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Speaker 1: Let's get to George Barboris, George's executive director also the

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Speaker 1: head of research at K two Set Management. He joins

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Speaker 1: from Melbourne. George, thanks for being with us and markets

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Speaker 1: now braced for the seventy five basis point rate hike

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Speaker 1: after that super strong employment report here in the States.

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Speaker 1: Do you want to go out on a limb and

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Speaker 1: talk to me about where you think the terminal rate

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Speaker 1: here is at this point, M good morning. Thanks for

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Speaker 1: having me. Um. It'll be too difficult because the predictive

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Speaker 1: nature of future creative conditions and future and explementum and

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Speaker 1: future rate settings are changing all the time for obvious reasons.

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Speaker 1: But without a doubt, UM, the US Federal Reserve would

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Speaker 1: have to go harder on rates than I think the

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Speaker 1: market is reflecting in the month of July. While the

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Speaker 1: month of during reaction and the risk of was an overreaction,

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Speaker 1: the counter to July was to make up for that.

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Speaker 1: But just looking at core measures of or p c

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Speaker 1: A for the Fed and core measures around the world

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Speaker 1: other central banks, it's very difficult to see your scenario

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Speaker 1: where it gets to a two to three percent on

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Speaker 1: a year on year basis a year two basis in

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Speaker 1: the foreseeable future of the next eight months or two years. Therefore,

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Speaker 1: the rates are going harder and staying higher a little

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Speaker 1: bit longer, and that will be a headwind for risk assets.

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Speaker 1: But you can muddle through that. If that makes any sense, Well, dummy, George, Okay,

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Speaker 1: you can have it. What's going on with the economy,

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Speaker 1: inst look at what we've got out of the earning season,

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Speaker 1: not just in terms of the rear view mirror, but

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Speaker 1: what they're suggesting in terms of forecasts. How did the

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Speaker 1: two sit together? Yeah, so the two are still unanswered,

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Speaker 1: as I should be, but just more uncertainty for the

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Speaker 1: months ahead. And that is um earnings expectation for the US.

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Speaker 1: They're very nice numbers that would expect because the economy

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Speaker 1: was coming along very well until the the rate highs

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Speaker 1: and monetary policy tightening and the QT and the variations

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Speaker 1: that it has for the bond market. So so we're

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Speaker 1: expected it to be good and it was. It's falling

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Speaker 1: to a long run main reversions of beating expectations seventy

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Speaker 1: five at the time, that type of thing. It's it's

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Speaker 1: really healthy aggregate balancy for corporate America and other developed economies.

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Speaker 1: But the challenges will will come, So how do we

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Speaker 1: reconcile with it? Is that good starting point last year

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Speaker 1: and they're gonna have to give some back earnings. There's

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Speaker 1: some additional tax impost in this multi decade transition to

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Speaker 1: s G that is occurring, and everyone's agreeing on it,

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Speaker 1: but it is a tax impost in aggregate in the economies.

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Speaker 1: There will be a positive externality at the other end

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Speaker 1: of it, but in the short term, the costs have

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Speaker 1: to be absorbed in those numbers. So so in essence

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Speaker 1: those headwinds will remain. But again it's just that balancing

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Speaker 1: act of how you slow the economy and to what

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Speaker 1: degree your slower the economy, and which impacts because there's

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Speaker 1: still a lot of cash free cash flow for a

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Speaker 1: lot of companies and sectors coming through George very quickly

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Speaker 1: thirty seconds or so. I mean, do you think the

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Speaker 1: bond market has it right? The U S Treasury curve

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Speaker 1: with this inversion? I mean, are we looking at recession

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Speaker 1: or is there any chance any at all that we're

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Speaker 1: going to see a soft landing. Soft landing possible, improbable

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Speaker 1: the bond market, the inversion to remain, but the Yok

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Speaker 1: curve in the bear market would lift about fifty buses

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Speaker 1: points at last, right across from two tents, and that

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Speaker 1: would be the headwind for equity markets in the in

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Speaker 1: the immediate and short term. You know, let's have a

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Speaker 1: look at some of where you're putting your money, and

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Speaker 1: you know you are cautious on China, and when you

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Speaker 1: look at some of the I suppose valuations, I mean

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Speaker 1: they're cheap here in Hong Kong. We're talking about seven

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Speaker 1: and a half percent sorry sorry, seven times earnings or

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Speaker 1: sever seven times learning to Chinese equities are really very

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Speaker 1: very cheap here as well. With these measures in mind,

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Speaker 1: and also priced to book and others. The thing is,

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Speaker 1: is there now a massive discount which has been priced

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Speaker 1: into Chinese equities and how long does it stay from

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Speaker 1: what type of percentage are we talking about? Obviously a

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Speaker 1: great question, difficult to answer that there are concerns, obviously

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Speaker 1: because evaluations are suggesting it again from fund managers like

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Speaker 1: ourselves this March quarter of twenty one is very difficult

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Speaker 1: to reconcile with what Beijing was doing from the regultary

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Speaker 1: side of things, and there's going to be concern You've

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Speaker 1: got to price that in as well as what's happening globally.

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Speaker 1: And if I can just evidence with the Asia Fund

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Speaker 1: that's part of our suite that's been around for twenty

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Speaker 1: three years, it's got the slowest waiting to China since,

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Speaker 1: you know, since n And the two stocks that I

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Speaker 1: noticed the team we're going into is JD dot Com

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Speaker 1: and Ali Barber in that June quarter from those lows.

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Speaker 1: So you love to buy those earnings, just like I

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Speaker 1: like to buy German earnings. But there's some concerns with

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Speaker 1: that because the markets pricing in those for a reason

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Speaker 1: that's legitimate. But yes, there's evaluations in China, Southeast Asia

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Speaker 1: very compelling tilting towards that going forward. Even though the

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Speaker 1: globe is going into two operating systems, the China led

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Speaker 1: one with the Western one, you can co exist with both.

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Speaker 1: At the end of the day, it's going to be

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Speaker 1: very difficult to navigate and it makes predicting future earnings

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Speaker 1: even more difficult than it would otherwise have been. Boy,

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Speaker 1: that is a courageous move to go along German equities

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Speaker 1: right now, given the fact that we could be looking

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Speaker 1: at a major recession in Europe and we're not even

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Speaker 1: talking about the negative impact that higher energy cost will

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Speaker 1: have when it comes to be winter time. There your

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Speaker 1: reference to the mainland economy. We mid week will get

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Speaker 1: the Chinese inflation data. On the pp I front, we're

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Speaker 1: expecting to see some moderation and factory cost increases. And

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Speaker 1: earlier George I referenced the weakness that we have seen

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Speaker 1: lately in crude oil. We're sub eight right now on

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Speaker 1: w T I would you go out on a limb

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Speaker 1: here and say we're at peak inflation, not quite peak inflation,

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Speaker 1: but around there. Obviously, the fall in W two iron

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Speaker 1: brand is a function of the demand destruction and the

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Speaker 1: slack creator for obvious reasons. With monetary policy, I think

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Speaker 1: it's important that the Biden administration continues to be close

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Speaker 1: to the Kingdom of the Saudi uh and continue to

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Speaker 1: go and visit there because they're important supply side. They

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Speaker 1: obviously didn't come on they could more than do more

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Speaker 1: on the supplies are going forward. That's an important relationship

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Speaker 1: to maintain for stability and prices globally. But yes, it's

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Speaker 1: the main destruction is the reason why dumbity and Brent's

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Speaker 1: rolled off. That are going to be concerned, But it's

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Speaker 1: all going to feed around to the core piece, the

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Speaker 1: core inflation measured by Central Bank or the PC and

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Speaker 1: the deflated by the Federal Reserve. And they don't look

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Speaker 1: compelling that they're going to get down to two to

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Speaker 1: three percent anytime soon, and that creates that headwind for

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Speaker 1: equity markets. And very quickly on German I said I'd

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Speaker 1: liked to buy German equities. I wouldn't at this stage

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Speaker 1: because they're compelling valuation. Uh in there, it's just it's

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Speaker 1: the same thing we start every kind of the year,

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Speaker 1: same Europe's cheap. It's a check for a reason, and

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Speaker 1: we haven't found the bottom yet. If I r well, certainly,

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Speaker 1: And we look at the Bank of England as they

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Speaker 1: raised interest rates of course last week with the Governor

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Speaker 1: Andrew Bailey coming out and said be ready for a

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Speaker 1: long recession. Do you think that was rather well? How

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Speaker 1: can I put it a statement to make which could

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Speaker 1: become a self fulfilling prophecy. Possibly, but it's fair to say,

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Speaker 1: if I could over generalize, this is a U shaped recovery.

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Speaker 1: We're bumping, bumping along the bottom, trying to second gas

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Speaker 1: the inversion of the yel curve. How high yields have

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Speaker 1: got to go up with that bare inversion, if that

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Speaker 1: makes sense. How much of a headwind with a higher

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Speaker 1: rate environment our future earnings And having said all of that,

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Speaker 1: aggregate household savings ratition, developed world and credit conditions and

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Speaker 1: the earnings momentum have been very good before we put

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Speaker 1: the brakes were slammed on. So there's that good positive

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Speaker 1: momentum that's been that demand destructions creating uh And I

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Speaker 1: think the UK is just an amplified version of the risks.

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Speaker 1: The US won't be exhibiting those it's a much bigger economy,

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Speaker 1: but the risks for the developed world is what's happening

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Speaker 1: in the UK if it's spreads George very quickly and

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Speaker 1: geopolitics definitely alpha right now you've got about fifteen seconds. Sorry, Yeah,

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Speaker 1: very difficult politics, difficult to be to be predictive, and

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Speaker 1: that concerned a way on risk assets. But don't capitulate

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Speaker 1: with the next set of volatiler it. George always a pleasure,

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Speaker 1: Never at your Georgio ber Booster. He's the executive director

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Speaker 1: and head of research at K two as Asset Managers.

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Speaker 1: Getting his take on what's going on market wise,