1 00:00:00,080 --> 00:00:02,600 Speaker 1: Let's get to George Bubura's set of research at K 2 00:00:02,800 --> 00:00:07,240 Speaker 1: two Asset Management. George, very nice to have you with 3 00:00:07,320 --> 00:00:10,240 Speaker 1: us here, Thanks very much. So I want to design 4 00:00:10,280 --> 00:00:13,040 Speaker 1: an arbitrage bet I need your big brain to to 5 00:00:13,160 --> 00:00:16,800 Speaker 1: help me do it. At tacking between these two notions, 6 00:00:16,880 --> 00:00:21,200 Speaker 1: one is that the FED rate hikes at a slower 7 00:00:21,280 --> 00:00:25,479 Speaker 1: pace is supportive from markets up against the other, which 8 00:00:25,560 --> 00:00:28,520 Speaker 1: is that the Fed commentary is hawkish and is negative 9 00:00:28,560 --> 00:00:32,800 Speaker 1: from markets. So what do we do good morning for 10 00:00:32,920 --> 00:00:36,519 Speaker 1: here in Melbourne. Obviously that's the key question, and um 11 00:00:36,760 --> 00:00:40,000 Speaker 1: it's actually quite predictive, and that is since October we've 12 00:00:40,040 --> 00:00:43,960 Speaker 1: got early signs of pake bondio into the inversion, pake 13 00:00:44,040 --> 00:00:48,239 Speaker 1: inflation inputs slowing and has led to that scenario of 14 00:00:49,520 --> 00:00:52,199 Speaker 1: increasing FED funds rights narrative at a decreat thing, right, 15 00:00:52,880 --> 00:00:57,160 Speaker 1: But the hawkishness is their front and center. And to 16 00:00:57,200 --> 00:01:00,640 Speaker 1: be fair, that's predictive and that that is the rollover 17 00:01:00,720 --> 00:01:03,040 Speaker 1: of the bond yields and the runover of peak inflation 18 00:01:03,080 --> 00:01:05,479 Speaker 1: has led to that rally since October. But it's about 19 00:01:05,480 --> 00:01:09,160 Speaker 1: where do we go for calendar three from here so 20 00:01:09,200 --> 00:01:12,199 Speaker 1: that narrative would persist. The markets are obviously saying the Fed, 21 00:01:12,760 --> 00:01:15,399 Speaker 1: we're second guessing you. We believe you'd be cutting rates 22 00:01:15,440 --> 00:01:18,600 Speaker 1: by the end of three into twenty four, and the 23 00:01:18,640 --> 00:01:21,000 Speaker 1: Fed's obviously going to remain hawkes as long as possible 24 00:01:21,280 --> 00:01:26,240 Speaker 1: to ensure those inputs on core inflation continue their transition lower. 25 00:01:26,680 --> 00:01:28,959 Speaker 1: There is a risk than the second half of next 26 00:01:29,000 --> 00:01:33,440 Speaker 1: year that they'll be as inflation falls on the annual rate, 27 00:01:33,480 --> 00:01:35,319 Speaker 1: it starts picking up a little bit before it goes 28 00:01:35,400 --> 00:01:37,640 Speaker 1: back down again in twenty four. There is that risk 29 00:01:37,680 --> 00:01:40,880 Speaker 1: in the FED funds fokish nature, but that's still a 30 00:01:40,920 --> 00:01:44,120 Speaker 1: care view for most markets, and that is slow down 31 00:01:44,120 --> 00:01:48,200 Speaker 1: in global growth in twenty three egg risk as obviously rally, 32 00:01:48,200 --> 00:01:50,240 Speaker 1: what's you get the confirmation of that. You've got the 33 00:01:50,320 --> 00:01:53,640 Speaker 1: de synchronization globally, stimulus coming out of Latin America, stimulus 34 00:01:53,680 --> 00:01:56,639 Speaker 1: coming out of China, and that's that's got a cushion 35 00:01:56,640 --> 00:01:59,080 Speaker 1: global growth. But that narrative of the FED funds means 36 00:01:59,320 --> 00:02:02,440 Speaker 1: where do I look elsewhere out of the US? And 37 00:02:02,920 --> 00:02:06,520 Speaker 1: emerging markets reasonable here? And is Europe reasonable here? That's 38 00:02:06,560 --> 00:02:10,560 Speaker 1: basically the outputs that come from that dichotomy of the 39 00:02:10,560 --> 00:02:14,120 Speaker 1: fund thrate remaining hawk ish. If it's funny because if 40 00:02:14,160 --> 00:02:16,920 Speaker 1: I ask you the question, so our starts going to 41 00:02:16,960 --> 00:02:21,080 Speaker 1: go up or down next year and your answer is yes, yeah, 42 00:02:21,160 --> 00:02:25,480 Speaker 1: So so risk assets to to appreciate one year forward 43 00:02:25,560 --> 00:02:28,000 Speaker 1: with obviously we will know annualized volu You look at 44 00:02:28,000 --> 00:02:30,200 Speaker 1: for ten percent expected return from equity asset class with 45 00:02:30,240 --> 00:02:33,920 Speaker 1: a fifth annualized volve, so we know that's quite risky. 46 00:02:33,960 --> 00:02:36,200 Speaker 1: But the point to reinforce here is that what are 47 00:02:36,200 --> 00:02:39,079 Speaker 1: the downgrades for US equities? Where's the bottom for there? 48 00:02:39,360 --> 00:02:42,200 Speaker 1: And the upside is quite limited versus previous cycles, and 49 00:02:42,680 --> 00:02:44,800 Speaker 1: the upside could be as little as five percent capital 50 00:02:44,880 --> 00:02:47,680 Speaker 1: before the cushion of the dividend for US equities as 51 00:02:47,680 --> 00:02:51,120 Speaker 1: an example, because of the volatility in bond markets. But 52 00:02:51,520 --> 00:02:55,560 Speaker 1: it's a pro risk one year forward, cautiously optimistic pe 53 00:02:55,720 --> 00:03:00,720 Speaker 1: VC property, low gear, CPI, protection, infrastruct they all will 54 00:03:00,720 --> 00:03:04,679 Speaker 1: be the beneficiaries. But looking at the equity asset class, 55 00:03:04,960 --> 00:03:09,919 Speaker 1: it still seems reasonable and valuations one year forward to persist. 56 00:03:09,919 --> 00:03:12,400 Speaker 1: And when do you go overweight? Sometime in the first 57 00:03:12,440 --> 00:03:16,480 Speaker 1: half and twenty three and what about where do you 58 00:03:16,520 --> 00:03:20,160 Speaker 1: go overweight? Um, We've had some encouraging news out of 59 00:03:20,280 --> 00:03:23,239 Speaker 1: China from the work conference. Our last guest was quite 60 00:03:23,280 --> 00:03:26,600 Speaker 1: optimistic about Chinese equities as well. Is this is this 61 00:03:26,680 --> 00:03:30,120 Speaker 1: an area to go overweight, and yes, so we have 62 00:03:30,200 --> 00:03:32,280 Speaker 1: been so underweight Chinese equities from the first half of 63 00:03:32,320 --> 00:03:35,600 Speaker 1: twenty one like most global fund managers, and will continue 64 00:03:35,640 --> 00:03:38,080 Speaker 1: to play China reopening internally which is a very big 65 00:03:38,120 --> 00:03:43,280 Speaker 1: stimulus via exporters into China through commodities, metals of all 66 00:03:43,320 --> 00:03:46,560 Speaker 1: top soft commodities, hard energy, et cetera. But we still 67 00:03:46,680 --> 00:03:49,840 Speaker 1: like in that overweight within Southeast Asia, and we like Japan, 68 00:03:49,960 --> 00:03:53,640 Speaker 1: Southeast Asia with a career, Singapore, Australia's are cooking for 69 00:03:53,640 --> 00:03:56,840 Speaker 1: a dividend, love Indonesia. Those sort of thematics will be 70 00:03:56,960 --> 00:04:00,760 Speaker 1: quite beneficial for the region, and everything's lining up. This 71 00:04:00,880 --> 00:04:05,320 Speaker 1: is predictive that the Southeast Asian region maybe are performing 72 00:04:05,720 --> 00:04:08,680 Speaker 1: other equity markets around the world one near forward, and 73 00:04:08,720 --> 00:04:11,000 Speaker 1: that obviously depends on what China does and how they 74 00:04:11,040 --> 00:04:15,280 Speaker 1: coordinate the stimulus. It's okay to be internally opening up 75 00:04:15,280 --> 00:04:18,560 Speaker 1: and not allow international travel, but how does the PBOC 76 00:04:18,800 --> 00:04:22,039 Speaker 1: in Beijing combine. It's that old if I can be 77 00:04:22,080 --> 00:04:24,159 Speaker 1: a bit cheeky here, tongue in cheek, that like the 78 00:04:24,200 --> 00:04:27,120 Speaker 1: old Russian proverb is that in China going forward, the 79 00:04:27,120 --> 00:04:30,599 Speaker 1: future is certain certainly the past that's unpredictable because they've 80 00:04:30,600 --> 00:04:33,200 Speaker 1: obviously got more control over their economy than ever before. 81 00:04:33,680 --> 00:04:35,839 Speaker 1: Makes it very difficult for us to be buying future 82 00:04:35,880 --> 00:04:39,280 Speaker 1: earnings in China specifically, But the stimulus there will be 83 00:04:39,440 --> 00:04:42,359 Speaker 1: indicative of the region benefiting, and that seems to be 84 00:04:42,680 --> 00:04:45,400 Speaker 1: a low risk way to play it. Or alternatively, if 85 00:04:45,440 --> 00:04:47,599 Speaker 1: you more bolits, you can play via German equities that 86 00:04:47,640 --> 00:04:51,040 Speaker 1: are very much aligned into the Chinese economy, and then 87 00:04:51,080 --> 00:04:52,800 Speaker 1: if you really like China and you believe in it, 88 00:04:52,839 --> 00:04:55,359 Speaker 1: then just go right into Chinese equity. But we just 89 00:04:55,400 --> 00:04:57,320 Speaker 1: think it's a bit early to do that given the 90 00:04:57,360 --> 00:05:00,960 Speaker 1: experiences we've seen in our sword folios from twenty one. 91 00:05:01,440 --> 00:05:04,599 Speaker 1: All right, George, where can I find some dividends that 92 00:05:04,640 --> 00:05:08,960 Speaker 1: are safe safe from being cut? Yeah? Well, that's the 93 00:05:09,000 --> 00:05:11,640 Speaker 1: other point is that the cushion of dividends, and this 94 00:05:11,760 --> 00:05:15,400 Speaker 1: is a catch twenty two dividends at the risk of 95 00:05:15,480 --> 00:05:18,279 Speaker 1: being cut, particularly with what's happening with the sliding economy 96 00:05:18,360 --> 00:05:21,640 Speaker 1: and the earnings downgrade. So you're looking for companies obviously 97 00:05:21,680 --> 00:05:24,080 Speaker 1: the consistent pay out ratios lo Uring et cetera, and 98 00:05:24,080 --> 00:05:25,800 Speaker 1: it's going to be very difficult, but in aggregate the 99 00:05:26,360 --> 00:05:29,559 Speaker 1: dividend cut should be quite low coming out of the US, 100 00:05:29,720 --> 00:05:33,279 Speaker 1: parts of Australia, parts of the UK. But the risk 101 00:05:33,320 --> 00:05:36,279 Speaker 1: here is that non traditional sectors are coming into contribute 102 00:05:36,279 --> 00:05:38,960 Speaker 1: to the dividend, and there as materials and energy, and 103 00:05:39,000 --> 00:05:42,400 Speaker 1: there's a regulatory risk going right across the globe. And 104 00:05:42,680 --> 00:05:45,240 Speaker 1: every time someone sees the headline of price caps of 105 00:05:45,400 --> 00:05:48,520 Speaker 1: energy and get a Google sort of download of that, 106 00:05:48,520 --> 00:05:51,320 Speaker 1: that is a risk to future earnings and a potential 107 00:05:51,360 --> 00:05:54,000 Speaker 1: dividend cut from the sector that's probably not priced in. 108 00:05:54,200 --> 00:05:57,040 Speaker 1: So dividends are a cushion, but to be cut to 109 00:05:57,200 --> 00:05:59,640 Speaker 1: the degree of cut we don't know, and that is 110 00:05:59,680 --> 00:06:03,000 Speaker 1: why the ultimate place to play one year forward is 111 00:06:03,520 --> 00:06:07,120 Speaker 1: two to three years. Senior unsecured investment grade corporates in 112 00:06:07,160 --> 00:06:12,200 Speaker 1: the developed world, UH good industrials, some some diverse by financials, 113 00:06:12,200 --> 00:06:15,320 Speaker 1: be wary of energy taking profits has done well well 114 00:06:15,400 --> 00:06:19,280 Speaker 1: year to date, some materials. Potential dividend cuts there, but 115 00:06:19,400 --> 00:06:22,480 Speaker 1: those two as the classes. And then pe VC and property, 116 00:06:22,560 --> 00:06:25,520 Speaker 1: particularly in the property that's got CPI hedges low, LVR 117 00:06:25,880 --> 00:06:29,920 Speaker 1: high or VRS anything towards makes it uneconomical one year forward, 118 00:06:30,279 --> 00:06:34,440 Speaker 1: given the dilemma of income received versus debt repayments. I 119 00:06:34,560 --> 00:06:36,640 Speaker 1: just said as much as I could across the capital 120 00:06:36,720 --> 00:06:40,320 Speaker 1: structure or the asset classes. But the volatility won't be 121 00:06:40,360 --> 00:06:42,919 Speaker 1: as bad in twenty three twenty two. But it's not 122 00:06:43,000 --> 00:06:46,760 Speaker 1: going away. And unfortunately, cash rates are staying high in 123 00:06:46,800 --> 00:06:49,880 Speaker 1: the developed world, even though Latin American China is stimulating 124 00:06:50,720 --> 00:06:53,320 Speaker 1: and inflation is coming off. That has the risk of 125 00:06:53,360 --> 00:06:56,919 Speaker 1: rebounding one year forward, and that will be something that 126 00:06:56,920 --> 00:06:59,799 Speaker 1: you need to be cognizant about. A messy environment, higher 127 00:06:59,839 --> 00:07:03,840 Speaker 1: risk free rate difficult for for many people, but with 128 00:07:03,880 --> 00:07:05,680 Speaker 1: a higher discount rate, you're just going to be very 129 00:07:05,680 --> 00:07:08,719 Speaker 1: certain on the quality of those earnings. In the guidance 130 00:07:08,960 --> 00:07:11,640 Speaker 1: three years out, George, we've got about a minute left. 131 00:07:11,640 --> 00:07:15,160 Speaker 1: I just want to lob in another volatility grenade for you. 132 00:07:15,280 --> 00:07:19,000 Speaker 1: The energy sector has a number of catalysts on both 133 00:07:19,000 --> 00:07:21,679 Speaker 1: the supply and demand side. What's your out look around 134 00:07:21,680 --> 00:07:26,760 Speaker 1: this space in three Yeah, most people like us taking 135 00:07:26,760 --> 00:07:28,680 Speaker 1: profit very quickly. It's been a very good performing year 136 00:07:28,720 --> 00:07:31,840 Speaker 1: to date. Um Quite clearly, energy transition requires l en 137 00:07:31,920 --> 00:07:34,120 Speaker 1: g Anyone with that in their portfolio is a key 138 00:07:34,120 --> 00:07:37,200 Speaker 1: participant in the energy transition globally in the developed world 139 00:07:37,360 --> 00:07:39,640 Speaker 1: and then the developing World's a good tail wind structurally, 140 00:07:40,240 --> 00:07:42,480 Speaker 1: but there's more regulatory risk in the developed world with 141 00:07:42,600 --> 00:07:46,560 Speaker 1: energy exporters and extractors. We still like exporters, but given 142 00:07:46,600 --> 00:07:49,400 Speaker 1: the very strong performance, will we continue to take profits 143 00:07:49,400 --> 00:07:52,720 Speaker 1: into three and there will be regulatory risk and lower 144 00:07:52,760 --> 00:07:56,280 Speaker 1: profit outlook in twenty three verses twenty two, But nevertheless 145 00:07:56,280 --> 00:07:59,360 Speaker 1: a big good contributor to aggregate earnings in the developed world. 146 00:07:59,640 --> 00:08:03,160 Speaker 1: Going d all right, George, thank you very much for 147 00:08:03,200 --> 00:08:05,800 Speaker 1: being with us. George Barbora's head of research at K 148 00:08:06,040 --> 00:08:08,040 Speaker 1: two Asset Management.