WEBVTT - Robert Hoffman on the Markets (Radio)

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<v Speaker 1>Let's get to Robert Hoffman, our guest to who joins

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<v Speaker 1>us from Singapore. Robert is head of investment Counselors for

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<v Speaker 1>South Asia at City Private Bank. Robert, thanks for being

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<v Speaker 1>with us. I don't know whether you've been to the

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<v Speaker 1>office yet, but I'm sure through your smartphones some clients

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<v Speaker 1>have been in touch. They've seen the selldown and US

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<v Speaker 1>risk assets. They've got a lot of questions about recession,

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<v Speaker 1>earnings contraction. UM, what kind of questions are you fielding

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<v Speaker 1>at this moment from your clients? I think, good morning,

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<v Speaker 1>Thank you very much for having me. I think the

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<v Speaker 1>very first part of this is this is seasonal and

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<v Speaker 1>we typically see a slowdown in trading and a slowdown

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<v Speaker 1>in volumes at this time, and that's no different this year.

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<v Speaker 1>The big releases of economic data rolling through over the

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<v Speaker 1>last couple of weeks, they certainly have had an impact

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<v Speaker 1>on markets and direct positioning from clients, but by and large,

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<v Speaker 1>clients are willing to sit this one out through the

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<v Speaker 1>end of the year until the next big data releases

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<v Speaker 1>start rolling in early January. The one notable exception is

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<v Speaker 1>what we're seeing in China. UM. Interestingly is we saw

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<v Speaker 1>before the Chinese reopening and the announcements of the Chinese

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<v Speaker 1>and Hong Kong reopening, we seen net sellers of Chinese equities,

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<v Speaker 1>and given the run up we've seen an equity markets

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<v Speaker 1>here in China, we would have expected those flows to change,

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<v Speaker 1>but actually what we've seen is selling into that strength

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<v Speaker 1>from clients who now have excess cash positions. So it

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<v Speaker 1>just further reinforces the theme clients are sitting in a

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<v Speaker 1>lot of cash waiting for next year to start. And

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<v Speaker 1>prospect this for next year, what do you anticipate that

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<v Speaker 1>cash is gonna end up being deployed. Well, we obviously

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<v Speaker 1>fixed income markets have absorbed a lot of this with

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<v Speaker 1>with the rise and interest rates over the course of

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<v Speaker 1>this year and in the expectation for continuing FED pressures

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<v Speaker 1>on interest rates in the first half of next year. Uh,

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<v Speaker 1>it's certainly going to attract more and more capital. So

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<v Speaker 1>I think clients are happy to sit on cash until

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<v Speaker 1>there's more clarity around the economic picture and the the

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<v Speaker 1>endpoint for where the FED is going to stop. But

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<v Speaker 1>also I think that the focus will shift in the

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<v Speaker 1>new year as we get more and more clarity around

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<v Speaker 1>the Chinese reopening and the potential for reopening with with

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<v Speaker 1>Hong Kong and more broadly to the to the global

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<v Speaker 1>trading environment. We'll see, But I think there's a lot

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<v Speaker 1>of dry powder there that could be put to work

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<v Speaker 1>very quickly, and so that's why we're fairly optimistic heading

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<v Speaker 1>in the next year for some parts of the world,

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<v Speaker 1>but relatively subdued on western countries such as the US

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<v Speaker 1>as well as UK and and more broadly in the

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<v Speaker 1>Eurozone over the winter. So do you think the picture

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<v Speaker 1>on the mainline is not going to be really clear

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<v Speaker 1>in the way that it ought to be, let's say,

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<v Speaker 1>for six months from now. I mean, it seems like this,

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<v Speaker 1>this reopening, given the COVID infection situation, is going to

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<v Speaker 1>be something that's going to unraveled and fits and starts. Yeah. Look,

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<v Speaker 1>if you look to the U S right now, it's

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<v Speaker 1>it's not just COVID itself, it's that people have really

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<v Speaker 1>been protected and insulated from viruses and illness more broadly,

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<v Speaker 1>and you're seeing this resurgence of illnesses which were typically

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<v Speaker 1>very benign and mild, all of a sudden, affecting a

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<v Speaker 1>vast swath of the population in the US. China is

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<v Speaker 1>going to go through the same experience here, but on

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<v Speaker 1>an accelerated path. But just because given that that they've

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<v Speaker 1>been through this process longer they've had they've they've lost

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<v Speaker 1>a little bit of that immunity. Um they're going to

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<v Speaker 1>be some fits and starts over the course of the

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<v Speaker 1>first quarter, But largely, the biggest issue for us is

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<v Speaker 1>that this is such a rapid change in policy, and

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<v Speaker 1>it's happened so quickly that it's it's hard to tell

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<v Speaker 1>what the next big appid changes are or the speed

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<v Speaker 1>with which they could happen. So again, we're optimistic, but

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<v Speaker 1>we're it's hard to find a direct line as to

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<v Speaker 1>where we want to go. I will say the travel

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<v Speaker 1>and leisure sector sectors as well as the services sectors

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<v Speaker 1>are certainly ripe for investment at this point, and this

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<v Speaker 1>is where client should be looking to expand their holdings.

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<v Speaker 1>And what about the materials sactive because we've had a

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<v Speaker 1>few bullish calls around expectations around commodities prices for three, Yeah,

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<v Speaker 1>a bit more nuanced there. I think the housing sector

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<v Speaker 1>and we've gotten some stimulative measures there, but the overhang

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<v Speaker 1>on the housing sector right now it could be a

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<v Speaker 1>long lived problem, and that is going to really affect

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<v Speaker 1>some of the materials demand their onshore in China, and

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<v Speaker 1>given the weakening the weakening situation in Europe as well

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<v Speaker 1>as in North America, that's likely not going to change

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<v Speaker 1>very quickly. However, other commodities, like energy commodities, coal, oil gas,

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<v Speaker 1>these are areas where there could be a rapid acceleration

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<v Speaker 1>in pricing and and I guess in a strange way

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<v Speaker 1>that actually probably worsens the environment for the FED to

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<v Speaker 1>be able to make decisions going forward with their rate policies.

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<v Speaker 1>They try to combat inflation on that front because it's

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<v Speaker 1>such a feed through to other asset classes. So how

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<v Speaker 1>do you want to be exposed to markets or economies

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<v Speaker 1>that are connected with the China and the trade dynamic.

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<v Speaker 1>I mean, Paul is talking commodities, He's thinking Australia, I'm

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<v Speaker 1>imagining and then I'm thinking, uh, North Asia, I'm thinking Japan,

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<v Speaker 1>I'm thinking South Korea, I'm thinking Taiwan. At the same time,

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<v Speaker 1>do you do you want to be able to to

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<v Speaker 1>strategically put money to work in markets that are reliant

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<v Speaker 1>on trade with China. I don't know that that's a

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<v Speaker 1>direct line that you want to use as the catalyst

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<v Speaker 1>for driving, but it certainly is an accelerant for why

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<v Speaker 1>you'd want to have exposure to different economies. Australia, absolutely,

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<v Speaker 1>I think that there's a real compelling case there for investment. However,

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<v Speaker 1>equity markets have already valued a little bit of that

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<v Speaker 1>in and so you're seeing richer valuations in that market.

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<v Speaker 1>I do think the currency, the Azzi dollar is probably

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<v Speaker 1>right for the best appreciation, so on a risk adjusted basis,

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<v Speaker 1>that might be the most attractive asset class within the

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<v Speaker 1>Australia market over the course of the next year. Japan, again,

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<v Speaker 1>they they have not had the pressures as far as

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<v Speaker 1>raising rates, so they've seen a weakening in their currency

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<v Speaker 1>that is going to take a toll on some of

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<v Speaker 1>their corporate earnings over the coming months. Therefore, and Japanese

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<v Speaker 1>equities might be a little bit challenged here in the

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<v Speaker 1>short term. Albeit the end again, the same story around

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<v Speaker 1>currency markets could actually be the real investment opportunity there

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<v Speaker 1>in the near term. Other economies Singapore, Indonesia, Uh, there

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<v Speaker 1>are opportunities, I think, and you're going to see that

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<v Speaker 1>resurgence of service and travel help to lift those markets

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<v Speaker 1>as well as other economies around the world have reopened,

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<v Speaker 1>but of course had to grapple with pandapics amount excuse me,

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<v Speaker 1>and rising inflation. Is this something you see in China's future? Absolutely.

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<v Speaker 1>I looked no further than the travel sector. I think

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<v Speaker 1>one of the areas of concern for for for us

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<v Speaker 1>here in Singapore as we sit today, is that it's

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<v Speaker 1>hard to get flights into to pay a reasonable cost

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<v Speaker 1>given some of the inflationary pressures we've seen on those

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<v Speaker 1>travel services. As that market begins to reopen, you can't

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<v Speaker 1>immediately flip the switch and get new pilots to hop

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<v Speaker 1>into airplanes, or get new capacity at runways at airports.

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<v Speaker 1>So there are gonna be some real logistical challenges that

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<v Speaker 1>we're going to face in the coming months, and there's

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<v Speaker 1>certainly going to be some inflationary pressures on some of

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<v Speaker 1>those countries and some of the surrounding economies, and I

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<v Speaker 1>think that's one of the areas of focus that we're

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<v Speaker 1>gonna have. How do you work through that and how

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<v Speaker 1>do you actually benefit as an investor from that. It's

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<v Speaker 1>interesting you make that point because here in the States

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<v Speaker 1>we had that disappointing retail sales number, but a part

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<v Speaker 1>of that data indicated that there is a shift now

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<v Speaker 1>towards greater spending on services. And and then I'm looking

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<v Speaker 1>at a new story that we had in the Bloomberg

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<v Speaker 1>terminal talking about the customer service agents at Southwest Airlines.

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<v Speaker 1>They've approved a new five year contract twenty general wage

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<v Speaker 1>increase over four years. So maybe we're underestimating the stickiness

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<v Speaker 1>of these inflationary pressures, particularly when it comes to services.

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<v Speaker 1>And what does that say about maybe underestimating the resolve

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<v Speaker 1>that central banks will have to have to get it

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<v Speaker 1>back in the box. Yeah, and look higher for longer

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<v Speaker 1>is definitely a risk, and this is maybe one of

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<v Speaker 1>the most underappreciated risks as we head in the next year.

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<v Speaker 1>But it's not a focus that I think investors are

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<v Speaker 1>pricing in today. Uh, look at Lenar's earnings last night

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<v Speaker 1>in the US, where they came out and said all

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<v Speaker 1>of the weaknesses that we had, all of the constraints

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<v Speaker 1>and pent up issues that we had, are actually now

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<v Speaker 1>supply gluts, so labor is coming back in and we're

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<v Speaker 1>able to hire workers. So there are going to be

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<v Speaker 1>some sectors where there's been that runaway inflationary pressure that

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<v Speaker 1>will start to be subdued in the first half of

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<v Speaker 1>next year. It just remains to be seen how pervasive

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<v Speaker 1>that is. Given the backdrop of China quickly re entering

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<v Speaker 1>the global trade economy, might be a good moment to

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<v Speaker 1>talk about your top risk for three, what do you see?

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<v Speaker 1>We have lots of risks were monitoring. We talked about

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<v Speaker 1>this in our midyear outlook, and we're going to mention

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<v Speaker 1>it again in our two thousand and twenty three outlook,

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<v Speaker 1>which is there have been a lot of little fires

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<v Speaker 1>that have burned throughout the course of two some of

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<v Speaker 1>those have become big fires. So the COVID situation in China,

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<v Speaker 1>the question is is what what are the next big

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<v Speaker 1>fires to to really erupt? And and there are so

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<v Speaker 1>many issues, whether it's the trade negotiations between the U.

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<v Speaker 1>S and China, or it could be geopolitical tensions, and

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<v Speaker 1>that again China tends to come to the forefront strengthening China,

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<v Speaker 1>where you've seen a more silent central government here recently.

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<v Speaker 1>If that should change and they become a little bit

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<v Speaker 1>more hawkish on the policy front, uh, it remains to

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<v Speaker 1>be seen what the impact will be on economy, but

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<v Speaker 1>it certainly would be an overhang. And then the final

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<v Speaker 1>one that I think we're all monitoring right now is

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<v Speaker 1>that the Federal reserve as much as they want to

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<v Speaker 1>increase rates and we're seeing a softness in the CPI data.

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<v Speaker 1>What if that CPI number stays high and the Fed

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<v Speaker 1>does have to go higher than expectations, it could create

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<v Speaker 1>some negative consequences for everybody's for it seems to be

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<v Speaker 1>a consensus view that it's going to be a first

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<v Speaker 1>half weakness second half strength. That could actually delay that

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<v Speaker 1>story into okay, ten seconds on that last point to

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<v Speaker 1>sign a probability of of that that that the Fed

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<v Speaker 1>has got to continue going in a way that the

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<v Speaker 1>market doesn't anticipate. And we've got that pegget about fifteen

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<v Speaker 1>percent right now in our probability spreadsheet. Robert, good stuff,

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<v Speaker 1>Thanks for dropping by our studios in Singapore. Robert Hoffman,

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<v Speaker 1>head of Investment Counselors for the Asia Pacific at City

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<v Speaker 1>Private Bank. This is Bloomberg