00:00What do you make of the reaction we're seeing in markets right now, in equity markets right now, on the
00:05back of developments overnight?
00:09Right. Well, I've been at the Jeffries Hong Kong conference this week, and so most investors I've talked to have
00:16been amazed how little the markets have been reacting to what is obviously major geopolitical events.
00:23And the explanation of most, including my own explanation, is that markets have become used to recent years to seeing
00:32these geopolitical events as buying opportunities.
00:35So I think that's the explanation for the remarkable complacency. But that clearly means that the longer this conflict goes
00:42on, the bigger the risk that it hits markets.
00:45And the fact that Donald Trump has delayed his trip to China is a clear indication that he's not doing,
00:54would seem to suggest anyway, that he's not doing, going to back off or do a taco anytime soon.
01:00Brent crude currently at 112 and it's been above $100 for several days now. How high do oil process have
01:11to be and for how long before you see perhaps a structural re-rating of the U.S. market in
01:18particular?
01:19Why would it re-rate?
01:48Let's say there's a massive increase in energy prices across the globe and these rising energy prices fundamentally damage GDP
01:57growth globally.
01:58Then in my view, the best market to own, equity market to own in the world during such a period
02:04is the Chinese mainland market.
02:07Why?
02:09Because the Chinese mainland market will be least geared to those negative developments.
02:13China has a decent supply of oil reserves and China's made dramatic advances in renewable energy, which means that China
02:25in reality has almost unlimited access to cheap power.
02:29And this has been a major development in China in contrast to the U.S., where in the U.S.
02:35you see this major bottleneck on electricity power generation, which is causing this huge ramp up in trying to invest
02:46in energy in the U.S.
02:47Whereas in China, you already have an incredible huge surge in power generation based on dramatic improvements in renewable energy,
02:57improvements in battery storage technology, which means based on what I've been hearing in recent months, that solar has now
03:04become cheaper than coal in China.
03:07So China is light years ahead of the U.S.
03:11So China is light years ahead of the U.S. in terms of energy, and energy is probably the key
03:14sector globally.
03:16And Chris, when you talk about China, would you say that you buy the dip?
03:21And what in particular is looking attractive in China?
03:28Well, I'm viewing the Chinese stock market as in a slow bull market, which is also what the Chinese government
03:34wants to achieve.
03:35Basically, the market bottomed in the end of about September, October 24, at about seven times earnings when we were
03:44fully discounting the deflation.
03:46Since then, we're basically been in a rising trend.
03:50But the Chinese government has been very anxious to avoid what's happened to all previous Chinese bull markets, which ended
03:57up in boom-bust cycles.
03:59So you've seen ongoing pressure on Chinese companies to boost dividend payout ratios, to buy back shares.
04:07And very importantly, in the mainland market, they seek to be preventing an explosion in supply in terms of IPOs.
04:15And you also had the national team playing a role.
04:18So I believe in January this year, to cool down the market, the national team sold about half their ETF
04:24holdings, so I'm told.
04:25And, you know, now that the market then subsequently corrected, I was in China last week.
04:30I heard that the national team had started buying again.
04:33So I buy into this sort of slow bull market narrative.
04:38Meanwhile, in Hong Kong, which is obviously appended to the Chinese story, that's where you're going to get the more
04:44and more evidence of Chinese companies listing in Hong Kong, which are already listed in the mainland.
04:50And in terms of the Chinese economy, we are – yep.
04:55Go ahead. Go ahead.
04:57No, no, just in terms of the Chinese economy, clearly we've been in deflation for many quarters.
05:03Nominal growth has been lower than real growth.
05:05But one good thing right now is CPI and PPI has started to go less negative.
05:12CPI has gone marginally positive.
05:15And actually one perverse positive side effect of this ongoing around conflict, if it continues, is it's likely to cause
05:23PPI to go positive.
05:25And in my experience, mainland fund managers are very focused on PPI.
05:31And PPI going positive will be viewed bullishly in the domestic Chinese market.
05:36And will raise hopes that deflation is ending in China.
05:41Chris, if the war persists, if oil prices remain elevated in excess of 100 bucks a barrel, how should investors
05:49be positioning to hedge stagflation, for instance?
05:54Well, yeah, I mean, equities, I think the best way to position is to own Chinese stocks.
05:59Otherwise, clearly you have to continue to own energy stocks.
06:03So to me, those are the two single best hedges.
06:07Gold is OK, too.
06:08I've been very bullish on gold.
06:10But my short term, my tactical view on gold, which I said at my presentation this week's conference, is I
06:16believe gold has entered a consolidation period.
06:21The signal that gold has peaked for now is that it did not make a new high on the outbreak
06:26of this conflict.
06:27So I kind of mentally view gold as in a trading range between 4.5 and 5.5.
06:33And I think that may extend for a period.
06:36Meanwhile, the gold mining stocks, which have performed incredibly over the past year, will also be in a consolidation mode
06:44because the higher energy costs are in part of their margin.
06:47So, yeah, so in my view, best way to hedge this is to own energy stocks and in terms of
06:53geographical allocation, be as overweight China as you can afford to be.
07:01How much gold should you be holding?
07:03Should you be holding more gold in your portfolio?
07:08Oh, no.
07:09Well, I've been owning gold for years.
07:11So gold, I put a target of 3,500 on gold back in 2002.
07:16So to me, gold's finally reached the levels it should have reached years ago.
07:21Long-term gold can go much higher.
07:24We are moving to a de facto gold standard globally because based on current gold prices, central banks globally now
07:34have more in gold than they own in U.S. Treasury bonds.
07:38So that's clear evidence that when no one's announced this, it's just a de facto move to a gold standard
07:44because central banks have been buying gold ever since they were shocked by the move to freeze Russia's foreign exchange
07:51reserves back in early 2022 when the Ukraine issue blew up.
07:58So, yeah, the central banks have driven this gold bull market.
08:05You talked about how you've been surprised by the complacency in the market.
08:09If all the risks are being priced in, where should markets actually be?
08:14How should they be looking at?
08:15What levels should they be at?
08:18Well, I would look at this more like at the VIX.
08:21So the VIX, when I last checked, it was well below where it was both in the pandemic and in
08:29the tariff taper tantrum.
08:32And so we can definitely get back to those levels on the VIX if this thing gets worse.
08:37So, but the key issue really is the key issue right now with this is are the U.S. going
08:44to put troops on the ground?
08:46I think markets have been hoping for a taco.
08:49And so far, obviously, the taco has not happened.
08:53And so the markets are finally waking up to the risk of more escalation.
08:57And what's prompted this scare overnight is simply the Iran, I think, responded by the attack on this energy facility
09:05because of the attack on its own facility.
09:08So nothing, none of this should be any surprise to anybody.
09:11The Iranians made it extremely clear before this whole thing started that if they were attacked, they would view it
09:18as an existential risk.
09:20And it would be all out war and they made it very clear they would attack U.S. military bases
09:26in the Gulf, regardless of the collateral damage.
09:28So that's what's been happening.
09:31We saw the Fed standing pat overnight.
09:34Do you think high oil prices would eventually force the Fed to start tightening?
09:41Well, I think, yes, at some point they'll have to acknowledge that.
09:44But I'm not surprised they stood pat overnight.
09:46I think more important than the Fed is the Treasury bond market.
09:50So long as the Treasury bond market remains well behaved, then the Fed will not be forced into tightening.
09:57So I think we need to keep an eye on the 10-year Treasury bond.
10:00But for now, the 10-year has been relatively well behaved.
10:04I think that the central bank where monetary policy is now important for markets is the Bank of Japan.
10:11The Bank of Japan is behind the curve in tightening.
10:14And the BOJ should, but I doubt it will, should take advantage of the excuse of this war to do
10:21what it should have already done,
10:23and that is raise rates in Japan.
10:25If they do not raise rates this week, they're increasing the risk that the yen breaks through the key technical
10:32level of 160 against the dollar.
10:35How soon do you think that will happen?
10:37Because the BOJ did stand pat today.
10:40Well, they made the wrong move.
10:43If the BOJ should have raised rates without telling the market, that would have been very positive.
10:50It would have caused the Japanese bond market to rally and the yen to stabilise.
10:54So I think that's a major error on their part.
10:57I think they should have raised rates even if this war wasn't happening.
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