Speaker 1: Let's get to our guests for this half hour. Mike Franklin.
Speaker 1: He's managing director and senior portfolio manager, A Man Your Life,
Speaker 1: and Mike was seeing a little bit of modest weakness
Speaker 1: on some markets. Today. We've got the Nick in positive Territory.
Speaker 1: You had a very whipstory kind of Dave for the
Speaker 1: US is does that risk really that we saw in
Speaker 1: the past couple of days done? Can you see markets
Speaker 1: holding onto those gains that we saw morning Pool. I
Speaker 1: think that we have to look at what's happened just before.
Speaker 1: We've had the two correction in financial markets across most
Speaker 1: asset classes. We got to points at the start of
Speaker 1: this week where markets were oversold technically in position for
Speaker 1: some kind of bounce. And over the last few days
Speaker 1: we've seen two or three central banks take measures which
Speaker 1: has got the market somewhat excited. So if you take
Speaker 1: the Reserve Bank of Australia, they only raised interest rates
Speaker 1: by twenty five basis points versus expectations of fifty. The
Speaker 1: Bank of Japhan has started to intervene in the FX market.
Speaker 1: The Bank of England intervened in the long end of
Speaker 1: the guilt's curve, so market participants. Some of them are saying,
Speaker 1: is the FED next? And if the FED is next,
Speaker 1: does that constitute a pivot? And if we see a pivot,
Speaker 1: that would be quite constructive for risk appetite. Premature to
Speaker 1: conclude that the u S data is not giving them
Speaker 1: sufficient room to do that, but coming from oversould conditions,
Speaker 1: it's understandable that there are some market participants that are
Speaker 1: looking to take advantage of that opportunity. Yeah, the key
Speaker 1: question though, is the fit next. We've heard some pretty
Speaker 1: porkers remarks from Mary Daily and Raphael Bostick in the
Speaker 1: past a few hours, and Mary Daily also calling inflation corrosive.
Speaker 1: They're giving no signs of a pivot at the moment,
Speaker 1: are they. We would look at the data on the
Speaker 1: inflation side, on the jobs market side to conclude that
Speaker 1: it is insufficient evidence for the Fed to start to
Speaker 1: talk a more softer tone. So some market participants may
Speaker 1: be disappointed if they don't see a slowing down of
Speaker 1: rate hikes before the end of this year. And indeed,
Speaker 1: if you look at market pricing, it's still the expectation
Speaker 1: that the FED will move seventy five basis points again
Speaker 1: at the next meeting, So the conclusion that we would
Speaker 1: have a manual life is that it's still too early
Speaker 1: to expect a pivot. Yeah, that seventy five basis point
Speaker 1: cut November does seem to be pretty much baked in.
Speaker 1: But what about after that? We've we've got Raphael Bostick saying, well,
Speaker 1: we're going to get to four and a half percent
Speaker 1: and then take a little breather. What happens next year? Though,
Speaker 1: it all comes down to what happens to inflation, and
Speaker 1: there the picture becomes a little bit unclear. There are
Speaker 1: certain categories within the inflation complex, such as energy, which
Speaker 1: will show via base effects a slowing down the momentum.
Speaker 1: But on the flip side, there are more persistent or
Speaker 1: stickier categories such as shelter or owner's equivalent rent which
Speaker 1: are showing material upside movement, as well as other categories
Speaker 1: such as medical equipment of medical care. So if you
Speaker 1: fast forward a few months, it's likely that core inflation
Speaker 1: will may have peaked, but it's not going to come
Speaker 1: down at the kind of pace that some market participants
Speaker 1: are hoping for. Um. I want to start ap peeling
Speaker 1: that energy onion in a moment, but just before we
Speaker 1: get to that very quickly. Do you think we've seen
Speaker 1: Pete Dolly yet? Very good question. I mean, ultimately, the
Speaker 1: do that is a reflection of interest rate differentials and
Speaker 1: by extension, inflation and growth differentials. So for the time being,
Speaker 1: the US economy is holding up reasonably well. The consumer
Speaker 1: is still optimistic, and therefore US consumer spending growth is
Speaker 1: still positive. As long as the US economy looks relatively
Speaker 1: robust against other regions, it's hard to call a complete
Speaker 1: top in the dollar. And Marc I said I wanted
Speaker 1: to talk about energy prices. We did, of course get
Speaker 1: the news as expected O Pick plus cutting supply by
Speaker 1: two million barrels per day. But coupled with that, we
Speaker 1: do have the strong dollar that we mentioned where we
Speaker 1: left off. So what are the implications here for emerging
Speaker 1: market economies. You have to split the emerging market economies
Speaker 1: into those that are net produces and exporters of energy
Speaker 1: and those that are net importers of energy. Those that
Speaker 1: are net exporters will actually be quite comforted by the
Speaker 1: decision that I Pick plus two yesterday and an increasingly
Speaker 1: tight physical market, whereas those emerging markets that are energy
Speaker 1: importers will concern themselves with what this means for the
Speaker 1: next round of inflation pressures. Should all prices continue to
Speaker 1: rise in the near term, there's a got more pressure
Speaker 1: on countries like Japan as well. I mean, ultimately they
Speaker 1: have a release valve for that pressure via the currency,
Speaker 1: and they continue to adopt what appears to be a
Speaker 1: very very loose montary policy with air your curve control.
Speaker 1: So the extent to which this drives further weakening of
Speaker 1: the yen against other cross currencies at a pace that
Speaker 1: they're uncomfortable with, it may force them to interview more aggressively. Yeah.
Speaker 1: Of course, the supply cuts just going to stoke energy
Speaker 1: price inflation as well. We do have inflation all over
Speaker 1: the place right now. What is going to happen? First,
Speaker 1: do we get inflation under control or is there going
Speaker 1: to be a global recession? I think we have to
Speaker 1: define what under control means. I mean, ultimately central bank
Speaker 1: inflation targets. If you take the US is a reversion
Speaker 1: towards a two percent inflation rates on the core PC measure.
Speaker 1: It's going to take some time to get there. If
Speaker 1: you look at previous inflationary cycles, it takes several quarters
Speaker 1: rather than several months. To get there, and that perhaps
Speaker 1: creates a sufficiently wide window for growth dynamics to come
Speaker 1: under increasing pressure. Now you're and playing a defense and
Speaker 1: your portfolio, what does that mean exactly? Do you look
Speaker 1: at havens, do you look at bonds? How's your cash
Speaker 1: allocation right now? Yeh, cash allocations are relatively high, and
Speaker 1: we've had to accept that when you see central banks
Speaker 1: so aggressively withdrawal liquidity from financial markets, it affects all
Speaker 1: asset classes, not just those risk assets, but also those
Speaker 1: more defensive assets. Traditionally, and we've seen this year traditionally
Speaker 1: defensive assets such as fixed income have not proven defensive.
Speaker 1: So we've had to appraise the macro environment. And we've
Speaker 1: talked about an environment which is increasingly stagflationary. So which
Speaker 1: types of asset classes performed resiliently in an inflationary environments?
Speaker 1: And energy is one example there, not all commodities necessarily,
Speaker 1: because as you mentioned earlier, the US dollar can pose
Speaker 1: somewhat of a headwinds to other commodity asset classes. Yeah,
Speaker 1: it's a been a while since we've heard somebody use
Speaker 1: the term stagflation here. Do you have serious concerns about
Speaker 1: global growth? At the moment. The extent to which central
Speaker 1: banks are in a very invidious position makes us concerned
Speaker 1: about the ability which they can restimulate growth anytime soon.
Speaker 1: So we are facing inflationary pressures, and not just at
Speaker 1: the reported level, but also at the core level, so
Speaker 1: inflation dynamics broadening out. They're also under significant pressure to
Speaker 1: effectively call off demand because they are unable to control supply.
Speaker 1: And until those supply situations ease, particularly around physical commodities,
Speaker 1: which they don't look like they're easing anytime soon, then
Speaker 1: it creates a difficult environment for policymakers to try to
Speaker 1: strike a balance between inflation control and supporting growth. We
Speaker 1: were talking about one of our guests last hour as
Speaker 1: well about the risk of earnings recessions. When you cast
Speaker 1: your eye across the SMP and the data as well,
Speaker 1: which companies are looking vulnerable to you at the moment. Well,
Speaker 1: I think we take a more sectoral approach and try
Speaker 1: to identify those sectors that are genuinely speaking quite supported
Speaker 1: in terms of their earnings dynamics in an inflationary dynamics.
Speaker 1: So if you take the utility sector as an example,
Speaker 1: it tends to get costs passed through with its regulated
Speaker 1: price level, so there is a certain degree of defensiveness
Speaker 1: in their earnings trajectory, even when there are cost pressures
Speaker 1: coming from the energy side, and some some companies within
Speaker 1: the consumer staples sector have such strong market positions which
Speaker 1: enables them to have pricing power and pass on those
Speaker 1: costs increases to consumers. On the flip side, we want
Speaker 1: to be avoiding those sectors where they're highly fragmented from
Speaker 1: a competition point of view, and generally speaking they default
Speaker 1: competing on price. Those are the types of the earnings
Speaker 1: complex which are vulnerable in this situation. Alright, Marc Franklin,
Speaker 1: we are out of time, but thanks so much for
Speaker 1: joining us on the Bloomberg daybreak ages today. Mark Franklin
Speaker 1: is managing director and Senior portfolio manager and Manu Life
Speaker 1: Investment Management