WEBVTT - Nick Schoenmaker on China (Radio)

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<v Speaker 1>We're joining us now right here in Sydney. We've got

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<v Speaker 1>Nick Sean Maker is a senior investment consultant and portfolio

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<v Speaker 1>manager at Evidentia Group, to talk about a number of things.

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<v Speaker 1>And Nick, I just want to start with central banks

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<v Speaker 1>if I can. We just heard from Morgan Stanley. They're

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<v Speaker 1>saying markets haven't for the priced and what's coming from

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<v Speaker 1>the Fed. But two was the year of tightening. What's

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<v Speaker 1>going to be particularly with four new voting members on

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<v Speaker 1>the FED. Yeah, Look, it's it's really interesting if you

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<v Speaker 1>see where the market is anticipating the terminal right to be,

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<v Speaker 1>it's about four point eight percent, and then for rates

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<v Speaker 1>to rate cuts to come later in the year, and

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<v Speaker 1>we know the FED is expecting rates to go above

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<v Speaker 1>five and stay there for the rest of the year.

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<v Speaker 1>So look, a lot of that's going to depend on

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<v Speaker 1>the shape of the recession. Um. The shape of the

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<v Speaker 1>recession will largely be determined by inflation, and inflation now

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<v Speaker 1>is going to be driven by core services. So you know,

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<v Speaker 1>we still do have a very very tight labor market

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<v Speaker 1>in the US UM and we need to see a

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<v Speaker 1>better balance labor markets. So if we don't see the

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<v Speaker 1>deflationary forces and the base effects of inflation. Seeing numbers

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<v Speaker 1>come down, market will be in the first half of

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<v Speaker 1>the year, you know, the FED is going to have

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<v Speaker 1>to to move more aggressively. So you know, there certainly

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<v Speaker 1>is a case to see that the FED dot plots

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<v Speaker 1>look realistic, but there's also obviously reasons at the market

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<v Speaker 1>thinks that perhaps the recessions worse than what the FED

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<v Speaker 1>make expect. You can see that by the terminal rate

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<v Speaker 1>pricing and the inversion of the yield curve. So it's

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<v Speaker 1>you know, yeah, we've seen we've seen r it's coming.

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<v Speaker 1>I mean, we've seen inflation coming down a little bit.

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<v Speaker 1>I'm not sure if the read of changes is enough

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<v Speaker 1>to impress you. But when you look at it, I mean,

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<v Speaker 1>are you enough encouraged by this to get long or

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<v Speaker 1>do you think there's just more time, that more wider

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<v Speaker 1>that has to go under the bridge. I think there's

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<v Speaker 1>more water that has to come under the bridge. It's

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<v Speaker 1>great to see two consecutive months where core inflation has

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<v Speaker 1>been below expectations. I mean the risk out there to

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<v Speaker 1>the risks out there is obviously the longer inflations around,

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<v Speaker 1>the more you have inflation expectations. Having a risk becoming

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<v Speaker 1>unhinged and that going through the wages like we saw

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<v Speaker 1>in the seventies um and there still is the million

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<v Speaker 1>dollar question of you know, some of these exogenous supply

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<v Speaker 1>issues that have contributed to inflation, COVID zero, Russia and Ukraine.

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<v Speaker 1>You know, will commodities be weaponized next year. So it's

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<v Speaker 1>just a very very very fluid environment and it's just

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<v Speaker 1>all about watching the data for now in terms of

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<v Speaker 1>supply issues. I'll give you exhibit A China and it's

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<v Speaker 1>bumby exit out of COVID zero settings. What are you

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<v Speaker 1>anticipating this ride is going to be like in the

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<v Speaker 1>next few months. Look, it's it's uncertain. I mean, you

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<v Speaker 1>know we've seen China flagging this or market participants forecasting

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<v Speaker 1>and enter COVID zero for so long. You know, there

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<v Speaker 1>is a risk that the population at some stage with

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<v Speaker 1>COVID cases rising, kind of self insured and kind of

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<v Speaker 1>lockdown themselves even if the country is opening up. I

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<v Speaker 1>think another interesting thing to watch around what happens with

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<v Speaker 1>China is what does it do to inflation. So you

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<v Speaker 1>could expect, if you know, all other things being equally saw,

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<v Speaker 1>how the rest of the world equity markets behaved when

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<v Speaker 1>economies were open. But then if you do have um

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<v Speaker 1>China reopening, commodity prices go up initially probably have a

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<v Speaker 1>non inflationary boost growth, but then does it also cause

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<v Speaker 1>problems for the fat if it contributes to inflation throughout

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<v Speaker 1>throughout next year? Um So lot we watch. We had problems,

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<v Speaker 1>or at least investors took issue with policy coming out

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<v Speaker 1>of China, and now it seems like we've got a

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<v Speaker 1>kind of two chains of command. There's a there's a

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<v Speaker 1>more moderate one that kind of is holding sway at

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<v Speaker 1>the moment, and there's the really strict side that we've

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<v Speaker 1>seen in the past. And I don't know if you're listening.

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<v Speaker 1>Before the type of the hour, I did a meter

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<v Speaker 1>review and there's an analysis piece in the Nick Asian

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<v Speaker 1>review that says that you know, people are confused. You've

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<v Speaker 1>got Premily Ka chiang uh dictating some matters, and then

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<v Speaker 1>the number two, the incoming Lee Chang, both of their

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<v Speaker 1>hands on the tillers. So I guess as an investor

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<v Speaker 1>you're faced with that difficulty as well. Yeah. Absolutely, I mean,

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<v Speaker 1>so there's the power at the moment emphasizing common prosperity

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<v Speaker 1>and regulation and that is a risk for markets as

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<v Speaker 1>well as it has been for the last two years.

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<v Speaker 1>I mean that there is also more progressive people in

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<v Speaker 1>China that don't want to be perceived as an enemy

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<v Speaker 1>of the West. But you know how that plays out

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<v Speaker 1>through time. It is hard to see, but you can

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<v Speaker 1>see now people take into the streets and protesting, and

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<v Speaker 1>that in itself can cause China to be more nationally

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<v Speaker 1>stick and all kinds of geopolitical conclusions or ramifications could

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<v Speaker 1>result from that, as we see all around the world.

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<v Speaker 1>We've heard again today from the PBOC, recently repeating it's

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<v Speaker 1>vow to support the property sector backing him and a

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<v Speaker 1>maintaining liquidity in the financial system. The work conference over

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<v Speaker 1>the weekend stressing the importance of the Internet. Both of

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<v Speaker 1>these parts of the economy took a bit of a

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<v Speaker 1>beating over the past twelve months. Because the time to

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<v Speaker 1>take a look now is the flora look. I think

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<v Speaker 1>there's a few things around that. You know, despite having

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<v Speaker 1>the best monthly return in Chinese equities in November for

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<v Speaker 1>I think about twenty years, they're still at a discount

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<v Speaker 1>verse to the rest of the world, So that warrants

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<v Speaker 1>some attention. Um if we're now in the first transition

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<v Speaker 1>of the US dollar peaking. Well, that tends to be

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<v Speaker 1>a green light for e MS sets, whether it's equities

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<v Speaker 1>or born so again that warrants some attention. You just

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<v Speaker 1>have to be extremely extremely selective. On the other side

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<v Speaker 1>of that, you can see many parallels to China to

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<v Speaker 1>Japan in the nineties with aging demographics and a very

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<v Speaker 1>over levied property sector. So it's it's again just a

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<v Speaker 1>very fluid backdrop like most things. At the moment, it's

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<v Speaker 1>a big day today for the United States and and

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<v Speaker 1>for Ukraine, with Vladimir Zelinski giving an address to the

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<v Speaker 1>Congress and meeting with the President. I'm just curious for

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<v Speaker 1>the night. You know, the President talked about seeking a

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<v Speaker 1>just piece in the war. Does it feel like there's

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<v Speaker 1>any end in sight to this? No, and it'd be

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<v Speaker 1>interesting to know what they what they mean by peace

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<v Speaker 1>in that context. But there doesn't seem to be an endgame.

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<v Speaker 1>It doesn't seem to be an endgame that I can

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<v Speaker 1>see there. I think when we see NATO, Ukraine and America,

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<v Speaker 1>let's say winning or making grounds in Russia, you know,

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<v Speaker 1>there still is orbit very low probability to the risk

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<v Speaker 1>that Russia then comes back with obviously, you know if

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<v Speaker 1>they're desperate new killer, So I mean, you almost don't

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<v Speaker 1>want to see things getting better. It's a bit of

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<v Speaker 1>a catch twenty two. So I don't know what the

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<v Speaker 1>endgame there is, but you know you can see the

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<v Speaker 1>world moving to the bricks in some case of Saudi

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<v Speaker 1>Arabia and so on, so you know that this this

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<v Speaker 1>hegemon of the US is certainly being confronted. All right,

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<v Speaker 1>Nick seon Maker, senior investment consultant, Ample follow your manager

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<v Speaker 1>at Evidentia Group. Thanks so much for joining us.