WEBVTT - Ann Berry on the Markets (Radio)

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<v Speaker 1>Let's get to our guest. And Barry is with us

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<v Speaker 1>and as founder also managing partner at Thread Needle, joining

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<v Speaker 1>us from here in New York, and it's always a pleasure.

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<v Speaker 1>Happy New Year, thanks for being with us. I think

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<v Speaker 1>we can agree that one of the key themes last

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<v Speaker 1>year was soaring inflation and aggressive tightening of financial conditions.

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<v Speaker 1>I'm wondering, from your point of view, does the narrative change.

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<v Speaker 1>I know we we have to begin talking about recession,

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<v Speaker 1>but are we in at a kind of an abrupt

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<v Speaker 1>turning point? Are we going to see pretty much a

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<v Speaker 1>continuation of let's say the last quarter continuation the last quarter,

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<v Speaker 1>Doug feels like it's the most likely to be on

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<v Speaker 1>the cars, which is the FED continuing to raise rates

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<v Speaker 1>because inflation just isn't down where we want it to

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<v Speaker 1>be quite yet. And so until we see the data

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<v Speaker 1>coming in through January and February, that is when I

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<v Speaker 1>think we'll have more clarity on By the way, turning

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<v Speaker 1>the corner here on inflation data in this and the

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<v Speaker 1>Fed's response to it, and any of you, how do

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<v Speaker 1>base effects play into all this? Richard? When you say

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<v Speaker 1>the base effects, you mean I'm talking about last year's numbers,

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<v Speaker 1>of course, when the inflation started off in a meaningful

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<v Speaker 1>way compared to what it is in relationship to this year. Yeah. Well,

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<v Speaker 1>I think the fact that we're starting at a point

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<v Speaker 1>that has got prices much higher that we were means

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<v Speaker 1>that we would hope to see the rate of inflation

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<v Speaker 1>come down. But I think Richard, the problem we have

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<v Speaker 1>at the moment is so much has happened over the

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<v Speaker 1>last six months that wasn't anticipated and which the reactions

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<v Speaker 1>are not yet um clear as to what they're going

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<v Speaker 1>to be. So whether it's the rate of which interest

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<v Speaker 1>rates came up, what the real impact is that on

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<v Speaker 1>the consumer, we still don't know yet. So far, consumer

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<v Speaker 1>default rates, for example, haven't cracked levels that would be onerous,

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<v Speaker 1>but we still don't know. We know that savings have

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<v Speaker 1>been depleted, we look at inflation, you know that some

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<v Speaker 1>elements of the U. S economy are still really suffering

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<v Speaker 1>from outside increases, specifically in industries that are very laboral

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<v Speaker 1>wage intensive. So while we've seen you know, slow down

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<v Speaker 1>and some of the core issues over the last month

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<v Speaker 1>or two, we still don't really know yet how they're

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<v Speaker 1>going to percolate through the US economy and whether it's

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<v Speaker 1>going to be Q one or Q two or Q

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<v Speaker 1>three where before we see some stabilization. One of the

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<v Speaker 1>stories that we've been tracking quite closely is the COVID

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<v Speaker 1>story in China and the disruption not only to the

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<v Speaker 1>population there, but also the second order impact, which is

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<v Speaker 1>supply chain problem and the third order I guess effect

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<v Speaker 1>that you could make a case for is reorganization of

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<v Speaker 1>global supply chains and reassuring of many industries in the

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<v Speaker 1>manufacturing economy. Is that going to be a theme that

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<v Speaker 1>becomes more aggressive, let's say in three The theme of chaos, Doug,

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<v Speaker 1>I think is going to stick with us for a

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<v Speaker 1>little bit before longer term effects. And the reason I

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<v Speaker 1>say that is if you look at what the global

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<v Speaker 1>response has been to China reopening. On the one hand,

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<v Speaker 1>it's been sort of euphoria that finally there could be

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<v Speaker 1>an unleashing of recovery and demand in China and perhaps

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<v Speaker 1>supply chain issues being resolved. On the other hand, you're

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<v Speaker 1>seeing whether it's US or whether it's Australia or whether

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<v Speaker 1>it's Europe slapping testing back on Chinese tourists and Chinese

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<v Speaker 1>travelers coming into these nations, which suggests that you know

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<v Speaker 1>that the West is not yet convinced that the possibility

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<v Speaker 1>of new variants emerging is under control. So I think

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<v Speaker 1>that's where it's going to be a bumpy ride um

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<v Speaker 1>for the moment. I do think that you've hit on

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<v Speaker 1>something much longer term, which is this idea of reashoring

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<v Speaker 1>or repatriating a lot of the areas of the supply

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<v Speaker 1>chain that had been outsourced. And I think that this

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<v Speaker 1>issue with covid UH really accelerated looking at that dynamic,

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<v Speaker 1>but it was only one piece of the puzzle dog.

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<v Speaker 1>I think there are other issues have been driving supply

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<v Speaker 1>chain changes, national security concerns being one of them, IP

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<v Speaker 1>protection being another, and also the fact that China has

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<v Speaker 1>actually become quite expensive as a place to outsource too

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<v Speaker 1>relative to other parts of the world. It's going to

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<v Speaker 1>take a long time for places like the US or

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<v Speaker 1>Europe to build sufficient infrastructure to bring it all back.

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<v Speaker 1>It will start, but I think that's going to be

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<v Speaker 1>a multi five ten year change and supply change. I

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<v Speaker 1>don't think it's going to happen overnight now. And that

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<v Speaker 1>also leads into how you've been looking at outsourcing as well.

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<v Speaker 1>You've been using for nearly fifteen years and you've been

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<v Speaker 1>an outsourced services CEO. So this is a trend which continues,

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<v Speaker 1>but it must have limits. It does have limits at Richard.

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<v Speaker 1>And there's different kinds of outsourcing. There's a kind of

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<v Speaker 1>global outsourcing we think about, which is business process um

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<v Speaker 1>uh bp os or call centers for example going overseas.

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<v Speaker 1>Or there's a kind of outsourcing which is sending own

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<v Speaker 1>manufacturing to China, for example. But there's also a huge

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<v Speaker 1>amount of outsourcing that happens within domestic confines that historically

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<v Speaker 1>has tended to happen during recessions. And the reason that

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<v Speaker 1>happens is companies and we're hearing it all the time

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<v Speaker 1>right now. We're trying to think about how to remove

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<v Speaker 1>costs and transition to be more asset life like when

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<v Speaker 1>you're in a down economy, and that means trying to

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<v Speaker 1>take permanent labor um and turning it into temporary labor.

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<v Speaker 1>And so for example, staffing industries tended you for well

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<v Speaker 1>during recessions. Productivity enhancing technology tends to do very well.

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<v Speaker 1>And so those are the kinds of areas Richelle that

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<v Speaker 1>I think, yes, at some point there is a cat

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<v Speaker 1>but actually from a cyclical perspective, there tends to be

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<v Speaker 1>some temporary or transient outsourcing that picks up during the

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<v Speaker 1>sessionary periods as well as these structural trends over time.

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<v Speaker 1>Do you have a sense of how that might look geographically?

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<v Speaker 1>Is it Russia, India, China and the creation of a

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<v Speaker 1>solidity there? Is it Canada, the United States and Mexico

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<v Speaker 1>maybe incorporating a little bit of South America as well.

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<v Speaker 1>Do we seem much more of a geographic kind of

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<v Speaker 1>fracturing of the global economy. Oh, you know, that's well,

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<v Speaker 1>let's take Russia aside for the moment, because I think

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<v Speaker 1>Russia has really sort of put itself in this very

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<v Speaker 1>um sort of isolated situation given what's going on in

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<v Speaker 1>the Ukraine, China, and India. Is very interesting to me

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<v Speaker 1>because and you and I've discussed this in the past, Um,

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<v Speaker 1>Doug Intoor, is this nation that feels as though it's

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<v Speaker 1>been becoming more and more visible in the dialogue around

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<v Speaker 1>for example, contributions into the global food supply, movements, into

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<v Speaker 1>global technology supply chains, textiles. Obviously, it has been for

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<v Speaker 1>a very long time, and you've seen India begin to

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<v Speaker 1>tighten its relationships, for example, with Singapore and much more

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<v Speaker 1>visible ways with the Middle East and much more visible

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<v Speaker 1>ways UM to really try and unleash some of its potential.

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<v Speaker 1>So I think it seeing India UM pop up more

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<v Speaker 1>in Asia in the Middle East is something that's likely

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<v Speaker 1>to happen. When it comes to what used to be

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<v Speaker 1>the North American Free Trade Association that you just touched on, Doug,

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<v Speaker 1>you know, I think those relationships has been solidified for

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<v Speaker 1>a very long time. I don't. I don't think those

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<v Speaker 1>are going to change materially. I think where there's a

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<v Speaker 1>big question mark is where Europe is going to align itself,

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<v Speaker 1>because that is a you know, the continent at the

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<v Speaker 1>moment struggling UM. It's seeking energy and energy independence from Russia.

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<v Speaker 1>It's doing a decent job at the moment, but it

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<v Speaker 1>hasn't really got long term solutions for alternatives figured out yet.

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<v Speaker 1>That needs a big question mark. And just from the

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<v Speaker 1>beginning answer of your answer, that is it India the

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<v Speaker 1>expense of China your view, I don't think it is

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<v Speaker 1>necessarily inju the expense of China UM. And the reason

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<v Speaker 1>I say that is just that the political structures of

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<v Speaker 1>India and China are so different, and so the ability

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<v Speaker 1>to drive change and reform in India versus in China

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<v Speaker 1>at real pace, it's just a totally different story. UM.

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<v Speaker 1>I also think China is further ahead when you look

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<v Speaker 1>at the massive investments that have been made into education,

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<v Speaker 1>into stem, into tech innovation. India has done some of that,

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<v Speaker 1>um and done some of that very successfully, but it's

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<v Speaker 1>not quite at the same place that China is yet,

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<v Speaker 1>particularly when it comes to manufacturing and particularly when it

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<v Speaker 1>comes to things like semiconductors or to electric innovation. So

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<v Speaker 1>I think there's a lag at the moment when it

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<v Speaker 1>comes to India versus China. So and in about sixty

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<v Speaker 1>seconds or so, given the pullback that we have seen

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<v Speaker 1>in equity asset prices, will be a year of m

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<v Speaker 1>and A activity or we're going to see a little

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<v Speaker 1>bit in the way of consolidation. We've ready seen it

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<v Speaker 1>was a tail in the twenty two dog, particularly in

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<v Speaker 1>places like software, which are cash flow generative, sticky businesses,

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<v Speaker 1>and you've just seen private equity, for example, just run

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<v Speaker 1>at that space even though the debt markets have been

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<v Speaker 1>shut down. So I think certain pockets we will see

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<v Speaker 1>M and A I think it's going to be heavily

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<v Speaker 1>skeowed towards corporate m and a UM where you've got

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<v Speaker 1>a number of companies flush with cash. We saw dividends

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<v Speaker 1>bumped to record levels in some cases in twenty two

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<v Speaker 1>where they reinstated. I do think some of that would

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<v Speaker 1>be redeployed towards acquisitions. And thanks for making time for

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<v Speaker 1>us on the day after the New Year holiday. Best

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<v Speaker 1>to you for hope to see you in studio soon

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<v Speaker 1>and Barry founder managing partner at Thread Needle, joining us

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<v Speaker 1>here on Daybreak Asia