Speaker 1: Let's get to our gas middle cotech ahead of emerging
Speaker 1: market strategy at TV Securities Middle. I got to ask
Speaker 1: you a question I asked a little bit earlier this morning.
Speaker 1: It still kind of galls me. Um, the comments from
Speaker 1: Bill Dudley. Now I understand, but he's basically saying that
Speaker 1: if the stock market is optimistic, then the FED is
Speaker 1: going to punish everybody with with even higher interest rates. Um.
Speaker 1: And And I just want to ask you the basic
Speaker 1: question and semi answer it myself. Does the stock market
Speaker 1: cause inflation? And in my semi answer, and you tell
Speaker 1: me if I'm wrong or right? When you when you
Speaker 1: have an illness, you don't try to cure the symptoms.
Speaker 1: You cure the disease. Markets and their optimism whatever, are
Speaker 1: symptoms of the Fed's battle with inflation. How successful the
Speaker 1: FED is or might be, it's inflation that's the disease,
Speaker 1: not the markets. Does that make sense to you? It
Speaker 1: does make sense, Um. But the same time, I think
Speaker 1: the Fair is probably looking at the easing in financial
Speaker 1: conditions that has been taking place via a weaker dollar
Speaker 1: as well as stronger stock markets, and probably looking at
Speaker 1: this is going against the impacts of their policy decisions.
Speaker 1: It does effectively, whether it's direct or indirect, have some
Speaker 1: impact on inflation, as it does boost balance sheets of companies,
Speaker 1: consumers feel healthier, spending increases. Potentially it could feed into wages.
Speaker 1: I mean, there's a number of angles here that the
Speaker 1: FED is probably looking at. And the reality is that
Speaker 1: we know that core services inflations in the US, tight
Speaker 1: to the labor market is still very very high and elevated,
Speaker 1: and the FED is concerned that they will need to
Speaker 1: like rate much more significantly. So of course, if equities
Speaker 1: are much stronger, it kind of plays into that some extent.
Speaker 1: I do understand what you're saying that the partly it
Speaker 1: is a symptom, and that's very true. But I do
Speaker 1: think that the easy in financial conditions in general is
Speaker 1: probably not something the FED wants to see at this
Speaker 1: point in the cycle. However, I think that Brian stated
Speaker 1: perfectly is it seems how investors look at this, the
Speaker 1: FED is punishing us. The Fed is causing pain. If
Speaker 1: you look at it from the Fed's point of view,
Speaker 1: They're doing what's necessary unfortunately to bring down ultra high inflation.
Speaker 1: And if they ease up because investors feel the feel
Speaker 1: pain you know, it's actually the workers are going to
Speaker 1: feel the pain, not the investors as much. Um, how
Speaker 1: do you handle that as someone who's got to run money,
Speaker 1: because now you have to gage two um elements, you've
Speaker 1: got to gage the FED, and you've got to gage
Speaker 1: the market's reaction. You know too that that's right. I mean, look,
Speaker 1: I think pain is is the key word here, and
Speaker 1: I think really where the pain is something that the
Speaker 1: set is targeting is going to be in the labor market,
Speaker 1: and as yet we're not seeing that. We've seen anecdotal
Speaker 1: evidence that many companies are starting to look at shedding
Speaker 1: labor and start layoffs the process of layoffs, but the
Speaker 1: reality is, if you look at the job stata, it's
Speaker 1: still pretty strong. Wage inflation is still very high. And
Speaker 1: I think the said fees this is key um in
Speaker 1: terms of only say inflicting pain, but it will be
Speaker 1: jobs pain that's going to be the key hereof and
Speaker 1: from the asset markets. And when they do finally start
Speaker 1: to see that coming through, I think then we can
Speaker 1: start talking about hitting the terminal rate and potentially even
Speaker 1: cutting rates further out. But at this point we're just
Speaker 1: not there. And I think, you know, that pain partly
Speaker 1: and indirectly when when companies are struggling in a sense
Speaker 1: of against higher interest rates and pressure on profits which
Speaker 1: are likely to intensify, that will hurt equity markets, that
Speaker 1: will potentially lead to more layoffs, and indirectly that could
Speaker 1: put some lower pressure eating pressure on the wages. And
Speaker 1: I think all of that is is directly going to
Speaker 1: be linked with head policy. So clearly wages very big
Speaker 1: part of this store, as you mentioned, and we had
Speaker 1: a big balance over the past eighteen months. Coincides with
Speaker 1: we did have a pandemic. So it's a big question.
Speaker 1: Is it a one time or is there some structural
Speaker 1: change in the economy now that could be permanent which
Speaker 1: gives you this feedback loop in which prices and wages
Speaker 1: drive each other up. Yeah. I think the risk is
Speaker 1: that what we've seen via COVID and the the structural
Speaker 1: shifts that we've seen in the labor market, you know,
Speaker 1: the great resignation, the shift in the demographics, the whole
Speaker 1: structure of the labor market shifting towards a significant work
Speaker 1: from home tyme, bias, productivity changes all has an impact
Speaker 1: that could be more prolonged going forward and could weigh
Speaker 1: on the FED thinking. And I think the reality is
Speaker 1: at the moment, you know, is we talk about what
Speaker 1: keep talking about wages, but really wages are the key.
Speaker 1: If we don't see any easing in pressure in wage
Speaker 1: growth and earnings going forward, it does suggest effects policies
Speaker 1: not taking effect, and I think that means again we
Speaker 1: go back to an issue of pain. But all of
Speaker 1: that means that we will probably need to suffer more
Speaker 1: pain via even higher rates, a higher terminal rate going forward.
Speaker 1: We think the terminal could get up to five and
Speaker 1: a half per cent um into next year, but the
Speaker 1: risks are still skewed towards even higher rates if we
Speaker 1: don't see any easing in these pressures. So what does
Speaker 1: this mean from emerging markets? Because coming into the end
Speaker 1: of the year, a lot of people have said, that's
Speaker 1: what we're going to see opportunities If for no other reason,
Speaker 1: then the inflation problem isn't as bad. Uh. And yes,
Speaker 1: the FED may put pressure on the dollar and downward
Speaker 1: pressure on emerging market currencies, but they still see some
Speaker 1: you know, areas where you can make some money. What
Speaker 1: do you see? I think emerging markets have been backward
Speaker 1: significantly in the last year or so, and obviously a
Speaker 1: lot of that is through higher FED rates, it's through
Speaker 1: general pressure on risk assets and worries that China's growth
Speaker 1: is weakening and COVID concerns, etcetera, etcetera. And I think
Speaker 1: you know, the one positive factor for EM into the
Speaker 1: next year is positioning is very very light. We've seen
Speaker 1: a huge outflow from e M as sets. I think
Speaker 1: what benefit EM is if the FED, if the market
Speaker 1: sees the FED peak UH and potentially starts pricing and easy,
Speaker 1: that will start pushing flows back into emerging markets assets
Speaker 1: that are in some ways pretty cheap and under invested.
Speaker 1: So I'm a little bit more constructive on e M
Speaker 1: next year. I know there's going to be a lot
Speaker 1: of economic pain. I'm not particularly bullish on China next year,
Speaker 1: but I do think we may see better prospects for
Speaker 1: e M assets. We've just seen China leave the loan
Speaker 1: prime rates unchanged, the one year at three sixty five
Speaker 1: and the five year at four point three zero percent,
Speaker 1: so no change there, no extra stimulus. Um your thoughts
Speaker 1: on China here in the shorter term where they have
Speaker 1: these issues tied to the reopening. I think China is
Speaker 1: going to struggle in the near term. I think the
Speaker 1: reopening process is still a little bit uncertain. It's still
Speaker 1: got a lot of volatility in it. We can hear
Speaker 1: anecdotal evidence of a ramp up in COVID cases even
Speaker 1: if you've issue in numbers are not showing that to
Speaker 1: some extent because they're not counting a symptomatic cases. The
Speaker 1: data I think is going to be fairly weak in
Speaker 1: the next one or two months. But medium term, I
Speaker 1: think the opening up is a positive. I think as
Speaker 1: we go into next year, it will help to push
Speaker 1: them upside risk to Chinese activity, potentially getting us up
Speaker 1: to sort of five percent or above growth. We're not
Speaker 1: talking about seven eight percent we've seen in the past.
Speaker 1: But I think you know, there is still a lot
Speaker 1: of constraints on the economy. Trade is weakening, Exports aren't
Speaker 1: going to pick up anytime soon. Uh, Consumers are still
Speaker 1: very cautious of property sector still under a lot of
Speaker 1: pressure despite recent measures. So it's going to be a
Speaker 1: very slow grind to recovery for China's economy in the
Speaker 1: next several months. Well. A lot of concerns possibly a
Speaker 1: budding humanitarian disaster, and that the cases are starting to
Speaker 1: run through a population that's not fully vaccinated. And then
Speaker 1: also we had the US expressing concerns that we might
Speaker 1: see some mutations that could extend the grip of this
Speaker 1: virus on on human kind as it were. Anyway, Mittle,
Speaker 1: thanks very much, Mittle, Katachia from Ted's Securities