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Speaker 1: Good morning, and welcome to the Bloomberg day Break Asia podcast.

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Speaker 1: I'm Doug Prisner. Here are the stories we're following today.

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Speaker 1: Joining us now is Jim Karen. He is the CIO

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Speaker 1: of Cross Asset Solutions at Morgan Stanley Investment Management. Jim

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Speaker 1: joining us here from New York City. Thanks for taking

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Speaker 1: the time to chat with us. Can we start with

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Speaker 1: the Fed, because today, if you look at the FED speak,

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Speaker 1: it seems like policymakers are really preparing the market for

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Speaker 1: a slower rate of easing. Is that a fair statement?

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Speaker 2: I would say that's a fair statement.

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Speaker 3: I mean, look, the data has come in, if we

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Speaker 3: look at retail sales, if we look at the CPI

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Speaker 3: data that has come out. I mean, the FED says

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Speaker 3: that they don't look at the equity markets, but the

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Speaker 3: equity markets have been doing very well also. But when

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Speaker 3: you put it all together, what we have to understand

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Speaker 3: is that the FED does want to cut interest rates,

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Speaker 3: but they want to cut interest rates on the condition

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Speaker 3: that inflation stays anchored around target levels, or is at

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Speaker 3: least making progress to target levels well and will remain

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Speaker 3: anchored there if that doesn't occur, If they believe that

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Speaker 3: there is some threat to inflation starting to rise and

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Speaker 3: move higher or just not go down or not continue

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Speaker 3: to make progress lower. Then I think that they're likely

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Speaker 3: to think about walking back some of the pace at

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Speaker 3: which they may want to cut rates. But make no mistake,

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Speaker 3: they are cutting rates. They're going to cut interest rates.

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Speaker 3: It's just a question of how much and how fast.

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Speaker 1: So you alluded to the equity market. We're just off

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Speaker 1: record highs right now. Do you think financial conditions generally speaking,

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Speaker 1: are a little too easy for the FED right now?

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Speaker 3: So yeah, I would say the answer, the basic answer

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Speaker 3: to that is yes. So when we think about financial conditions,

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Speaker 3: I think it's important that we define what that is.

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Speaker 3: And it's really it's an index. It's a measurement of

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Speaker 3: five things. Short term interest rates, intermediate term interest rates,

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Speaker 3: the value of the equity market, the trade weighted value

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Speaker 3: of the dollar, and also credit spreads, triple B credit spreads.

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Speaker 3: So if we look at credit spreads right now, credit

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Speaker 3: spreads are very tight. I mean, yields are still you know,

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Speaker 3: I know they've come up recently, but they're still relatively low.

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Speaker 3: But spreads are still extremely tight right now. If we

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Speaker 3: look at the equity market, equity markets very strong. Bond yields,

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Speaker 3: like I said, have come up, but they're still relatively low.

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Speaker 3: So putting that all together, I would say that the

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Speaker 3: financial conditions are somewhat easy right now. I wouldn't say

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Speaker 3: that they're overly tight, and they may be too easy

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Speaker 3: to continue to push inflation lower sustainably and durably to

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Speaker 3: keep it around target levels. So when the FED looks

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Speaker 3: at the equity markets, it's not just the equity market

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Speaker 3: that they're looking at. They're looking at it across a

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Speaker 3: blend of different things that we call financial conditions, and

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Speaker 3: I think that their assessment is that, well, you know, look,

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Speaker 3: inflation is making progress lower and it's okay for right now,

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Speaker 3: but they don't want to push it too far, get

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Speaker 3: too easy, and stoke those inflation fears.

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Speaker 1: Again, it's very interesting to see the price action in

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Speaker 1: the bond market today and the spike and yield right

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Speaker 1: across the curve, more so at the long end, and

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Speaker 1: I'm wondering whether or not the market is beginning to

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Speaker 1: understand the risk the potential for inflation maybe to drift

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Speaker 1: up a little bit that the Fed doesn't yet have

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Speaker 1: a firm, firm hand on controlling price action.

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Speaker 3: Yeah, so when we look at this, we typically measure

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Speaker 3: the yield curve, and the yield curve has been steepening

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Speaker 3: as of recently. And I would argue that a steep

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Speaker 3: yel curve is really just the normal state of affairs.

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Speaker 3: It's a question of how steep though. So the measurement

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Speaker 3: that I want to look at, which is typically what

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Speaker 3: the Fed looks at, is a difference between the FED

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Speaker 3: funds policy rate and the ten year treasure yield. Now

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Speaker 3: that's on average is usually around plus seventy five basis points.

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Speaker 3: Currently at this point it's still it's still inverted, and

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Speaker 3: it's inverted quite substantially. If we think of FED policy

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Speaker 3: rates around the four seventy five to five percent level

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Speaker 3: and the ten yere treasury at about four point two percent,

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Speaker 3: you know, the curve is still reasonably inverted at the moment.

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Speaker 3: So if the Fed cuts interest rates, let's say their

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Speaker 3: terminal policy rate, gets them all the way down to

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Speaker 3: say four percent or three point seven five percent. Now

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Speaker 3: I know the markets saying that they do more, but

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Speaker 3: let's just say that they go to three point seventy

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Speaker 3: five to four. The question is, then, is what is

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Speaker 3: the spread between that FED funds rate and the tenure treasury.

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Speaker 3: Let's say it's positive fifty basis points, and that would

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Speaker 3: put the ten year treasury around four and a half percent,

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Speaker 3: with a FED policy rate at about four percent or

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Speaker 3: even three point seventy five percent. So that's the dynamic

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Speaker 3: that's being played here. The FED can control front end rates,

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Speaker 3: but they can hand control back end rates. Backend rates

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Speaker 3: can stay stubbornly high while the FED controls those front

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Speaker 3: end rates and drives them lower.

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Speaker 1: So in your view, everything that you're kind of laying

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Speaker 1: out there in terms of interest rates, what does that

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Speaker 1: mean for the equity market?

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Speaker 3: So when we think about this, I'm going to really

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Speaker 3: start with valuations, right, So, when we think about valuations,

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Speaker 3: valuations are effectively think of it as almost a measurement

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Speaker 3: of a discounted cash flow. So it's like the present

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Speaker 3: value of future cash flows. And the valuation typically comes

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Speaker 3: in as in the form of a multiple. And the

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Speaker 3: multiple right now inequities is somewhere around a twenty two pe. Now,

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Speaker 3: historically that's kind of high, but we also have to

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Speaker 3: recognize that if interest rates are relatively low or expected

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Speaker 3: to go lower, then those valuations, those multiples tend to be,

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Speaker 3: you know, tend to be a bit higher. So if

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Speaker 3: we take that set that aside for one second, you know,

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Speaker 3: that multiple valuation, then we look at earnings.

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Speaker 2: What's earnings. Earnings is people's opinions.

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Speaker 3: It's what their forecasts are, it's what their views are

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Speaker 3: for what they think the SMP five hundred collectively will

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Speaker 3: have in earnings.

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Speaker 2: Right now, that.

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Speaker 3: Consensus for twenty twenty five full year earnings is around

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Speaker 3: two hundred and eighty dollars. So the question for us is,

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Speaker 3: if we assign today's multiple at twenty two, and we

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Speaker 3: multiply at times at two hundred and eighty dollars earning,

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Speaker 3: you're going to get an SMP valuation of somewhere around

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Speaker 3: sixty one sixty, which is, you know, higher than where

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Speaker 3: we are today. But if those earnings settle back down,

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Speaker 3: if they go down a little bit, meaning if interest

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Speaker 3: rates go up and those valuations come down, so you

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Speaker 3: go from a twenty two pe multiple to a twenty,

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Speaker 3: then you're looking at you know, still with the two

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Speaker 3: hundred and eighty dollars earnings estimate. Now you're looking at

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Speaker 3: an SMP five hundred that could go to fifty six hundred,

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Speaker 3: which is below where we are by you know, by

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Speaker 3: by by a few percentage points. So the market's debating

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Speaker 3: this higher interests will depress some of these multiples lower,

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Speaker 3: whereas lower interest rates help boost those earnings and sorry

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Speaker 3: help boost the valuations in terms of the PE multiple.

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Speaker 3: So what I would say is that together the market

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Speaker 3: is expecting the FED to cut rates, and some of

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Speaker 3: that is supporting today's current twenty two PE multiple. But

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Speaker 3: if the Fed doesn't deliver on those rate cuts, it's

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Speaker 3: not going to be good for the equity markets because

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Speaker 3: that PE multiple will start to come down, Valuations will

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Speaker 3: come down.

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Speaker 1: Step back from the equity market. Look at the overall economy.

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Speaker 1: Could we see a resurgence in growth? And if that's

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Speaker 1: the case, do I want to be more exposed, let's say,

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Speaker 1: to small cap stocks rather than some of the large

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Speaker 1: multinational names.

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Speaker 2: Absolutely.

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Speaker 3: Look so, if we get a resurgency growth, so we

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Speaker 3: get a cyclical recovery.

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Speaker 2: If that happens, typically, what that.

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Speaker 3: Means is that the market broadens out, so we start

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Speaker 3: to move into these broader sectors of the marketplace, small caps.

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Speaker 3: In that environment, if you get growth, if you get

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Speaker 3: broad growth would actually do most likely would do very well.

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Speaker 4: Now.

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Speaker 3: The question though, is if we get that growth. What

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Speaker 3: most people are thinking about right now is we're getting

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Speaker 3: a slowdown, right, So why would the FED be cutting rates?

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Speaker 3: They if we're expecting a lot of growth, right, they

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Speaker 3: wouldn't be. So they're cutting rates because they expect there

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Speaker 3: to be a growth slow down. And I think that's

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Speaker 3: what most people believe, and that's the soft landing, that's

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Speaker 3: the narrative today. But if that narrative changes and it

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Speaker 3: changes into a growth story, then the Fed's going to

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Speaker 3: stop cutting interest rates. And if you get that growth,

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Speaker 3: then I think the markets could broaden out and small

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Speaker 3: caps could do well. So small caps doing well, it's

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Speaker 3: conditional upon that view.

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Speaker 1: So we've talked about the macro. Give me your perspective

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Speaker 1: on the industry groups that you expect to outperform at

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Speaker 1: this stage or the cycle.

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Speaker 3: So, you know, typically speaking, I mean, you know, we

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Speaker 3: know what has been doing well, right, So we know

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Speaker 3: utilities obviously has done very well. Maybe that's sort of

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Speaker 3: wrapped up into the AI story. So technology has been

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Speaker 3: doing well. Industrials also, But you know what, I you

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Speaker 3: know where I think the future lies is. I'm more

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Speaker 3: interested in some of the lagging sectors in the marketplace,

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Speaker 3: and that's going to be materials. So look, if the

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Speaker 3: US is on shoring, if that's the big move for

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Speaker 3: the US, that's the Chips Act, that's the IRA Act

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Speaker 3: where deglobalization. I think materials can actually do reasonably well.

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Speaker 3: Other areas like, for example, healthcare. Healthcare is another segment

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Speaker 3: of the economy. Now clearly it's political, so you know,

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Speaker 3: it depends who's in office and what the policies are.

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Speaker 3: So that's why it's going to trade it a little

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Speaker 3: bit of a discount to maybe where it could. But

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Speaker 3: I think once that gets settled, I think ultimately healthcare

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Speaker 3: sectors start to do you know, can start to do well.

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Speaker 3: Consumer staples. Those are other areas too that I would

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Speaker 3: argue that have been lagging behind a bit that could

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Speaker 3: actually do you know, re well going forward, particularly if

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Speaker 3: the market broadens out, and that's really what we're looking for.

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Speaker 1: So I hear what you're saying when it comes to reshoring.

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Speaker 1: You mentioned the Chips Act. I'm wondering whether or not

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Speaker 1: it's more prudent to be exposed to a market like

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Speaker 1: let's say Mexico rather than the US following with this

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Speaker 1: near shoring theme.

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Speaker 3: So I would say absolutely, yes, in the long term,

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Speaker 3: it's going to depend on who is in the White

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Speaker 3: House and what policies are. But I think the broad

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Speaker 3: story is, you know, absolutely, I mean, Mexico in many

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Speaker 3: ways could be you know, the US is China, right.

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Speaker 3: You do a lot of manufacturing in Mexico and import,

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Speaker 3: but you know, clearly there's got to be a lot

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Speaker 3: of trade agreements that get made in order for that

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Speaker 3: to happen very effectively. So Mexico's just gone through their

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Speaker 3: own round of elections and you know there's been some

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Speaker 3: volatility there. But yeah, I would say that as a broad,

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Speaker 3: longer term theme, I think that's correct. But right now

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Speaker 3: we are not overly invested in Mexico only because we

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Speaker 3: want to see how US policy gets established, because Mexico

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Speaker 3: could be subject to some pretty big swings. So it's

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Speaker 3: a good idea. I just need a bit more information, all.

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Speaker 1: Right, Jim, we'll leave it there. Thank you so much

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Speaker 1: for making time to chat with us. Jim Karen is

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Speaker 1: the CIO of Cross Assets Solutions at Morgan Stanley Investment Management,

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Speaker 1: joining us here from New York. Joining us now is

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Speaker 1: Peter Maguire. He is the CEO of XM Australia. On

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Speaker 1: the line from Sydney, Peter, it's always a pleasure to

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Speaker 1: have a chance to chat with you. I'd like to

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Speaker 1: begin with the FED, because we had a couple of

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Speaker 1: FED speakers today preparing the market for what may be

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Speaker 1: a slower pace of rate cuts in the coming quarters.

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Speaker 1: Is this going to change your thinking in terms of

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Speaker 1: the dollars behavior?

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Speaker 4: Good morning, Doug. It could well do.

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Speaker 5: I mean we're at nearly that US dollar index sitting

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Speaker 5: at one o four. It's had a very strong rally

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Speaker 5: over the last couple of weeks, being bit up and

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Speaker 5: you know, naturally sell off. As far as all the

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Speaker 5: other currencies, uro Yen, they're coming under pressure. So I

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Speaker 5: wouldn't be that I wouldn't be surprised for that to

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Speaker 5: happen in the sense of delayed or pushing them out.

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Speaker 5: There's still a mixed view on the street as far

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Speaker 5: as retail trade. A sum are saying there's a a

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Speaker 5: portion the same we've got no cut at all in November,

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Speaker 5: and you know a big percentage naturally are saying twenty

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Speaker 5: five basis points so the juries out, we've just got

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Speaker 5: to see how it drops.

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Speaker 1: On the seventh, I want to talk about the Aussie

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Speaker 1: dollar as it relates to China. A lot of the

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Speaker 1: stimulus measures that we have seen come out of Beijing recently.

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Speaker 1: But terms of the greenback right now, are you favoring it?

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Speaker 1: If you had to go long a currency right now,

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Speaker 1: would it be the US dollar?

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Speaker 4: Well, you've got to be.

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Speaker 5: I mean, over the last couple of weeks it's been

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Speaker 5: enormous because you've had a really strong bush ups from

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Speaker 5: those September where we had the Assy sitting you know,

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Speaker 5: sixty eight and a half, it's now sixty six and

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Speaker 5: a half been sold off heavily. You've got Euro sitting

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Speaker 5: one o eight fifteen, so it's more pressure there to

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Speaker 5: the downside. I wouldn't be surprised if another rate cut

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Speaker 5: for the euro. So there's the general consensus is US

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Speaker 5: dollar up and maybe even take a one.

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Speaker 4: Oh four fifty out. It's just been strongly bit up.

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Speaker 5: And you can't from a currency trading perspective, Doug, you

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Speaker 5: can't take your eye or focus off that because it

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Speaker 5: just seems to have momentum at the moment.

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Speaker 1: How are you feeling about the Aussie given a lot

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Speaker 1: of the stimulus that has come out of China.

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Speaker 4: Well, look, I would have.

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Speaker 5: Thought that maybe we may have touched possibly a sixty nine,

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Speaker 5: but it's been pushed all the way back, and you know,

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Speaker 5: we are a bit of a proxy trade for China.

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Speaker 5: We're all understanding what the situation is. And you know, naturally,

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Speaker 5: the PREBOC cutting rates yesterday, they have been widely expected.

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Speaker 5: So you know, it's just it's a choppy one. It's volatile.

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Speaker 5: If you want to ride a wild bronco ozzie. US

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Speaker 5: dollar is the trade. It's like writing that gas.

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Speaker 1: Are you tending to stay away from commodity currencies right now?

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Speaker 2: A little bit?

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Speaker 4: You've got to look at the Canadian dollar.

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Speaker 5: It's full and two point six percents from that September

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Speaker 5: high where he's been crushed. So look, if we've still

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Speaker 5: got a big appetite for them from our retail base, dog,

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Speaker 5: I mean, they trade it twenty four hours a day

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Speaker 5: and they like the volatility. But if you've just got

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Speaker 5: to be very mindful of it from a risk perspective,

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Speaker 5: because it is incredibly volatile. But that doesn't naturally, and

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Speaker 5: that doesn't necessarily shy traders away from the opportunity because

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Speaker 5: many traders, as you know, of their risk management processes,

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Speaker 5: they lock them in and they just yeah, they trade

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Speaker 5: the technicals.

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Speaker 1: Next week we have a rate decision from the BOG.

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Speaker 1: There seems to have been a little bit of a

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Speaker 1: policy pivot right now. Perhaps the BOJ is slow walking

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Speaker 1: the next rate hike. How are you feeling about what

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Speaker 1: the BOJ may deliver.

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Speaker 4: I'm thinking that they won't do it.

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Speaker 5: We won't see a ray fike, and it's just, you know,

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Speaker 5: they might again push it out.

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Speaker 4: You've got that yen.

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Speaker 5: There has been you know, one nearly one fifty one,

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Speaker 5: so it's been incredibly volatile. We've got a very strong

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Speaker 5: stock market. Then the nick guy has performed extremely well

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Speaker 5: over the last twelve the way months. Everyone knows that.

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Speaker 5: So it's a market you couldn't be with, you know,

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Speaker 5: not being involved in. I think that, Yeah, the situation

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Speaker 5: in Japan is just it'll be a push out and

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Speaker 5: we're not expecting anything dramatic to happen, but it's full

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Speaker 5: of surprises and I'm not going to say that it

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Speaker 5: won't happen, But at the moment, I'm more in the

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Speaker 5: camp that it won't happen than will happen.

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Speaker 1: So even though the boj is signaling it may push

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Speaker 1: out a raid hike, do we have to be worried

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Speaker 1: about maybe a little bit of intervention from the Ministry

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Speaker 1: of Finance when you're talking about a yen that's flirting

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Speaker 1: with one fifty one.

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Speaker 4: Yeah, I think so.

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Speaker 5: I mean, you know, it's been it's always on the

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Speaker 5: back of everyone's mind. If it was to tick higher,

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Speaker 5: then naturally, you know, if you get that one fifty five,

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Speaker 5: you could see some form of intervention. And you can't

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Speaker 5: rule that out because it was only a couple of

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Speaker 5: weeks back, or was it running at that forty three

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Speaker 5: one forty four. So it's again an incredibly volatile trade

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Speaker 5: yen dollar, and I wouldn't be surprised that you see it,

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Speaker 5: you know, edge up even higher from here, maybe a

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Speaker 5: one fifty three hand or Doug, you might see even

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Speaker 5: see a one fifty four. But it's just it's got

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Speaker 5: momentum at the moment, and you can't stand in the

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Speaker 5: road of it because it'll run you over.

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Speaker 1: Let's take a step back, because one of the things

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Speaker 1: we have yet to discuss is how the presidential election

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Speaker 1: here in the US may kind of interfere with the

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Speaker 1: behavior of the foreign exchange. Is that likely? Could we

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Speaker 1: see a little bit of a pick up in volatility

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Speaker 1: as we get closer to the election, and maybe on

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Speaker 1: the other side of it, I.

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Speaker 4: Would think so.

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Speaker 5: First off, yes, so that I think the volatility will

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Speaker 5: pick up, and we're only two weeks out, so that

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Speaker 5: is a I think that's how it'll play. And then

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Speaker 5: after the election, yes, I won't be surprised. I mean,

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Speaker 5: I'm very conscious as far as the meeting on this week,

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Speaker 5: the IMF and World Bank meeting in Washington, d C.

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Speaker 5: And the commentary coming from m D george Eva. You know,

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Speaker 5: there's I think we're going to see some some major

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Speaker 5: themes play out from a debt level, and that's what

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Speaker 5: she's really focused on. And that will happen, I feel

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Speaker 5: in the in the second half of this quarter. So

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Speaker 5: it's going to be a dynamic quarter. And yeah, strap

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Speaker 5: yourself in. There could be more volatility.

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Speaker 1: You mentioned the euro a short while ago. We're treading

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Speaker 1: a bucket against the greenback. A lot of weakness economically

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Speaker 1: speaking on the continent. I mean, is this something that

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Speaker 1: will persist into next year.

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Speaker 5: Yeah, I look at Germany and I'm very conscious of

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Speaker 5: the big picture. I mean, they're manufacturing struggling, you know,

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Speaker 5: and even weak demand in China from you know, for

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Speaker 5: their finished goods. So for it to stay competitive, it's

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Speaker 5: going to be a tough hard ask. I'm conscious as

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Speaker 5: far as the political turmoil in France and the uncertainty

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Speaker 5: for business. So these are themes that will naturally impact

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Speaker 5: ECP decision. We've had three rate cuts totaling seventy five

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Speaker 5: basis points more easy naturally must be on the way,

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Speaker 5: and you've got septembers pmis. Were that so bad, you know,

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Speaker 5: prompted an about term by the ECB. So with these

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Speaker 5: flash pmis this week, Doug, I think that, you know,

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Speaker 5: we've just got to see how it all falls.

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Speaker 1: So we've talked over the next month, sorry, Peter. We've

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Speaker 1: talked a little bit about the macro, We've talked about

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Speaker 1: the presidential election, We've talked about the FED and the BOG.

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Speaker 1: I'm wondering whether geopolitics enters you're thinking these days, and

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Speaker 1: you whether or not you see it as being a

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Speaker 1: driver of any of the movement in the foreign exchange.

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Speaker 5: Absolutely, I'm conscious as far as Taiwan, Straight, Ukraine, Russia,

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Speaker 5: Middle East. So these are major themes, and I feel

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Speaker 5: as though that they're gaining momentum, which in turn could

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Speaker 5: manifest pre election. So there's something from a trading perspective, Doug.

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Speaker 5: We're very focused on soaring government, that's the other side.

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Speaker 5: But when you look at the geopolitical tensions, yeah, you know,

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Speaker 5: and there will be a safety to king dollar. You've

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Speaker 5: seen that big run up as far as bullion price

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Speaker 5: and silver, So we're conscious as far as you know,

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Speaker 5: a change of sentiment from this time last year, as

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Speaker 5: far as precious metals, and yeah, I feel as though

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Speaker 5: that those geopolitical stresses are very, very major themes.

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Speaker 1: So the bull trend in gold continues.

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Speaker 4: Well. Twenty seven forty wow, I mean, no one. I

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Speaker 4: don't think anyone.

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Speaker 5: You know, there were bullish analysts that said we'll see

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Speaker 5: twenty seven hundred in the fourth quarter. I have and said,

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Speaker 5: you know, you'll see twenty five hundred this year earlier

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Speaker 5: in the year. But I've been even amazed with the

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Speaker 5: velocity of it that's been unheralded. And yeah, I again

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Speaker 5: won't be surprised if you tell me it's twenty nine

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Speaker 5: to fifty by Christmas. I go, okay, yeah, I won't

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Speaker 5: be surprised at all. And so I just think it's

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Speaker 5: got uplifted moment.

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Speaker 1: I'm wondering if it's flashing a warning signal of any

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Speaker 1: type that there may be a pocket in the market

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Speaker 1: that really comes in or under a lot of stress,

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Speaker 1: and gold may be sending that signal already.

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Speaker 4: You bet you.

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Speaker 5: I think that that's the case. I mean, you know,

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Speaker 5: the market that's up over forty percent in a year.

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Speaker 5: I mean, it's just mind blowing. It's it's beaten the

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Speaker 5: s and p it's something and it's global. I mean,

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Speaker 5: you know you're looking at retail investors across India or

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Speaker 5: across Asia. You know, the likes of cross Goo selling

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Speaker 5: physical You've got Australians buying retail, public are buying ingots

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Speaker 5: and gold and silver. So the appetite is there and

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Speaker 5: that seems to be a collective across pretty much the world.

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Speaker 4: Done.

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Speaker 1: Peter, thanks so much for taking the time to chat

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Speaker 1: with us. It's always a pleasure. Peter maguire is the

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Speaker 1: CEO of XM Australia, joining us from Sydney on the

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Speaker 1: Daybreak Asia podcast. This is Bloomberg Daybreak Asia. You're a

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Speaker 1: to Singapore and While. Look for us on your podcast

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