Speaker 1: Let's get to our guest. And Barry is with us
Speaker 1: and as founder also managing partner at Thread Needle, joining
Speaker 1: us from here in New York, and it's always a pleasure.
Speaker 1: Happy New Year, thanks for being with us. I think
Speaker 1: we can agree that one of the key themes last
Speaker 1: year was soaring inflation and aggressive tightening of financial conditions.
Speaker 1: I'm wondering, from your point of view, does the narrative change.
Speaker 1: I know we we have to begin talking about recession,
Speaker 1: but are we in at a kind of an abrupt
Speaker 1: turning point? Are we going to see pretty much a
Speaker 1: continuation of let's say the last quarter continuation the last quarter,
Speaker 1: Doug feels like it's the most likely to be on
Speaker 1: the cars, which is the FED continuing to raise rates
Speaker 1: because inflation just isn't down where we want it to
Speaker 1: be quite yet. And so until we see the data
Speaker 1: coming in through January and February, that is when I
Speaker 1: think we'll have more clarity on By the way, turning
Speaker 1: the corner here on inflation data in this and the
Speaker 1: Fed's response to it, and any of you, how do
Speaker 1: base effects play into all this? Richard? When you say
Speaker 1: the base effects, you mean I'm talking about last year's numbers,
Speaker 1: of course, when the inflation started off in a meaningful
Speaker 1: way compared to what it is in relationship to this year. Yeah. Well,
Speaker 1: I think the fact that we're starting at a point
Speaker 1: that has got prices much higher that we were means
Speaker 1: that we would hope to see the rate of inflation
Speaker 1: come down. But I think Richard, the problem we have
Speaker 1: at the moment is so much has happened over the
Speaker 1: last six months that wasn't anticipated and which the reactions
Speaker 1: are not yet um clear as to what they're going
Speaker 1: to be. So whether it's the rate of which interest
Speaker 1: rates came up, what the real impact is that on
Speaker 1: the consumer, we still don't know yet. So far, consumer
Speaker 1: default rates, for example, haven't cracked levels that would be onerous,
Speaker 1: but we still don't know. We know that savings have
Speaker 1: been depleted, we look at inflation, you know that some
Speaker 1: elements of the U. S economy are still really suffering
Speaker 1: from outside increases, specifically in industries that are very laboral
Speaker 1: wage intensive. So while we've seen you know, slow down
Speaker 1: and some of the core issues over the last month
Speaker 1: or two, we still don't really know yet how they're
Speaker 1: going to percolate through the US economy and whether it's
Speaker 1: going to be Q one or Q two or Q
Speaker 1: three where before we see some stabilization. One of the
Speaker 1: stories that we've been tracking quite closely is the COVID
Speaker 1: story in China and the disruption not only to the
Speaker 1: population there, but also the second order impact, which is
Speaker 1: supply chain problem and the third order I guess effect
Speaker 1: that you could make a case for is reorganization of
Speaker 1: global supply chains and reassuring of many industries in the
Speaker 1: manufacturing economy. Is that going to be a theme that
Speaker 1: becomes more aggressive, let's say in three The theme of chaos, Doug,
Speaker 1: I think is going to stick with us for a
Speaker 1: little bit before longer term effects. And the reason I
Speaker 1: say that is if you look at what the global
Speaker 1: response has been to China reopening. On the one hand,
Speaker 1: it's been sort of euphoria that finally there could be
Speaker 1: an unleashing of recovery and demand in China and perhaps
Speaker 1: supply chain issues being resolved. On the other hand, you're
Speaker 1: seeing whether it's US or whether it's Australia or whether
Speaker 1: it's Europe slapping testing back on Chinese tourists and Chinese
Speaker 1: travelers coming into these nations, which suggests that you know
Speaker 1: that the West is not yet convinced that the possibility
Speaker 1: of new variants emerging is under control. So I think
Speaker 1: that's where it's going to be a bumpy ride um
Speaker 1: for the moment. I do think that you've hit on
Speaker 1: something much longer term, which is this idea of reashoring
Speaker 1: or repatriating a lot of the areas of the supply
Speaker 1: chain that had been outsourced. And I think that this
Speaker 1: issue with covid UH really accelerated looking at that dynamic,
Speaker 1: but it was only one piece of the puzzle dog.
Speaker 1: I think there are other issues have been driving supply
Speaker 1: chain changes, national security concerns being one of them, IP
Speaker 1: protection being another, and also the fact that China has
Speaker 1: actually become quite expensive as a place to outsource too
Speaker 1: relative to other parts of the world. It's going to
Speaker 1: take a long time for places like the US or
Speaker 1: Europe to build sufficient infrastructure to bring it all back.
Speaker 1: It will start, but I think that's going to be
Speaker 1: a multi five ten year change and supply change. I
Speaker 1: don't think it's going to happen overnight now. And that
Speaker 1: also leads into how you've been looking at outsourcing as well.
Speaker 1: You've been using for nearly fifteen years and you've been
Speaker 1: an outsourced services CEO. So this is a trend which continues,
Speaker 1: but it must have limits. It does have limits at Richard.
Speaker 1: And there's different kinds of outsourcing. There's a kind of
Speaker 1: global outsourcing we think about, which is business process um
Speaker 1: uh bp os or call centers for example going overseas.
Speaker 1: Or there's a kind of outsourcing which is sending own
Speaker 1: manufacturing to China, for example. But there's also a huge
Speaker 1: amount of outsourcing that happens within domestic confines that historically
Speaker 1: has tended to happen during recessions. And the reason that
Speaker 1: happens is companies and we're hearing it all the time
Speaker 1: right now. We're trying to think about how to remove
Speaker 1: costs and transition to be more asset life like when
Speaker 1: you're in a down economy, and that means trying to
Speaker 1: take permanent labor um and turning it into temporary labor.
Speaker 1: And so for example, staffing industries tended you for well
Speaker 1: during recessions. Productivity enhancing technology tends to do very well.
Speaker 1: And so those are the kinds of areas Richelle that
Speaker 1: I think, yes, at some point there is a cat
Speaker 1: but actually from a cyclical perspective, there tends to be
Speaker 1: some temporary or transient outsourcing that picks up during the
Speaker 1: sessionary periods as well as these structural trends over time.
Speaker 1: Do you have a sense of how that might look geographically?
Speaker 1: Is it Russia, India, China and the creation of a
Speaker 1: solidity there? Is it Canada, the United States and Mexico
Speaker 1: maybe incorporating a little bit of South America as well.
Speaker 1: Do we seem much more of a geographic kind of
Speaker 1: fracturing of the global economy. Oh, you know, that's well,
Speaker 1: let's take Russia aside for the moment, because I think
Speaker 1: Russia has really sort of put itself in this very
Speaker 1: um sort of isolated situation given what's going on in
Speaker 1: the Ukraine, China, and India. Is very interesting to me
Speaker 1: because and you and I've discussed this in the past, Um,
Speaker 1: Doug Intoor, is this nation that feels as though it's
Speaker 1: been becoming more and more visible in the dialogue around
Speaker 1: for example, contributions into the global food supply, movements, into
Speaker 1: global technology supply chains, textiles. Obviously, it has been for
Speaker 1: a very long time, and you've seen India begin to
Speaker 1: tighten its relationships, for example, with Singapore and much more
Speaker 1: visible ways with the Middle East and much more visible
Speaker 1: ways UM to really try and unleash some of its potential.
Speaker 1: So I think it seeing India UM pop up more
Speaker 1: in Asia in the Middle East is something that's likely
Speaker 1: to happen. When it comes to what used to be
Speaker 1: the North American Free Trade Association that you just touched on, Doug,
Speaker 1: you know, I think those relationships has been solidified for
Speaker 1: a very long time. I don't. I don't think those
Speaker 1: are going to change materially. I think where there's a
Speaker 1: big question mark is where Europe is going to align itself,
Speaker 1: because that is a you know, the continent at the
Speaker 1: moment struggling UM. It's seeking energy and energy independence from Russia.
Speaker 1: It's doing a decent job at the moment, but it
Speaker 1: hasn't really got long term solutions for alternatives figured out yet.
Speaker 1: That needs a big question mark. And just from the
Speaker 1: beginning answer of your answer, that is it India the
Speaker 1: expense of China your view, I don't think it is
Speaker 1: necessarily inju the expense of China UM. And the reason
Speaker 1: I say that is just that the political structures of
Speaker 1: India and China are so different, and so the ability
Speaker 1: to drive change and reform in India versus in China
Speaker 1: at real pace, it's just a totally different story. UM.
Speaker 1: I also think China is further ahead when you look
Speaker 1: at the massive investments that have been made into education,
Speaker 1: into stem, into tech innovation. India has done some of that,
Speaker 1: um and done some of that very successfully, but it's
Speaker 1: not quite at the same place that China is yet,
Speaker 1: particularly when it comes to manufacturing and particularly when it
Speaker 1: comes to things like semiconductors or to electric innovation. So
Speaker 1: I think there's a lag at the moment when it
Speaker 1: comes to India versus China. So and in about sixty
Speaker 1: seconds or so, given the pullback that we have seen
Speaker 1: in equity asset prices, will be a year of m
Speaker 1: and A activity or we're going to see a little
Speaker 1: bit in the way of consolidation. We've ready seen it
Speaker 1: was a tail in the twenty two dog, particularly in
Speaker 1: places like software, which are cash flow generative, sticky businesses,
Speaker 1: and you've just seen private equity, for example, just run
Speaker 1: at that space even though the debt markets have been
Speaker 1: shut down. So I think certain pockets we will see
Speaker 1: M and A I think it's going to be heavily
Speaker 1: skeowed towards corporate m and a UM where you've got
Speaker 1: a number of companies flush with cash. We saw dividends
Speaker 1: bumped to record levels in some cases in twenty two
Speaker 1: where they reinstated. I do think some of that would
Speaker 1: be redeployed towards acquisitions. And thanks for making time for
Speaker 1: us on the day after the New Year holiday. Best
Speaker 1: to you for hope to see you in studio soon
Speaker 1: and Barry founder managing partner at Thread Needle, joining us
Speaker 1: here on Daybreak Asia