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Speaker 1: Bloomberg Audio Studios, Podcasts, radio News.

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Speaker 2: Welcome to the Bloomberg Daybreak Asia podcast. I'm Doug Krisner.

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Speaker 2: We begin in China, where wholesale inflation again deteriorated further,

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Speaker 2: so actually we're talking about an environment of deflation, producer

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Speaker 2: prices in the month of December falling at a rate

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Speaker 2: of two point three percent, slightly above what the street

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Speaker 2: was looking for. The estimate was looking for negative two

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Speaker 2: point four percent. Joining me now from our studios in

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Speaker 2: Hong Kong is Mark Conan. He is the chief investment

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Speaker 2: officer at AIA Group. Mark, thanks for being with us.

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Speaker 2: I got to ask you right up front whether you're

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Speaker 2: concerned about the degree to which we're still talking about

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Speaker 2: this deflationary narrative in China.

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Speaker 3: Deflation certainly at play in China. It's going to be

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Speaker 3: a continued slow workout of the overhang that we're experiencing

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Speaker 3: from the accesses in the residential property market and particularly

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Speaker 3: the developers that were involved in that. Twenty twenty four

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Speaker 3: was the year when government policy was really focused on

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Speaker 3: making sure that the banking system was resilient enough to

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Speaker 3: withstand those shocks, and I believe that that has been successful.

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Speaker 3: The other aspect, of course, because property in China is

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Speaker 3: connected to so many other aspects of the financial system.

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Speaker 3: The other key policy initiative was to make sure that

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Speaker 3: local governments could still function effectively even though their dependency

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Speaker 3: on real estate had been very significant, and that real

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Speaker 3: estate support was no longer there. So that's twenty twenty four.

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Speaker 3: Come in to twenty five. With those points of resiliency established,

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Speaker 3: we still don't see where the stimulus for growth is

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Speaker 3: going to come. You've got twenty trillion dollars equivalent of

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Speaker 3: individual's money sitting in cash in the banking system. That

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Speaker 3: is not going to be deployed for as long as

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Speaker 3: people are not feeling confident and are out you know,

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Speaker 3: as a result, are not outspending and are not taking

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Speaker 3: more risk in terms of their personal savings. So in

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Speaker 3: the absence of that and that really needs to shift,

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Speaker 3: and in the absence of policy that's going to support

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Speaker 3: the individual, the consumer, we are not going to see

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Speaker 3: a significant pickup in growth.

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Speaker 2: So there have been incremental moves to try to stimulate

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Speaker 2: domestic demand, particularly where the consumer is concerned, but to

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Speaker 2: your point, none have succeeded. What more can be done?

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Speaker 2: And if you had to write a prescription, what would

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Speaker 2: it look like.

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Speaker 3: Well, remember, the context in this part of the world,

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Speaker 3: including very much including China, is very different to what

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Speaker 3: we saw in North America and in Europe coming through

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Speaker 3: that COVID pandemic period and subsequently, Whereas in the rest

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Speaker 3: of the world there was a direct application of fiscal

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Speaker 3: stimulus to individuals, either directly or through the corporate sector.

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Speaker 3: We didn't see that in this part of the world,

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Speaker 3: and we didn't see it in China, and we're not

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Speaker 3: going to see it. So you can take that sort

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Speaker 3: of direct fiscal stimulus out of the equation. In the

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Speaker 3: absence of that, what we need to see is a

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Speaker 3: slight redeployment in terms of where the policy focuses. The

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Speaker 3: focus has been very much on the strategic sectors. On

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Speaker 3: the supply side. We need to see more demand side

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Speaker 3: stimulus come through or measures come through which encourage businesses

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Speaker 3: to take more risk, which encourage consumers to spend and

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Speaker 3: allow the economy to grow its way out of this situation.

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Speaker 3: We're not there yet. What would we need to see

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Speaker 3: We'd need to see much more of a detailed plan

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Speaker 3: in how the PBOC is going to support with monetary policy,

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Speaker 3: and how the central government is likely to support the

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Speaker 3: transmission of budgetary spending down to the local governments.

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Speaker 2: I can only imagine the challenges facing authorities in Beijing

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Speaker 2: as they try to predict what's likely to occur under

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Speaker 2: the incoming Trump administration. So today we are learning that

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Speaker 2: the Biden administration he is set to impose additional restrictions

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Speaker 2: on the export of certain semiconductors used in artificial intelligence.

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Speaker 2: One of the aims here seems to be to prevent

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Speaker 2: China from having access to advanced technologies. How do you

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Speaker 2: think this is going to continue under the Trump administration?

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Speaker 2: Is it likely that it's going to get worse before

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Speaker 2: it gets resolved?

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Speaker 3: Difficult to say at this point, Doug, And it's difficult

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Speaker 3: to second guess, you know, on a daily basis what

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Speaker 3: the new administration is likely to do. But I think

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Speaker 3: the direction of travel is pretty much set. You know,

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Speaker 3: we are at a point where we are have a

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Speaker 3: biification in terms of the use of technology between the

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Speaker 3: two largest economic actors globally, the US and China, and

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Speaker 3: that is going to continue. It's hard to see how

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Speaker 3: that will go into reverse. There may be points of

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Speaker 3: commonality agreement, but the biifurcation is very much set.

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Speaker 2: So does that essentially force you to have to be

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Speaker 2: exposed to the US in a way that may be

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Speaker 2: a little overweight.

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Speaker 3: Well, so, I think money globally is definitely gravitating and

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Speaker 3: has been for some time to the US. Our book

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Speaker 3: is fairly diversified by currency, given out the nature of

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Speaker 3: our business where we're underwriting liabilities across the region. Having

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Speaker 3: said that, we have an extremely large dollar book, US

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Speaker 3: dollar book because most of what we write, all of

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Speaker 3: what we write here in Hong Kong, is in US dollars,

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Speaker 3: So we have a natural you know, some parts of

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Speaker 3: our book, you know, make us resemble a US insurance

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Speaker 3: company because our liability is are US dollars, So we

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Speaker 3: invest as if we are stateside.

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Speaker 2: Almost so, given everything we've been talking about, I'm curious

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Speaker 2: about what your investment strategy is for twenty twenty five.

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Speaker 3: So, given we're long term investors, we're managing our book

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Speaker 3: relative to our life abilities. The flow of money clearly

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Speaker 3: still is into the US, where we have the best

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Speaker 3: level of innovation, we have the highest level of growth

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Speaker 3: economic growth, We have strong earnings that are now in

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Speaker 3: a good way threatening to broaden out across the market,

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Speaker 3: which is positive. And we also have productivity improvement, So

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Speaker 3: the gravitational pall of investment assets or investment dollars is

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Speaker 3: still towards the US, and that makes perfect sense. Broadening

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Speaker 3: out in the market definitely, I think in terms of

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Speaker 3: the overall sort of multi asset strategy, favoring risk assets

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Speaker 3: or favoring equities, Europe lagging clearly, China is not going

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Speaker 3: to be attracting international capital anytime soon. And then in

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Speaker 3: terms of fixed income, starting to get to the point,

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Speaker 3: given the sell off in US fixed income in treasuries

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Speaker 3: and the increasing yield, we're starting to get to the

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Speaker 3: point where we want to go long duration in US

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Speaker 3: fixed income. In terms of US credit, we're avoiding long

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Speaker 3: dated credit because we think spreads are particularly tight and

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Speaker 3: although we're not expecting a credit event, no point taking

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Speaker 3: the risk, so stay at the short end on credit.

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Speaker 3: And then in China, we feel that the constant, you know,

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Speaker 3: focus on buying cgbs has has pushed them to the

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Speaker 3: point of overvalued, and we would be the other side

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Speaker 3: of that trade.

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Speaker 2: At this point in time, do you tend to be

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Speaker 2: a little on the conservative side.

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Speaker 3: Well, insurance companies are always conservative. You know, we only

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Speaker 3: take risk where we think we can get rewarded. We

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Speaker 3: won't we won't trade rates, for example. We don't think

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Speaker 3: there's any reward in that for a long term investor.

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Speaker 3: But yeah, we have a significant allocation to risk assets

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Speaker 3: in the context of the type of business that we

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Speaker 3: do have private equity, we have private credit, we have

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Speaker 3: a significant real estate portfolio. Obviously the dominant allocation for

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Speaker 3: us is fixed income.

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Speaker 2: How do you feel about dividend plays right now? In

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Speaker 2: this environment?

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Speaker 3: We feel very good, particularly in China. So we talk

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Speaker 3: about deflation, and we talk about the sort of marin

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Speaker 3: bound equity market and the lack of confidence in the

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Speaker 3: equity market and the fact that international investors are shunning

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Speaker 3: the Chinese equity market. In that context, high dividend opportunities

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Speaker 3: stand out, are a standout opportunity. And if you look

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Speaker 3: at high dividend stocks for example in the mainland, very attractive,

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Speaker 3: very attractive for a longtime investor, very attractive for insurance company,

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Speaker 3: and compete very very effectively. Of course, with very low

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Speaker 3: rates being offered in the banking system.

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Speaker 2: Are you shunning European assets? Pretty much.

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Speaker 3: Europe has a number of challenges. I mean, they have

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Speaker 3: far more structural challenges than the US, and you know,

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Speaker 3: the cyclical side is not that pervasive. So the market's

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Speaker 3: fairly valued in our opinion, but upside is sort of

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Speaker 3: limited by the ability to grow, and it's not growing

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Speaker 3: as fast as the US.

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Speaker 2: So it's really going to be a year of continued

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Speaker 2: strength in the dollar, I think it's fair to say.

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Speaker 2: And that's going to represent a huge challenge for markets

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Speaker 2: in Asia.

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Speaker 3: I think the strength of the dollar has been you know,

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Speaker 3: is the top of that market has been called successively

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Speaker 3: for quite some time of a multiple quarters. I tend

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Speaker 3: to agree with you. I didn't believe it this time

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Speaker 3: last year, and I don't believe it now. I think

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Speaker 3: the dollar will continue to be strong. It's just a

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Speaker 3: simple arithmetic where the productivity, where the innovation, and where

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Speaker 3: the dollars and where the money is flowing. That does

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Speaker 3: create challenges, but of course in this region we didn't

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Speaker 3: have the excesses of of fiscal stimulus through the COVID

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Speaker 3: and post COVID period, and we do see opportunities there

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Speaker 3: for on the monetary side for central banks in this

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Speaker 3: region to be somewhat more supportive, so it's not all

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Speaker 3: doom and glue. I think there are policy responses in

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Speaker 3: this region which can be productive.

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Speaker 2: Market's always a pleasure. Thanks so much for making time

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Speaker 2: to chat with us. Happy New Year to you. Mark

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Speaker 2: Conen is the chief Investment Officer at AIA Group. Joining

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Speaker 2: us from our studios in Hong Kong here on the

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Speaker 2: Daybreak Asia podcast. Welcome back to the Daybreak Asia Podcast.

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Speaker 2: I'm Doug Chrisner. We want to take a broader look

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Speaker 2: at global markets and to do that, we're joined by

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Speaker 2: Gene Goldman. He is the chief investment officer at Satara

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Speaker 2: Financial Group. Jane, Happy New Year. Is always a pleasure.

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Speaker 2: Thanks for joining us. I think it's fair to start

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Speaker 2: with this idea that the market now seems to be

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Speaker 2: waking up to the fact that we're going to get

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Speaker 2: far fewer rate cuts from the Fed. If we look

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Speaker 2: at what the swaps market is indicating right now, we

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Speaker 2: only get one rate cut in the second half of

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Speaker 2: the year. How is that aligned with your thinking?

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Speaker 1: Yeah, it's a great question. So if we take a

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Speaker 1: step back, if you look at our three themes for

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Speaker 1: twenty twenty five, one of our big themes was simply this,

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Speaker 1: the FEDS becomes a friend. They go from being a

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Speaker 1: foe to a friend. But more importantly, they're not as

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Speaker 1: good of a friend as they as we thought they were.

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Speaker 1: So with that in mind, last year, the markets were

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Speaker 1: pricing in six seven rate cuts. Earlier in the year.

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Speaker 1: We've been saying three times for twenty twenty four, and

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Speaker 1: this year we've been saying one or two times. We

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Speaker 1: do think that the FED is facing some significant issues.

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Speaker 1: I think you've seen, for example, you've seen dissension among

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Speaker 1: FED FED voters, especially in December and in November November

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Speaker 1: the first time since two thousand and five. The other

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Speaker 1: things to think about. We looked at the dot plot,

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Speaker 1: and the dot plot the disparity in terms of where

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Speaker 1: the neutral rate is, it's pretty wide, anywhere from two

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Speaker 1: point four up to three point nine. The FED is

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Speaker 1: just as confused in terms of where where everything is going,

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Speaker 1: where inflation is going, where the employment picture is going,

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Speaker 1: where the economy is going. So right now the markets

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Speaker 1: are pricing in one to two we think probably just one.

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Speaker 1: And I think the reason we say that is because

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Speaker 1: you know, you have uncertainty around the data coming out

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Speaker 1: of Trump two point zero, the inflation pressure from potential immigration,

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Speaker 1: potential tariffs, so many other issues facing the markets, facing

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Speaker 1: the FED, facing inflation, and more importantly, you look at

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Speaker 1: the economic growth the economy. Yes, it is slowing down

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Speaker 1: of it. It's moderating slightly, but still pretty good. You know,

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Speaker 1: you look at Atlanta Fed GDP now for the fourth quarter,

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Speaker 1: we're looking at three point one percent. We're looking at

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Speaker 1: an unemplumber rate that comes out later this week at

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Speaker 1: probably at four point two percent. That's a pretty good number.

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Speaker 2: Stagflation is a pretty dramatic term, but it seems like

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Speaker 2: that's a little of what you're indicating here, where growth

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Speaker 2: begins to slow, yet inflation remains stubbornly elevated.

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Speaker 1: True, yes, but I do think inflation, yes, it's elevated,

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Speaker 1: but I do think it's a temporary phenomenon. I think

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Speaker 1: it's going to slow, but not as fast as a

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Speaker 1: FED had hoped. The reason I say this is that

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Speaker 1: if you look at the FED funds rate, the FED

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Speaker 1: funds right it's about two percent over inflation right now.

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Speaker 1: While it's not necessarily affecting the economy at this point,

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Speaker 1: it will affect the economy the longer the FED keeps

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Speaker 1: that above two percent above inflation. I think a case

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Speaker 1: in point was the data that we saw come out

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Speaker 1: recently on bankruptcies. The number of bankruptcies have increased dramatically,

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Speaker 1: and you look at we're back to twenty ten levels.

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Speaker 1: This suggests to me that firms are struggling a little

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Speaker 1: bit more than GDP, and the labor markets are suggesting

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Speaker 1: suggesting that likely GDP slows down a bit a little

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Speaker 1: bit later this year, and consequently inflation slows with it.

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Speaker 2: But I was looking at the ism the services price gauge,

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Speaker 2: which was shockingly high, I think relative to market expectations.

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Speaker 2: That's why I'm kind of trying to tease out the

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Speaker 2: stubbornly high rate of inflation. Would you go along with

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Speaker 2: that or you still love the opinion that, yeah, maybe

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Speaker 2: it's high now, but you expected to begin to decline.

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Speaker 1: Yeah, I do think it's high now, but I do

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Speaker 1: think it's a temporary effect. And I think the reason,

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Speaker 1: and we point to that, is that you look at

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Speaker 1: as you point, the services inflation, the manufacturing price is paid.

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Speaker 1: Both of these indicators are as we all know. They're

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Speaker 1: the first look at December's economy but I do think

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Speaker 1: it's somewhat of a temporary effect because I do believe

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Speaker 1: broadly speaking, you know, the economy will start to slow down,

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Speaker 1: which will work its way into some of the prices services. Yes,

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Speaker 1: there is a strong demand coming out of especially December,

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Speaker 1: with a lot of people going in the restaurants, people

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Speaker 1: going in to the bars, people celebrating. But I think

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Speaker 1: that slows down pretty quickly, especially as we see the

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Speaker 1: fact that you know, mortgage rates aren't really coming down

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Speaker 1: because a ten year treasury is stubborn. We look at

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Speaker 1: this uncertainty around jobs. We saw the Jolts report that

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Speaker 1: came out earlier this week, and we saw that that, yes,

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Speaker 1: it showed that there's more jobs available, but some of

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Speaker 1: the other metrics aren't that great, like quit rates are

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Speaker 1: slowing down, hires are slowing down. Again, taking this together,

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Speaker 1: I do think inflation slows down a bit, though not

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Speaker 1: as fast as a FED was hoping.

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Speaker 2: So how are you allowing everything that you you are

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Speaker 2: articulating now to translate into an investment strategy?

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Speaker 1: So from an investment strategy, I think the thing to

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Speaker 1: think about the most broadly speaking, member, we've had two

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Speaker 1: straight years of twenty plus percent gains in the S

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Speaker 1: and P five hundred, something we haven't seen since nineteen

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Speaker 1: ninety eight. So with this in mind, in the back

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Speaker 1: of our mind, returns are going to be a little

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Speaker 1: bit less, a little bit more modest than they were

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Speaker 1: over the past couple of years in our opinion. But

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Speaker 1: here's our base case. Our base case is positive for equities.

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Speaker 1: We do have pretty good economic growth, inflation that will

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Speaker 1: moderate a little bit more later this year. The FED

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Speaker 1: is still easy, they're still cutting rates in double digit

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Speaker 1: earnings growth. Typically that leads to good equity returns, but

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Speaker 1: we are concerned near term. You know, any type of

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Speaker 1: pullback in our opinion, is a good buying opportunity, but

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Speaker 1: there's a lot of near term pressure, you know, FED uncertainty,

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Speaker 1: the surge, and bond yields, market dynamics for example, high

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Speaker 1: valuation is too much market optimism, weak market bread, stronger dollar.

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Speaker 1: You take all those together, we do think we'll have

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Speaker 1: a good year for the markets, but it will be

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Speaker 1: pretty and maybe a pullback, maybe a correction in the

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Speaker 1: near term. One of our favorite areas that we like

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Speaker 1: to invest in right now, we think the bond market

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Speaker 1: is extremely attractive on the high quality fixed income side.

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Speaker 1: Everyone is so down on bonds, but these levels I'm

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Speaker 1: seeing opportunity written all over them. I think yields are

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Speaker 1: up as we all know on inflation, on oil and economy,

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Speaker 1: but yields are still about two percent over inflation. As

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Speaker 1: I mentioned before, the Fed funds rate is two percent

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Speaker 1: over inflation. We have strong foreign ownership with treasuries, stronger dollar,

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Speaker 1: and just a huge retail demand for bonds. Take this together,

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Speaker 1: we really love bonds, high quality bonds.

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Speaker 2: Is there a part on the curve that is most

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Speaker 2: attractive at this point in terms of duration? Where are you?

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Speaker 1: I think from a duration, So if you look at

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Speaker 1: the agg the AG is probably a duration of around

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Speaker 1: six we're pretty close to that. So I think we

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Speaker 1: are really loading up on sort of that sort of

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Speaker 1: that seven to ten year level within our asset allocation.

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Speaker 1: So really that's sort of pretty close to the benchmark duration.

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Speaker 1: So I think our overall duration today is just a

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Speaker 1: little lower, maybe five point nine.

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Speaker 2: So, Gene, I'm curious, are there industries that you like

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Speaker 2: right now on the equity side.

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Speaker 1: Yes, I think broadly speaking the equic side, just taking

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Speaker 1: from a sector perspective, the areas that we really like

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Speaker 1: would be healthcare, would be financials, of course, would be

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Speaker 1: a lot of the under the areas that really hadn't

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Speaker 1: performed well over the last year or so. Obviously, financials

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Speaker 1: have done pretty well. But I think if you drill

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Speaker 1: down a lot further, what's our favorite sort of industries?

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Speaker 1: You know, we love artificial intelligence and automation. I mean,

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Speaker 1: you think about reduced immigration, the need for efficiencies and

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Speaker 1: sort of these labor intensive industries like healthcare and finance.

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Speaker 1: This kind of leads you into areas like sempic conductors,

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Speaker 1: AI software providers, robotics firms. Another industry we like is

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Speaker 1: sort of this around this healthcare innovation. You know, first

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Speaker 1: of all sector perspective, healthcare is pretty attractive. You get

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Speaker 1: high quality growth, pretty good earnings growth for twenty twenty five.

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Speaker 1: But then you have advances in biotech, personalized medicine, and

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Speaker 1: telehealth solutions are really revolutionizing patient care. You take this together,

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Speaker 1: industries we like are like biotech, med tech, even healthcare

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Speaker 1: it and then the other area it's kind of a

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Speaker 1: little bit of a sneaky area, but we do believe

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Speaker 1: in the emerging markets recovery. I mean we do see that,

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Speaker 1: especially on the emerging market side, the benefit from our

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Speaker 1: rising middle class consumption, some infrastructure improvement, infrastructure investing, really

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Speaker 1: looking at those countries where you're seeing favorable demographic trends

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Speaker 1: in the Indonesia, Philippines. Think about Indonesia. You know, here

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Speaker 1: in the United States, our median average age is what

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Speaker 1: thirty nine, forty years old. Indonesia's down to thirty. So

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Speaker 1: with that in mind, industry is focusing on technology, infrastructure,

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Speaker 1: consumer discretion. In the emerging market area we think are

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Speaker 1: pretty attractive.

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Speaker 2: So you indicated a moment ago, Jeane, that maybe there

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Speaker 2: is a pullback of sorts on the horizon. And I'm

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Speaker 2: curious about the degree to which you're holding cash right now.

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Speaker 2: Are you fully invested or are you maybe accumulating a

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Speaker 2: bit of dry powder?

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Speaker 1: YEA, we are fully investment. We aren't market timers. We

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Speaker 1: are asset allocators. And this ties into one of our themes.

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Speaker 1: One of our themes this year is diversification comes back.

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Speaker 1: So what we've done in our portfolios is we believe

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Speaker 1: in diversification and we continue to believe in it. So

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Speaker 1: what we've done is allocated to other parts of the market,

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Speaker 1: not just the mag seven nine just aggressive large cap growth,

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Speaker 1: so value small caps, mid caps, non US and the Kicker.

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Speaker 1: How do we mitigate against near term Volatiley liquid alternatives,

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Speaker 1: those investments at ZIG when the rest of the market

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Speaker 1: is zagging. So a multim manager, so those low correlation investments.

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Speaker 1: So instead of using cash, we're using low correlation investments

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Speaker 1: to take advantage of any type of potential pullback.

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Speaker 2: Jane, It's always a pleasure. Thanks for making time to

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Speaker 2: catch up with us. Gene Goldman there, he is the

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Speaker 2: chief investment officer at Satera Financial Group, joining us here

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Speaker 2: on the Daybreak Asia podcast. Thanks for listening to today's

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Speaker 2: episode of the Bloomberg Daybreak Asia Edition podcast. Each weekd Hey,

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Speaker 2: we look at the story shaping markets, finance, and geopolitics

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Speaker 2: in the Asia Pacific. You can find us on Apple, Spotify,

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Speaker 2: the Bloomberg Podcast YouTube channel, or anywhere else you listen.

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Speaker 2: Join us again tomorrow for insight on the market moves

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Speaker 2: from Hong Kong to Singapore and Australia. I'm Doug Prisoner

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Speaker 2: and this is Bloomberg