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

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Speaker 2: Welcome to the Daybreak Asia podcast. I'm Doug Prisner. We

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Speaker 2: want to begin with China. After the annual parliamentary session,

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Speaker 2: President Xi Jinping seems to be determined to push ahead

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Speaker 2: with a very ambitious growth goal of around five percent

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Speaker 2: this year, despite the trade war with the US. Now

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Speaker 2: we know the tariffs on Chinese imports to the US

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Speaker 2: are a twenty percent, and if President Trump were to

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Speaker 2: boost that rate further, analysts are saying that Beijing will

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Speaker 2: definitely need to unleash some big stimulus in order to

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Speaker 2: hit that growth target. Let's bring in Katya Dmitrieva. She

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Speaker 2: is Bloomberg News Asia Economy reporter, joining us from our

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Speaker 2: studios in Hong Kong. Thank you. I'm sure it's been

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Speaker 2: busy where you are.

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Speaker 3: Yeah, very busy few days, right.

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Speaker 2: Can we talk about the growth target? Does that seem

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Speaker 2: realistic at this point?

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Speaker 3: Depends who you ask. Chinese officials definitely think they can

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Speaker 3: make it. It's the exact same target they've set in

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Speaker 3: twenty twenty four. They've met their targets for the past

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Speaker 3: three years, so history would suggest that once they set something,

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Speaker 3: they're going to do everything they can to meet it.

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Speaker 3: The Bloomberg survey of economists. If you ask economists, however,

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Speaker 3: we've got a Bloomberg survey and it says that they're

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Speaker 3: likely China is more likely to hit four point five percent. Now,

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Speaker 3: the question is really how much the stimulus can help

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Speaker 3: revive consumption. I know that's always the question, but this

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Speaker 3: year in particular, because from Premiere Li Cheng's speech, it's

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Speaker 3: very clear that they're doing a couple things. So they're

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Speaker 3: boosting how much they're going to be spending in their

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Speaker 3: budget deficit or how much they're comfortable with spending this year.

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Speaker 2: What is that part percentage right now?

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Speaker 3: So they've got a fiscal deficit target of four percent,

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Speaker 3: which means they're going to be spending a lot more

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Speaker 3: on a number of programs. We only know kind of

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Speaker 3: a handful of what those will be. They're raising the

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Speaker 3: pension payout levels, there's a public subsidy for medical insurance

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Speaker 3: that they're going to be boosting. The question, though, is

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Speaker 3: what else are they going to do? And if history

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Speaker 3: again serves as a guide, we know that throughout the year,

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Speaker 3: the first few months growth is quite strong. They roll

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Speaker 3: out these programs and then about halfway through the year

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Speaker 3: they're forced to do more because the numbers aren't stacking that.

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Speaker 2: Do you think that leadership in Beijing is operating under

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Speaker 2: the assumption that it is inevitable that more US tariffs

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Speaker 2: or at least higher US tariffs are on the way.

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Speaker 3: Absolutely, and you can see that in their reaction. So

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Speaker 3: if you just look at Trump's previous statements, everything from

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Speaker 3: sixty percent to one hundred percent tariffs on China, which

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Speaker 3: you said during the campaign trail, Now one hundred percent,

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Speaker 3: take that with a grain of salt, But I think

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Speaker 3: sixty percent was mentioned enough that that's what a lot

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Speaker 3: of economists and analysts and people in Beijing are now

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Speaker 3: pricing in. And so the reason why this NPC was

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Speaker 3: particularly important is because it was the first chance that

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Speaker 3: Chinese officials could react to that eventuality, or what is

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Speaker 3: perceived to be that eventuality. So raising the fiscal deficit

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Speaker 3: target and also raising the fiscal deficit target and also

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Speaker 3: focusing on the consumer is a sign that they're not

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Speaker 3: going to be or trying not to be, as reliant

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Speaker 3: on exports, right, because if you have these tariffs coming

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Speaker 3: in from the US and you have this growing protectionism

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Speaker 3: really globally. Then you can't rely on those tariffs, or

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Speaker 3: you can't rely on trade, you can't rely on exports

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Speaker 3: as much because it's just going to contribute to deflation.

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Speaker 3: It's not going to get your growth to about five percent.

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Speaker 2: So talk to me about this split screen that we

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Speaker 2: saw happen yes today, that would be Wednesday, where you

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Speaker 2: are Tuesday here in the US, where Trump, on one hand,

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Speaker 2: was addressing a joint session of Congress, and then we

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Speaker 2: had Chinese Premier Lee kind of detailing the work report. Right.

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Speaker 3: It was pretty incredible, especially if you had the two

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Speaker 3: screens on at the same time, because at a certain

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Speaker 3: point it was something like sixty seconds apart between the

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Speaker 3: premiere finishing and President Trump standing up and saying America

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Speaker 3: is back. And I think it's a really good image

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Speaker 3: of what the next few years are going to look like,

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Speaker 3: especially for China, because you have all these efforts domestically

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Speaker 3: in China to boost growth and to get the country

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Speaker 3: out of deflation, this dangerous firal of deflation, and trying

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Speaker 3: to study the property sector and doing all of these

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Speaker 3: things that were announced during the un PC over those

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Speaker 3: few hours speech, and then right after you had President

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Speaker 3: Trump doubling down on tariffs, mentioning reciprocal tariffs which are

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Speaker 3: coming in April, and mentioning China by name, as well

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Speaker 3: as several other countries in Asia like India and South Korea.

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Speaker 3: But the point being that it's just was just a

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Speaker 3: reminder of how limited in some ways China's policies are.

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Speaker 3: Because at the end of the day, you have the US,

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Speaker 3: the biggest economy and one of China's biggest markets, saying well, actually,

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Speaker 3: we're going to make it a lot more difficult for you.

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Speaker 2: If Chinese leadership has to do more on the stimulus side.

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Speaker 2: Are people talking about the risk that may be associated

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Speaker 2: with that, I'm thinking about the debt levels that are

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Speaker 2: maybe problematic already.

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Speaker 3: Yeah, there's going to be a lot of debt issuance

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Speaker 3: for sure, and of course fiscal deficit increasing. But this

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Speaker 3: is kind of with China is a special case in

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Speaker 3: some ways, and in some ways it's also not so

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Speaker 3: it's a special case and that they have more control

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Speaker 3: over these things. We're going to see a lot more bondishuans.

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Speaker 3: There's some response in markets. They're still hungry for that debt.

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Speaker 2: So the government from what I understand is also planning

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Speaker 2: to raise defense spending by about seven point two percent.

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Speaker 2: That seems to be the same thing that occurred last year, right,

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Speaker 2: not a big surprise on that front, but does it

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Speaker 2: send a message.

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Speaker 3: Yeah, it is the same level as last year, But again,

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Speaker 3: given how big China's economy is and how much they're

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Speaker 3: spending already on it, it's significant. And this just goes

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Speaker 3: to how China has said in the past and repeats

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Speaker 3: officials repeat quite frequently, they would like the defense sector,

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Speaker 3: the military in China to match US and America spends

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Speaker 3: among so many countries, among the top ten biggest countries,

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Speaker 3: spends more on their military than any other nation. And

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Speaker 3: so that's a pretty big ask. So you think of

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Speaker 3: this kind of spending and it tends to drive economic growth,

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Speaker 3: and it tends to be. It tends to be what

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Speaker 3: we saw with Germany for example this week as well

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Speaker 3: with this Bazuka expandis with their military like it does

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Speaker 3: help growth. However, of course, geopolitically, it could further increase

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Speaker 3: tensions between the US and China. We didn't see Trump

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Speaker 3: reacting to that. We didn't really see any major officials

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Speaker 3: raising a red flag and saying, hey, this actually indicates

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Speaker 3: that China is very much a threat and we need

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Speaker 3: to actually go forward and maybe add more tariffs aside

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Speaker 3: from the ones we already added this week.

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Speaker 2: So we're dealing with a trade war right now. And

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Speaker 2: one of the things that I thought was very interesting

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Speaker 2: is Beijing reiterating this stance on opening up markets to

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Speaker 2: foreign investors. Where is this foreign capital going to come from,

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Speaker 2: in the mind of Chinese leadership, other than the US.

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Speaker 3: They're hoping it'll come from all over the US, maybe Europe,

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Speaker 3: but Southeast State and Asia in particular. You've seen since

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Speaker 3: twenty eighteen really solidifying of trade and foreign direct investment

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Speaker 3: ties between China and Asia, especially as companies kind of

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Speaker 3: pulled back from the States in Europe and there were

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Speaker 3: a lot more restrictions in those regions and kind of

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Speaker 3: the Western world. So there is a sense that Asia

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Speaker 3: could contribute.

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Speaker 4: A lot more.

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Speaker 3: You know, think of India, think of even South Korea,

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Speaker 3: and a lot of the Southeast Asian economies that are

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Speaker 3: growing at a much faster clip and sort of minting

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Speaker 3: new companies and millionaires and billionaires every day. So I

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Speaker 3: think the thinking is that the investment will come from there, however,

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Speaker 3: it'll be a pretty tall order to get foreign investment

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Speaker 3: to come back. There's still a lot of questions about

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Speaker 3: the property sector bottoming out. In fact, if you speak

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Speaker 3: to any investor, they will flag that particular issue. The

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Speaker 3: data shows the opposite, that domestic investors are taking their

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Speaker 3: money out of China at a much faster clip and

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Speaker 3: money is going into China at a much slower rate.

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Speaker 3: So it's not looking optimistic for that.

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Speaker 2: I think we're going to get figures in the week

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Speaker 2: ahead on foreign direct investment for China. But what are

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Speaker 2: some of the important data points that you are looking

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Speaker 2: at in the coming days. I know over the weekend

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Speaker 2: we'll have some inflation numbers, also new loans data. But

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Speaker 2: is there anything in particular that you think can shed

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Speaker 2: a light on the vibrancy or the lack of vibrancy

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Speaker 2: in the Chinese economy Maybe in the next week.

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Speaker 3: I think three things. There's three indicators that I always

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Speaker 3: watch when it comes to China. There's the CPI and PPI,

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Speaker 3: which I'm wrapping into one as inflation. There's housing and

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Speaker 3: in particular how in particular ular home sales, home prices

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Speaker 3: for some of the biggest cities. So we get that,

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Speaker 3: we get the inflation data this week, we get new

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Speaker 3: home prices, used home prices in a couple of weeks,

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Speaker 3: and then I would say the third thing is retail spending.

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Speaker 2: So talk to me about the behavior of the Chinese consumer.

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Speaker 2: It's going to be some time, a few days, I think,

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Speaker 2: before we get the monthly activity data. Do we know

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Speaker 2: anything about how well retail spending has been performing.

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Speaker 3: It has been very weak. In fact, the last few

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Speaker 3: months in particular have been surprisingly weak. Given that the

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Speaker 3: start of the year we had a major holiday. We

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Speaker 3: thought spending was going to lift as a result of that,

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Speaker 3: but actually to end the year there was this unexpected

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Speaker 3: slow down and sort of starting the year as well.

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Speaker 3: I mean, in general, the issue is that there's still

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Speaker 3: a two speed economy, right. You have industrial product that's

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Speaker 3: picking up, you have retail sales and consumption that's flatlining,

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Speaker 3: and growth is just nowhere near where it should be

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Speaker 3: to support economic growth, and certainly nowhere near where it

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Speaker 3: needs to be to support five percent growth, especially if

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Speaker 3: you're going to be relying on the consumer.

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Speaker 2: Specifically, if we're talking about stimulating domestic demand very quickly,

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Speaker 2: can you imagine what that might look like.

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Speaker 3: Yes, and it has to do with stimulating households more directly,

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Speaker 3: in other words, providing childcare subsidies. That's a big one

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Speaker 3: that economists and analysts have been asking for or looking

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Speaker 3: for as a pretty significant way to not only boost

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Speaker 3: consumption but also addressing this issue of aging and the

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Speaker 3: demographics shift. So if you provide things like childcare subsidies,

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Speaker 3: or you know, take a chapter out of South Korea's

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Speaker 3: book and just provide direct checks are funding for new

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Speaker 3: couples or housing subsidies for families, I think that's something

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Speaker 3: that would immediately change the game.

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Speaker 2: Okay, we'll leave it there, Katya, thank you so much

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Speaker 2: for joining us. Katya Dmitrieva there, joining from our Hong

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Speaker 2: Kong studio here on the Daybreak Asia podcast. Welcome back

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Speaker 2: to the Daybreak Asia Podcast. I'm Doug Prisner. So markets

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Speaker 2: are now looking ahead to the US jobs data do

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Speaker 2: Friday morning. The latest reading on private payrolls showed that

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Speaker 2: hiring among US companies slowed in February to the slowest

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Speaker 2: pace in July. And on top of that, we know

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Speaker 2: that government workers are in the process of being dismissed.

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Speaker 2: So what do we think we will learn from the

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Speaker 2: February jobs data. Joining me now is George Sippoloni's portfolio

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Speaker 2: manager at Penn Mutual Asset Management, joining from Philadelphia here

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Speaker 2: on the Daybreak Asia podcast. George, it's always a pleasure

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Speaker 2: than thank you for making time to chat with us.

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Speaker 2: So what is your sense of the labor market right now?

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Speaker 2: Is it churning a bit?

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Speaker 4: Let's feel that way, Doug. It's great to be with

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Speaker 4: you again, yes, but it does. So the labor market

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Speaker 4: has a few key segments that are about to get weaker.

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Speaker 4: Number one obviously government jobs, which you mentioned in which

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Speaker 4: everybody is talking about. We're hearing some pretty big potential

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Speaker 4: reports coming out even from the Veterans administration maybe cutting

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Speaker 4: back as well. In addition to that is obviously immigration

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Speaker 4: and that impact on the job market. So we are

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Speaker 4: seeing some churn and I really do feel for corporate

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Speaker 4: managers out there today. So if you think about anyone

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Speaker 4: that's the steward of capital investors, companies, countries, they're dealing

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Speaker 4: with a lot of uncertainty here. So it is harder

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Speaker 4: now to set and make long term plans regarding employment, manufacturing,

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Speaker 4: just about anything today.

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Speaker 2: So talk to me about what you're seeing in the

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Speaker 2: bond market. Yields have been coming in recently, and I

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Speaker 2: wonder whether that is a function of the growth scare.

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Speaker 2: Doesn't seem like the bond market is too concerned about

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Speaker 2: the potential for stubborn inflation. Do I have that right?

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Speaker 4: I think you do, Doug, And so a couple of

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Speaker 4: the data points to watch. Obviously, this is a growth

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Speaker 4: scare so far. And if you just look at the

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Speaker 4: Atlanta Fed GDP number, that number was pretty stark, and

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Speaker 4: it's pretty telling in terms of just a general tone.

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Speaker 4: That's one stat and it went negative for the first

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Speaker 4: time in a while, and pretty sharply and pretty quickly.

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Speaker 4: The other thing is that best and obviously has talked

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Speaker 4: about lower rates, and I was always wondering how he

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Speaker 4: was going to do it because the tenure is a

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Speaker 4: market rate. In Trump's first administration, he was beating up

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Speaker 4: pal about short term rates. That kind of made sense,

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Speaker 4: I guess, to some respect, because that's more of a

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Speaker 4: controlled rate where the tenure is not. So it looks like, yes,

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Speaker 4: bringing in some of these growth fears, whether it was

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Speaker 4: intentional for DCHSS, whatever the administration is doing has worked

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Speaker 4: so far.

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Speaker 2: You make a very interesting point there, So I'm going

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Speaker 2: to ask you this. Could you imagine a world where

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Speaker 2: President Trump to use your term beats up on FED

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Speaker 2: share J Powell to use the balance sheet as a

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Speaker 2: way of bringing down market rates?

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Speaker 4: Certainly could so. I think one of the things is

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Speaker 4: obviously he's using this bully pulpit across the board, whether

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Speaker 4: you know, you can talk about trade or you can

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Speaker 4: talk about rates or just about anything right now. So yes,

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Speaker 4: I think he could potentially do that. Now again, I

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Speaker 4: think the biggest thing to watch is this tenure. Where

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Speaker 4: does it go? But now I think they are playing

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Speaker 4: with fire though, because you don't want to get the

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Speaker 4: market too concerned about growth, because it could really unravel

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Speaker 4: here and we could get even more volatility, and that

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Speaker 4: I think could be a big concern.

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Speaker 2: A couple of the big houses on Wall Street in

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Speaker 2: the last week a signal that they are increasingly concerned

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Speaker 2: about the risk of recession, a model from JP Morgan

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Speaker 2: showing a higher probability of that fact. Similarly, Goldman Sachs

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Speaker 2: as a model that suggests the risk is edging higher.

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Speaker 2: Is that something that you're concerned about? We're talking about

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Speaker 2: growth scare. I know that is it a bridge too

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Speaker 2: far to say that we're on the verge of a recession.

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Speaker 4: I don't think it's a bridge too far, just because again,

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Speaker 4: this uncertainty is going to cause a lot of managers

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Speaker 4: to kind of pause, and we're already seeing and earning.

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Speaker 4: So if you just look what we're we are bottom

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Speaker 4: up managers for our for our fund, and one of

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Speaker 4: the things we do is we listen to management teams

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Speaker 4: all day long, and what we're seeing is a pretty

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Speaker 4: good contrast from the fourth quarter down to the first quarter,

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Speaker 4: where we are starting to see a rollover of earnings

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Speaker 4: expectations and it's pretty much just about every sector and

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Speaker 4: that's different. So again, I think if there's more uncertainty,

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Speaker 4: that's going to make managers pause and that could lead

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Speaker 4: to even worse EPs results moving forward. So hopefully it's

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Speaker 4: not recession ary, I do. I will say full you know,

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Speaker 4: full disclosure. I do think this administration does want to

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Speaker 4: be pro growth, but I do think if there's going

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Speaker 4: to be any weakness or slow down, they're going to

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Speaker 4: want it earlier in Trump's second tenure versus later.

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Speaker 2: So, George, where are you seeing opportunity. I'm curious, Uh.

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Speaker 4: This is so this is the perfect lead into you know,

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Speaker 4: what we're doing today. Now, obviously this volatility is kicking

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Speaker 4: up a lot. What is that doing the asset prices?

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Speaker 4: It's moving them all around. I will say one of

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Speaker 4: the areas, so bonds have rallied, So we did increase

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Speaker 4: duration a few months ago, which was very beneficial. The

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Speaker 4: other areas of that most people probably don't participate in

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Speaker 4: or look at, or convertible bonds. We are seeing some

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Speaker 4: price moves down forty to fifty to sixty points in

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Speaker 4: some of these convertible bonds, and that's one area where

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Speaker 4: we can invest in for our fund because it is

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Speaker 4: so flexible. That's an area that we're spending a heck

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Speaker 4: of a lot of time in right now. Small caps

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Speaker 4: again I say small caps a lot, but you know,

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Speaker 4: if you find four of our five best performers last year,

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Speaker 4: we're small caps and they were up you know, anywhere

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Speaker 4: from eighty to one hundred percent, and there are still

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Speaker 4: there is still a lot of value there with this

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Speaker 4: recent decline. So that's where we're going to spend most

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Speaker 4: of our time today.

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Speaker 2: Are you lightning your position if you are exposed to

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Speaker 2: megacap tech let's say the Googles, the Alphabets, the Microsoft,

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Speaker 2: the Apple. Are you kind of dialing back from that exposure?

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Speaker 4: So we tend to avoid peaks in cycles and tops,

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Speaker 4: and that's one. So we did have a decent amount

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Speaker 4: of even though we're value investors, we did have some

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Speaker 4: exposure to whether it's subcomponent companies that would support this

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Speaker 4: AI move, and we did trim back on a heck

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Speaker 4: of a lot of those because they moved up a

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Speaker 4: lot at the end of last year and in November

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Speaker 4: and into December. And so, yes, we do have an

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Speaker 4: elevated cash level. Part of that is in the bond

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Speaker 4: side of the fund. Part of that is on the

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Speaker 4: equity side of the fund. So we do have dry powder,

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Speaker 4: which I'd love to have excess cash when markets get volatile,

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Speaker 4: because that's when we tend to have some fun. But

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Speaker 4: again going back to it, yes, I do think we

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Speaker 4: tend to avoid cyclical peaks, and that could be a

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Speaker 4: cyclical peak in chemicals or it could be in tech.

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Speaker 4: We are agnostic in that. From that standpoint, Are.

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Speaker 2: You looking for exposure offshore right now in this current

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Speaker 2: environment in any way, whether it's Asia or Europe or

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Speaker 2: South America.

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Speaker 4: So that's an interesting thing, Doug. If you remember last year,

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Speaker 4: international stocks were getting walloped relative to US stocks, and

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Speaker 4: so that was a pocket where we found a decent

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Speaker 4: amount of So all of the companies that we own

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Speaker 4: have to be US denominated and trading US dollars, and

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Speaker 4: so we can buy ad rs, and we did increase

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Speaker 4: our ADR exposure last year just because there were so

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Speaker 4: significantly cheap relative to US stocks, and a lot of

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Speaker 4: those have gapped up and rallied. And you know, if

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Speaker 4: you look at foreign markets, whether it's Germany today, their

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Speaker 4: stock market has rallied a lot, Japan rallied a decent amount,

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Speaker 4: and even China now is after years of just sluggish

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Speaker 4: stock movement has finally started to pick up. So yes,

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Speaker 4: to your point, we do have some exposure there starting

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Speaker 4: from last year, and we're happy we did that.

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Speaker 2: George, we'll leave it there. It's always a pleasure. Thank

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Speaker 2: you so much for making time to chat with us.

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Speaker 2: George Sippaloni there. He is portfolio manager at Pen Mutual

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Speaker 2: Asset Management, joining us here on the Daybreak Asia podcast.

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Speaker 2: Thanks for listening to today's episode of the Bloomberg Daybreak

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Speaker 2: Asia Edition podcast. Each weekday, we look at the story

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Speaker 2: shaping markets, finance, and geopolitics in the Asia Pacific. You

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Speaker 2: can find us on Apple, Spotify, the Bloomberg Podcast YouTube channel,

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Speaker 2: or anywhere else you listen. Join us again tomorrow for

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Speaker 2: insight on the market moves from Hong Kong to Singapore

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Speaker 2: and Australia. I'm Doug Prisoner and this is Bloomberg