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Speaker 1: Welcome to the Bloomberg day Break Asia Podcast. I'm Doug Krisner.

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Speaker 1: Markets in the Asia Pacific are bracing for the fed's

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Speaker 1: final policy decision of the year, and in a moment

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Speaker 1: we'll take a look at the US rate environment with

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Speaker 1: Mark Heppenstaal. He is President and CIO at Pen Mutual

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Speaker 1: Asset Management. But we begin in Bangkok, Thailand. It's there

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Speaker 1: we find David Chao, the global market strategist at Invesco

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Speaker 1: Asia Pacific. David, thank you for having the chance to

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Speaker 1: speak with us. It's always a pleasure, and I want

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Speaker 1: to begin with a story that we have been reporting

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Speaker 1: on Japanese carmakers Honda and Nissan preparing to begin negotiations

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Speaker 1: on a possible merger. Give me your sense of where

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Speaker 1: the automobile industry is right now globally, in terms of

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Speaker 1: what could be described as excess capacity. Is that a

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Speaker 1: fair statement.

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Speaker 2: I think that's a fair statement. I think that what

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Speaker 2: we're seeing now is a pretty big shake up in

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Speaker 2: the global auto industry, and I expect further consolidation as well.

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Speaker 2: What we have right now, there's just too much supply

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Speaker 2: for cars, evs, hybrids, combustion cars out there, and I

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Speaker 2: think that that certainly is pushing profit margins to levels

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Speaker 2: we haven't seen for a while, and I think that's

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Speaker 2: going to ultimately drive the consolidation, whether it's in Japan

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Speaker 2: or in other places. Chinese automakers are now the world's

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Speaker 2: most dominant at automakers out there. China makes round seven

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Speaker 2: to eight million cars a year, yet the domestic demand

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Speaker 2: is somewhere closer to two to three. It's around five

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Speaker 2: to six million cars need to find homes in other

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Speaker 2: parts of the world, whether it ends up in places

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Speaker 2: like South America or Africa versus places like the US

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Speaker 2: or Europe. It's pretty clear that China is now trying

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Speaker 2: to make better trade partners now that they've had taxes

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Speaker 2: on evs on under ten thousand dollars in Western countries.

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Speaker 1: I think the overcapacity story in China goes well beyond

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Speaker 1: just evs. I mean, there are other segments of the

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Speaker 1: Chinese industrial economy, the manufacturing economy, that also have far

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Speaker 1: too much capacity.

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Speaker 2: That's right. I mean we have to remember that China's

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Speaker 2: political economy is a command one very much set forth

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Speaker 2: by by policy makers, compared to in the US, whereas

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Speaker 2: more market is driven by market forces, and so the

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Speaker 2: industrial policy in China has been one that they recognize

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Speaker 2: that acaonomic growth propellers for Chinese economy is slowing. So

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Speaker 2: what are they going to do. They're really going to

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Speaker 2: kind of amp up capital expenditures and investments in manufacturing

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Speaker 2: and exports in order to give the economy a boost.

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Speaker 2: That's before the consumption can pick up, Although the most

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Speaker 2: recent numbers that we've seen from China show that perhaps

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Speaker 2: there could be a little more physical stimulus and more

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Speaker 2: monetary stimulus to enable consumers to feel more comfortable buying

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Speaker 2: and consuming in China.

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Speaker 1: So that takes me to the next question about the

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Speaker 1: stimulus that we have had from the Poluit bureau lately,

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Speaker 1: or at least the messaging of it. What's your takeaway here?

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Speaker 1: Is it going to be enough to move the needle?

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Speaker 1: Do you think, especially where consumption is concerned.

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Speaker 2: I think that it's likely to be enough to start

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Speaker 2: to invigorate the domestic consumption market in China. It's probably

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Speaker 2: not going to be enough, you know, for for markets.

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Speaker 2: I think markets still want significant size of Bazuka sized stimulus,

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Speaker 2: whether it's monetary or fysical simulus. I don't think we're

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Speaker 2: going to get that. But this is the first time

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Speaker 2: that we've heard the Pollup Bureau address both physcal stimulus

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Speaker 2: and helping domestic consumption in the same document, and so

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Speaker 2: I think that's a welcome surprise. And I think that

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Speaker 2: in the coming year GDP growth in China is probably

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Speaker 2: also going to be set around five percent, and I

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Speaker 2: think that more stimulus it's likely, but we're not going

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Speaker 2: to get significantly anymore.

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Speaker 1: Does it cause you to change your strategy when putting

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Speaker 1: money to work in China? Maybe that's an assumption that

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Speaker 1: I'm making. Are you putting fresh money to work in

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Speaker 1: the Chinese market right now?

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Speaker 2: I am. I think that the Chinese markets look quite attractive.

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Speaker 2: We know that they are momentum driven. Chinese stocks are

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Speaker 2: around down round ten to fifteen percent from their recent highs.

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Speaker 2: We saw a surge back in September, and you know,

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Speaker 2: we've seen them come down since then. I think that

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Speaker 2: we get another leg up from now and over the

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Speaker 2: next few months. What's interesting is when Trump was elected

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Speaker 2: president back in November, you think that Chinese stocks would

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Speaker 2: get dinged because of his threats of tariff policy, but

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Speaker 2: they actually went up. So I think this time around,

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Speaker 2: Chinese companies and policymakers are a lot more ready for

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Speaker 2: his terrorft policy, and secondly, more stimulus is come online.

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Speaker 2: And thirdly, I think that there could be another leg

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Speaker 2: up relatively shortly.

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Speaker 1: Hey David, let's take a look at what's going on

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Speaker 1: in Japan if we can pivot there. A boj's got

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Speaker 1: a policy decision at the end of the week. Conventional

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Speaker 1: wisdom right now is that the BOJ is going to

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Speaker 1: do nothing. Maybe they look at something as soon as January,

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Speaker 1: perhaps March of next year, before they raise rates again.

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Speaker 1: How are you understanding what the BOJ is trying to

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Speaker 1: accomplish right now?

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Speaker 2: Well, you're right, I think they're likely to sit on

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Speaker 2: their hands this week, but we know that there's more

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Speaker 2: room for tightening. I think that there could have been

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Speaker 2: a bit of post traumatic stress from what happened in

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Speaker 2: that September time period where they you know where they

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Speaker 2: cause were they royal the currency markets and also stock

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Speaker 2: market because they didn't telegraph the cut that was coming,

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Speaker 2: they didn't telegraph the policy pathway forward. So I think

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Speaker 2: this time around, although the economy I think could very

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Speaker 2: much survive and thrive with a hike, I think that

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Speaker 2: the message is more that they're going to be gradual.

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Speaker 2: If we look at the most recent Bank of Japan

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Speaker 2: tank Kan December service that showed that even small Japanese

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Speaker 2: companies have not felt more stress in their financial positions

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Speaker 2: from the two rounds of pikes that we've seen so far.

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Speaker 2: So the Japanese economy is on on much sure sound footing.

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Speaker 2: I think that I think that a hike would not

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Speaker 2: throw a wrench in that kind of economic recovery there.

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Speaker 2: I think Japanese stocks are also tracked it because Japanese

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Speaker 2: consumers are finally having you know, that positive real consumption power,

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Speaker 2: meaning that their wage growth is above inflation, uh you know,

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Speaker 2: over you know, and it's been negative over the past year.

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Speaker 2: So I think the mesic consumption is going to pick up,

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Speaker 2: you know. So for those traveling to Japan, you know,

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Speaker 2: to enjoy the week and over the holiday period, you

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Speaker 2: may have a much harder time at a restaurant reservation,

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Speaker 2: not because of you know, competing from other tourists, but

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Speaker 2: from actually domestic you know, Japanese consumers, and that week

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Speaker 2: currency has really helped to drive the export economy in Japan.

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Speaker 1: I think in the month of November, exports were up

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Speaker 1: three point eight percent. Shipments to China alone were up

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Speaker 1: about four point one percent. A lot of this has

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Speaker 1: to do with chip making machinery, maybe some non ferrous

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Speaker 1: metals in there as well, so kind of also helps

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Speaker 1: out Japan Inc. That we currency.

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Speaker 2: That's right. I think the japan is going to start

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Speaker 2: firing on all cylinders pretty soon. The only missing link

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Speaker 2: so far has been domestic consumption. But we're starting to

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Speaker 2: see that pickup, and so you better watch out when

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Speaker 2: they're firing on all cylinders. And Japanese equities continue to

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Speaker 2: be very attractively priced, especially when compared to the US,

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Speaker 2: and so I continue to like Japan as my most

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Speaker 2: favorite developed market. Four for twenty twenty five.

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Speaker 1: Hey, David, before I let you go, can I get

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Speaker 1: your view on what's happening in South and what it

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Speaker 1: means for the South Korean markets.

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Speaker 2: Well, let me just compare what happened back in twenty

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Speaker 2: sixteen when the Korean president was impeached then and what

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Speaker 2: markets did. Actually, markets outperformed the following year, and Korean

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Speaker 2: stocks did really well, and that's because of the semiconductor upcycle.

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Speaker 2: When companies were spending money on hard tech, and so

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Speaker 2: I think that leads me to think that Korean stocks,

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Speaker 2: the Korean market cares more about the global macro dynamics

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Speaker 2: and semiconductor cycle then what's happening from a domestic political situation.

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Speaker 2: So yes, I think that maybe over the next few

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Speaker 2: months there could be noise, but ultimately it's really the

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Speaker 2: semi conductor cycle that drives Korean stock.

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Speaker 1: And to be okay, we should point out the Central

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Speaker 1: Bank in South Korea has vowed to kind of guard

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Speaker 1: against instability in not only the currency but financial markets

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Speaker 1: as well. David, thank you so much for being with us.

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Speaker 1: He is David Chow, the global market strategist at Invesco

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Speaker 1: Asia Pacific, joining us from a Bangkok, Thailand here on

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Speaker 1: the Daybreak Asia podcast. Welcome back to the Bloomberg Daybreak

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Speaker 1: Asia Podcast. I'm Doug Krisner. FED decision tomorrow and a

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Speaker 1: quarter point rate cut is expected to take a closer

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Speaker 1: look at where the FED is in its process of

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Speaker 1: lowering interest rates and markets in general. We're joined by

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Speaker 1: Mark Happenstall. He is the president and CIO at Pen

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Speaker 1: Mutual Asset Management. It's not really going to be a surprise,

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Speaker 1: I think in terms of the rate cut. Markets are

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Speaker 1: firmly convinced of this fact. One of the things I'm

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Speaker 1: wondering about, though, has to do with the outlook where

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Speaker 1: we go from here. What's your sense on that?

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Speaker 3: Well, that is going to be I would say the

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Speaker 3: topical question, because in some ways, you know, the interest

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Speaker 3: rate decision tomorrow is less important than the dot plot.

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Speaker 3: And I would say the economic projections forward next year,

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Speaker 3: because if you look at where markets are pricing in

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Speaker 3: sort of that long term neutral rate, it's just below

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Speaker 3: the four percent level, about one hundred basis points higher

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Speaker 3: than the Fed was projecting at the September meeting. So

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Speaker 3: I think that's going to be the primary focus for

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Speaker 3: investors where they see the FED funds rate ending next

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Speaker 3: year as opposed to Mars's interest rate decision.

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Speaker 1: I thought it was interesting because the reading today on

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Speaker 1: retail sales top estimate's a gain of seven tens of

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Speaker 1: one percent, and that was driven in large part by

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Speaker 1: big jump in car purchases. And when I think of vehicles,

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Speaker 1: I think of that category as being very interest rates sensitive.

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Speaker 1: Makes sense of that for.

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Speaker 3: Me, Well, that is true, clearly, you know the low

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Speaker 3: borrowing costs you know, especially post COVID, I think helped

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Speaker 3: did sustain the auto industry in what would have been

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Speaker 3: more difficult times. But I will say, you know, if

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Speaker 3: you look at the consumer wealth that has been attained

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Speaker 3: more recently, whether it's the equity markets, clearly really really

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Speaker 3: strong gains there, those that have invested in crypto clearly

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Speaker 3: incredible gains there as well. So it does feel as though,

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Speaker 3: you know, even though there are haves and have nots

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Speaker 3: within the US consumer, and I would say across the

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Speaker 3: country broadly, that goes for corporations as well, it does

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Speaker 3: feel as though there's still a lot of money slashing

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Speaker 3: around in the system. And so to the extent that

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Speaker 3: folks can afford new vehicles, it seems though they have

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Speaker 3: the wherewithal to spend on that.

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Speaker 1: So a lot of money slashing around the system. That

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Speaker 1: sounds inflationary. Are we wrong to expect aggressive rate cuts

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Speaker 1: in the new year?

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Speaker 3: Do you think my base case would be maybe one

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Speaker 3: or two rate cuts next year? I just feel as

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Speaker 3: though inflation isn't ready to sort of come close to

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Speaker 3: the FEDS two percent target. And I think, I mean,

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Speaker 3: I guess the other interesting aspect of Tomor's meeting will

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Speaker 3: be the descents, because clearly there are seems though a

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Speaker 3: growing number of FED officials that feel as though we

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Speaker 3: need to make more progress order to keep lowering interest rates.

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Speaker 3: So again, the dissent votes will be interesting tomorrow as well.

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Speaker 3: But I think my base case again is for just

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Speaker 3: barely lower interest rates next year, as opposed to material

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Speaker 3: lowering of rates.

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Speaker 1: So do you think that what we've heard in terms

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Speaker 1: of economic policies from the incoming Trump administration, do you

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Speaker 1: think those details, sparse as they may be, would give

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Speaker 1: the Fed a little unease about maybe trying to plan

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Speaker 1: too much in the future.

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Speaker 3: Well, I will say what has been interesting to me is,

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Speaker 3: you know, the bond market has really viewed the world

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Speaker 3: of you know, potentially in terms of policy a little

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Speaker 3: more glass half empty, maybe focusing on higher inflation, possibly

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Speaker 3: from tariffs and immigration policies. It seems so the equity

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Speaker 3: markets look more so at deregulation in a more favorable

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Speaker 3: tax environment. So I will say I think the two

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Speaker 3: have sort of coexisted so far. But I do think

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Speaker 3: that if rates at the long end of the yield

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Speaker 3: curve move in the vicinity of five percent, I think

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Speaker 3: that it's likely that risk assets and equity markets are

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Speaker 3: going to struggle with interest rates reaching that level.

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Speaker 1: So how are you adjusting your strategies these days when

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Speaker 1: it comes to putting new money to work in markets.

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Speaker 3: Well, we focus primarily on the fixed income markets, and

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Speaker 3: we're still sourcing really attractive opportunities. I will say, I

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Speaker 3: think we found a little bit better relative value in

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Speaker 3: the world of securitized credit versus corporate credit where spreads

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Speaker 3: sit today. But you know, the all in yield levels

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Speaker 3: that we're witnessing today, whether it's cover credit or securitized credit,

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Speaker 3: or even treasury rates, really it's about as good as

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Speaker 3: it's been since the global financial crisis. So again, it's

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Speaker 3: been really attractive new investment opportunities that we're witnessing in

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Speaker 3: the credit markets today.

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Speaker 1: What's your outlook for the bond market next year? When

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Speaker 1: we're talking about things like potential terror, we're talking about

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Speaker 1: tax cuts, I mean these seem to be maybe a

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Speaker 1: little worrisome for bond investors.

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Speaker 3: Well, you know, I do think it's going to be

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Speaker 3: an interesting time. I do think in some ways maybe

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Speaker 3: the tails of the curve have been expanded, just you know,

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Speaker 3: I would say that's possibly to the upside and to

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Speaker 3: the downside in light of some of the uncertainty, some

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Speaker 3: of the disruption that is likely to be implemented under

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Speaker 3: the Trump administration and new policies there. So, you know,

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Speaker 3: I think being good investors you have to have a

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Speaker 3: level of being proactive and also reactive. And I would

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Speaker 3: say that, you know, next year may be more a

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Speaker 3: case of being able to react to current events that

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Speaker 3: are happening as opposed to, you know, basically setting a

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Speaker 3: game plan in advance.

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Speaker 1: So and I'm wondering as well, as long as we're

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Speaker 1: talking about the possibility of fewer regulations, whether we can

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Speaker 1: assume maybe a little bit more in the way of

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Speaker 1: merger and acquisition activity, and if any of that deal

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Speaker 1: making is going to be funded by the issuance of

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Speaker 1: some new debt. What do you think about that?

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Speaker 3: Well, you know, I think that you know, clearly the

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Speaker 3: M and A activity has really been pretty stagnant. So

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Speaker 3: but clearly, you know, I would say this administration is

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Speaker 3: going to be much more M and A friendly, So

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Speaker 3: you know, that does I would say, increase the possibility

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Speaker 3: of more debt issuance. But I will say, you know,

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Speaker 3: the corporate credit markets have been incredibly wide open this year,

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Speaker 3: so both investment grade and high credit spreads are really

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Speaker 3: approaching or at the tightest levels we've seen since the

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Speaker 3: nineteen nineties. So even given the level of interest rates today,

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Speaker 3: the level of treasure yields, you know, corporate borrowing is

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Speaker 3: still relatively attractive if you compared to longer term historical metrics.

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Speaker 3: So again, you know, I would expect and A debt

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Speaker 3: activity to increase, but I will say a lot of

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Speaker 3: issuers have been able to take advantage of the tight

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Speaker 3: credit spread environment and basically push out any near term

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Speaker 3: which so we think that you know, the opportunities for

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Speaker 3: defaulse is likely to be somewhat diminished as a result

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Speaker 3: of all the refinancing that's happened this year.

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Speaker 1: At what point on the curve are you kind of

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Speaker 1: focused more so at the shorter end?

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Speaker 3: Yeah, I mean I do think that, you know, longer term,

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Speaker 3: the yield curve is likely to steepen, So I would

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Speaker 3: say sort of that intermediate, sort of middle part of

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Speaker 3: the curve, the so called belly of the yield curve,

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Speaker 3: tends to do best in a yield curve steepening. And

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Speaker 3: again given the flatness of the treasury yeld curve, oftentimes.

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Speaker 2: You're all in.

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Speaker 3: Yield levels are just as attractive there as opposed opportunities

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Speaker 3: further out the curve. So again, you know, we think

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Speaker 3: on a risk adjusted basis, it makes sense to be

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Speaker 3: sort of that intermediate duration debt maturity spectrum.

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Speaker 1: Mark, good stuff. We'll leave it there. Thank you so

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Speaker 1: much for being with us. Mark Happenstall, Presidency Io at

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Speaker 1: Pen Mutual Asset Management, joining us here on the Daybreak

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Speaker 1: Asia Podcast. Thanks for listening to today's episode of the

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Speaker 1: Bloomberg Daybreak Asia Edition podcast. Each weekday, we look at

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Speaker 1: the story shaping markets, finance, and geopolitics in the Asia Pacific.

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