Citi's Baldwin on Global Markets, Strategy

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00:00So, let's start in the U.S. because a lot of, I guess the pundits are out saying,

00:06is the Fed going to ease or not going to ease? And it's tipping 50-50 right now.

00:10What's your outlook on that and how it relates to what we've seen as a recent weakness in the stocks?

00:16Yeah, no, fantastic. Look, it's great to be here in Shanghai.

00:18As you can see, it's bustling with 2,300 people behind us.

00:22So, starting in the U.S., look, you're absolutely right.

00:25The December rate cut has gone from being a nailed-on certainty to now being about 60% priced in by markets.

00:31Our view is we will get that cut because of the weakness in the job market.

00:35We're seeing this notion of a jobless boom in the United States.

00:39And we think you'll get a couple more cuts in next year.

00:42So, you've got this sort of Goldilocks scenario emerging, right?

00:46Inflation's under control. Obviously, we've had the shutdown.

00:49So, the fourth quarter GDP numbers are likely to be softer.

00:52But you should see that bounce back in Q1.

00:54So, Q1's actually setting up to be quite a strong quarter in the U.S. for growth,

00:59with that pullback from the shutdown, plus some tax refunds,

01:03and also some investments, again, incentives in the one big, beautiful bill.

01:07So, I think you've got a few reasons to be optimistic that growth looks pretty good,

01:11you've got the cutting cycle of the Fed continuing,

01:14and you've got this backdrop of this rather remarkable AI boom still unfolding.

01:19Still unfolding, not popping?

01:21Well, we think still unfolding, right?

01:23You can debate where we are versus a bubble versus, say, the early 2000s.

01:27But I think the key difference for us is obviously the fundamentals of the majority of the companies

01:32that are spending the money, these big hyperscalers, right?

01:35They're obviously still buying back stock, paying dividends.

01:38They're largely spending all this out of cash flow.

01:40Very different dynamic to the early 2000s.

01:43I think investors are obviously right to put a lens on the returns question,

01:47because the capex that we're seeing, the infrastructure build is far more significant than I think anybody had expected.

01:54And in truth, I think the monetization, particularly at the enterprise level,

01:58has been a bit slower to come through, which I think is what's causing people to ponder the return picture.

02:04But we feel very bullish that medium to long term, this is a massive growth driver,

02:09particularly for the U.S., but also for China, in terms of GDP growth and productivity growth.

02:15So it is a jobless boom, as you said.

02:17Are the job cuts going to continue?

02:19And what does that mean for stocks as well?

02:21Because, again, to pay for the AI investment, they're cutting jobs.

02:24Yeah, look, I think you've got a few dynamics in the job market, right?

02:28You've had labor hoarding post-COVID, so you're starting to see that kind of unwind.

02:32You've had the interest rate environment, right?

02:34We've had higher rates in the U.S.

02:35Okay, we're now cutting, but for a period of time, some interest rate sectors really struggled from a jobs market perspective.

02:42You've got this AI piece.

02:45Those are just some of the raw ingredients, as well as the tariff and policy uncertainty.

02:50But I think the AI jobs data that worries people is at that entry level, right?

02:55A lot of the studies that have come out, whether it's from us or some of the academic institutions,

02:59suggests you've got that real bifurcation.

03:01And that graduate cohort, whether it's in some of the technology fields like software or in customer service,

03:07that's where you're seeing that weakness.

03:09And that's going to be a big problem for society, both in the U.S., but also all around the world, right,

03:13in terms of thinking about the social innovation and the policy innovation that is going to be required.

03:18So I hate to take such a long-term lens, but 10 years, I mean, your counterparts over at Goldman are talking about

03:24EM is going to outperform the S&P 500 over the next 10 years at an annual rate of about 10.9 percent

03:31compared to 6.5 percent or thereabout for the S&P 500.

03:36Would you share that long-term horizon?

03:38You are overweight EM.

03:39You are overweight China.

03:41Yeah, look, I think so that the challenge with the U.S. market, which to your point,

03:45we are still overweight from an equities perspective for that sort of setup we talked about.

03:49The challenge is obviously valuation, right?

03:51It's in the sort of 95th percentile of its history.

03:54And although valuation is never a reason in and of itself to sell an equity market,

03:59it's a caution in terms of the potential upside from here because it has to all be done through this earnings growth, right?

04:04Whereas in contrast, if you've got the S&P 500 trading on 23 times forward,

04:09Hang Seng, although it's had a fantastic year up 30 percent this year,

04:13is still only trading on 13 times forward.

04:16So you can totally see why China and the EM complex offers an awful lot of growth,

04:21obviously from a GDP perspective growing more rapidly.

04:25Lots of companies seeing that boom and growth in earnings, but at a much cheaper valuation.

04:29So the cheaper valuation is what draws you to Hong Kong.

04:32The IPO market has been very hot.

04:34But again, the fundamentals, we just heard the data today.

04:37China's consumption trends are extremely weak, persistent deflation, continued property woes.

04:44What's going to drive it?

04:45Can it all be based on this AI boom?

04:48Well, it's a really great question because, as you say, you know,

04:51the property market is still problematic for sure, right?

04:53There's still got to be some sort of policy intervention here.

04:56Whether that looks like Europe and the West, I don't know,

05:00because I think obviously that playbook was more good bank, bad bank to clear that.

05:04Here it's taking longer to clear.

05:06As you say, the shift to a more consumption-driven economy is taking longer.

05:10Again, probably need a little bit more stimulus to come through.

05:13But I think, you know, the market is obviously very weighted to some of these high growth sectors now here in Asia.

05:19And I think that's really important, this sort of difference between the economy and the actual market and the main index, right?

05:25There's a big weight to the growth sectors, both in terms of market cap but also in terms of earnings power.

05:31And it's really the excitement around seeing China dominate in sectors like AI and obviously robotics and other areas, right,

05:39in the way that they have with cleantech and the EV ecosystem.

05:42And you can see that potential for that to come through over the next few years and be a really meaningful driver of growth.

05:48We've seen also politically de-risking.

05:51Yes, there's a truce between Xi and Trump in the U.S., but it's a temporary truce.

05:55And there is still a trend, overall trend, of de-risking.

05:58So how do you play that?

05:59Because also in your research notes, you talked about many of these trade-dependent economies in emerging markets and in Asia

06:05weathered the tariff regime pretty well.

06:08I think it's been a big surprise this year, the resilience, like some might say defying of gravity, right?

06:14Because as you say, we came to this year very nervous about the tariff impact.

06:18You look at China exports, you know, they're still up 8% this year, having been up 13% last year.

06:24Incredibly resilient, right?

06:25A lot of where that trade has gone is different.

06:28That supply chain reconfiguration has happened so rapidly and dynamically.

06:32The agility of this economy, I think, has taken everybody by surprise.

06:35But I think it's obviously given that conviction that that can continue.

06:40I think the 30th of October meeting between President Trump and President Xi was really important, right?

06:45Because I think it's the first time for investors you saw the two biggest economies on the world really start to negotiate together

06:52on two areas that are clearly very critical to both rare earths and the supply of high-end semiconductor equipment.

06:59They got some clarity at least for 14 months to the end of next year, and they brought the temperature down.

07:03What about gold?

07:04Obviously, the temperature has been hot, and then it cooled off a bit.

07:07But you're convinced that there's going to be a run-up again.

07:11Yeah, and I think to sort of summarize on the tariff piece, that stability and predictability is going to help a lot of things, right,

07:16in terms of the appetite for risk assets.

07:19So in contrast, gold, right, was a go-to asset.

07:22It's been up 50% this year, up over 100% in just two years.

07:26But I think that debasement trade has run a lot quite quickly.

07:29Structurally long-term, we're quite bullish.

07:31I think the potential for crypto ETFs, the broadening of the stablecoin market, all of those dynamics help,

07:38as well as, of course, the central bank buying, which will continue.

07:42But I think what we've probably seen is a big move very quickly.

07:46So we'd be more cautious near-term, and then structurally longer-term, we'd look to come back into that.

07:50There's a million things we could talk about, but I want to ask you, finally, on Japan.

07:54They've had, obviously, a stimulus-driven, pro-growth prime minister in Takeichi.

08:00You have the weak yen at 150+++.

08:03And there are lots more foreign interest in the Japanese market.

08:07The Nikkei is up 30% this year.

08:09What's your take on Japan?

08:10Yeah, Japan is the one economy, if we look at 30 major central banks, where we're expecting to see hikes.

08:16So it's a bit of an outlier in that sense.

08:19I think investors are still fascinated by the ongoing corporate reform agenda,

08:23which is a huge support in terms of earnings growth for the equity market.

08:26So, again, I'd say a lot of interest in Japan.

08:29And I think it's one to watch in terms of the currency dynamics as we go into next year.

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