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Speaker 1: Welcome to the Daybreak Asia podcast. I'm Derek Krisner. Today

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Speaker 1: we'll be looking at the outlook for emerging markets. We'll

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Speaker 1: be joined in a moment or two by Stephen quatri

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Speaker 1: He is the EM equity portfolio manager at Morgan Stanley

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Speaker 1: Investment Management. But first we go to Hong Kong and

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Speaker 1: bring in Ben Luck. He is the senior multi asset

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Speaker 1: strategist at State Street Global Markets. Ben joins is from

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Speaker 1: Hong Kong. It's always a pleasure, Ben. Can I begin

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Speaker 1: by getting your reaction to the things that you're hearing

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Speaker 1: from the incoming Trump administration as it relates to tariff policy.

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Speaker 1: How do you think this is going to play out

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Speaker 1: in markets over the near term?

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Speaker 2: Right?

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Speaker 3: I think in terms of obviously all of these policies,

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Speaker 3: the clear trend is obviously going to be positive for

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Speaker 3: the US and net negative for anybody basically in the

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Speaker 3: rest of the world or in particular EM. But when

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Speaker 3: we actually think about it more on how investors should

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Speaker 3: be positioned, whether or not there are areas where is

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Speaker 3: already overweights or underweights that we need to the story

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Speaker 3: is a little bit more complex. I think, although from

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Speaker 3: a more top level multi asset approach that we have.

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Speaker 3: We're still long the US exceptionalism story. That hasn't changed,

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Speaker 3: But it doesn't mean that we are actually outright negative

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Speaker 3: on everything, Doug. I mean we are still positive on

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Speaker 3: selected parts of em Asia, in particular places that we

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Speaker 3: believe are less reliant on the US, less correlated with

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Speaker 3: US assets in particular, so places like Indonesia is an

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Speaker 3: area that we actually like the most in terms of

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Speaker 3: both the FX and the bond space. With respect to equities,

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Speaker 3: we are a little bit more concerned obviously in terms

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Speaker 3: of let's say China and Korea, places that obviously are

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Speaker 3: much more reliant and dependent I would say, in terms

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Speaker 3: of what the new administration will do. But in terms

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Speaker 3: of just looking at it from an earnings perspective, we're

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Speaker 3: still liking what we see in Taiwan. That remains to

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Speaker 3: be what is the biggest chunk of our overweight, given

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Speaker 3: really our strong preference towards US tech and the spillover

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Speaker 3: from that towards the region's equity. So that's what we're

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Speaker 3: doing right now. We're still trying to get a sense

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Speaker 3: of some of the policies, but we still need to

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Speaker 3: be positioned in general so focusing on the US and

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Speaker 3: selected parts of em Asia.

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Speaker 1: We also had the minutes from the last FED meeting

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Speaker 1: during the last session, and they show kind of broad

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Speaker 1: support for what may be described as a careful approach

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Speaker 1: to future rate cuts and maybe even if inflation were

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Speaker 1: to remain elevated, a pause in rate cuts. So this

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Speaker 1: notion that maybe inflation could remain elevated, do you think

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Speaker 1: that is in any way related to Trump's economic plans.

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Speaker 3: I think that revolves around the expectation side, Doug. Again,

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Speaker 3: a lot of how yields are priced in is either

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Speaker 3: based on inflation expectations or obviously the surge or movement

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Speaker 3: in the term premium as well. I think the term

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Speaker 3: premium story would be much more driven by the potential

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Speaker 3: Trump administration and how those physical stimulus are going to

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Speaker 3: come through, whether or not we'll see more radical policies

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Speaker 3: or policies that actually impact the rest of the world

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Speaker 3: as well as the US. But in terms of future

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Speaker 3: inflation expectations, I still believe it's more driven by the

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Speaker 3: US domestic economy. Labor market strength is still there. Yes,

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Speaker 3: it has weakened a bit, but we consider it still

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Speaker 3: as relatively tight. Inflation. We like to track our own

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Speaker 3: inflation in using online price that this is a daily

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Speaker 3: measurement of online products, and we continue to see still

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Speaker 3: very sticky inflation, so I think that's also going to

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Speaker 3: be I would say a challenge for the FED to

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Speaker 3: continue to cut rates next year. For US, the expectation

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Speaker 3: is they will still move in December with another twenty

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Speaker 3: five BIPs cut, but next year is really going to

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Speaker 3: be more driven by whether or not we'll see a

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Speaker 3: much lower movement in the labor market numbers, which will

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Speaker 3: obviously warn't a bigger cut, but I think that's still

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Speaker 3: a weight and see most so the next year anticipation

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Speaker 3: for US still would be more towards just that. Even

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Speaker 3: yet two cut would be something that we expect.

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Speaker 1: For now, Ben, I want to get your view on China.

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Speaker 1: We just learned that industrial profits in China during the

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Speaker 1: month of October we're down about ten percent from a

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Speaker 1: year ago, and we are well aware of the deflationary

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Speaker 1: pressures that have been plaguing the economy on the mainland.

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Speaker 1: Is this something that you're concerned about that, if not corrected,

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Speaker 1: could become a little bit more entrenched in the Chinese economy?

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Speaker 3: Yeah, So again looking at our own inflation using that

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Speaker 3: price that method that I talked about earlier, we've actually

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Speaker 3: seen Chinese prices in particular being in deflation for more

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Speaker 3: than two years already, and that's really on the combination

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Speaker 3: of the lack of pricing power from producers as well

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Speaker 3: as really the lack of spending in general in Chinese consumers.

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Speaker 3: As a way to put it, I think it clearly

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Speaker 3: signifies that a lot of the hype or announcements that

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Speaker 3: Beijing and the government has highlighted are good to boost

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Speaker 3: near term sentiment in terms of risk assets, but it

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Speaker 3: doesn't really solve the underlying credit problems. We're still seeing

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Speaker 3: deterioration of credit across both households and businesses in general

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Speaker 3: in China, and this is something that they really need

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Speaker 3: to affix next year because it will spiral down to

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Speaker 3: much lower expectations in terms of prices as well, and

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Speaker 3: that will spiral down even more into lower earnings growth

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Speaker 3: in terms of Chinese equity. So I do anticipate that

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Speaker 3: irrespective of what the Trump administration will do towards targeting China,

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Speaker 3: they still need to do a lot more in terms

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Speaker 3: of pushing four much more stimulus, actual stimulus packages to

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Speaker 3: support the local economy.

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Speaker 1: So what might that look like if you were to

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Speaker 1: recommend to policymakers in Beijing and approach. Can you give

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Speaker 1: me a sense of how that may take shape?

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Speaker 3: Right? I think a lot of what we have seen

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Speaker 3: so far, to be honest, Doug is really kicking the

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Speaker 3: can down the road approach. The numbers sound big, but

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Speaker 3: there again they're mostly swap programs, so they're really just

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Speaker 3: trying to transfer the risk, let's say, from local governments

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Speaker 3: to maybe central governments as a way to help them ease.

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Speaker 3: To me, that's really not going to help them in

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Speaker 3: a medium term because it doesn't stimulate enough. The easiest way,

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Speaker 3: again is to really focus on actually new credit would

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Speaker 3: be what I would be the most important thing, Having

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Speaker 3: actual figures that actually drives new credits. Let's say, if

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Speaker 3: it's actually two or three trillion in terms of new

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Speaker 3: credit creation, that could obviously help to spur more incentive

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Speaker 3: in terms of US can US or a Chinese consumers suspend.

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Speaker 3: On the other hand, I still think it's also a

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Speaker 3: currency approach where they need to let go of the

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Speaker 3: currency because of how tight policy is. If currency remains

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Speaker 3: to be overvalue for US, it's still overvalue given how

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Speaker 3: weak the local economy is, So I do see higher

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Speaker 3: dollar c and why going next year as another way

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Speaker 3: to really help loosen out that credit and liquidity to

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Speaker 3: the system.

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Speaker 1: So do you think that there are more opportunities in

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Speaker 1: the fixed income space in China rather than on the

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Speaker 1: equity side for US?

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Speaker 3: Yes, I think there's a more clear story to see

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Speaker 3: that the PBOC will directly inject or directly support the

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Speaker 3: liquidity system, which will obviously drive yields lower. Although it's

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Speaker 3: obviously extremely tighter rety and valuation is expensive, but it

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Speaker 3: is a more i would say easier approach in terms

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Speaker 3: of actually seeing where the support is. On the flip side.

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Speaker 3: The equity space is a lot more geared towards whether

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Speaker 3: or not we'll see sustainable earnings. Last year, sorry, this

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Speaker 3: year again, markets are up, but earnings haven't lived up

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Speaker 3: to the same expectation. And if next year remains to

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Speaker 3: be the same, then I anticipate that the foreign flows

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Speaker 3: would actually start to leave the country if they don't

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Speaker 3: actually see concrete fundamental improvement. So I would see more

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Speaker 3: of a bond space and actually hedging the currency to

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Speaker 3: get to get better return as opposed to focusing on

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Speaker 3: Chinese equities.

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Speaker 1: Ben, we'll leave it there. Thanks so much for being

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Speaker 1: with us. He has Ben Look, senior multi asset strategist

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Speaker 1: at State Street Global Markets, been joining today from Hong

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Speaker 1: Kong here on the Daybreak Asia podcast. Welcome back to

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Speaker 1: the Bloomberg Daybreak Asia Podcast. I'm Doug Prisoner. We go

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Speaker 1: next to President Elect Trump's economic policy and his use

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Speaker 1: of tariffs. I think it's fair to say is a centerpiece.

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Speaker 1: Joining us now for a closer look is Stephen quatri

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Speaker 1: He is em equity portfolio manager at Morgan Stanley Investment Management.

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Speaker 1: Stephen joining from here in New York City. Thanks for

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Speaker 1: making time to chat with us, Steven. We just learned

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Speaker 1: that the President elect is set to name Jamison Greer

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Speaker 1: as US Trade Representative. He's a longtime protege of Robert Leittheiser,

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Speaker 1: who served as USTR in the first Trump administration, and

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Speaker 1: Greer was a key part of the President Elect's first

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Speaker 1: term trade negotiations. It seems to me the message is unmistakable.

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Speaker 1: You got to use tariff policy to force negotiations on

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Speaker 1: trade agreements. Do I have that right?

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Speaker 2: I think that's right. I think that he's been very

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Speaker 2: clear about wanting to use tariffs as a policy tool.

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Speaker 2: I think the degree to which they will raise hers

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Speaker 2: is sort of up for debate. Some of the signs

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Speaker 2: to me suggest they are being used as a negotiating ploye.

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Speaker 2: So starting with the worst possible scenario, but I think

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Speaker 2: time will tell. I think we need to see this

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Speaker 2: administration come in and start to get to work before

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Speaker 2: we can have any real clarity.

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Speaker 1: Yeah, Canadian Prime Minister Trudeau as well as as Mexican

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Speaker 1: President Shine Bomb both suggested possible retaliation. We didn't get

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Speaker 1: that definitely, but it's looming as a possibility. Is that

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Speaker 1: a real risk when you look at companies like Ford

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Speaker 1: Motor and Ford that are exposed to those markets and

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Speaker 1: have manufacturing sites in those countries, I think.

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Speaker 2: It's it's definitely a potential risk. But you know, there

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Speaker 2: are some potential offsetting factors as well. Remember that the

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Speaker 2: last time tariffs were imposed, the inflationary impact could be

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Speaker 2: offset by the sort of disinflationary impulse of lower commodity prices,

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Speaker 2: and so you know that certainly impacts the demand for

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Speaker 2: autos as well, and so I think it's really hard

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Speaker 2: to say. It's a very complex system. We focus on

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Speaker 2: bilateral trade, but as we know, trade tends to happen

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Speaker 2: in various ways beyond just the bilateral trade. So a

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Speaker 2: little hard to say at this juncture, but certainly something

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Speaker 2: we are watching anxiously.

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Speaker 1: So when President Electroump made the announcement about the threat

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Speaker 1: of twenty five percent tariffs on Canadian and Mexican goods,

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Speaker 1: he also talked about imposing an additional ten percent tariff

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Speaker 1: on Chinese goods on top of the levees that also

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Speaker 1: exist beginning his first day in office. Talk to me

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Speaker 1: about US China relations and the use of tariffs to

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Speaker 1: try to maybe construct a more level playing field. Is

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Speaker 1: that even a possibility.

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Speaker 2: I think that the ability to use tariffs to construct

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Speaker 2: a level playing field, it's going to be a bit difficult.

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Speaker 2: As we know, labor costs are quite different in these countries.

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Speaker 2: There's a number of different sort of structural factors. But

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Speaker 2: it's possible that this administration certainly tries to do that.

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Speaker 2: Time will tell how successful they are, how much the

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Speaker 2: currencies would need to adjust. But so I'm a little

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Speaker 2: skeptical that tariffs can actually do the sort of broad

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Speaker 2: of all the work that needs to be done, but

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Speaker 2: time will tell. It's really hard to know at this stage.

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Speaker 1: Well, we do know that the Chinese economy is still

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Speaker 1: struggling and the export arena has been one of the

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Speaker 1: bright spots. This certainly represents a big headwind for Beijing,

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Speaker 1: does it not.

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Speaker 2: It does. However, Let's remember that the last time that

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Speaker 2: tariffs were enacted on China in twenty seventeen to twenty nineteen,

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Speaker 2: they simply shifted their exports to other emerging markets and

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Speaker 2: we saw that share rise quite a bit. So clearly

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Speaker 2: China is, you know, we like to say, over indebted,

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Speaker 2: over leveraged, and oversupplied, and they are exporting that oversupply

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Speaker 2: to the rest of the world. If they can shift

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Speaker 2: enough of it from the US to other emerging markets

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Speaker 2: and those emerging markets sort of accept that disinflationary impulse,

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Speaker 2: then that's a possible route. It also has that nice

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Speaker 2: effect of helping them build this sort of other bricks

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Speaker 2: coalition that it seems to be they want to build,

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Speaker 2: So it's one route they can take. But certainly, at

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Speaker 2: the end of the day, it does seem like China

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Speaker 2: is going to need to stimulate their own economy. They

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Speaker 2: can't seem to simply realize solely on exporting their excess supply, no.

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Speaker 1: Doubt about that. And when you talk to people who

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Speaker 1: put money to work in markets these days, I can't

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Speaker 1: tell you the number of people that have been on

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Speaker 1: this podcast talking about the fact that it's not yet

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Speaker 1: time to put money to work in China. Are they

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Speaker 1: missing anything? Maybe not in China, but other markets in

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Speaker 1: the APAC region that may in some way be connected

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Speaker 1: to China.

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Speaker 2: I think there's a lot of focus on the superpowers

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Speaker 2: of China and the US and not enough focus on

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Speaker 2: what i'd say are the middle powers. And so when

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Speaker 2: I think of markets in Asia that or maybe not

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Speaker 2: in the direct cross airs of tariffs, you can think

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Speaker 2: of markets like Indonesia, the Philippines, even India which just

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Speaker 2: had a larger share of domestic demand, for better or

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Speaker 2: for worse, they have not relied on exports as a channel.

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Speaker 2: So I think some of these markets are quite interesting.

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Speaker 2: They're home to many structural themes that you can gain

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Speaker 2: exposure to by investing in them. So I think certainly

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Speaker 2: that's where we're focused at the moment, away from from

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Speaker 2: China and some of these other countries that are in

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Speaker 2: the direct crosshairs of teriffs.

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Speaker 1: But I'm wondering as you look out to twenty twenty

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Speaker 1: five whether em will still struggle given the fact that

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Speaker 1: developed markets like the US seem to be performing very

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Speaker 1: very well.

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Speaker 2: I think they're The bual case for emerging market equities

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Speaker 2: is maybe delayed, but I don't see it as derailed.

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Speaker 2: And that's simply because you know, the economic fundamentals are

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Speaker 2: much better now than they have been over the last decade.

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Speaker 2: You certainly need to take a country specific approach and

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Speaker 2: as I've said, sort of focus on the winners and losers.

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Speaker 2: But I don't think that, you know, making a broad

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Speaker 2: brush emerging markets won't do well is a bit of

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Speaker 2: is a bit too far. Then I'm willing to go

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Speaker 2: again because of those fundamentals. And again, if you look

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Speaker 2: at certain the merging market countries, they are seeing growth

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Speaker 2: accelerate quite a bit, all the while, you know, growth

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Speaker 2: is slowing down in some some large economies, so you know,

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Speaker 2: ex China, maybe even create Taiwan where growth is shifting down.

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Speaker 2: There are some really interesting growth stories in emerging markets

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Speaker 2: that that we tend to focus on.

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Speaker 1: So within those realms. Are there themes that you really

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Speaker 1: are attracted to, whether it's in support maybe of the

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Speaker 1: consumer in those jurisdictions, or maybe it's more on the

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Speaker 1: industrial side. Talk to me about the themes that you

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Speaker 1: like right now in em.

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Speaker 2: Yeah, I think on the consumer side, we're really focused

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Speaker 2: on some structural themes, and some of the smaller emerging markets,

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Speaker 2: you're seeing the rise of the middle class. So in

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Speaker 2: places like Vietnam where the country is urbanizing, they're shifting

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Speaker 2: their retail patterns away from wet markets more towards traditional retail.

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Speaker 2: In a place like Indonesia that simply hasn't built out

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Speaker 2: their healthcare infrastructure but has recently become the largest healthcare

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Speaker 2: scheme in the world in terms of universal healthcare, so

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Speaker 2: I think a trend like that is set to continue.

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Speaker 2: The country will continue to build more and more hospitals

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Speaker 2: irrespective of what's going on in tariff, simply because the

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Speaker 2: infrastructure is not there. So I think there's plenty of

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Speaker 2: these sort of classic emerging market themes that are uncorrelated

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Speaker 2: maybe to tariffs and what's going on in global trade,

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Speaker 2: and frankly, some of them are creating at pretty interesting

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Speaker 2: valuations of twelve to thirteen times, earning so plenty of

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Speaker 2: thanks to life in these markets.

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Speaker 1: Steven, we'll leave it there. Thanks so much for joining us.

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Speaker 1: Stevid Quatri there he is em Equity portfolio manager at

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Speaker 1: Morgan Stanley Investment Management. Joining from here in New York

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Speaker 1: City on the Daybreak Asia Podcast. Thanks for listening to

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Speaker 1: today's episode of the Bloomberg Daybreak Asia Edition podcast. Each weekday,

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Speaker 1: we look at the story shaping markets, finance, and geopolitics

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Speaker 1: in the Asia Pacific. You can find us on Apple, Spotify,

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Speaker 1: the Bloomberg Podcast YouTube channel, or anywhere else you listen.

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Speaker 1: Join us again tomorrow for insight on the market moves

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Speaker 1: from Hong Kong to Singapore and Australia. I'm Doug Prisoner

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Speaker 1: and this is Blomberg

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Speaker 2: M