Speaker 1: You're listening to Asia Centric from Bloomberg Intelligence, the podcast
Speaker 1: that pulls back the curtain non global business so you
Speaker 1: can invest better across the Pacific realm. I'm Tom Corbett
Speaker 1: in Hong Kong.
Speaker 2: And I'm John Lee. The potent cocktail of soaring stocks,
Speaker 2: stamma inflation, and lofty interest rates is giving global asset
Speaker 2: managers an adrenaline rush.
Speaker 1: The Nike, the naz Dak and the S and P
Speaker 1: five hundred have defied gravity early this year, but for
Speaker 1: some that adrenaline rush is more like a white knuckle ride.
Speaker 2: Exuberance is abundant, but so are the risks. Are the
Speaker 2: world's equity markets soaring too far too quickly? And what
Speaker 2: about fixed income markets? And is the old sixty to
Speaker 2: forty asset allocation model still relevant?
Speaker 1: Let's bring in one of the leading luminaries of global investing,
Speaker 1: Jean charleber Tom is Global Chief Investment Officer of Multi
Speaker 1: Assets at HSBC Asset Management. He joins us from Paris,
Speaker 1: Jean Charles Bonjou. Welcome the Asia Centrack.
Speaker 3: HI term hydroen. Great to be here, JC.
Speaker 2: Global equity markets have started twenty twenty four with a
Speaker 2: bang Global Corporate credit spreads are also really tight. Are
Speaker 2: you surprised how sanguine financial markets are to be?
Speaker 3: Frank a bit, But I would make a big difference
Speaker 3: between our perspective of the short term and let's say
Speaker 3: the next three to six months compared to six to
Speaker 3: twelve months. On a short term basis, Tactically speaking, we
Speaker 3: can understand actually the good performance of risky assets with
Speaker 3: largely driven by the fact that it's not only now
Speaker 3: kind of soft landing scenario which is to be priced
Speaker 3: in the market, but even more, you know, a kind
Speaker 3: of golden pass scenario when we have inflation which is,
Speaker 3: let's stabilizing and at the same time very strong positive surprises.
Speaker 3: So from this perspective, the good performance of risk key
Speaker 3: assets is something that we can understand. From our perspective,
Speaker 3: this could continue a couple of weeks, even a couple
Speaker 3: of months, because we do not see any strong risk
Speaker 3: of growth going down or even inflation continuing to stabilize. However, however,
Speaker 3: the picture could be significantly different if we have no
Speaker 3: longer investment horizon six to twelve months, and for this
Speaker 3: investment horizon we would recommend more defensive growth positioning in portfolios.
Speaker 2: Okay, Jason, you sort of alluded to the FED policy rate.
Speaker 2: Are you in the camp of higher for longer or
Speaker 2: more of a FED pivot?
Speaker 3: We are in the camp of a fat pivot, which
Speaker 3: is pro rare with the larger price as of today
Speaker 3: by the market. But O pur perspective is slightly different.
Speaker 3: Let's be more precise what do I mean by that?
Speaker 3: So we are expecting a fat pivot around media or
Speaker 3: likely in June, which is approprior Right now, the concerns
Speaker 3: us as the constusitus expecting three rate cuts after and
Speaker 3: after some type of normalization on our side, and this
Speaker 3: is driven by our in or would be a more
Speaker 3: negative perspective for the economic groups of the second half
Speaker 3: of the year. We believe that we could have selectly
Speaker 3: more than three rate cuts four to five in the
Speaker 3: second half of this year. So yes, believe in fat
Speaker 3: periods and which would be stronger higher than what is
Speaker 3: it currently expected.
Speaker 1: And closely related to that, the economists recently ran a
Speaker 1: piece saying that if you want to get a sense
Speaker 1: of the US economy's vigor, don't look at the S
Speaker 1: and P. Five hundred, Rather look at what they say
Speaker 1: the S and P. Four ninety three. Obviously a reference
Speaker 1: to the Magnificent seven and their gravity defined performance is
Speaker 1: that bifurcated US index with so much market capitalization in
Speaker 1: so few companies. How do you see that? Is that
Speaker 1: an opportunity or risk?
Speaker 3: That's true that if we look at the simply five
Speaker 3: hundred now the magnificent sevenths are probably making the whole story.
Speaker 3: Having said that, if we look at US equities performance
Speaker 3: since the end of October so or less of the
Speaker 3: last four months, there has been a widening brets in
Speaker 3: the market. If you compare the performance of the Magnificent
Speaker 3: seven and the four hundred and ninety three or the
Speaker 3: stocks over the last four months, the gap in different
Speaker 3: terms of performance is much smaller than before. So yes,
Speaker 3: of course Magnificent seven always dominate the market, but at
Speaker 3: the same time to a much less extant than what
Speaker 3: we had seen before. First point to mention. Second point,
Speaker 3: let's come back now to the Magnificent seven. On one
Speaker 3: side of your sleeve. You look at market concentrations. This
Speaker 3: is very exceptional, even on a historical basis, even if
Speaker 3: it's not completely unusual, I would say, and probably a
Speaker 3: good comparison to make is with the Fourth Horsemen at
Speaker 3: the end of the nineties in terms of extreme concentration. However,
Speaker 3: the same time, and coming back to the Fourth Horsemen
Speaker 3: in the nineties, we are more positive on the Magnificent
Speaker 3: Seven for three reasons. The first reason is that in
Speaker 3: terms of valuation compared to Fourth Horsemen, valuations are not cheap, obviously,
Speaker 3: but at the same time they are very far from
Speaker 3: being extreme like in the dot com crisis. So it
Speaker 3: makes a big difference if you look at the Magnificent
Speaker 3: seventh right now for what is around thirty So of course,
Speaker 3: once again this is not cheap, but at the same time,
Speaker 3: in these launely justify by earnings, current earnings and forecasts earnings.
Speaker 3: And at the same time the stocks also they have
Speaker 3: a kind of quality bias obviously, and in a context
Speaker 3: where we also expect fed red cats, as I explained before,
Speaker 3: they should continue to be supportive. So of course, at
Speaker 3: the end of the day it will not continue forever,
Speaker 3: but for the next few months, who are not too
Speaker 3: much worried about the Magnificent seven, And we continue to
Speaker 3: believe that this still makes sense in equity portfolios, and
Speaker 3: in verty said portfolio generally speaking.
Speaker 1: I hear you say the US markets are probably not
Speaker 1: in a bubble.
Speaker 3: If you look at the Magnificent seven, the answer is no.
Speaker 3: Once again, it does not mean that they are cheap,
Speaker 3: which is not the case. It does not mean that
Speaker 3: there will be no correction, but it's not a bubber
Speaker 3: like during the dot Com for sure. And if you
Speaker 3: look now at the other stocks, the four ninety three,
Speaker 3: they are very far from being a bubble. If you
Speaker 3: look at valiation, they are close to actually average levels.
Speaker 3: So we're not too much read about that. Once again,
Speaker 3: not a bubble does not mean that they should not
Speaker 3: be a market correction, and she is probably more aura
Speaker 3: scenario for the second half of the year, which is
Speaker 3: a bit different from a bubble.
Speaker 2: So given your cautious stance, how should investors be positioned
Speaker 2: between equities and fixed income?
Speaker 3: So what you are recommending right now is, once again,
Speaker 3: wherever you want to make a distinction between if your
Speaker 3: investment horizon is let's say around three months or more
Speaker 3: tical intactical basis and a bit longer six to twelve
Speaker 3: months three months investment horizon. As regards equities, we are neutral.
Speaker 3: As I explained before, there are still some positive factors
Speaker 3: if now your investment horizon is a bit longer six
Speaker 3: to twelve months, we would recommend to be quite cautious
Speaker 3: in your assetlocation. So what does it mean either reduce
Speaker 3: your equity allocation compared to sixty to forty portfolio directly
Speaker 3: or what we believe it is also quite interesting as
Speaker 3: of today is to use some hedges. Which type of
Speaker 3: hedges and we're talking about option option heedges. If you
Speaker 3: look at implied volatility, and for us, it's a bit
Speaker 3: of puzzle to see that it's quite low actually and
Speaker 3: still low and even for six to twelve months horizon.
Speaker 3: So for as it makes sense to add positions in
Speaker 3: options to hatch your put for you, we are more
Speaker 3: negative on credit even at a short term investment horizon
Speaker 3: and a more medium term investment horizon, spreads are very tight.
Speaker 3: At the same time, i'm significant refinancing needs for this year.
Speaker 3: It has already started until now, no strong impact on
Speaker 3: the market, but we believe that the strong insurance will
Speaker 3: have a negative impact. And also at the same time,
Speaker 3: we all know that credit and corporate bonds they are
Speaker 3: not very good assets in late cycle. They have negative convexity,
Speaker 3: which means that when there is a downgrade or fall
Speaker 3: in growth, they perform very very poor, so more reservation
Speaker 3: on credit and strong preference for IIG compared to highyield
Speaker 3: So bones definitely value in bonds, not in all bond market,
Speaker 3: but in government bonds definitely. We're still waiting over the
Speaker 3: short term for better entree points in terms of duration,
Speaker 3: so probably a closer to four point three for US treasuries,
Speaker 3: but right now there is still some value if you
Speaker 3: have once again more medium term investment horizon, large but
Speaker 3: not least, And coming back to your point about the
Speaker 3: sixty forty sou portfolio, we believe that commodities also make
Speaker 3: sense in portfolios. Secretly gold so very good of course
Speaker 3: padging properties, particularly geopolitical risk, which could be a bit
Speaker 3: important this year, and gold also could benefit from the
Speaker 3: fact that we're expecting red decreases. So if real rates,
Speaker 3: which are quite relatively high at least from a historical perspective,
Speaker 3: good talent, they should also benefit to gold and other
Speaker 3: commodities like oil. It could be so good, hatch if
Speaker 3: there is a particularly more gew pritical risk. And we
Speaker 3: believe al so that in terms of supply and demand,
Speaker 3: the market is still a bit imbalanced towards actually possibility
Speaker 3: or to see some reduced supply in the market. So
Speaker 3: commodities are a good diversifying assets from our perspective.
Speaker 1: JC, Let's shift the Chinea a bit. In Multi China,
Speaker 1: we've had some state induced buying. The so called national
Speaker 1: team has been scooping up stocks fairly generously. It's brought
Speaker 1: some stability back to the CSI three hundred for a while.
Speaker 1: They seem to be in free fall, but foreign investors
Speaker 1: are still keeping their distance happily. Parts on what it
Speaker 1: might take to restore foreign investors' components in China.
Speaker 3: Definitely, China is not a difficult question and there is
Speaker 3: no easy answer if we come back to China. We
Speaker 3: have always thought that it would be a kind of
Speaker 3: a bumpy road for China, definitely, for growth to recover,
Speaker 3: to improve, and for the equity market. Market timing is
Speaker 3: of course a bit difficult, and on our side, what
Speaker 3: we are more recommending as of today is to see
Speaker 3: some opportunities, because we all know and Japan is probably
Speaker 3: the perfect example. Even in a market which can be
Speaker 3: in a very parish environment, there are still some pockets
Speaker 3: of opportunities. So this is more what we are doing
Speaker 3: right now to try to identify sectors which are still
Speaker 3: a bit attractive. Coming back to your question now about
Speaker 3: what could restore investor confidence, but definitely they are all
Speaker 3: waiting for some big political changes as regards monetary polisis
Speaker 3: and particularly fiscal policy. So this is the key driver.
Speaker 3: The recent announcements, particular two sessions went into the right direction,
Speaker 3: but reinvestors, I'm still expecting even bigger announcement. This is
Speaker 3: the reason why we believe that the market could see
Speaker 3: some political driven rallies in the next few months. This
Speaker 3: is what we have already seen. This probably is going
Speaker 3: to continue also, but at the same time, as I said,
Speaker 3: there are still some headwinds and without no strong commitment
Speaker 3: or even stronger commitments from financial authorities, it will still
Speaker 3: a bit difficult to fully recover.
Speaker 2: So Jace, just listening to what you mentioned on China,
Speaker 2: are you cautious overall on emerging markets?
Speaker 3: Yeah, definitely as an asset class, and right now we
Speaker 3: under way to emerging markets in our portfolios. Of course,
Speaker 3: negative momentum. At the same time, global factors are not
Speaker 3: very favorable with a strong DORA, with frattish commodities, even
Speaker 3: if I'm a bit more positive over the media the
Speaker 3: short term, as I said, so as a consequence went
Speaker 3: the way. Having said that what we are favoring right
Speaker 3: now in emerging market, we believe that there are some
Speaker 3: areas of optimism in emerging markets. We are quite active
Speaker 3: in emerging market, but more more on a lative value basis,
Speaker 3: as on asset class won the weight. But now we
Speaker 3: see in emerging markets we take relatively strong positions and
Speaker 3: we see actually some opportunities in Asia India, so that's
Speaker 3: probably has become quite popular. But on our side, that
Speaker 3: has been one of our favorite peaks for a few
Speaker 3: months now, very profitable. So we believe that the social
Speaker 3: story we buy would say the social story for India,
Speaker 3: but also the tactical story, so we continue even if
Speaker 3: it has performed very well, to have overweight or long
Speaker 3: positions in India. There are other markets, maybe a bit
Speaker 3: more niche markets like Indonesia Indonesian equities, so also believe
Speaker 3: that there is some value here, particularly after the elections,
Speaker 3: so which has showed some continuity. The profitability of Indonesian
Speaker 3: companies is very good at this on a errative basis,
Speaker 3: and it should also continue to benefit from the IV ecosystem,
Speaker 3: so positive views on Indonesia and after in Latin America,
Speaker 3: So Mexico, Mexican equities and the Mexican peso are also
Speaker 3: emerging assets that we are considered as attractive. So being
Speaker 3: not very positive on the atclass as itself underweight, but
Speaker 3: being quite active on a raative value basis and seeing
Speaker 3: some opportunities.
Speaker 1: Yes, jac it's interesting you mentioned India because it wasn't
Speaker 1: long ago when Mark Mobius, the veteran emerging markets investor,
Speaker 1: was on this very podcast singing India's praises. Do you
Speaker 1: see India's politics though, as being a risk factor to
Speaker 1: its growth story?
Speaker 3: Definitely. Having said that, we will see, of course the
Speaker 3: resources of the election, but we are not expecting big
Speaker 3: changes in terms of monetary policy. It seems to us
Speaker 3: that compared to a couple of years ago, the policy,
Speaker 3: in particularly the monetary policy by the central Bank is
Speaker 3: i would say, very orthodox right now, and they are
Speaker 3: quite concious as regards in particularly reducing rates if inflation
Speaker 3: is not close to their targets. So definitely, yes, there
Speaker 3: still remains uncertainties about politics. That maybe also the reason
Speaker 3: why even if India if you look at earnings growth,
Speaker 3: it's extremely strong. At at the same time, there is
Speaker 3: still let's say a risk premium which is quite significant
Speaker 3: in Indian equities, so that maybe is the reason. But
Speaker 3: we're not too much worried about that and would say
Speaker 3: much better than in the past. So for us, it's
Speaker 3: not at all a brooking point. And as I said,
Speaker 3: we favor all the positive factors in others. Continue to
Speaker 3: keep an overweight and a long position in Indian equities.
Speaker 2: Jac there are a lot of potential risks out there.
Speaker 2: We still have two wars going on right now. Some
Speaker 2: people talk about a potential US recession or that seems
Speaker 2: to have diffused somewhat. There's also a lot of risks
Speaker 2: around commercial real estate what keeps you late at night.
Speaker 3: There are always a lot of risk, and I would
Speaker 3: say that if you're particularly multi asset putform manager, because
Speaker 3: you cover so many asset classes, your main objective is
Speaker 3: the riad to look at the risk and fully agree
Speaker 3: with you. So there are the obvious ones, I would say,
Speaker 3: so obvious usual political risk. As I said before, to
Speaker 3: us that a good way to hatch against this geopolitical
Speaker 3: risk is to take to commodities, gold in particular, the
Speaker 3: dollar is also a good safe heaven asset in order
Speaker 3: to hatch against the geopolitical risk. So there are always
Speaker 3: actually at least to try to partially protect your put
Speaker 3: for your investment against this geopolitical risk. There are other
Speaker 3: risks which are a bit less obvious, maybe less straightforward.
Speaker 3: Let's say so of course about the economy itself. So
Speaker 3: everyone is talking about soft landing golden pass, but there
Speaker 3: is a risk of hard landing, either because inflation is
Speaker 3: stickier than expected or because we are saying, let's say,
Speaker 3: not to slow down in growth, but a recession. These
Speaker 3: are possible risks on our side. As I already explained before,
Speaker 3: we are hedging ourselves against this hard landing because due
Speaker 3: of stickier inflation or lower growth through cautious exposure to
Speaker 3: risk assets, particularly if you have a six to twelve
Speaker 3: months horizon, particularly given the fact that right now the
Speaker 3: market is almost perfectly priced for a soft planning scenario
Speaker 3: or a Gonden past scenario. So what does it mean.
Speaker 3: It means that you do not necessarily need a match
Speaker 3: to see some market force. Once again, not too much
Speaker 3: radio over the next three to six months. We believe
Speaker 3: that there are much more headwinds at six to twelve
Speaker 3: months in Western horizon, so here, yes, we would like
Speaker 3: to hatch even more our portfolios definitely.
Speaker 2: Jasey, you just mentioned that you cover so many financial
Speaker 2: markets across all the geographies. How as a multi asset
Speaker 2: manager do you decide what's the asset allocation process?
Speaker 3: Very good question. The only possibility for me, because by
Speaker 3: essence you can cover hundreds and hundreds of asset classes
Speaker 3: or markets, is to have a very very discipline approach
Speaker 3: and in particularly to rely on the use of quantitative
Speaker 3: techniques to at least to do some screening. This is
Speaker 3: the only way to be able to detect opportunities and
Speaker 3: to be portfolios in a consistent way. To make it short,
Speaker 3: what we're doing on our sites, so we use a
Speaker 3: combination of quantitative tools and more qualitative insights. And how
Speaker 3: does it work. It's probably in two steps as regards views,
Speaker 3: So we've got strategic views that we discuss on a
Speaker 3: quarterly basis across all chesb SS capabilities, so equity is
Speaker 3: fixed income, multi asset and these strategic views are largely
Speaker 3: based on macroeconomic insights analysis and at the same time
Speaker 3: capital market assumption which is the new name for long
Speaker 3: term expected returns which can derive from proprietary models. We
Speaker 3: have also some tactical views short term investment horizon, which
Speaker 3: rely a lot on quantitative signals, so momentum signals, risk signals,
Speaker 3: carry signals in order to take into account other factors.
Speaker 3: Because what is very key also is to realize that
Speaker 3: markets are not only driven by one dimension one seam
Speaker 3: at given time, so it's very important to take into
Speaker 3: a different perspectives. Last, but not least, when we have views,
Speaker 3: you need to build portfolios, So how can you build
Speaker 3: portfolios in a consistent way? Here we use some quantitative
Speaker 3: tools of proprietory risk optimization techniques or risk budgeting techniques.
Speaker 3: In a nutshare we try to get the best of
Speaker 3: both words quantitative insights rigor but also qualitative insights. And
Speaker 3: particularly when we discuss our strategic views.
Speaker 2: JC, there's been a lot of criticisms of the traditional
Speaker 2: sixty forty asset allocation model. Equities and bond prices seem
Speaker 2: to be correlated, especially towards the end of last year,
Speaker 2: with hearing all these hype of alternative assets. What's your
Speaker 2: view is the sixty to forty model dead.
Speaker 3: This is very important and a key question for multi
Speaker 3: asset port through managers. I would say that, unfortunately, the
Speaker 3: natural tendencies to go from one extreme to the other one.
Speaker 3: So yeah, the sixty forty was the best model, and
Speaker 3: now it's completely crapped and we should do something else.
Speaker 3: I have a more nuanced view, So what do I
Speaker 3: mean by that? I would say that first, sixty forty
Speaker 3: has never been an ideal for us. Once again, from
Speaker 3: our perspective, complementing a sixty to forty portfolio by taking
Speaker 3: exposure to commodities on a structural basis or to liquid alternative. Also,
Speaker 3: if something which is making sense from a structural perspective,
Speaker 3: particularly commodities, they have low correlation to traditional set classes,
Speaker 3: so they on good edges in portfolios. So that's for
Speaker 3: the first common Strategically speaking, we believe that sixty to
Speaker 3: forty probably on a strategic basis, it's even better to
Speaker 3: have let's say fifty forty and ten with STEN allocated
Speaker 3: to altern liquid alts and particular commodities. Now, I will
Speaker 3: not be so pessimistic about the sixty to forty in
Speaker 3: the short to medium term and y because the negative
Speaker 3: comments about sixty forty portfolio were largely related to what
Speaker 3: happened in not necessarily in last year, but probably more
Speaker 3: the year before in twenty twenty two, when we saw
Speaker 3: both asset classes bonds and equities falling at the same time,
Speaker 3: they were having very strongly negative returns, so very strongly
Speaker 3: positive coalation between both, and this is usually the case,
Speaker 3: of course when you have some spikes and inflation. Now
Speaker 3: our view and this is what we have also seen.
Speaker 3: If you look at bond and stock correlation more recently,
Speaker 3: we can still remain positive, but it is more coming
Speaker 3: back actually to zero, so low coalation or even no
Speaker 3: coalation between bond and equities, which from our perspective is
Speaker 3: what we should expect now if we are reassured, which
Speaker 3: is our case, about the fact that inflation rates or
Speaker 3: you know, coming closer and closer to central advanced targets.
Speaker 3: To summarize in a share over the short to medium term,
Speaker 3: we believe that the coalation between bonds and equities is
Speaker 3: going to be less positive that we have seen before.
Speaker 3: In this case, it's positive for sixty forty portfolio, but
Speaker 3: at the same time we also believe that we can
Speaker 3: do better than structure is and a classic sixty forty
Speaker 3: by taking exposure to alternatives, particular commodities, liquid alts. If
Speaker 3: you're considering alternatives like private assets. So here it's a
Speaker 3: bit different because you have the liquidity question which has
Speaker 3: to be taken into consideration, particularly for retail investors, but
Speaker 3: definitely liquid the alternative, yes, and particular communities, they make sense.
Speaker 3: They have their room in a classic allocation for sure.
Speaker 1: Yes, jac wanted to ask you about how to think
Speaker 1: about event risk in the context of the elections this
Speaker 1: year for many of the world's leading democracies. The United
Speaker 1: States gets its turn in November with a rematch between
Speaker 1: Donald Trump and Joe Biden. How should investors think about
Speaker 1: the outcome of that election in November in terms of
Speaker 1: the global business outlook and any other risks associated with that.
Speaker 3: I would say that in both cases, whatever the outcome
Speaker 3: of the election, which is not easy to focus, to
Speaker 3: say it softly, we believe that as regards pecular global
Speaker 3: trade policy or they should necessarily no big changes, meaning
Speaker 3: that in both cases, for the US, there is still
Speaker 3: a tendency to favor resharing or unsharings not necessary, but
Speaker 3: big consequences because it's very of course difficult to focus selection.
Speaker 3: Once again, our recommendation would be on our side to
Speaker 3: consider that there are good safe heaven assets to protect
Speaker 3: ourselves against volatility. That's probably the door. So we believe
Speaker 3: that having some exposure to the Dora is a good
Speaker 3: hatch against this type of geopolitical risk. And at the
Speaker 3: same time also options still a bit puzzled to see
Speaker 3: that if you look at the implied volatility for S
Speaker 3: and P options even put options out of the money,
Speaker 3: if you look at their prices around the action in
Speaker 3: October November, the price is still remain quite clow. So
Speaker 3: for us, this is relatively cheap ways to hatch or
Speaker 3: put forlio against political risk heaven risk, and this is
Speaker 3: what we would recommend.
Speaker 1: Our guest has been Jean Schallbert, Global Chief Investment Officer
Speaker 1: of Multi Assets at HSBC Asset Management. He's been with
Speaker 1: us from Paris. Jean Schale. It's been an amazing conversation,
Speaker 1: wide ranging, covering the world and politics and opportunity and risk.
Speaker 1: It's been a pleasure speaking with you and we've enjoyed
Speaker 1: having you on Asia centric to depression. I'm Tom Corbett
Speaker 1: in Hong Kong
Speaker 2: And I'm John Lee This podcast was produced by Clara
Speaker 2: Chin and you've been listening to the Asia Centric podcast