Speaker 1: It's getting trickier for investors to navigate markets. Every day
Speaker 1: there are new announcements from the White House that threaten
Speaker 1: to upend global trade and potentially even the Central Bank.
Speaker 1: Especially for those making bets for the long term, it's
Speaker 1: tough to predict.
Speaker 2: This has significant ramifications for Asian currencies and bonds. Governments
Speaker 2: are forced intervene more, and the US dollar, once a
Speaker 2: source of stability, is now seen as less safe. Meanwhile,
Speaker 2: the nation's debt levels and fiscal situation that prompted at
Speaker 2: downgrading its credit rating also threatens assets long term. Should
Speaker 2: investors look outside the US towards Asia.
Speaker 1: You're listening to Asia Centric from Bloomberg Intelligence. I'm Kat
Speaker 1: Dmitri in Hong Kong.
Speaker 2: I'm John Lee, also in Hong Kong.
Speaker 1: And this week we're speaking with Adana Apio. She's an
Speaker 1: economist and portfolio manager at First Egal Investment Management, which
Speaker 1: oversees one hundred and sixty one billion dollars in assets.
Speaker 1: She joins us very early in the morning from New York.
Speaker 1: Thank you for joining us today, Donna.
Speaker 3: Thank you so much for having me. Really looking forward
Speaker 3: to this.
Speaker 1: So, Donna, as we just mentioned tariffs, trade, this is
Speaker 1: something that investors need to be thinking about every minute
Speaker 1: of every day. You're a long term investor, how do
Speaker 1: you think about tariffs and trade impacting your investments right now?
Speaker 3: I think the challenge with tariffs, as you first highlighted,
Speaker 3: is that, of course, every day there's a new announcement,
Speaker 3: and you're constantly wondering what are other people thinking about
Speaker 3: these announcements, and then thinking about, you know, from my
Speaker 3: perspective as both an economists, currency analysts, sovereign analysts, thinking about,
Speaker 3: you know, what does this mean for the economy, and
Speaker 3: then what does that sort of translate into asset prices?
Speaker 3: So many steps there. Obviously, we heard the news about
Speaker 3: or the tweet about the Japan framework the other day
Speaker 3: the Japan dealed, and so maybe there's a fair amount
Speaker 3: of optimism because there are signs that there is some
Speaker 3: flexibility on the sectoral tariffs this. You know, the negotiations
Speaker 3: to date have largely been about the reciprocal tariffs. I
Speaker 3: don't really like using that words since they aren't technically reciprocal,
Speaker 3: but about the reciprocal tariffs with the sectoral tariffs being
Speaker 3: in place. But what we saw from the broad outlines
Speaker 3: of the Japan deal, and it's rumored to be part
Speaker 3: of the deal with the EU is that there's flexibility
Speaker 3: on the sectoral side for auto So I think that
Speaker 3: is what is providing some good news and maybe a
Speaker 3: bit more certainty. That said, I am still very skeptical
Speaker 3: that we sort of have heard the last about tariffs.
Speaker 3: I think it's still not sure exactly where tariff levels
Speaker 3: will settle. We have uncertainty about how the US courts
Speaker 3: will handle the reciprocal or ie EPA tariffs when they
Speaker 3: start the arguments surrounding at the end of the month.
Speaker 3: And then you know, there's still talk of new sectoral
Speaker 3: tariffs that the administration is looking at pharma, perhaps semiconductors,
Speaker 3: you know, so there's other potential sort of knives to fall.
Speaker 3: So I realized the market is happy to see some flexibility,
Speaker 3: and I'm happy to see some flexibility on the sectoral tariffs,
Speaker 3: but I'm not convinced this is sort of the end
Speaker 3: all when it comes to tariffs. So that's step one.
Speaker 3: You know, some news, maybe a little more certainty, but
Speaker 3: still a lot of open questions for me. But then
Speaker 3: the question is how does it affect the economy. We
Speaker 3: have some initial signs. If you look at Q two data,
Speaker 3: the US collected about sixty five billion in tariff revenue,
Speaker 3: which was about a nine percent effective teriff freight for June.
Speaker 3: What we see in the data is that it doesn't
Speaker 3: appear that foreign exporters into the US are paying much
Speaker 3: of the tarraf Yes, instead, most of it's being absorbed
Speaker 3: by the US. Some seems to be having been passed
Speaker 3: on to consumers, and consumers in terms of inflation in
Speaker 3: certain sectors we see it showing up, but for the
Speaker 3: most part at this point, and again it's early days
Speaker 3: in tariffs, it seems that firms are absorbing the tariffs.
Speaker 1: And that there'll be US firms like US importers.
Speaker 3: US importers exactly, US importing firms.
Speaker 1: Yeah, because you're referring there probably to the export prices
Speaker 1: from Asia in particular, where we haven't really seen a
Speaker 1: lot of movement, and then US import prices have also
Speaker 1: been relatively flat, which kind of just shows you, Okay,
Speaker 1: importers are paying this, and you know, certain sectors like
Speaker 1: maybe japan autos are absorbing in exactly.
Speaker 2: But importantly, it seems like US consumers have yet to
Speaker 2: feel the brunt of the tariffs. You're an economist, are
Speaker 2: you surprised that the American inflation data has been relatively
Speaker 2: benign so far? Well, do you think it's just a
Speaker 2: matter of time before we start seeing this rise.
Speaker 3: I think it's a matter of time. We do see
Speaker 3: the tariff impact in certain sectors, so core goods X autos.
Speaker 3: For now we are seeing a material increase, but that
Speaker 3: is being swamped by the very good sort of decline
Speaker 3: that we've been seeing in housing, rents inflation that are
Speaker 3: much larger component of inflation series, and that really swamp
Speaker 3: what's going on. It's sort of the goods side of
Speaker 3: the inflation data. So that's the good news. But as
Speaker 3: I said, since it seems like for now, given the
Speaker 3: uncertainty the early days of the tariffs, the US firms
Speaker 3: importing firms have absorbed those tariffs. I think the question
Speaker 3: is over time, what happens At some point do they
Speaker 3: begin to pass those on to other firms to end consumers.
Speaker 3: Do they need to cut other costs to support their margins,
Speaker 3: you know, canceling and vement projects, potentially firing workers. That's
Speaker 3: the unknown, and so I think it's going to take
Speaker 3: time to work through the system. So maybe it shows
Speaker 3: up through prices, maybe it shows up through more growth,
Speaker 3: through weaker investment, weaker employment. But I think we have
Speaker 3: to wait for thousands of individual firms to make their
Speaker 3: decisions about how they're going to handle this. It's perhaps
Speaker 3: helpful that they're getting maybe a little more certainty that
Speaker 3: maybe the equilibrium tariff rate might be around fifteen percent.
Speaker 3: Maybe that's something we can sort of the sign maybe
Speaker 3: we're getting from these deals. You know, compared to the
Speaker 3: pre tariff level or pre April level of about one
Speaker 3: and a half percent, that's a huge increase. And so
Speaker 3: you know, I think we have to wait for firms
Speaker 3: to make their decisions. So as an economist, you know,
Speaker 3: we always want to plug in our models and this
Speaker 3: sort of gets to the asset prices and all that.
Speaker 3: But the real world is far more complex than our
Speaker 3: models correct. And so you know, thinking about like the pandemic,
Speaker 3: none of us had lived through a global pandemic before
Speaker 3: we weren't sure what the impacts on the economy would be.
Speaker 3: None of us have lived through a massive increase in
Speaker 3: terrorists from the largest economy in the world, the biggest
Speaker 3: sort of importer in the world. I think we have
Speaker 3: to be humble that we're just not sure what the
Speaker 3: impacts are going to be and the timeframe.
Speaker 2: Don I don't want to bash on economists, but I
Speaker 2: do remember at the beginning of the pandemic, most economists
Speaker 2: said that COVID will be deflationary. There was supposed to
Speaker 2: be a lot of job losses, especially in the SME sector,
Speaker 2: and you were supposed to see deflation. The opposite occuld
Speaker 2: it ended up being massively inflationary. Is there a chance
Speaker 2: that this time around the economists could also be wrong.
Speaker 2: All economists are expecting tariffs to lead to inflationary pressure,
Speaker 2: but we're still not seeing that yet.
Speaker 3: It's definitely possible. I think the mistake in the pandemic
Speaker 3: was underestimating the supply side effects, and also there were surprises,
Speaker 3: I think underestimating the degree of monetary and fiscal response
Speaker 3: that was just outsize compared to anything we see, especially
Speaker 3: in the US, especially in the US, and then of
Speaker 3: course the unknown of the Russia's invasion of Ukraine and
Speaker 3: the spike and energy prices, so there were a lot
Speaker 3: of factors there here. You know, I think you're absolutely right,
Speaker 3: firms are going to have to decide how to respond.
Speaker 3: If the end consumer can't absorb the price increases, then
Speaker 3: there'll be less more of a demand shock. Firms may
Speaker 3: cut back production more. We may see more reductions and investment,
Speaker 3: we may see job losses. So it is possible that
Speaker 3: it ends up being more weighs more on growth, and
Speaker 3: so therefore the inflationary effects in certain products are more
Speaker 3: than swamped by the sort of weaker growth outlook. The
Speaker 3: other challenge to me that I'm watching is, at the
Speaker 3: same time we're having something that's receiving less attention, but
Speaker 3: another bold experiment with our immigration policies, which it would
Speaker 3: also tend to be in the direction of higher prices
Speaker 3: weaker growth. So, you know, the combination of these two
Speaker 3: is why I think it can be very difficult, you know.
Speaker 3: I think also why you see the Federal Reserve is
Speaker 3: waiting for data to decide how to respond, and they
Speaker 3: face the same uncertainty that we do. Is this inflationary,
Speaker 3: is it more of a growth shock, is it stagflationary?
Speaker 3: We kind of have to wait and see.
Speaker 1: Well, since you brought up the FED, I wonder as
Speaker 1: an economist, as an investment manager, how do you factor
Speaker 1: in everything that's happening with the FED into your decisions,
Speaker 1: because of course we're in a moment in time where
Speaker 1: the FED is being highly politicized. There could be a
Speaker 1: shift in leadership. Maybe it depends on the day and
Speaker 1: who's talking from the administration. How do you consider that
Speaker 1: and even begin to think about, for example, inflation forecasting,
Speaker 1: if something could change so rapidly.
Speaker 3: Yeah, it is challenging. And I worked at the New
Speaker 3: York FED for almost fifteen years. Personally, I find it
Speaker 3: very disheartening to see the attacks on an institution that
Speaker 3: is really committed to its public service mandate and to
Speaker 3: remaining a political and sort of acting in the best
Speaker 3: interest of the US economy. Whereas I would have thought
Speaker 3: there's very little chance of the FED losing its independence,
Speaker 3: I'm increasingly worried about the political noise surrounding the FED,
Speaker 3: and it's another factor that could be weighing on inflation forecasts,
Speaker 3: And certainly it is coming into my thinking about inflation
Speaker 3: inflation forecasts, medium term inflation expectations. We don't see it
Speaker 3: in market pricing yet, but I know it certainly is
Speaker 3: affecting our views on the way we are investing in
Speaker 3: our portfolio.
Speaker 1: In what ways.
Speaker 3: You know, added quite a lot to inflation linked treasury
Speaker 3: bonds in our portfolios over the last year or so,
Speaker 3: especially more recently, given that the factors we're discussing terrorists,
Speaker 3: immigration changes, now more attacks on the FED at least
Speaker 3: a bias you towards perhaps easier policy all else equal,
Speaker 3: that that should be inflationary over the medium term. At
Speaker 3: some point that should start to show up more in
Speaker 3: markets and in inflation statistics.
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Speaker 2: and share. And Sticking with the US, are you worried
Speaker 2: about the fiscal position of the government. The US spends
Speaker 2: more money on interest expense than the defense budget.
Speaker 1: You know.
Speaker 2: The US also lost its Triple A credit rating recently.
Speaker 2: What's your views there?
Speaker 1: We also have the Big Beautiful Bill. Don't forget about that.
Speaker 2: Exactly.
Speaker 3: I've been concerned about the US fiscal position for a while.
Speaker 3: There are a number of structural, sort of medium term
Speaker 3: trends aging the challenges we have with our entitlements that
Speaker 3: are growing as a share of the budget, that sort
Speaker 3: of paint a worrisome picture. However, more recently, you know,
Speaker 3: with higher interest rates, that makes the situation much more troubling,
Speaker 3: as you're going to be rolling from lower cost debt
Speaker 3: into higher cost debt. And of course the passage of
Speaker 3: the One Big Beautiful Bill, by our estimates, should add
Speaker 3: to the deficit over time. The challenges with the bill
Speaker 3: is it's some deceptive. It's much larger than sort of
Speaker 3: traditionally scored because the tax cuts are front loaded, the
Speaker 3: tax hikes and expenditure cuts are backloaded. And I have
Speaker 3: my doubts. And that change really happens after twenty twenty eight,
Speaker 3: So after the next administration comes in, you'll have a
Speaker 3: new president, new Congress. At that point, are they going
Speaker 3: to suddenly tighten fiscal policy dramatically? I think we've learned
Speaker 3: over time that no politician wants to take that on.
Speaker 3: So it's actually a much more expensive expansive bill than
Speaker 3: written on paper and reduces the flexibility. As you said,
Speaker 3: interest expenses growing, the discretionary parts of the budget are
Speaker 3: being squeezed, discretionary spending being squeezed. At the same time
Speaker 3: the sort of entitlements, the mandatory spending keeps growing, and
Speaker 3: then you've reduced your tax intake further. So again, as
Speaker 3: a sovereign analyst, these are all sorts of things that
Speaker 3: you don't want to see when a government puts together
Speaker 3: a budget. I am definitely nervous about the fiscal trajectory.
Speaker 3: And when I look across sort of the long end
Speaker 3: of the yield curve, there is concern. You know, we
Speaker 3: hear from US Treasury, the Treasury Secretary that they want
Speaker 3: to skew issuance to the shorter end of the curve.
Speaker 3: They want to reduce long term rates. When you look
Speaker 3: sort of across in the past twenty years or so,
Speaker 3: long term bond yields are still not that high, considering
Speaker 3: the level of debt, the uncertainties in the economy, and
Speaker 3: so there's always the chance that long term rates rise
Speaker 3: from here. Additionally, when you look at the term premia,
Speaker 3: which is the difference between long term bond yields and
Speaker 3: the expected path of short rates. The term premia has increased.
Speaker 3: It used to be negative. It was negative for many
Speaker 3: numbers of years. It's become positive, which I think is
Speaker 3: a healthy development, suggesting that you're getting paid for taking
Speaker 3: some duration risk. But it's still below sort of historical
Speaker 3: averages of term premia, even though, as you highlighted, sort
Speaker 3: of the credit quality, the credit standing of the United
Speaker 3: States has deteriorated, so you know, we see scope that
Speaker 3: there could be further increases in term premia. And when
Speaker 3: you couple that with questions about the FED and their
Speaker 3: commitment to inflation fighting, that's sort of another risk for
Speaker 3: the long end of the yield curve.
Speaker 2: So what does this all mean. It sounds like it's
Speaker 2: going to be more inflation in the US. Does this
Speaker 2: mean that you underweight US assets versus the rest of
Speaker 2: the world, any in particular Asia, And what's your views
Speaker 2: also on the US dollar?
Speaker 3: So at First Eagle, we invest for the long term.
Speaker 3: We build globally diversified portfolios, and so valuations really are
Speaker 3: guiding north star. We try to invest in businesses or
Speaker 3: assets when we think they're below our estimate of intrinsic
Speaker 3: value or fair value. Because US markets have been expensive
Speaker 3: for extended period time, equity markets, credit markets, the dollar
Speaker 3: has been overvalued for an extended period of time. That
Speaker 3: has meant that we've been adding much more to the
Speaker 3: portfolios overseas. Internationally, emerging markets were hit quite hard during
Speaker 3: the pandemic, and so again it's not surprising that you know,
Speaker 3: if we can find a good business or a sovereign
Speaker 3: or an asset that we like that we want to own,
Speaker 3: that we take advantage. When it's unloved by the market,
Speaker 3: that's typically when we will enter into positions. So, yes,
Speaker 3: we have been shying away from US assets adding more
Speaker 3: international assets to the portfolio for a number of years.
Speaker 3: I will say, not all sectors of the US markets
Speaker 3: are loved, and so again we'll use flexibility. So when
Speaker 3: we see a very nice business that we believe is
Speaker 3: trading below its fair value, you know, we will enter
Speaker 3: those positions. So then coming to currencies, you know, we
Speaker 3: have to think about the impact of taris on the economy,
Speaker 3: and then we think about the impact of currencies, and
Speaker 3: the thing, you know, if you had asked me this
Speaker 3: question out my outlook for the dollar in December, I
Speaker 3: would have said, well, we're unsure about tariffs, but all
Speaker 3: else equal, everything in equilibrium. A good economist answer means
Speaker 3: that the dollars should appreciate to offset the change in
Speaker 3: relative prices coming from tariffs. And indeed we did see
Speaker 3: that in the twenty eighteen nineteen period, when tariffs were
Speaker 3: mainly focused on China, the China dollar exchange rate really shifted.
Speaker 3: The dollar appreciated and offset quite a lot of the tariffs.
Speaker 3: This time around, of course, we've had the exact opposite again,
Speaker 3: proving that economists can be wrong and are often wrong.
Speaker 3: And the dollar has depreciated, and so I think you
Speaker 3: have to start to bring in you know, not everything
Speaker 3: else is equal. What else is happening? Our investors losing
Speaker 3: confidence in the dollar in US assets? And is that
Speaker 3: changing behavior? Is there more concerns about growth in the
Speaker 3: US versus the rest of the world. Is there more
Speaker 3: concerned about inflation in the US compared to the rest
Speaker 3: of the world.
Speaker 1: I wonder if the first trade war offers some guidance
Speaker 1: for this trade war or if it's just completely uncertain.
Speaker 1: And the reason I ask that is because there are
Speaker 1: a lot of differences in the way the world economy
Speaker 1: is right now, we also have a trade war against
Speaker 1: much of the world as opposed to just primarily one
Speaker 1: country being China. And the other thing that I've been
Speaker 1: talking to some economists about is when it comes to
Speaker 1: inflation in the US, we now have a situation where
Speaker 1: supply chains are potentially going to become even more complex
Speaker 1: and inefficient, and the potential for companies to start offloading
Speaker 1: those even higher costs throughout the world, not just in
Speaker 1: the US. So I wonder how you're thinking about this
Speaker 1: trade war versus the.
Speaker 3: Last Yes, And I think the mistake, certainly, my mistake
Speaker 3: is perhaps I initially viewed Trade War two point zero
Speaker 3: in the same lens as the original one, which was
Speaker 3: largely focused against China.
Speaker 1: Everyone did yeah, yeah.
Speaker 3: You know, against China until the board came out, and
Speaker 3: I think there was a collective gasp of oh, my goodness,
Speaker 3: this is this is a different beast. The first trade
Speaker 3: war was largely focused against China, and the effective tariff
Speaker 3: rate went from one and a half percent to about
Speaker 3: three percent in the US, so doubled. But now we're
Speaker 3: talking fifteen to twenty percent. I mean, it's just a
Speaker 3: different order of magnitude, and then over time that effective
Speaker 3: tariff rate sort of crept back down to you know,
Speaker 3: in the twos as firms reoriented supply chains, as Chinese
Speaker 3: firms changed the sort of structure of their exports to
Speaker 3: the US through third countries, and so you could see
Speaker 3: how over time businesses were sort of optimizing around those tariffs.
Speaker 3: A trade war against everybody. Again, as an economist, you know,
Speaker 3: free trade, it's like a core tenant and part of
Speaker 3: the religion of an economist, sort of comparative advantage gains
Speaker 3: from trade, and so we're conducting war against everybody else.
Speaker 3: It is likely to make the US first and foremost
Speaker 3: less competitive, grow more slowly. There have been studies done
Speaker 3: on the first trade war, you know, for instance, washing
Speaker 3: machines and dryers where there were high tariffs and posed
Speaker 3: there were studies that were done that showed that US
Speaker 3: firms raise their prices just as much as imports. Studies
Speaker 3: done on the steel industry where steel tariffs were quite high,
Speaker 3: that US steel using firms importing firms became much less
Speaker 3: competitive after them position. So there's a number of reasons
Speaker 3: to believe that this is going to make the US
Speaker 3: less competitive grow less quickly, and it will be bad
Speaker 3: for the global economy, both because the US is such
Speaker 3: a large consumer, so a weaker US obviously not great
Speaker 3: for the rest of the world. And to the extent
Speaker 3: that the US is poor consumes less, perhaps there's some
Speaker 3: shifting of production. It also begins to hit other economies,
Speaker 3: and of course Asia, which is the world's largest exporter,
Speaker 3: especially to the US, will be hit by that. So
Speaker 3: everybody else is worse off. To your point about complexity,
Speaker 3: and I think again this sort of gets at in
Speaker 3: the US. We haven't seen really the results yet. Firms
Speaker 3: unsure of how to respond. You're not sure where ultimate
Speaker 3: teriff rates end up. You know, it's hard enough for
Speaker 3: a supply chain manager to deal with suddenly much higher
Speaker 3: tariffs on China, but suddenly you have to look at,
Speaker 3: you know, terif rates around the world different industries. Yeah,
Speaker 3: I think it's going a lot of wasted time in
Speaker 3: this space, you know. I know there was a lot
Speaker 3: of hope with this administration that they pursue a deregulatory agenda,
Speaker 3: but they are creating a massive regulatory burden surrounding trade.
Speaker 3: Both for the government who suddenly has to enforce a
Speaker 3: wide range of tear of schedules and for firms that
Speaker 3: suddenly are going to be faced with this difficult optimization
Speaker 3: problem of how to rejigger supply chains in an ever
Speaker 3: changing world.
Speaker 2: Don I'd love to bring the discussion to Asia, given
Speaker 2: everything that we've said, is there any particular Asian you know,
Speaker 2: sovereign or country that you think could outperform in this
Speaker 2: type of environment.
Speaker 3: So two points one, I think countries that are less
Speaker 3: export dependent perhaps tend to fare a bit better. So
Speaker 3: maybe that's an India and Indonesia just you know, they're
Speaker 3: less open to trade and less exposed to the US market. Additionally,
Speaker 3: to the extent you know, again we haven't really seen
Speaker 3: the details of any of these deals yet, there's still
Speaker 3: more tweet form than full of trade agreements. But also
Speaker 3: to the extent that they do reduce tariffs, a country
Speaker 3: like India or Indonesia again that have relatively high tariff rates,
Speaker 3: to the extent they help bring down their own domestic
Speaker 3: tariff rates because again, as an economist, we think lower
Speaker 3: tariff rates are actually very good for your economy and
Speaker 3: your business sector to improve sort of the competitive landscape.
Speaker 3: And so you know, that could be an added bonus.
Speaker 3: But also when I think about the rest of Asia,
Speaker 3: it is looking like that perhaps everybody is going to
Speaker 3: face about a relatively similar teriff rate. With respect to
Speaker 3: the US, we seem to be sort of in the
Speaker 3: fifteen to twenty percent, So in that case, maybe the
Speaker 3: relative competitiveness doesn't change among Asian economies or between Asia
Speaker 3: and Europe and the rest of the world. And quite frankly,
Speaker 3: I find it hard to believe that the US, especially initially,
Speaker 3: is going to be able to produce everything that we
Speaker 3: import from Asia. Quite frankly, we won't be able to. So,
Speaker 3: you know, at some point, I'm sort of left with
Speaker 3: if Asian economies are facing similar teriff rates, you know,
Speaker 3: maybe in a relative perspective, they're no worse off. So again,
Speaker 3: very competitive economies like a Korea or Japan, or China
Speaker 3: or Taiwan don't end up being that much worse off.
Speaker 3: Maybe they see somewhat weaker growth, weaker demand for their
Speaker 3: products because the US is somewhat poorer buying less, but
Speaker 3: from a competitive position doesn't make much of a big deal.
Speaker 1: And earlier, Adanna, you said that you're looking for opportunities
Speaker 1: outside of the US. If we can put it that way.
Speaker 1: So Indian and Indonesia are you kind of focused? There
Speaker 1: are there other countries that you've been interested in recently.
Speaker 3: For the rest of Asia. So if thinking from my
Speaker 3: perspective on currencies, Asian currencies have been quite weak for
Speaker 3: extended period of time. Some of that has to do
Speaker 3: with the weakness in the end in yuan. It's hard
Speaker 3: for other currencies to appreciate when the two behemoth currencies
Speaker 3: are so weak, and so I think this is a
Speaker 3: struct you know, with the weakness and the dollar, this
Speaker 3: gives sort of a structural ability for Asian currencies to
Speaker 3: start to strengthen, especially I think the unknown question again
Speaker 3: coming back to the dollar. The unknown is even with
Speaker 3: the dollar having depreciated, you know, ten percent year to
Speaker 3: date against the broad currencies, the dollar is still overvalued.
Speaker 3: The question that I'm particularly focused on is whether this
Speaker 3: weakness in the dollar persists, if there's a change. When
Speaker 3: you look over time over history, the dollar moves in
Speaker 3: large swings. They're strong dollar regimes, week dollar regimes. Are
Speaker 3: we moving into a weaker dollar regime? Are we moving
Speaker 3: away from that period of US exceptionalism? Foreign investors into
Speaker 3: the US have become very overweight US assets in their portfolio.
Speaker 3: Those their stock and bond investments to the share of
Speaker 3: US GDP have reached record highs. If we begin to
Speaker 3: see just a small shift away from the US, or
Speaker 3: just less flows moving into US markets, or even just
Speaker 3: more hedging of dollar exposure in those US investments, that
Speaker 3: could cause weakness in the dollar and weakness in US assets.
Speaker 3: And a lot of that capital has come from Asia,
Speaker 3: to the extent we see capital flow back to Asia
Speaker 3: where valuations are more compelling across Asian equities and currencies.
Speaker 3: You know, again, do we get more of that capital
Speaker 3: flow coming back? That remains to be seen. But so
Speaker 3: if we're investing based on valuations, that's where we're headed,
Speaker 3: because we do see those opportunities.
Speaker 1: You're outlining the sort of I don't want to say pessimistic,
Speaker 1: but you're you're outlining a future that there are a
Speaker 1: lot of risks out there. And I think I've been surprised,
Speaker 1: and you touched on this as well, but sort of
Speaker 1: the surprising strength in equity markets, and also we continue
Speaker 1: to see really tight spreads kind of globally, so our
Speaker 1: investors being a bit too complacent here or are they
Speaker 1: kind of waiting for something to drop, like it just
Speaker 1: seems like a lot of this risk is not really
Speaker 1: priced into markets.
Speaker 3: So I think there's a fair amount of complacency. As
Speaker 3: I said, I think we've yet to see the impact
Speaker 3: of tariffs over time if they persist, which I have
Speaker 3: to assume they will, but again, depending on the daily headline,
Speaker 3: sometimes you have a different view. But assuming they persist,
Speaker 3: you know, firms are going to have to make this
Speaker 3: decision about how do they address those costs. I'm of
Speaker 3: the view that once it begins to show up in
Speaker 3: the data, either in the form of higher inflation or
Speaker 3: weaker growth, weaker earnings, or a combination of all of those,
Speaker 3: that equity markets, credit markets should begin to reflect those risks.
Speaker 3: On top of that, you know, if they're concerns about
Speaker 3: the FED, and if there's questions about whether the Fed's
Speaker 3: actions if they're viewed through a political lens, that could
Speaker 3: sort of add to those market fears. So I do
Speaker 3: think there's a fair amount of complacency here. And finally,
Speaker 3: you know, when you look at again the US fiscal position,
Speaker 3: we're running deficits around six and a half percent of GDP,
Speaker 3: which will only grow over time, and we're at full
Speaker 3: employment the top of a business cycle. These don't sort
Speaker 3: of correlate. The markets are priced for that. We're sort
Speaker 3: of in this perfect world, goldilocks world, but there's a
Speaker 3: lot that could go wrong from here. So that's sort
Speaker 3: of how I'm thinking about it.
Speaker 2: It done it. Before we let you go, I wanted
Speaker 2: to ask first. Egally manages over one hundred billion dollars
Speaker 2: in assets under management. But before we started recording this podcast,
Speaker 2: you mentioned that you invest over the long term. You
Speaker 2: have an investment horizon of ten years. Now, tell us
Speaker 2: how do you look so far ahead.
Speaker 1: Especially when things are changing so quickly every single day.
Speaker 3: One of our core tenants is that our crystal ball
Speaker 3: is foggy at best, and I think that's been proven
Speaker 3: over and over again the last five years, that we
Speaker 3: really can't know where the world is headed. So instead,
Speaker 3: our north star is really valuations. If we can buy
Speaker 3: into a business at a price below what we think
Speaker 3: it's worth, if we can buy into a currency that
Speaker 3: we think is undervalued versus its medium term value, if
Speaker 3: we can buy into a yield curve that we think
Speaker 3: is above sort of where we think it's equilibrium. Level
Speaker 3: is then that hopefully provides some protection in a very
Speaker 3: volatile unknown world. And then because you know, our crystal
Speaker 3: ball is so foggy and the world has been so
Speaker 3: chaotic and volatile the last several years. As an active manager,
Speaker 3: it does provide you a lot of opportunities. The world
Speaker 3: is always changing, the market is moving. It can give
Speaker 3: you those opportunities to invest in excellent businesses or currencies
Speaker 3: or sovereigns at a very attractive price if you're willing
Speaker 3: to look through the noise of you know, things may
Speaker 3: move up or down or not. The other I think
Speaker 3: unique aspect is that first eagle. We use gold in
Speaker 3: all our portfolios as a portfolio hedge. That is something
Speaker 3: we've done for a long period of time. It's useful.
Speaker 3: It performs well in inflationary and deflationary environments. It has
Speaker 3: sort of a zero percent correlation with equities, except in
Speaker 3: times when in very risk off events, that correlation term
Speaker 3: sharply negative. So that's why it's very useful as a
Speaker 3: portfolio hedge.
Speaker 1: Exciting times. Thank you so much for joining us.
Speaker 3: Sure, thank you, thank you so much.
Speaker 1: You've been listening to Asia Centric from Bloomberg Intelligence and
Speaker 1: Katjadmitreva here in Hong Kong.
Speaker 2: I'm John Lee, also in Hong Kong. This podcast was
Speaker 2: produced and edited by Clara Chen and You can listen
Speaker 2: to all our episodes on Spotify, Apple Podcasts, or review listen.
Speaker 2: Thanks for listening.