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Speaker 1: Welcome to the Bloomberg day Break Asia Podcast. I'm Doug Krisner.

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Speaker 1: Markets in Asia came online today to news of a

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Speaker 1: big sell off in the US. We had the S

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Speaker 1: and P five hundred suffering a loss of three percent

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Speaker 1: that after the FED reduced the number of expected rate

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Speaker 1: cuts next year by half. In a moment, we'll be

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Speaker 1: talking with Pat Kennedy, he is founding partner at All

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Speaker 1: Source Investment Management. But we'll begin in Singapore where we

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Speaker 1: find Paul Dobson, Bloomberg Executive Editor for Markets in Asia.

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Speaker 1: He joins us from our studios in the Lion City. Paul,

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Speaker 1: thanks for taking time to chat with us. It's got

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Speaker 1: to be a big shock. I'm sure a big spike

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Speaker 1: in yields, much stronger dollar, and the dollar story alone

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Speaker 1: has to be spelling trouble for markets in Asia. Yeah,

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Speaker 1: Hi there.

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Speaker 2: Certainly this doesn't look very positive for Asia's markets on

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Speaker 2: the round because they're so negatively correlated to the dollar.

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Speaker 2: So you know, after the FED we had that big

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Speaker 2: push hire in US yields that supported the dollar right

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Speaker 2: across the board, and for Asian currencies that we're trading

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Speaker 2: or trade currencies from our time zone, that we're trading

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Speaker 2: in those hours. It was a pretty swift move lower.

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Speaker 2: The New Zealand dollar, the Australian dollar, for example, under pressure,

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Speaker 2: and we're deciding to see that as we get markets

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Speaker 2: opening up now in our region. The Korean one fell

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Speaker 2: a long way at the open, the weakest level in

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Speaker 2: decades there and right across the board. You know, kind

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Speaker 2: of we're going to see now is how various central

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Speaker 2: banks are going to respond to it. Are they going

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Speaker 2: to try and intervene and resist it, or are they

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Speaker 2: going to tolerate further weakness against the dollar if this

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Speaker 2: all falling in tandem.

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Speaker 1: Well, speaking of weakness, the Japanese end was down in

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Speaker 1: New York trading by around nine tens to one percent.

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Speaker 1: We're trading at just under a one fifty five against

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Speaker 1: the greenback. This takes us to the BOJ, which has

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Speaker 1: a policy decision at the end of the week. Is

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Speaker 1: the feeling still that BOJ is going to kind of

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Speaker 1: sit on its hands.

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Speaker 2: So it's an interesting one, isn't it. Like said, the

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Speaker 2: yen one five and under weakening pressure, the bj has

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Speaker 2: a pretty clear path if it wants to to raise

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Speaker 2: interest rates as soon as this week in order to

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Speaker 2: give the currency a little bit of support, and yet

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Speaker 2: having given us a sort of indication that that might

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Speaker 2: be where it was leaning, you know, as recently as

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Speaker 2: sort of like a month ago, it then sort of

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Speaker 2: pivoted and the communications seemed to push back against the

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Speaker 2: idea that there would be a hike this year. And

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Speaker 2: so now market is trying to work out whether it's

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Speaker 2: January would be the right month, or even a hold

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Speaker 2: until March in order to be more certain that wage

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Speaker 2: inflation is still entrenched. Now, you know, kind of people

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Speaker 2: will be thinking, on the other hand, why do they

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Speaker 2: need to wait so long when not get on with it?

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Speaker 2: Well while the opportunity is there. They don't want to

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Speaker 2: unsettle the bonds market. They don't want to they don't

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Speaker 2: want to stop inflation from budding in Japan. But at

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Speaker 2: the same time, you know, a hold and some signal

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Speaker 2: that they're in no hurry to move now may push

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Speaker 2: the end through that one point fifty five level and

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Speaker 2: see it continuing to weaken too fresh lows against the dollar.

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Speaker 1: But I would imagine it's quite the opposite when you

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Speaker 1: consider the People's Bank of China, because of the weakness

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Speaker 1: in the offshore you want and onshore as well. Is

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Speaker 1: that the right way to think about this? I mean

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Speaker 1: that the PBOC would allow the one to weaken to

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Speaker 1: help with the export economy.

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Speaker 2: It doesn't seem in any particular hurry to do it.

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Speaker 2: The UN is training with a weakening bias, and certainly

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Speaker 2: if Donald Trump does come in and starts to impose

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Speaker 2: those tariffs, then the market calculus is that the PBOC

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Speaker 2: will allow the UN's a weekend to offset the impact

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Speaker 2: of that on the Chinese economy and on Chinese exporders.

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Speaker 2: On the other hand, what it doesn't want is a

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Speaker 2: sharp depreciation in the end that encourages more outflows from

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Speaker 2: the currency. So it's playing that sort of delicate balancing acts,

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Speaker 2: a little bit of a tightrope where yes, the general

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Speaker 2: direction seems to be to allow it to weaken, but

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Speaker 2: no sort of strong or neeja kind of moves more

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Speaker 2: at a sort of steady pace would be would be

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Speaker 2: the way to see it.

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Speaker 1: Generally speaking, if you look at the reaction in markets

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Speaker 1: to what we've been hearing from the polic Bureau, some

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Speaker 1: of the official messaging as it relates to future policy,

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Speaker 1: how would you characterize this? Are people cautiously optimistic.

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Speaker 2: Yeah, Doug, I think people are just so skeptical because

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Speaker 2: we've been promised so much and the delivery has been

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Speaker 2: underwhelming for the most part. You know, what everybody in

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Speaker 2: markets would really love to see would be some kind

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Speaker 2: of huge, big bang where with a lot of policy

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Speaker 2: enactments all at once, But instead it's more of a

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Speaker 2: piecemeal approach where there's incremental pieces of stimulus being announced

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Speaker 2: and put into place. Of course, that requires patients, and

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Speaker 2: financial markets aren't really patient. So when we did finally

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Speaker 2: get a little bit of a sense that there was

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Speaker 2: something coming together, we had that big beam higher in

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Speaker 2: the equities markets at the start of the fourth quarter.

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Speaker 2: But since then, you know, the enthusiasm has died off somewhat.

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Speaker 2: And while you know, the market might view the Chinese

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Speaker 2: authorities has been more minded to stimulate growth, to stimulate

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Speaker 2: the economy, to borrow in order to fuel growth, the

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Speaker 2: exact mechanisms and way that that's going to play out

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Speaker 2: are still a little bit unclear, and until there's more

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Speaker 2: policy clarity, yes, there could be you know, an underlying

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Speaker 2: sense of perhaps we're headed in the right direction, but

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Speaker 2: there's still that sort of unwillingness to commit too much

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Speaker 2: on hope rather than you know, kind of firm evidence

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Speaker 2: of what's coming.

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Speaker 1: And then you look at what we had in the

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Speaker 1: last week, the retail sales data, which was shockingly weak,

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Speaker 1: and that just kind of goes to the point, does

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Speaker 1: it not.

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Speaker 2: That the need to get consumption going again, and there

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Speaker 2: is bits and bobs going on, you know, working through

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Speaker 2: some of the property market difficulties and helping out their consumption.

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Speaker 2: Vare is that kind of thing seems to be very popular.

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Speaker 2: They have that trade in policy where people can exchange

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Speaker 2: some of their electronic goods the sort of cash for

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Speaker 2: Clunker's equivalent in China for new products for the discount.

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Speaker 2: But for all of that, you know, it's the same

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Speaker 2: as with the markets in a way. The consumer is

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Speaker 2: still skeptical and I'm willing to spend too much either.

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Speaker 1: Paul will leave it there. Thanks so much for taking

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Speaker 1: the time to chat with us. Paul Dobson is Bloomberg

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Speaker 1: Executive Editor for Asia Markets, joining from Singapore here on

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Speaker 1: the Daybreak Asia podcast. Welcome back to the Bloomberg Daybreak

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Speaker 1: Asia Podcast. I'm Doug Chrisner. So the final FED meeting

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Speaker 1: of the year is now history. We got that twenty

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Speaker 1: five bases point rate cut, as markets had expected, but

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Speaker 1: the bigger surprise was the outlook for rate cuts in

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Speaker 1: the new year. For a closer look, we are joined

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Speaker 1: by Pat Kennedy. He's founding partner of All Source Investment Management. Pat,

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Speaker 1: thanks for making time to chat with us. If you're

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Speaker 1: looking at what the Fed is now implying at this

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Speaker 1: point in time and what the market had been thinking

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Speaker 1: in terms of rate cuts for the new year, that's

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Speaker 1: a big disconnect, right, and no doubt explains today's sell off.

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Speaker 3: It does, Doug, But to me, it wasn't too much

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Speaker 3: of a surprise, and I think last time it was

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Speaker 3: on we had talked about some risks that we had

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Speaker 3: saw to twenty twenty five, and we see inflation very

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Speaker 3: much in the forefront.

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Speaker 2: Still.

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Speaker 3: We don't think it's something that's gone away yet. If

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Speaker 3: you look back at the seventies when the Fed fought

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Speaker 3: inflation last you had this bullwhip effect where you know,

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Speaker 3: they'd raise rates, inflation would go away. As soon as

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Speaker 3: they started cutting, inflation would come roaring back, right. And

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Speaker 3: I'm not saying it's exactly a repeat this time, but

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Speaker 3: history does run. So this was something that we were

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Speaker 3: concerned about. I think that what Powell communicated today, at

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Speaker 3: least most institutional investors I speak with, there was no

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Speaker 3: big surprise, right, So you know, the economy is hanging

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Speaker 3: in there. We have CEO confidence raising, confidence raising, you

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Speaker 3: have lower regulation next year, M and A is expected

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Speaker 3: to pick up. Why would they cut is the question?

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Speaker 3: So I think going from four to two is not

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Speaker 3: that big of a secret. And to be honest, that

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Speaker 3: was surprised to the price action afterwards, because to me,

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Speaker 3: it wasn't much of a headline.

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Speaker 1: We need to tease out what he said about some

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Speaker 1: members of the committee expressing maybe a little greater uncertainty

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Speaker 1: about disinflation. If you look at what we're hearing in

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Speaker 1: terms of economic policies from the incoming Trump administration, do

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Speaker 1: you think that is worrying the FED a great deal.

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Speaker 3: I think that the Fed doesn't want to mess up.

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Speaker 3: There's soft landing. I think Jerome Powell now sees the

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Speaker 3: soft landing as a real possibility. We're in it right,

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Speaker 3: and I think that it's time to kind of take

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Speaker 3: the training wheels off and see if this economy can

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Speaker 3: stand on its own. So I think they're in the

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Speaker 3: process of doing that, and I think they want to

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Speaker 3: do it very delicately. I don't think they want to

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Speaker 3: go down as the FED that let the inflation genie

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Speaker 3: back out of the bottle. And again, if you go

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Speaker 3: back to you know, the last time in history this

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Speaker 3: happened in the seventies. As soon as the FED started cutting,

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Speaker 3: inflation came roaring back. It wasn't until Vulkar came in

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Speaker 3: and truly stomped inflation out and kept rates very high

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Speaker 3: for a long time that it truly went away. So

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Speaker 3: I think the FED doesn't want to be known as

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Speaker 3: the Fed to go down of in history that let

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Speaker 3: the inflation genie back out of the buck.

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Speaker 1: But when you hear things about the possibility of tariffs

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Speaker 1: sometime next year or tax cuts being extended that haven't

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Speaker 1: necessarily been funded, and the risk to maybe inflation in

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Speaker 1: that environment, does that create a little bit of concern

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Speaker 1: for you?

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Speaker 3: For me, it does. I look more at the national

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Speaker 3: debt at this point. I think that's kind of the

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Speaker 3: nine hundred pound gorilla in the room that most people

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Speaker 3: aren't talking about. You know, you got a five trillion

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Speaker 3: dollar debt service two trillion dollar deficit and thirty five

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Speaker 3: trillion dollar debt. We're getting to the point where it's

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Speaker 3: getting out of control, right, So yeah, Drunken Miller talk

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Speaker 3: about this a while ago. Folks like Paul Tutor Jones

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Speaker 3: are now saying that the chickens come home to roofs.

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Speaker 3: We now need to start paying attention to this, and

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Speaker 3: I think if we continue to put it off, it's

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Speaker 3: going to become such a problem where we're going to

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Speaker 3: have to face it. And if we get to that point,

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Speaker 3: it's not going to be a pretty picture.

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Speaker 1: So what's your outlook for the equity market in the

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Speaker 1: year ahead?

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Speaker 3: So you know, we look at strategists and you know,

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Speaker 3: most people are predicting somewhere on the S and P

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Speaker 3: range from sixty five hundred to seven thousand. We think

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Speaker 3: it's going to be a decent year. You have em

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Speaker 3: and A expected to pick up. We're seeing that in

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Speaker 3: private equity markets, by the way. We're starting to see

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Speaker 3: private equity managers call down capital again and things of

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Speaker 3: that nature. We're also seeing deregulation, well at least rumors

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Speaker 3: that deregulation is going to pick up in a big way.

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Speaker 3: So we think that's pretty bullish. With that being said,

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Speaker 3: we're still cautious on some things next year, right. I

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Speaker 3: think we just hit on one inflation and potential for the

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Speaker 3: FED to change course. To be honest, I wouldn't be

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Speaker 3: surprised at all if the FED comes out within the

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Speaker 3: next twelve months and what's a cut on the table

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Speaker 3: or excuse me, a hike on the table.

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Speaker 1: Wow.

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Speaker 3: And the reason why it is, I mean, look where

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Speaker 3: we've come from, right, you know, six cuts to four

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Speaker 3: and now to two. You know, if we have tons

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Speaker 3: of spending that goes on next year and inflation starts

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Speaker 3: really ramping back up, it wouldn't surprise me in the

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Speaker 3: least to see the Fed come out and say, hey,

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Speaker 3: we need to hike right at that point, all they

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Speaker 3: would need to do is just hint at it and

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Speaker 3: markets would price it in. So we view that as

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Speaker 3: a big risk. The other big risk that we see

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Speaker 3: that could potentially play out that we're paying real close

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Speaker 3: attention to is AI monetization. So you know, the AI

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Speaker 3: train has been running for a while now, we've seen

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Speaker 3: the benefits of it, and names like a video, some

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Speaker 3: of the software names are starting to really popping out too.

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Speaker 3: And trust me, we've been benefit or beneficiaries of that

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Speaker 3: through our stock managers and so on. But we now

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Speaker 3: are at the point where I think the market needs

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Speaker 3: to see results when it comes to earnings. So earnings

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Speaker 3: are expected to grow mid teens next year. Profit margins

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Speaker 3: are expected to expand about mid teens as well. Well.

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Speaker 3: I think a lot of that is based on AI

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Speaker 3: and what AI can do. If we start to see

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Speaker 3: a miss in that, that's going to be a real

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Speaker 3: risk to the market. So those are kind of the

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Speaker 3: two big things that we're looking at. Well. Three the

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Speaker 3: FED changing course inflation and then AI monetization that could

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Speaker 3: potentially throw off what we think will be a decent

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Speaker 3: year based on deregulation and m and a picking up.

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Speaker 1: So, Pat, I'm curious about where you're finding opportunities in

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Speaker 1: the equity market right now. We talked a moment ago

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Speaker 1: about the sell off today, not just in the broader market,

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Speaker 1: but I was struck by the fact that small cap

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Speaker 1: shures we're especially hard hit. So there seems to be

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Speaker 1: a concern in markets now that yes, the economy may

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Speaker 1: be downshifting a little bit under the weight of higher

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Speaker 1: rates and as the FED recalculates the notion of aggressive

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Speaker 1: rate cuts in the new year. It seems like the

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Speaker 1: stocks that are more exposed to the domestic economy are

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Speaker 1: now a lot more vulnerable.

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Speaker 3: You bring up a really good point, Doug. So we

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Speaker 3: think it will be a stock pickers market next year.

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Speaker 3: So we do think it will be a decent year

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Speaker 3: for the as a whole. But we think that fundamentals

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Speaker 3: are still really going to matter.

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Speaker 1: Right.

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Speaker 3: It's not going to be one of these environments where

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Speaker 3: there's excessive cutting going going on and it kind of

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Speaker 3: raises all boats with the tie. We think that you know,

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Speaker 3: Pal is going to be very cautious as he cuts,

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Speaker 3: just as he said today, and because of that, we're

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Speaker 3: going to be in a higher rate environment than anticipated.

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Speaker 3: In that sort of environment, fundamentals are extremely important, which

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Speaker 3: is one of the reasons why we prefer active management

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Speaker 3: over passive management. We think active managers, things like hedge

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Speaker 3: funds could have a really big year next year. In fact,

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Speaker 3: in fact, Blackrock did a study basically going back to

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Speaker 3: nineteen ninety four and they took a look at when

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Speaker 3: rates were below two percent and above two percent, and

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Speaker 3: then took a look at hedge fund performance. Right, So

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Speaker 3: when rates were above two percent, hedge funds performed at

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Speaker 3: about twelve percent per animal. When rates were below two percent,

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Speaker 3: hedge funds did about five percent per in them, right.

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Speaker 3: So it just shows you that when rates are higher,

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Speaker 3: as Warren Buffett says, it's going to gravity for asset prices.

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Speaker 3: And that's a stock picker seven right there, which is

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Speaker 3: one of the reasons why we're getting more exposure to

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Speaker 3: hedge funds and active management going into next year.

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Speaker 1: So away from the equity market, when you look at

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Speaker 1: fixed income, are you finding opportunities in corporates.

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Speaker 3: You know, because we're concerned about inflation still, We're really

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Speaker 3: not doing anything too fancy within fixed income our fixed

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Speaker 3: income bucket. Being a heavy alternative manager is more so

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Speaker 3: things like again, hedge funds, private equity, private credit is

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Speaker 3: a big thing in our portfolios. We still like golden

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Speaker 3: commodities a lot. We think gold will be a great

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Speaker 3: hedge going forward. You know, Bitcoin, we don't own it

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Speaker 3: in a big way. We're not you know, extremely exposed

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Speaker 3: to it, but we are bullish on it. So we're

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Speaker 3: starting to see institutional adoption there and we could see

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Speaker 3: prices go higher. We have some client specific positions, which

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Speaker 3: is why we monitor the asset class. But yeah, we

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Speaker 3: anticipate bitcoin goal commodities all to run higher if inflation

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Speaker 3: stays a bit hotter.

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Speaker 1: So we've talked a lot about the US. I'm curious Pat,

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Speaker 1: whether you're seeing opportunities offshore these days, whether it's Europe

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Speaker 1: or Asia. Is there anything there?

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Speaker 3: Yeah? Great, great question, Doug. So you know our long

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Speaker 3: term stance on China. You know, we kind of say data,

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Speaker 3: don't marry it, right, but we have been seeing some

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Speaker 3: really good trading opportunities in China around the headlines. So

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Speaker 3: as a new round of stimulus is anticipated and that

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Speaker 3: sort of thing, you see a lot of great momentum

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Speaker 3: take place. We're playing that more in the short term

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Speaker 3: through names like k web and that sort of thing,

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Speaker 3: rather than you know, locking in for long term investments.

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Speaker 3: But we do see some trades there in the next

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Speaker 3: call it, you know, three to six months.

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Speaker 1: Pat will leave it there. It's always a pleasure. Thanks

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Speaker 1: for joining us today and all the best for the

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Speaker 1: year ahead. Pat Kennedy is founding partner at All Source

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Speaker 1: Investment Management, joining us from Hartford, Connecticut here on the

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Speaker 1: Daybreak Asia podcast. Thanks for listening to today's episode of

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Speaker 1: the Bloomberg Daybreak Asia Edition podcast. Each weekday, we look

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Speaker 1: at the story shaping markets, finance, and geopolitics in the

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Speaker 1: Asia Pacific. You can find us on Apple, Spotify, the

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Speaker 1: Bloomberg Podcast YouTube channel, or anywhere else you listen. Join

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Speaker 1: us again tomorrow for insight on the market moves from

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Speaker 1: Hong Kong to Singapore and Australia. I'm Doug Prisoner and

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Speaker 1: this is Bloomberg