U.S. Economy Sees Slow Growth In Q2; What's Next?

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Does the U.S. data lead to a firmer belief of a pause in Fed action? #StandardChartered Wealth Management's Steve Brice shares insights into what it means for risk assets worldwide. #BQLive

Transcript

00:00 Thanks for tuning into this conversation.

00:01 Lots of global news flow around us.

00:04 If the Fed meet and the Jackson Hole symposium wasn't enough,

00:09 there is some very contrasting data coming in from China.

00:12 But in the PMI data that came out recently

00:14 was slightly better than what was estimated.

00:16 The largest China ETF has seen a very large set

00:22 of inflows as well.

00:23 So lots of moving parts in addition

00:25 to what's happening in India.

00:28 We love talking to Steve Bryce on all of this

00:30 and today is no different.

00:30 He joins us right now from Singapore.

00:32 Steve, almost afternoon for you.

00:35 So good afternoon, thanks for taking the time out.

00:38 Thank you so much, it's good to be here.

00:40 Yep, thank you.

00:41 Steve, what do you make of the global news flow

00:45 surrounding us?

00:46 Because when I was looking at the US markets, for example,

00:49 and then the data emanating thereof,

00:51 there seems to be a probability or a belief

00:54 that the Fed might be on pause

00:55 because of the weakening economic indicators

00:57 and the jobs data.

00:58 How would you look into it?

01:00 Yes, certainly when we look at the US economy,

01:04 there's starting to be some signs at least

01:07 that the economy is starting to falter here, right?

01:10 So, I mean, obviously we've seen some weakness

01:12 in the manufacturing sector for some time,

01:14 but now we're starting to see signs

01:16 that's spreading to the services sector as well.

01:19 Obviously, we've got some very, very key data coming up

01:21 in the coming 48 hours and into next week as well

01:26 in the form of inflation data

01:28 and obviously the employment reports as well

01:30 at the end of this week

01:31 and then the Fed's page book survey next week.

01:35 But overall, it seems to be painting a picture

01:37 that this narrative that we'd see a soft landing

01:41 in the US economy might be a bit of wishful thinking.

01:45 And from that perspective,

01:47 it's gonna be a bit more challenging times,

01:49 I think, for the global economy,

01:51 not just for the US economy,

01:53 but also for the global economy going forward

01:56 as we see this weakness finally coming through

01:58 that lagged effects of the monetary policy tightening

02:00 that we've seen,

02:01 really starting to feed into the economy now.

02:05 - There is an argument being made, Steve,

02:09 that there is very little reason

02:10 to hold too much in US equities

02:12 because the earnings yield at large

02:14 relative to the real yield

02:16 on either the short or long dated treasuries

02:19 is not great, it's a very poor one.

02:23 And therefore, you might see a stagnation

02:26 to maybe a marginal decline in the US equity markets as well

02:30 purely because of these technical factors

02:32 leave aside the fundamentals.

02:34 What's your sense?

02:35 - Yes, certainly, obviously the valuations,

02:39 whether it be just on a standalone basis

02:41 or relative to bonds in terms of the earnings yield

02:44 and relative to the bonding yield,

02:47 they're rarely very useful from a short term perspective.

02:50 Obviously, people talk about them,

02:51 but longer term perspective,

02:52 they have much greater impact on relative expected returns.

02:56 But you're right,

02:57 they don't look that favorable towards equities now.

03:00 Obviously, bond yields have gone up significantly

03:02 and equities have gone up

03:03 so that earnings yield has come down.

03:06 So from that perspective,

03:08 we do still feel that we're favoring bonds

03:11 over equities a little bit,

03:12 particularly high grade bonds.

03:14 But to be honest, that's more of a cyclical view

03:17 rather than a valuation view.

03:19 It's really coming down to the point of saying,

03:22 look, we do believe that we're gonna go through

03:24 some bumpy times from an economic perspective.

03:27 That's likely to hit earnings.

03:29 That's also likely to bring interest rates and yields lower.

03:32 So from a six to 12 month basis,

03:35 we do believe that we'll see some sort of weakness

03:38 coming through in equities at some point.

03:39 It's just trying to time that.

03:41 And therefore, that's why we have a preference

03:43 for high quality bonds in this environment over equities.

03:47 - And would that be true only for US

03:51 or would you believe it could happen in the EM space as well

03:53 because that's very divergent

03:56 if you will what's happening in the EMs, Steve.

03:58 - Yeah, so I guess there's several ways to look at this.

04:02 I mean, there is usually a reasonable correlation

04:05 between what happens in US or developed markets

04:09 and what happens in emerging market equities.

04:11 So if the US equity market is doing well,

04:14 emerging markets need to be doing something very different,

04:17 I think for them to perform well in that environment.

04:21 Now, so that's sort of the first starting point.

04:25 I guess the potential from a relative position perspective,

04:29 one can argue that a lot of the bad news

04:31 is priced into certain parts of emerging markets already.

04:36 So obviously you mentioned in the intro

04:38 that the news flow coming out of China

04:41 at the moment is pretty mixed.

04:43 But I would argue it's on the balance.

04:45 It's pretty negative.

04:47 But to a significant extent,

04:49 that negativity is already priced into the market.

04:51 So typically the offshore market.

04:53 So you can say, yes, you've got this headwind

04:55 from potentially a pullback in developed market equities.

04:59 But from a relative position,

05:01 maybe they can actually outperform in that environment

05:04 just because they're not pricing

05:06 a good outcome at the moment.

05:08 - Got it.

05:10 Okay.

05:12 How do you read what's happening in China?

05:14 Al?

05:15 - Yeah, so I guess as I said before,

05:20 the news flow is pretty negative,

05:22 whether you're looking at the economic side.

05:24 So you highlighted some,

05:26 maybe some silver lining around the cloud,

05:29 but the cloud still seems pretty big to us

05:32 from an economic perspective.

05:34 Obviously we're seeing exports and imports collapse.

05:37 We're seeing inflation negative,

05:40 particularly producer price,

05:41 but even consumer prices are starting to fall now.

05:45 That seems to be discouraging some consumption going on

05:50 in the economy as well.

05:51 And obviously investment is lagging

05:52 due to the property sector challenges,

05:55 both from a clamp down on the property sector,

05:57 but obviously also the credit challenges being faced

06:00 by certain large property developers.

06:03 And that's obviously being a bit of a challenge for them.

06:05 So, the economic situation is pretty poor.

06:10 We are seeing policy easing coming through,

06:13 but I think, you know,

06:14 the way I frame the Chinese policy response is

06:18 they are really trying to focus on generating strong growth

06:22 over the course of the next 10 to 20 years

06:25 and not excessively focused on mitigating

06:29 or leading to a sharp rebound in economic activity.

06:32 So they're really aiming to mitigate the downside risks

06:35 to the economy in their interim,

06:37 rather than trying to spur a sharp acceleration

06:40 in economic activity.

06:42 So, you know, we're in a situation now where,

06:44 as I mentioned before,

06:45 from an equity market perspective, the market is cheap,

06:48 but it's searching for a catalyst really to move higher.

06:51 And I'm not sure what's happened so far

06:54 is going to be sufficient to lead to a sustained rebound

06:57 in Chinese equities in the imminent future.

07:04 - Yeah, no, okay.

07:06 Just to follow up there,

07:07 and maybe I should have asked this

07:09 because you already spoke about, yes, China,

07:12 but the point being,

07:13 because the opinion around what China might do

07:19 is split right down the middle,

07:21 wherein some people talk about how

07:22 they do not want to reflate the property bubble

07:25 and, you know, welfarism, if you will.

07:28 And then there's an economic argument made

07:30 that they need to do it in order to revive the economy,

07:32 but who knows what they will do.

07:33 So, see, would it be safe to say that

07:35 when it comes to Chinese markets,

07:38 preempting and investing might be a hazardous thing to do,

07:44 and therefore, would most market participants,

07:47 to your mind, effectively follow an event

07:50 rather than preempting it,

07:52 or trigger rather than preempting it?

07:54 - I think it's a great question, right?

07:58 I mean, maybe the starting point I'd have from this

08:01 is saying, okay, if you're a Chinese investor,

08:05 historically, you've had three areas

08:07 of the market to invest in, right?

08:09 So you've had equities, property sector,

08:12 and wealth management products, right?

08:13 So property sector, obviously, in the doldrums,

08:16 given the policy constraints and challenges

08:19 faced by the property developers there.

08:21 So that doesn't seem to be rich pickings at the moment.

08:25 Also got wealth management products running into challenges

08:28 in terms of making their payments.

08:30 So one could argue that the stock market

08:32 is the place for a domestic investor to focus on.

08:36 And maybe the best way to think about that

08:38 is to sort of focus on areas of the market

08:41 that probably have greater pricing capacity.

08:43 So you've got, obviously, all this headwinds

08:46 when it comes to the macro environment.

08:49 But there's still businesses that are actually

08:51 relatively cheap and can do well, even in this environment.

08:54 So, you know, and we're focused on the communication services

08:58 and the consumer discretionary element

08:59 of the market.

09:01 So even without the headline growth, necessarily,

09:05 the index level, maybe other parts of the economy

09:08 can still do quite well underneath that.

09:10 So I think that's the way we're suggesting people

09:13 position it, rather than trying to preempt

09:15 what the government's going to do,

09:17 just say, okay, let's try and pick some good companies

09:19 and invest in those in a pretty focused way at the moment.

09:23 - Good, and what about India, Steve?

09:26 A big rally, all-time highs,

09:28 20,000 on the index, nifty,

09:30 and then there's been stagnation of sorts

09:32 the last couple of months,

09:34 but the broader markets are moving thick and fast.

09:36 So how are you looking at India currently?

09:38 - So yeah, I guess from India perspective,

09:42 obviously, you know, it's almost the reverse

09:45 of what's happening in India, right?

09:46 I think that the general dynamics are pretty positive.

09:49 Obviously, we did have that negative inflation surprise,

09:53 which is a little bit of a headwind.

09:55 But you've got generally a very bullish economic story

09:59 over the next 12 months, but also over the next 10 years.

10:02 So from that perspective,

10:04 people are interested in the Indian market,

10:06 but then you have the valuations,

10:08 which is a perennial challenge for the Indian market,

10:11 or theoretically, it's a perennial challenge,

10:14 but it just keeps powering ahead.

10:16 So our sense is that within Asia,

10:19 you know, we are overweight Asia

10:21 within our global asset allocation model.

10:24 Within that, we're neutral India.

10:26 So we're actually suggesting that people,

10:29 you know, still be invested in India

10:31 because it has that positive story.

10:32 If we did see valuations cheap and significantly,

10:36 then, you know, given the positive backdrop,

10:39 from a fundamental perspective,

10:41 you know, we'd probably move back overweight.

10:43 But for now, it's a neutral allocation

10:45 within an overweight Asia allocation.

10:48 - Point well taken, Steve.

10:52 Thank you so much for taking the time out

10:53 and being with us today and sharing your insights.

10:56 - Thank you so much.

10:59 - Well, the pleasure was ours

11:00 and viewers, thanks for tuning in.

11:02 (upbeat music)

11:05 (upbeat music)

11:07 (typewriter clacking)

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