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Speaker 1: Bloomberg Audio Studios, podcasts, radio news.

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Speaker 2: This is the Bloomberg Daybreak Aisia podcast. I'm Doug Krisner.

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Speaker 2: You can join Brian Curtis and myself for the stories,

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Speaker 2: making news and moving markets in the APAC region. You

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Speaker 2: can subscribe to the show anywhere you get your podcast

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Speaker 2: and always on Bloomberg Radio, the Bloomberg Terminal, and the

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Speaker 2: Bloomberg Business app.

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Speaker 3: To take a closer look at markets and economic growth

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Speaker 3: for leading countries around the world and the region is

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Speaker 3: Brian Jacobson, with US chief economist at Annex Wealth Management. Brian,

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Speaker 3: the weaker not weak, but the weaker non farm payrolls

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Speaker 3: report took a little pressure off for those who are

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Speaker 3: really worried that strong growth will keep inflation higher in

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Speaker 3: thus central banks higher. But the thing is inflation remains sticky.

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Speaker 3: Do you believe that we'll get a drop in inflation

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Speaker 3: numbers that might match what we saw in j.

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Speaker 4: Yes, we do. Yeah. So here at Annex on our

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Speaker 4: Investment committee, we were looking at some of the data

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Speaker 4: and it does seem to us that the first three

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Speaker 4: months of twenty twenty four we've seen those upside surprises

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Speaker 4: with inflation. So it's just still too hot to handle,

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Speaker 4: But underneath the surface, there is still that goods price

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Speaker 4: deflation that is taking place, especially with durable goods. It

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Speaker 4: does appear as though wage growth has really moderated, and

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Speaker 4: so perhaps that is then going to lead to service

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Speaker 4: sector prices actually shifting from that rather high inflation to

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Speaker 4: something a little bit more tepid. So we actually are

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Speaker 4: optimistic that the first three months of twenty twenty four

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Speaker 4: are not a prelude to what to expect for the

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Speaker 4: balance of the year. So we do expect to see

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Speaker 4: decline in inflation pressures here.

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Speaker 2: So if inflation is coming down and growth is softening

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Speaker 2: ever so slightly, what does that mean for the equity market?

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Speaker 2: And are you playing this solely on the fact that

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Speaker 2: there will be a little bit more liquidity added when

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Speaker 2: rates come down. I mean, shouldn't we be concerned about

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Speaker 2: the quality of earnings going forward?

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Speaker 4: We're always concerned about the quality of earnings. One of

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Speaker 4: the things that we oftentimes focus on when we're looking

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Speaker 4: at individual equities for client portfolios is to make sure

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Speaker 4: that we have confidence that those companies are going to

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Speaker 4: be able to maintain or expand their margins relative to

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Speaker 4: their industry peers, and so that's kind of like an

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Speaker 4: initial screen that we really like to look at, and

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Speaker 4: we are a little concerned about the health of some

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Speaker 4: of the areas as far as the vulnerabilities to a

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Speaker 4: consumer slowdown. Maybe that's one of the reasons why you're

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Speaker 4: to date in ETF like XLY, which is the sector

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Speaker 4: ETF for consumer discretionary, has been underperforming the broader market.

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Speaker 4: So much is because not that the consumer isn't doing

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Speaker 4: well now, but it is likely that they're going to

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Speaker 4: be coming under further press sure as the year goes on.

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Speaker 4: With the wage data that we saw, I think that

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Speaker 4: it almost validates that idea. You only saw a point

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Speaker 4: two percent month on month increase in wages three point

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Speaker 4: nine percent year on year, and we still have relatively

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Speaker 4: high inflation, so the real purchasing power of consumer incomes

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Speaker 4: isn't growing as fast as what it used to.

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Speaker 3: I wonder whether or not the little bit of softness

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Speaker 3: that we see in the consumer might be offset by

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Speaker 3: strength and industrial because we have this other whole trend

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Speaker 3: of you know, obviously with AI and with industrialization and

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Speaker 3: reshoring and all of that, that that might be propping

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Speaker 3: up the economy because we fear about the consumer, and

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Speaker 3: yet the numbers overall are sort of okay.

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Speaker 4: It's absolutely correct, and really you can see this in

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Speaker 4: the ISM data. The ISM Manufacturing index was below fifty

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Speaker 4: for sixteen months in a row, then we briefly went

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Speaker 4: above fifty, and now we dip back below it. At

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Speaker 4: the same time, the ISM services index was above fifty,

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Speaker 4: and now we just recently went below it. We actually

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Speaker 4: believe that we will be seeing manufacturing beginning to get

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Speaker 4: some of a footing here because of some of the

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Speaker 4: investment in artificial intelligence, maybe the efficiency gains that can

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Speaker 4: come from that government spending on infrastructure. So there are

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Speaker 4: some things that we believe can really help the industrial area,

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Speaker 4: and industrials is one of those sectors that we do

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Speaker 4: have a preferred view on, along with materials. They have

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Speaker 4: underperformed for a while. Valuations to us look fairly reasonable,

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Speaker 4: as reasonable as what they can be in this type

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Speaker 4: of environment, and so we actually do think maybe the

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Speaker 4: baton is being handed from the consumer to more manufacturing

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Speaker 4: and industrial for growth.

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Speaker 2: So we've focused a lot in this conversation on the

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Speaker 2: equity side. I'm wondering how you view fixed income under

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Speaker 2: these conditions. That we've been describing.

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Speaker 4: It continues to be challenging. It seems like really it

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Speaker 4: does depend a lot on government deficits Treasury refunding operations.

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Speaker 4: As far as you know, the quarterly refunding report was

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Speaker 4: about in line with expectations, so that was encouraging. We

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Speaker 4: think that maybe the US Treasury has gotten some religion

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Speaker 4: as far as being attentive to what the market is

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Speaker 4: actually expecting and trying not to make any adverse surprises

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Speaker 4: on that front. But really we don't see a huge

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Speaker 4: upside for bonds in general. We think that it's an

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Speaker 4: environment where it's more about clipping the coupon. And really,

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Speaker 4: if you think about a year from now, where are

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Speaker 4: we likely to be with the Fed funds rate, probably

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Speaker 4: maybe one hundred basis points lower. Perhaps that means the

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Speaker 4: tenure Treasury can go down fifty basis points, maybe seventy

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Speaker 4: five basis points on a good day. That's a decent

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Speaker 4: capital appreciation. But really we're viewing bonds more as for

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Speaker 4: just where is it that you can get that good income,

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Speaker 4: and a lot of that we're finding is more on

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Speaker 4: the shorter term investment grade side of things.

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Speaker 3: If I could throw a little shade on my earlier question.

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Speaker 3: You know, among the adages that you know, we all

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Speaker 3: put a lot of faith in, don't fight the FED,

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Speaker 3: and also that the consumer is about seventy percent of

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Speaker 3: the US economy. Given that question and your answer is

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Speaker 3: that relationship changing a little.

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Speaker 4: Well, not necessarily for the markets really, if you're absolutely

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Speaker 4: right as far as with the economy. So, economic growth

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Speaker 4: in the United States is heavily dependent upon the consumer. Now,

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Speaker 4: when it comes to corporate profitability, the earnings per share

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Speaker 4: of the S and P five hundred, that's where we

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Speaker 4: think that it's really more important about the global growth story.

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Speaker 4: Are we going to see some sort of maybe reacceleration

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Speaker 4: in China Europe emerging from their recession. So really it's

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Speaker 4: more about manufacturing and global growth as opposed to just

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Speaker 4: purely consumer spending that's likely to drive EPs or earnings

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Speaker 4: per share for the S and P five hundred or

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Speaker 4: even the broader market.

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Speaker 2: Well, Brian, I'm glad you mentioned China and Europe because

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Speaker 2: my next question had to do with opportunities that you

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Speaker 2: may see offshore. Is there anything that's a compelling buy

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Speaker 2: right now offshore?

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Speaker 3: Oh?

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Speaker 4: Well, for US, we actually do like emerging market debt.

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Speaker 4: We think that maybe the currencies can appreciate from here

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Speaker 4: decent coupon income, and even China, a lot of people

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Speaker 4: have kind of thrown in the towel on them, declaring

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Speaker 4: it to be uninvestable. But yet the valuations may be

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Speaker 4: maybe a good area for us to be looking at

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Speaker 4: for longer term investments.

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Speaker 3: All right, Brian, thanks so much for joining us here

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Speaker 3: on the program. Always learn a lot when you come on.

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Speaker 3: Thank you for being with us. Brian Jacobson, Chief Economists

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Speaker 3: at Annex Wealth Management. One of the top stories of

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Speaker 3: the day, Chinese President Jijinping has arrived in France and

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Speaker 3: will begin today a three nations swing through Europe. This

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Speaker 3: is all to try to improve relations with Europe at

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Speaker 3: a time when relations have been a little strained and

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Speaker 3: very tough with the United States. Joining us now for

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Speaker 3: some discussion of this is Oreana Schuyler Mastro, a fellow

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Speaker 3: at Stanford University's Institute for International Studies. With us, we

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Speaker 3: heard from Emmanuel Macron asking for a reset in French

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Speaker 3: or European China relations. We can interpret that in a

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Speaker 3: number of ways. I think a lot of people are

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Speaker 3: curious here at the outset of this trip Oreana. Whether

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Speaker 3: or not Europe is going to continue with the process

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Speaker 3: of toughening its stance on China, or whether or not

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Speaker 3: it's going to use this trip as a way of

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Speaker 3: trying to smooth things out, Well.

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Speaker 1: That's a great question. I'm an expert on China and

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Speaker 1: not on Europe, but if I had to speculate, I

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Speaker 1: think even the view that Europe has been tough on

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Speaker 1: China is a little overblown. The reason that China is

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Speaker 1: going to a place like France, for example, is that

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Speaker 1: they have gotten these signals from Europe that these countries

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Speaker 1: are to a degree prioritizing their economic relationships with China,

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Speaker 1: and so there is an opening here for the Chinese

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Speaker 1: to try to dangle some economic benefits in front of

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Speaker 1: US europionallers, allies and partners and hope that these countries

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Speaker 1: will consider more of those economic interests over the strategic

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Speaker 1: interests that the United States wants them to keep in mind,

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Speaker 1: whether it's pressuring Russia on Ukraine or putting more pressure

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Speaker 1: on China in this sort of strategic competition that is

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Speaker 1: currently ongoing between Beijing and Washington.

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Speaker 2: Well, Washington and Brussels seem to be pretty unified when

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Speaker 2: it comes to the issue of Chinese over capacity on

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Speaker 2: the manufacturing side. You mentioned war in Ukraine. Do you

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Speaker 2: think President she is trying to find a chink in

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Speaker 2: the armor, so to speak, and drive a wedge in

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Speaker 2: that to try to create maybe a little bit more

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Speaker 2: differential between Europe and the US.

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Speaker 4: Well.

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Speaker 1: Absolutely, I think there's a lot of commentary from the

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Speaker 1: Chinese side that they do believe if they strengthen political

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Speaker 1: cooperation and economic interdependence with Europe, they could use that

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Speaker 1: kind of as a bargaining ship, warming relations between China

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Speaker 1: and Europe to stabilize the relations with the United States.

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Speaker 1: And so it is kind of a multi step, multi

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Speaker 1: tiered strategy that in the end gives them an upper

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Speaker 1: hand in the competition with the United States and ideally,

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Speaker 1: from their perspective, reduce some of the pressure that the

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Speaker 1: United States and its allies is putting on China in

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Speaker 1: the economic and trade sphere, of course, but also in

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Speaker 1: the military strategic sphere.

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Speaker 3: Something that has languished a bit between China and Europe

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Speaker 3: is a bilateral investment treaty. Do you expect to see

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Speaker 3: any progress on that during these five days.

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Speaker 1: I think we would be hard pressed to see progress

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Speaker 1: on that in these five days. That it is from

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Speaker 1: the Chinese respective hopefully a first step to be able

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Speaker 1: to push some of those initiatives through right things that

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Speaker 1: were already signed, but we don't see a lot of

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Speaker 1: implementation happening, and so maybe there'd be some sort of

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Speaker 1: agreement for or further discussions or further talks about implementation.

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Speaker 1: That would be seen as a big win. But if

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Speaker 1: anything comes from it to make progress in the bilateral

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Speaker 1: investment treaty, it will be in incremental stuff.

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Speaker 2: You could make the case that there's maybe a little

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Speaker 2: bit of difference between where France is and Germany happens

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Speaker 2: to be on the manufacturing stuff. I mentioned the ev

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Speaker 2: There is also the medical device issue, but I think

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Speaker 2: that France and Germany are pretty aligned when it comes

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Speaker 2: to war in Ukraine. Do you think there's any way

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Speaker 2: that they could get China to take a tougher stance

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Speaker 2: where Russia is against Russia in what's happening in Ukraine.

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Speaker 1: I think unless there is some real cost to China

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Speaker 1: for its closer military strategic relationship with Russia, the Chinese

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Speaker 1: are not going to see it in their best interest

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Speaker 1: to pressure Russia and create that distance between them. So

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Speaker 1: it's only if they thought there were going to be

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Speaker 1: some significant economic costs, like European countries, we're going to

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Speaker 1: put some sort of sanctions, secondary sanctions on China for

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Speaker 1: their support of the war, that the Chinese would consider

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Speaker 1: moving away. But from now, if it's just kind of

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Speaker 1: a naming and shaming thing or diplomacy and just you know,

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Speaker 1: criticizing them for the policy, I don't think that's going

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Speaker 1: to be a significant enough disincentive from their perspective, given

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Speaker 1: everything they get from that relationship with Russia.

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Speaker 3: Is there frustration on the Chinese side about you know,

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Speaker 3: relations now between China and Europe, and China and the

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Speaker 3: US having shifted a little bit more of the ideological

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Speaker 3: side and not so much on the practical side they're

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Speaker 3: doing business side. Is that something that is tangible?

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Speaker 1: I think it is. The United States has been trying

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Speaker 1: to argue that this is not just a conflict of

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Speaker 1: unfair trade practices or even territorial disputes and conflicts in Asia,

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Speaker 1: but we have a China that is a threat to

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Speaker 1: the liberal international order, and the United States with its

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Speaker 1: analyies and partners who tend to be liberal democracies have

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Speaker 1: different interests from the autocracies of the world like China

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Speaker 1: and Russia or North Korea that are coming closer together.

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Speaker 1: So China has tried it for the past twenty five

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Speaker 1: years through a variety of strategies that I lay out

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Speaker 1: in my book coming out next month. Up start how

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Speaker 1: China becomes a great power to create that divide and

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Speaker 1: say this is not an ideological battle because they don't

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Speaker 1: want European countries in the United States to form this

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Speaker 1: type of coalition and to prioritize things like human rights.

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Speaker 1: Then these ideological battles over economics. So during this trip,

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Speaker 1: they're going to try to push this idea that it's

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Speaker 1: much better to do business with China and ignore some

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Speaker 1: of those factors.

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Speaker 2: What do you see as the biggest risk to China

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Speaker 2: in following the trajectory that you lay out in your book.

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Speaker 2: Is there one major potential pitfall?

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Speaker 1: Well, I think the biggest pitfall is I lay out

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Speaker 1: in the book that they were able to build power

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Speaker 1: largely by doing different things in the United States. Does

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Speaker 1: we see under Shijenping the reason they've done that. One

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Speaker 1: of the reasons is they were trying to avoid a backlash.

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Speaker 1: But domestically, you now hear this argument being made that

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Speaker 1: no matter what China does, there's going to be pressure

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Speaker 1: from the United States. So they're no longer prioritizing playing nice.

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Speaker 1: And if that's the case, it does seem like they

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Speaker 1: have more incentives in the future to be more aggressive,

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Speaker 1: and they also have incentives to abandon some of their

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Speaker 1: smarter strategies that were more effective. And so what that

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Speaker 1: means is, on one hand, we can expect a more

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Speaker 1: aggressive China in the future, but on the other one,

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Speaker 1: that is not going to be quite so successful in

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Speaker 1: their pursuit of power as they have the past twenty

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Speaker 1: five years.

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Speaker 3: You know, we always had an ideological angle, you know,

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Speaker 3: we had the annual NFN tussle between the US and China,

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Speaker 3: but then it switched to more on the practical side.

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Speaker 3: What do you think change things.

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Speaker 2: Back to the ideological very quick?

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Speaker 3: The single biggest thing, and.

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Speaker 1: I think we came to the realization that China, you

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Speaker 1: can't create a distinction between the ideology, the economics, the military,

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Speaker 1: any of it. China has a brand strategy that brings

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Speaker 1: all those components together. And so if we're going to

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Speaker 1: protect US interests and allied interests. We have to consider

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Speaker 1: all those components together as well.

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Speaker 3: Arianna, thanks so much for being with this. Oreana Schuyler Mustro,

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Speaker 3: a fellow at Stanford University's Institute for International Studies.

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Speaker 2: The bold case for Chinese equities appears to be more

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Speaker 2: compelling than it has for a long time, and investors

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Speaker 2: seem to be gradually dipping their toes in despite what

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Speaker 2: is being called the scars, the deep scars of last year.

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Speaker 2: Mary Nikola joins us now. Mary is Bloomberg m Live

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Speaker 2: strategist who joins us from our studios in Singapore. It's

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Speaker 2: always good to chat with you, And I'm wondering, is

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Speaker 2: this something that's going to be durable in your view

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Speaker 2: or is this maybe just a quick sort of recovery

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Speaker 2: that may resume. I mean, the weak trend would reach

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Speaker 2: zoom before it's too long from now.

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Speaker 5: Yeah, I think this time around, there's just a few

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Speaker 5: more catalysts to help support this rally. So if you look,

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Speaker 5: we know valuations have been cheap, that's nothing new for us,

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Speaker 5: but look at some of the other factors. So take

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Speaker 5: for example, the equity risk premium, which is the difference

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Speaker 5: between the earnings yields for equities and the government bond yields.

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Speaker 5: They're actually showing you that you are getting compensated for

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Speaker 5: taking risk. So that's one factor, and it's actually has

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Speaker 5: been improving. It's above its five year average, so there's

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Speaker 5: a case there that you're getting compensation. The second factor

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Speaker 5: is that you are hearing more support from policymakers. And

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Speaker 5: again we have heard this numerous times, but this time

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Speaker 5: the Pull Up Bureau was focusing on two things that

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Speaker 5: you know, for someone for someone like me, got excited,

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Speaker 5: which is the fact that they're looking at ways to

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Speaker 5: help with consumer demand and they're looking at ways of

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Speaker 5: figuring out what's going to happen with housing. Obviously we

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Speaker 5: know these are the two issues that have been the

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Speaker 5: underlying key thing that has been dragging down the economy.

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Speaker 5: So they're now targeting those two things, and that's what

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Speaker 5: they mentioned at the Pull Up Bureau meeting that closed

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Speaker 5: out on Tuesday.

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Speaker 3: Completing units that are in the process of being built

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Speaker 3: and getting those two people walk us through how that

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Speaker 3: winds up being also adding to the bolishness.

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Speaker 5: Yeah, absolutely, so there's so much supply out there there's

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Speaker 5: also a lot of people who haven't gotten their apartments,

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Speaker 5: and obviously that's weighing on sentiment. The fact that you know,

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Speaker 5: we've seen a lot of that move from property and

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Speaker 5: they're looking for ways to put their wealth in gold.

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Speaker 5: That's another factor. Obviously that's been weighing on the equity markets.

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Speaker 5: But if the government takes charge of, you know, making

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Speaker 5: of delivering on a lot of these housing projects two

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Speaker 5: people and putting them back in their hands, that is

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Speaker 5: a big, big positive support for the average consumer.

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Speaker 2: I'm glad you mentioned gold because Brian and I were

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Speaker 2: talking earlier about a story in the New York Times

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Speaker 2: over the weekend Chinese consumers have flocked to gold really

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Speaker 2: fast here. I mean, I think they're buying a hand

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Speaker 2: over fist as confidence in traditional venues like real estate

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Speaker 2: and inequities have faltered a bit. Do you think this

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Speaker 2: is also a temporary phenomenon.

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Speaker 5: You know, there's there's a lot to be set for

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Speaker 5: gold at this point, especially if you're seeing and your

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Speaker 5: expectations are that, you know, growth is going to continue

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Speaker 5: to be on the weaker side. That's just the long

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Speaker 5: term trajectory for China growth, right, So it has nothing

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Speaker 5: to do with anything else, but this is where we're

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Speaker 5: heading from a long term perspective. So you have that

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Speaker 5: supporting gold, not to mention you're expecting currency weakness, bond

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Speaker 5: yields are quite low, so and then the housing market

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Speaker 5: you still don't have the confidence to jump back in.

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Speaker 5: If you think about it, where the most you know,

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Speaker 5: the average Chinese put their wealth. They put their wealth

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Speaker 5: in the housing market, and that's really lost a lot

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Speaker 5: of dampened their confidence. So for now it's going to

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Speaker 5: be about gold of where they can put their wealth,

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Speaker 5: and that seems to be a beacon of stability. So

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Speaker 5: they're going to always have that little bit on the

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Speaker 5: side as a part of let's say, their portfolio.

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Speaker 3: In the overall picture, about looking at a little bit

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Speaker 3: more in terms of bullish conditions for Chinese equities. We

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Speaker 3: haven't talked too much before about some sort of China

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Speaker 3: discount like we've seen with Korea for a long time.

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Speaker 3: And if that is permanently baked in, how much of

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Speaker 3: a constraint does that offer?

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Speaker 5: Yeah, I mean there is because of the fact that

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Speaker 5: you've had all this piecemeal stimulus that's come through and

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Speaker 5: nothing has really gotten people excited or really gotten things

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Speaker 5: going from a growth perspective. So to some degree, there

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Speaker 5: is there is a concern about the unwinding of a

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Speaker 5: lot of the stimulus that they have put in or

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Speaker 5: some of the regulations that they may impose, because we

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Speaker 5: have to also remember the start of the rally was

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Speaker 5: really based on the trading regulations and the buying from

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Speaker 5: the national team, so now it just needs another oomph, right,

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Speaker 5: So they've been putting it through the nine point Plan

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Speaker 5: where they're trying to help with companies give out better

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Speaker 5: dividends or improve their profitability and really focusing on that,

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Speaker 5: and that's absolutely crucial and absolutely critical in terms of

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Speaker 5: looking at valuations. So it's all about the follow through

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Speaker 5: and it's going to continue to be about that.

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Speaker 2: So when we were talking about gold a moment ago,

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Speaker 2: you linked it to the weak currency. Well, the weak

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Speaker 2: currency has been a positive where the export economy in

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Speaker 2: China has been concerned, and there's been a lot written

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Speaker 2: recently on how strong that is. Is there a risk

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Speaker 2: that that trend could maybe adjust a bit, soften a

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Speaker 2: bit if the currency were to recover.

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Speaker 5: I don't think so. I think there's been an export

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Speaker 5: boom more globally. So we've seen it not only in Korea,

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Speaker 5: in Taiwan, and obviously they have the AI backing them,

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Speaker 5: but at the same time you still have this export

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Speaker 5: global boom and an export recovery. We've seen it in

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Speaker 5: a lot of the numbers across this region, especially in

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Speaker 5: let's say intermediary goods and final goods as well. So

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Speaker 5: that's going to continue. And if you look at the CNY,

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Speaker 5: sure against the dollar, it's weekend, but if you look

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Speaker 5: at it across versus other currencies, it's actually been doing

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Speaker 5: pretty well, and yet the exports have been holding up.

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Speaker 2: Mary, it's a pleasure to have you on the program.

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Speaker 2: Thanks for joining us. Mary Nicola, Bloomberg m Live Strategist.

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Speaker 3: This is the Bloomberg Daybreak Asia podcast, bringing you the stories,

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