WEBVTT - Dong Chen on the Markets (Audio)

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<v Speaker 1>Let's get to our guests. Don't Chend, head of Asia

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<v Speaker 1>macro Economic Research at picked At Wealth Management. So a

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<v Speaker 1>lot of investors are waiting on a FED pivot, and

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<v Speaker 1>so we had the FED minutes and there was a

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<v Speaker 1>little bit of a change because now we understand that

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<v Speaker 1>there's uh the futures markets are suggesting a stronger likelihood

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<v Speaker 1>of a fifty basis point high coming up rather than

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<v Speaker 1>seventy five. So you might interpret that as the beginning

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<v Speaker 1>of a FED pivot. So I think we needed to

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<v Speaker 1>actually trying to define what is the FED pivot. Well,

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<v Speaker 1>we think that um, I mean you really look at

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<v Speaker 1>you need to look at the US economy as a

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<v Speaker 1>big picture, and at this point we think that the

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<v Speaker 1>labor market continued to be very very strong. And also

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<v Speaker 1>you're looking at the inflation numbers, even though they possibly

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<v Speaker 1>have already picked with still at over a percent kind

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<v Speaker 1>of level. So at this juncture, I think it's very

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<v Speaker 1>difficult for the FED just to claim victory saying that

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<v Speaker 1>we have got the mission accomplished. So we think they're

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<v Speaker 1>still quite some amount of tightening to do going forward.

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<v Speaker 1>So some accounts of tightening, including I guess the fact

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<v Speaker 1>that you don't see them dialing back anytime soon. When

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<v Speaker 1>that does happen, you know, what kind of moved to

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<v Speaker 1>risk assets do we see? And I guess what kind

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<v Speaker 1>of vulnerability could be market? Well, we think that's you know,

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<v Speaker 1>the first wave of massive selff in the market probably

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<v Speaker 1>reflects the changing monetary conditions and so on, which had

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<v Speaker 1>a big impact on the you know, corporate valuations. But

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<v Speaker 1>at this moment, usually look at the corporate earnings. They're

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<v Speaker 1>still holding up pretty well. So we we need to

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<v Speaker 1>be very very careful looking at you know, corporate earnings

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<v Speaker 1>going forward when the economy actually really show showing signs

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<v Speaker 1>of slowing down and actually have an impact on corporate

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<v Speaker 1>earnings growth. Yeah. I like that question from Juliet because

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<v Speaker 1>I think it's still up in the air once we

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<v Speaker 1>get a pivot um whether the market will have already moved,

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<v Speaker 1>you know, and you might actually go the other direction.

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<v Speaker 1>It's it's uh, it's perilous sometimes moving with these markets.

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<v Speaker 1>Because we had all these FED speakers out there just

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<v Speaker 1>talking about how tough the Fed still needs to be

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<v Speaker 1>to get a handle on inflation. The SMP rally nine

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<v Speaker 1>since the last FED meeting, So it does it does

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<v Speaker 1>set up as kind of interesting going forward. Just a

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<v Speaker 1>very quick pivot to China because that's another big area

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<v Speaker 1>of concern in the markets. Is China moving toward a

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<v Speaker 1>second half recovery or still stumbling. Well, we think the

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<v Speaker 1>worst time property is over, because the worst time, as

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<v Speaker 1>we see it, is that when the entire city of

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<v Speaker 1>Shanghai was locked down. That was back in you know,

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<v Speaker 1>April June, April two June, that kind of period. But

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<v Speaker 1>at this point, we think the recovery is very, very

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<v Speaker 1>bumpy because you still have a lot of kind of

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<v Speaker 1>arbitrary restrictions that can lead to disruption from time to time.

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<v Speaker 1>And at the same time, the situations in the property

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<v Speaker 1>sectors seem to get worse instead of better. So that's

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<v Speaker 1>so you're saying the second half covering in China is stumbling,

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<v Speaker 1>and that's pretty much on par with what we're seeing

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<v Speaker 1>from a number of analyst. Goldman cutting their China GDP

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<v Speaker 1>forecast too for this year to three pc from three

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<v Speaker 1>point three. But longer term, tell us why you've downgraded

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<v Speaker 1>your forecast for China over the next five years. Well,

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<v Speaker 1>we think there's a couple of factors. The most important

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<v Speaker 1>fundamentally looking at the Chinese economy slowdown that is because

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<v Speaker 1>of changing you know, Chinese demographic structure. And one direct

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<v Speaker 1>implication of that is that, you know, the the younger

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<v Speaker 1>population or the younger urban population that has been growing

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<v Speaker 1>very very fast over the past decades. Now they're definitely

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<v Speaker 1>slowing down and we're seeing you know, this means that

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<v Speaker 1>a reduction in the housing demand in China, which has

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<v Speaker 1>already shown up here, and given on top of that

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<v Speaker 1>you have the government regulation that really really put a

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<v Speaker 1>lot of pains in the sector. So we expect that

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<v Speaker 1>the slowdown in property sector is going to be a

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<v Speaker 1>main drag to Chinese growth over the next few years.

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<v Speaker 1>And another very important factor is increasing regulations in a

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<v Speaker 1>lot of new industries, where previously those companies really growing

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<v Speaker 1>without any boundary, without any constraint. Now they are facing

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<v Speaker 1>a new set of constraints, and we think they're grocery

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<v Speaker 1>will be slowing down. So all those factors lead to

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<v Speaker 1>our downgrade of longer term Chinese grocer rate. If we

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<v Speaker 1>take a very broad look at global growth going forward,

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<v Speaker 1>particularly over longer term, you mentioned this great divergence, and

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<v Speaker 1>this is a mismatch between debt and your ability to

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<v Speaker 1>grow because of higher levels of inflation. Explain well that

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<v Speaker 1>I think it's a very important thing that we really

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<v Speaker 1>need to take a look at. On the one hand,

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<v Speaker 1>you're saying that over the past decades, the governments are

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<v Speaker 1>accumulating a lot of a lot of debts, and a

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<v Speaker 1>lot of those debts actually were supported by the ever

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<v Speaker 1>decreasing interest rate, so that government actually can service those debts.

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<v Speaker 1>But potentially we're actually getting into a new region with

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<v Speaker 1>structurally higher inflation, and we're saying that central bank are

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<v Speaker 1>going to push up the interest rate even though they're

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<v Speaker 1>going to pivot as we just discussed earlier, but the

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<v Speaker 1>longer term, we think that they're going to be higher

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<v Speaker 1>than where we work, you know, prior to the pandemic.

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<v Speaker 1>And this is going to put a lot of trouble

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<v Speaker 1>on some governments where you know, they have high reliance

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<v Speaker 1>on that. And we were just looking at the broader

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<v Speaker 1>d M world, particularly some of the European countries. I

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<v Speaker 1>think there's good examples. China is another example, and we're

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<v Speaker 1>going to have to face it. So this we think

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<v Speaker 1>we'll lead to potentially financial instability ahead energy costal the

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<v Speaker 1>energy crisis, if you want to put it that way,

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<v Speaker 1>is something that we're focusing on very much globally too.

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<v Speaker 1>And you're saying that the global economy could face a

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<v Speaker 1>structural increase in the direct cost of energy. How do

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<v Speaker 1>I guess governments get around this? You know, what sort

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<v Speaker 1>of further moves do we need to see in terms

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<v Speaker 1>of carbon pricing? Well, of course, and the carbon pricing

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<v Speaker 1>is a market mechanism trying to correct this externality. But

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<v Speaker 1>again related to what is said, you know, climate change

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<v Speaker 1>is definitely something that the governments have to address, but

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<v Speaker 1>to address that requires a huge amount of investments. And

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<v Speaker 1>on top of that you just mentioned we have direct

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<v Speaker 1>higher you know, higher direct cost of energies. All those

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<v Speaker 1>actually tend to increase government spending, especially when the government

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<v Speaker 1>trying to subsidize the household sector, and that actually add

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<v Speaker 1>to the problem with just discussed. Yeah. So so if

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<v Speaker 1>if higher levels of inflation are going to um lead

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<v Speaker 1>to higher interest rates and that's going to put a

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<v Speaker 1>crimp on on countries that have high debt, it begs

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<v Speaker 1>the question, what are the countries that have low debt

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<v Speaker 1>that I can invest in over the next five years

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<v Speaker 1>and sleep will at night. We're looking at a selected

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<v Speaker 1>group of emerging markets. They are still on a at

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<v Speaker 1>least on a relative basis at center food. So for example,

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<v Speaker 1>you look at the India and India still have a

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<v Speaker 1>pretty low government detuty DP ratio and some other you know,

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<v Speaker 1>select it e M country in Southeast Asia. We think

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<v Speaker 1>that you know, for this region, of this group of countries,

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<v Speaker 1>probably at least on this regard, we think they are

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<v Speaker 1>in a much better position. Alright, Great to have you

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<v Speaker 1>with us, Strong Shan, head of Asia Macroeconomic researcher Pick

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<v Speaker 1>Day Wealth Management, in our Hong Kong studio here on

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<v Speaker 1>Bloomberg Daybreak Asia