:15:00.840 --> 0:15:04.320
<v Speaker 1>Bank Wealth Management. Joining us here on the Daybreak Asia Podcast.

0:15:07.000 --> 0:15:10.400
<v Speaker 1>Thanks for listening to today's episode of the Bloomberg Daybreak

0:15:10.560 --> 0:15:13.920
<v Speaker 1>Asia Edition podcast. Each weekday, we look at the story

0:15:14.000 --> 0:15:18.320
<v Speaker 1>shaping markets, finance, and geopolitics in the Asia Pacific. You

0:15:18.360 --> 0:15:22.480
<v Speaker 1>can find us on Apple, Spotify, the Bloomberg Podcast YouTube channel,

0:15:22.600 --> 0:15:25.600
<v Speaker 1>or anywhere else you listen. Join us again tomorrow for

0:15:25.720 --> 0:15:29.240
<v Speaker 1>insight on the market moves from Hong Kong to Singapore

0:15:29.640 --> 0:15:33.400
<v Speaker 1>and Australia. I'm Doug Prisner, and this is Bloomberg.