Speaker 1: Bloomberg Audio Studios, Podcasts, radio News.
Speaker 2: Welcome to the Bloomberg Daybreak Asia podcast. I'm Doug Chrisner.
Speaker 2: On today's episode, we'll take a look at how deflation
Speaker 2: seems to be gripping the Chinese economy, plus a look
Speaker 2: at how looming tariffs will shape the trading week ahead.
Speaker 2: In a moment, we'll be speaking with George Schultze. He
Speaker 2: is founder of Schultzea Wealth Management. But we begin in
Speaker 2: the Asia Pacific. Over the weekend, we learned China's consumer
Speaker 2: inflation fell in February by far more than expected. The
Speaker 2: consumer price index was down seven tens of one percent
Speaker 2: from last year, falling below zero for the first time
Speaker 2: in thirteen months. For a closer look, now, I am
Speaker 2: joined by Chi Lo. He is APAX senior market strategist
Speaker 2: at BNP Peribah Asset Management. Chi is on the line
Speaker 2: from Hong Kong. Thank you for making time to chat
Speaker 2: with us. It's always a pleasure. So how do you
Speaker 2: make sense of this re Is it an anomaly? I
Speaker 2: was looking at data from Goldman Sachs. A couple of
Speaker 2: people are interpreting this reading in a different way. But
Speaker 2: can we walk away? Can we ignore the fact that
Speaker 2: China seems to be just trapped in deflation right now.
Speaker 3: We cannot really walk away. It is very clear that
Speaker 3: the Chinese economy is still weak, especially the private sector.
Speaker 3: Confidence is still not fully recovered. When you look at
Speaker 3: product sector investment growth, it's being close to zero, offering
Speaker 3: between negative and zero for the past two and a
Speaker 3: half years. So this CPI negative reading, yes grunted, partly
Speaker 3: because of the base effects due to the distorsion of
Speaker 3: the Chinese New Year, but fundamentally we are still not
Speaker 3: really seeing a turnaround in public sentiment, in private sector
Speaker 3: spending and the overall momentum of the economy, which argues
Speaker 3: for further and more aggressive policy easing by Beijing. It
Speaker 3: seems that you know the government is aware of that
Speaker 3: and be hopeful that in the coming months we'll see
Speaker 3: more assertive easing just to make sure the grow co
Speaker 3: momentum in the Chinese economy doesn't folter further.
Speaker 2: Does it have to be a massive type stimulus program?
Speaker 3: Do you think it does have to be more aggressive
Speaker 3: than what we saw in the past two years.
Speaker 1: I e.
Speaker 3: Different from the incremental easing stance that Beijing had been pursuing.
Speaker 3: Until late last year. The point here is that because
Speaker 3: private sector is not spending, consumers are still not confident
Speaker 3: in spending more So, it's a simple economics that when
Speaker 3: the private sector is moving is not moving ahead, the
Speaker 3: public sector has to step in get things going kick
Speaker 3: started just to rebuild confidence. So we do need to
Speaker 3: see Beijing to be more aggressives. How aggressive, but definitely
Speaker 3: more aggressive than what we saw in the past two years,
Speaker 3: as I said earlier, but not necessarily you know, in big,
Speaker 3: big spending stabilis that we saw in the past cycles.
Speaker 3: Because the trick here is to find the point that
Speaker 3: can turn around prodit sector confidence. And it seems that
Speaker 3: we see some green shoots in the economy recently. We
Speaker 3: may be close to the point that the sector is
Speaker 3: turning around, but that needs more help from the government.
Speaker 3: That's the point.
Speaker 2: This is undoubtedly being complicated by an increase in trade
Speaker 2: tension between Washington and Beijing. We're talking about new tariffs
Speaker 2: that will take effect on Monday from the China side.
Speaker 2: Is it really a critical moment right now if you're
Speaker 2: a leader in Beijing and you have to kind of
Speaker 2: try to balance the risk here, how critical is this
Speaker 2: moment in time well.
Speaker 3: Indeed, the tariff factor is another drag from the external
Speaker 3: side on Chinese growth. But at this point, if the
Speaker 3: tariff rates still remained at additional twenty percent, it is
Speaker 3: still manageable from China's perspects active because the estimated drag
Speaker 3: that we calculated on the back of the envelope is
Speaker 3: that the twenty percent tariff on Chinese exports to the
Speaker 3: US would trim Chinese growth by about zero one six percent,
Speaker 3: maybe a little less now. But when you look at
Speaker 3: Beijing's announced fiscal spending, the fiscal deficit and so on,
Speaker 3: we estimated that the net fiscal stimulus to the Chinese
Speaker 3: economy at the current physical spending package is around one
Speaker 3: point six percent of GDP, so that would be more
Speaker 3: than enough to offset the tariff drag on growth, So
Speaker 3: that is still manageable. But the point here is, as
Speaker 3: I said, if Chinese public sector parvate sector is not
Speaker 3: turning around, and then if the tariff factor added to
Speaker 3: adds to destroying confidence further, then they would be a
Speaker 3: serious ease with the Beijing has to rethink about. But
Speaker 3: in the end, I still think that if Beijing wants
Speaker 3: to do it, they can do more, they have the
Speaker 3: tools to do it and expand the mestic sector further.
Speaker 3: So it's a policy choice. Down the road, we do
Speaker 3: see that Beijing is shifting to more stabilis.
Speaker 2: So we've talked about the big negative, weak demand, bad sentiment,
Speaker 2: and deflation. Now let's talk about the positivity as it
Speaker 2: relates to the deep seek narrative and from that, the
Speaker 2: interest in AI driven buying of some of the companies,
Speaker 2: smaller firms in China that are high tech related and
Speaker 2: what that has meant for foreign money coming into China.
Speaker 2: What kind of flows are you seeing right now?
Speaker 3: We do see some selective flows going back to the
Speaker 3: Chinese market, partly because they are investors who hold a
Speaker 3: view like us that the probability of more stimbolus going
Speaker 3: forward by Beijing is going to turn around things. But
Speaker 3: they are also cautious and suspicious investors there. So the
Speaker 3: selective flows going back to China now more tactical, and
Speaker 3: many of them, no doubt, as you a little to
Speaker 3: have have gone into the tech sector for the simple
Speaker 3: fact that Chinese tech has been bitten down for more
Speaker 3: than three years. And now the Deepsek shock, I just
Speaker 3: call it a shock because it does shake up the
Speaker 3: global tax sector and ask investors to re evaluate the
Speaker 3: develop market tech companies, the Magnificent seven so to speak,
Speaker 3: you know, questioning their earnings, outloak, their business model, their costs,
Speaker 3: and so on. So when you look at this China
Speaker 3: shock on the tech sector, there is indeed a positive
Speaker 3: implication on Chinese tech stocks, first because of the evaluation,
Speaker 3: and secondly, the Chinese can do similar things like the
Speaker 3: big tech Western companies can do as much cheaper, and
Speaker 3: that means, you know, there is more opportunity in the
Speaker 3: Chinese tech sector to grow and rebound. And if you
Speaker 3: add on the Chinese government's expected stimulus, that is a
Speaker 3: good story for portfolio flows going back to the Chinese
Speaker 3: market and also especially going to the Chinese tex stop.
Speaker 2: So I'm wondering about the extent to which the move
Speaker 2: up that we have seen in the market is being
Speaker 2: underpinned by expectations that we're going to see some central
Speaker 2: bank easing in China. We talked a little bit about
Speaker 2: the stimulus side. I get that from a kind of
Speaker 2: a fiscal point of view, but how much of the
Speaker 2: positivity is being supported by the notion that the PBOC
Speaker 2: is going to cut rates here.
Speaker 3: The PBOC will continue to ease. Now, in my view,
Speaker 3: what's important for the stimulus program to work here is
Speaker 3: primarily fiscal spending, which we see Bijing is doing, supported
Speaker 3: or funded by special government bond issues. And then secondary
Speaker 3: is monetary easy which monetary easing role here is to
Speaker 3: facility the physical spending and to make sure the systems
Speaker 3: liquidity will remain ample. It is not primary because there
Speaker 3: is deflictionary forces in the Chinese economy. There's a lack
Speaker 3: of confidence if you rely mainly or only on monetary
Speaker 3: easing in this situation is something like a liquidity trap,
Speaker 3: which means that monetary easing is like pushing on a
Speaker 3: piece of strength. So we do need the fiscal spending
Speaker 3: coming in, but monetary easing is a facilitating factor, and
Speaker 3: we do need to see PBOC to ease further, mainly
Speaker 3: because when you look at the real policy rates in China,
Speaker 3: it is still weighed about ten year average. So from
Speaker 3: that perspective, there is room for the PBOC to continue
Speaker 3: to ease further.
Speaker 2: Are you finding more opportunity on the fixed income side
Speaker 2: in China than you are on the equity side at.
Speaker 3: This point, I think both segments of the asset markets
Speaker 3: offer good opportunities. Now, if there is still a very
Speaker 3: sluggish recovery in confidence, which drags on economic growth and
Speaker 3: yet on the guitar effactor and so on, so that
Speaker 3: means we're not going to see any significant demand push
Speaker 3: on inflation in China which would lead to monetary EA
Speaker 3: is monetary tightening, so that's not really a risk. Now
Speaker 3: in this environment, fixed income is good. But on the
Speaker 3: other hand, if our reading of the steamolant program that
Speaker 3: Beijing is putting in wells eventually, you know, sometimes in
Speaker 3: the second half of this year, shows signs of turning
Speaker 3: around the economy, that would turn around investors centiquent quick
Speaker 3: sharply leading super War info back to China. So that
Speaker 3: would be good for the for the equity market. So
Speaker 3: at this point I would I would say, you know,
Speaker 3: sort of a fifty to fifty portfolio in equity is
Speaker 3: fifty percent in effics income in China is an appropriate stance.
Speaker 3: But going into the second half of this year and
Speaker 3: we have a greater outroop for equity performance there, we
Speaker 3: we can move back to the typical sixty forty sixty
Speaker 3: percent equities and forty percent fixed income.
Speaker 2: Gee, thank you so much for joining us. Chilo there.
Speaker 2: He is APAX senior market strategist at BNP Periba Asset Management.
Speaker 2: Joining us here on the Daybreak Asia podcast. Welcome back
Speaker 2: to the Daybreak Asia Podcast. I'm Doug Krisner. So in
Speaker 2: the US last Friday, the equity market closed higher. This
Speaker 2: was after fed scher J. Powell said he is expecting
Speaker 2: the path to two percent inflation to continue. Now markets
Speaker 2: appear to take these remarks to mean any price increase
Speaker 2: as a result of tariffs could be temporary. Joining me
Speaker 2: now is George Schultze. He is founder and CEO of
Speaker 2: Schultze Wealth Management. Joining from just outside of New York City.
Speaker 2: Thanks for making time to chat with us. George, First
Speaker 2: of all, is Powell correct you believe in assuming that
Speaker 2: any price shock as a result of these tariffs would
Speaker 2: be temporary.
Speaker 1: We think it is here at Schultze Asset Management.
Speaker 3: Yeah.
Speaker 1: There's been a lot of market uncertainty and volatility in
Speaker 1: the last few days, a lot of concern about tariffs
Speaker 1: and uncertainty specifically about how they're going to impact economic
Speaker 1: growth globally. But I think I think power's taken the
Speaker 1: uh you know the right approach here. I mean, remember,
Speaker 1: you know, inflation has dropped a fair amount, and you know,
Speaker 1: let's face that many of these policies that Trump has
Speaker 1: issued our economic friendly policies. They're pro business policies. So
Speaker 1: we'll see how the specific tariffs all get rolled out
Speaker 1: and how many of them will roll off after we
Speaker 1: have negotiated new deals with different countries. But for sure,
Speaker 1: the Fed has some ammunition leftic and lower interest rates
Speaker 1: if it becomes a concern. And you know, I think
Speaker 1: I think a little bit of this market volatility is
Speaker 1: a little premature.
Speaker 2: I had a colleague pointing out that Powell's remarks were
Speaker 2: eerily similar to his remarks on transitory inflation that made
Speaker 2: during the pandemic. They of course turned out to be
Speaker 2: a mistake. Do you want to be hedged against the
Speaker 2: possibility that inflation is still a little stubborn and sticky.
Speaker 1: Well, yes, inflation has been sticking it. Remember how long
Speaker 1: it took to increase inflation. I think it took about
Speaker 1: ten years. So yes, we think it probably makes a
Speaker 1: little sense to have some hedging, you know, against inflation specifically.
Speaker 1: I think, you know, there's some interesting short selling opportunities
Speaker 1: as well with certain companies that are facing higher costs
Speaker 1: that seem to be persistent. And again with with with
Speaker 1: the tariffs, I think, you know, certain industries, for example,
Speaker 1: automakers that import a lot of product, you know, they'll
Speaker 1: face they'll be facing risk of higher prices on their
Speaker 1: input prices. But on the other hand, many of them
Speaker 1: will be able to push through some of those price
Speaker 1: increases to their customers, and some of their customers will
Speaker 1: be uh, you know, price elastic and willing to pay,
Speaker 1: you know, to buy new vehicles even with higher component parts.
Speaker 2: So the rhetoric around tariffs, combined with the FED being
Speaker 2: maybe higher for longer, I think that's fair to say
Speaker 2: at this point. One of the things that those two
Speaker 2: factors have contributed to is a much stronger dollar. And
Speaker 2: I'm wondering whether you think that that will still be
Speaker 2: a significant headwind for any US multinational.
Speaker 1: Yeah, so, you know, stronger dollar actually, you know works
Speaker 1: out pretty well for many of the big US companies.
Speaker 1: You know, I think the important thing is you know
Speaker 1: where you have your borrowings. I mean, if you're a multinational,
Speaker 1: you have borrowed in US dollars and you have revenue
Speaker 1: and income coming from overseas, then you could have an issue,
Speaker 1: but certainly a strong dollar it actually welcome right now.
Speaker 1: I mean, you know, one of the things we're seeing
Speaker 1: with Dog and you know all this government expenditure cutting
Speaker 1: is you know, a new approach to you know, focus
Speaker 1: on potentially balancing the budget going forward instead of just
Speaker 1: spending so much money like a drunk saler. So you know,
Speaker 1: we think generally these are good business endly things, and
Speaker 1: you know, to the extent they ultimately ultimately lead to
Speaker 1: lower taxes for individuals or corporations in the US that
Speaker 1: could really be good for future economic growth.
Speaker 2: So you mentioned those there. The brainchild of Elon Musk,
Speaker 2: his company Tesla, has been struggling lately. The last figure
Speaker 2: that I saw on shipments in China showed a decline.
Speaker 2: I think they've been falling for about five consecutive months now.
Speaker 2: February sales I think down forty nine percent compared to
Speaker 2: last year. And at the same time, you have a
Speaker 2: company like Byd on the mainland that is gaining market share.
Speaker 2: I think by D last month saw if you can
Speaker 2: believe this, one hundred and sixty one percent year on
Speaker 2: year increase, do you have to reconsider some of the
Speaker 2: let's say Mag seven, the darlings. I use Tesla as
Speaker 2: an example, but maybe there are other situations where these
Speaker 2: companies perhaps are a little over extended in their growth prospects.
Speaker 1: I think that's right. I think you do have to
Speaker 1: be learned about that. And people have been saying that
Speaker 1: for a long time, including US. You know, they've gone
Speaker 1: they've just gone up parabolically, and now you know, you
Speaker 1: wonder whether you know there's really value for some of
Speaker 1: these Mags seven socks. I mean, they've been on such
Speaker 1: a run and there's been so much money chasing them
Speaker 1: that now you're seeing other markets, you know, with with
Speaker 1: big technology or you know, high growth companies outperform, like
Speaker 1: you're seeing in Hong Kong and other international markets like
Speaker 1: for instance, in Germany, you know, where you have a
Speaker 1: you know, close to a twenty percent return year to
Speaker 1: date for both those those markets versus in the US,
Speaker 1: you know, you're flat to down. Looks like the NASAC
Speaker 1: is down already, you know, a fair amount so far
Speaker 1: this year. So so it seems to be a bit
Speaker 1: of a rotation. We'll see how long it continues. But certainly.
Speaker 1: You know, US investors in the MA seven another big
Speaker 1: socks have have done very well looking back over the
Speaker 1: last two years, and so I think we're probably we
Speaker 1: were probably due for a little bit of a correction there.
Speaker 1: But we'll see how long this continues, whether you know,
Speaker 1: it stops now or you know, continues to get worse
Speaker 1: and we wind up having another year like we had
Speaker 1: in twenty twenty two.
Speaker 2: How are you positioning yourself offshore right now? If at all.
Speaker 1: We've made certain investments in certain countries where we think
Speaker 1: there's opportunity for more appreciation. You know, there are some
Speaker 1: interesting value investments, and you know around Europe and also
Speaker 1: in Asia. In China, for instance, it's just been you know,
Speaker 1: theres a lot of changes, and also in Japan there
Speaker 1: are a lot of interesting changes, you know, structural changes
Speaker 1: in Japan, you know, where companies are getting a little
Speaker 1: bit more shareholder friendly. In China, you know, of course,
Speaker 1: we had this big property market correction and now you know,
Speaker 1: there seems to be you know a good amount of
Speaker 1: stimulus and you know, perhaps a more business friendly attitude
Speaker 1: and an effort to combat you know, risk of tariffs.
Speaker 1: In Europe, there's it seems that you know, there's going
Speaker 1: to be a bazuka of spend, you know, for military
Speaker 1: and potentially infrastructure spending. So there are some interesting opportunities
Speaker 1: in overseas markets right now, and we think investment or
Speaker 1: should be flexible and willing to look at other places
Speaker 1: if it's likely that you're going to lose money in
Speaker 1: the US market. However, there are some very interesting and
Speaker 1: very cheap companies trading in the US market that have
Speaker 1: been I think over sold in the last couple of
Speaker 1: weeks here with all this turmoil and all this market volatility.
Speaker 2: So I want to get your view on the macro. Then,
Speaker 2: over the weekend, President Trump was saying the American economy
Speaker 2: does face a period of transition, although he declined to
Speaker 2: predict whether or not a recession will happen this year.
Speaker 2: What is your sense of whether or not we'll see
Speaker 2: contraction in growth.
Speaker 1: I don't think we're there yet. I mean, I think
Speaker 1: the economy is still growing. You know, we still have
Speaker 1: some inflation. I think if we're close to there, Powell
Speaker 1: would have been indicating that we're probably going to start
Speaker 1: lowering rates, you know, more quickly. But I do think,
Speaker 1: as I said, earlier that that, you know, the Fed
Speaker 1: has some dry powder now in case, you know, we
Speaker 1: do get risk of you know, recession here, you know,
Speaker 1: he could lower rates or you know, maybe perhaps reduce
Speaker 1: quantitative tightening. Also, not too many people talk about that,
Speaker 1: but you still have quantitative tightening that's going on month
Speaker 1: to month with the Fed still reducing the size of
Speaker 1: its balance sheet each month. So right now, it doesn't
Speaker 1: feel really like, you know, the US is at big
Speaker 1: risk of recession. Sure, there's a lot of change, you know,
Speaker 1: you have tariff policy uncertainty, you have you know, immigration
Speaker 1: policies that have changed, and certainly a lot of layoffs
Speaker 1: that are coming through with the government. You know, I guess,
Speaker 1: I guess all of this is creating a certain amount
Speaker 1: of economic uncertainty and perhaps slow and spending in certain sectors.
Speaker 1: But I don't think we're at the point where, you know,
Speaker 1: we're facing risk of recession yet. The economy is just
Speaker 1: too strong and growing too well, and there's some pretty
Speaker 1: good tail wind still.
Speaker 2: So underneath that uncertainty, I'm wondering whether you're still optimistic
Speaker 2: that the strategy on imposing tariffs will contribute to a
Speaker 2: really significant move in reshoring. Do you think that's going
Speaker 2: to move the needle when you look at American manufacturing
Speaker 2: of products like deal and aluminum.
Speaker 1: So they're big changes. And unfortunately, you know, a change
Speaker 1: like this doesn't happen overnight. I mean, think of how
Speaker 1: long it took for all these manufacturing companies to get
Speaker 1: out of the US. It took decades, you know, decades
Speaker 1: of of really weak policies that allowed all the you know,
Speaker 1: all the other good industry to go overseas. So it's
Speaker 1: not going to happen overnight. And I think that's what
Speaker 1: what Trump was trying to telegraph in the in the
Speaker 1: State of the Union address that you know, bear with me,
Speaker 1: it is going to be you know, it might not
Speaker 1: be you know, so pretty in the short term, but
Speaker 1: but over the long term, it's probably going to be
Speaker 1: better for the for the economy. I think that's true. Unfortunately,
Speaker 1: it doesn't happen overnight. But you are seeing certain indications.
Speaker 1: You know, I think a number of auto companies are
Speaker 1: talking about, you know, reshoring into the US or expanding
Speaker 1: their production here and reducing production in Canada and Mexico.
Speaker 1: And you have periodic announcements of new you know, multi
Speaker 1: billion dollar investment plans, you know, coming into technology space
Speaker 1: and others. I think that will continue.
Speaker 2: George will leave it there. Thank you so much. George Schultzee,
Speaker 2: founder and CEO of Shultzee Wealth Management, joining us here
Speaker 2: on the Daybreak Asia Podcast. Thanks for listening to today's
Speaker 2: episode of the Bloomberg Daybreak Asia Edition podcast. Each weekday,
Speaker 2: we look at the story shaping markets, finance, and geopolitics
Speaker 2: in the Asia Pacific. You can find us on Apple, Spotify,
Speaker 2: the Bloomberg Podcast YouTube channel, or anywhere else you listen.
Speaker 2: Join us again tomorrow for insight on the market moves
Speaker 2: from Hong Kong to Singapore and Australia. I'm Doug Chrisner,
Speaker 2: and this is Bloomberg