1 00:00:00,080 --> 00:00:02,040 Speaker 1: Let's get to our guess. Joy in the Singapore studio 2 00:00:02,080 --> 00:00:06,479 Speaker 1: is Jim Leave, us public fixed income CEO at MERG Investments. 3 00:00:06,640 --> 00:00:08,720 Speaker 1: So Jim a lot to digest in terms of what 4 00:00:08,760 --> 00:00:11,800 Speaker 1: we heard from j Pale and certainly some commentary out 5 00:00:11,840 --> 00:00:14,440 Speaker 1: there saying I don't think that this hawk has suddenly 6 00:00:14,480 --> 00:00:17,040 Speaker 1: become a dove. But when we look at what's flashing 7 00:00:17,160 --> 00:00:19,920 Speaker 1: in the bond market, what sort of a downturn are 8 00:00:19,920 --> 00:00:24,800 Speaker 1: you expecting? Well, the at the Brookings Institute last night 9 00:00:24,960 --> 00:00:28,400 Speaker 1: it was obviously something that please bond markets a lot, 10 00:00:28,600 --> 00:00:33,520 Speaker 1: despite remaining quite hawkish in many areas. So I think 11 00:00:33,520 --> 00:00:37,080 Speaker 1: that things that people look for, We're talk about the 12 00:00:37,120 --> 00:00:40,760 Speaker 1: core goods prices coming down, looking forward to next year, 13 00:00:40,760 --> 00:00:44,120 Speaker 1: and seeing rents and other service sector measures of inflation 14 00:00:44,200 --> 00:00:47,040 Speaker 1: coming down, and that allowed them to look through what 15 00:00:47,240 --> 00:00:49,600 Speaker 1: I thought was some fairly hawk ish messages from the 16 00:00:49,640 --> 00:00:55,080 Speaker 1: speech as well, talking about history, warning against preemptively loosening 17 00:00:55,080 --> 00:00:57,680 Speaker 1: monetary policy and saying that rates are going to be 18 00:00:57,680 --> 00:01:00,160 Speaker 1: restricted for some time. So it was a mixed bag, 19 00:01:00,400 --> 00:01:04,320 Speaker 1: but bond markets really like the kind of forward looking view. Yeah, 20 00:01:04,319 --> 00:01:06,320 Speaker 1: but it's exactly the opposite, I think, or whether the 21 00:01:06,400 --> 00:01:08,520 Speaker 1: third would like to see you have a loosening, a 22 00:01:08,640 --> 00:01:12,320 Speaker 1: dramatic loosening, and financial conditions with higher starks, lower yields, 23 00:01:12,319 --> 00:01:15,280 Speaker 1: and a much weaker dollar. Let's tease out the dollar weakness. 24 00:01:15,280 --> 00:01:17,520 Speaker 1: What does that do to your thinking when when you 25 00:01:17,600 --> 00:01:21,640 Speaker 1: look at fixed income across the APACK region. Yeah, I mean, 26 00:01:21,680 --> 00:01:23,960 Speaker 1: I think it's going to be good news for UM 27 00:01:24,400 --> 00:01:28,880 Speaker 1: currencies across the region really and for growth across the region. 28 00:01:29,120 --> 00:01:31,640 Speaker 1: The strong dollar that we've seen that's been a massive 29 00:01:31,920 --> 00:01:34,959 Speaker 1: secular trend for a couple of years now appears to 30 00:01:35,000 --> 00:01:39,120 Speaker 1: be drawing to a close. And that's because expectations of 31 00:01:39,160 --> 00:01:44,440 Speaker 1: the interest rate differentials between this region and the US 32 00:01:44,640 --> 00:01:47,400 Speaker 1: are likely to not be diverging in the way that 33 00:01:47,440 --> 00:01:50,920 Speaker 1: they had done. And so I think we'll see currencies 34 00:01:51,200 --> 00:01:54,559 Speaker 1: in a pack start to appreciate against the US dollar 35 00:01:55,000 --> 00:01:58,880 Speaker 1: and namingly maybe the yen. You're talking there about policy divergence. 36 00:01:58,880 --> 00:02:00,600 Speaker 1: You can't get much further for that. The Bank of 37 00:02:00,680 --> 00:02:04,320 Speaker 1: Japan and End the fit, Yeah, exactly. That's been the big, 38 00:02:04,720 --> 00:02:07,160 Speaker 1: the big under performance in currency terms. The end has 39 00:02:07,160 --> 00:02:10,000 Speaker 1: been pretty much the worst performer against the US dollar 40 00:02:10,120 --> 00:02:14,680 Speaker 1: over that period of dollar strength. It's left itself fundamentally 41 00:02:14,880 --> 00:02:17,880 Speaker 1: extremely cheap. So if you look at many measures of 42 00:02:18,240 --> 00:02:21,760 Speaker 1: currency valuation, whether it's your big MAC index or real 43 00:02:21,800 --> 00:02:26,080 Speaker 1: effective exchange rates, the end is probably around twenty cheap 44 00:02:26,200 --> 00:02:29,400 Speaker 1: to the US dollar. So suddenly if you get these 45 00:02:29,480 --> 00:02:34,480 Speaker 1: expectations that rate differentials are not going to widen any further, 46 00:02:34,560 --> 00:02:36,840 Speaker 1: and the FED might even be cutting by the end 47 00:02:36,880 --> 00:02:40,520 Speaker 1: of three. That's really why we've seen such a strong 48 00:02:40,560 --> 00:02:42,919 Speaker 1: reaction from the END over the past month or so, 49 00:02:43,320 --> 00:02:45,520 Speaker 1: and so the ends probably up around eight percent or 50 00:02:45,560 --> 00:02:48,240 Speaker 1: something against the U S Dollar from those lows, and 51 00:02:48,280 --> 00:02:52,320 Speaker 1: it could potentially go stronger still very quickly. Jim twenty 52 00:02:52,360 --> 00:02:56,440 Speaker 1: seconds or so, we'll elaborate on the fact that we're 53 00:02:56,480 --> 00:02:59,880 Speaker 1: seeing much weaker growth globally. Are you concerned about the 54 00:03:00,080 --> 00:03:04,320 Speaker 1: high yield space when it comes to credit markets um, 55 00:03:04,400 --> 00:03:06,520 Speaker 1: they offer value at the moment, So spreads are still 56 00:03:06,560 --> 00:03:09,519 Speaker 1: four hundred and fifty or five hundred in European high 57 00:03:09,560 --> 00:03:13,040 Speaker 1: yield UM, so you know you've got value there. But 58 00:03:13,160 --> 00:03:16,960 Speaker 1: defaults will go up in three and twenty four, so 59 00:03:17,320 --> 00:03:19,440 Speaker 1: maybe towards the end of next year it spreads wide 60 00:03:19,440 --> 00:03:22,840 Speaker 1: and again, so we're talking about the economic downtterm. We 61 00:03:22,880 --> 00:03:26,840 Speaker 1: are expecting in three and what the economy actually looks 62 00:03:26,840 --> 00:03:29,640 Speaker 1: like the global economy, is it something that's going to 63 00:03:29,680 --> 00:03:31,800 Speaker 1: be potentially on par we thought we saw in two 64 00:03:31,800 --> 00:03:34,680 Speaker 1: thousand and nine. I doubt it will be that bad. 65 00:03:35,200 --> 00:03:37,280 Speaker 1: We hope it won't be that bad. But I think 66 00:03:37,360 --> 00:03:40,200 Speaker 1: that in certain areas, the UK in particular, where there 67 00:03:40,240 --> 00:03:44,680 Speaker 1: are strong um links with housing markets, and as rates 68 00:03:44,680 --> 00:03:48,040 Speaker 1: have gone up, mortgage payments have gone up dramatically. So 69 00:03:48,120 --> 00:03:51,000 Speaker 1: we will see areas of Europe as well be hit 70 00:03:51,040 --> 00:03:54,160 Speaker 1: by the natural gas prices. And so I think everyone 71 00:03:54,320 --> 00:03:56,120 Speaker 1: would expect that next year is going to be a 72 00:03:56,160 --> 00:03:58,440 Speaker 1: week year for growth, But I don't think we have 73 00:03:58,560 --> 00:04:02,000 Speaker 1: those systemic issues with housing markets that we had back 74 00:04:02,000 --> 00:04:05,120 Speaker 1: in the global financial crisis. And of course, if the 75 00:04:05,200 --> 00:04:08,760 Speaker 1: news that we're here today around COVID in China continues 76 00:04:08,840 --> 00:04:11,640 Speaker 1: to improve, then that will be an upside surprise for 77 00:04:11,680 --> 00:04:15,400 Speaker 1: global growth in three. But when you look at credit markets, 78 00:04:15,440 --> 00:04:18,880 Speaker 1: the property market story in China has been a definite 79 00:04:18,920 --> 00:04:21,640 Speaker 1: source spot. Are you seeing signs that the government is 80 00:04:21,680 --> 00:04:24,360 Speaker 1: attagging this in a way to give the market a 81 00:04:24,440 --> 00:04:26,880 Speaker 1: little bit of breathing room, some relief when it comes 82 00:04:26,920 --> 00:04:31,040 Speaker 1: to property developer credit, Yeah, I think that the government's 83 00:04:31,080 --> 00:04:34,120 Speaker 1: put together a plan, you know, a many stage plan 84 00:04:34,279 --> 00:04:38,240 Speaker 1: to help support housing market in China, and that's going 85 00:04:38,240 --> 00:04:41,600 Speaker 1: to reassure investors to some extent um. I don't think 86 00:04:41,640 --> 00:04:44,520 Speaker 1: we see a massive rally back in the bonds are 87 00:04:44,520 --> 00:04:48,320 Speaker 1: issued by Chinese property companies yet, but they are off 88 00:04:48,320 --> 00:04:52,040 Speaker 1: the bottom. You're reducing your credit exposure. What kind of 89 00:04:52,040 --> 00:04:55,719 Speaker 1: further defaults are you expecting potentially, So at the moment, 90 00:04:55,760 --> 00:04:58,680 Speaker 1: default rates around the world are incredibly low, and that's 91 00:04:58,800 --> 00:05:00,960 Speaker 1: thanks to cheap money. It's thanks to the fact that 92 00:05:01,080 --> 00:05:04,560 Speaker 1: corporate bond issuers borrowed for a long time, so that 93 00:05:04,640 --> 00:05:07,760 Speaker 1: the good news is there's no big wall of refinancing 94 00:05:07,800 --> 00:05:11,200 Speaker 1: to come high yield bond issuers. Credit issuers don't need 95 00:05:11,240 --> 00:05:13,440 Speaker 1: to come back to the market next year or the 96 00:05:13,520 --> 00:05:17,000 Speaker 1: year after and all borrow simultaneously. And that means that 97 00:05:17,040 --> 00:05:19,719 Speaker 1: the default cycle this time isn't going to be as 98 00:05:19,800 --> 00:05:22,840 Speaker 1: dramatic as it has been in the past. But still 99 00:05:22,880 --> 00:05:25,480 Speaker 1: we could expect the doubling of defaults in the high 100 00:05:25,560 --> 00:05:29,320 Speaker 1: yield market next year. So maybe a two percent default 101 00:05:29,360 --> 00:05:31,880 Speaker 1: rate in the high yield market in twenty three and 102 00:05:31,960 --> 00:05:35,880 Speaker 1: maybe if the recession is bad next year, are further 103 00:05:35,960 --> 00:05:39,120 Speaker 1: doubling to four percent in Europe, higher than that in 104 00:05:39,160 --> 00:05:41,960 Speaker 1: the US, where companies are maybe a bit more levied. 105 00:05:42,320 --> 00:05:44,480 Speaker 1: So would you be willing to take a flyer when 106 00:05:44,560 --> 00:05:46,280 Speaker 1: it comes to junk credit or are you going to 107 00:05:46,360 --> 00:05:48,360 Speaker 1: be a little bit more conservative as we go into 108 00:05:49,279 --> 00:05:51,320 Speaker 1: gym or you're going to focus on investment grade and 109 00:05:51,800 --> 00:05:55,719 Speaker 1: sovereigned it. Yeah, we're focusing on investment grade at the moment. 110 00:05:55,760 --> 00:05:57,960 Speaker 1: We have owned high yield. But the rally that we've 111 00:05:58,000 --> 00:06:00,800 Speaker 1: seen over the past month or so that taken spreads 112 00:06:00,880 --> 00:06:04,080 Speaker 1: down from six hundred to four hundred and fifty basis 113 00:06:04,120 --> 00:06:07,120 Speaker 1: points means it's time to lighten up there. And you 114 00:06:07,120 --> 00:06:09,240 Speaker 1: can still get a hundred and fifty basis points for 115 00:06:09,360 --> 00:06:14,239 Speaker 1: investing in good quality US investment grade or or European names, 116 00:06:14,279 --> 00:06:16,640 Speaker 1: and in bank bonds you get even a bit more. 117 00:06:16,720 --> 00:06:19,200 Speaker 1: And we think they're a good place to be. You're 118 00:06:19,240 --> 00:06:21,719 Speaker 1: normally based in London, you're on tour at the moment, 119 00:06:21,800 --> 00:06:24,880 Speaker 1: and you're in Southeast Asia. Have you been encouraged by 120 00:06:24,880 --> 00:06:27,440 Speaker 1: the growth that you're seeing in this region? Yes, I 121 00:06:27,480 --> 00:06:30,320 Speaker 1: think so. I think that there are bright spots in 122 00:06:30,640 --> 00:06:34,560 Speaker 1: the region. I think that a China recovery will obviously 123 00:06:34,560 --> 00:06:38,320 Speaker 1: be extremely good news for the region as well, and 124 00:06:38,360 --> 00:06:42,080 Speaker 1: there are some interesting bond opportunities in certain areas, for 125 00:06:42,160 --> 00:06:46,440 Speaker 1: instance Indonesia. So if you look at emerging markets in general, 126 00:06:46,480 --> 00:06:50,480 Speaker 1: it's their bond markets offer even more value in some 127 00:06:50,600 --> 00:06:54,280 Speaker 1: areas than, for instance, high yielding investment grade. So lots 128 00:06:54,320 --> 00:06:57,200 Speaker 1: of opportunities in bonds in general at the moment thanks 129 00:06:57,279 --> 00:06:59,960 Speaker 1: to the kind of pivot that we're seeing more generally 130 00:07:00,000 --> 00:07:03,640 Speaker 1: in terms of people's expectations that inflation is peaked. So 131 00:07:03,760 --> 00:07:06,200 Speaker 1: when it comes to Europe, because you're based in London, 132 00:07:06,200 --> 00:07:07,720 Speaker 1: I want to get your view on the continent. Do 133 00:07:07,920 --> 00:07:10,200 Speaker 1: you think the worst is over in terms of the 134 00:07:10,320 --> 00:07:15,080 Speaker 1: negativity for for corporate credit. Um, I think the worst 135 00:07:15,160 --> 00:07:18,160 Speaker 1: is over for sure. I think in terms of economic growth, 136 00:07:18,600 --> 00:07:22,160 Speaker 1: the big unknown is simply down to the weather. Up 137 00:07:22,160 --> 00:07:25,280 Speaker 1: to now, Europe's weather has been warmer than it has 138 00:07:25,320 --> 00:07:29,520 Speaker 1: been on average historically, and that's led to gas prices 139 00:07:29,520 --> 00:07:31,960 Speaker 1: in the spot market being pretty weak. But in the 140 00:07:32,040 --> 00:07:34,560 Speaker 1: recent days and weeks, you know, the last couple of weeks, 141 00:07:34,880 --> 00:07:37,720 Speaker 1: the weather is deteriorated and it's got cold again, and 142 00:07:37,760 --> 00:07:39,200 Speaker 1: that is going to you know, that's going to be 143 00:07:39,240 --> 00:07:42,200 Speaker 1: the single biggest thing that leads to whether we get 144 00:07:42,240 --> 00:07:46,040 Speaker 1: a severe recession because of the impact on industry and 145 00:07:46,080 --> 00:07:49,440 Speaker 1: households of higher gas prices, and that will determine what 146 00:07:49,520 --> 00:07:52,760 Speaker 1: the ECB does next. Indeed, the cost of heating very 147 00:07:52,880 --> 00:07:55,440 Speaker 1: much on many people's Mindstum, We thank you so much 148 00:07:55,480 --> 00:07:58,160 Speaker 1: for your time, Jim Le public Fixed Income ce IO 149 00:07:58,280 --> 00:08:00,960 Speaker 1: at MG Investments with me here in Singapore, at least 150 00:08:01,440 --> 00:08:04,360 Speaker 1: getting a few rays of sunshine while you're here.