Speaker 1: Bloomberg Audio Studios, Podcasts, Radio News.
Speaker 2: Welcome to the Daybreak Asia podcast. I'm Doug Prisner. We
Speaker 2: want to begin with China. After the annual parliamentary session,
Speaker 2: President Xi Jinping seems to be determined to push ahead
Speaker 2: with a very ambitious growth goal of around five percent
Speaker 2: this year, despite the trade war with the US. Now
Speaker 2: we know the tariffs on Chinese imports to the US
Speaker 2: are a twenty percent, and if President Trump were to
Speaker 2: boost that rate further, analysts are saying that Beijing will
Speaker 2: definitely need to unleash some big stimulus in order to
Speaker 2: hit that growth target. Let's bring in Katya Dmitrieva. She
Speaker 2: is Bloomberg News Asia Economy reporter, joining us from our
Speaker 2: studios in Hong Kong. Thank you. I'm sure it's been
Speaker 2: busy where you are.
Speaker 3: Yeah, very busy few days, right.
Speaker 2: Can we talk about the growth target? Does that seem
Speaker 2: realistic at this point?
Speaker 3: Depends who you ask. Chinese officials definitely think they can
Speaker 3: make it. It's the exact same target they've set in
Speaker 3: twenty twenty four. They've met their targets for the past
Speaker 3: three years, so history would suggest that once they set something,
Speaker 3: they're going to do everything they can to meet it.
Speaker 3: The Bloomberg survey of economists. If you ask economists, however,
Speaker 3: we've got a Bloomberg survey and it says that they're
Speaker 3: likely China is more likely to hit four point five percent. Now,
Speaker 3: the question is really how much the stimulus can help
Speaker 3: revive consumption. I know that's always the question, but this
Speaker 3: year in particular, because from Premiere Li Cheng's speech, it's
Speaker 3: very clear that they're doing a couple things. So they're
Speaker 3: boosting how much they're going to be spending in their
Speaker 3: budget deficit or how much they're comfortable with spending this year.
Speaker 2: What is that part percentage right now?
Speaker 3: So they've got a fiscal deficit target of four percent,
Speaker 3: which means they're going to be spending a lot more
Speaker 3: on a number of programs. We only know kind of
Speaker 3: a handful of what those will be. They're raising the
Speaker 3: pension payout levels, there's a public subsidy for medical insurance
Speaker 3: that they're going to be boosting. The question, though, is
Speaker 3: what else are they going to do? And if history
Speaker 3: again serves as a guide, we know that throughout the year,
Speaker 3: the first few months growth is quite strong. They roll
Speaker 3: out these programs and then about halfway through the year
Speaker 3: they're forced to do more because the numbers aren't stacking that.
Speaker 2: Do you think that leadership in Beijing is operating under
Speaker 2: the assumption that it is inevitable that more US tariffs
Speaker 2: or at least higher US tariffs are on the way.
Speaker 3: Absolutely, and you can see that in their reaction. So
Speaker 3: if you just look at Trump's previous statements, everything from
Speaker 3: sixty percent to one hundred percent tariffs on China, which
Speaker 3: you said during the campaign trail, Now one hundred percent,
Speaker 3: take that with a grain of salt, But I think
Speaker 3: sixty percent was mentioned enough that that's what a lot
Speaker 3: of economists and analysts and people in Beijing are now
Speaker 3: pricing in. And so the reason why this NPC was
Speaker 3: particularly important is because it was the first chance that
Speaker 3: Chinese officials could react to that eventuality, or what is
Speaker 3: perceived to be that eventuality. So raising the fiscal deficit
Speaker 3: target and also raising the fiscal deficit target and also
Speaker 3: focusing on the consumer is a sign that they're not
Speaker 3: going to be or trying not to be, as reliant
Speaker 3: on exports, right, because if you have these tariffs coming
Speaker 3: in from the US and you have this growing protectionism
Speaker 3: really globally. Then you can't rely on those tariffs, or
Speaker 3: you can't rely on trade, you can't rely on exports
Speaker 3: as much because it's just going to contribute to deflation.
Speaker 3: It's not going to get your growth to about five percent.
Speaker 2: So talk to me about this split screen that we
Speaker 2: saw happen yes today, that would be Wednesday, where you
Speaker 2: are Tuesday here in the US, where Trump, on one hand,
Speaker 2: was addressing a joint session of Congress, and then we
Speaker 2: had Chinese Premier Lee kind of detailing the work report. Right.
Speaker 3: It was pretty incredible, especially if you had the two
Speaker 3: screens on at the same time, because at a certain
Speaker 3: point it was something like sixty seconds apart between the
Speaker 3: premiere finishing and President Trump standing up and saying America
Speaker 3: is back. And I think it's a really good image
Speaker 3: of what the next few years are going to look like,
Speaker 3: especially for China, because you have all these efforts domestically
Speaker 3: in China to boost growth and to get the country
Speaker 3: out of deflation, this dangerous firal of deflation, and trying
Speaker 3: to study the property sector and doing all of these
Speaker 3: things that were announced during the un PC over those
Speaker 3: few hours speech, and then right after you had President
Speaker 3: Trump doubling down on tariffs, mentioning reciprocal tariffs which are
Speaker 3: coming in April, and mentioning China by name, as well
Speaker 3: as several other countries in Asia like India and South Korea.
Speaker 3: But the point being that it's just was just a
Speaker 3: reminder of how limited in some ways China's policies are.
Speaker 3: Because at the end of the day, you have the US,
Speaker 3: the biggest economy and one of China's biggest markets, saying well, actually,
Speaker 3: we're going to make it a lot more difficult for you.
Speaker 2: If Chinese leadership has to do more on the stimulus side.
Speaker 2: Are people talking about the risk that may be associated
Speaker 2: with that, I'm thinking about the debt levels that are
Speaker 2: maybe problematic already.
Speaker 3: Yeah, there's going to be a lot of debt issuance
Speaker 3: for sure, and of course fiscal deficit increasing. But this
Speaker 3: is kind of with China is a special case in
Speaker 3: some ways, and in some ways it's also not so
Speaker 3: it's a special case and that they have more control
Speaker 3: over these things. We're going to see a lot more bondishuans.
Speaker 3: There's some response in markets. They're still hungry for that debt.
Speaker 2: So the government from what I understand is also planning
Speaker 2: to raise defense spending by about seven point two percent.
Speaker 2: That seems to be the same thing that occurred last year, right,
Speaker 2: not a big surprise on that front, but does it
Speaker 2: send a message.
Speaker 3: Yeah, it is the same level as last year, But again,
Speaker 3: given how big China's economy is and how much they're
Speaker 3: spending already on it, it's significant. And this just goes
Speaker 3: to how China has said in the past and repeats
Speaker 3: officials repeat quite frequently, they would like the defense sector,
Speaker 3: the military in China to match US and America spends
Speaker 3: among so many countries, among the top ten biggest countries,
Speaker 3: spends more on their military than any other nation. And
Speaker 3: so that's a pretty big ask. So you think of
Speaker 3: this kind of spending and it tends to drive economic growth,
Speaker 3: and it tends to be. It tends to be what
Speaker 3: we saw with Germany for example this week as well
Speaker 3: with this Bazuka expandis with their military like it does
Speaker 3: help growth. However, of course, geopolitically, it could further increase
Speaker 3: tensions between the US and China. We didn't see Trump
Speaker 3: reacting to that. We didn't really see any major officials
Speaker 3: raising a red flag and saying, hey, this actually indicates
Speaker 3: that China is very much a threat and we need
Speaker 3: to actually go forward and maybe add more tariffs aside
Speaker 3: from the ones we already added this week.
Speaker 2: So we're dealing with a trade war right now. And
Speaker 2: one of the things that I thought was very interesting
Speaker 2: is Beijing reiterating this stance on opening up markets to
Speaker 2: foreign investors. Where is this foreign capital going to come from,
Speaker 2: in the mind of Chinese leadership, other than the US.
Speaker 3: They're hoping it'll come from all over the US, maybe Europe,
Speaker 3: but Southeast State and Asia in particular. You've seen since
Speaker 3: twenty eighteen really solidifying of trade and foreign direct investment
Speaker 3: ties between China and Asia, especially as companies kind of
Speaker 3: pulled back from the States in Europe and there were
Speaker 3: a lot more restrictions in those regions and kind of
Speaker 3: the Western world. So there is a sense that Asia
Speaker 3: could contribute.
Speaker 4: A lot more.
Speaker 3: You know, think of India, think of even South Korea,
Speaker 3: and a lot of the Southeast Asian economies that are
Speaker 3: growing at a much faster clip and sort of minting
Speaker 3: new companies and millionaires and billionaires every day. So I
Speaker 3: think the thinking is that the investment will come from there, however,
Speaker 3: it'll be a pretty tall order to get foreign investment
Speaker 3: to come back. There's still a lot of questions about
Speaker 3: the property sector bottoming out. In fact, if you speak
Speaker 3: to any investor, they will flag that particular issue. The
Speaker 3: data shows the opposite, that domestic investors are taking their
Speaker 3: money out of China at a much faster clip and
Speaker 3: money is going into China at a much slower rate.
Speaker 3: So it's not looking optimistic for that.
Speaker 2: I think we're going to get figures in the week
Speaker 2: ahead on foreign direct investment for China. But what are
Speaker 2: some of the important data points that you are looking
Speaker 2: at in the coming days. I know over the weekend
Speaker 2: we'll have some inflation numbers, also new loans data. But
Speaker 2: is there anything in particular that you think can shed
Speaker 2: a light on the vibrancy or the lack of vibrancy
Speaker 2: in the Chinese economy Maybe in the next week.
Speaker 3: I think three things. There's three indicators that I always
Speaker 3: watch when it comes to China. There's the CPI and PPI,
Speaker 3: which I'm wrapping into one as inflation. There's housing and
Speaker 3: in particular how in particular ular home sales, home prices
Speaker 3: for some of the biggest cities. So we get that,
Speaker 3: we get the inflation data this week, we get new
Speaker 3: home prices, used home prices in a couple of weeks,
Speaker 3: and then I would say the third thing is retail spending.
Speaker 2: So talk to me about the behavior of the Chinese consumer.
Speaker 2: It's going to be some time, a few days, I think,
Speaker 2: before we get the monthly activity data. Do we know
Speaker 2: anything about how well retail spending has been performing.
Speaker 3: It has been very weak. In fact, the last few
Speaker 3: months in particular have been surprisingly weak. Given that the
Speaker 3: start of the year we had a major holiday. We
Speaker 3: thought spending was going to lift as a result of that,
Speaker 3: but actually to end the year there was this unexpected
Speaker 3: slow down and sort of starting the year as well.
Speaker 3: I mean, in general, the issue is that there's still
Speaker 3: a two speed economy, right. You have industrial product that's
Speaker 3: picking up, you have retail sales and consumption that's flatlining,
Speaker 3: and growth is just nowhere near where it should be
Speaker 3: to support economic growth, and certainly nowhere near where it
Speaker 3: needs to be to support five percent growth, especially if
Speaker 3: you're going to be relying on the consumer.
Speaker 2: Specifically, if we're talking about stimulating domestic demand very quickly,
Speaker 2: can you imagine what that might look like.
Speaker 3: Yes, and it has to do with stimulating households more directly,
Speaker 3: in other words, providing childcare subsidies. That's a big one
Speaker 3: that economists and analysts have been asking for or looking
Speaker 3: for as a pretty significant way to not only boost
Speaker 3: consumption but also addressing this issue of aging and the
Speaker 3: demographics shift. So if you provide things like childcare subsidies,
Speaker 3: or you know, take a chapter out of South Korea's
Speaker 3: book and just provide direct checks are funding for new
Speaker 3: couples or housing subsidies for families, I think that's something
Speaker 3: that would immediately change the game.
Speaker 2: Okay, we'll leave it there, Katya, thank you so much
Speaker 2: for joining us. Katya Dmitrieva there, joining from our Hong
Speaker 2: Kong studio here on the Daybreak Asia podcast. Welcome back
Speaker 2: to the Daybreak Asia Podcast. I'm Doug Prisner. So markets
Speaker 2: are now looking ahead to the US jobs data do
Speaker 2: Friday morning. The latest reading on private payrolls showed that
Speaker 2: hiring among US companies slowed in February to the slowest
Speaker 2: pace in July. And on top of that, we know
Speaker 2: that government workers are in the process of being dismissed.
Speaker 2: So what do we think we will learn from the
Speaker 2: February jobs data. Joining me now is George Sippoloni's portfolio
Speaker 2: manager at Penn Mutual Asset Management, joining from Philadelphia here
Speaker 2: on the Daybreak Asia podcast. George, it's always a pleasure
Speaker 2: than thank you for making time to chat with us.
Speaker 2: So what is your sense of the labor market right now?
Speaker 2: Is it churning a bit?
Speaker 4: Let's feel that way, Doug. It's great to be with
Speaker 4: you again, yes, but it does. So the labor market
Speaker 4: has a few key segments that are about to get weaker.
Speaker 4: Number one obviously government jobs, which you mentioned in which
Speaker 4: everybody is talking about. We're hearing some pretty big potential
Speaker 4: reports coming out even from the Veterans administration maybe cutting
Speaker 4: back as well. In addition to that is obviously immigration
Speaker 4: and that impact on the job market. So we are
Speaker 4: seeing some churn and I really do feel for corporate
Speaker 4: managers out there today. So if you think about anyone
Speaker 4: that's the steward of capital investors, companies, countries, they're dealing
Speaker 4: with a lot of uncertainty here. So it is harder
Speaker 4: now to set and make long term plans regarding employment, manufacturing,
Speaker 4: just about anything today.
Speaker 2: So talk to me about what you're seeing in the
Speaker 2: bond market. Yields have been coming in recently, and I
Speaker 2: wonder whether that is a function of the growth scare.
Speaker 2: Doesn't seem like the bond market is too concerned about
Speaker 2: the potential for stubborn inflation. Do I have that right?
Speaker 4: I think you do, Doug, And so a couple of
Speaker 4: the data points to watch. Obviously, this is a growth
Speaker 4: scare so far. And if you just look at the
Speaker 4: Atlanta Fed GDP number, that number was pretty stark, and
Speaker 4: it's pretty telling in terms of just a general tone.
Speaker 4: That's one stat and it went negative for the first
Speaker 4: time in a while, and pretty sharply and pretty quickly.
Speaker 4: The other thing is that best and obviously has talked
Speaker 4: about lower rates, and I was always wondering how he
Speaker 4: was going to do it because the tenure is a
Speaker 4: market rate. In Trump's first administration, he was beating up
Speaker 4: pal about short term rates. That kind of made sense,
Speaker 4: I guess, to some respect, because that's more of a
Speaker 4: controlled rate where the tenure is not. So it looks like, yes,
Speaker 4: bringing in some of these growth fears, whether it was
Speaker 4: intentional for DCHSS, whatever the administration is doing has worked
Speaker 4: so far.
Speaker 2: You make a very interesting point there, So I'm going
Speaker 2: to ask you this. Could you imagine a world where
Speaker 2: President Trump to use your term beats up on FED
Speaker 2: share J Powell to use the balance sheet as a
Speaker 2: way of bringing down market rates?
Speaker 4: Certainly could so. I think one of the things is
Speaker 4: obviously he's using this bully pulpit across the board, whether
Speaker 4: you know, you can talk about trade or you can
Speaker 4: talk about rates or just about anything right now. So yes,
Speaker 4: I think he could potentially do that. Now again, I
Speaker 4: think the biggest thing to watch is this tenure. Where
Speaker 4: does it go? But now I think they are playing
Speaker 4: with fire though, because you don't want to get the
Speaker 4: market too concerned about growth, because it could really unravel
Speaker 4: here and we could get even more volatility, and that
Speaker 4: I think could be a big concern.
Speaker 2: A couple of the big houses on Wall Street in
Speaker 2: the last week a signal that they are increasingly concerned
Speaker 2: about the risk of recession, a model from JP Morgan
Speaker 2: showing a higher probability of that fact. Similarly, Goldman Sachs
Speaker 2: as a model that suggests the risk is edging higher.
Speaker 2: Is that something that you're concerned about? We're talking about
Speaker 2: growth scare. I know that is it a bridge too
Speaker 2: far to say that we're on the verge of a recession.
Speaker 4: I don't think it's a bridge too far, just because again,
Speaker 4: this uncertainty is going to cause a lot of managers
Speaker 4: to kind of pause, and we're already seeing and earning.
Speaker 4: So if you just look what we're we are bottom
Speaker 4: up managers for our for our fund, and one of
Speaker 4: the things we do is we listen to management teams
Speaker 4: all day long, and what we're seeing is a pretty
Speaker 4: good contrast from the fourth quarter down to the first quarter,
Speaker 4: where we are starting to see a rollover of earnings
Speaker 4: expectations and it's pretty much just about every sector and
Speaker 4: that's different. So again, I think if there's more uncertainty,
Speaker 4: that's going to make managers pause and that could lead
Speaker 4: to even worse EPs results moving forward. So hopefully it's
Speaker 4: not recession ary, I do. I will say full you know,
Speaker 4: full disclosure. I do think this administration does want to
Speaker 4: be pro growth, but I do think if there's going
Speaker 4: to be any weakness or slow down, they're going to
Speaker 4: want it earlier in Trump's second tenure versus later.
Speaker 2: So, George, where are you seeing opportunity. I'm curious, Uh.
Speaker 4: This is so this is the perfect lead into you know,
Speaker 4: what we're doing today. Now, obviously this volatility is kicking
Speaker 4: up a lot. What is that doing the asset prices?
Speaker 4: It's moving them all around. I will say one of
Speaker 4: the areas, so bonds have rallied, So we did increase
Speaker 4: duration a few months ago, which was very beneficial. The
Speaker 4: other areas of that most people probably don't participate in
Speaker 4: or look at, or convertible bonds. We are seeing some
Speaker 4: price moves down forty to fifty to sixty points in
Speaker 4: some of these convertible bonds, and that's one area where
Speaker 4: we can invest in for our fund because it is
Speaker 4: so flexible. That's an area that we're spending a heck
Speaker 4: of a lot of time in right now. Small caps
Speaker 4: again I say small caps a lot, but you know,
Speaker 4: if you find four of our five best performers last year,
Speaker 4: we're small caps and they were up you know, anywhere
Speaker 4: from eighty to one hundred percent, and there are still
Speaker 4: there is still a lot of value there with this
Speaker 4: recent decline. So that's where we're going to spend most
Speaker 4: of our time today.
Speaker 2: Are you lightning your position if you are exposed to
Speaker 2: megacap tech let's say the Googles, the Alphabets, the Microsoft,
Speaker 2: the Apple. Are you kind of dialing back from that exposure?
Speaker 4: So we tend to avoid peaks in cycles and tops,
Speaker 4: and that's one. So we did have a decent amount
Speaker 4: of even though we're value investors, we did have some
Speaker 4: exposure to whether it's subcomponent companies that would support this
Speaker 4: AI move, and we did trim back on a heck
Speaker 4: of a lot of those because they moved up a
Speaker 4: lot at the end of last year and in November
Speaker 4: and into December. And so, yes, we do have an
Speaker 4: elevated cash level. Part of that is in the bond
Speaker 4: side of the fund. Part of that is on the
Speaker 4: equity side of the fund. So we do have dry powder,
Speaker 4: which I'd love to have excess cash when markets get volatile,
Speaker 4: because that's when we tend to have some fun. But
Speaker 4: again going back to it, yes, I do think we
Speaker 4: tend to avoid cyclical peaks, and that could be a
Speaker 4: cyclical peak in chemicals or it could be in tech.
Speaker 4: We are agnostic in that. From that standpoint, Are.
Speaker 2: You looking for exposure offshore right now in this current
Speaker 2: environment in any way, whether it's Asia or Europe or
Speaker 2: South America.
Speaker 4: So that's an interesting thing, Doug. If you remember last year,
Speaker 4: international stocks were getting walloped relative to US stocks, and
Speaker 4: so that was a pocket where we found a decent
Speaker 4: amount of So all of the companies that we own
Speaker 4: have to be US denominated and trading US dollars, and
Speaker 4: so we can buy ad rs, and we did increase
Speaker 4: our ADR exposure last year just because there were so
Speaker 4: significantly cheap relative to US stocks, and a lot of
Speaker 4: those have gapped up and rallied. And you know, if
Speaker 4: you look at foreign markets, whether it's Germany today, their
Speaker 4: stock market has rallied a lot, Japan rallied a decent amount,
Speaker 4: and even China now is after years of just sluggish
Speaker 4: stock movement has finally started to pick up. So yes,
Speaker 4: to your point, we do have some exposure there starting
Speaker 4: from last year, and we're happy we did that.
Speaker 2: George, we'll leave it there. It's always a pleasure. Thank
Speaker 2: you so much for making time to chat with us.
Speaker 2: George Sippaloni there. He is portfolio manager at Pen Mutual
Speaker 2: Asset Management, joining us here on the Daybreak Asia podcast.
Speaker 2: Thanks for listening to today's episode of the Bloomberg Daybreak
Speaker 2: Asia Edition podcast. Each weekday, we look at the story
Speaker 2: shaping markets, finance, and geopolitics in the Asia Pacific. You
Speaker 2: can find us on Apple, Spotify, the Bloomberg Podcast YouTube channel,
Speaker 2: or anywhere else you listen. Join us again tomorrow for
Speaker 2: insight on the market moves from Hong Kong to Singapore
Speaker 2: and Australia. I'm Doug Prisoner and this is Bloomberg