Speaker 1: Let's get to Robert Hoffman, our guest to who joins
Speaker 1: us from Singapore. Robert is head of investment Counselors for
Speaker 1: South Asia at City Private Bank. Robert, thanks for being
Speaker 1: with us. I don't know whether you've been to the
Speaker 1: office yet, but I'm sure through your smartphones some clients
Speaker 1: have been in touch. They've seen the selldown and US
Speaker 1: risk assets. They've got a lot of questions about recession,
Speaker 1: earnings contraction. UM, what kind of questions are you fielding
Speaker 1: at this moment from your clients? I think, good morning,
Speaker 1: Thank you very much for having me. I think the
Speaker 1: very first part of this is this is seasonal and
Speaker 1: we typically see a slowdown in trading and a slowdown
Speaker 1: in volumes at this time, and that's no different this year.
Speaker 1: The big releases of economic data rolling through over the
Speaker 1: last couple of weeks, they certainly have had an impact
Speaker 1: on markets and direct positioning from clients, but by and large,
Speaker 1: clients are willing to sit this one out through the
Speaker 1: end of the year until the next big data releases
Speaker 1: start rolling in early January. The one notable exception is
Speaker 1: what we're seeing in China. UM. Interestingly is we saw
Speaker 1: before the Chinese reopening and the announcements of the Chinese
Speaker 1: and Hong Kong reopening, we seen net sellers of Chinese equities,
Speaker 1: and given the run up we've seen an equity markets
Speaker 1: here in China, we would have expected those flows to change,
Speaker 1: but actually what we've seen is selling into that strength
Speaker 1: from clients who now have excess cash positions. So it
Speaker 1: just further reinforces the theme clients are sitting in a
Speaker 1: lot of cash waiting for next year to start. And
Speaker 1: prospect this for next year, what do you anticipate that
Speaker 1: cash is gonna end up being deployed. Well, we obviously
Speaker 1: fixed income markets have absorbed a lot of this with
Speaker 1: with the rise and interest rates over the course of
Speaker 1: this year and in the expectation for continuing FED pressures
Speaker 1: on interest rates in the first half of next year. Uh,
Speaker 1: it's certainly going to attract more and more capital. So
Speaker 1: I think clients are happy to sit on cash until
Speaker 1: there's more clarity around the economic picture and the the
Speaker 1: endpoint for where the FED is going to stop. But
Speaker 1: also I think that the focus will shift in the
Speaker 1: new year as we get more and more clarity around
Speaker 1: the Chinese reopening and the potential for reopening with with
Speaker 1: Hong Kong and more broadly to the to the global
Speaker 1: trading environment. We'll see, But I think there's a lot
Speaker 1: of dry powder there that could be put to work
Speaker 1: very quickly, and so that's why we're fairly optimistic heading
Speaker 1: in the next year for some parts of the world,
Speaker 1: but relatively subdued on western countries such as the US
Speaker 1: as well as UK and and more broadly in the
Speaker 1: Eurozone over the winter. So do you think the picture
Speaker 1: on the mainline is not going to be really clear
Speaker 1: in the way that it ought to be, let's say,
Speaker 1: for six months from now. I mean, it seems like this,
Speaker 1: this reopening, given the COVID infection situation, is going to
Speaker 1: be something that's going to unraveled and fits and starts. Yeah. Look,
Speaker 1: if you look to the U S right now, it's
Speaker 1: it's not just COVID itself, it's that people have really
Speaker 1: been protected and insulated from viruses and illness more broadly,
Speaker 1: and you're seeing this resurgence of illnesses which were typically
Speaker 1: very benign and mild, all of a sudden, affecting a
Speaker 1: vast swath of the population in the US. China is
Speaker 1: going to go through the same experience here, but on
Speaker 1: an accelerated path. But just because given that that they've
Speaker 1: been through this process longer they've had they've they've lost
Speaker 1: a little bit of that immunity. Um they're going to
Speaker 1: be some fits and starts over the course of the
Speaker 1: first quarter, But largely, the biggest issue for us is
Speaker 1: that this is such a rapid change in policy, and
Speaker 1: it's happened so quickly that it's it's hard to tell
Speaker 1: what the next big appid changes are or the speed
Speaker 1: with which they could happen. So again, we're optimistic, but
Speaker 1: we're it's hard to find a direct line as to
Speaker 1: where we want to go. I will say the travel
Speaker 1: and leisure sector sectors as well as the services sectors
Speaker 1: are certainly ripe for investment at this point, and this
Speaker 1: is where client should be looking to expand their holdings.
Speaker 1: And what about the materials sactive because we've had a
Speaker 1: few bullish calls around expectations around commodities prices for three, Yeah,
Speaker 1: a bit more nuanced there. I think the housing sector
Speaker 1: and we've gotten some stimulative measures there, but the overhang
Speaker 1: on the housing sector right now it could be a
Speaker 1: long lived problem, and that is going to really affect
Speaker 1: some of the materials demand their onshore in China, and
Speaker 1: given the weakening the weakening situation in Europe as well
Speaker 1: as in North America, that's likely not going to change
Speaker 1: very quickly. However, other commodities, like energy commodities, coal, oil gas,
Speaker 1: these are areas where there could be a rapid acceleration
Speaker 1: in pricing and and I guess in a strange way
Speaker 1: that actually probably worsens the environment for the FED to
Speaker 1: be able to make decisions going forward with their rate policies.
Speaker 1: They try to combat inflation on that front because it's
Speaker 1: such a feed through to other asset classes. So how
Speaker 1: do you want to be exposed to markets or economies
Speaker 1: that are connected with the China and the trade dynamic.
Speaker 1: I mean, Paul is talking commodities, He's thinking Australia, I'm
Speaker 1: imagining and then I'm thinking, uh, North Asia, I'm thinking Japan,
Speaker 1: I'm thinking South Korea, I'm thinking Taiwan. At the same time,
Speaker 1: do you do you want to be able to to
Speaker 1: strategically put money to work in markets that are reliant
Speaker 1: on trade with China. I don't know that that's a
Speaker 1: direct line that you want to use as the catalyst
Speaker 1: for driving, but it certainly is an accelerant for why
Speaker 1: you'd want to have exposure to different economies. Australia, absolutely,
Speaker 1: I think that there's a real compelling case there for investment. However,
Speaker 1: equity markets have already valued a little bit of that
Speaker 1: in and so you're seeing richer valuations in that market.
Speaker 1: I do think the currency, the Azzi dollar is probably
Speaker 1: right for the best appreciation, so on a risk adjusted basis,
Speaker 1: that might be the most attractive asset class within the
Speaker 1: Australia market over the course of the next year. Japan, again,
Speaker 1: they they have not had the pressures as far as
Speaker 1: raising rates, so they've seen a weakening in their currency
Speaker 1: that is going to take a toll on some of
Speaker 1: their corporate earnings over the coming months. Therefore, and Japanese
Speaker 1: equities might be a little bit challenged here in the
Speaker 1: short term. Albeit the end again, the same story around
Speaker 1: currency markets could actually be the real investment opportunity there
Speaker 1: in the near term. Other economies Singapore, Indonesia, Uh, there
Speaker 1: are opportunities, I think, and you're going to see that
Speaker 1: resurgence of service and travel help to lift those markets
Speaker 1: as well as other economies around the world have reopened,
Speaker 1: but of course had to grapple with pandapics amount excuse me,
Speaker 1: and rising inflation. Is this something you see in China's future? Absolutely.
Speaker 1: I looked no further than the travel sector. I think
Speaker 1: one of the areas of concern for for for us
Speaker 1: here in Singapore as we sit today, is that it's
Speaker 1: hard to get flights into to pay a reasonable cost
Speaker 1: given some of the inflationary pressures we've seen on those
Speaker 1: travel services. As that market begins to reopen, you can't
Speaker 1: immediately flip the switch and get new pilots to hop
Speaker 1: into airplanes, or get new capacity at runways at airports.
Speaker 1: So there are gonna be some real logistical challenges that
Speaker 1: we're going to face in the coming months, and there's
Speaker 1: certainly going to be some inflationary pressures on some of
Speaker 1: those countries and some of the surrounding economies, and I
Speaker 1: think that's one of the areas of focus that we're
Speaker 1: gonna have. How do you work through that and how
Speaker 1: do you actually benefit as an investor from that. It's
Speaker 1: interesting you make that point because here in the States
Speaker 1: we had that disappointing retail sales number, but a part
Speaker 1: of that data indicated that there is a shift now
Speaker 1: towards greater spending on services. And and then I'm looking
Speaker 1: at a new story that we had in the Bloomberg
Speaker 1: terminal talking about the customer service agents at Southwest Airlines.
Speaker 1: They've approved a new five year contract twenty general wage
Speaker 1: increase over four years. So maybe we're underestimating the stickiness
Speaker 1: of these inflationary pressures, particularly when it comes to services.
Speaker 1: And what does that say about maybe underestimating the resolve
Speaker 1: that central banks will have to have to get it
Speaker 1: back in the box. Yeah, and look higher for longer
Speaker 1: is definitely a risk, and this is maybe one of
Speaker 1: the most underappreciated risks as we head in the next year.
Speaker 1: But it's not a focus that I think investors are
Speaker 1: pricing in today. Uh, look at Lenar's earnings last night
Speaker 1: in the US, where they came out and said all
Speaker 1: of the weaknesses that we had, all of the constraints
Speaker 1: and pent up issues that we had, are actually now
Speaker 1: supply gluts, so labor is coming back in and we're
Speaker 1: able to hire workers. So there are going to be
Speaker 1: some sectors where there's been that runaway inflationary pressure that
Speaker 1: will start to be subdued in the first half of
Speaker 1: next year. It just remains to be seen how pervasive
Speaker 1: that is. Given the backdrop of China quickly re entering
Speaker 1: the global trade economy, might be a good moment to
Speaker 1: talk about your top risk for three, what do you see?
Speaker 1: We have lots of risks were monitoring. We talked about
Speaker 1: this in our midyear outlook, and we're going to mention
Speaker 1: it again in our two thousand and twenty three outlook,
Speaker 1: which is there have been a lot of little fires
Speaker 1: that have burned throughout the course of two some of
Speaker 1: those have become big fires. So the COVID situation in China,
Speaker 1: the question is is what what are the next big
Speaker 1: fires to to really erupt? And and there are so
Speaker 1: many issues, whether it's the trade negotiations between the U.
Speaker 1: S and China, or it could be geopolitical tensions, and
Speaker 1: that again China tends to come to the forefront strengthening China,
Speaker 1: where you've seen a more silent central government here recently.
Speaker 1: If that should change and they become a little bit
Speaker 1: more hawkish on the policy front, uh, it remains to
Speaker 1: be seen what the impact will be on economy, but
Speaker 1: it certainly would be an overhang. And then the final
Speaker 1: one that I think we're all monitoring right now is
Speaker 1: that the Federal reserve as much as they want to
Speaker 1: increase rates and we're seeing a softness in the CPI data.
Speaker 1: What if that CPI number stays high and the Fed
Speaker 1: does have to go higher than expectations, it could create
Speaker 1: some negative consequences for everybody's for it seems to be
Speaker 1: a consensus view that it's going to be a first
Speaker 1: half weakness second half strength. That could actually delay that
Speaker 1: story into okay, ten seconds on that last point to
Speaker 1: sign a probability of of that that that the Fed
Speaker 1: has got to continue going in a way that the
Speaker 1: market doesn't anticipate. And we've got that pegget about fifteen
Speaker 1: percent right now in our probability spreadsheet. Robert, good stuff,
Speaker 1: Thanks for dropping by our studios in Singapore. Robert Hoffman,
Speaker 1: head of Investment Counselors for the Asia Pacific at City
Speaker 1: Private Bank. This is Bloomberg