1
00:00:00,160 --> 00:00:02,800
Speaker 1: Let's get to our guest, Jeff Schultz, who's director and

2
00:00:02,920 --> 00:00:07,400
Speaker 1: investment strategist at Clearbridge Investments. So, Jeff, if you want

3
00:00:07,400 --> 00:00:10,280
Speaker 1: to be barish, yes, you can say that maybe the

4
00:00:10,320 --> 00:00:15,280
Speaker 1: market has already discounted aggressive FED tightening and that the

5
00:00:15,320 --> 00:00:18,239
Speaker 1: soft landing scenario is kind of thrown out the window.

6
00:00:18,560 --> 00:00:20,680
Speaker 1: But if you take into account what Mike Wilson's talking

7
00:00:20,680 --> 00:00:24,119
Speaker 1: about from Morgan Stanley and earnings revisions, particularly if you

8
00:00:24,160 --> 00:00:27,240
Speaker 1: see those earnings revisions of up around ten percent or

9
00:00:27,240 --> 00:00:30,000
Speaker 1: so for profits next year, then you could see another

10
00:00:30,080 --> 00:00:32,600
Speaker 1: leg down that perhaps is not even close to being

11
00:00:32,600 --> 00:00:36,440
Speaker 1: priced in your thoughts. Well, first off, thank you for

12
00:00:36,520 --> 00:00:38,560
Speaker 1: having me on the program, and I think there's a

13
00:00:38,640 --> 00:00:42,440
Speaker 1: lot of validity to Mike Wilson's argument. You know, first off,

14
00:00:42,600 --> 00:00:46,800
Speaker 1: multiples have expanded back above seventeen times forward earnings. One

15
00:00:46,840 --> 00:00:49,559
Speaker 1: could make the argument that the multiple compression that you've

16
00:00:49,600 --> 00:00:52,280
Speaker 1: seen so far has really been driven by the rise

17
00:00:52,320 --> 00:00:56,160
Speaker 1: of the tenure treasury, really hasn't been driven by the

18
00:00:56,240 --> 00:01:00,040
Speaker 1: reality of lower earnings expectations as we move into a

19
00:01:00,080 --> 00:01:03,360
Speaker 1: slower growth environment and potentially a recession and maybe a

20
00:01:03,400 --> 00:01:05,680
Speaker 1: deeper scession if the FED has to continue to hike

21
00:01:05,720 --> 00:01:08,440
Speaker 1: from here. But one thing that we've watched is the

22
00:01:08,480 --> 00:01:13,000
Speaker 1: relationship between manufacturing p m I and earnings. Usually, manufacturing

23
00:01:13,040 --> 00:01:15,440
Speaker 1: kem I in the US leads earnings by two quarters.

24
00:01:15,760 --> 00:01:17,640
Speaker 1: And if you go all the way back to nineteen

25
00:01:17,720 --> 00:01:21,039
Speaker 1: fifty seven, UM, every bear market that we've seen, and

26
00:01:21,080 --> 00:01:24,120
Speaker 1: there was FED tightening prior to that bear market, and

27
00:01:24,319 --> 00:01:28,240
Speaker 1: eight out of nine of those instances, manufacturing p m

28
00:01:28,319 --> 00:01:32,080
Speaker 1: I bottomed and its first dectyle of all readings, which

29
00:01:32,120 --> 00:01:35,280
Speaker 1: is a level of forty three or lower that's consistent

30
00:01:35,360 --> 00:01:40,200
Speaker 1: with double digit earnings declines. UM. So, I think given

31
00:01:40,360 --> 00:01:42,480
Speaker 1: the fact that the FED is embarking on the second

32
00:01:42,520 --> 00:01:45,400
Speaker 1: fastest start to a tightening cycle since nineteen fifty five,

33
00:01:45,840 --> 00:01:49,280
Speaker 1: and we're going to see cute quantitative tightening doubling here

34
00:01:49,320 --> 00:01:52,120
Speaker 1: in September, I think there's a strong risk of a

35
00:01:52,200 --> 00:01:55,400
Speaker 1: policy error, and I think earnings are just way too optimistic.

36
00:01:55,840 --> 00:01:58,680
Speaker 1: And you say, potentially the fact of a recession not

37
00:01:58,800 --> 00:02:01,160
Speaker 1: being a full gone conclude Jian, what are you expecting

38
00:02:01,200 --> 00:02:03,000
Speaker 1: in terms of some of the other data when we

39
00:02:03,200 --> 00:02:07,360
Speaker 1: particularly look ahead to jobs, Well, the jobs for print

40
00:02:07,920 --> 00:02:10,920
Speaker 1: expectations are for three hundred thousand UM. I think it's

41
00:02:10,919 --> 00:02:13,200
Speaker 1: probably gonna come in above those levels, even though we've

42
00:02:13,200 --> 00:02:16,640
Speaker 1: got a soft ADP print earlier today. But if you

43
00:02:16,639 --> 00:02:20,800
Speaker 1: look at ADP s relationship with the employment survey that

44
00:02:20,880 --> 00:02:24,160
Speaker 1: comes out, there has been no correlation over the last year.

45
00:02:24,200 --> 00:02:26,040
Speaker 1: So I'm not putting a lot of faith into the

46
00:02:26,120 --> 00:02:29,359
Speaker 1: data that we got today, but looking at other jobs

47
00:02:29,400 --> 00:02:32,120
Speaker 1: in labor market data that we've seen here recently, a

48
00:02:32,160 --> 00:02:37,760
Speaker 1: block bluster job openings number yesterday well above consensus expectations.

49
00:02:38,080 --> 00:02:40,400
Speaker 1: You see initial jobs claims coming back down to the

50
00:02:40,400 --> 00:02:43,679
Speaker 1: two and forty thousand per week range. Uh. And you've

51
00:02:43,720 --> 00:02:47,280
Speaker 1: also um seen a lot of resilience in a lot

52
00:02:47,360 --> 00:02:51,120
Speaker 1: of the wage growth measures out there. I'm anticipating a

53
00:02:51,160 --> 00:02:53,760
Speaker 1: beat to the upside, and we're firmly in an environment

54
00:02:53,760 --> 00:02:57,519
Speaker 1: we're bad news. Good news is bad news for equity investors,

55
00:02:57,800 --> 00:03:00,640
Speaker 1: and we saw that with jolts yesterday. It's possible that

56
00:03:00,720 --> 00:03:04,919
Speaker 1: the selling could be getting close to exhausting itself, maybe

57
00:03:04,919 --> 00:03:07,400
Speaker 1: in the short term, but maybe even longer term. And

58
00:03:07,480 --> 00:03:10,919
Speaker 1: I you you you pointed out some historical inputs there,

59
00:03:10,960 --> 00:03:12,840
Speaker 1: so I can ask you about this from March of

60
00:03:12,919 --> 00:03:16,080
Speaker 1: nineteen eight one to June of eight two, when Volka

61
00:03:16,280 --> 00:03:20,200
Speaker 1: was being his most potent. The SNP five hundred fell nine,

62
00:03:21,560 --> 00:03:24,000
Speaker 1: and you know we've seen those kind of losses already

63
00:03:24,040 --> 00:03:27,800
Speaker 1: this year. How much is discounted, Well, I think if

64
00:03:27,840 --> 00:03:31,000
Speaker 1: you go back to the early nineteen eighties, um, you know,

65
00:03:31,240 --> 00:03:33,600
Speaker 1: p s were in single digits in a very different

66
00:03:33,680 --> 00:03:36,000
Speaker 1: environment than where we find ourselves today with the forward

67
00:03:36,040 --> 00:03:39,640
Speaker 1: P of around seventeen. So markets are certainly much more

68
00:03:39,640 --> 00:03:43,240
Speaker 1: expensive than when Volker had to break the back of inflation.

69
00:03:43,880 --> 00:03:45,960
Speaker 1: Um So I do think that there's probably some more

70
00:03:46,000 --> 00:03:49,320
Speaker 1: downside to the markets. And um look, I think we

71
00:03:49,360 --> 00:03:51,920
Speaker 1: may retest the lows that we saw back in June,

72
00:03:51,960 --> 00:03:54,160
Speaker 1: we may break through them, but I don't think it's

73
00:03:54,160 --> 00:03:58,280
Speaker 1: going to get much more aggressive than that if overcession

74
00:03:58,320 --> 00:04:00,960
Speaker 1: doesn't sue, because I do leave because of the health

75
00:04:01,000 --> 00:04:05,040
Speaker 1: of the consumer, the health of bank uh company balance sheets,

76
00:04:05,240 --> 00:04:08,560
Speaker 1: banks are in very good positions today that this will

77
00:04:08,600 --> 00:04:10,760
Speaker 1: be a shallow recession when all is said and done,

78
00:04:10,760 --> 00:04:13,760
Speaker 1: and the earnings degradation isn't going to be as aggressive

79
00:04:13,800 --> 00:04:16,480
Speaker 1: as what you've seen in some of these deeper recessions.

80
00:04:16,640 --> 00:04:18,680
Speaker 1: So you're saying some chopping us in volatility over the

81
00:04:18,720 --> 00:04:21,479
Speaker 1: next four months, Is there any particular sector that you

82
00:04:21,480 --> 00:04:23,760
Speaker 1: would pick up at these levels will hold on too.

83
00:04:23,760 --> 00:04:27,799
Speaker 1: I know you overweight energy, yeah, I like I like

84
00:04:27,880 --> 00:04:30,200
Speaker 1: a bit of an eclectic mix of sectors. I think

85
00:04:30,320 --> 00:04:34,080
Speaker 1: energy is and an attractive opportunity given valuations, free cash

86
00:04:34,120 --> 00:04:37,960
Speaker 1: flow generation, and really the lack of investment that you're

87
00:04:38,000 --> 00:04:40,800
Speaker 1: seeing this time compared to when energy is last at

88
00:04:40,839 --> 00:04:43,520
Speaker 1: these levels UM. So, I think that is going to

89
00:04:43,560 --> 00:04:45,400
Speaker 1: be an area even though you're seeing some weakness, and

90
00:04:45,640 --> 00:04:48,760
Speaker 1: if you do see a US recession and some global weakness,

91
00:04:49,000 --> 00:04:52,320
Speaker 1: you could see some more price weakness as we moved

92
00:04:52,360 --> 00:04:54,760
Speaker 1: through the next couple of months. But let's not forget

93
00:04:54,880 --> 00:04:58,640
Speaker 1: global inventories are at very low levels um Looking back

94
00:04:58,680 --> 00:05:01,839
Speaker 1: to July, out of the tent at countries UH, only

95
00:05:01,960 --> 00:05:04,440
Speaker 1: three of them hit their production quotas UM so it's

96
00:05:04,440 --> 00:05:07,440
Speaker 1: a very tight market and with natural gas prices being

97
00:05:07,480 --> 00:05:09,919
Speaker 1: so high over in Europe, there's going to be some

98
00:05:09,960 --> 00:05:13,840
Speaker 1: substitution from natural gas over to oil. So I think

99
00:05:13,920 --> 00:05:17,719
Speaker 1: energy is an attractive area. And surprisingly throughout this rally

100
00:05:18,160 --> 00:05:20,400
Speaker 1: UM utilities you would think we would have be having

101
00:05:20,440 --> 00:05:22,840
Speaker 1: a difficult time with the rise of the tenure treasury,

102
00:05:23,080 --> 00:05:26,560
Speaker 1: but over of utilities in the SMP five hundred are

103
00:05:26,560 --> 00:05:30,280
Speaker 1: above its two hundred day moving average. Only energy can

104
00:05:30,360 --> 00:05:33,320
Speaker 1: boast that same claim. So I think utilities will do

105
00:05:33,400 --> 00:05:35,560
Speaker 1: well in this environment. And uh, you also want to

106
00:05:35,560 --> 00:05:38,080
Speaker 1: have staples in there because of the volatility and the

107
00:05:38,120 --> 00:05:41,839
Speaker 1: downward pressure that I'm anticipating. It's a delicate scenario that

108
00:05:41,920 --> 00:05:45,040
Speaker 1: we have right here, and you can imagine the FEDS predicament.

109
00:05:45,560 --> 00:05:47,800
Speaker 1: We worried about both. I mean, some people doubt the

110
00:05:47,880 --> 00:05:52,479
Speaker 1: FEDS resolve, but you know, I don't think you'd bet

111
00:05:52,520 --> 00:05:54,520
Speaker 1: on that because if they were to just throw in

112
00:05:54,560 --> 00:05:57,120
Speaker 1: the towel and say we're happy with what we've done

113
00:05:57,160 --> 00:05:59,360
Speaker 1: so far, We'll wait to see what happens and let

114
00:05:59,400 --> 00:06:03,239
Speaker 1: inflation run, that could be even worse. There's another concern,

115
00:06:03,320 --> 00:06:05,840
Speaker 1: which is that right now, with this stance of being

116
00:06:06,040 --> 00:06:08,719
Speaker 1: ultra hawkish, that you could see quite a sell off

117
00:06:08,720 --> 00:06:11,280
Speaker 1: and rich people, you know, rich people getting a lot

118
00:06:11,360 --> 00:06:14,040
Speaker 1: poorer may not be good for spending or the economy.

119
00:06:14,120 --> 00:06:17,960
Speaker 1: So it's pretty tough. What I'd say to that is, yes,

120
00:06:18,000 --> 00:06:21,599
Speaker 1: if you look at the top of American households, vast

121
00:06:21,600 --> 00:06:24,960
Speaker 1: majority of the equity and mutual fund assets accrued to

122
00:06:25,120 --> 00:06:27,840
Speaker 1: this cohort. But this is still the same cohort that

123
00:06:27,880 --> 00:06:31,039
Speaker 1: has the lowest propensity to change their spending patterns. The

124
00:06:31,080 --> 00:06:36,159
Speaker 1: bottom six Americans really spend that marginal dollar, and the

125
00:06:36,160 --> 00:06:39,920
Speaker 1: bottom six Americans their largest asset has been their home.

126
00:06:40,200 --> 00:06:43,480
Speaker 1: And although home price appreciation is going to come down, um,

127
00:06:43,560 --> 00:06:47,159
Speaker 1: they've been continuing to accrue net wealth over the course

128
00:06:47,240 --> 00:06:50,280
Speaker 1: of this year. So certainly going to hurt spending on

129
00:06:50,320 --> 00:06:53,000
Speaker 1: the margin, if you will. UM, But I don't think

130
00:06:53,279 --> 00:06:57,120
Speaker 1: the consumer is being as affected from financial market volatility

131
00:06:57,200 --> 00:07:00,520
Speaker 1: as one would expect. Let's talk about shin. I mean,

132
00:07:00,600 --> 00:07:03,080
Speaker 1: the p m I data for August was a modest bait,

133
00:07:03,120 --> 00:07:05,440
Speaker 1: but still showing a lot of challenges for this economy

134
00:07:05,440 --> 00:07:07,960
Speaker 1: and prompted more downgrades. I think A and Z now

135
00:07:08,000 --> 00:07:10,920
Speaker 1: saying three percent growth for the year. What is enough

136
00:07:11,000 --> 00:07:15,000
Speaker 1: to kind of jump start to China's economy here? Well,

137
00:07:15,000 --> 00:07:17,360
Speaker 1: look this the soft reading that we got there really

138
00:07:17,360 --> 00:07:19,800
Speaker 1: shouldn't be a surprise. Right. There's a lot of headwinds

139
00:07:19,800 --> 00:07:21,880
Speaker 1: that are out there. You have obviously have a hot weather,

140
00:07:22,320 --> 00:07:25,280
Speaker 1: the drought. You had a policy vacuum in the first

141
00:07:25,280 --> 00:07:28,600
Speaker 1: half of August, which has now been reversed. Um, you're

142
00:07:28,640 --> 00:07:31,120
Speaker 1: seeing a pick up of COVID cases, the property downturn.

143
00:07:31,600 --> 00:07:34,440
Speaker 1: But you are seeing some change, right. There's some certainty

144
00:07:34,440 --> 00:07:38,000
Speaker 1: on the twentie Party Congress now being announced on October

145
00:07:38,120 --> 00:07:40,960
Speaker 1: sixt so some of the political uncertainties are going to

146
00:07:41,040 --> 00:07:44,119
Speaker 1: be removed. You saw cut in some key interest rates

147
00:07:44,640 --> 00:07:47,440
Speaker 1: or a couple of weeks ago, and then also UM

148
00:07:47,440 --> 00:07:50,800
Speaker 1: there's been a release of the stimules package just last week.

149
00:07:50,880 --> 00:07:52,720
Speaker 1: But I think the key here is this is not

150
00:07:52,760 --> 00:07:55,480
Speaker 1: the shock and all stimulus that you normally see when

151
00:07:55,480 --> 00:07:57,440
Speaker 1: the Chinese economy is weak. So I think this is

152
00:07:57,440 --> 00:08:01,200
Speaker 1: certainly enough to stabilize the economy UM, at least until

153
00:08:01,200 --> 00:08:03,240
Speaker 1: we get through the Party Congress, But I don't think

154
00:08:03,280 --> 00:08:05,480
Speaker 1: it's enough really to jump start growth like we've seen

155
00:08:05,520 --> 00:08:08,880
Speaker 1: in prior cycles. Have you tried to game out policy

156
00:08:08,920 --> 00:08:14,040
Speaker 1: direction after the Party Congress, Yeah, I think that there's

157
00:08:14,040 --> 00:08:17,640
Speaker 1: going to be an incentive to rupt the economy. I

158
00:08:17,680 --> 00:08:21,560
Speaker 1: think obviously you're seeing a boost of credit growth in infrastructure. UM.

159
00:08:21,600 --> 00:08:24,840
Speaker 1: The property sector is obviously the main driver of growth

160
00:08:25,080 --> 00:08:27,480
Speaker 1: in China over time. UM. I would argue it's the

161
00:08:27,480 --> 00:08:30,640
Speaker 1: most important asset class to the global economy, and with

162
00:08:30,720 --> 00:08:33,120
Speaker 1: the drop of mortgage rates, this would be normally enough

163
00:08:33,160 --> 00:08:36,920
Speaker 1: to boost housing demand, but authorities are taking steps in

164
00:08:37,000 --> 00:08:41,480
Speaker 1: order to instill confidence in consumers in the housing markets.

165
00:08:41,520 --> 00:08:43,160
Speaker 1: And I do think as we get through the Party

166
00:08:43,160 --> 00:08:45,760
Speaker 1: Congress that more effort will be done in this area

167
00:08:45,800 --> 00:08:48,520
Speaker 1: and they will be able to achieve their initiative, which

168
00:08:48,559 --> 00:08:51,439
Speaker 1: is to stop the the decline that you're seeing in

169
00:08:51,520 --> 00:08:54,600
Speaker 1: property broad based and and obviously turn it into a

170
00:08:54,640 --> 00:08:57,920
Speaker 1: support in the economy as we move into three Jeff,

171
00:08:57,960 --> 00:08:59,839
Speaker 1: great to have you with us. Jeff Schultz story and

172
00:08:59,840 --> 00:09:02,800
Speaker 1: IF revestment strategistic Clearbridge Investments on the line from New

173
00:09:02,840 --> 00:09:04,480
Speaker 1: York for us here on Daybreak Asia