WEBVTT - Kopi Time E132 - GIC’s Prakash Kannan on Global Macro and Asset Allocation 0:00:06.019 --> 0:00:09.079 Hello, this is uh Copy Time, a podcast series on 0:00:09.090 --> 0:00:12.659 Markets and Economies from DVS Group Research. I'm Turbe, chief economist, 0:00:12.670 --> 0:00:15.560 welcoming you to our 132nd episode. 0:00:16.159 --> 0:00:19.559 Today we have with us Dr Prakash Kanan, chief economist 0:00:19.569 --> 0:00:22.950 and director of the Economics and Investment Strategy Department at 0:00:22.959 --> 0:00:26.069 G IC. One of two key sovereign wealth funds of 0:00:26.079 --> 0:00:29.329 the government of Singapore. Prakash is responsible for developing the 0:00:29.340 --> 0:00:32.549 top down view on the investment environment as well as 0:00:32.560 --> 0:00:36.458 the asset allocation strategy for G IC. Prior to joining 0:00:36.470 --> 0:00:40.479 G IC in 2012, uh Prakash worked with the International 0:00:40.490 --> 0:00:41.220 Monetary Fund. 0:00:41.619 --> 0:00:44.490 I know him from those days, the Central Bank of Malaysia, 0:00:44.880 --> 0:00:48.700 Bangarra and GTES Pension Fund, Prakash, Shaan. Welcome back to 0:00:48.709 --> 0:00:50.400 Copy time. It's been a while. 0:00:51.380 --> 0:00:54.080 Thanks J Good to be back. I can't believe it's 0:00:54.090 --> 0:00:54.990 been four years, 0:00:55.330 --> 0:00:58.549 August 2020. These were the early days of cooking time 0:00:58.580 --> 0:01:01.430 when you were kind enough to join me. Uh Lots 0:01:01.439 --> 0:01:05.119 has happened since then. Prakash and Macro remains exciting 0:01:05.410 --> 0:01:08.529 and no, first. Congratulations. Uh I think the podcast has 0:01:08.540 --> 0:01:12.519 definitely gone from strength to strength. Uh I think it was, yeah, 0:01:12.529 --> 0:01:15.768 it was hit what episode? 24? I believe I was now. 0:01:15.830 --> 0:01:19.199 It's 100 and change. So, congratulations. 0:01:19.690 --> 0:01:22.599 Uh II, I have been able to run it because 0:01:22.610 --> 0:01:24.809 I've had, you know, friends and colleagues like you come 0:01:24.819 --> 0:01:27.540 and support it. So again, Prakash, thanks for coming back today. 0:01:27.870 --> 0:01:30.209 And like I said, back in 2020 I think most 0:01:30.220 --> 0:01:33.690 of the podcast was about dealing with pandemic economics. We 0:01:33.699 --> 0:01:37.430 can hopefully put that aside, not if not even behind 0:01:37.440 --> 0:01:38.429 for the time being. 0:01:38.699 --> 0:01:42.550 Uh Prakash. Uh Let's start with some macro discussion. And 0:01:42.559 --> 0:01:44.739 then I do want to hear about your views on 0:01:44.750 --> 0:01:48.199 asset allocation in this environment, but to set the trajectory, 0:01:48.279 --> 0:01:51.239 uh let's start with the US. Uh lots of chat 0:01:51.250 --> 0:01:57.610 about Jerome Powell's Jacksonville speech. September is probably most likely the, 0:01:57.620 --> 0:01:59.839 you know, beginning of the rate cut in this cycle 0:01:59.949 --> 0:02:03.559 and people are trying to price in the 2024 2025 scenario. 0:02:03.610 --> 0:02:04.480 Your thoughts. 0:02:05.860 --> 0:02:07.879 No, thanks man. And look, I think it's a great 0:02:07.889 --> 0:02:10.179 place to start. Um you know, for better or for worse. 0:02:10.190 --> 0:02:13.000 I think uh what the fed does really matters, not 0:02:13.008 --> 0:02:14.220 just for the US, but I think for the rest 0:02:14.229 --> 0:02:17.119 of the world. Um I think, you know, really thinking 0:02:17.130 --> 0:02:19.880 about the question, we, we have to take both 0:02:20.309 --> 0:02:23.490 uh the expected path of rate but also the outlook 0:02:23.500 --> 0:02:27.309 for the economy uh and inflation uh together, you know, 0:02:27.320 --> 0:02:30.399 sometimes you have these discussions where people just focus on 0:02:30.410 --> 0:02:32.729 the rates but, but ignore actually what's happening in the 0:02:32.740 --> 0:02:36.199 uh in the macro context. Uh So if I start 0:02:36.210 --> 0:02:37.889 by looking actually at what's price, then 0:02:38.199 --> 0:02:42.538 you have about 220 basis points of cuts between now 0:02:42.550 --> 0:02:45.649 and the end of 2025 which is, you know, roughly 0:02:45.679 --> 0:02:49.970 100 for this year and about 100 and 20 for 0:02:49.979 --> 0:02:53.619 next year. Now, you rarely see this kind of extent 0:02:53.630 --> 0:02:55.300 of cuts outside of a recession. 0:02:55.940 --> 0:02:59.360 So in that sense, uh it really is a very 0:02:59.369 --> 0:03:03.940 strong uh kind of a degree of monetary policy kind 0:03:03.949 --> 0:03:07.179 of easing that's being priced into the market. So when 0:03:07.190 --> 0:03:09.119 I look at that and then I try and square 0:03:09.130 --> 0:03:12.679 it with my central view uh of the of the 0:03:12.690 --> 0:03:15.800 economy uh that the amount of cuts being priced in 0:03:15.809 --> 0:03:20.050 seems a little excessive. Uh Our baseline is still for 0:03:20.059 --> 0:03:21.660 a uh a soft landing. 0:03:22.008 --> 0:03:25.490 Uh but importantly, with a slightly sticky path for uh 0:03:25.500 --> 0:03:29.589 for inflation uh such that it would likely end 2025 0:03:29.600 --> 0:03:31.429 still with a, with a two handle. 0:03:32.050 --> 0:03:35.660 Um And so if you take that into context, uh 0:03:35.669 --> 0:03:38.690 you know, we think likely that um you're not gonna 0:03:38.699 --> 0:03:42.070 get this amount of uh uh cut um that the 0:03:42.080 --> 0:03:44.509 market is currently pricing it. But of course, you know, 0:03:44.520 --> 0:03:47.639 that's the central scenario, the the alternative scenarios around it. 0:03:48.009 --> 0:03:53.029 Um We do actually place a relatively high uh probability 0:03:53.039 --> 0:03:57.029 and a recession scenario about 30 to 35%. Uh This is, 0:03:57.039 --> 0:04:00.100 you know, about twice the kind of unconditional mean. 0:04:00.429 --> 0:04:02.210 Uh And a large part of that is just based 0:04:02.220 --> 0:04:04.800 on the, the dynamics that you're seeing in the, uh, 0:04:04.809 --> 0:04:07.970 in the labor market. Uh Now if you do get 0:04:07.979 --> 0:04:10.570 that scenario, then, then I do think actually the fed 0:04:10.580 --> 0:04:13.050 has a lot of ammunition. Uh, and I think they 0:04:13.059 --> 0:04:16.290 will actually act, uh in a fairly aggressive manner. 0:04:16.928 --> 0:04:19.309 Uh The other scenario is of course, that, that actually 0:04:19.320 --> 0:04:21.329 we are wrong on inflation and actually it comes down 0:04:21.339 --> 0:04:23.390 a lot faster. Uh that I think is a bit 0:04:23.399 --> 0:04:25.779 more consistent with what the market is, is pricing in, 0:04:25.790 --> 0:04:27.899 not too bad, not too bad on growth, but actually 0:04:27.910 --> 0:04:29.988 very fast disinflation process. 0:04:30.678 --> 0:04:31.829 And of course, you know, we have to talk about 0:04:31.839 --> 0:04:34.820 the elephant in the room, which is the, the US election. 0:04:35.678 --> 0:04:39.290 Um you know, depending on how that pans out. Um 0:04:39.299 --> 0:04:42.419 You know, I think there is a scenario where the 0:04:42.428 --> 0:04:45.169 FED may just want to pause and wait until you 0:04:45.178 --> 0:04:50.929 get some clarity on uh on policies because across both candidates, 0:04:51.238 --> 0:04:53.649 you know, a lot of the discussion has been 0:04:53.928 --> 0:04:56.850 uh you know, on, on kind of broader issues, let's 0:04:56.859 --> 0:05:00.829 say immigration, uh uh crime, the economy, et cetera, but, 0:05:00.839 --> 0:05:03.279 but very little kind of clarity in terms of what 0:05:03.290 --> 0:05:07.039 exactly uh type of policies they would uh deliver. Uh 0:05:07.049 --> 0:05:09.488 So that again, I think would, would probably lead to 0:05:09.500 --> 0:05:11.570 a bit more caution, I think from the fed, uh, 0:05:11.579 --> 0:05:14.170 relative to what, uh, what's priced in. 0:05:15.640 --> 0:05:18.790 Right. And I, I think I am very much in 0:05:18.799 --> 0:05:20.820 line with you that, to 0:05:21.970 --> 0:05:25.070 prognosticate about uh, recession, just, just around the corner sounds 0:05:25.079 --> 0:05:27.450 really a bit far fetched to me, uh, in the 0:05:27.459 --> 0:05:30.820 past for, gosh, I mean, we've only had proper recessions 0:05:30.829 --> 0:05:33.500 with proper shocks which are, you know, by definition, not 0:05:33.510 --> 0:05:36.959 really predictable like the pandemic or the financial stability issues 0:05:36.970 --> 0:05:40.119 are on 0809 and the market can't predict that. So 0:05:40.130 --> 0:05:42.579 in it, if it's pricing it, in that narrative, in 0:05:42.589 --> 0:05:44.829 my view doesn't carry a lot of weight. Whereas to 0:05:44.839 --> 0:05:47.640 your point that if inflation starts surprising on the downside, 0:05:47.869 --> 0:05:50.510 uh then just the fact that, you know, we don't 0:05:50.519 --> 0:05:53.470 need to have such high real rates makes sense. Uh 0:05:53.480 --> 0:05:57.089 But still, it has to be combined with some degree 0:05:57.100 --> 0:05:59.730 of weakness in the labor market, what you say because 0:05:59.738 --> 0:06:02.899 if labor market does not weaken materially and we rule 0:06:02.910 --> 0:06:07.329 out of recession, then sustained cuts could lead to undue 0:06:07.750 --> 0:06:11.399 uh you know, softening of financial conditions and create financial 0:06:11.410 --> 0:06:13.970 stability issues on the other end, like a melt up scenario. 0:06:15.178 --> 0:06:17.808 No, I think, I think, I think that's, that's absolutely right. 0:06:17.820 --> 0:06:20.640 Um You know, the, the one thing unique about the 0:06:20.649 --> 0:06:22.890 US is that there actually is a bit of an 0:06:22.899 --> 0:06:27.149 asymmetry with regards to uh the sensitivity to interest rates, 0:06:27.339 --> 0:06:30.619 uh mostly because a lot of uh economic entities in 0:06:30.630 --> 0:06:34.640 the US actually have optionality when it comes to uh 0:06:34.649 --> 0:06:38.678 uh refinancing, right? So, so as interest rates go up, 0:06:39.170 --> 0:06:42.579 um you know, as you know, a lot of households 0:06:42.589 --> 0:06:45.630 are on kind of fixed rate mortgages which have very 0:06:45.640 --> 0:06:48.029 long duration relative to other parts of the world. Uh 0:06:48.049 --> 0:06:51.170 Corporates actually also have turned out their debt such that, 0:06:51.178 --> 0:06:54.029 that pass through of higher interest rates to balance sheets 0:06:54.040 --> 0:06:56.630 is a, is a lot slower. But if you invert 0:06:56.640 --> 0:06:57.350 the process, 0:06:57.820 --> 0:07:01.820 um actually, then you suddenly could get the uh opportunity 0:07:01.829 --> 0:07:06.119 for households to refinance uh uh much faster uh households 0:07:06.130 --> 0:07:09.250 to even take uh potentially uh home equity uh uh 0:07:09.260 --> 0:07:12.720 uh withdrawals. So, so you could get actually an, an 0:07:12.730 --> 0:07:17.078 asymmetric response to cuts, um which I think going to, 0:07:17.089 --> 0:07:19.209 your point would lead to, I think to, to a 0:07:19.220 --> 0:07:22.679 bit of uh uh uh uh a melt up scenario. And, 0:07:22.690 --> 0:07:25.480 and I think here, you know, the, the, the risk 0:07:25.489 --> 0:07:26.399 is that 0:07:26.859 --> 0:07:31.109 um there's perhaps too much emphasis I think placed on, 0:07:31.559 --> 0:07:34.489 uh you know, this concept of a neutral uh uh 0:07:34.500 --> 0:07:37.559 interest rate of this house car, uh which is, you know, as, 0:07:37.570 --> 0:07:41.940 you know, uh unobservable. Um And so, if there is 0:07:41.950 --> 0:07:46.269 a belief that uh policy is quote unquote tight, just 0:07:46.279 --> 0:07:50.220 because it's relative to this um conceptual uh uh our 0:07:50.359 --> 0:07:50.899 star 0:07:51.200 --> 0:07:53.260 that, that pressure to cut may actually be a lot 0:07:53.269 --> 0:07:57.130 more than uh uh what, what uh uh is actually 0:07:57.140 --> 0:07:59.929 necessary for, for the economy. So, so, yeah, I agree 0:07:59.940 --> 0:08:01.549 with you. I think that, that, that there could be 0:08:01.559 --> 0:08:05.369 that scenario, uh where, you know, the, the fed kind 0:08:05.380 --> 0:08:10.220 of in a way underestimates, um uh how much actually 0:08:10.230 --> 0:08:13.500 our car has uh, has increased over the past few years. 0:08:13.890 --> 0:08:16.309 That's right. I want to talk a little bit about 0:08:16.320 --> 0:08:20.149 the treasury. Uh I've seen some articles lately talking about 0:08:20.160 --> 0:08:23.119 the fact that the treasury focus on issuing bonds at 0:08:23.130 --> 0:08:25.470 the short end of the spectrum, as well as the 0:08:25.480 --> 0:08:28.779 long end constitute some sort of a QE which has 0:08:28.790 --> 0:08:31.619 sort of offset the feds qt. Do you, do you 0:08:31.630 --> 0:08:32.669 have any view on this issue? 0:08:34.500 --> 0:08:37.530 Yeah. You know, I mean, um, I, I think um 0:08:37.659 --> 0:08:38.299 uh 0:08:39.070 --> 0:08:41.909 the challenge with the, with the Treasury is that they 0:08:41.919 --> 0:08:43.640 actually have to do a lot of uh a lot 0:08:43.650 --> 0:08:47.289 of issuance. Um And, you know, that's, that's the function 0:08:47.299 --> 0:08:50.630 of uh the large amount of deficits that, that actually 0:08:50.640 --> 0:08:51.289 is being done. 0:08:51.820 --> 0:08:54.880 Um, you know, we have kind of reached a tricky 0:08:54.890 --> 0:08:58.719 position where, you know, kind of treasury auction announcements have 0:08:58.729 --> 0:09:02.239 been uh, almost seem to be like market moving uh 0:09:02.250 --> 0:09:06.650 uh events. Um I think, uh I think that there 0:09:06.659 --> 0:09:08.460 will be a time where they will need to issue 0:09:08.469 --> 0:09:09.439 a lot more duration. 0:09:09.890 --> 0:09:12.260 Um, in a sense, they are kind of getting up 0:09:12.270 --> 0:09:16.229 to the 20 25% amount of uh uh kind of 0:09:16.239 --> 0:09:20.030 bills relative to overall uh uh issuance that I think 0:09:20.039 --> 0:09:23.549 uh is roughly their, their sweet spot. Um Having said that, 0:09:23.559 --> 0:09:26.079 you know, it has actually helped uh the balance of 0:09:26.090 --> 0:09:28.468 liquidity uh uh in the market. 0:09:28.989 --> 0:09:32.090 Um because, you know, by, by issuing much on the 0:09:32.099 --> 0:09:35.210 shorter end, actually, they have in a way, uh uh 0:09:35.219 --> 0:09:38.270 as you were saying, offset the amount of uh qt that, 0:09:38.280 --> 0:09:41.299 that is uh has been going on. Uh our own 0:09:41.309 --> 0:09:44.270 estimate is that um as you know, QT is already 0:09:44.280 --> 0:09:48.179 uh uh reduced in, in, in magnitude. Um But we 0:09:48.190 --> 0:09:50.750 think that runs probably until about the middle of next year. 0:09:51.049 --> 0:09:53.710 Uh and then that too will, will eventually stop. And 0:09:53.719 --> 0:09:56.080 perhaps at that time, the fed can actually extend the 0:09:56.090 --> 0:09:58.190 duration of uh of their borrowing, 0:09:59.710 --> 0:10:02.209 right? I, I also think that some of the stuff 0:10:02.219 --> 0:10:04.409 that the treasury is doing as much as the market 0:10:04.419 --> 0:10:06.950 would like to follow minute by minute. I think it 0:10:06.960 --> 0:10:10.440 is fairly predictable, it is fairly stable and I think 0:10:10.450 --> 0:10:13.179 they're focusing on the short end of the curve does 0:10:13.190 --> 0:10:16.799 not reveal any desire to sort of offset the fed's moves. 0:10:16.809 --> 0:10:18.689 And to your point, we also estimate that at the 0:10:18.700 --> 0:10:20.729 current pace by the middle of next year might be 0:10:20.739 --> 0:10:21.369 the longest. 0:10:21.679 --> 0:10:25.280 The fed can go a final word on global liquidity 0:10:25.289 --> 0:10:28.979 uh precaution, not just uh fed's operations, but the things 0:10:28.989 --> 0:10:31.968 that are happening at the Bank of England P BC 0:10:32.000 --> 0:10:35.369 Bank of Japan. And uh one concern that I hear 0:10:35.380 --> 0:10:38.250 going into 2025 is that the FED may be doing 0:10:38.260 --> 0:10:40.969 its thing, but there are other things happening elsewhere which 0:10:40.979 --> 0:10:44.929 might constitute somewhat of a liquidity crunch uh for 0:10:45.669 --> 0:10:50.349 banks and financial institutions. Uh and, and the private sector 0:10:50.359 --> 0:10:53.789 in general. Uh your your sense, do you have any 0:10:53.799 --> 0:10:55.609 concern with respect to liquidity? 0:10:56.869 --> 0:10:58.630 Yeah, you know, I think uh I mean, we looked 0:10:58.640 --> 0:11:01.229 at this a bit and uh my sense is that 0:11:01.239 --> 0:11:07.280 uh the both awareness by um uh central banks on 0:11:07.289 --> 0:11:10.650 this issue as well as actually the, the existence of 0:11:10.659 --> 0:11:11.489 new tools 0:11:11.729 --> 0:11:15.179 uh I think do actually limit the uh the likelihood of, 0:11:15.190 --> 0:11:19.830 of any kind of uh uh sharp liquidity uh shock. 0:11:19.950 --> 0:11:22.699 I think the standing repo facility, uh the fed of course, 0:11:22.710 --> 0:11:26.030 is something new um relative to the, the last uh 0:11:26.039 --> 0:11:29.770 uh kind of repo uh scam. And, and I think 0:11:29.780 --> 0:11:32.380 this actually does uh will help uh to be a 0:11:32.390 --> 0:11:35.190 little bit of a, of an offset. And plus, you know, 0:11:35.200 --> 0:11:36.109 I think um 0:11:36.390 --> 0:11:40.179 uh there is a lot more kind of discussion with 0:11:40.190 --> 0:11:45.650 uh um with uh kind of market participants. Um There 0:11:45.659 --> 0:11:49.409 is actually also, you know, uh Laurie Logan, who's now 0:11:49.419 --> 0:11:53.329 the um uh Fed president over in uh the Dallas 0:11:53.340 --> 0:11:55.650 Fed uh also carries, I think a kind of a 0:11:55.659 --> 0:11:59.489 wealth of knowledge uh with her. Uh And so, you know, 0:11:59.500 --> 0:12:01.978 in fact, uh we pay, we pay a lot of 0:12:01.989 --> 0:12:04.349 attention to, to her speeches, I think on, on the 0:12:04.359 --> 0:12:05.650 balance sheet. And uh 0:12:06.099 --> 0:12:08.750 and I think she, she also has a good pulse of, 0:12:08.760 --> 0:12:11.840 of what actually is kind of the the true demand 0:12:11.849 --> 0:12:14.569 for uh for reserve assets from the bank. So I 0:12:14.580 --> 0:12:16.770 think in general, both the awareness as well as the 0:12:16.780 --> 0:12:19.900 tools that are out there, uh We think actually limit 0:12:19.909 --> 0:12:22.559 the likelihood of a, of a big liquidity scare 0:12:23.400 --> 0:12:27.340 because the awareness that you're talking about uh beyond the US, 0:12:27.349 --> 0:12:30.539 when you talk to central bankers in other industrial and 0:12:30.719 --> 0:12:34.539 emerging economies, do you feel that they are picking up 0:12:34.549 --> 0:12:38.098 that cue from the FED and would probably be amen, 0:12:38.109 --> 0:12:42.099 amenable toward more activist intervention with respect to liquidity going forward? 0:12:43.559 --> 0:12:46.750 Yeah, I think, I think that that uh uh definitely 0:12:46.760 --> 0:12:48.570 is there. I mean, you, you see it in the, 0:12:48.580 --> 0:12:52.619 in the ECB uh uh as well. Uh I think those, 0:12:52.630 --> 0:12:55.380 those discussions are, are, are happening and I think in 0:12:55.390 --> 0:13:00.079 the previous um I would say two years or so. II, 0:13:00.090 --> 0:13:00.940 I think that 0:13:01.239 --> 0:13:04.309 that emphasis on while doing QT but also kind of 0:13:04.320 --> 0:13:06.830 making sure that uh you know, liquid institution of the 0:13:06.840 --> 0:13:10.140 banks uh are are kind of adequate, I think has 0:13:10.150 --> 0:13:13.679 been uh has been quite uh uh I would say 0:13:13.690 --> 0:13:16.849 a key input towards the way that they've been actually structuring. 0:13:17.200 --> 0:13:21.199 Um you know, the various uh degrees of uh asset 0:13:21.210 --> 0:13:23.739 purchase programs that the ECB has been doing. 0:13:24.130 --> 0:13:25.700 Uh So I do think it is, it is top 0:13:25.710 --> 0:13:28.539 of mind uh for, for a lot of the policymakers and, 0:13:28.549 --> 0:13:30.848 and I do think that uh they, they do have 0:13:30.859 --> 0:13:32.510 the tools to, to kind of overcome that, 0:13:33.059 --> 0:13:36.000 right. Uh I do this chart Prakash, which is a 0:13:36.010 --> 0:13:38.909 G four central bank balance sheet as a share of 0:13:38.919 --> 0:13:42.099 G four GDP. And from that metric, we're not that 0:13:42.109 --> 0:13:45.570 far from going back to the prepa levels of liquidity. 0:13:45.650 --> 0:13:47.859 So in dollar terms, of course, it's much, much bigger 0:13:48.099 --> 0:13:51.530 but nominal GDP has expanded quite a bit. So I 0:13:51.539 --> 0:13:54.119 I hope that, you know, not just the fed but 0:13:54.130 --> 0:13:56.609 other central banks including the ECB, but also probably Bank 0:13:56.619 --> 0:13:58.479 of Japan and others are taking note of that. 0:13:59.090 --> 0:14:00.770 Yeah, but I think, I think the important thing is 0:14:00.780 --> 0:14:02.760 it's not so much GDP actually, you have to look 0:14:02.770 --> 0:14:06.439 at bank assets. Um And I think that that part 0:14:06.450 --> 0:14:09.409 in a way that credit creation process has actually been 0:14:09.419 --> 0:14:14.750 not as strong as, as GDP, right? So um you know, 0:14:14.760 --> 0:14:16.809 I mean that when when we look at what we 0:14:16.820 --> 0:14:18.609 think is would be the kind of adequate level of 0:14:18.619 --> 0:14:22.780 reserves scaling it by by bank assets, we think kind 0:14:22.789 --> 0:14:25.200 of forms a bit of a better, a better base and, 0:14:25.210 --> 0:14:25.530 and 0:14:26.049 --> 0:14:27.979 uh which is, which kind of goes back a little 0:14:27.989 --> 0:14:31.229 bit to the earlier discussion because the cycle has been 0:14:31.239 --> 0:14:33.500 very unique Right. It's not, it's not been a credit 0:14:33.510 --> 0:14:37.429 driven cycle but, but it's actually been income. Right. And, 0:14:37.440 --> 0:14:40.630 and it's income in a sense of transfers from the 0:14:40.760 --> 0:14:45.380 state to, to, to private entities. And so, you know, that's, 0:14:45.390 --> 0:14:47.729 in fact, that's one reason why when interest rates went 0:14:47.739 --> 0:14:50.169 up so much, you didn't have that kind of, 0:14:50.460 --> 0:14:54.309 uh, a large uh contraction effect on, on real economies 0:14:54.320 --> 0:14:57.260 just because uh balance sheets were in general a bit 0:14:57.270 --> 0:15:00.719 of a better shape. Um So, so, you know, in 0:15:00.729 --> 0:15:04.599 that sense, um uh you know, how much uh reserves 0:15:04.609 --> 0:15:07.770 banks need actually may, may be a little bit less than, 0:15:08.099 --> 0:15:10.099 than I think if you were just to scale it 0:15:10.530 --> 0:15:11.909 relative to GDP, 0:15:12.289 --> 0:15:15.400 right? Unless of course, you know, we see finally a 0:15:15.409 --> 0:15:18.119 resumption of the credit cycle and then the ratios could 0:15:18.130 --> 0:15:20.919 evolve quite dramatically going forward. Uh Yeah, I guess that's 0:15:20.929 --> 0:15:23.309 a 2025 story. And we are thinking and hoping um 0:15:23.320 --> 0:15:26.929 from a banking perspective that as rates come down, uh 0:15:26.940 --> 0:15:29.049 there might be a little more intermediation even if it 0:15:29.059 --> 0:15:31.280 is not in the US elsewhere. Uh There is certainly 0:15:31.289 --> 0:15:33.750 a lot of impulse coming from the government for the 0:15:33.760 --> 0:15:37.070 investment sector to pick up. So maybe it will happen 0:15:37.289 --> 0:15:38.380 um progress. So 0:15:38.770 --> 0:15:42.590 staying with the story outside the US, uh thinking about 0:15:42.599 --> 0:15:46.150 Asian uh economies, uh my take is that, you know, 0:15:46.159 --> 0:15:48.799 eight months into the year they have held up pretty well. 0:15:48.880 --> 0:15:51.510 Trade has done better than what I would have feared 0:15:51.520 --> 0:15:56.349 coming to 2024. Consumption is decent. Uh What's your assessment 0:15:56.359 --> 0:15:58.429 of the performance of Asian economies this year? 0:15:59.549 --> 0:16:02.190 No, actually, I'm very glad you brought this up because 0:16:02.200 --> 0:16:04.750 I think it actually is a, is a, is an 0:16:04.760 --> 0:16:09.299 unappreciated uh fact, uh in the sense of the degree 0:16:09.309 --> 0:16:13.369 of uh resilience across a lot of emerging markets, uh 0:16:13.380 --> 0:16:15.309 you know, we were competing the other day, this metric, 0:16:15.320 --> 0:16:17.849 which is, you know, let's say you strip out China 0:16:18.299 --> 0:16:22.289 and you look at EMX China growth relative to developed markets, 0:16:22.739 --> 0:16:25.880 you know, in the early two thousands, uh this kind 0:16:25.890 --> 0:16:28.450 of EMX China uh cohort 0:16:28.760 --> 0:16:33.020 uh actually was outpacing developed market growth about 4% points. 0:16:33.729 --> 0:16:37.669 Then actually, after the global financial crisis, um that actually 0:16:37.679 --> 0:16:42.340 fell quite, quite rapidly. Um And you had, you know, 0:16:42.349 --> 0:16:46.229 at some point, even less than 1% point uh in 0:16:46.239 --> 0:16:50.229 terms of the out performance relative to, to develop markets. 0:16:50.650 --> 0:16:52.799 Uh and, and this is just, you know, I mean, 0:16:52.809 --> 0:16:55.469 it kind of goes against all our usual convergence uh 0:16:55.489 --> 0:16:58.140 uh thinking with regards to, you know, ems kind of 0:16:58.150 --> 0:17:00.340 growing at a much faster pace than, than D MS. 0:17:00.849 --> 0:17:03.489 And so, you know, I always feel like when we 0:17:03.500 --> 0:17:05.750 look back at that post GFC period, a lot of 0:17:05.760 --> 0:17:09.829 people talk about secular stagnation in the US, but actually 0:17:09.839 --> 0:17:12.250 the the secular stagnation was happening in the, in the 0:17:12.260 --> 0:17:17.109 emerging market space. Um and, and that also actually passed 0:17:17.119 --> 0:17:18.169 on to equity returns. 0:17:18.828 --> 0:17:22.238 We did a decomposition of equity returns over the last decade. 0:17:22.249 --> 0:17:25.418 Just kind of seeing why did Ems perform so badly? 0:17:25.779 --> 0:17:29.188 And the biggest piece of why Ems perform badly was 0:17:29.198 --> 0:17:33.129 just that earnings just didn't grow. Um And, and so, 0:17:33.138 --> 0:17:36.109 you know, I think what we have seen, not just 0:17:36.119 --> 0:17:38.058 for the first eight months of this year, but also 0:17:38.068 --> 0:17:42.667 actually uh last year uh has actually been quite phenomenal. 0:17:42.678 --> 0:17:44.447 So that, that differential between 0:17:44.930 --> 0:17:49.099 EMX China and, and developed markets has now gone back 0:17:49.109 --> 0:17:52.169 up to 2% points. Um And if you, you know, 0:17:52.180 --> 0:17:54.979 if you use some proxy of new orders and et cetera, 0:17:54.989 --> 0:17:57.198 uh uh coming out in PM, I actually, you know, 0:17:57.209 --> 0:17:59.469 that that could be forecast to, to go back up 0:17:59.479 --> 0:18:00.390 to about 3%. 0:18:01.040 --> 0:18:03.599 So, so that out performance of uh 0:18:04.339 --> 0:18:08.149 uh uh EMS relative to, to D MS is actually 0:18:08.160 --> 0:18:10.879 uh picking up and, and I mean, you know, we, we, we, 0:18:10.890 --> 0:18:14.260 we know at least structurally why uh that's been the case. 0:18:14.270 --> 0:18:16.959 I mean, I think the national balance sheets, I think 0:18:16.969 --> 0:18:20.359 has been, have been a lot uh a lot stronger. 0:18:20.699 --> 0:18:24.669 Uh there's a much more um kind of reduced reliance on, 0:18:24.680 --> 0:18:26.079 on foreign flows. 0:18:26.400 --> 0:18:29.280 Um And uh you know, I think there's just in 0:18:29.290 --> 0:18:33.218 general uh fewer, fewer imbalances. Uh but, you know, I mean, 0:18:33.229 --> 0:18:36.448 there is also a cyclical story, I think, uh you know, 0:18:37.109 --> 0:18:39.739 as you know, a lot of the countries, especially in Asia, 0:18:40.209 --> 0:18:43.540 uh I think outside of, of Singapore, not a lot 0:18:43.550 --> 0:18:47.599 of countries actually did uh uh you know, fiscal stimulus 0:18:47.609 --> 0:18:50.839 to the extent that you saw in, you know, the US, 0:18:50.849 --> 0:18:53.920 uh Europe, et cetera. And, and so, you know, the 0:18:53.930 --> 0:18:55.619 output gaps, I think was still 0:18:56.160 --> 0:19:00.569 quite negative, uh you know, coming into 2022. Uh And so, 0:19:00.579 --> 0:19:02.109 in that sense, you know, I mean, I think there 0:19:02.119 --> 0:19:04.579 was a little bit of, of uh of uh uh 0:19:04.589 --> 0:19:07.810 slack that, that the economy could uh could grow into. 0:19:08.459 --> 0:19:11.780 And then I think the other thing is um you know, the, 0:19:11.790 --> 0:19:16.150 the resilience of EMS uh particularly Asia is the flip 0:19:16.160 --> 0:19:20.189 side of the resilience of the US, right? Um You know, the, 0:19:20.199 --> 0:19:23.640 the one thing which is um uh you know, been, 0:19:23.650 --> 0:19:25.938 been very positive in the US has actually just been 0:19:25.949 --> 0:19:31.119 manufacturing capa um and manufacturing Capex and, and structures usually, 0:19:31.209 --> 0:19:34.349 uh uh you know, kind of helps uh em exports. 0:19:34.359 --> 0:19:36.400 Uh you've seen it in, in uh uh in, in 0:19:36.410 --> 0:19:37.260 Korea 0:19:37.540 --> 0:19:39.780 uh is in this part of the world. So, so, 0:19:39.790 --> 0:19:42.250 you know, I think, I think that that part of 0:19:42.260 --> 0:19:42.439 um 0:19:43.109 --> 0:19:46.729 uh the kind of resilience of the U SI think has, 0:19:46.739 --> 0:19:49.819 has also helped uh helped this part of the world. But, 0:19:49.829 --> 0:19:51.739 you know, it, you're right, it, it is actually a 0:19:51.750 --> 0:19:56.589 really underappreciated uh uh phenomenon. Uh and, and actually, even, 0:19:56.599 --> 0:19:58.679 even if you look at the, the turmoil that happened 0:19:58.689 --> 0:19:59.688 in early August. 0:20:00.349 --> 0:20:05.579 Um Once again, you know, I mean, ems in general did, did, OK. 0:20:05.589 --> 0:20:08.369 I mean, you, you had the bifurcation between the Latin 0:20:08.380 --> 0:20:12.510 American uh economies which were the kind of recipient of 0:20:12.520 --> 0:20:16.130 the carry trade flows. Uh and, and those currencies unwound 0:20:16.140 --> 0:20:16.890 quite sharply. 0:20:17.709 --> 0:20:19.930 But in this part of the world, actually, you know, 0:20:19.939 --> 0:20:23.329 suddenly you, you had uh, number one, the prospect of 0:20:23.339 --> 0:20:28.560 the Fed uh actually uh uh cutting uh and two, 0:20:28.569 --> 0:20:30.650 you had uh the yen appreciating. 0:20:31.260 --> 0:20:34.560 Um And so, you know, you had Malaysian Ringgit Ruia 0:20:35.000 --> 0:20:39.430 one actually uh uh appreciating quite uh quite a bit 0:20:39.439 --> 0:20:41.969 of this in this region. So II, I do think 0:20:41.979 --> 0:20:45.540 that um uh you know, the EMS are definitely in 0:20:45.550 --> 0:20:48.400 a much better position uh now than, than they were, 0:20:48.410 --> 0:20:50.079 I think post post GFC. 0:20:50.900 --> 0:20:51.879 Absolutely. So, 0:20:52.030 --> 0:20:54.709 you know that uh uh we at D BS did 0:20:54.719 --> 0:20:57.920 a collaboration with uh B and company and an Council 0:20:57.930 --> 0:21:01.530 looking at Substation over the next decade and one of 0:21:01.540 --> 0:21:03.119 the points we made in this report and I think 0:21:03.130 --> 0:21:06.229 it is reflected very clearly by what you just said 0:21:06.239 --> 0:21:10.969 is that the last decade or two, somewhat underwhelming performance 0:21:10.979 --> 0:21:13.780 should not be construed as a marker of things to come. 0:21:13.790 --> 0:21:15.030 Because during that time, 0:21:15.369 --> 0:21:18.250 balance sheets have improved, the quality of human capital has 0:21:18.260 --> 0:21:21.439 improved and a lot of stars are aligned, so to 0:21:21.449 --> 0:21:23.930 speak for the region, with respect to China plus one. 0:21:24.040 --> 0:21:26.410 So the next 10 years in my view actually looks 0:21:26.420 --> 0:21:29.800 pretty good, particularly from an earnings perspective. Uh, I would 0:21:29.810 --> 0:21:33.188 not look at the lackluster performance of the past decade 0:21:33.199 --> 0:21:35.389 as a market for things to come at all. So 0:21:35.400 --> 0:21:37.188 glad to know that you're on the same page. 0:21:38.609 --> 0:21:40.910 Yeah. Yeah. You know, I, I think, um, I mean, 0:21:40.920 --> 0:21:45.419 the challenge for EMS of, particularly investors in the EMS 0:21:45.430 --> 0:21:49.069 has always been uh how do you get access to 0:21:49.209 --> 0:21:51.290 uh to the growth? Right. So, you know, I mean, 0:21:51.300 --> 0:21:53.609 you'd be hard pressed to find the kind of growth 0:21:53.619 --> 0:21:55.489 numbers you get in this part of the world. Uh 0:21:55.500 --> 0:21:57.739 literally any anywhere else. 0:21:58.109 --> 0:22:01.198 Um But at the same time, like at least on 0:22:01.209 --> 0:22:04.189 the list of equity space, you know, returns have just 0:22:04.199 --> 0:22:07.800 not been uh not been that great uh especially for, 0:22:07.810 --> 0:22:10.989 for a a. Um and, and so I think, uh 0:22:11.000 --> 0:22:14.540 you know, really kind of being uh uh selective thinking about, 0:22:14.550 --> 0:22:18.229 you know, the particular sectors. Um and then, and then 0:22:18.239 --> 0:22:22.050 I think, um um you know, of course India is, 0:22:22.060 --> 0:22:24.680 is uh one of the few markets where, 0:22:25.199 --> 0:22:28.119 you know, markets have been compounding at 12 to 14% 0:22:28.439 --> 0:22:31.399 a year actually since the nineties, right? So kind of 0:22:31.410 --> 0:22:35.300 through any uh any administration. Uh So really, I think 0:22:35.310 --> 0:22:36.969 you gotta, you gotta pick your spots uh 0:22:37.380 --> 0:22:38.219 uh pre spots 0:22:38.290 --> 0:22:38.459 well 0:22:38.469 --> 0:22:38.810 here, 0:22:39.160 --> 0:22:44.510 right? But also that industry is so instructive for policymakers 0:22:44.520 --> 0:22:49.500 in ASEAN that when you have that virtual cycle, virtual cycle, 0:22:49.510 --> 0:22:54.280 if you will of capital markets, dynamic, growing very fast, 0:22:54.290 --> 0:22:55.449 creates as entrepreneurs, 0:22:56.079 --> 0:23:00.069 energy, which then becomes so fulfilling. And that's what we're 0:23:00.079 --> 0:23:02.380 seeing in India, you know, on a regular basis, tremendous 0:23:02.390 --> 0:23:06.829 wealth creation, which itself is feeding into innovation and new 0:23:06.839 --> 0:23:09.790 companies and new ideas. Uh And it's hardening to watch that. 0:23:09.839 --> 0:23:12.979 I think ASEAN used to be like that pre 1997. 0:23:15.109 --> 0:23:17.939 No, you're right. You know, I actually, I, I um I, 0:23:18.000 --> 0:23:20.689 I think it's, it still is, right. I mean, um 0:23:20.699 --> 0:23:23.890 you know, if you look at, of course, Indonesia has 0:23:24.079 --> 0:23:27.560 some of the more um kind of well known uh 0:23:27.579 --> 0:23:31.189 start up whether it's uh you know, Gojek to BP. 0:23:32.270 --> 0:23:35.729 Uh And uh but actually, even if you look at Malaysia, 0:23:36.479 --> 0:23:40.530 I think the entrepreneurial spirit that is actually phenomenally strong. 0:23:40.859 --> 0:23:44.349 Um And so that ecosystem around, you know, that kind 0:23:44.359 --> 0:23:49.069 of China plus one strategy, I think uh is actually 0:23:49.079 --> 0:23:52.040 uh thriving and back to your point. I think that 0:23:52.050 --> 0:23:53.069 to me is the 0:23:53.780 --> 0:23:57.419 kind of the, the raw ingredients that you need to 0:23:57.430 --> 0:24:02.439 then actually build, you know, capital markets, et cetera. Uh 0:24:02.449 --> 0:24:06.270 uh around. Uh and, you know, at least on, on 0:24:06.280 --> 0:24:08.589 paper that they have a lot of these good policies 0:24:08.599 --> 0:24:12.310 are really trying to help the small midcap um uh 0:24:12.329 --> 0:24:15.920 uh space kind of get uh better access to, to 0:24:15.930 --> 0:24:19.719 financing uh promoting a venture capital ecosystem 0:24:20.180 --> 0:24:23.339 So things like this, I think um you know, once 0:24:23.349 --> 0:24:25.949 it's really well developed, I think we'll, we'll capture even 0:24:25.959 --> 0:24:27.540 global investor interests, 0:24:27.859 --> 0:24:28.250 right? 0:24:28.410 --> 0:24:31.439 And I think in the region there's some frustration about 0:24:31.449 --> 0:24:35.139 like we need deeper capital markets and better stock markets. 0:24:35.280 --> 0:24:35.680 But I think 0:24:35.755 --> 0:24:38.015 I, I heard someone say that, you know, without good companies, 0:24:38.025 --> 0:24:40.135 you can't have good markets. It's not necessarily a chicken 0:24:40.145 --> 0:24:43.015 and egg thing, you have to have good exciting companies first. 0:24:43.314 --> 0:24:47.104 Uh So, so yeah, I'm looking forward to the next 0:24:47.114 --> 0:24:50.574 round of entrepreneurs and next round of value creation in 0:24:50.584 --> 0:24:54.175 this region. Um progress. Let's talk a little bit about China. 0:24:54.479 --> 0:24:57.599 Uh We have had a couple of years now where 0:24:57.609 --> 0:25:01.260 a steady drip of policy easing has been the characteristic 0:25:01.270 --> 0:25:04.900 of the Chinese economy. Uh but concerns around property sector 0:25:04.910 --> 0:25:09.430 consolidation is still substantial. And now lately, very recently, we've 0:25:09.439 --> 0:25:12.380 also seen this issue related to this, this sharp decline 0:25:12.390 --> 0:25:16.329 in interest rates around everybody crowding into the Chinese government market. 0:25:16.439 --> 0:25:19.060 So some, some thoughts around China. 0:25:20.510 --> 0:25:24.489 Yeah, look, I I think um uh the starting point 0:25:24.500 --> 0:25:27.478 uh for thinking about China is really that 0:25:27.760 --> 0:25:31.540 uh trend growth has, has come down, right? Um You know, 0:25:31.550 --> 0:25:34.030 one of the reasons I talked about uh you know, 0:25:34.040 --> 0:25:36.609 doing that E MD M comparison in terms of growth rates, 0:25:36.619 --> 0:25:39.880 kind of excluding China uh is because you don't want 0:25:39.890 --> 0:25:43.139 to kind of take that huge decline in trend growth 0:25:43.349 --> 0:25:47.199 uh to, to distort that that relationship. Uh So as, 0:25:47.209 --> 0:25:50.510 you know, China, uh you know, 1015 years ago was 0:25:50.520 --> 0:25:51.979 growing between 8 to 10%. 0:25:52.420 --> 0:25:55.959 Uh We now have trend growth at about four in change. 0:25:56.260 --> 0:25:59.020 Uh And we think that actually falls to about three 0:25:59.030 --> 0:26:01.589 and change in the next decade. Uh So it's really 0:26:01.599 --> 0:26:04.589 is a very sharp uh uh fall in, in trend 0:26:04.599 --> 0:26:07.140 growth and a large part of that is just uh 0:26:07.150 --> 0:26:10.599 it's just demographics. Uh and, and also actually a moderation 0:26:10.609 --> 0:26:14.359 in uh in, in productivity. Um And so, you know, that, 0:26:14.560 --> 0:26:18.599 that I feel kind of needs to recalibrate in terms 0:26:18.609 --> 0:26:21.109 of actually how fast we think China could grow. 0:26:21.630 --> 0:26:26.329 And to me, the way I read uh uh policymakers 0:26:26.339 --> 0:26:29.300 read of the economy is that actually they've also kind 0:26:29.310 --> 0:26:31.780 of incorporated that the fact that that trend growth is 0:26:31.790 --> 0:26:34.780 lower in the way that they are thinking about uh 0:26:34.790 --> 0:26:39.410 about stimulus. Um So, you know, is, is a uh 0:26:39.420 --> 0:26:42.889 kind of a 5% growth uh if they achieve that 0:26:43.479 --> 0:26:47.660 this year, um is that really uh uh an, an 0:26:47.670 --> 0:26:50.399 underperformance or, or is that kind of, you know, in 0:26:50.410 --> 0:26:54.089 line with where with, where trend growth uh uh is? 0:26:54.099 --> 0:26:56.400 Uh And I think, I think I, in some sense, 0:26:56.410 --> 0:26:59.339 uh it is actually already uh going down to, to 0:26:59.349 --> 0:27:01.859 where trend growth is. Uh And I, and that's why 0:27:01.869 --> 0:27:04.968 I don't expect kind of a big uh Bazooka type 0:27:04.979 --> 0:27:07.579 uh stimulus that, that they will do. But ha but 0:27:07.589 --> 0:27:09.819 having said that I, I do think that 0:27:10.119 --> 0:27:14.229 um there is an issue of um, kind of uh 0:27:14.239 --> 0:27:19.300 lack of animal spirits. Uh that's, that's, uh you know, if, 0:27:19.310 --> 0:27:23.000 if not addressed, well, I think could, could potentially lead 0:27:23.010 --> 0:27:25.439 to uh, you know, kind of a sharper fall in 0:27:25.449 --> 0:27:30.250 growth and, and uh a bit more deflationary uh uh dynamics. 0:27:30.660 --> 0:27:34.420 Um What, what I think, um uh there, you know, 0:27:34.430 --> 0:27:37.500 if I, if I look at the uh uh kind 0:27:37.510 --> 0:27:40.000 of the output from the third plenum, also the July 0:27:40.010 --> 0:27:45.040 Politburo meeting, it looks like these issues are, are front and, 0:27:45.050 --> 0:27:47.540 and center. Um You know, I was surprised just to 0:27:47.550 --> 0:27:49.939 hear how much, you know, like the phrase kind of 0:27:49.949 --> 0:27:53.540 supporting consumption uh has come up, I think in recent 0:27:53.550 --> 0:27:55.780 uh policy uh statements. 0:27:56.099 --> 0:27:58.260 So, so I think that knowledge of what needs to 0:27:58.270 --> 0:28:02.560 be done, uh you know, everything from supporting consumption to 0:28:02.849 --> 0:28:08.900 improving the uh balance between center and local government finances, 0:28:09.130 --> 0:28:13.919 improving land reform uh with regards to mobility of, of 0:28:13.930 --> 0:28:18.399 people uh improving urbanization. And I think all these things 0:28:18.410 --> 0:28:22.560 are definitely the right direction of travel. Um So to me, 0:28:22.569 --> 0:28:25.040 it really is just kind of a an execution 0:28:25.479 --> 0:28:29.260 uh issue that uh uh that, that is, is a 0:28:29.270 --> 0:28:30.010 little bit lucky. 0:28:31.439 --> 0:28:34.819 I just want to throw in one nerdy economics question, 0:28:34.829 --> 0:28:37.739 putting markets aside for a second Prakash, which is this 0:28:37.750 --> 0:28:40.849 whole notion that the US Treasury has brought to the fore, 0:28:40.859 --> 0:28:45.510 the China overcapacity argument and its role in destabilizing global 0:28:45.520 --> 0:28:48.780 markets and creating deflation risk. Although I thought the US 0:28:48.790 --> 0:28:51.560 Treasury would worry about inflation risk, but overcapacity seems to 0:28:51.569 --> 0:28:53.790 be the other end of the argument. What's your sense 0:28:53.800 --> 0:28:54.619 of overcapacity? 0:28:56.869 --> 0:28:59.989 Yeah, you know, it's uh uh you know, it's funny 0:29:00.040 --> 0:29:03.189 as much as we think about um this kind of 0:29:03.199 --> 0:29:06.449 lack of animal spirits in, in China, I think in 0:29:06.459 --> 0:29:12.140 the sectors uh for which China is thriving. Um you know, 0:29:12.150 --> 0:29:18.319 EVs batteries solar, I mean, the competition is absolutely fierce. 0:29:18.569 --> 0:29:21.290 Um You know, I, I uh 0:29:22.510 --> 0:29:25.510 we've seen, you know, we've met companies where, you know, that, 0:29:25.520 --> 0:29:29.290 that the margin squeeze has just been uh quite uh 0:29:29.300 --> 0:29:32.479 uh striking across these sectors just because there's a very 0:29:32.489 --> 0:29:36.089 strong competition and the quality of the products that they're, 0:29:36.099 --> 0:29:38.849 that they're putting out, I think is, is just uh quite, 0:29:38.859 --> 0:29:41.920 quite phenomenal. Um You know, I've, I've seen kind of 0:29:41.930 --> 0:29:46.449 autonomous driving developments in China, which I think is much 0:29:46.459 --> 0:29:48.949 better than, than anywhere else. Uh uh you feel uh 0:29:48.959 --> 0:29:52.000 in the world. So uh II I find it um 0:29:52.300 --> 0:29:56.569 uh uh hard to, to, to think really in terms 0:29:56.579 --> 0:30:00.000 of uh of overcapacity, I think uh uh in, in 0:30:00.010 --> 0:30:01.869 that sense, I mean, as you know, the the world 0:30:01.880 --> 0:30:04.660 needs a lot of these uh kind of green uh 0:30:04.670 --> 0:30:08.449 uh green products. Um I think the challenge uh really 0:30:08.459 --> 0:30:13.140 here is uh what happens if more and more countries 0:30:13.150 --> 0:30:16.969 put up barriers uh with regards to, to China, uh 0:30:16.979 --> 0:30:19.310 which I think then uh 0:30:19.709 --> 0:30:21.680 in a way it's gonna feed a little bit back 0:30:21.689 --> 0:30:25.790 more into the deflationary uh challenges that you have in 0:30:25.800 --> 0:30:28.800 uh uh in China. Uh ultimately, as we know, uh 0:30:28.810 --> 0:30:31.989 we just need to find ways to boost demand. Um 0:30:32.000 --> 0:30:34.859 And uh I think that's where, you know, that whole 0:30:34.869 --> 0:30:39.310 emphasis on consumption. Uh if it actually gets um uh 0:30:39.319 --> 0:30:42.280 gets more traction, I think that will be a better 0:30:42.290 --> 0:30:44.280 way of solving this, you know, kind of quote unquote 0:30:44.290 --> 0:30:48.599 overcapacity problem uh than I think really trying to, to 0:30:48.910 --> 0:30:51.140 limit limit their, their exports. 0:30:51.939 --> 0:30:54.339 OK. In case our listeners missed it. Uh I just 0:30:54.349 --> 0:30:57.119 want to reiterate the point you made in a different 0:30:57.130 --> 0:30:59.699 way because that's a really cool one which is concerns 0:30:59.709 --> 0:31:05.329 about overcapacity with trade restriction measures and treating domestic supply 0:31:05.339 --> 0:31:09.890 chains would actually compound overcapacity problem on a global systemic scale. 0:31:11.180 --> 0:31:12.150 Yeah, I think so. Yeah. 0:31:12.229 --> 0:31:16.170 Yeah. Yeah. Well, put uh I think uh this issue 0:31:16.180 --> 0:31:19.119 came up in the context of India's ambition to have 0:31:19.130 --> 0:31:22.750 its own solar industry when the Chinese were supplying those 0:31:22.760 --> 0:31:25.359 solar cells with the rock bottom prices. And I think 0:31:25.369 --> 0:31:27.569 my initial inflation was exactly that, that if you want 0:31:27.579 --> 0:31:29.920 to have even more solar cells in the world, how 0:31:29.930 --> 0:31:33.390 does it help uh from a global capacity perspective? I 0:31:33.400 --> 0:31:33.750 think 0:31:34.359 --> 0:31:36.579 at least in the countries of India Prakash, I see 0:31:36.589 --> 0:31:40.319 a little more calibrated approach to dealing with China and 0:31:40.329 --> 0:31:44.369 its production in the last year or so. Uh, not 0:31:44.380 --> 0:31:48.569 necessarily tariff barriers and protection but other ways of making 0:31:48.579 --> 0:31:51.420 the relationship a bit more balanced, which I like, I 0:31:51.430 --> 0:31:53.209 would like to see some of that from the US, 0:31:53.410 --> 0:31:57.209 but I think independent of December, November's election outcome, I 0:31:57.219 --> 0:31:59.000 don't think the US policy on China is going to 0:31:59.010 --> 0:31:59.640 change much. 0:32:02.170 --> 0:32:04.910 Yeah. No, I think, I think you're right. Um I 0:32:04.920 --> 0:32:09.099 think um uh I in a way the, 0:32:10.000 --> 0:32:13.130 as much as uh you know, the current administration is 0:32:13.140 --> 0:32:17.420 trying to focus on the small yard high fence uh approach. 0:32:17.920 --> 0:32:20.849 Uh to me, the risk is, is twofold, one is 0:32:20.859 --> 0:32:26.199 that you are introducing actually new policies. Um for example, 0:32:26.209 --> 0:32:30.140 you know, uh restrictions on the outward flow of capital. 0:32:30.500 --> 0:32:34.739 Uh And once I think you introduce new policies, I 0:32:34.750 --> 0:32:37.079 think that the risk is always that, that, you know, 0:32:37.089 --> 0:32:39.739 that uh these things start start expanding. 0:32:40.449 --> 0:32:43.930 Uh and, and second is I think um from a 0:32:43.939 --> 0:32:49.130 financial investor perspective, uh you know, I think there, there 0:32:49.140 --> 0:32:52.640 is actually already uh uh among a lot of uh 0:32:52.650 --> 0:32:56.270 uh kind of us institutional investors, you know, some form 0:32:56.280 --> 0:32:57.300 of financial decoupling. 0:32:57.949 --> 0:33:01.369 Uh that's, that's happening between the US and China and, 0:33:01.380 --> 0:33:05.209 and I think that's, that's very unfortunate. Um So, so, 0:33:05.219 --> 0:33:08.170 you know, that, that part of it, I think um 0:33:08.390 --> 0:33:11.250 uh you're right, I think would be relatively robust to 0:33:11.270 --> 0:33:14.810 uh to the different administration. But, you know, II I 0:33:14.819 --> 0:33:15.770 think that 0:33:17.109 --> 0:33:20.650 in theory that that more targeted approach is still better 0:33:20.660 --> 0:33:23.930 than I think, you know, a large blanket tariff for 0:33:23.939 --> 0:33:28.699 uh all such policies which I think will uh hurt 0:33:28.709 --> 0:33:29.869 not just um 0:33:30.670 --> 0:33:35.619 uh uh uh Chinese manufacturers, but, but also us, us consumers. 0:33:35.979 --> 0:33:40.150 Um and you know, it's probably uh with the saliency 0:33:40.160 --> 0:33:43.130 of inflation, I think still in the background, I I 0:33:43.140 --> 0:33:45.239 think this could really put the fed in a very 0:33:45.250 --> 0:33:51.270 difficult position if us policy kind of goes down that path. 0:33:51.699 --> 0:33:52.680 Yes, yes, definitely 0:33:52.689 --> 0:33:53.250 concur 0:33:53.630 --> 0:33:57.430 um speaking of uh issues that sort of afflict the 0:33:57.439 --> 0:34:00.329 market and one is, of course, you know, the issue 0:34:00.339 --> 0:34:02.510 related to the US election, but the other one is 0:34:02.520 --> 0:34:05.530 around currency market, you touched upon this briefly earlier percussion, 0:34:05.540 --> 0:34:07.780 let's expand on that. So what are your thoughts on 0:34:07.790 --> 0:34:10.620 this currency market volatility that we experienced in late July, 0:34:11.020 --> 0:34:14.540 early August? And if you think that the conditions that 0:34:14.550 --> 0:34:16.459 made that happen are still very much in place and 0:34:16.469 --> 0:34:18.409 therefore we could have a recurrence. 0:34:20.219 --> 0:34:21.879 Yeah. So, so um 0:34:22.820 --> 0:34:26.239 you know, I think what's very unique in this um 0:34:26.620 --> 0:34:32.510 uh in this cycle is really uh both cyclical as 0:34:32.520 --> 0:34:36.399 well as uh uh kind of in a way structural 0:34:36.409 --> 0:34:41.439 uh uh divergence across the major economies, right? So, you know, 0:34:41.449 --> 0:34:45.239 you've got the uh the US which uh you know, 0:34:45.250 --> 0:34:48.280 it kind of operating above capacity kind of coming back 0:34:48.540 --> 0:34:52.479 uh towards uh you know, some concept of, of equilibrium. 0:34:52.949 --> 0:34:57.379 And then you've got uh uh Japan which, you know, 0:34:57.389 --> 0:35:01.010 is kind of exiting uh deflation and kind of, you know, 0:35:01.020 --> 0:35:04.529 starting a normalization process. And then you've got China, which is, 0:35:04.540 --> 0:35:07.089 you know, as I saying, kind of dealing with, with 0:35:07.100 --> 0:35:11.580 this slowing trend growth. Um you know, it's funny when you, 0:35:11.590 --> 0:35:12.570 when you go to Japan, 0:35:12.889 --> 0:35:17.840 um people actually talk about the wage price spiral in 0:35:17.850 --> 0:35:20.799 a very positive uh light. And in fact, it's something 0:35:20.810 --> 0:35:23.669 that they're trying to encourage. Uh whereas, you know, if 0:35:23.679 --> 0:35:26.330 you go to Europe, uh you know, the conversation, that 0:35:26.340 --> 0:35:28.739 is what we are trying to avoid the, the wage 0:35:28.750 --> 0:35:32.179 price spiral. So I think ultimately, when you, when you're 0:35:32.189 --> 0:35:35.658 faced with this kind of uh uh both cyclical and 0:35:35.669 --> 0:35:40.090 policy uh divergence, uh it is going to be currency 0:35:40.100 --> 0:35:40.830 markets that, 0:35:41.520 --> 0:35:45.300 that play a lot of the um uh the, the adjustments. 0:35:45.669 --> 0:35:49.540 Um and I think central to that, uh I think 0:35:49.550 --> 0:35:54.219 really is the uh uh the yen um uh you know, for, 0:35:54.229 --> 0:35:56.899 for historical reasons, et cetera. But, but also the fact 0:35:56.909 --> 0:35:59.000 that it was one of the markets where you really 0:35:59.010 --> 0:36:03.010 had the largest uh policy divergence uh between, between the 0:36:03.020 --> 0:36:04.899 US and uh and Japan. 0:36:05.639 --> 0:36:09.689 Um And so, you know, I think that uh direction 0:36:09.699 --> 0:36:14.330 of uh of unwind, uh we think uh still has 0:36:14.340 --> 0:36:18.340 a little bit uh ways to go. Um because, you know, 0:36:18.350 --> 0:36:22.340 we do think that, that um uh the BOJ actually still, 0:36:22.350 --> 0:36:27.659 still normalizes um uh from, from where they are uh today. 0:36:27.919 --> 0:36:30.459 Um You know, I mean, if, if Japan does manage 0:36:30.469 --> 0:36:34.570 to get a 2% inflation, 0:36:34.909 --> 0:36:39.060 we estimate their trend growth at, you know, slightly below 1% real. 0:36:39.090 --> 0:36:41.790 So that's, that's an economy that's operating at about a 3% 0:36:42.149 --> 0:36:45.089 nominal growth rate. Uh It's not too 0:36:45.790 --> 0:36:48.290 unreasonable to have a policy rate that, you know, is 0:36:48.300 --> 0:36:51.169 around 1% or, or even up to 1.5% in the 0:36:51.179 --> 0:36:53.850 long run. Um And actually, if you look at the, 0:36:53.860 --> 0:36:56.489 the way that the J GB curve is priced, you know, 0:36:56.500 --> 0:36:58.040 at the back end of the curve, actually, there is 0:36:58.050 --> 0:37:00.989 a lot of, of uh uh hikes that's been priced 0:37:01.000 --> 0:37:02.750 in the 10 year tenure rate is, you know, kind 0:37:02.760 --> 0:37:06.090 of north of 2.5% right. So, so in that sense, 0:37:06.100 --> 0:37:09.290 we do think that, um you are gonna continue to, 0:37:09.300 --> 0:37:13.100 to get this, um, uh divergence where, where we think 0:37:13.340 --> 0:37:14.370 back to Japan is kind of, 0:37:14.679 --> 0:37:17.060 you know, interests are going to be going upwards and, 0:37:17.070 --> 0:37:19.780 and the fed is going to be going, going downwards. 0:37:20.300 --> 0:37:22.759 Um So, you know, while, while the bulk of the 0:37:22.770 --> 0:37:26.009 moves have happened, uh we do still think that that 0:37:26.020 --> 0:37:29.679 actually the yen uh could potentially uh appreciate a bit 0:37:29.689 --> 0:37:32.479 further from here. Uh But like I was saying, you know, 0:37:32.489 --> 0:37:36.060 I think actually for our part of the world, uh 0:37:36.070 --> 0:37:37.659 it's actually a good thing. 0:37:38.520 --> 0:37:41.459 Um It's a good thing in the sense that uh 0:37:41.469 --> 0:37:45.219 I think it does give room for regional currencies here 0:37:45.229 --> 0:37:47.939 uh to appreciate. Uh because as, you know, the, the, 0:37:47.949 --> 0:37:51.179 the big thing about Asian economies is that we're all 0:37:51.189 --> 0:37:54.699 net surplus economies. Uh and the, the thing with net 0:37:54.709 --> 0:37:57.280 surplus economies is that, uh I mean, outside of uh 0:37:57.290 --> 0:38:00.739 uh India and Indonesia, um we are, we, we tend 0:38:00.750 --> 0:38:02.100 to be low yielders. 0:38:02.429 --> 0:38:05.270 Uh And I think in that low yielded environment, it 0:38:05.280 --> 0:38:09.859 was just very difficult uh to kind of uh you know, 0:38:09.870 --> 0:38:13.479 get exchange rates on a stable or appreciating trend uh 0:38:13.489 --> 0:38:17.799 when us interest rates were north of 5%. So I think, 0:38:17.810 --> 0:38:21.100 I think uh um with FED coming down, but also 0:38:21.110 --> 0:38:23.759 with the yen appreciating, I think it does give this 0:38:23.770 --> 0:38:27.610 region a lot more policy space. Um and kind of 0:38:27.620 --> 0:38:28.570 going back to China. 0:38:29.070 --> 0:38:31.069 Uh I think it gives them a lot more freedom 0:38:31.080 --> 0:38:35.689 to uh to cut interest rates. Uh Then I think 0:38:35.699 --> 0:38:37.330 um it was the case maybe about 0:38:38.030 --> 0:38:39.649 two months or so back. 0:38:40.409 --> 0:38:41.760 Right. No, absolutely. 0:38:41.889 --> 0:38:44.350 Uh And also, I mean, one observation and one follow 0:38:44.360 --> 0:38:48.000 up question, one observation is that unlike the two previous 0:38:48.010 --> 0:38:50.479 episodes in the past quarter of a century, when the 0:38:50.489 --> 0:38:53.100 BOJ tried to do lift off and had to scale 0:38:53.110 --> 0:38:55.300 back its ambition immediately because the economy fell apart. I 0:38:55.310 --> 0:38:59.669 think things are fundamentally quite different. I mean, Japan's industrial 0:38:59.679 --> 0:39:02.020 sector for the first time in a quarter century seems 0:39:02.030 --> 0:39:03.939 energized and new investments are taking place. 0:39:04.024 --> 0:39:06.495 So I think there is a fundamental underpinning to the 0:39:06.504 --> 0:39:10.495 growth story than just G PM feeding exports. But my 0:39:10.504 --> 0:39:13.625 follow up question was on your observation on low yield 0:39:13.635 --> 0:39:17.715 uh Prakash the cherry trade story. Uh We had a 0:39:17.725 --> 0:39:19.734 lot of, you know, borrowing yen and invest in us 0:39:19.745 --> 0:39:22.695 tech story, uh We have elsewhere in Asia. There is 0:39:22.705 --> 0:39:26.614 also elements of Cherry Trade. Uh how big or meaningful 0:39:26.625 --> 0:39:27.524 is this dynamic? 0:39:29.399 --> 0:39:32.290 Yeah, you know, it's a um it's, it's a very 0:39:32.300 --> 0:39:36.800 difficult number to, to, to estimate. Um you know, I 0:39:36.810 --> 0:39:41.040 think even our own estimates prior to, you know, what 0:39:41.050 --> 0:39:44.129 happened in the first week of August. Uh I think 0:39:44.139 --> 0:39:45.739 the moves that you see in the market were a 0:39:45.750 --> 0:39:48.689 lot faster and a and a lot more wide ranging than, 0:39:48.699 --> 0:39:52.370 than even we uh we had thought um I think 0:39:52.379 --> 0:39:56.199 you do have a lot of um um hedge funds 0:39:56.209 --> 0:39:57.060 that were 0:39:57.590 --> 0:40:03.169 uh kind of funding themselves uh from yen. Um And in, 0:40:03.179 --> 0:40:06.729 in the sense, you know, you, you uh whatever the 0:40:06.739 --> 0:40:09.120 funds we're investing in, you know, we were quite broad 0:40:09.179 --> 0:40:12.159 ranging um relative to just the usual, 0:40:12.439 --> 0:40:17.669 you know, um Yen uh Mexico or Yen Brazil uh 0:40:17.679 --> 0:40:20.589 type types of trades. Uh So I do think it is, 0:40:20.600 --> 0:40:23.469 it is actually quite uh quite extensive. And I, and 0:40:23.479 --> 0:40:25.979 I do think that it's uh uh it's, it's just very, 0:40:25.989 --> 0:40:28.790 very hard to uh to monitor. I mean, if you 0:40:28.800 --> 0:40:29.780 take the uh 0:40:30.669 --> 0:40:33.989 Chinese Renminbi, for example, you know, it was a little 0:40:34.000 --> 0:40:38.169 bit of a, of a crowded trade as well because, 0:40:38.540 --> 0:40:42.000 you know, if you had the view that the uh 0:40:42.010 --> 0:40:45.820 Chinese policy was going to be easing the economy is slowing, 0:40:46.100 --> 0:40:48.219 uh that you had a view that the exchange rate 0:40:48.229 --> 0:40:51.520 was going to depreciate. Uh you were paid to, to 0:40:51.530 --> 0:40:56.610 hedge the currency. Um And so, you know, in that sense, 0:40:56.620 --> 0:40:58.448 it was a pretty crowded trade. 0:40:58.929 --> 0:41:01.989 Um And so when that, when that whole thing um 0:41:02.020 --> 0:41:05.379 unwound uh you know, once again, you, you, you, you, 0:41:05.389 --> 0:41:08.909 you get that appreciation in the, the Renminbi and, and so, 0:41:08.919 --> 0:41:11.439 so I think, um you know, really trying to, to 0:41:11.449 --> 0:41:15.350 trace down where, where all the flows were going uh 0:41:15.360 --> 0:41:20.409 in this kind of more opaque market has just been 0:41:20.419 --> 0:41:22.659 very difficult. Uh I mean, I think, I think even 0:41:22.669 --> 0:41:24.830 Malaysian policymakers were surprised that 0:41:25.489 --> 0:41:29.879 the extent to which the ring get appreciated, it was 0:41:29.889 --> 0:41:35.810 actually quite a phenomenal thing. But as I was saying, 0:41:35.820 --> 0:41:38.129 you know, it's, it's in line with what they were 0:41:38.139 --> 0:41:39.350 trying to achieve and, 0:41:40.060 --> 0:41:42.550 and I think um uh with that, it does take 0:41:42.560 --> 0:41:45.780 actually it does give them uh as well as the 0:41:45.790 --> 0:41:48.050 whole region. I think a lot more uh breeding room. 0:41:48.620 --> 0:41:49.169 Yeah, just 0:41:49.179 --> 0:41:52.259 things are becoming a little more balanced and I like 0:41:52.270 --> 0:41:54.949 that very much too because you might remember from our 0:41:54.959 --> 0:41:58.459 graduate school days, this paper by Guillermo Calvo called varieties 0:41:58.469 --> 0:42:01.009 of capital market crisis. I think that was the first 0:42:01.020 --> 0:42:04.429 paper I read on uh uh sort of contemporary financial 0:42:04.439 --> 0:42:06.590 crisis building on, you know, the stuff that Putman had 0:42:06.600 --> 0:42:08.239 done earlier in that previous decade. 0:42:08.560 --> 0:42:11.100 So one point that have made was that, you know, 0:42:11.110 --> 0:42:14.629 portfolio managers have a bunch of positions and they try 0:42:14.639 --> 0:42:18.159 to balance it. And sometimes when they have a negative 0:42:18.169 --> 0:42:20.779 view on one asset, it manifests in them selling in 0:42:20.790 --> 0:42:23.770 other assets. So that rebalancing approach then manifests in all 0:42:23.780 --> 0:42:24.300 sorts of things. 0:42:24.590 --> 0:42:26.540 So the reason I bring it up is because it 0:42:26.550 --> 0:42:28.810 is really through the next two questions and these are 0:42:28.820 --> 0:42:31.310 the two final questions of this discussion. So first one 0:42:31.320 --> 0:42:34.969 is on gold, the kind of rise in gold that 0:42:34.979 --> 0:42:38.658 we have seen, does it reflect this portfolio rebalancing thing 0:42:38.669 --> 0:42:40.370 that KVO was alluding to in his paper? 0:42:42.239 --> 0:42:46.770 Um iii I think actually it um uh the drivers 0:42:46.780 --> 0:42:50.379 that I feel are are slightly different. Um you know, 0:42:50.389 --> 0:42:52.138 prior to 0:42:52.780 --> 0:42:57.600 2022 you know, there was a very tight link between 0:42:57.780 --> 0:43:02.770 um gold and uh and real interest rates. Um and, and, 0:43:02.780 --> 0:43:05.229 you know, for, for right reasons, right? You know, I mean, 0:43:05.239 --> 0:43:07.310 um you could, you could think of real interest rates 0:43:07.320 --> 0:43:10.560 as being the kind of opportunity cost of, of holding gold, 0:43:10.570 --> 0:43:13.469 which doesn't give you any yield. And so when, when, 0:43:13.479 --> 0:43:15.429 when interest rates go up, actually the price of gold 0:43:15.439 --> 0:43:22.260 goes down. Um And then, you know, just after, uh the, 0:43:22.889 --> 0:43:27.189 uh you know, I would say about March 2022 you, 0:43:27.199 --> 0:43:31.550 you had this, this um this decoupling. Um Now it's, 0:43:31.560 --> 0:43:35.189 it's interesting because around that time, uh of course, the 0:43:35.199 --> 0:43:38.609 fed started hiking uh rates. And so, you know, the 0:43:38.620 --> 0:43:41.659 presumption was that actually gold prices were, were, were gonna fall, 0:43:42.250 --> 0:43:45.909 but he also had the Russian invasion of uh of Ukraine. 0:43:46.399 --> 0:43:49.780 Um And, you know, I think that in a way 0:43:49.790 --> 0:43:54.489 catalyzed AAA new driver uh for gold, which I think 0:43:54.500 --> 0:43:57.638 was very different from the traditional drivers, which is real 0:43:57.649 --> 0:44:00.750 interest rates and, and the dollar. Um And, and this 0:44:00.760 --> 0:44:03.428 driver was actually from, from central banks. 0:44:03.909 --> 0:44:06.830 Um And so if you look across uh you know, 0:44:06.840 --> 0:44:08.989 the data that comes up from the World Gold Council, 0:44:09.000 --> 0:44:11.929 you know, demand for gold by central banks actually really, 0:44:11.939 --> 0:44:14.020 really shut up uh from that period. 0:44:14.840 --> 0:44:18.409 And uh and I think that at the margin has been, 0:44:18.620 --> 0:44:21.820 you know, uh kind of a big, a big support 0:44:21.830 --> 0:44:25.879 for um uh for gold. Uh which is interesting because 0:44:25.889 --> 0:44:30.689 we look at the uh ETF flows um on um 0:44:31.100 --> 0:44:33.638 uh like GLD, for example, actually, actually that, that's been, 0:44:33.649 --> 0:44:37.659 that's been flat to, to kind of uh uh coming down. So, 0:44:37.669 --> 0:44:40.100 so um it has been, I think a lot more 0:44:40.110 --> 0:44:42.439 central bank flows and then recently a bit more retail 0:44:42.449 --> 0:44:44.379 flows as well. Um uh 0:44:44.780 --> 0:44:47.959 So I think it's uh it's been a very different 0:44:47.969 --> 0:44:52.620 uh uh driver and uh to, to a certain extent, 0:44:52.629 --> 0:44:55.389 I think probably keying off a bit more on kind 0:44:55.399 --> 0:45:01.139 of geopolitical uh risk uh than this about, about portfolio 0:45:01.149 --> 0:45:06.280 uh rebalance. But, you know, II I uh uh of late, you, 0:45:06.290 --> 0:45:08.428 you do find that the correlation has kind of come 0:45:08.439 --> 0:45:10.759 back a little bit more. Uh But with the dollar, 0:45:11.179 --> 0:45:14.469 um so, you know, as the dollar has been falling, 0:45:14.760 --> 0:45:17.479 um you know, you've seen that, that kind of being a, 0:45:17.489 --> 0:45:20.010 a support for uh for gold, 0:45:20.830 --> 0:45:24.110 right? It's like a headset win tails, you lose for 0:45:24.120 --> 0:45:26.770 gold rates go up, the goal goes up because of 0:45:26.820 --> 0:45:29.600 your political concerns and rates come down, then the old 0:45:29.610 --> 0:45:32.969 relationship comes back. Uh OK. So this, this brings me 0:45:32.979 --> 0:45:36.820 to the portfolio construction question. Uh Prakash. Uh How do 0:45:36.830 --> 0:45:39.699 you design a portfolio? Uh given everything that we just 0:45:39.709 --> 0:45:42.330 talked about across uh duration and asset classes? 0:45:43.300 --> 0:45:45.290 No, no, I think that's a, that's a good question. 0:45:45.300 --> 0:45:47.339 I mean, you know, at least uh in a way that's, 0:45:47.350 --> 0:45:51.090 that's where the rubber hits the road. Um I think, 0:45:51.100 --> 0:45:53.928 uh you know, we've just kind of been through a, 0:45:54.479 --> 0:46:00.850 a very unique decade, right where um actually diversification uh 0:46:00.919 --> 0:46:05.699 hasn't paid off at all. Um You know, not only 0:46:05.760 --> 0:46:08.860 would you, uh, would you have wanted to be in 0:46:08.870 --> 0:46:12.800 a fully equity centric portfolio? But actually you wanted to 0:46:12.810 --> 0:46:16.080 be fully in the US. Um And in fact, you know, 0:46:16.090 --> 0:46:19.620 I think most managers, you go around talking to the 0:46:19.629 --> 0:46:20.260 question is 0:46:20.629 --> 0:46:24.520 why, why bother diversifying, uh why bother buying anything other than, 0:46:24.530 --> 0:46:27.810 than the SNP. Um But, but I do think that, 0:46:27.820 --> 0:46:31.689 that we have kind of uh gotten to a point where, um, 0:46:31.699 --> 0:46:34.590 you know, diversification, I think is, is actually gonna uh 0:46:34.600 --> 0:46:38.439 matter uh uh a lot more, you know, the one, 0:46:38.449 --> 0:46:41.209 the one positive thing I, I take away from the 0:46:41.939 --> 0:46:45.250 episode that we saw in, uh in early August is that, 0:46:45.439 --> 0:46:48.839 you know, when actually faced with the growth scare, uh 0:46:48.850 --> 0:46:51.419 you know, where, where the market was, you know, for, 0:46:51.729 --> 0:46:54.189 you can argue reasonable, not reasonable, putting more weight on 0:46:54.199 --> 0:46:58.600 a recession scenario, actually, bonds, bonds did their job, uh and, 0:46:58.610 --> 0:47:02.810 and rates uh rates uh rallied, right. So, so I think, 0:47:02.820 --> 0:47:05.689 uh uh what we, you know, we are thinking about 0:47:05.699 --> 0:47:08.080 and what I think, uh uh most investors are thinking 0:47:08.090 --> 0:47:10.479 about is actually that this is the time, 0:47:10.790 --> 0:47:13.399 uh that you do actually want to do a lot 0:47:13.409 --> 0:47:18.850 more uh diversification. Um you know, part of the uh 0:47:18.949 --> 0:47:22.899 uh uh story in a way, even if you have 0:47:22.909 --> 0:47:26.489 a um kind of a soft landing uh baseline scenario, 0:47:26.860 --> 0:47:31.939 risk premier are actually quite uh quite tight. Um So, 0:47:31.949 --> 0:47:35.030 you know, whatever measure of, of valuations you want to 0:47:35.040 --> 0:47:38.580 do for the US relative to where real rates are. 0:47:38.929 --> 0:47:41.820 Uh Even if you look at credit spreads uh by 0:47:41.830 --> 0:47:44.699 and large, actually, you're not getting compensated for uh for 0:47:44.709 --> 0:47:47.388 a lot of risk. Uh But I do think actually 0:47:47.399 --> 0:47:51.189 um uh you know, kind of diversifying uh the portfolio 0:47:51.449 --> 0:47:54.110 and kind of going back to the discussion on, on 0:47:54.120 --> 0:47:54.429 the 0:47:54.510 --> 0:47:57.860 emerging markets. You know, if you do get that soft 0:47:57.870 --> 0:48:02.080 landing scenario where the fed is cutting because inflation is 0:48:02.090 --> 0:48:06.370 falling rather than, than growth and the dollar comes down. 0:48:06.379 --> 0:48:09.049 I mean, historically, this has been a great period for, 0:48:09.060 --> 0:48:09.969 for Ems. 0:48:10.659 --> 0:48:13.489 Um So I think, I think that's one aspect, the 0:48:13.500 --> 0:48:15.750 other one I think is that, you know, some of 0:48:15.760 --> 0:48:18.839 the most structural forces that, um you know, we didn't, 0:48:18.850 --> 0:48:20.590 we didn't get a chance to talk about, you know, 0:48:20.600 --> 0:48:21.239 whether it's 0:48:21.949 --> 0:48:25.879 climate change and the energy transition, uh a whole range 0:48:25.889 --> 0:48:30.350 of industrial policy, uh you know, build out of Capex 0:48:30.360 --> 0:48:33.520 related to A I, you know, a lot of these things, 0:48:33.699 --> 0:48:37.169 um you know, in a way, push out the investment 0:48:37.179 --> 0:48:41.669 curve a lot more. Um And then, you know, when 0:48:41.679 --> 0:48:44.239 you think about how much the governments are spending, you know, 0:48:44.250 --> 0:48:46.760 we bring back the the savings curve. So 0:48:47.320 --> 0:48:49.239 they put two economies in a room and you always 0:48:49.250 --> 0:48:52.489 have to talk about uh curves at some point. Um So, 0:48:52.500 --> 0:48:54.370 so I think if you look at that intersection between 0:48:54.379 --> 0:48:57.100 savings and investment. Uh you know, I, I think in 0:48:57.110 --> 0:48:59.979 general rates uh uh uh in terms of equilibrium a 0:48:59.989 --> 0:49:02.040 bit higher, but I think in general they are also 0:49:02.050 --> 0:49:03.830 a bit more inflationary. Uh 0:49:03.935 --> 0:49:06.754 um And so, you know, finding ways to protect your 0:49:06.764 --> 0:49:11.584 portfolio from higher inflation, uh I think is uh a 0:49:11.594 --> 0:49:15.134 place uh that, that you should be focused. And I think, 0:49:15.145 --> 0:49:17.404 you know, I know we said uh heads you in 0:49:17.415 --> 0:49:19.645 uh tails you in a thing for gold. But, but 0:49:19.655 --> 0:49:22.084 I do think actually, uh you know, in that, in 0:49:22.094 --> 0:49:23.875 that scenario of um 0:49:24.600 --> 0:49:27.840 uh you know, kind of a more monetary led uh inflation, 0:49:27.850 --> 0:49:31.250 I think gold actually uh does well. Uh but I 0:49:31.350 --> 0:49:33.879 also think, um you know, adding a little bit more 0:49:33.909 --> 0:49:38.709 uh commodities, real assets, I think to the portfolio. Uh 0:49:38.719 --> 0:49:40.820 I think do make a lot of sense of this 0:49:41.169 --> 0:49:45.060 uh uh in this environment because um you know, we 0:49:45.070 --> 0:49:48.299 are likely to be faced with a lot more supply shortages. 0:49:48.709 --> 0:49:51.800 Um And, you know, this is the kind of uh 0:49:51.810 --> 0:49:52.899 environment where 0:49:53.300 --> 0:49:56.669 I think getting that bit more um uh 0:49:57.330 --> 0:50:01.790 balance or support for your kind of uh core equity 0:50:01.800 --> 0:50:04.820 uh position, I think will, will, will pay off a 0:50:04.830 --> 0:50:05.379 lot more. 0:50:06.280 --> 0:50:11.069 I think that's a great astute observation Prakash because when 0:50:11.080 --> 0:50:15.290 I talk to investors to your point that uh dominant 0:50:15.300 --> 0:50:16.820 view is, you know, what's the point of, you know, 0:50:16.830 --> 0:50:20.020 investing beyond the US, it's been so great. Uh But 0:50:20.389 --> 0:50:21.899 the sands are shifting 0:50:22.290 --> 0:50:25.040 and if we don't take positioning now, it could be that, 0:50:25.050 --> 0:50:26.479 you know, we look back and say, well, this was 0:50:26.489 --> 0:50:29.179 the time to make the adjustment. So I really appreciate 0:50:29.189 --> 0:50:32.229 your view on that uh progress. Final, final question is 0:50:32.239 --> 0:50:36.350 on the private space, the public markets have done their thing. 0:50:36.360 --> 0:50:38.979 We've seen good equity performance in the West. We've seen 0:50:38.989 --> 0:50:41.959 fixed income rally around expectation of stump soft lending. 0:50:42.199 --> 0:50:45.350 Uh But then there's this intrigue around whether there's a 0:50:45.360 --> 0:50:47.770 lot of leverage build up in the private markets because 0:50:47.780 --> 0:50:49.899 they are not subject to market to market. Maybe we 0:50:49.909 --> 0:50:52.830 don't really know how big the damage is. Uh But 0:50:52.840 --> 0:50:56.669 so far with almost two years and counting of high rates, 0:50:56.790 --> 0:50:58.959 we haven't seen any accidents in the private space. So 0:50:58.969 --> 0:51:00.129 are we out of the woods? 0:51:01.879 --> 0:51:04.439 Yeah, look, I mean, uh um in some sense, I 0:51:04.449 --> 0:51:07.649 think that the rebound in the public market space has 0:51:07.659 --> 0:51:10.709 uh has, has helped uh just in terms of, of 0:51:10.719 --> 0:51:14.888 anchoring valuations uh for the for the private space. But 0:51:14.899 --> 0:51:18.139 I think going forward, uh if you think of um 0:51:18.449 --> 0:51:22.199 uh you know, returns uh in private assets coming from, 0:51:22.209 --> 0:51:26.469 as you mentioned, uh leverage second is actually uh kind 0:51:26.479 --> 0:51:28.689 of valuation uh rating 0:51:29.199 --> 0:51:32.820 and the third is actually kind of value creation, you know, 0:51:32.830 --> 0:51:37.439 kind of getting better uh ebita growth. Uh What we're 0:51:37.449 --> 0:51:39.669 seeing is that we don't you know, you just can't 0:51:39.679 --> 0:51:43.139 rely on the first two forces anymore. Uh And it 0:51:43.149 --> 0:51:46.939 really has to be about, about value creation. Um So 0:51:46.949 --> 0:51:49.149 I think that that would be the big uh challenge 0:51:49.159 --> 0:51:53.100 for the private market space. Uh Is that if you 0:51:53.110 --> 0:51:55.580 were actually just resorting to the first two 0:51:55.860 --> 0:51:58.520 uh uh pieces, uh you're just not gonna get the 0:51:58.530 --> 0:52:01.000 kind of growth that uh that you did uh uh 0:52:01.010 --> 0:52:03.320 in the past. Uh So, what we've been doing actually 0:52:03.330 --> 0:52:05.969 with a lot of our portfolio companies um as well 0:52:05.979 --> 0:52:09.428 as uh via the, the GPS is actually putting more 0:52:09.439 --> 0:52:13.110 emphasis on uh on, on the 3rd, 3rd part. And, 0:52:13.120 --> 0:52:14.629 and this is, I think the, 0:52:15.060 --> 0:52:20.419 the, the kind of true strength of, of uh private markets, 0:52:20.429 --> 0:52:25.840 particularly private equity in that you actually have a controlled premium, right? You, you, 0:52:25.850 --> 0:52:28.560 you do have the ability to uh to, to make 0:52:28.570 --> 0:52:32.189 those changes and actually help create that uh that value. 0:52:32.590 --> 0:52:34.929 Um So it is, it is uh going to be 0:52:34.939 --> 0:52:37.779 a tough period, I think uh uh going forward for 0:52:37.790 --> 0:52:41.689 the space. Um But I think it will actually lead 0:52:41.699 --> 0:52:44.169 to in a way, the way I think about it, 0:52:44.179 --> 0:52:49.449 actually a more sustainable uh growth trajectory for um uh for, 0:52:49.459 --> 0:52:50.770 for this, this universe. 0:52:51.989 --> 0:52:55.199 That's a very good point to end. Uh PS Kan. 0:52:55.340 --> 0:52:57.509 Thank you very much for your time and insights. Thanks 0:52:57.520 --> 0:52:58.649 for coming back to COVID time. 0:52:59.229 --> 0:53:00.839 Thanks tomorrow. Take care. 0:53:01.270 --> 0:53:04.110 Good to have you. Thanks to our listeners and viewers 0:53:04.120 --> 0:53:06.379 as well. Copy Time was produced by Ken Delbridge at 0:53:06.429 --> 0:53:10.260 Spy studios. Violet Le and Daisy Sharon provided additional assistance. 0:53:10.280 --> 0:53:13.070 It is for information only and does not represent any 0:53:13.080 --> 0:53:17.189 trade recommendations. All 132 episodes of the podcast are available 0:53:17.199 --> 0:53:22.050 on youtube and all major podcast platforms including Apple and Spotify. 0:53:22.229 --> 0:53:24.949 As for our research publications, webinars and live streams, you 0:53:24.959 --> 0:53:28.669 can find them all by Googling P research library. Have 0:53:28.679 --> 0:53:29.489 a great day.