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Speaker 1: Let's get to Mark Franklin. Here's our guest. Market is

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Speaker 1: managing director also senior portfolio manager at Manual Life Investment Management,

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Speaker 1: joining us from our studios in Hong Kong. Mark, thanks

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Speaker 1: for being with us. I think we can agree that

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Speaker 1: the narrative for high inflation central bankers leaning in hard

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Speaker 1: to fight it. And now for twenty three, the question

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Speaker 1: is are we facing global recession? What do you think?

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Speaker 1: So a Manual Life, we're not too obsessive about the

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Speaker 1: question about whether or not we're going into recession. We're

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Speaker 1: going to look at the speed with which we descend

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Speaker 1: into a low growth phase and how long that phase

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Speaker 1: lasts fall. And that's particularly relevant for equity markets because

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Speaker 1: sometimes equity markets are willing to look through a very short,

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Speaker 1: sharp procession if they believe that it will be over

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Speaker 1: very quickly. But if you go to a prolonged growth

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Speaker 1: slowdown of several quarters, then that will force equity markets

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Speaker 1: to effectively take multiples down. Our view would be that

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Speaker 1: we are going to probably four to six quarters globally

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Speaker 1: of low growth, led by Europe to some extent participated

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Speaker 1: in by the US. But there's a wild card here.

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Speaker 1: What's going on with China. So it's going through a

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Speaker 1: very heavy COVID wave now exit zero COVID, but it's

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Speaker 1: really exiting with momentum and intent, and the reignition of

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Speaker 1: the Chinese economy will have implications for the global economy

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Speaker 1: given its importance for marginal growth. So with their mind

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Speaker 1: is the plan that sell everything else by China. It's

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Speaker 1: definitely an important question to what extent do we think

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Speaker 1: that US equities can take leadership of global equity markets

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Speaker 1: this year? And that's a relative question, so in absolute terms,

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Speaker 1: are still pretty cautious on the islank for global equities,

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Speaker 1: but our tactical view will be yes, you're probably going

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Speaker 1: to be inclined to take some equity risk allocation away

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Speaker 1: from the US, perhaps with a preference for Asian equities

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Speaker 1: given their participation and benefits from from a China reopening.

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Speaker 1: And to some extent in Europe, if you look at

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Speaker 1: gas prices, wholesale gas prices in Europe then now back

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Speaker 1: to levels where they before the Russian invasion of Ukraine,

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Speaker 1: and that creates some headroom for inflation to come down

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Speaker 1: and for the can kicking down the road of structural

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Speaker 1: forms that are desperately needed so within the equity world,

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Speaker 1: then are there themes that you want to identify, Maybe

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Speaker 1: it's an industry that you think will out perform in

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Speaker 1: We still think that energy in the commodities complex look

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Speaker 1: relatively attractive from an asset allocation perspective. Physical markets are

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Speaker 1: very tight um, so the supply outlook and the under

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Speaker 1: investment risks are there. The question will be whether demand

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Speaker 1: holds up sufficiently for the supply side to become the narrative,

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Speaker 1: the dominant narrative for the market. And that's where China

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Speaker 1: comes back in. Assuming that China is able to reopen

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Speaker 1: without too many hiccups, without too many speed bumps, and

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Speaker 1: that should allow for the energy complex in particular, and

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Speaker 1: therefore the derivatives of that inequity markets to continue to

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Speaker 1: perform well relative to the broader market. So when you

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Speaker 1: consider China, what what is a reasonable timeline for exiting

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Speaker 1: this rough ride out of COVID zero. Unfortunately, that the

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Speaker 1: global lessons that we've learned is that you have these

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Speaker 1: waves which then subside after sort of six to eight weeks,

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Speaker 1: and then new variants crop up. Somewhere down the line.

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Speaker 1: You go through another another wave again, and I think

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Speaker 1: China's attitude is that let's get everyone infected, so that

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Speaker 1: then you build up a nationwide level of immunity. Immunity

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Speaker 1: for at least six to nine months. So what you

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Speaker 1: could argue is that perhaps by the time we get

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Speaker 1: to the beginning of March, we're through the worst on

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Speaker 1: a national level, where there will be provincial differences there

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Speaker 1: and that will are now for the economy to start

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Speaker 1: showing some positive momentum a bit from a very very

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Speaker 1: suppressed base in the second quarter of this year into

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Speaker 1: the third quarter. So it seems as though we're going

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Speaker 1: to get some conversation started, another conversation between Washington and

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Speaker 1: Beijing on the subject of geopolitical risk. There's obviously war

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Speaker 1: in Ukraine. There is the story on Russia and the

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Speaker 1: alliance that seems to be developing. You mentioned energy between

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Speaker 1: not only China but India as well. Talk to me

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Speaker 1: a little bit about how you see the landscape, interns

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Speaker 1: of geopolitics and maybe risks that are on the horizon

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Speaker 1: that the market needs to be a little bit more

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Speaker 1: in tune with. Discounting well, a thing that we're really

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Speaker 1: focused on. Manual life is partly geopolitical, but it's also

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Speaker 1: economic is the concept of deglobalization reashoring. So clearly zero

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Speaker 1: COVID has had a profound impact on global corporations assessments

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Speaker 1: of where they should place their supply chains. And then

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Speaker 1: when you start to see government policy increasingly active in

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Speaker 1: terms of industrial policy, whether it's around national security or

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Speaker 1: self sufficiency, it's forcing reshoring, a diversification supply chains, and

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Speaker 1: so that's going to create tensions at governmental level. But

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Speaker 1: it's also going to have implications for inflation as well.

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Speaker 1: So we definitely see this sort of concatenation of risks

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Speaker 1: from the geopolitical arena bleed into the economic arena. Bloomberg

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Speaker 1: has released an inflation forecast for twenty three for a

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Speaker 1: number of economies, in the case of China, seen accelerating

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Speaker 1: to two point three percent. Does this fit with your thinking, Well,

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Speaker 1: it's it's very much dependent on the ease with which

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Speaker 1: they're able to get economic activity back up and running again,

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Speaker 1: and that comes down to the ability for factories to

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Speaker 1: get staff back in to produce. It's also about incentivizing

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Speaker 1: households and corporates to invest and to spend. There's been

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Speaker 1: so much um of a hit to the willingness of

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Speaker 1: of of households and businesses to leverage up, to take

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Speaker 1: credit out, to invest. Because of the inactivity that's been

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Speaker 1: presided over by zero COVID, it's going to take some

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Speaker 1: time for those confidences, the animal spirits to kick back in.

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Speaker 1: So I think that probably by the end of this

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Speaker 1: Canada you're going to see a very very different economic

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Speaker 1: activity level to where we are now. It's not going

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Speaker 1: to be a straight line um, and it's going to

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Speaker 1: be come down to, let's say, the confidence in businesses

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Speaker 1: and consumers to start spending materially again. And then also

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Speaker 1: you've got to look at the export markets for China,

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Speaker 1: whether it's Europe or whether it's the US. Clearly consumers

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Speaker 1: in Europe behaving very cautiously right now. US consume this

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Speaker 1: have depleted their excess savings to a large extent. So

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Speaker 1: maybe the growth drivers will need to be more domestic

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Speaker 1: in nature for China this year. So on the subject

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Speaker 1: of reassuring, does it necessarily follow that I will choose

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Speaker 1: semiconductors as an example. I mean, yes, we know that

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Speaker 1: a number of manufacturers are bringing production facilities to the US,

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Speaker 1: but there may be other industries kind of lower level

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Speaker 1: um manufacturing that may be shifted out of China to

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Speaker 1: places like India. I mean, are there countries that are

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Speaker 1: may not be directly correlated to trade tension story or

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Speaker 1: the supply chain story that could be the beneficiaries. Yes,

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Speaker 1: so there's definitely beneficiaries of reassuring or diversification supply chains.

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Speaker 1: And some of these moves were going on well before

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Speaker 1: COVID happens. So if you look at textiles, you know

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Speaker 1: the likes of Vietnam and Bangladesh were benefiting from businesses

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Speaker 1: taking their footprint out of China because of rising wages

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Speaker 1: and wising labor costs and moving them there. So that's

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Speaker 1: that's already got a tow wins. And I think then

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Speaker 1: if you start moving up the value chain, whether it's

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Speaker 1: sort of consumer electronics, then the likes of India and

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Speaker 1: also other parts of Southeast Asia will probably benefit from

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Speaker 1: companies such as Apple looking to not be as totally

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Speaker 1: dependent on China for its production of iPhones and and

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Speaker 1: max as well. There's certainly no shortage of predictions of

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Speaker 1: doom and gloom. For three, do you have an outsize

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Speaker 1: allocation to havens and that the question is what serves

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Speaker 1: as a haven these days, because I think fixed income

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Speaker 1: really dropped the ball last year. The correlations with equities

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Speaker 1: shifted completely, and it made made sense given that the

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Speaker 1: change in the macroeconomic regime that we saw. I mean, ultimately,

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Speaker 1: you have to start this year with a much more

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Speaker 1: cautious stance in terms of US allocation and what you

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Speaker 1: define as for safe haven cash should not be underestimated

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Speaker 1: as as an important diversifier in this environment. It also

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Speaker 1: gives you optionality for when situation stabilized and when you

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Speaker 1: spot opportunities that have attractive risk all because then you've

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Speaker 1: got the cash ready to deploy. So we believe in

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Speaker 1: running certainly elevator at cash levels to start the year.

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Speaker 1: And we also think that energy and commodities provide a

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Speaker 1: certain amount of diversification, but with elevated volatility. So if

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Speaker 1: you're running a strategy which has low bold, you have

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Speaker 1: to be a bit careful about commodities and energy. But

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Speaker 1: if you have a certain bandwidth for taking on volatility,

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Speaker 1: then we think those asset classes can potentially perform well

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Speaker 1: on a relative basis in the first few months of

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Speaker 1: this year. Good conversation, Mark, thank you so much for

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Speaker 1: sharing your perspective thoroughly enjoyable. Mark Franklin, m D, also

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Speaker 1: senior portfolio manager at Manual Life Investment Management, joining us

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Speaker 1: here on Daybreak Asia