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Speaker 1: Our guest is Jason Thomas, managing director and head of

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Speaker 1: Global research at Carlisle, with us to take a look

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Speaker 1: at markets. Jason, I suppose we knew this was coming

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Speaker 1: after Jerome Powell told us at Jackson Hole that the

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Speaker 1: FED was prepared to accept recession in order to beat inflation.

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Speaker 1: So do you accept that recession is coming and do

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Speaker 1: we end up beating inflation? Well, first of all, thanks

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Speaker 1: very much for having me. I would say that instilling

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Speaker 1: fear of a recession is very much a necessary ingredient

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Speaker 1: to get inflation back down towards target. Right now that

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Speaker 1: the FED is trying to take pricing power away from businesses,

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Speaker 1: and businesses are going to be less inclined to continue

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Speaker 1: to try to raise prices if they fear a recession,

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Speaker 1: because price increases in that circumstance would be self defeating.

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Speaker 1: It would It would just mean lost sales. In the

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Speaker 1: same way, fears of recession is a very effective way

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Speaker 1: psychologically to tamp down wage demands. Workers who are fearful

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Speaker 1: of recession, fearful of losing one's job, less inclined to

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Speaker 1: to again demand what wage increases. So let's be clear

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Speaker 1: that the rhetoric the hawk is rhetoric. And also of

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Speaker 1: course they put their money with their mouth is with

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Speaker 1: with the raid hikes seventy five basis points twice that

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Speaker 1: have occurred. The seventy five basis points, that's that's going

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Speaker 1: to arrive today. But a big part of this strategy

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Speaker 1: is again instilling the fear of recession so as to

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Speaker 1: to affect those pricing decisions and wage demands. Do you

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Speaker 1: see such an ugly scenario as what Neural Rabani is

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Speaker 1: seeing in terms of stock sinking potentially? No? And and

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Speaker 1: and so I think there's there's two points here. First

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Speaker 1: of all, I don't believe that we're likely to see

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Speaker 1: a very deep, prolonged, prolonged downturn. I say that because

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Speaker 1: when we look historically really over the last sixty years,

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Speaker 1: that the very deep contractions and economic activity are always

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Speaker 1: in everywhere caused by excess capath city uh and and

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Speaker 1: they're triggered when businesses try to downsize, they try to

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Speaker 1: shed payroll, they try to shed assets, they try to

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Speaker 1: cut losses and again reduce their footprint. And I think

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Speaker 1: what's been revealed by the pandemic is that over the

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Speaker 1: last decade, really the period since the global financial crisis.

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Speaker 1: There's been two little investment and and as a results

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Speaker 1: of the two little investment, you had extremely fragile global

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Speaker 1: supply chains. You had inventory levels that were just inadequate

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Speaker 1: that that you know, had no margin for any perturbation

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Speaker 1: to the system. Of course, there was insufficient investment in energy,

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Speaker 1: which has led to to insecure energy supplies. And and

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Speaker 1: so you know, I do think in all these areas

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Speaker 1: were likely to see increases of investment going forward. And

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Speaker 1: that's exactly again the opposite that one sees in those

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Speaker 1: deep downturns, which are which are always led by investment

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Speaker 1: declining more than proportionately to g d P, essentially driving

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Speaker 1: the decline in incomes employment. Uh and and you know,

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Speaker 1: just worsening they consumption outlook everything else. And and and then

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Speaker 1: just it's it's as far as stocks go in the

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Speaker 1: declinent valuations, you know, it's a very you have to

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Speaker 1: look across and and really stratify across valuations. If you

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Speaker 1: look at the top of stocks by valuation, they're about

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Speaker 1: above the historic valuation for the top of stocks. If

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Speaker 1: you look at the bottom forty percent, it actually looks

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Speaker 1: quite cheap with current valuations below a long run averages,

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Speaker 1: So so that's very very different. I wouldn't generalize about,

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Speaker 1: you know, overall downturn of of certainly of that magnitude.

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Speaker 1: I wanted to talk a little bit about China and

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Speaker 1: the differential between what we're seeing with the FIT and

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Speaker 1: the p BOC, because a lot of that is playing

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Speaker 1: into these incredible fixes we're getting from the PBOC. To

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Speaker 1: at what point do you see some optimism coming through

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Speaker 1: in the Chinese economy too? Things change after the party conguess.

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Speaker 1: I think they do, uh, And I think that there

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Speaker 1: is going to be a relaxation in terms of zero COVID,

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Speaker 1: but but you know, ultimately we'll see I think that

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Speaker 1: the more consequential aspect of the Chinese economy today is

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Speaker 1: of course in the property sector, and things do look grim,

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Speaker 1: and that the data are very bad in terms of

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Speaker 1: new floor space delivered, price trends implied, non performing loans, etcetera.

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Speaker 1: I do think it's important to note, however, that this

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Speaker 1: is very much an intentional policy, and right now housing

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Speaker 1: and residential real estate more generally just consumes too large

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Speaker 1: a share of China's GDP, consumes too large a share

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Speaker 1: of finite savings finite sidal resources. And you know this

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Speaker 1: made sense when you're moving four hundred million people from

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Speaker 1: the countryside to cities. But today, given change demographics, given

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Speaker 1: China's high tech ambitions, that savings would be much more

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Speaker 1: productive if channeled to advanced manufacturing, hardware, software, uh and

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Speaker 1: and also medical technology. And so you know this this

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Speaker 1: is a lot of pain in the near term. But

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Speaker 1: but I do think it's ext increasing China's potential growth

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Speaker 1: rate over you know, I would say certainly a three

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Speaker 1: to ten year horizon. So it seems like time is

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Speaker 1: is a very important factor here. I mentioned that your

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Speaker 1: commentary seemed reasonably positive about things maybe down the road,

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Speaker 1: not quite as bad as Norio Rabini's um long and

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Speaker 1: hard recession. Uh And then also on China, are you

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Speaker 1: are you optimistic, say a year from now? I am again,

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Speaker 1: I think that this the time really does matter quite

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Speaker 1: a lot. I think you know, you said said, quoting

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Speaker 1: the note that danger lurks in every direction. I think

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Speaker 1: that's right. If you look out over the next twelve months,

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Speaker 1: you have you know, a certainly a slowing US economy,

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Speaker 1: I mean the second quarter because pricing power was so

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Speaker 1: widely distributed across companies. You had top line growth in

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Speaker 1: the U S among public reporting businesses of four percent

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Speaker 1: year over year. I mean that that's going to slow considerably.

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Speaker 1: You're going to have, because of the dollar UH a

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Speaker 1: client of about four basis points and earnings just from

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Speaker 1: the translated value of foreign sales and earnings. You have

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Speaker 1: an energy crisis in Europe of uncertain depth and uncertain duration,

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Speaker 1: and of course the impact on GDP could be quite significant.

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Speaker 1: And and then you know, because of the dollar, you

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Speaker 1: have a lot of stress in many developing economies, short

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Speaker 1: on food, short on fuel UH and and you know

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Speaker 1: simply cannot obtain the dollars or dollar finance, cannot borrow

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Speaker 1: the dollar finance to to purchase food and fuel, and

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Speaker 1: you know a lot of uncertainty there. So you know,

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Speaker 1: the near term outlook is, you know, fairly grim. But

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Speaker 1: I think again, if if one takes a three to

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Speaker 1: five year horizon, there are a number of changes I

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Speaker 1: think in attitudes and in risk perceptions that actually augur

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Speaker 1: reasonably well for the global economy. I think again, the

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Speaker 1: reallocation in terms of China's economy, putting more of that savings,

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Speaker 1: more of those resources, and more productive use is something

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Speaker 1: that one would have to clude. It looks is going

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Speaker 1: to improve potential growth in the next five years. And

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Speaker 1: then as I mentioned, all of the investment coming online

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Speaker 1: to create redundancies, to create more resilient, more robust supply chains,

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Speaker 1: larger inventories, and and then I think ultimately the amount

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Speaker 1: of investment that's coming in energy as well as people

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Speaker 1: become more serious about energy security so very quickly, Jason,

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Speaker 1: the best opportunity now in the short term, well, I

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Speaker 1: think it's probably India. India is the fastest growing global

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Speaker 1: fastest growing major economy, and I think what's most interesting

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Speaker 1: about India, and something we've we've highlighted in the past

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Speaker 1: is that the the return on incremental capital in the economy,

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Speaker 1: essentially the amount of sales or GDP generated per per

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Speaker 1: unit of investment, is is about So that's an incredibly

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Speaker 1: high return on an unlevered basis. Uh So, so that's

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Speaker 1: certainly the place where where your your capital, your your

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Speaker 1: discretion and capital locations are the most productive today. All right, Jason,

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Speaker 1: great to have you with us. Jays and Thomas is

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Speaker 1: m D and ahead of Global research at Carlisle joining

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Speaker 1: us from Singapore. Here on daybreak Asia