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Speaker 1: Bloomberg Audio Studios, Podcasts, radio News.

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Speaker 2: Welcome to the Bloomberg Daybreak Asia podcast. I'm Doug Chrisner.

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Speaker 2: On today's episode, we'll take a look at how deflation

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Speaker 2: seems to be gripping the Chinese economy, plus a look

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Speaker 2: at how looming tariffs will shape the trading week ahead.

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Speaker 2: In a moment, we'll be speaking with George Schultze. He

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Speaker 2: is founder of Schultzea Wealth Management. But we begin in

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Speaker 2: the Asia Pacific. Over the weekend, we learned China's consumer

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Speaker 2: inflation fell in February by far more than expected. The

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Speaker 2: consumer price index was down seven tens of one percent

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Speaker 2: from last year, falling below zero for the first time

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Speaker 2: in thirteen months. For a closer look, now, I am

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Speaker 2: joined by Chi Lo. He is APAX senior market strategist

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Speaker 2: at BNP Peribah Asset Management. Chi is on the line

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Speaker 2: from Hong Kong. Thank you for making time to chat

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Speaker 2: with us. It's always a pleasure. So how do you

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Speaker 2: make sense of this re Is it an anomaly? I

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Speaker 2: was looking at data from Goldman Sachs. A couple of

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Speaker 2: people are interpreting this reading in a different way. But

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Speaker 2: can we walk away? Can we ignore the fact that

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Speaker 2: China seems to be just trapped in deflation right now.

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Speaker 3: We cannot really walk away. It is very clear that

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Speaker 3: the Chinese economy is still weak, especially the private sector.

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Speaker 3: Confidence is still not fully recovered. When you look at

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Speaker 3: product sector investment growth, it's being close to zero, offering

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Speaker 3: between negative and zero for the past two and a

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Speaker 3: half years. So this CPI negative reading, yes grunted, partly

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Speaker 3: because of the base effects due to the distorsion of

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Speaker 3: the Chinese New Year, but fundamentally we are still not

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Speaker 3: really seeing a turnaround in public sentiment, in private sector

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Speaker 3: spending and the overall momentum of the economy, which argues

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Speaker 3: for further and more aggressive policy easing by Beijing. It

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Speaker 3: seems that you know the government is aware of that

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Speaker 3: and be hopeful that in the coming months we'll see

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Speaker 3: more assertive easing just to make sure the grow co

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Speaker 3: momentum in the Chinese economy doesn't folter further.

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Speaker 2: Does it have to be a massive type stimulus program?

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Speaker 3: Do you think it does have to be more aggressive

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Speaker 3: than what we saw in the past two years.

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Speaker 1: I e.

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Speaker 3: Different from the incremental easing stance that Beijing had been pursuing.

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Speaker 3: Until late last year. The point here is that because

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Speaker 3: private sector is not spending, consumers are still not confident

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Speaker 3: in spending more So, it's a simple economics that when

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Speaker 3: the private sector is moving is not moving ahead, the

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Speaker 3: public sector has to step in get things going kick

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Speaker 3: started just to rebuild confidence. So we do need to

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Speaker 3: see Beijing to be more aggressives. How aggressive, but definitely

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Speaker 3: more aggressive than what we saw in the past two years,

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Speaker 3: as I said earlier, but not necessarily you know, in big,

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Speaker 3: big spending stabilis that we saw in the past cycles.

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Speaker 3: Because the trick here is to find the point that

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Speaker 3: can turn around prodit sector confidence. And it seems that

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Speaker 3: we see some green shoots in the economy recently. We

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Speaker 3: may be close to the point that the sector is

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Speaker 3: turning around, but that needs more help from the government.

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Speaker 3: That's the point.

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Speaker 2: This is undoubtedly being complicated by an increase in trade

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Speaker 2: tension between Washington and Beijing. We're talking about new tariffs

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Speaker 2: that will take effect on Monday from the China side.

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Speaker 2: Is it really a critical moment right now if you're

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Speaker 2: a leader in Beijing and you have to kind of

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Speaker 2: try to balance the risk here, how critical is this

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Speaker 2: moment in time well.

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Speaker 3: Indeed, the tariff factor is another drag from the external

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Speaker 3: side on Chinese growth. But at this point, if the

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Speaker 3: tariff rates still remained at additional twenty percent, it is

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Speaker 3: still manageable from China's perspects active because the estimated drag

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Speaker 3: that we calculated on the back of the envelope is

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Speaker 3: that the twenty percent tariff on Chinese exports to the

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Speaker 3: US would trim Chinese growth by about zero one six percent,

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Speaker 3: maybe a little less now. But when you look at

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Speaker 3: Beijing's announced fiscal spending, the fiscal deficit and so on,

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Speaker 3: we estimated that the net fiscal stimulus to the Chinese

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Speaker 3: economy at the current physical spending package is around one

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Speaker 3: point six percent of GDP, so that would be more

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Speaker 3: than enough to offset the tariff drag on growth, So

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Speaker 3: that is still manageable. But the point here is, as

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Speaker 3: I said, if Chinese public sector parvate sector is not

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Speaker 3: turning around, and then if the tariff factor added to

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Speaker 3: adds to destroying confidence further, then they would be a

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Speaker 3: serious ease with the Beijing has to rethink about. But

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Speaker 3: in the end, I still think that if Beijing wants

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Speaker 3: to do it, they can do more, they have the

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Speaker 3: tools to do it and expand the mestic sector further.

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Speaker 3: So it's a policy choice. Down the road, we do

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Speaker 3: see that Beijing is shifting to more stabilis.

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Speaker 2: So we've talked about the big negative, weak demand, bad sentiment,

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Speaker 2: and deflation. Now let's talk about the positivity as it

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Speaker 2: relates to the deep seek narrative and from that, the

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Speaker 2: interest in AI driven buying of some of the companies,

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Speaker 2: smaller firms in China that are high tech related and

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Speaker 2: what that has meant for foreign money coming into China.

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Speaker 2: What kind of flows are you seeing right now?

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Speaker 3: We do see some selective flows going back to the

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Speaker 3: Chinese market, partly because they are investors who hold a

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Speaker 3: view like us that the probability of more stimbolus going

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Speaker 3: forward by Beijing is going to turn around things. But

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Speaker 3: they are also cautious and suspicious investors there. So the

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Speaker 3: selective flows going back to China now more tactical, and

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Speaker 3: many of them, no doubt, as you a little to

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Speaker 3: have have gone into the tech sector for the simple

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Speaker 3: fact that Chinese tech has been bitten down for more

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Speaker 3: than three years. And now the Deepsek shock, I just

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Speaker 3: call it a shock because it does shake up the

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Speaker 3: global tax sector and ask investors to re evaluate the

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Speaker 3: develop market tech companies, the Magnificent seven so to speak,

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Speaker 3: you know, questioning their earnings, outloak, their business model, their costs,

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Speaker 3: and so on. So when you look at this China

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Speaker 3: shock on the tech sector, there is indeed a positive

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Speaker 3: implication on Chinese tech stocks, first because of the evaluation,

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Speaker 3: and secondly, the Chinese can do similar things like the

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Speaker 3: big tech Western companies can do as much cheaper, and

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Speaker 3: that means, you know, there is more opportunity in the

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Speaker 3: Chinese tech sector to grow and rebound. And if you

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Speaker 3: add on the Chinese government's expected stimulus, that is a

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Speaker 3: good story for portfolio flows going back to the Chinese

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Speaker 3: market and also especially going to the Chinese tex stop.

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Speaker 2: So I'm wondering about the extent to which the move

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Speaker 2: up that we have seen in the market is being

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Speaker 2: underpinned by expectations that we're going to see some central

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Speaker 2: bank easing in China. We talked a little bit about

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Speaker 2: the stimulus side. I get that from a kind of

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Speaker 2: a fiscal point of view, but how much of the

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Speaker 2: positivity is being supported by the notion that the PBOC

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Speaker 2: is going to cut rates here.

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Speaker 3: The PBOC will continue to ease. Now, in my view,

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Speaker 3: what's important for the stimulus program to work here is

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Speaker 3: primarily fiscal spending, which we see Bijing is doing, supported

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Speaker 3: or funded by special government bond issues. And then secondary

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Speaker 3: is monetary easy which monetary easing role here is to

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Speaker 3: facility the physical spending and to make sure the systems

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Speaker 3: liquidity will remain ample. It is not primary because there

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Speaker 3: is deflictionary forces in the Chinese economy. There's a lack

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Speaker 3: of confidence if you rely mainly or only on monetary

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Speaker 3: easing in this situation is something like a liquidity trap,

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Speaker 3: which means that monetary easing is like pushing on a

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Speaker 3: piece of strength. So we do need the fiscal spending

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Speaker 3: coming in, but monetary easing is a facilitating factor, and

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Speaker 3: we do need to see PBOC to ease further, mainly

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Speaker 3: because when you look at the real policy rates in China,

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Speaker 3: it is still weighed about ten year average. So from

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Speaker 3: that perspective, there is room for the PBOC to continue

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Speaker 3: to ease further.

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Speaker 2: Are you finding more opportunity on the fixed income side

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Speaker 2: in China than you are on the equity side at.

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Speaker 3: This point, I think both segments of the asset markets

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Speaker 3: offer good opportunities. Now, if there is still a very

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Speaker 3: sluggish recovery in confidence, which drags on economic growth and

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Speaker 3: yet on the guitar effactor and so on, so that

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Speaker 3: means we're not going to see any significant demand push

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Speaker 3: on inflation in China which would lead to monetary EA

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Speaker 3: is monetary tightening, so that's not really a risk. Now

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Speaker 3: in this environment, fixed income is good. But on the

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Speaker 3: other hand, if our reading of the steamolant program that

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Speaker 3: Beijing is putting in wells eventually, you know, sometimes in

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Speaker 3: the second half of this year, shows signs of turning

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Speaker 3: around the economy, that would turn around investors centiquent quick

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Speaker 3: sharply leading super War info back to China. So that

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Speaker 3: would be good for the for the equity market. So

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Speaker 3: at this point I would I would say, you know,

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Speaker 3: sort of a fifty to fifty portfolio in equity is

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Speaker 3: fifty percent in effics income in China is an appropriate stance.

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Speaker 3: But going into the second half of this year and

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Speaker 3: we have a greater outroop for equity performance there, we

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Speaker 3: we can move back to the typical sixty forty sixty

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Speaker 3: percent equities and forty percent fixed income.

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Speaker 2: Gee, thank you so much for joining us. Chilo there.

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Speaker 2: He is APAX senior market strategist at BNP Periba Asset Management.

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Speaker 2: Joining us here on the Daybreak Asia podcast. Welcome back

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Speaker 2: to the Daybreak Asia Podcast. I'm Doug Krisner. So in

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Speaker 2: the US last Friday, the equity market closed higher. This

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Speaker 2: was after fed scher J. Powell said he is expecting

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Speaker 2: the path to two percent inflation to continue. Now markets

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Speaker 2: appear to take these remarks to mean any price increase

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Speaker 2: as a result of tariffs could be temporary. Joining me

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Speaker 2: now is George Schultze. He is founder and CEO of

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Speaker 2: Schultze Wealth Management. Joining from just outside of New York City.

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Speaker 2: Thanks for making time to chat with us. George, First

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Speaker 2: of all, is Powell correct you believe in assuming that

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Speaker 2: any price shock as a result of these tariffs would

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Speaker 2: be temporary.

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Speaker 1: We think it is here at Schultze Asset Management.

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Speaker 3: Yeah.

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Speaker 1: There's been a lot of market uncertainty and volatility in

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Speaker 1: the last few days, a lot of concern about tariffs

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Speaker 1: and uncertainty specifically about how they're going to impact economic

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Speaker 1: growth globally. But I think I think power's taken the

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Speaker 1: uh you know the right approach here. I mean, remember,

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Speaker 1: you know, inflation has dropped a fair amount, and you know,

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Speaker 1: let's face that many of these policies that Trump has

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Speaker 1: issued our economic friendly policies. They're pro business policies. So

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Speaker 1: we'll see how the specific tariffs all get rolled out

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Speaker 1: and how many of them will roll off after we

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Speaker 1: have negotiated new deals with different countries. But for sure,

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Speaker 1: the Fed has some ammunition leftic and lower interest rates

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Speaker 1: if it becomes a concern. And you know, I think

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Speaker 1: I think a little bit of this market volatility is

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Speaker 1: a little premature.

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Speaker 2: I had a colleague pointing out that Powell's remarks were

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Speaker 2: eerily similar to his remarks on transitory inflation that made

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Speaker 2: during the pandemic. They of course turned out to be

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Speaker 2: a mistake. Do you want to be hedged against the

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Speaker 2: possibility that inflation is still a little stubborn and sticky.

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Speaker 1: Well, yes, inflation has been sticking it. Remember how long

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Speaker 1: it took to increase inflation. I think it took about

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Speaker 1: ten years. So yes, we think it probably makes a

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Speaker 1: little sense to have some hedging, you know, against inflation specifically.

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Speaker 1: I think, you know, there's some interesting short selling opportunities

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Speaker 1: as well with certain companies that are facing higher costs

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Speaker 1: that seem to be persistent. And again with with with

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Speaker 1: the tariffs, I think, you know, certain industries, for example,

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Speaker 1: automakers that import a lot of product, you know, they'll

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Speaker 1: face they'll be facing risk of higher prices on their

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Speaker 1: input prices. But on the other hand, many of them

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Speaker 1: will be able to push through some of those price

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Speaker 1: increases to their customers, and some of their customers will

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Speaker 1: be uh, you know, price elastic and willing to pay,

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Speaker 1: you know, to buy new vehicles even with higher component parts.

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Speaker 2: So the rhetoric around tariffs, combined with the FED being

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Speaker 2: maybe higher for longer, I think that's fair to say

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Speaker 2: at this point. One of the things that those two

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Speaker 2: factors have contributed to is a much stronger dollar. And

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Speaker 2: I'm wondering whether you think that that will still be

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Speaker 2: a significant headwind for any US multinational.

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Speaker 1: Yeah, so, you know, stronger dollar actually, you know works

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Speaker 1: out pretty well for many of the big US companies.

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Speaker 1: You know, I think the important thing is you know

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Speaker 1: where you have your borrowings. I mean, if you're a multinational,

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Speaker 1: you have borrowed in US dollars and you have revenue

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Speaker 1: and income coming from overseas, then you could have an issue,

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Speaker 1: but certainly a strong dollar it actually welcome right now.

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Speaker 1: I mean, you know, one of the things we're seeing

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Speaker 1: with Dog and you know all this government expenditure cutting

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Speaker 1: is you know, a new approach to you know, focus

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Speaker 1: on potentially balancing the budget going forward instead of just

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Speaker 1: spending so much money like a drunk saler. So you know,

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Speaker 1: we think generally these are good business endly things, and

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Speaker 1: you know, to the extent they ultimately ultimately lead to

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Speaker 1: lower taxes for individuals or corporations in the US that

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Speaker 1: could really be good for future economic growth.

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Speaker 2: So you mentioned those there. The brainchild of Elon Musk,

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Speaker 2: his company Tesla, has been struggling lately. The last figure

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Speaker 2: that I saw on shipments in China showed a decline.

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Speaker 2: I think they've been falling for about five consecutive months now.

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Speaker 2: February sales I think down forty nine percent compared to

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Speaker 2: last year. And at the same time, you have a

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Speaker 2: company like Byd on the mainland that is gaining market share.

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Speaker 2: I think by D last month saw if you can

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Speaker 2: believe this, one hundred and sixty one percent year on

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Speaker 2: year increase, do you have to reconsider some of the

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Speaker 2: let's say Mag seven, the darlings. I use Tesla as

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Speaker 2: an example, but maybe there are other situations where these

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Speaker 2: companies perhaps are a little over extended in their growth prospects.

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Speaker 1: I think that's right. I think you do have to

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Speaker 1: be learned about that. And people have been saying that

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Speaker 1: for a long time, including US. You know, they've gone

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Speaker 1: they've just gone up parabolically, and now you know, you

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Speaker 1: wonder whether you know there's really value for some of

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Speaker 1: these Mags seven socks. I mean, they've been on such

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Speaker 1: a run and there's been so much money chasing them

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Speaker 1: that now you're seeing other markets, you know, with with

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Speaker 1: big technology or you know, high growth companies outperform, like

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Speaker 1: you're seeing in Hong Kong and other international markets like

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Speaker 1: for instance, in Germany, you know, where you have a

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Speaker 1: you know, close to a twenty percent return year to

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Speaker 1: date for both those those markets versus in the US,

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Speaker 1: you know, you're flat to down. Looks like the NASAC

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Speaker 1: is down already, you know, a fair amount so far

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Speaker 1: this year. So so it seems to be a bit

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Speaker 1: of a rotation. We'll see how long it continues. But certainly.

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Speaker 1: You know, US investors in the MA seven another big

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Speaker 1: socks have have done very well looking back over the

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Speaker 1: last two years, and so I think we're probably we

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Speaker 1: were probably due for a little bit of a correction there.

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Speaker 1: But we'll see how long this continues, whether you know,

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Speaker 1: it stops now or you know, continues to get worse

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Speaker 1: and we wind up having another year like we had

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Speaker 1: in twenty twenty two.

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Speaker 2: How are you positioning yourself offshore right now? If at all.

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Speaker 1: We've made certain investments in certain countries where we think

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Speaker 1: there's opportunity for more appreciation. You know, there are some

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Speaker 1: interesting value investments, and you know around Europe and also

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Speaker 1: in Asia. In China, for instance, it's just been you know,

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Speaker 1: theres a lot of changes, and also in Japan there

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Speaker 1: are a lot of interesting changes, you know, structural changes

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Speaker 1: in Japan, you know, where companies are getting a little

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Speaker 1: bit more shareholder friendly. In China, you know, of course,

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Speaker 1: we had this big property market correction and now you know,

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Speaker 1: there seems to be you know a good amount of

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Speaker 1: stimulus and you know, perhaps a more business friendly attitude

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Speaker 1: and an effort to combat you know, risk of tariffs.

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Speaker 1: In Europe, there's it seems that you know, there's going

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Speaker 1: to be a bazuka of spend, you know, for military

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Speaker 1: and potentially infrastructure spending. So there are some interesting opportunities

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Speaker 1: in overseas markets right now, and we think investment or

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Speaker 1: should be flexible and willing to look at other places

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Speaker 1: if it's likely that you're going to lose money in

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Speaker 1: the US market. However, there are some very interesting and

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Speaker 1: very cheap companies trading in the US market that have

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Speaker 1: been I think over sold in the last couple of

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Speaker 1: weeks here with all this turmoil and all this market volatility.

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Speaker 2: So I want to get your view on the macro. Then,

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Speaker 2: over the weekend, President Trump was saying the American economy

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Speaker 2: does face a period of transition, although he declined to

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Speaker 2: predict whether or not a recession will happen this year.

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Speaker 2: What is your sense of whether or not we'll see

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Speaker 2: contraction in growth.

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Speaker 1: I don't think we're there yet. I mean, I think

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Speaker 1: the economy is still growing. You know, we still have

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Speaker 1: some inflation. I think if we're close to there, Powell

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Speaker 1: would have been indicating that we're probably going to start

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Speaker 1: lowering rates, you know, more quickly. But I do think,

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Speaker 1: as I said, earlier that that, you know, the Fed

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Speaker 1: has some dry powder now in case, you know, we

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Speaker 1: do get risk of you know, recession here, you know,

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Speaker 1: he could lower rates or you know, maybe perhaps reduce

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Speaker 1: quantitative tightening. Also, not too many people talk about that,

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Speaker 1: but you still have quantitative tightening that's going on month

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Speaker 1: to month with the Fed still reducing the size of

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Speaker 1: its balance sheet each month. So right now, it doesn't

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Speaker 1: feel really like, you know, the US is at big

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Speaker 1: risk of recession. Sure, there's a lot of change, you know,

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Speaker 1: you have tariff policy uncertainty, you have you know, immigration

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Speaker 1: policies that have changed, and certainly a lot of layoffs

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Speaker 1: that are coming through with the government. You know, I guess,

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Speaker 1: I guess all of this is creating a certain amount

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Speaker 1: of economic uncertainty and perhaps slow and spending in certain sectors.

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Speaker 1: But I don't think we're at the point where, you know,

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Speaker 1: we're facing risk of recession yet. The economy is just

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Speaker 1: too strong and growing too well, and there's some pretty

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Speaker 1: good tail wind still.

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Speaker 2: So underneath that uncertainty, I'm wondering whether you're still optimistic

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Speaker 2: that the strategy on imposing tariffs will contribute to a

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Speaker 2: really significant move in reshoring. Do you think that's going

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Speaker 2: to move the needle when you look at American manufacturing

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Speaker 2: of products like deal and aluminum.

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Speaker 1: So they're big changes. And unfortunately, you know, a change

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Speaker 1: like this doesn't happen overnight. I mean, think of how

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Speaker 1: long it took for all these manufacturing companies to get

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Speaker 1: out of the US. It took decades, you know, decades

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Speaker 1: of of really weak policies that allowed all the you know,

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Speaker 1: all the other good industry to go overseas. So it's

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Speaker 1: not going to happen overnight. And I think that's what

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Speaker 1: what Trump was trying to telegraph in the in the

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Speaker 1: State of the Union address that you know, bear with me,

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Speaker 1: it is going to be you know, it might not

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Speaker 1: be you know, so pretty in the short term, but

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Speaker 1: but over the long term, it's probably going to be

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Speaker 1: better for the for the economy. I think that's true. Unfortunately,

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Speaker 1: it doesn't happen overnight. But you are seeing certain indications.

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Speaker 1: You know, I think a number of auto companies are

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Speaker 1: talking about, you know, reshoring into the US or expanding

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Speaker 1: their production here and reducing production in Canada and Mexico.

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Speaker 1: And you have periodic announcements of new you know, multi

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Speaker 1: billion dollar investment plans, you know, coming into technology space

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Speaker 1: and others. I think that will continue.

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Speaker 2: George will leave it there. Thank you so much. George Schultzee,

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Speaker 2: founder and CEO of Shultzee Wealth Management, joining us here

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Speaker 2: on the Daybreak Asia Podcast. Thanks for listening to today's

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Speaker 2: episode of the Bloomberg Daybreak Asia Edition podcast. Each weekday,

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Speaker 2: we look at the story shaping markets, finance, and geopolitics

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Speaker 2: in the Asia Pacific. You can find us on Apple, Spotify,

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Speaker 2: the Bloomberg Podcast YouTube channel, or anywhere else you listen.

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Speaker 2: Join us again tomorrow for insight on the market moves

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Speaker 2: from Hong Kong to Singapore and Australia. I'm Doug Chrisner,

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Speaker 2: and this is Bloomberg