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Speaker 2: Let's turn out to Homan Lee, senior macro strategist at
Speaker 2: Lombard Odier with a little bit of a closer look
Speaker 2: here at China. So you're neutral on the market with
Speaker 2: kind of a cautious view.
Speaker 3: Why, well, I guess the economy has, especially the manufacturing
Speaker 3: sector has done pretty well due to robust demand overseas
Speaker 3: and this increasing success at getting more market share overseas.
Speaker 3: So the combination of this will definitely create a bit
Speaker 3: of offside for twenty twenty four, so you know, the
Speaker 3: growth will be closer to five percent target. But can
Speaker 3: the economy do better? You know next year and the
Speaker 3: year after. We still have some structural issues that have
Speaker 3: not been resolved. The real estate sector continues to struggle
Speaker 3: despite you know, many easing measures from basing. It's also
Speaker 3: pretty clear that with their main asset class struggling, the
Speaker 3: domestic consumers are still relatively cautious. If you look at
Speaker 3: the bank loans for instance, four households, it's actually pretty weak.
Speaker 4: It was pretty weak in May.
Speaker 3: At the sentiment indicators is still pretty depressed, so and
Speaker 3: the prices.
Speaker 4: Are still pretty low.
Speaker 3: So the domestic you know, manufacturers and supplies are still
Speaker 3: struggling to get the secure margins for their own businesses.
Speaker 3: And the share of loss making business for the industrial
Speaker 3: sectors about a third. So in this kind of combination,
Speaker 3: it's very difficult to get the enthusiasm up well the
Speaker 3: medium to long term. But it's also true that the
Speaker 3: leadership is aware of this situation, so in.
Speaker 4: July it's possible to try to deliver.
Speaker 3: Some new reform measures for the real estate. So you know,
Speaker 3: these two factors basically, you know, cancel each other out,
Speaker 3: and that's the reason why we are still comfortable to
Speaker 3: maintain a neutral position on the market.
Speaker 1: That's an interesting point. It's kind of consistent with what
Speaker 1: the government is saying about really making sure that the
Speaker 1: manufacturing economy is doing well so that you know, the
Speaker 1: real estate segment can heal if that's the right word
Speaker 1: to use. I guess it's fair to say that China
Speaker 1: has really perfected the manufacturing economy. I mean, the efficiency,
Speaker 1: the modernization, automation, robotics, everything that's being deployed right now
Speaker 1: and has been for a number of years is really
Speaker 1: kind of you know, unmatched globally. But are you concerned
Speaker 1: now that we're talking about trade wars potentially in geopolitical
Speaker 1: risk that may be shifting slightly?
Speaker 3: That's exactly right. The part of this development is actually
Speaker 3: not sustainable in the long run because it will you know,
Speaker 3: definitely intensify frictions with the trading partners. We already had
Speaker 3: you know, reaction from European Union for the EV sector.
Speaker 3: But that dispute, even though the recent announcement was a
Speaker 3: bit mild and I will expect it so uh, that's
Speaker 3: that was slightly encouraging. But the thing is that dispute
Speaker 3: will spread to the other sectors as well, like solar panels,
Speaker 3: you know, wind turbines, semiconductors and uh and the other sectors.
Speaker 4: So and and you know, you you're aware that you know.
Speaker 3: Canada is beginning to think about the e V related tariff. UH.
Speaker 3: You know, Japan is now beginning to increase restrictions for
Speaker 3: a trade related to maybe you know, Russia and Ukraine.
Speaker 3: So so these issues are as set to worsen. So
Speaker 3: the fact that China is genny gain in the market.
Speaker 4: Share is partly in the near term.
Speaker 3: But that tension is definitely there and it will be
Speaker 3: it will be even more.
Speaker 4: Difficult for the exporters are going forward the medium to
Speaker 4: long term.
Speaker 2: It's the first time in a long time that China
Speaker 2: seems to be a little bit more concerned about this
Speaker 2: than Europe and the United States. I mean, you look
Speaker 2: at the speech from Chinese Premier Li Chiang yesterday at
Speaker 2: the World Economic Forum, and basically he's talking about the
Speaker 2: regressive actions of decoupling and that there would be negative consequences.
Speaker 2: He thinks that it would drag the world into a
Speaker 2: destructive spiral. You're not hearing Europe and the United States
Speaker 2: talk about, you know, losing a bit of contact with
Speaker 2: China as being that big of a thing on the
Speaker 2: global front, but China is. Does that show you that
Speaker 2: they're quite significantly nervous about this.
Speaker 3: This decoupling, the decompanying is real, and it's already happening,
Speaker 3: and it'd be very difficult to reverse it given the
Speaker 3: political sensitivities and different capitals around the world, you know,
Speaker 3: including Beijing. So the loss of trust here in the
Speaker 3: system is really sad thing to watch, and you will
Speaker 3: definitely reduce efficiency at the global economic level, at the
Speaker 3: global level going forward.
Speaker 4: So it's really you know, a setback, you know for
Speaker 4: a long term outlook.
Speaker 3: But you're absolutely right, you know this, Uh, you know,
Speaker 3: loss of trust is going to stay.
Speaker 4: And you know, especially with the you know, the political
Speaker 4: you know event coming up in the US.
Speaker 3: You know the dialogue will likely worse. And and you know,
Speaker 3: as far as the Chinese exporters outlook is concerned, uh,
Speaker 3: you know, they're doing well.
Speaker 1: Uh.
Speaker 4: And and you know part of this is in fact, you.
Speaker 3: Know, the actual innovation happening in China, but the reaction
Speaker 3: to it will will definitely get stronger.
Speaker 1: So we know that because I'm sorry home and the
Speaker 1: challenges in China typically create rippel effects across the apex.
Speaker 1: You're in South Korea, can you give us a sense
Speaker 1: of how you're seeing what China is going through kind
Speaker 1: of resonate through the South Korean economy.
Speaker 3: So for sure, one of the successes of you know,
Speaker 3: the factors that drove the success of South Korea in
Speaker 3: past twenty years was the globalization and the collaboration with China.
Speaker 3: So the fact that the coupling is happening, you will
Speaker 3: create some ramifications for.
Speaker 4: The business sector. Here.
Speaker 3: For instance, if you think think about the memory sector
Speaker 3: in South Korea, a huge chunk of the instaal capacity
Speaker 3: is still in China, and you know, the leading manufacturers
Speaker 3: need to figure out how to you know, manage that
Speaker 3: the exposure going forward, especially because they're not beginning to
Speaker 3: build facilities in the US under the US conditions. So
Speaker 3: these are the issues that they need to deal with.
Speaker 3: But at the same time, some businesses, you know, feeling
Speaker 3: a bit more optimistic because you know, there is this
Speaker 3: expectation that may be the greater restrictions from the US
Speaker 3: in Europe could create opportunities. But South Korea a battery sector,
Speaker 3: for instance, the leading battery manufacturers in South Korea, they
Speaker 3: were losing market share to China, so potentially this new
Speaker 3: tariff that's coming up could open the door for them.
Speaker 3: So it cuts both ways. But definitely the navigation devigating
Speaker 3: this is not going to be easy so.
Speaker 2: Put that all together, like, for instance, this morning, we're
Speaker 2: seeing a rebound in in Tokyo Electron and ske Heinex
Speaker 2: is some more than three percent. What's your number one
Speaker 2: call at the moment, Well.
Speaker 3: The number one call in Asia is that we are
Speaker 3: still long dollar against the select Asian currencies.
Speaker 4: We do think yen yuen.
Speaker 3: Will soften a bit against dollar going forward given the
Speaker 3: macro challenges there, and for Japan, we do think the
Speaker 3: adjustments by Banko Japan will come up in the July
Speaker 3: policy meeting.
Speaker 2: All right, well, we've got weakness in the end. This morning,
Speaker 2: dollar yen's at one fifte seventy eight. Homan, thank you
Speaker 2: for joining us. Homan Lee, senior macro strategist at Lombard Odier.
Speaker 2: Well joining us now on the program to take a
Speaker 2: closer look at markets. Is Jeff you, senior EMEA market
Speaker 2: strategist to at B and why Jeff, thanks very much
Speaker 2: for being with us inequities. We've actually had considerably more
Speaker 2: volatility in some of the individual stock performance than we
Speaker 2: have seen at the index level. So in some ways,
Speaker 2: I suppose you could say that what that translates to
Speaker 2: is it's a good time to be a stock picker,
Speaker 2: are you that, dude?
Speaker 5: Well, at this point, I think with respect to stock markets,
Speaker 5: we've got to take into account seasonality. You know, there's
Speaker 5: month ender, so somebody balancing going on as course to
Speaker 5: rend as well, so it amplifies things. But I think
Speaker 5: it's not just in equity markets where you want to
Speaker 5: be a stock picker. I want to be a quote
Speaker 5: unquote stockpicker in currency markets as well, and bond markets.
Speaker 5: To idiosyncratic risk and countries are the same as looking
Speaker 5: at company fundamentals as well. So to your point, broadbrush
Speaker 5: risk on environment that certainly doesn't really apply, and more
Speaker 5: especially with effet common so that you've just played, especially
Speaker 5: if it's a high for longer environment, then you've got
Speaker 5: to be very careful in ass allocation where you want
Speaker 5: to own, who you want to own, and how you
Speaker 5: deploy money.
Speaker 1: Yeah, we're fortunate to be speaking with you from Beijing,
Speaker 1: so i'd like to get your take on the overall
Speaker 1: economy in China, But talk to me about some of
Speaker 1: the geopolitical risks that you see right now. Yesterday we
Speaker 1: were talking about Canada imposing terrorff sun Chinese evs. We
Speaker 1: know the state, what the situation here in terms of
Speaker 1: the terror of situation is with the US also Europe,
Speaker 1: and then a moment ago we were talking about open
Speaker 1: AI taking additional steps to curb Chinese access to AI software.
Speaker 1: How do you view the geopolitical environment right now, the
Speaker 1: US versus China.
Speaker 5: Well, I think, you know, broadly, all of this is
Speaker 5: being factored into ass allocation, right so, you know, to
Speaker 5: the point we're regarding the last question about you know,
Speaker 5: stop picking, and I think these premiums or discounts are
Speaker 5: being factored in as well, you know, but all sides
Speaker 5: are talking at this point, you know, China, EU discussing
Speaker 5: the situation with you know, tariffs up ahead, how that's
Speaker 5: going to impact industry. But broadly speaking, when it comes
Speaker 5: to the domestic economy, I think that still is going
Speaker 5: to be the focus. How to continue to a lift
Speaker 5: sentiment and an asse allocation terms for much of Asia
Speaker 5: where we see significant underweights from our own client flow,
Speaker 5: there is an opportunity there. But at the same time
Speaker 5: we need to see policies follow up as well. So
Speaker 5: let's not get too distracted on the international side of things,
Speaker 5: and let's see if Asia as a whole can pick
Speaker 5: itself up in terms of generating growth and a challenging environment.
Speaker 2: I like ad One of the things about stock picking
Speaker 2: that I think resonates is it's about the stories. And
Speaker 2: I think you could apply that to all asset classes,
Speaker 2: including your specialties the bond market and currencies for instance.
Speaker 2: You know, these are these are comments that play out
Speaker 2: pretty well within video. It's probably, you know, a difficult
Speaker 2: thing to short at this time, to get your head
Speaker 2: handed back to you basically just because of valuation. You know,
Speaker 2: it's a story that seemingly is still intact. Don't overthink it.
Speaker 2: Are there some parallel stories that you see with other
Speaker 2: asset classes?
Speaker 5: Well to one or two weeks ago, when we're talking
Speaker 5: about the situation in France and we're asked about safe havens, right, so,
Speaker 5: what would you consider as a safer asset right now?
Speaker 5: The European government dead or tech stocks in the US.
Speaker 5: And I suppose a lot of asset allocators would pivot
Speaker 5: towards the latter right now, which does sound counterintuitive to
Speaker 5: some extent, but many times now I would say clients
Speaker 5: take the approach, if it ain't broke, don't fix it,
Speaker 5: right and being in tech being invested in the US
Speaker 5: has worked. You know, we actually have to acknowledge that.
Speaker 5: So rather you know, think about valuations in the US,
Speaker 5: let's think about the discounts in Europe. Why European companies
Speaker 5: are why you're bonds struggling to attract the kind of
Speaker 5: flows that US tech is generating right now on a
Speaker 5: volatility adjusted basis as well. I look at real rates
Speaker 5: in the US, and then I look at real rates south.
Speaker 4: Of the border in Mexico.
Speaker 5: We're talking one percent in the US compared to four
Speaker 5: or five percent for a Mexican equivalent. You know, Yet
Speaker 5: over the last few weeks or so, we've seen the
Speaker 5: dollar outperformer as well. So is it too much of
Speaker 5: a premium in US assets or a discount elsewhere? That's
Speaker 5: worthy of discussion. But time and time again US stocks
Speaker 5: have shown their worth and so I think that is
Speaker 5: basically cornering market investments right now.
Speaker 1: So what is the level of risk in Europe? Even
Speaker 1: if the ECB begins to accommodate and apply a few
Speaker 1: more rate cuts here, is that enough to assuage your
Speaker 1: concerns at all?
Speaker 5: Actually, if I look at the euro where it's some trading,
Speaker 5: what I am concerned about somewhat counter into is the ECB.
Speaker 5: And if there are many, many reasons and to be
Speaker 5: bearish on the Euro right now, and perhaps the European
Speaker 5: economy politics, oddly enough, is actually not one of them.
Speaker 5: So the French debt reaction, I think that was more
Speaker 5: due to overpositioning ahead of time, ahead of the election announcement,
Speaker 5: rather than fundamentals itself. I look at manufacturing PMI in Europe,
Speaker 5: the cornerstone of European industry, the car industry in particular,
Speaker 5: that has been contracting for god knows how long now,
Speaker 5: Yet the ECB's focused on the more narrowly defined services inflation.
Speaker 5: So I do think that the PO will need to
Speaker 5: cut a lot what that would assuage my concerns. So,
Speaker 5: if anything, ECB is not cutting enough right now.
Speaker 2: Yeah, and that wouldn't even strengthen a dollar more. Yeah,
Speaker 2: I'm curious what you think about this. I've listened to
Speaker 2: so many sessions with you and Tom Keane on surveillance.
Speaker 2: I feel like I know you and.
Speaker 4: I know you.
Speaker 2: Look at the US, I think most people would probably
Speaker 2: think that the neutral rate on the economy in the
Speaker 2: US is somewhere between two and a half and three percent,
Speaker 2: the funds rates at five thirty seven and a half.
Speaker 2: How long can that go on without doing some damage?
Speaker 5: Well, how can that go on, you know in terms
Speaker 5: of you tightening financial conditions. But we just have to
Speaker 5: go back to the data and the data right now
Speaker 5: as many FED members of highlighters just not showing signs
Speaker 5: are slowing down. So there may be an argument that
Speaker 5: for high for longer or long term equilibrium rates are being.
Speaker 4: Pushed higher now.
Speaker 5: A recent speech by the Swiss National Banks President Thomas
Speaker 5: Jordan also highlighted that equilibrim rates in the in Switzerland,
Speaker 5: known for low inflation in the past, may be a
Speaker 5: bit harder than expected. So to your point about a
Speaker 5: structural level of rates and the level at which they
Speaker 5: need need to be to do some damage, maybe higher
Speaker 5: across the board than we previously expected. So I think
Speaker 5: now that is a really supportive of the dollar right now.
Speaker 5: And to be frank, apart from the Swiss and the Yen,
Speaker 5: you know, maybe dollar downside is going to be quite
Speaker 5: limited at this point.
Speaker 1: Jeff, very quickly, before we let you go, since you're
Speaker 1: in China, let's do a little bit of walk about economics.
Speaker 1: What is the situation there on the ground.
Speaker 5: So you know, right now, you know, we always say
Speaker 5: this can be a stronger, you know than we would
Speaker 5: like it to be. But there is an effort scene
Speaker 5: to try to support the economy. And also the PBOC
Speaker 5: comments I think throughout the yeah, they are redoubling efforts
Speaker 5: to do so, you know, what are the castalysts And
Speaker 5: for some I just don't think with my international hat on,
Speaker 5: there is enough focus and on some of the opportunities.
Speaker 4: I'm here at this point.
Speaker 5: So we remain positive on ass allocation in China, mostly
Speaker 5: because the extent of waitings is actually quite soft. Okay,
Speaker 5: so you know sometimes you think about price action. No
Speaker 5: one owns China at this point, you know, that's the
Speaker 5: point I look at our flows. No one owns emerging
Speaker 5: markets in general. Yeah, that's where the opportunities are.
Speaker 2: We got to go, Jeff. But that's why I was wow,
Speaker 2: you know, it's it's it's it's it's interesting to hear.
Speaker 2: We'll say that for the next time. Details Jeff, you
Speaker 2: from BN one. Let's get to our guest, Mark Machini,
Speaker 2: chief investment strategist Jenny Montgomery Scott, Mark, thank you for
Speaker 2: coming on the program. We had the FED Governor Michelle Bowman, actually,
Speaker 2: I'm worried about upside risk on inflation. It's a little
Speaker 2: counter to what we've seen in the past couple of months.
Speaker 2: And the FED Governor Lisa Cook went the other direction,
Speaker 2: saying that she sees inflation gradually improving this year. We
Speaker 2: had Steve Eisman on surveillance last night, my time, and
Speaker 2: he said, it doesn't matter. You know, five hundred and
Speaker 2: fifty basis points of upside one move here, one or two,
Speaker 2: It just doesn't matter. How do you see this?
Speaker 6: Well, I think there's a case be made that could
Speaker 6: probably defend both Fed Governor's positions. At the same time,
Speaker 6: though several of the leading indicators that we consider in
Speaker 6: factoring in the somewhat guesstimate work that goes into ascertaining
Speaker 6: the likely direction of inflation suggests it's more likely to
Speaker 6: continue to cool than necessarily reh Now, maybe in the
Speaker 6: case of Governor Bowman, there was an acknowledgement of the
Speaker 6: earlier in the year readings that came in a little
Speaker 6: bit hotter than expected. That can't obviously be dismissed at
Speaker 6: this juncture just because we've stacked a couple of good
Speaker 6: inflation readings subsequent to that. So again it's a heavy
Speaker 6: reliance and data and lack of commitment or conviction on
Speaker 6: the part of the Federal Reserve members with regard to
Speaker 6: what their next move might be, allowing for the data
Speaker 6: to serve their reaction function as opposed to speculating.
Speaker 1: So, if you're right and we do see evidence of cooling,
Speaker 1: it may manifest Friday with that PCEE data. If we
Speaker 1: know it's the feds preferred measure, will that change consumer behavior?
Speaker 1: I mean, if we start to see inflation come down.
Speaker 1: I noted today that the Conference Board's consumer sentiment index
Speaker 1: eased a bit. I mean, the survey also pointed to
Speaker 1: a more muted outlook for business conditions and some softness
Speaker 1: in the labor mard and an incomes as well. I mean,
Speaker 1: so I'm wondering whether if inflation comes down, that the
Speaker 1: consumer may react in a way that suggests a little
Speaker 1: bit of positivity.
Speaker 6: Perhaps ultimately, certainly, the University of Michigan survey is tied
Speaker 6: more closely to inflation readings, and is that of the
Speaker 6: Conference Board, which tends to be a little bit more
Speaker 6: waged and job market driven, but nonetheless you know, I
Speaker 6: think the angst in the consumer at the moment is
Speaker 6: not so much the fact that they don't recognize that
Speaker 6: inflation has been cut by two thirds from its peak
Speaker 6: back in June to twenty two of nine point one percent.
Speaker 6: Is that prices in general aren't falling, and so is
Speaker 6: the elevation of prices rather than the rate of change
Speaker 6: in inflation that is causing some anxiety on the part
Speaker 6: of the consumer that you're seeing by way of perhaps
Speaker 6: some modest slowdown weakness and spending. That evidence in the
Speaker 6: most recent retail sales figures. So you know, it's always
Speaker 6: the function to watch what they do, not what they say.
Speaker 6: But at the same time, you can't ignore those confidence
Speaker 6: ratings that do suggest, particularly as it relates to their
Speaker 6: responses to their intentions to buy durable goods items or
Speaker 6: take vacations or what have you, are still really weak.
Speaker 2: But you know, that's where time figures in, because in
Speaker 2: time people would get used to the current rates as
Speaker 2: long as they're not going up. But I think it's
Speaker 2: kind of interesting when you think about, Okay, if you
Speaker 2: have growth faltering a little and you have inflation coming down,
Speaker 2: it's kind of a no brainer that the FED might
Speaker 2: want to cut. You still don't know when. But what's
Speaker 2: interesting is what if you have inflation come down but
Speaker 2: growth remains firm. Could the Fed stay higher for longer
Speaker 2: in that environment?
Speaker 6: I think they could if inflation would come down, though
Speaker 6: they'd have no reason to. I mean, their battle right
Speaker 6: now seems to be solely focused on inflation, since they're
Speaker 6: still at or maybe even slightly below what they deem
Speaker 6: to be all employment in the country, so that side
Speaker 6: of their dual mandate is still in line with their goal.
Speaker 6: So if they've in fact feel increasingly confident they can
Speaker 6: declare victory over stamping out the ravages of rapidly rising inflation,
Speaker 6: then there's no reason for them to continue to hold
Speaker 6: interest rates high. If in fact, the economy seems to
Speaker 6: be motoring along at a trend or above trend base
Speaker 6: and at the same time concurrent with falling inflation that
Speaker 6: is on a slide path that they have a high
Speaker 6: degree of certainty is going to land adder near their
Speaker 6: two percent target.
Speaker 1: So, Mark, I'd like to apply everything that you've been
Speaker 1: saying into an investment strategy. What would that look like
Speaker 1: at this point?
Speaker 6: Well, I think you know, for me, it tends to
Speaker 6: be that you know, your bias should be at worse
Speaker 6: to be you know, market weight whatever that is congluned
Speaker 6: with one's target weighting for equities in a portfolio, sent
Speaker 6: or balanced in a sixty forty allocation, whatever might be appropriate,
Speaker 6: and go overweight at times in which we've seen a
Speaker 6: deep enough pullback that would weren't, you know, either shifting
Speaker 6: money into equities from bonds or adding new moneys to
Speaker 6: the equity market. I think the only time you'd want
Speaker 6: to consider underweighting equities is when we're in the midst
Speaker 6: of a condition that, by all accounts, appears that a
Speaker 6: recession is inevitable, because that's where you experience the bear
Speaker 6: market drawdowns of significant orders of magnitude, and for the moment,
Speaker 6: that doesn't seem to be an imminent threat. So I
Speaker 6: think the window for equity prices to continue to advance,
Speaker 6: perhaps not quite at the same pace as we've seen
Speaker 6: over the first call it half of twenty twenty four,
Speaker 6: but nonetheless advance is still open, and I think investors
Speaker 6: therefore should stay committed to their equity positions.
Speaker 2: But mark is this a better time for stock pickers
Speaker 2: than index buyers?
Speaker 6: Well, the index buyer has been rewarded by the fact
Speaker 6: that the disproportion or represents of tech and tech related
Speaker 6: companies have really done all the heavy lifting. If you
Speaker 6: consider the Magnificent seven's return of call it thirty six
Speaker 6: percent year to date versus the fifteen percent of return
Speaker 6: for the even cap weighted s and P five hundred,
Speaker 6: you've benefited from being an index or if you will,
Speaker 6: in that respect. At the same time, though, I can't
Speaker 6: help but think going forward, it may be more rewarding
Speaker 6: to spread bets around because valuations are extremely demanding.
Speaker 2: All right, Mark, thank you so much, Mark Luceini. There
Speaker 2: from Jenny Montgomery.
Speaker 4: S God.
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