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Speaker 1: Let's get you. Our guests are we lash Narayan, whose

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Speaker 1: senior investment strategist that standard Charge Wealth Management. I'll be Lash,

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Speaker 1: thanks very much for joining us UM. So all of

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Speaker 1: this action here from the Bank of Japan UM. We've

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Speaker 1: been canvassing clients and guests on the program today on

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Speaker 1: whether or not they think that makes Japan look more

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Speaker 1: attractive or less attractive going forward. Your thoughts on that

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Speaker 1: level absolutely. I mean, if you look at the announcement yesterday,

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Speaker 1: it did can come as a as a big shot

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Speaker 1: to investors, and we can see that from the reaction

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Speaker 1: of bond as well as f X markets. But I

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Speaker 1: think at the margin it does make Japanese fixed income

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Speaker 1: markets a bit more attractive. Now we see two potential

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Speaker 1: implications of yesterday's movie. First one is, you know, it

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Speaker 1: just solidifies the tighter monetary conditions of the title monetary

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Speaker 1: policies from various central banks, so we could see a

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Speaker 1: knock on impact and higher yields in US and European

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Speaker 1: government bond markets. So you know, we won't be surprised

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Speaker 1: if treasuries moved towards uh, you know, four percent over

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Speaker 1: the next few weeks. And the second impact because we

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Speaker 1: think that we could see more flows back into Japanese markets.

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Speaker 1: I mean, we know Japanese investors are large holders of

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Speaker 1: fixed income globally, uh and you know, with the latest move,

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Speaker 1: Japanese fixed income is becoming more attractive. So for instance,

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Speaker 1: if you look at the hedged yield of U S

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Speaker 1: treasuries today for Japanese investors versus the j g bield,

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Speaker 1: Japanese investors get one d sixty basis point pick up

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Speaker 1: versus the hedged US treasury, So it is becoming more attractive.

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Speaker 1: In fact, you know, jgbs offer a higher hedge deeald

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Speaker 1: as compared to US I G corporate bonds, So we

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Speaker 1: could start to see incremental rotation back into Japanese fixed

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Speaker 1: income markets. You know. But that isn't a slam dunk

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Speaker 1: because while we've seen a lot of policy normalization in

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Speaker 1: the US, you know, it's it's just starting in Japan,

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Speaker 1: to be honest, Yeah, and see your point. What's going

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Speaker 1: on here in terms of the bigger pictures, the ground

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Speaker 1: being prepared for a new Bank of Japan governor in April,

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Speaker 1: and that kind of relates to our Bloomberg question of

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Speaker 1: the day, when will Japan exit negative rights. When's that

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Speaker 1: going to happen? Well, um, that's that's that's tough question

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Speaker 1: to answer. I think one thing we know about Bank

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Speaker 1: of Japan is like, unlike the FED and the ECB,

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Speaker 1: which tend to you know, favor giving forward guidance to markets,

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Speaker 1: Bank of Japan has been one of the banks where

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Speaker 1: you know, surprise has been at the order of the day.

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Speaker 1: So it's it's difficult to predict, but it's likely that

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Speaker 1: we won't exit the negative rates in Japan at least

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Speaker 1: until Governor Kuruda's term ends. But you know, it's it's

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Speaker 1: still early days. While Governor Kuruda did emphasize that this

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Speaker 1: was a one off technical move, we'll get a better

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Speaker 1: picture or better clarity in in the next meeting from

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Speaker 1: Bank of Japan on eighteenth of January. In any case,

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Speaker 1: we're coming into a year that will probably be nervous

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Speaker 1: times for a lot of people. I see from your

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Speaker 1: notes that you think it's a good time to play

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Speaker 1: it safe and and you like exposure to high quality bonds.

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Speaker 1: So where would you be targeting some fresh money at

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Speaker 1: the moment. Well, you're absolutely right, So we have turned

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Speaker 1: overweight on bonds both you know, government bonds as well

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Speaker 1: as i G. Corporate bonds uh and we think that

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Speaker 1: given the backdrop that there is an elevated risk of procession,

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Speaker 1: from a risk management perspective, it does make sense to

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Speaker 1: to turn a bit more defensive within bonds. We do

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Speaker 1: have a preference for for Asian dollar bonds, and we

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Speaker 1: also think that uh US treasury yields should decline in

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Speaker 1: three so you could see a bit more capital gains

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Speaker 1: from U S traagories as well. So you know, we

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Speaker 1: wouldn't take very concentrated beds. We still favored diversification, but

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Speaker 1: at the margin we do favor Asian dollar bonds over

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Speaker 1: over develop market counterparts. Two chins still deeply inverted. When

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Speaker 1: do you see that changing, Well, it's it's unlikely to

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Speaker 1: go back into the positive territory anytime soon, at least

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Speaker 1: until we start seeing fit Star, you know, cutting rates

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Speaker 1: in a more aggressive fashion. But we do think that

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Speaker 1: the inversion could soften. So while we are at two

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Speaker 1: eight basis points in the inverted territory, in three we

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Speaker 1: should start to see that normalize a bit. And one

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Speaker 1: of the key reasons why we think that was going

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Speaker 1: to happen is because we expect the FED to cut

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Speaker 1: rates accumulatively by around seventy five basis points in the

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Speaker 1: second half of two So that should be, you know,

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Speaker 1: a major factor in bringing the two year yields lower

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Speaker 1: and reducing the inversion that we are seen right now.

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Speaker 1: So we often talk a lot about China on this program,

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Speaker 1: but I have to say that the Bank of Japan

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Speaker 1: has kind of stolen the thunder from China. We're talking

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Speaker 1: so much about Japan this morning, Let's talk a little

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Speaker 1: bit about what's happening with the Chinese economy here as

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Speaker 1: they change policy on their approach to COVID. Sam Fizzelia

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Speaker 1: Bloomberg Intelligence Um Analysts, the chief pharmaceutical analysts, is saying

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Speaker 1: that the death toll likely could hit seven hundred housing

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Speaker 1: now because COVID will be running through the population, and

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Speaker 1: its study by another team of researchers in Hong Kong

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Speaker 1: puts the figure at almost one million. Are these numbers

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Speaker 1: significant enough to really really disrupt the reopening or are

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Speaker 1: we going to see the Chinese economy, you know, really

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Speaker 1: changed before our very eyes in the short term. Well,

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Speaker 1: that's that's that's a great question, and I think this

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Speaker 1: is something we've been debating a lot as well. Now

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Speaker 1: in our assessment, we think that the path to reopening

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Speaker 1: is unlikely to be a linear one. We will see

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Speaker 1: some bumps around the road. And as far as the

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Speaker 1: number of deaths and the projections there are concerned, I

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Speaker 1: think it also depends a lot on on what do

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Speaker 1: you use as a definition for COVID related death and

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Speaker 1: we've seen, you know, varying definitions being used by different participants.

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Speaker 1: But clearly there will be an impact on the economy,

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Speaker 1: and we think that, you know, there is a risk

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Speaker 1: that the optimism that we've seen around Chinese assets with

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Speaker 1: equities and bonds recently could take us of a step back.

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Speaker 1: Investors may reassess whether China is committed to reopening or

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Speaker 1: not and see, it is the process that will take

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Speaker 1: a few months. It's not going to happen within two

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Speaker 1: weeks or four weeks. So we will see ebbs and flows.

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Speaker 1: We will see potentially a pullback in Chinese equities when

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Speaker 1: investors become concerned about the magnitude of of infection spread

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Speaker 1: in China. But if you have a six or twelve

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Speaker 1: month horizon, we would be buyers on the tips. So

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Speaker 1: we think that Chinese stocks are quite beaten down. We

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Speaker 1: think Chinese bonds are quite beaten down, and we see

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Speaker 1: attractive risk premium embedded in both these asset classes, so

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Speaker 1: we like both Chinese equities as well as Asian dollar bonds,

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Speaker 1: where Chinese issues are around fifty percent of the universe.

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Speaker 1: What's a realistic expectation around Chinese growth for the next

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Speaker 1: twelve months. Well, a lot depends on how quickly China reopens,

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Speaker 1: but we also have to keep in mind that you know,

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Speaker 1: China is a large exporter and we are going to

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Speaker 1: see slow down in the US and Europe, So we

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Speaker 1: are assigning a several five percent proba vility of a

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Speaker 1: recession in US and uniples the next twelve months. So

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Speaker 1: there are a number of variables, but we think that

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Speaker 1: Chinese growth should be about four percent UH in three

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Speaker 1: and if you do see a faster reopening, a soft

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Speaker 1: landing in the US and in Europe, it's possible that

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Speaker 1: we end up seeing growth that's closer to five. But

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Speaker 1: right now it's it's a bit too early to to

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Speaker 1: give more concrete figures. I know you like some contrarian calls.

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Speaker 1: Do you think it's possible that we see recession in

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Speaker 1: the United States, but we don't see a big spike

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Speaker 1: in unemployment and we don't see a huge rise in defaults. Well, uh,

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Speaker 1: never say never. It is certainly possible. But if you

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Speaker 1: look at history, right, if you look at past US

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Speaker 1: recession since nineteen seventies. We did an analysis and what

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Speaker 1: that showed was that whenever unemployment rate starts to rise

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Speaker 1: in the US, especially around the times of procession, usually

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Speaker 1: it rises by over two percent. So you know, while

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Speaker 1: FED is projecting that unemployment rate will peak at four

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Speaker 1: point six percent, which is just one person had from

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Speaker 1: WAYBA today, history shows that is very difficult to achieve.

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Speaker 1: So yeah, I could go higher. Yeah, Abulas, thanks so

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Speaker 1: much for joining us. A really interesting commentary. Abilash Nari

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Speaker 1: in their Senior Investment Strategist at Standard Chartered Wealth Management