1 00:00:00,040 --> 00:00:02,599 Speaker 1: Let's get to our guest, Karen Calders with us. Karen 2 00:00:02,720 --> 00:00:07,000 Speaker 1: his head of equity research for Asia at UBP. He's 3 00:00:07,040 --> 00:00:10,639 Speaker 1: on the line from Singapore. Karen, thanks for being with us. 4 00:00:10,960 --> 00:00:13,720 Speaker 1: A lot of the conversation is obviously focused on the 5 00:00:13,760 --> 00:00:17,400 Speaker 1: relaxation of these strict COVID measures on the mainland, the 6 00:00:17,520 --> 00:00:21,400 Speaker 1: reopening story in China. The equity market loves it. Are 7 00:00:21,400 --> 00:00:26,320 Speaker 1: you a buyer of Chinese assets right now? Hi? Good morning? Uh? So, 8 00:00:26,480 --> 00:00:30,440 Speaker 1: I mean we've obviously, um, you know, we're we're cautiously 9 00:00:30,480 --> 00:00:34,360 Speaker 1: optimistic on this early reopening signals from China. UM. You know, 10 00:00:34,440 --> 00:00:37,080 Speaker 1: the market clearly wants this, wants us to happen. It's 11 00:00:37,159 --> 00:00:41,559 Speaker 1: encouraging that. UM. It seems like the official messages has 12 00:00:41,600 --> 00:00:45,640 Speaker 1: started to recognize the actual science of oh macron, which 13 00:00:45,680 --> 00:00:48,680 Speaker 1: is that it is is less deadly. UM. So hopefully 14 00:00:48,680 --> 00:00:51,800 Speaker 1: the announcement you you mentioned that's meant to happen later 15 00:00:51,840 --> 00:00:57,040 Speaker 1: today will be uh, you know, something around uh effective 16 00:00:57,080 --> 00:01:00,840 Speaker 1: vaccination because this is the other problem in China. Well, 17 00:01:00,880 --> 00:01:04,760 Speaker 1: there's a relatively high vaccination right the the uh we 18 00:01:04,840 --> 00:01:07,480 Speaker 1: understand that the vaccine is not that effective. Um, and 19 00:01:07,520 --> 00:01:10,120 Speaker 1: they're they're not you know, they haven't brought in the 20 00:01:10,240 --> 00:01:15,200 Speaker 1: m R and a vaccines um um, which would have 21 00:01:15,240 --> 00:01:17,880 Speaker 1: which would have made it much safer to reopen quicker. 22 00:01:18,040 --> 00:01:20,399 Speaker 1: So how should we view this? Should we view this 23 00:01:20,440 --> 00:01:23,280 Speaker 1: as bumps in the road? They kept this policy for 24 00:01:23,319 --> 00:01:27,000 Speaker 1: so long. They taught people to you know, stay home 25 00:01:27,120 --> 00:01:28,920 Speaker 1: and be free of going out and all kinds of things. 26 00:01:29,400 --> 00:01:31,319 Speaker 1: And now you've got to change that and you're going 27 00:01:31,360 --> 00:01:34,319 Speaker 1: to have spikes in cases winters coming. So is that 28 00:01:34,360 --> 00:01:36,440 Speaker 1: a bump in the road? Ors? Oh, they could roll 29 00:01:36,560 --> 00:01:38,960 Speaker 1: this back. You know, there's a skepticism. They've tried, they've 30 00:01:39,160 --> 00:01:41,440 Speaker 1: said they're turning away from COVID zero in the past, 31 00:01:41,680 --> 00:01:43,920 Speaker 1: and then they don't do it. What kind of situation 32 00:01:44,040 --> 00:01:47,760 Speaker 1: is it? Yeah? I think I would categorize it as 33 00:01:47,760 --> 00:01:50,680 Speaker 1: the beginning of the end um So, you know, don't 34 00:01:50,720 --> 00:01:54,840 Speaker 1: forget uh. It's education is important in China around this 35 00:01:54,920 --> 00:01:58,080 Speaker 1: because Chinese, Uh, the message in China has been that 36 00:01:58,200 --> 00:02:00,720 Speaker 1: COVID will kill you. And you know, when we see 37 00:02:00,720 --> 00:02:04,240 Speaker 1: the you know, lockdown of Ikia and the factories and stuff, 38 00:02:04,240 --> 00:02:06,400 Speaker 1: and people running away, they're not running away because they 39 00:02:06,400 --> 00:02:07,920 Speaker 1: want to be free. They're runn away because they think 40 00:02:07,920 --> 00:02:10,720 Speaker 1: they might get locked in and get COVID and die. Um. 41 00:02:11,000 --> 00:02:13,160 Speaker 1: So there needs to be uh, you know. And certainly 42 00:02:13,160 --> 00:02:15,440 Speaker 1: the message you know, from the top has been look, 43 00:02:15,440 --> 00:02:18,919 Speaker 1: oh Macron is uh not that bad um. And that's 44 00:02:18,960 --> 00:02:21,440 Speaker 1: part of the education process. So you know, certainly, it's 45 00:02:21,520 --> 00:02:23,960 Speaker 1: China and anything could happen, um, but it does seem 46 00:02:24,000 --> 00:02:25,880 Speaker 1: to be uh you know. Certainly the message from the 47 00:02:25,960 --> 00:02:27,760 Speaker 1: top is that this is the beginning of the end 48 00:02:27,800 --> 00:02:29,880 Speaker 1: and they want to get it done. What about how 49 00:02:30,000 --> 00:02:34,720 Speaker 1: Western companies in particular are reevaluating their business ties with 50 00:02:34,760 --> 00:02:37,760 Speaker 1: the mainland. I mean, even during the trade war under 51 00:02:37,800 --> 00:02:40,799 Speaker 1: the Trump administration, there were companies that were re examining 52 00:02:40,840 --> 00:02:45,519 Speaker 1: supply chain issues. Obviously that became or was exacerbated by 53 00:02:45,720 --> 00:02:50,840 Speaker 1: the pandemic. Now we've had a draconian response. Um. We 54 00:02:50,880 --> 00:02:54,520 Speaker 1: can describe in greater detail what's underneath the hood, but 55 00:02:54,639 --> 00:02:57,840 Speaker 1: fundamentally is that China has not been open for business 56 00:02:57,840 --> 00:03:01,040 Speaker 1: for some time now, and come pennies in the West 57 00:03:01,120 --> 00:03:03,480 Speaker 1: have had to deal with the consequence of that. And 58 00:03:03,680 --> 00:03:08,200 Speaker 1: if I'm running a major company, I'm reinvestigating or revisiting 59 00:03:08,680 --> 00:03:12,440 Speaker 1: the strategy as it relates to reliance on the Chinese economy. 60 00:03:12,480 --> 00:03:16,079 Speaker 1: Fair statement and so what can we be expecting then 61 00:03:16,120 --> 00:03:20,600 Speaker 1: on that front over the next twelve months. Let's say, yeah, absolutely, 62 00:03:20,680 --> 00:03:22,840 Speaker 1: it's a fair statement. And and then you know, as 63 00:03:22,840 --> 00:03:24,880 Speaker 1: you mentioned, it started kind of with the with the 64 00:03:24,919 --> 00:03:28,320 Speaker 1: trade war, got exacerbated by COVID. But it also falls 65 00:03:28,360 --> 00:03:32,360 Speaker 1: within the sort of global theme around deglobalization. UM. So 66 00:03:32,480 --> 00:03:36,440 Speaker 1: if you are running a global supply chain, UM, you 67 00:03:36,440 --> 00:03:42,280 Speaker 1: know it includes China or even in the past Russia. UM. Definitely, 68 00:03:42,560 --> 00:03:46,480 Speaker 1: you know, plans are underway to to UH diversify their 69 00:03:46,560 --> 00:03:50,200 Speaker 1: so potential beneficiaries. You know in the region obviously our 70 00:03:50,280 --> 00:03:55,320 Speaker 1: our Vietnam which is UH has had great growth in 71 00:03:55,440 --> 00:03:59,080 Speaker 1: terms of supply chain reallocation. Possibly India although it's not 72 00:03:59,120 --> 00:04:01,920 Speaker 1: without its interest extra problems, and some of the other 73 00:04:02,000 --> 00:04:05,200 Speaker 1: countries in Southeast Asia as well. UM. So you know 74 00:04:05,240 --> 00:04:08,720 Speaker 1: absolutely this is this is UH not an issue that 75 00:04:08,920 --> 00:04:11,040 Speaker 1: is going to go go to go way quickly or 76 00:04:11,120 --> 00:04:13,640 Speaker 1: not just going to go away with the relaxation of 77 00:04:13,640 --> 00:04:16,920 Speaker 1: COVID over time in China. UM. But it also falls 78 00:04:16,960 --> 00:04:20,160 Speaker 1: within the context of UH kind of a reversal in 79 00:04:20,240 --> 00:04:27,600 Speaker 1: globalization or the globalization. Okay, so how about what everybody 80 00:04:27,600 --> 00:04:32,040 Speaker 1: else is expecting or not expecting that you are in 81 00:04:32,160 --> 00:04:35,679 Speaker 1: terms of what to do with my money in Asia. Sure, 82 00:04:35,960 --> 00:04:38,919 Speaker 1: I mean so we you know, we think there's a 83 00:04:38,920 --> 00:04:41,960 Speaker 1: few major things. Um. We started driving our our view, 84 00:04:41,960 --> 00:04:44,520 Speaker 1: which is which is kind of cautious. And we just 85 00:04:44,560 --> 00:04:47,599 Speaker 1: published an outlook for next year called walking the tight rope, 86 00:04:47,600 --> 00:04:50,120 Speaker 1: which kind of gives a illustration of where we think 87 00:04:50,160 --> 00:04:53,000 Speaker 1: we are. UM. So why you know inflation is probably 88 00:04:53,000 --> 00:04:55,520 Speaker 1: topped out in the short term. UM. And you know, 89 00:04:55,560 --> 00:04:57,880 Speaker 1: we generally agree that the terminal rate of around five 90 00:04:58,400 --> 00:05:01,520 Speaker 1: is UM looks about right. And we'll get an increase 91 00:05:01,560 --> 00:05:04,200 Speaker 1: in the guidance from the Fed next week. But but 92 00:05:04,279 --> 00:05:07,880 Speaker 1: don't forget that. Um. Uh. If you know, against the 93 00:05:07,920 --> 00:05:11,640 Speaker 1: market expectations that the Fed has to start cutting by 94 00:05:11,680 --> 00:05:15,480 Speaker 1: mid next year, UM, in the sort of goldilocks case, 95 00:05:15,480 --> 00:05:18,920 Speaker 1: will rehead for a soft landing. UM. The FED has 96 00:05:18,960 --> 00:05:23,240 Speaker 1: in the past against aggressive rate high cycles. Uh. The 97 00:05:23,279 --> 00:05:26,120 Speaker 1: period between the last hike and the first cut has 98 00:05:26,120 --> 00:05:29,800 Speaker 1: been between six and nine months. UM. So I would 99 00:05:29,800 --> 00:05:31,440 Speaker 1: say that we shouldn't expect a short you know, a 100 00:05:31,480 --> 00:05:33,479 Speaker 1: short term reversal. And maybe that's where we differ a 101 00:05:33,480 --> 00:05:36,440 Speaker 1: little bit. UM. We think it leads us to a 102 00:05:36,480 --> 00:05:40,160 Speaker 1: few strategies. One is um certainly inflation is high, but 103 00:05:40,200 --> 00:05:42,120 Speaker 1: it's starting to fall, and we think that's creating a 104 00:05:42,160 --> 00:05:46,479 Speaker 1: technical opportunity to do two things. One is focus on 105 00:05:46,480 --> 00:05:50,640 Speaker 1: on profits that come from UH reallocation or forest reallocation 106 00:05:50,680 --> 00:05:54,080 Speaker 1: of spending, so around energy transition and also around the 107 00:05:54,160 --> 00:05:58,760 Speaker 1: infrastructure globally even and also a shift towards dividends UH 108 00:05:58,800 --> 00:06:01,400 Speaker 1: and income as key driver of total returns in this 109 00:06:02,080 --> 00:06:05,400 Speaker 1: UM you know, you know, six to twelve month period 110 00:06:05,680 --> 00:06:09,120 Speaker 1: as inflation is high but starts to fall UM and 111 00:06:09,120 --> 00:06:14,320 Speaker 1: and we should expect overall UM you know, positive real 112 00:06:14,360 --> 00:06:17,120 Speaker 1: returns from equities over that period of time, and we 113 00:06:17,160 --> 00:06:18,960 Speaker 1: think the best way to get that is from you know, 114 00:06:19,000 --> 00:06:20,720 Speaker 1: the two the two things we just mentioned, which is 115 00:06:20,800 --> 00:06:24,600 Speaker 1: rellocation spending towards energy and infrastructure and also UH dividends 116 00:06:24,600 --> 00:06:27,159 Speaker 1: and income. So I'm trying to understand in listening to 117 00:06:27,600 --> 00:06:30,440 Speaker 1: your kind of view on FED policy, what it means 118 00:06:30,440 --> 00:06:33,840 Speaker 1: for the path of the dollar. Today's strengthening notwithstanding, I mean, 119 00:06:33,880 --> 00:06:36,320 Speaker 1: we have elevated deals. I get that with some of 120 00:06:36,360 --> 00:06:39,000 Speaker 1: the datas in the States has been a little hot, 121 00:06:39,600 --> 00:06:43,960 Speaker 1: UH kind of just creating a little bit more anxiety 122 00:06:44,000 --> 00:06:47,320 Speaker 1: around this notion of you know, higher for longer and 123 00:06:47,400 --> 00:06:50,400 Speaker 1: maybe a terminal rate that's well above five by the 124 00:06:50,400 --> 00:06:53,360 Speaker 1: middle of next year. But so if you had to 125 00:06:54,040 --> 00:06:56,680 Speaker 1: kind of put a view on the dollar here and 126 00:06:56,760 --> 00:06:59,000 Speaker 1: not only where the dollar may trade, but what that 127 00:06:59,040 --> 00:07:03,120 Speaker 1: means for Asia, how do you weigh in? We think 128 00:07:03,200 --> 00:07:07,040 Speaker 1: the dollar is peaked or is peaking, UM, So obviously 129 00:07:07,160 --> 00:07:11,040 Speaker 1: you know that is supported by UM. You know, the 130 00:07:11,040 --> 00:07:14,040 Speaker 1: bulk of interest rate increases have already happened, even if 131 00:07:14,040 --> 00:07:16,600 Speaker 1: we're going even if we were going to six. Uh, 132 00:07:16,680 --> 00:07:20,360 Speaker 1: most of it's already happened or certainly that you know, Uh, 133 00:07:20,480 --> 00:07:22,800 Speaker 1: the surprise part of it is long ago already happened. 134 00:07:23,200 --> 00:07:26,200 Speaker 1: That's one thing. UM. So we think you know, it 135 00:07:26,320 --> 00:07:29,480 Speaker 1: shift towards a week or dollar is obviously obviously a 136 00:07:29,520 --> 00:07:33,440 Speaker 1: positive for M e M in general. UM. The biggest 137 00:07:33,480 --> 00:07:36,000 Speaker 1: part of EM is you know, obviously China. So if 138 00:07:36,040 --> 00:07:39,480 Speaker 1: we could get uh, you know, view towards peaking of 139 00:07:39,560 --> 00:07:42,800 Speaker 1: rates and a reopening of China, we think that could 140 00:07:42,840 --> 00:07:46,480 Speaker 1: be very positive indeed for UM, for e M earnings 141 00:07:46,520 --> 00:07:50,480 Speaker 1: and e M markets into into next year. Well, it 142 00:07:50,480 --> 00:07:52,760 Speaker 1: all seems like not pie in this guy, like all 143 00:07:52,760 --> 00:07:54,680 Speaker 1: of that could happen. Karen called all called or thank 144 00:07:54,720 --> 00:07:58,880 Speaker 1: you so very much. You're fascinating conversation and potentially profitable conversation. 145 00:07:58,960 --> 00:08:01,440 Speaker 1: Head of Equity Research for Asia at U b P.