Speaker 1: Bloomberg Audio Studios, Podcasts, radio News.
Speaker 2: Welcome to the Bloomberg Daybreak Asia Podcast. I'm Doug Chrisner.
Speaker 2: Markets in the Asia Pacific are reacting to some disappointing
Speaker 2: US ECO data. We had some weak prints on both
Speaker 2: hiring and services activity, and that in turn seemed to
Speaker 2: boost conviction in the FED cutting infrast rates as soon
Speaker 2: as September. In a moment, we'll get reaction from David Bonson,
Speaker 2: he is the CIO at the Bonson Group. But we
Speaker 2: begin this morning in Hong Kong. Joining me now is
Speaker 2: Villam Sells. He is the global CIO at HSBC Global
Speaker 2: Private Banking and Premiere Wealth Film. Joins us from our
Speaker 2: studios in Hong Kong. Thank you for making time to
Speaker 2: chat with me. Let's begin with the global macro if
Speaker 2: we can. Just the other day, the OECD cut its
Speaker 2: forecast for global growth and given a lot of the
Speaker 2: sentiment indicators that we have been seeing and the week
Speaker 2: readings that we have been looking at as a result
Speaker 2: of the trade war, that really shouldn't come as a
Speaker 2: surprise for the US. The oe c D is saying
Speaker 2: we're going to see a deceleration in GDP, a pretty
Speaker 2: sharp one at that to a rate of around one
Speaker 2: point six percent. It seems dramatic. Do you think that's
Speaker 2: about right?
Speaker 1: We have a one point nine percent growth forecast for
Speaker 1: the US. I think most economists will agree that, you know,
Speaker 1: tariff's you know, could lower growth and increase inflation to
Speaker 1: some extent directionally. But I think what is most important
Speaker 1: for investors is that we are of the view that
Speaker 1: we don't go into recession, and I'm glad that the
Speaker 1: OECD agrees with that, neither recession nor stagflation. And that
Speaker 1: is to a very large extent, because we you know,
Speaker 1: before we undergo this shock, we are actually in a
Speaker 1: relatively decent and healthy position from an economic perspective, in
Speaker 1: the labor markets, in terms of corporate balance sheets, you know,
Speaker 1: the Atlanta Fed, the things that we are currently running
Speaker 1: into three point eight two percent growth rate for example.
Speaker 1: So certainly the first quarter GDP number was misleading because
Speaker 1: it's all due to that from running of impulse. Corporate
Speaker 1: profits are healthy as well, you know, with solid surprises,
Speaker 1: and the margins are strong. So I think we can
Speaker 1: undergo a shock without going into recession.
Speaker 2: Does that necessarily mean that we should expect the fed
Speaker 2: to lower interest rates by maybe fifty basis points between
Speaker 2: now and the end of the year.
Speaker 1: So they are obviously in that bind where they are
Speaker 1: balancing that, you know, the growth story together with the
Speaker 1: inflation story. So there is at this point in time,
Speaker 1: as economic growth is reasonably resilient, less of an urge
Speaker 1: to cut, but also they are still looking at whether
Speaker 1: inflation allows them to cut. And you know, I do
Speaker 1: think that they will see some of the tariffs being
Speaker 1: absorbed in those fat margins of the corporates and therefore
Speaker 1: and somewhat an trees in inflation to probably two point
Speaker 1: nine percent this year. But importantly that is already priced
Speaker 1: into the bond market. But yes, we do expect a
Speaker 1: few cusps from the fit still this year.
Speaker 2: So if we could take a step back and look
Speaker 2: at the global economy, worldwide manufacturing operating conditions, we're down
Speaker 2: for a second month in a row in May. That's
Speaker 2: according to JP Morgan. They have the global manufacturing PMI.
Speaker 2: I think it's at a five month low now and
Speaker 2: among large nations you've got pmis contracting in China, Germany,
Speaker 2: Japan and the UK. I know, the PMI is a
Speaker 2: sentiment indicator we call it soft data versus you know,
Speaker 2: when you look at an industrial production reading, which is
Speaker 2: a more firm kind of hard data point. Are you
Speaker 2: seeing a big divergence between hard data and soft data
Speaker 2: still or do you think that gap is beginning to narrow.
Speaker 1: It's narrowing a little bit, but there is indeed a gap,
Speaker 1: and it's of course it's it's logical that you do
Speaker 1: gain you know, net gap. Also importantly, we need to,
Speaker 1: you know, realize that manufacturing in many countries is much
Speaker 1: smaller than services. So in the US, for example, it's
Speaker 1: eleven percent of GDP, it's about eight nine percent of employment.
Speaker 1: You know, services is healthier. And you know what I
Speaker 1: look at for the stock market, you see that correlation
Speaker 1: between an ism manufacturing and the stock market, how the
Speaker 1: stock market moves. That has broken down. It used to
Speaker 1: be very strongly correlated over the last decades. Over the
Speaker 1: last three four years much less so. And that's obviously
Speaker 1: because of the growth in services and technology. So as
Speaker 1: long as services and technology can do well, and we've
Speaker 1: seen good results from technology in the first quarter, I
Speaker 1: do think the stock market can hold up.
Speaker 2: You're in Hong Kong. Let's talk about the Asia Pacific
Speaker 2: China in particular. We recently heard from Treasury Secretary Scott
Speaker 2: Besson saying that China needs to shift to a more
Speaker 2: consumption led economy to help ease global imbalances. That seems
Speaker 2: like it's a very obvious point. It's been out there
Speaker 2: the zeitgeist for some time right now, But I'm curious
Speaker 2: to get your take on what Beijing could be doing
Speaker 2: to stimulate more domestic demand. I mean, is there some resistance.
Speaker 2: Do you think that the government has to try to
Speaker 2: improve domestic consumption?
Speaker 1: China has been you know, building out some of its
Speaker 1: you know, domestic stimulus already. There were those exchange programs
Speaker 1: you know, of of of consumer goods for example, and
Speaker 1: we do think that we will you know, continue to
Speaker 1: see you know, stimulus added further. But it doesn't want
Speaker 1: to react to every single change in you know, US
Speaker 1: government policy. It's rather a longer term trend that we
Speaker 1: are seeing. There. Again, from a stock market perspective, this
Speaker 1: is actually a very domestic economy. So the so the
Speaker 1: so the GDP exposure to US trade is much bigger
Speaker 1: than the actual stocks in the stock market. Their exposure
Speaker 1: to to to the US. So to give you an
Speaker 1: idea of that. You know, Chinese stocks in the MSAI
Speaker 1: China only their revenues only two point three percent is
Speaker 1: goods exports to the US. So it's a very domestic
Speaker 1: market and that's why I do think that number one,
Speaker 1: that domestic stimulus is important, but also that makes it
Speaker 1: a bit more resilient in terms of a stock market
Speaker 1: visa VI the tariff news flow.
Speaker 2: But we know that the deflation story in China is
Speaker 2: pretty bleak right now, and in essence, the government has
Speaker 2: been allowing excess products to be exported as a way
Speaker 2: of trying to help with the issue of overcapacity to
Speaker 2: some extent, and this is where the criticism is coming
Speaker 2: from and the part of the United States. Do you
Speaker 2: think that that's going to change in a meaningful way.
Speaker 1: Well, we do think that there is going to be
Speaker 1: further you know domestic staminus on top of you know,
Speaker 1: regional integration. So China doesn't just trade with US, it
Speaker 1: trades a lot with the region as well, and that
Speaker 1: is also an avenue you know, to continue those exports
Speaker 1: so that it continues to be in a balanced economy
Speaker 1: where you have you know, exports as well as obviously
Speaker 1: that domestic stimulus feeding through into a bit more support
Speaker 1: for domestic amount.
Speaker 2: I'm curious to get your take on the signals that
Speaker 2: you're getting from the US bond market. I mean, the
Speaker 2: inflation story is one part of it. The deficit, the
Speaker 2: budget deficit story is another part of it. I mean,
Speaker 2: what is your takeaway really from the if you look
Speaker 2: at the price section in US treasuries.
Speaker 1: So I think there are three elements to look at.
Speaker 1: The inflation story. Obviously, we will have a tariff impact
Speaker 1: on goods, where you will have goods inflation rising, But
Speaker 1: goods inflation has not been the issue over the last
Speaker 1: number of months. It has been that services inflation that
Speaker 1: is coming down. So if you add it up together,
Speaker 1: the components of CPI may change, but it will be
Speaker 1: a mild increase to around the two point nine percent level.
Speaker 1: Then on top of that, bond market is asking for
Speaker 1: two kinds of risk premiums. One is the real yield,
Speaker 1: which is simply the compensation over inflation expectations, and that
Speaker 1: is already at a multi year high. The other one
Speaker 1: is the term premium, and the term premium compensates you
Speaker 1: for taking longer dated risk, and that obviously needs to
Speaker 1: compensate for the difficulty to assess where's economic growth going
Speaker 1: over the next number of years and where is that
Speaker 1: debt pile going over the next number of years. Well,
Speaker 1: that term premium as well is near multi year highs,
Speaker 1: so I do think that the market compensates you with
Speaker 1: a risk premium. Clearly, we will have continued volatility until
Speaker 1: we get to the big beautiful bill being voted and
Speaker 1: then the budget being voted. But I do think that
Speaker 1: bonds have a place in portfolios because of the valuations
Speaker 1: that already incorporate at risk premium, and certainly for people
Speaker 1: who worry, of course about the recesion risk.
Speaker 2: Philm We've been having a number of conversation on this
Speaker 2: podcast about the degree to which foreign investors have been
Speaker 2: reducing their exposure to US risk assets. Is that a
Speaker 2: trade that you're participating in.
Speaker 1: We're seeing this a little bit from our Asian clients,
Speaker 1: but much less so from our European clients, and frankly,
Speaker 1: that is what you see as well in the data
Speaker 1: so far in terms of flows. Now, the DICK data
Speaker 1: are very slow. You will have a new release, so
Speaker 1: put it in your calendar for the eighteenth of June.
Speaker 1: On the same day as the FED where you will
Speaker 1: see a lot of specific data around US flows. So far,
Speaker 1: it's in details Asians that have potentially been selling a
Speaker 1: little bit, but the European has been buying. What we
Speaker 1: are doing is, rather than flee from the US, diversify
Speaker 1: a bit. And I think that is healthy Asia merits
Speaker 1: and higher allocation in many portfolios, not just for diversification purposes,
Speaker 1: but also because of the because of the improving fundamentals here.
Speaker 1: We were talking about the challenges to Chinese demand, but
Speaker 1: there is on the other hand, the very strong, you know,
Speaker 1: technological innovation that we have here in the region, and
Speaker 1: that is creating a lot of excitement. And obviously those
Speaker 1: technology companies are trading at much lower multiples than in
Speaker 1: the US, so a lot of clients are very interested
Speaker 1: in that AI plus the application so automation and so on.
Speaker 2: What markets in the Asia Pacific are you favoring right
Speaker 2: now and for what reason?
Speaker 1: So mostly we're favoring India, China and Singapore, and that
Speaker 1: is indeed because of the point that we just touched on,
Speaker 1: which is that domestic angle. So China, India and Singapore
Speaker 1: have some somewhere between two and four percent of their
Speaker 1: revenues for the equity markets coming from goods exports to
Speaker 1: the US. If you compare that to Korea, that's twelve percent.
Speaker 1: If you compare it to Japan, it's eighteen percent. So
Speaker 1: that's the choice that we're making here, is that we
Speaker 1: think that the tariff and volatility is going to continue
Speaker 1: to lead to equity market volatility. So to shield yourself,
Speaker 1: you go to those three domestic markets.
Speaker 2: Villain will leave it there, Thank you so much. Villain
Speaker 2: Sells the Global CIO at HSBC Global Private Banking and
Speaker 2: Premiere Wealth. Joining from our Hong Kong studio here on
Speaker 2: the Daybreak Asia podcast, Welcome back to the Daybreak Asia Podcast.
Speaker 2: I'm Doug Krisner. The latest economic news in the US
Speaker 2: was a bit disappointing and it seemed to boost the
Speaker 2: conviction in the Fed cutting interest rates as soon as September.
Speaker 2: We had the ISM measure of services activity contracting in
Speaker 2: May for the first time in a year, and the
Speaker 2: private payroll survey from ADP showed weakness and job creation
Speaker 2: the weakest job creation that we've had in about two years.
Speaker 2: In the bond market, today, we had yields down right
Speaker 2: across the treasury curve For a closer look at the macro,
Speaker 2: I am joined by David Bonson. He is the founder
Speaker 2: also the CIO at the Bonson Group. He is on
Speaker 2: the line from Newport Beach, California. David, thank you for
Speaker 2: making time to chat with me. Can we talk about
Speaker 2: what you saw today in not only the data but
Speaker 2: the way in which the bond market performed. That was
Speaker 2: a pretty big move in the tenure. I think we
Speaker 2: were down about ten basis points. Do you think the
Speaker 2: bond market is getting maybe a little too ahead of itself,
Speaker 2: given the fact that we still have a lot of
Speaker 2: uncertainty on this spending bill that has yet to get
Speaker 2: out of Congress.
Speaker 3: I think that the bond market is properly responding to
Speaker 3: growth expectations. So this is a rally in bonds for
Speaker 3: the wrong reason. It's not coming from declining inflation expectations
Speaker 3: or greater stability. It's coming from declining real growth expectations.
Speaker 3: If we want a ten year around four to four
Speaker 3: point three, you really want that because you're getting somewhere
Speaker 3: around one half for two inflation expectations and then another
Speaker 3: you know, two to three real GDP growth we're not
Speaker 3: getting that. I think. I think that the other side
Speaker 3: to this coin is very important. Though, when the yield
Speaker 3: was up around four point five and everybody said, oh boy,
Speaker 3: the bond market is really revolting against this spending bill,
Speaker 3: that was rather exaggerated as well. So my my own
Speaker 3: view is that the bond market is in a very
Speaker 3: tight range. Actually, it is not pricing in a big extreme,
Speaker 3: either for recession or for some sort of runaway fears
Speaker 3: about where the debt is going. My fear is that
Speaker 3: the debt is going too high, but it isn't the
Speaker 3: bond market saying so, it's just our our expectations of
Speaker 3: real growth.
Speaker 2: We also had the latest survey from the FED, the
Speaker 2: Beijbook Report, and it seemed to underscore the risk facing
Speaker 2: the economy, where overall activity declined slightly, but all twelve
Speaker 2: FED districts did report elevated levels of uncertainty. And this
Speaker 2: seems directly correlated to the story on tariffs. Wouldn't you
Speaker 2: agree there's.
Speaker 3: Absolutely no question that that is correct, that the uncertainty
Speaker 3: is highly correlated to the tariff policy reality not only
Speaker 3: the difficulties of the policy, but the uncertainties around the
Speaker 3: policy including implementation timing, and just various expectations. So I
Speaker 3: expect to see more of it in data that we
Speaker 3: find out throughout month of May. There was a really
Speaker 3: compressed reality of productive activity as a result of tariff uncertainty.
Speaker 2: But it's not just the story on weaker growth. I mean,
Speaker 2: the basebook indicates widespread expectations that both cost and prices
Speaker 2: are going to rise at a faster rate going forward.
Speaker 2: That sounds like a recipe for stagflation, which is the
Speaker 2: big concern.
Speaker 3: Well, if that were the case the bond market, you
Speaker 3: would see tip spreads widening. I just simply don't believe
Speaker 3: that we're seeing that. I think that we mix up
Speaker 3: the definition of inflation sometimes. I think that it's very
Speaker 3: true the tariffs raise prices on certain things. But if
Speaker 3: inflation is indeed a monetary phenomena in theory, what it's
Speaker 3: doing is pushing price is higher on autos or steel aluminum,
Speaker 3: and yet pushing prices lower on other things. My bigger
Speaker 3: fear as to why I see them as problematic is
Speaker 3: that they force a lower level of productive activity, a
Speaker 3: lower level of trade. So I would be worried about
Speaker 3: the stag of portion, but not the inflation portion. I
Speaker 3: think there's downward pressure on prices, and I don't say
Speaker 3: that is a good thing.
Speaker 2: So where does this leave the Fed at the end
Speaker 2: of the day, We've got a policy decision in a
Speaker 2: couple of weeks.
Speaker 3: Well, it's pretty clear in the futures market that they
Speaker 3: don't intend to be cutting rates at the next meeting.
Speaker 3: The future's curve is indicating September. Do they end up
Speaker 3: acting in July? It's possible, it's not zero percent, but
Speaker 3: I think you're going to get two to three by
Speaker 3: the end of the year. And the question is more
Speaker 3: if you're going to start getting them a little bit
Speaker 3: sooner than later, so you get a couple other weak
Speaker 3: economic points. You know this ism services today, the ISM
Speaker 3: manufacturing the other day, the ADP number today. If you
Speaker 3: get a couple tag on negative economic data points, that
Speaker 3: will start more of a narrative of the FED doing
Speaker 3: so sooner than later. But I don't think it changes
Speaker 3: the terminal for the end of the year. I think
Speaker 3: at the most they're going to cut seventy five out.
Speaker 3: It's just a matter of when they start.
Speaker 2: So let's change gears. If we can talk a little
Speaker 2: bit about the equity market. Are you still constructive on
Speaker 2: US stocks?
Speaker 3: Well, I am, but it requires someone being selective, It
Speaker 3: requires someone having a value orientation. I do not think
Speaker 3: that i'd be constructive on buying forty x you know,
Speaker 3: fortype stocks, hoping they go to fifty PE and in
Speaker 3: some cases that's been conservative. So unfortunately for capitlated index investors,
Speaker 3: they're still heavily, heavily reliant on a few names, and
Speaker 3: I think that's going to prove to run in place
Speaker 3: for quite some time. But where there is better value,
Speaker 3: better opportunity, better you know PE ratios and yet organic
Speaker 3: earnings growth, ourselves, as divid and growth investors are very
Speaker 3: focused in some of those names, and we think there's
Speaker 3: some good opportunities in financials and healthcare and consumer staples and.
Speaker 2: Energy without naming a specific stock or a specific company.
Speaker 2: Are there generalizations that you can make about certain industry
Speaker 2: groups groups right now that you believe have some type
Speaker 2: of advantage.
Speaker 3: Yes, And again I'm happy to talk in visual names
Speaker 3: if you want me to do it. But if you'd
Speaker 3: rather I just talk sectors, that's fine. I think, like
Speaker 3: I said, the mid stream energy sector provides a lot
Speaker 3: of great opportunity. There's very attractive yield spreads and very
Speaker 3: healthy financials, and so that sector to me is attractive
Speaker 3: regardless of where some of these issues around tariffs go. Similarly,
Speaker 3: with healthcare, they've kind of priced in a lot of
Speaker 3: bad news some of the pharmaceutical names. There's this fear of,
Speaker 3: you know, the pricing executive order. There's a lot of
Speaker 3: upside possibility because some of those things that the presidents
Speaker 3: threatened are at risk of not happening once courts and
Speaker 3: Congress and other things get involved. But at the end
Speaker 3: of the day, though, the bad news seems to be
Speaker 3: disproportionately priced in. So we think pharma and energy offer
Speaker 3: some great opportunities where you're not trying to buy a
Speaker 3: stock at thirty times earnings.
Speaker 2: What about the financials. We were talking a moment ago
Speaker 2: about your expectations for lower interest rates a slower economy.
Speaker 2: Does that necessarily mean that you want to put money
Speaker 2: into the banks right now?
Speaker 3: No. I think when I talk about the financials, we're
Speaker 3: talking about asset managers. We're talking about some fee based
Speaker 3: type businesses. There are a couple of banks we own
Speaker 3: that we like, but as a group or as a
Speaker 3: I think that the overall business model that is just
Speaker 3: requiring that interest margin is more difficult. But again, the
Speaker 3: commercial banks tend to be more pro cyclical and even
Speaker 3: in good times are pretty boring businesses. There are a
Speaker 3: couple we like, but the financials includes more than just
Speaker 3: the banks, and when you look at some of the
Speaker 3: asset managers, there's some good opportunities there.
Speaker 2: Before I let you go, David, I have to ask
Speaker 2: about opportunities offshore and whether you're compelled to look at
Speaker 2: markets elsewhere, particularly in Asia.
Speaker 3: Well, we're more bottom up investors, and so the top
Speaker 3: down side, meaning looking at a country to provoke opportunity,
Speaker 3: is a little bit different than our process. What I
Speaker 3: would say is if one has a week dollar thesis,
Speaker 3: so they believe that the end result of a lot
Speaker 3: of these trade deals is going to be the administration
Speaker 3: wanting a weeker dollar, then I think emerging markets are
Speaker 3: finally going to get a little better tailwind, and so
Speaker 3: we wouldn't mind a excuse me emerging markets, But in
Speaker 3: terms of the developed Asian, developed European markets, it's hard
Speaker 3: to get real bullish there.
Speaker 2: David. We'll leave it there, thank you so much. David
Speaker 2: Bonson there. He is the founder also the CIO at
Speaker 2: Bonson Group. On the line from Newport Beach, California, 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