Speaker 1: Hello, this is uh Copy Time, a podcast series on
Speaker 1: Markets and Economies from DVS Group Research. I'm Turbe, chief economist,
Speaker 1: welcoming you to our 132nd episode.
Speaker 1: Today we have with us Dr Prakash Kanan, chief economist
Speaker 1: and director of the Economics and Investment Strategy Department at
Speaker 1: G IC. One of two key sovereign wealth funds of
Speaker 1: the government of Singapore. Prakash is responsible for developing the
Speaker 1: top down view on the investment environment as well as
Speaker 1: the asset allocation strategy for G IC. Prior to joining
Speaker 1: G IC in 2012, uh Prakash worked with the International
Speaker 1: Monetary Fund.
Speaker 1: I know him from those days, the Central Bank of Malaysia,
Speaker 1: Bangarra and GTES Pension Fund, Prakash, Shaan. Welcome back to
Speaker 1: Copy time. It's been a while.
Speaker 2: Thanks J Good to be back. I can't believe it's
Speaker 2: been four years,
Speaker 1: August 2020. These were the early days of cooking time
Speaker 1: when you were kind enough to join me. Uh Lots
Speaker 1: has happened since then. Prakash and Macro remains exciting
Speaker 2: and no, first. Congratulations. Uh I think the podcast has
Speaker 2: definitely gone from strength to strength. Uh I think it was, yeah,
Speaker 2: it was hit what episode? 24? I believe I was now.
Speaker 2: It's 100 and change. So, congratulations.
Speaker 1: Uh II, I have been able to run it because
Speaker 1: I've had, you know, friends and colleagues like you come
Speaker 1: and support it. So again, Prakash, thanks for coming back today.
Speaker 1: And like I said, back in 2020 I think most
Speaker 1: of the podcast was about dealing with pandemic economics. We
Speaker 1: can hopefully put that aside, not if not even behind
Speaker 1: for the time being.
Speaker 1: Uh Prakash. Uh Let's start with some macro discussion. And
Speaker 1: then I do want to hear about your views on
Speaker 1: asset allocation in this environment, but to set the trajectory,
Speaker 1: uh let's start with the US. Uh lots of chat
Speaker 1: about Jerome Powell's Jacksonville speech. September is probably most likely the,
Speaker 1: you know, beginning of the rate cut in this cycle
Speaker 1: and people are trying to price in the 2024 2025 scenario.
Speaker 1: Your thoughts.
Speaker 2: No, thanks man. And look, I think it's a great
Speaker 2: place to start. Um you know, for better or for worse.
Speaker 2: I think uh what the fed does really matters, not
Speaker 2: just for the US, but I think for the rest
Speaker 2: of the world. Um I think, you know, really thinking
Speaker 2: about the question, we, we have to take both
Speaker 2: uh the expected path of rate but also the outlook
Speaker 2: for the economy uh and inflation uh together, you know,
Speaker 2: sometimes you have these discussions where people just focus on
Speaker 2: the rates but, but ignore actually what's happening in the
Speaker 2: uh in the macro context. Uh So if I start
Speaker 2: by looking actually at what's price, then
Speaker 2: you have about 220 basis points of cuts between now
Speaker 2: and the end of 2025 which is, you know, roughly
Speaker 2: 100 for this year and about 100 and 20 for
Speaker 2: next year. Now, you rarely see this kind of extent
Speaker 2: of cuts outside of a recession.
Speaker 2: So in that sense, uh it really is a very
Speaker 2: strong uh kind of a degree of monetary policy kind
Speaker 2: of easing that's being priced into the market. So when
Speaker 2: I look at that and then I try and square
Speaker 2: it with my central view uh of the of the
Speaker 2: economy uh that the amount of cuts being priced in
Speaker 2: seems a little excessive. Uh Our baseline is still for
Speaker 2: a uh a soft landing.
Speaker 2: Uh but importantly, with a slightly sticky path for uh
Speaker 2: for inflation uh such that it would likely end 2025
Speaker 2: still with a, with a two handle.
Speaker 2: Um And so if you take that into context, uh
Speaker 2: you know, we think likely that um you're not gonna
Speaker 2: get this amount of uh uh cut um that the
Speaker 2: market is currently pricing it. But of course, you know,
Speaker 2: that's the central scenario, the the alternative scenarios around it.
Speaker 2: Um We do actually place a relatively high uh probability
Speaker 2: and a recession scenario about 30 to 35%. Uh This is,
Speaker 2: you know, about twice the kind of unconditional mean.
Speaker 2: Uh And a large part of that is just based
Speaker 2: on the, the dynamics that you're seeing in the, uh,
Speaker 2: in the labor market. Uh Now if you do get
Speaker 2: that scenario, then, then I do think actually the fed
Speaker 2: has a lot of ammunition. Uh, and I think they
Speaker 2: will actually act, uh in a fairly aggressive manner.
Speaker 2: Uh The other scenario is of course, that, that actually
Speaker 2: we are wrong on inflation and actually it comes down
Speaker 2: a lot faster. Uh that I think is a bit
Speaker 2: more consistent with what the market is, is pricing in,
Speaker 2: not too bad, not too bad on growth, but actually
Speaker 2: very fast disinflation process.
Speaker 2: And of course, you know, we have to talk about
Speaker 2: the elephant in the room, which is the, the US election.
Speaker 2: Um you know, depending on how that pans out. Um
Speaker 2: You know, I think there is a scenario where the
Speaker 2: FED may just want to pause and wait until you
Speaker 2: get some clarity on uh on policies because across both candidates,
Speaker 2: you know, a lot of the discussion has been
Speaker 2: uh you know, on, on kind of broader issues, let's
Speaker 2: say immigration, uh uh crime, the economy, et cetera, but,
Speaker 2: but very little kind of clarity in terms of what
Speaker 2: exactly uh type of policies they would uh deliver. Uh
Speaker 2: So that again, I think would, would probably lead to
Speaker 2: a bit more caution, I think from the fed, uh,
Speaker 2: relative to what, uh, what's priced in.
Speaker 1: Right. And I, I think I am very much in
Speaker 1: line with you that, to
Speaker 1: prognosticate about uh, recession, just, just around the corner sounds
Speaker 1: really a bit far fetched to me, uh, in the
Speaker 1: past for, gosh, I mean, we've only had proper recessions
Speaker 1: with proper shocks which are, you know, by definition, not
Speaker 1: really predictable like the pandemic or the financial stability issues
Speaker 1: are on 0809 and the market can't predict that. So
Speaker 1: in it, if it's pricing it, in that narrative, in
Speaker 1: my view doesn't carry a lot of weight. Whereas to
Speaker 1: your point that if inflation starts surprising on the downside,
Speaker 1: uh then just the fact that, you know, we don't
Speaker 1: need to have such high real rates makes sense. Uh
Speaker 1: But still, it has to be combined with some degree
Speaker 1: of weakness in the labor market, what you say because
Speaker 1: if labor market does not weaken materially and we rule
Speaker 1: out of recession, then sustained cuts could lead to undue
Speaker 1: uh you know, softening of financial conditions and create financial
Speaker 1: stability issues on the other end, like a melt up scenario.
Speaker 2: No, I think, I think, I think that's, that's absolutely right.
Speaker 2: Um You know, the, the one thing unique about the
Speaker 2: US is that there actually is a bit of an
Speaker 2: asymmetry with regards to uh the sensitivity to interest rates,
Speaker 2: uh mostly because a lot of uh economic entities in
Speaker 2: the US actually have optionality when it comes to uh
Speaker 2: uh refinancing, right? So, so as interest rates go up,
Speaker 2: um you know, as you know, a lot of households
Speaker 2: are on kind of fixed rate mortgages which have very
Speaker 2: long duration relative to other parts of the world. Uh
Speaker 2: Corporates actually also have turned out their debt such that,
Speaker 2: that pass through of higher interest rates to balance sheets
Speaker 2: is a, is a lot slower. But if you invert
Speaker 2: the process,
Speaker 2: um actually, then you suddenly could get the uh opportunity
Speaker 2: for households to refinance uh uh much faster uh households
Speaker 2: to even take uh potentially uh home equity uh uh
Speaker 2: uh withdrawals. So, so you could get actually an, an
Speaker 2: asymmetric response to cuts, um which I think going to,
Speaker 2: your point would lead to, I think to, to a
Speaker 2: bit of uh uh uh uh a melt up scenario. And,
Speaker 2: and I think here, you know, the, the, the risk
Speaker 2: is that
Speaker 2: um there's perhaps too much emphasis I think placed on,
Speaker 2: uh you know, this concept of a neutral uh uh
Speaker 2: interest rate of this house car, uh which is, you know, as,
Speaker 2: you know, uh unobservable. Um And so, if there is
Speaker 2: a belief that uh policy is quote unquote tight, just
Speaker 2: because it's relative to this um conceptual uh uh our
Speaker 2: star
Speaker 2: that, that pressure to cut may actually be a lot
Speaker 2: more than uh uh what, what uh uh is actually
Speaker 2: necessary for, for the economy. So, so, yeah, I agree
Speaker 2: with you. I think that, that, that there could be
Speaker 2: that scenario, uh where, you know, the, the fed kind
Speaker 2: of in a way underestimates, um uh how much actually
Speaker 2: our car has uh, has increased over the past few years.
Speaker 1: That's right. I want to talk a little bit about
Speaker 1: the treasury. Uh I've seen some articles lately talking about
Speaker 1: the fact that the treasury focus on issuing bonds at
Speaker 1: the short end of the spectrum, as well as the
Speaker 1: long end constitute some sort of a QE which has
Speaker 1: sort of offset the feds qt. Do you, do you
Speaker 1: have any view on this issue?
Speaker 2: Yeah. You know, I mean, um, I, I think um
Speaker 2: uh
Speaker 2: the challenge with the, with the Treasury is that they
Speaker 2: actually have to do a lot of uh a lot
Speaker 2: of issuance. Um And, you know, that's, that's the function
Speaker 2: of uh the large amount of deficits that, that actually
Speaker 2: is being done.
Speaker 2: Um, you know, we have kind of reached a tricky
Speaker 2: position where, you know, kind of treasury auction announcements have
Speaker 2: been uh, almost seem to be like market moving uh
Speaker 2: uh events. Um I think, uh I think that there
Speaker 2: will be a time where they will need to issue
Speaker 2: a lot more duration.
Speaker 2: Um, in a sense, they are kind of getting up
Speaker 2: to the 20 25% amount of uh uh kind of
Speaker 2: bills relative to overall uh uh issuance that I think
Speaker 2: uh is roughly their, their sweet spot. Um Having said that,
Speaker 2: you know, it has actually helped uh the balance of
Speaker 2: liquidity uh uh in the market.
Speaker 2: Um because, you know, by, by issuing much on the
Speaker 2: shorter end, actually, they have in a way, uh uh
Speaker 2: as you were saying, offset the amount of uh qt that,
Speaker 2: that is uh has been going on. Uh our own
Speaker 2: estimate is that um as you know, QT is already
Speaker 2: uh uh reduced in, in, in magnitude. Um But we
Speaker 2: think that runs probably until about the middle of next year.
Speaker 2: Uh and then that too will, will eventually stop. And
Speaker 2: perhaps at that time, the fed can actually extend the
Speaker 2: duration of uh of their borrowing,
Speaker 1: right? I, I also think that some of the stuff
Speaker 1: that the treasury is doing as much as the market
Speaker 1: would like to follow minute by minute. I think it
Speaker 1: is fairly predictable, it is fairly stable and I think
Speaker 1: they're focusing on the short end of the curve does
Speaker 1: not reveal any desire to sort of offset the fed's moves.
Speaker 1: And to your point, we also estimate that at the
Speaker 1: current pace by the middle of next year might be
Speaker 1: the longest.
Speaker 1: The fed can go a final word on global liquidity
Speaker 1: uh precaution, not just uh fed's operations, but the things
Speaker 1: that are happening at the Bank of England P BC
Speaker 1: Bank of Japan. And uh one concern that I hear
Speaker 1: going into 2025 is that the FED may be doing
Speaker 1: its thing, but there are other things happening elsewhere which
Speaker 1: might constitute somewhat of a liquidity crunch uh for
Speaker 1: banks and financial institutions. Uh and, and the private sector
Speaker 1: in general. Uh your your sense, do you have any
Speaker 1: concern with respect to liquidity?
Speaker 2: Yeah, you know, I think uh I mean, we looked
Speaker 2: at this a bit and uh my sense is that
Speaker 2: uh the both awareness by um uh central banks on
Speaker 2: this issue as well as actually the, the existence of
Speaker 2: new tools
Speaker 2: uh I think do actually limit the uh the likelihood of,
Speaker 2: of any kind of uh uh sharp liquidity uh shock.
Speaker 2: I think the standing repo facility, uh the fed of course,
Speaker 2: is something new um relative to the, the last uh
Speaker 2: uh kind of repo uh scam. And, and I think
Speaker 2: this actually does uh will help uh to be a
Speaker 2: little bit of a, of an offset. And plus, you know,
Speaker 2: I think um
Speaker 2: uh there is a lot more kind of discussion with
Speaker 2: uh um with uh kind of market participants. Um There
Speaker 2: is actually also, you know, uh Laurie Logan, who's now
Speaker 2: the um uh Fed president over in uh the Dallas
Speaker 2: Fed uh also carries, I think a kind of a
Speaker 2: wealth of knowledge uh with her. Uh And so, you know,
Speaker 2: in fact, uh we pay, we pay a lot of
Speaker 2: attention to, to her speeches, I think on, on the
Speaker 2: balance sheet. And uh
Speaker 2: and I think she, she also has a good pulse of,
Speaker 2: of what actually is kind of the the true demand
Speaker 2: for uh for reserve assets from the bank. So I
Speaker 2: think in general, both the awareness as well as the
Speaker 2: tools that are out there, uh We think actually limit
Speaker 2: the likelihood of a, of a big liquidity scare
Speaker 1: because the awareness that you're talking about uh beyond the US,
Speaker 1: when you talk to central bankers in other industrial and
Speaker 1: emerging economies, do you feel that they are picking up
Speaker 1: that cue from the FED and would probably be amen,
Speaker 1: amenable toward more activist intervention with respect to liquidity going forward?
Speaker 2: Yeah, I think, I think that that uh uh definitely
Speaker 2: is there. I mean, you, you see it in the,
Speaker 2: in the ECB uh uh as well. Uh I think those,
Speaker 2: those discussions are, are, are happening and I think in
Speaker 2: the previous um I would say two years or so. II,
Speaker 2: I think that
Speaker 2: that emphasis on while doing QT but also kind of
Speaker 2: making sure that uh you know, liquid institution of the
Speaker 2: banks uh are are kind of adequate, I think has
Speaker 2: been uh has been quite uh uh I would say
Speaker 2: a key input towards the way that they've been actually structuring.
Speaker 2: Um you know, the various uh degrees of uh asset
Speaker 2: purchase programs that the ECB has been doing.
Speaker 2: Uh So I do think it is, it is top
Speaker 2: of mind uh for, for a lot of the policymakers and,
Speaker 2: and I do think that uh they, they do have
Speaker 2: the tools to, to kind of overcome that,
Speaker 1: right. Uh I do this chart Prakash, which is a
Speaker 1: G four central bank balance sheet as a share of
Speaker 1: G four GDP. And from that metric, we're not that
Speaker 1: far from going back to the prepa levels of liquidity.
Speaker 1: So in dollar terms, of course, it's much, much bigger
Speaker 1: but nominal GDP has expanded quite a bit. So I
Speaker 1: I hope that, you know, not just the fed but
Speaker 1: other central banks including the ECB, but also probably Bank
Speaker 1: of Japan and others are taking note of that.
Speaker 2: Yeah, but I think, I think the important thing is
Speaker 2: it's not so much GDP actually, you have to look
Speaker 2: at bank assets. Um And I think that that part
Speaker 2: in a way that credit creation process has actually been
Speaker 2: not as strong as, as GDP, right? So um you know,
Speaker 2: I mean that when when we look at what we
Speaker 2: think is would be the kind of adequate level of
Speaker 2: reserves scaling it by by bank assets, we think kind
Speaker 2: of forms a bit of a better, a better base and,
Speaker 2: and
Speaker 2: uh which is, which kind of goes back a little
Speaker 2: bit to the earlier discussion because the cycle has been
Speaker 2: very unique Right. It's not, it's not been a credit
Speaker 2: driven cycle but, but it's actually been income. Right. And,
Speaker 2: and it's income in a sense of transfers from the
Speaker 2: state to, to, to private entities. And so, you know, that's,
Speaker 2: in fact, that's one reason why when interest rates went
Speaker 2: up so much, you didn't have that kind of,
Speaker 2: uh, a large uh contraction effect on, on real economies
Speaker 2: just because uh balance sheets were in general a bit
Speaker 2: of a better shape. Um So, so, you know, in
Speaker 2: that sense, um uh you know, how much uh reserves
Speaker 2: banks need actually may, may be a little bit less than,
Speaker 2: than I think if you were just to scale it
Speaker 2: relative to GDP,
Speaker 1: right? Unless of course, you know, we see finally a
Speaker 1: resumption of the credit cycle and then the ratios could
Speaker 1: evolve quite dramatically going forward. Uh Yeah, I guess that's
Speaker 1: a 2025 story. And we are thinking and hoping um
Speaker 1: from a banking perspective that as rates come down, uh
Speaker 1: there might be a little more intermediation even if it
Speaker 1: is not in the US elsewhere. Uh There is certainly
Speaker 1: a lot of impulse coming from the government for the
Speaker 1: investment sector to pick up. So maybe it will happen
Speaker 1: um progress. So
Speaker 1: staying with the story outside the US, uh thinking about
Speaker 1: Asian uh economies, uh my take is that, you know,
Speaker 1: eight months into the year they have held up pretty well.
Speaker 1: Trade has done better than what I would have feared
Speaker 1: coming to 2024. Consumption is decent. Uh What's your assessment
Speaker 1: of the performance of Asian economies this year?
Speaker 2: No, actually, I'm very glad you brought this up because
Speaker 2: I think it actually is a, is a, is an
Speaker 2: unappreciated uh fact, uh in the sense of the degree
Speaker 2: of uh resilience across a lot of emerging markets, uh
Speaker 2: you know, we were competing the other day, this metric,
Speaker 2: which is, you know, let's say you strip out China
Speaker 2: and you look at EMX China growth relative to developed markets,
Speaker 2: you know, in the early two thousands, uh this kind
Speaker 2: of EMX China uh cohort
Speaker 2: uh actually was outpacing developed market growth about 4% points.
Speaker 2: Then actually, after the global financial crisis, um that actually
Speaker 2: fell quite, quite rapidly. Um And you had, you know,
Speaker 2: at some point, even less than 1% point uh in
Speaker 2: terms of the out performance relative to, to develop markets.
Speaker 2: Uh and, and this is just, you know, I mean,
Speaker 2: it kind of goes against all our usual convergence uh
Speaker 2: uh thinking with regards to, you know, ems kind of
Speaker 2: growing at a much faster pace than, than D MS.
Speaker 2: And so, you know, I always feel like when we
Speaker 2: look back at that post GFC period, a lot of
Speaker 2: people talk about secular stagnation in the US, but actually
Speaker 2: the the secular stagnation was happening in the, in the
Speaker 2: emerging market space. Um and, and that also actually passed
Speaker 2: on to equity returns.
Speaker 2: We did a decomposition of equity returns over the last decade.
Speaker 2: Just kind of seeing why did Ems perform so badly?
Speaker 2: And the biggest piece of why Ems perform badly was
Speaker 2: just that earnings just didn't grow. Um And, and so,
Speaker 2: you know, I think what we have seen, not just
Speaker 2: for the first eight months of this year, but also
Speaker 2: actually uh last year uh has actually been quite phenomenal.
Speaker 2: So that, that differential between
Speaker 2: EMX China and, and developed markets has now gone back
Speaker 2: up to 2% points. Um And if you, you know,
Speaker 2: if you use some proxy of new orders and et cetera,
Speaker 2: uh uh coming out in PM, I actually, you know,
Speaker 2: that that could be forecast to, to go back up
Speaker 2: to about 3%.
Speaker 2: So, so that out performance of uh
Speaker 2: uh uh EMS relative to, to D MS is actually
Speaker 2: uh picking up and, and I mean, you know, we, we, we,
Speaker 2: we know at least structurally why uh that's been the case.
Speaker 2: I mean, I think the national balance sheets, I think
Speaker 2: has been, have been a lot uh a lot stronger.
Speaker 2: Uh there's a much more um kind of reduced reliance on,
Speaker 2: on foreign flows.
Speaker 2: Um And uh you know, I think there's just in
Speaker 2: general uh fewer, fewer imbalances. Uh but, you know, I mean,
Speaker 2: there is also a cyclical story, I think, uh you know,
Speaker 2: as you know, a lot of the countries, especially in Asia,
Speaker 2: uh I think outside of, of Singapore, not a lot
Speaker 2: of countries actually did uh uh you know, fiscal stimulus
Speaker 2: to the extent that you saw in, you know, the US,
Speaker 2: uh Europe, et cetera. And, and so, you know, the
Speaker 2: output gaps, I think was still
Speaker 2: quite negative, uh you know, coming into 2022. Uh And so,
Speaker 2: in that sense, you know, I mean, I think there
Speaker 2: was a little bit of, of uh of uh uh
Speaker 2: slack that, that the economy could uh could grow into.
Speaker 2: And then I think the other thing is um you know, the,
Speaker 2: the resilience of EMS uh particularly Asia is the flip
Speaker 2: side of the resilience of the US, right? Um You know, the,
Speaker 2: the one thing which is um uh you know, been,
Speaker 2: been very positive in the US has actually just been
Speaker 2: manufacturing capa um and manufacturing Capex and, and structures usually,
Speaker 2: uh uh you know, kind of helps uh em exports.
Speaker 2: Uh you've seen it in, in uh uh in, in
Speaker 2: Korea
Speaker 2: uh is in this part of the world. So, so,
Speaker 2: you know, I think, I think that that part of
Speaker 2: um
Speaker 2: uh the kind of resilience of the U SI think has,
Speaker 2: has also helped uh helped this part of the world. But,
Speaker 2: you know, it, you're right, it, it is actually a
Speaker 2: really underappreciated uh uh phenomenon. Uh and, and actually, even,
Speaker 2: even if you look at the, the turmoil that happened
Speaker 2: in early August.
Speaker 2: Um Once again, you know, I mean, ems in general did, did, OK.
Speaker 2: I mean, you, you had the bifurcation between the Latin
Speaker 2: American uh economies which were the kind of recipient of
Speaker 2: the carry trade flows. Uh and, and those currencies unwound
Speaker 2: quite sharply.
Speaker 2: But in this part of the world, actually, you know,
Speaker 2: suddenly you, you had uh, number one, the prospect of
Speaker 2: the Fed uh actually uh uh cutting uh and two,
Speaker 2: you had uh the yen appreciating.
Speaker 2: Um And so, you know, you had Malaysian Ringgit Ruia
Speaker 2: one actually uh uh appreciating quite uh quite a bit
Speaker 2: of this in this region. So II, I do think
Speaker 2: that um uh you know, the EMS are definitely in
Speaker 2: a much better position uh now than, than they were,
Speaker 2: I think post post GFC.
Speaker 1: Absolutely. So,
Speaker 1: you know that uh uh we at D BS did
Speaker 1: a collaboration with uh B and company and an Council
Speaker 1: looking at Substation over the next decade and one of
Speaker 1: the points we made in this report and I think
Speaker 1: it is reflected very clearly by what you just said
Speaker 1: is that the last decade or two, somewhat underwhelming performance
Speaker 1: should not be construed as a marker of things to come.
Speaker 1: Because during that time,
Speaker 1: balance sheets have improved, the quality of human capital has
Speaker 1: improved and a lot of stars are aligned, so to
Speaker 1: speak for the region, with respect to China plus one.
Speaker 1: So the next 10 years in my view actually looks
Speaker 1: pretty good, particularly from an earnings perspective. Uh, I would
Speaker 1: not look at the lackluster performance of the past decade
Speaker 1: as a market for things to come at all. So
Speaker 1: glad to know that you're on the same page.
Speaker 2: Yeah. Yeah. You know, I, I think, um, I mean,
Speaker 2: the challenge for EMS of, particularly investors in the EMS
Speaker 2: has always been uh how do you get access to
Speaker 2: uh to the growth? Right. So, you know, I mean,
Speaker 2: you'd be hard pressed to find the kind of growth
Speaker 2: numbers you get in this part of the world. Uh
Speaker 2: literally any anywhere else.
Speaker 2: Um But at the same time, like at least on
Speaker 2: the list of equity space, you know, returns have just
Speaker 2: not been uh not been that great uh especially for,
Speaker 2: for a a. Um and, and so I think, uh
Speaker 2: you know, really kind of being uh uh selective thinking about,
Speaker 2: you know, the particular sectors. Um and then, and then
Speaker 2: I think, um um you know, of course India is,
Speaker 2: is uh one of the few markets where,
Speaker 2: you know, markets have been compounding at 12 to 14%
Speaker 2: a year actually since the nineties, right? So kind of
Speaker 2: through any uh any administration. Uh So really, I think
Speaker 2: you gotta, you gotta pick your spots uh
Speaker 2: uh pre spots
Speaker 1: well
Speaker 2: here,
Speaker 1: right? But also that industry is so instructive for policymakers
Speaker 1: in ASEAN that when you have that virtual cycle, virtual cycle,
Speaker 1: if you will of capital markets, dynamic, growing very fast,
Speaker 1: creates as entrepreneurs,
Speaker 1: energy, which then becomes so fulfilling. And that's what we're
Speaker 1: seeing in India, you know, on a regular basis, tremendous
Speaker 1: wealth creation, which itself is feeding into innovation and new
Speaker 1: companies and new ideas. Uh And it's hardening to watch that.
Speaker 1: I think ASEAN used to be like that pre 1997.
Speaker 2: No, you're right. You know, I actually, I, I um I,
Speaker 2: I think it's, it still is, right. I mean, um
Speaker 2: you know, if you look at, of course, Indonesia has
Speaker 2: some of the more um kind of well known uh
Speaker 2: start up whether it's uh you know, Gojek to BP.
Speaker 2: Uh And uh but actually, even if you look at Malaysia,
Speaker 2: I think the entrepreneurial spirit that is actually phenomenally strong.
Speaker 2: Um And so that ecosystem around, you know, that kind
Speaker 2: of China plus one strategy, I think uh is actually
Speaker 2: uh thriving and back to your point. I think that
Speaker 2: to me is the
Speaker 2: kind of the, the raw ingredients that you need to
Speaker 2: then actually build, you know, capital markets, et cetera. Uh
Speaker 2: uh around. Uh and, you know, at least on, on
Speaker 2: paper that they have a lot of these good policies
Speaker 2: are really trying to help the small midcap um uh
Speaker 2: uh space kind of get uh better access to, to
Speaker 2: financing uh promoting a venture capital ecosystem
Speaker 2: So things like this, I think um you know, once
Speaker 2: it's really well developed, I think we'll, we'll capture even
Speaker 2: global investor interests,
Speaker 1: right?
Speaker 1: And I think in the region there's some frustration about
Speaker 1: like we need deeper capital markets and better stock markets.
Speaker 1: But I think
Speaker 1: I, I heard someone say that, you know, without good companies,
Speaker 1: you can't have good markets. It's not necessarily a chicken
Speaker 1: and egg thing, you have to have good exciting companies first.
Speaker 1: Uh So, so yeah, I'm looking forward to the next
Speaker 1: round of entrepreneurs and next round of value creation in
Speaker 1: this region. Um progress. Let's talk a little bit about China.
Speaker 1: Uh We have had a couple of years now where
Speaker 1: a steady drip of policy easing has been the characteristic
Speaker 1: of the Chinese economy. Uh but concerns around property sector
Speaker 1: consolidation is still substantial. And now lately, very recently, we've
Speaker 1: also seen this issue related to this, this sharp decline
Speaker 1: in interest rates around everybody crowding into the Chinese government market.
Speaker 1: So some, some thoughts around China.
Speaker 2: Yeah, look, I I think um uh the starting point
Speaker 2: uh for thinking about China is really that
Speaker 2: uh trend growth has, has come down, right? Um You know,
Speaker 2: one of the reasons I talked about uh you know,
Speaker 2: doing that E MD M comparison in terms of growth rates,
Speaker 2: kind of excluding China uh is because you don't want
Speaker 2: to kind of take that huge decline in trend growth
Speaker 2: uh to, to distort that that relationship. Uh So as,
Speaker 2: you know, China, uh you know, 1015 years ago was
Speaker 2: growing between 8 to 10%.
Speaker 2: Uh We now have trend growth at about four in change.
Speaker 2: Uh And we think that actually falls to about three
Speaker 2: and change in the next decade. Uh So it's really
Speaker 2: is a very sharp uh uh fall in, in trend
Speaker 2: growth and a large part of that is just uh
Speaker 2: it's just demographics. Uh and, and also actually a moderation
Speaker 2: in uh in, in productivity. Um And so, you know, that,
Speaker 2: that I feel kind of needs to recalibrate in terms
Speaker 2: of actually how fast we think China could grow.
Speaker 2: And to me, the way I read uh uh policymakers
Speaker 2: read of the economy is that actually they've also kind
Speaker 2: of incorporated that the fact that that trend growth is
Speaker 2: lower in the way that they are thinking about uh
Speaker 2: about stimulus. Um So, you know, is, is a uh
Speaker 2: kind of a 5% growth uh if they achieve that
Speaker 2: this year, um is that really uh uh an, an
Speaker 2: underperformance or, or is that kind of, you know, in
Speaker 2: line with where with, where trend growth uh uh is?
Speaker 2: Uh And I think, I think I, in some sense,
Speaker 2: uh it is actually already uh going down to, to
Speaker 2: where trend growth is. Uh And I, and that's why
Speaker 2: I don't expect kind of a big uh Bazooka type
Speaker 2: uh stimulus that, that they will do. But ha but
Speaker 2: having said that I, I do think that
Speaker 2: um there is an issue of um, kind of uh
Speaker 2: lack of animal spirits. Uh that's, that's, uh you know, if,
Speaker 2: if not addressed, well, I think could, could potentially lead
Speaker 2: to uh, you know, kind of a sharper fall in
Speaker 2: growth and, and uh a bit more deflationary uh uh dynamics.
Speaker 2: Um What, what I think, um uh there, you know,
Speaker 2: if I, if I look at the uh uh kind
Speaker 2: of the output from the third plenum, also the July
Speaker 2: Politburo meeting, it looks like these issues are, are front and,
Speaker 2: and center. Um You know, I was surprised just to
Speaker 2: hear how much, you know, like the phrase kind of
Speaker 2: supporting consumption uh has come up, I think in recent
Speaker 2: uh policy uh statements.
Speaker 2: So, so I think that knowledge of what needs to
Speaker 2: be done, uh you know, everything from supporting consumption to
Speaker 2: improving the uh balance between center and local government finances,
Speaker 2: improving land reform uh with regards to mobility of, of
Speaker 2: people uh improving urbanization. And I think all these things
Speaker 2: are definitely the right direction of travel. Um So to me,
Speaker 2: it really is just kind of a an execution
Speaker 2: uh issue that uh uh that, that is, is a
Speaker 2: little bit lucky.
Speaker 1: I just want to throw in one nerdy economics question,
Speaker 1: putting markets aside for a second Prakash, which is this
Speaker 1: whole notion that the US Treasury has brought to the fore,
Speaker 1: the China overcapacity argument and its role in destabilizing global
Speaker 1: markets and creating deflation risk. Although I thought the US
Speaker 1: Treasury would worry about inflation risk, but overcapacity seems to
Speaker 1: be the other end of the argument. What's your sense
Speaker 1: of overcapacity?
Speaker 2: Yeah, you know, it's uh uh you know, it's funny
Speaker 2: as much as we think about um this kind of
Speaker 2: lack of animal spirits in, in China, I think in
Speaker 2: the sectors uh for which China is thriving. Um you know,
Speaker 2: EVs batteries solar, I mean, the competition is absolutely fierce.
Speaker 2: Um You know, I, I uh
Speaker 2: we've seen, you know, we've met companies where, you know, that,
Speaker 2: that the margin squeeze has just been uh quite uh
Speaker 2: uh striking across these sectors just because there's a very
Speaker 2: strong competition and the quality of the products that they're,
Speaker 2: that they're putting out, I think is, is just uh quite,
Speaker 2: quite phenomenal. Um You know, I've, I've seen kind of
Speaker 2: autonomous driving developments in China, which I think is much
Speaker 2: better than, than anywhere else. Uh uh you feel uh
Speaker 2: in the world. So uh II I find it um
Speaker 2: uh uh hard to, to, to think really in terms
Speaker 2: of uh of overcapacity, I think uh uh in, in
Speaker 2: that sense, I mean, as you know, the the world
Speaker 2: needs a lot of these uh kind of green uh
Speaker 2: uh green products. Um I think the challenge uh really
Speaker 2: here is uh what happens if more and more countries
Speaker 2: put up barriers uh with regards to, to China, uh
Speaker 2: which I think then uh
Speaker 2: in a way it's gonna feed a little bit back
Speaker 2: more into the deflationary uh challenges that you have in
Speaker 2: uh uh in China. Uh ultimately, as we know, uh
Speaker 2: we just need to find ways to boost demand. Um
Speaker 2: And uh I think that's where, you know, that whole
Speaker 2: emphasis on consumption. Uh if it actually gets um uh
Speaker 2: gets more traction, I think that will be a better
Speaker 2: way of solving this, you know, kind of quote unquote
Speaker 2: overcapacity problem uh than I think really trying to, to
Speaker 2: limit limit their, their exports.
Speaker 1: OK. In case our listeners missed it. Uh I just
Speaker 1: want to reiterate the point you made in a different
Speaker 1: way because that's a really cool one which is concerns
Speaker 1: about overcapacity with trade restriction measures and treating domestic supply
Speaker 1: chains would actually compound overcapacity problem on a global systemic scale.
Speaker 2: Yeah, I think so. Yeah.
Speaker 1: Yeah. Yeah. Well, put uh I think uh this issue
Speaker 1: came up in the context of India's ambition to have
Speaker 1: its own solar industry when the Chinese were supplying those
Speaker 1: solar cells with the rock bottom prices. And I think
Speaker 1: my initial inflation was exactly that, that if you want
Speaker 1: to have even more solar cells in the world, how
Speaker 1: does it help uh from a global capacity perspective? I
Speaker 1: think
Speaker 1: at least in the countries of India Prakash, I see
Speaker 1: a little more calibrated approach to dealing with China and
Speaker 1: its production in the last year or so. Uh, not
Speaker 1: necessarily tariff barriers and protection but other ways of making
Speaker 1: the relationship a bit more balanced, which I like, I
Speaker 1: would like to see some of that from the US,
Speaker 1: but I think independent of December, November's election outcome, I
Speaker 1: don't think the US policy on China is going to
Speaker 1: change much.
Speaker 2: Yeah. No, I think, I think you're right. Um I
Speaker 2: think um uh I in a way the,
Speaker 2: as much as uh you know, the current administration is
Speaker 2: trying to focus on the small yard high fence uh approach.
Speaker 2: Uh to me, the risk is, is twofold, one is
Speaker 2: that you are introducing actually new policies. Um for example,
Speaker 2: you know, uh restrictions on the outward flow of capital.
Speaker 2: Uh And once I think you introduce new policies, I
Speaker 2: think that the risk is always that, that, you know,
Speaker 2: that uh these things start start expanding.
Speaker 2: Uh and, and second is I think um from a
Speaker 2: financial investor perspective, uh you know, I think there, there
Speaker 2: is actually already uh uh among a lot of uh
Speaker 2: uh kind of us institutional investors, you know, some form
Speaker 2: of financial decoupling.
Speaker 2: Uh that's, that's happening between the US and China and,
Speaker 2: and I think that's, that's very unfortunate. Um So, so,
Speaker 2: you know, that, that part of it, I think um
Speaker 2: uh you're right, I think would be relatively robust to
Speaker 2: uh to the different administration. But, you know, II I
Speaker 2: think that
Speaker 2: in theory that that more targeted approach is still better
Speaker 2: than I think, you know, a large blanket tariff for
Speaker 2: uh all such policies which I think will uh hurt
Speaker 2: not just um
Speaker 2: uh uh uh Chinese manufacturers, but, but also us, us consumers.
Speaker 2: Um and you know, it's probably uh with the saliency
Speaker 2: of inflation, I think still in the background, I I
Speaker 2: think this could really put the fed in a very
Speaker 2: difficult position if us policy kind of goes down that path.
Speaker 1: Yes, yes, definitely
Speaker 1: concur
Speaker 1: um speaking of uh issues that sort of afflict the
Speaker 1: market and one is, of course, you know, the issue
Speaker 1: related to the US election, but the other one is
Speaker 1: around currency market, you touched upon this briefly earlier percussion,
Speaker 1: let's expand on that. So what are your thoughts on
Speaker 1: this currency market volatility that we experienced in late July,
Speaker 1: early August? And if you think that the conditions that
Speaker 1: made that happen are still very much in place and
Speaker 1: therefore we could have a recurrence.
Speaker 2: Yeah. So, so um
Speaker 2: you know, I think what's very unique in this um
Speaker 2: uh in this cycle is really uh both cyclical as
Speaker 2: well as uh uh kind of in a way structural
Speaker 2: uh uh divergence across the major economies, right? So, you know,
Speaker 2: you've got the uh the US which uh you know,
Speaker 2: it kind of operating above capacity kind of coming back
Speaker 2: uh towards uh you know, some concept of, of equilibrium.
Speaker 2: And then you've got uh uh Japan which, you know,
Speaker 2: is kind of exiting uh deflation and kind of, you know,
Speaker 2: starting a normalization process. And then you've got China, which is,
Speaker 2: you know, as I saying, kind of dealing with, with
Speaker 2: this slowing trend growth. Um you know, it's funny when you,
Speaker 2: when you go to Japan,
Speaker 2: um people actually talk about the wage price spiral in
Speaker 2: a very positive uh light. And in fact, it's something
Speaker 2: that they're trying to encourage. Uh whereas, you know, if
Speaker 2: you go to Europe, uh you know, the conversation, that
Speaker 2: is what we are trying to avoid the, the wage
Speaker 2: price spiral. So I think ultimately, when you, when you're
Speaker 2: faced with this kind of uh uh both cyclical and
Speaker 2: policy uh divergence, uh it is going to be currency
Speaker 2: markets that,
Speaker 2: that play a lot of the um uh the, the adjustments.
Speaker 2: Um and I think central to that, uh I think
Speaker 2: really is the uh uh the yen um uh you know, for,
Speaker 2: for historical reasons, et cetera. But, but also the fact
Speaker 2: that it was one of the markets where you really
Speaker 2: had the largest uh policy divergence uh between, between the
Speaker 2: US and uh and Japan.
Speaker 2: Um And so, you know, I think that uh direction
Speaker 2: of uh of unwind, uh we think uh still has
Speaker 2: a little bit uh ways to go. Um because, you know,
Speaker 2: we do think that, that um uh the BOJ actually still,
Speaker 2: still normalizes um uh from, from where they are uh today.
Speaker 2: Um You know, I mean, if, if Japan does manage
Speaker 2: to get a 2% inflation,
Speaker 2: we estimate their trend growth at, you know, slightly below 1% real.
Speaker 2: So that's, that's an economy that's operating at about a 3%
Speaker 2: nominal growth rate. Uh It's not too
Speaker 2: unreasonable to have a policy rate that, you know, is
Speaker 2: around 1% or, or even up to 1.5% in the
Speaker 2: long run. Um And actually, if you look at the,
Speaker 2: the way that the J GB curve is priced, you know,
Speaker 2: at the back end of the curve, actually, there is
Speaker 2: a lot of, of uh uh hikes that's been priced
Speaker 2: in the 10 year tenure rate is, you know, kind
Speaker 2: of north of 2.5% right. So, so in that sense,
Speaker 2: we do think that, um you are gonna continue to,
Speaker 2: to get this, um, uh divergence where, where we think
Speaker 2: back to Japan is kind of,
Speaker 2: you know, interests are going to be going upwards and,
Speaker 2: and the fed is going to be going, going downwards.
Speaker 2: Um So, you know, while, while the bulk of the
Speaker 2: moves have happened, uh we do still think that that
Speaker 2: actually the yen uh could potentially uh appreciate a bit
Speaker 2: further from here. Uh But like I was saying, you know,
Speaker 2: I think actually for our part of the world, uh
Speaker 2: it's actually a good thing.
Speaker 2: Um It's a good thing in the sense that uh
Speaker 2: I think it does give room for regional currencies here
Speaker 2: uh to appreciate. Uh because as, you know, the, the,
Speaker 2: the big thing about Asian economies is that we're all
Speaker 2: net surplus economies. Uh and the, the thing with net
Speaker 2: surplus economies is that, uh I mean, outside of uh
Speaker 2: uh India and Indonesia, um we are, we, we tend
Speaker 2: to be low yielders.
Speaker 2: Uh And I think in that low yielded environment, it
Speaker 2: was just very difficult uh to kind of uh you know,
Speaker 2: get exchange rates on a stable or appreciating trend uh
Speaker 2: when us interest rates were north of 5%. So I think,
Speaker 2: I think uh um with FED coming down, but also
Speaker 2: with the yen appreciating, I think it does give this
Speaker 2: region a lot more policy space. Um and kind of
Speaker 2: going back to China.
Speaker 2: Uh I think it gives them a lot more freedom
Speaker 2: to uh to cut interest rates. Uh Then I think
Speaker 2: um it was the case maybe about
Speaker 2: two months or so back.
Speaker 1: Right. No, absolutely.
Speaker 1: Uh And also, I mean, one observation and one follow
Speaker 1: up question, one observation is that unlike the two previous
Speaker 1: episodes in the past quarter of a century, when the
Speaker 1: BOJ tried to do lift off and had to scale
Speaker 1: back its ambition immediately because the economy fell apart. I
Speaker 1: think things are fundamentally quite different. I mean, Japan's industrial
Speaker 1: sector for the first time in a quarter century seems
Speaker 1: energized and new investments are taking place.
Speaker 1: So I think there is a fundamental underpinning to the
Speaker 1: growth story than just G PM feeding exports. But my
Speaker 1: follow up question was on your observation on low yield
Speaker 1: uh Prakash the cherry trade story. Uh We had a
Speaker 1: lot of, you know, borrowing yen and invest in us
Speaker 1: tech story, uh We have elsewhere in Asia. There is
Speaker 1: also elements of Cherry Trade. Uh how big or meaningful
Speaker 1: is this dynamic?
Speaker 2: Yeah, you know, it's a um it's, it's a very
Speaker 2: difficult number to, to, to estimate. Um you know, I
Speaker 2: think even our own estimates prior to, you know, what
Speaker 2: happened in the first week of August. Uh I think
Speaker 2: the moves that you see in the market were a
Speaker 2: lot faster and a and a lot more wide ranging than,
Speaker 2: than even we uh we had thought um I think
Speaker 2: you do have a lot of um um hedge funds
Speaker 2: that were
Speaker 2: uh kind of funding themselves uh from yen. Um And in,
Speaker 2: in the sense, you know, you, you uh whatever the
Speaker 2: funds we're investing in, you know, we were quite broad
Speaker 2: ranging um relative to just the usual,
Speaker 2: you know, um Yen uh Mexico or Yen Brazil uh
Speaker 2: type types of trades. Uh So I do think it is,
Speaker 2: it is actually quite uh quite extensive. And I, and
Speaker 2: I do think that it's uh uh it's, it's just very,
Speaker 2: very hard to uh to monitor. I mean, if you
Speaker 2: take the uh
Speaker 2: Chinese Renminbi, for example, you know, it was a little
Speaker 2: bit of a, of a crowded trade as well because,
Speaker 2: you know, if you had the view that the uh
Speaker 2: Chinese policy was going to be easing the economy is slowing,
Speaker 2: uh that you had a view that the exchange rate
Speaker 2: was going to depreciate. Uh you were paid to, to
Speaker 2: hedge the currency. Um And so, you know, in that sense,
Speaker 2: it was a pretty crowded trade.
Speaker 2: Um And so when that, when that whole thing um
Speaker 2: unwound uh you know, once again, you, you, you, you,
Speaker 2: you get that appreciation in the, the Renminbi and, and so,
Speaker 2: so I think, um you know, really trying to, to
Speaker 2: trace down where, where all the flows were going uh
Speaker 2: in this kind of more opaque market has just been
Speaker 2: very difficult. Uh I mean, I think, I think even
Speaker 2: Malaysian policymakers were surprised that
Speaker 2: the extent to which the ring get appreciated, it was
Speaker 2: actually quite a phenomenal thing. But as I was saying,
Speaker 2: you know, it's, it's in line with what they were
Speaker 2: trying to achieve and,
Speaker 2: and I think um uh with that, it does take
Speaker 2: actually it does give them uh as well as the
Speaker 2: whole region. I think a lot more uh breeding room.
Speaker 1: Yeah, just
Speaker 1: things are becoming a little more balanced and I like
Speaker 1: that very much too because you might remember from our
Speaker 1: graduate school days, this paper by Guillermo Calvo called varieties
Speaker 1: of capital market crisis. I think that was the first
Speaker 1: paper I read on uh uh sort of contemporary financial
Speaker 1: crisis building on, you know, the stuff that Putman had
Speaker 1: done earlier in that previous decade.
Speaker 1: So one point that have made was that, you know,
Speaker 1: portfolio managers have a bunch of positions and they try
Speaker 1: to balance it. And sometimes when they have a negative
Speaker 1: view on one asset, it manifests in them selling in
Speaker 1: other assets. So that rebalancing approach then manifests in all
Speaker 1: sorts of things.
Speaker 1: So the reason I bring it up is because it
Speaker 1: is really through the next two questions and these are
Speaker 1: the two final questions of this discussion. So first one
Speaker 1: is on gold, the kind of rise in gold that
Speaker 1: we have seen, does it reflect this portfolio rebalancing thing
Speaker 1: that KVO was alluding to in his paper?
Speaker 2: Um iii I think actually it um uh the drivers
Speaker 2: that I feel are are slightly different. Um you know,
Speaker 2: prior to
Speaker 2: 2022 you know, there was a very tight link between
Speaker 2: um gold and uh and real interest rates. Um and, and,
Speaker 2: you know, for, for right reasons, right? You know, I mean,
Speaker 2: um you could, you could think of real interest rates
Speaker 2: as being the kind of opportunity cost of, of holding gold,
Speaker 2: which doesn't give you any yield. And so when, when,
Speaker 2: when interest rates go up, actually the price of gold
Speaker 2: goes down. Um And then, you know, just after, uh the,
Speaker 2: uh you know, I would say about March 2022 you,
Speaker 2: you had this, this um this decoupling. Um Now it's,
Speaker 2: it's interesting because around that time, uh of course, the
Speaker 2: fed started hiking uh rates. And so, you know, the
Speaker 2: presumption was that actually gold prices were, were, were gonna fall,
Speaker 2: but he also had the Russian invasion of uh of Ukraine.
Speaker 2: Um And, you know, I think that in a way
Speaker 2: catalyzed AAA new driver uh for gold, which I think
Speaker 2: was very different from the traditional drivers, which is real
Speaker 2: interest rates and, and the dollar. Um And, and this
Speaker 2: driver was actually from, from central banks.
Speaker 2: Um And so if you look across uh you know,
Speaker 2: the data that comes up from the World Gold Council,
Speaker 2: you know, demand for gold by central banks actually really,
Speaker 2: really shut up uh from that period.
Speaker 2: And uh and I think that at the margin has been,
Speaker 2: you know, uh kind of a big, a big support
Speaker 2: for um uh for gold. Uh which is interesting because
Speaker 2: we look at the uh ETF flows um on um
Speaker 2: uh like GLD, for example, actually, actually that, that's been,
Speaker 2: that's been flat to, to kind of uh uh coming down. So,
Speaker 2: so um it has been, I think a lot more
Speaker 2: central bank flows and then recently a bit more retail
Speaker 2: flows as well. Um uh
Speaker 2: So I think it's uh it's been a very different
Speaker 2: uh uh driver and uh to, to a certain extent,
Speaker 2: I think probably keying off a bit more on kind
Speaker 2: of geopolitical uh risk uh than this about, about portfolio
Speaker 2: uh rebalance. But, you know, II I uh uh of late, you,
Speaker 2: you do find that the correlation has kind of come
Speaker 2: back a little bit more. Uh But with the dollar,
Speaker 2: um so, you know, as the dollar has been falling,
Speaker 2: um you know, you've seen that, that kind of being a,
Speaker 2: a support for uh for gold,
Speaker 1: right? It's like a headset win tails, you lose for
Speaker 1: gold rates go up, the goal goes up because of
Speaker 1: your political concerns and rates come down, then the old
Speaker 1: relationship comes back. Uh OK. So this, this brings me
Speaker 1: to the portfolio construction question. Uh Prakash. Uh How do
Speaker 1: you design a portfolio? Uh given everything that we just
Speaker 1: talked about across uh duration and asset classes?
Speaker 2: No, no, I think that's a, that's a good question.
Speaker 2: I mean, you know, at least uh in a way that's,
Speaker 2: that's where the rubber hits the road. Um I think,
Speaker 2: uh you know, we've just kind of been through a,
Speaker 2: a very unique decade, right where um actually diversification uh
Speaker 2: hasn't paid off at all. Um You know, not only
Speaker 2: would you, uh, would you have wanted to be in
Speaker 2: a fully equity centric portfolio? But actually you wanted to
Speaker 2: be fully in the US. Um And in fact, you know,
Speaker 2: I think most managers, you go around talking to the
Speaker 2: question is
Speaker 2: why, why bother diversifying, uh why bother buying anything other than,
Speaker 2: than the SNP. Um But, but I do think that,
Speaker 2: that we have kind of uh gotten to a point where, um,
Speaker 2: you know, diversification, I think is, is actually gonna uh
Speaker 2: matter uh uh a lot more, you know, the one,
Speaker 2: the one positive thing I, I take away from the
Speaker 2: episode that we saw in, uh in early August is that,
Speaker 2: you know, when actually faced with the growth scare, uh
Speaker 2: you know, where, where the market was, you know, for,
Speaker 2: you can argue reasonable, not reasonable, putting more weight on
Speaker 2: a recession scenario, actually, bonds, bonds did their job, uh and,
Speaker 2: and rates uh rates uh rallied, right. So, so I think,
Speaker 2: uh uh what we, you know, we are thinking about
Speaker 2: and what I think, uh uh most investors are thinking
Speaker 2: about is actually that this is the time,
Speaker 2: uh that you do actually want to do a lot
Speaker 2: more uh diversification. Um you know, part of the uh
Speaker 2: uh uh story in a way, even if you have
Speaker 2: a um kind of a soft landing uh baseline scenario,
Speaker 2: risk premier are actually quite uh quite tight. Um So,
Speaker 2: you know, whatever measure of, of valuations you want to
Speaker 2: do for the US relative to where real rates are.
Speaker 2: Uh Even if you look at credit spreads uh by
Speaker 2: and large, actually, you're not getting compensated for uh for
Speaker 2: a lot of risk. Uh But I do think actually
Speaker 2: um uh you know, kind of diversifying uh the portfolio
Speaker 2: and kind of going back to the discussion on, on
Speaker 2: the
Speaker 2: emerging markets. You know, if you do get that soft
Speaker 2: landing scenario where the fed is cutting because inflation is
Speaker 2: falling rather than, than growth and the dollar comes down.
Speaker 2: I mean, historically, this has been a great period for,
Speaker 2: for Ems.
Speaker 2: Um So I think, I think that's one aspect, the
Speaker 2: other one I think is that, you know, some of
Speaker 2: the most structural forces that, um you know, we didn't,
Speaker 2: we didn't get a chance to talk about, you know,
Speaker 2: whether it's
Speaker 2: climate change and the energy transition, uh a whole range
Speaker 2: of industrial policy, uh you know, build out of Capex
Speaker 2: related to A I, you know, a lot of these things,
Speaker 2: um you know, in a way, push out the investment
Speaker 2: curve a lot more. Um And then, you know, when
Speaker 2: you think about how much the governments are spending, you know,
Speaker 2: we bring back the the savings curve. So
Speaker 2: they put two economies in a room and you always
Speaker 2: have to talk about uh curves at some point. Um So,
Speaker 2: so I think if you look at that intersection between
Speaker 2: savings and investment. Uh you know, I, I think in
Speaker 2: general rates uh uh uh in terms of equilibrium a
Speaker 2: bit higher, but I think in general they are also
Speaker 2: a bit more inflationary. Uh
Speaker 2: um And so, you know, finding ways to protect your
Speaker 2: portfolio from higher inflation, uh I think is uh a
Speaker 2: place uh that, that you should be focused. And I think,
Speaker 2: you know, I know we said uh heads you in
Speaker 2: uh tails you in a thing for gold. But, but
Speaker 2: I do think actually, uh you know, in that, in
Speaker 2: that scenario of um
Speaker 2: uh you know, kind of a more monetary led uh inflation,
Speaker 2: I think gold actually uh does well. Uh but I
Speaker 2: also think, um you know, adding a little bit more
Speaker 2: uh commodities, real assets, I think to the portfolio. Uh
Speaker 2: I think do make a lot of sense of this
Speaker 2: uh uh in this environment because um you know, we
Speaker 2: are likely to be faced with a lot more supply shortages.
Speaker 2: Um And, you know, this is the kind of uh
Speaker 2: environment where
Speaker 2: I think getting that bit more um uh
Speaker 2: balance or support for your kind of uh core equity
Speaker 2: uh position, I think will, will, will pay off a
Speaker 2: lot more.
Speaker 1: I think that's a great astute observation Prakash because when
Speaker 1: I talk to investors to your point that uh dominant
Speaker 1: view is, you know, what's the point of, you know,
Speaker 1: investing beyond the US, it's been so great. Uh But
Speaker 1: the sands are shifting
Speaker 1: and if we don't take positioning now, it could be that,
Speaker 1: you know, we look back and say, well, this was
Speaker 1: the time to make the adjustment. So I really appreciate
Speaker 1: your view on that uh progress. Final, final question is
Speaker 1: on the private space, the public markets have done their thing.
Speaker 1: We've seen good equity performance in the West. We've seen
Speaker 1: fixed income rally around expectation of stump soft lending.
Speaker 1: Uh But then there's this intrigue around whether there's a
Speaker 1: lot of leverage build up in the private markets because
Speaker 1: they are not subject to market to market. Maybe we
Speaker 1: don't really know how big the damage is. Uh But
Speaker 1: so far with almost two years and counting of high rates,
Speaker 1: we haven't seen any accidents in the private space. So
Speaker 1: are we out of the woods?
Speaker 2: Yeah, look, I mean, uh um in some sense, I
Speaker 2: think that the rebound in the public market space has
Speaker 2: uh has, has helped uh just in terms of, of
Speaker 2: anchoring valuations uh for the for the private space. But
Speaker 2: I think going forward, uh if you think of um
Speaker 2: uh you know, returns uh in private assets coming from,
Speaker 2: as you mentioned, uh leverage second is actually uh kind
Speaker 2: of valuation uh rating
Speaker 2: and the third is actually kind of value creation, you know,
Speaker 2: kind of getting better uh ebita growth. Uh What we're
Speaker 2: seeing is that we don't you know, you just can't
Speaker 2: rely on the first two forces anymore. Uh And it
Speaker 2: really has to be about, about value creation. Um So
Speaker 2: I think that that would be the big uh challenge
Speaker 2: for the private market space. Uh Is that if you
Speaker 2: were actually just resorting to the first two
Speaker 2: uh uh pieces, uh you're just not gonna get the
Speaker 2: kind of growth that uh that you did uh uh
Speaker 2: in the past. Uh So, what we've been doing actually
Speaker 2: with a lot of our portfolio companies um as well
Speaker 2: as uh via the, the GPS is actually putting more
Speaker 2: emphasis on uh on, on the 3rd, 3rd part. And,
Speaker 2: and this is, I think the,
Speaker 2: the, the kind of true strength of, of uh private markets,
Speaker 2: particularly private equity in that you actually have a controlled premium, right? You, you,
Speaker 2: you do have the ability to uh to, to make
Speaker 2: those changes and actually help create that uh that value.
Speaker 2: Um So it is, it is uh going to be
Speaker 2: a tough period, I think uh uh going forward for
Speaker 2: the space. Um But I think it will actually lead
Speaker 2: to in a way, the way I think about it,
Speaker 2: actually a more sustainable uh growth trajectory for um uh for,
Speaker 2: for this, this universe.
Speaker 1: That's a very good point to end. Uh PS Kan.
Speaker 1: Thank you very much for your time and insights. Thanks
Speaker 1: for coming back to COVID time.
Speaker 2: Thanks tomorrow. Take care.
Speaker 1: Good to have you. Thanks to our listeners and viewers
Speaker 1: as well. Copy Time was produced by Ken Delbridge at
Speaker 1: Spy studios. Violet Le and Daisy Sharon provided additional assistance.
Speaker 1: It is for information only and does not represent any
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Speaker 1: a great day.