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This is the Bloomberg Daybreak Asia podcast. I'm Doug Krisner. You can join Brian Curtis and myself for the stories, making news and moving markets in the APAC region. You can subscribe to the show anywhere you get your podcast and always on Bloomberg Radio, the Bloomberg Terminal, and the Bloomberg Business app. Carlos Kusanov is with us. Carlos is senior Asia economist at UBP. He is in our studios
in Hong Kong. Nice of you to join us. I got to begin with the data that we looked at on the Chinese economy over the weekend, this manufacturing PMI. Maybe it wasn't surprising to you that we're going to see continued weakness. How problematic is it though? For Beijing?
Good morning and thanks for having me so. Over the weekend we saw much week manufacturing PMI numbers marking the fourth month of consecutive declines. So it was not entirely surprising because we have already seen it happen for three months. It is problematic in the sense that China is looking to achieve a five point zero percent growth target. And we are far behind that number. Growth in the first half was four point five, but of course that's only because we had a very strong GDP print in the
first quarta. Growth slowed significantly to below four percent in the second quarta. So the manufacturing PMI weighs quite a bit on GDP and it was quite negative, suggesting that pressures do persist and the government needs to do more to alleviate those pressures.
If one of the things that struck me, both the underlying input cost index and the output sub index showed signs of deepening deflation. And I know we've talked about the similarities between what Japan went through thirty years ago and what China could be facing these days. Are we at risk of seeing a really severe deflationary trap in China right now?
That's right. So if you look at these subcomponents of the PMI index, we saw weakness across the board, but a lot of the declines, you know, marked declines across two key subcomponents producer, the output price and the input price, and that reflects two different things. The output price reflects the fact that you have over capacity concerns in some industrial sectors, and because demand is still very weak. You have supply exceeding demand, and you have very negative factory prices.
It you know, in any economy, upstream prices trickle down to consumer prices, and so the fact that you have signs of deflation in upstream prices suggests that it's going to be that much more challenging for China to reflate its economy once again because you have the structural oversupply of goods in the economy, very weak demand. And the
other subcomponent was the input price. Now that is not entirely reflective of the domestic economy, but we did see broad based US dollar weakness last month, and so the cost of inputs decreased as a result of that. So that is the other factor that was perhaps you know, exacerbating inflationary pressures in the economy, but it isn't, you know, undeniable that we are seeing over capacity and weak demand,
which is translating to structural this inflationary pressure. So not quite Japan in my opinion, but it is going to take a lot for China to reflate its economy in this environment.
You look at the lack of positive sentiment and reflected in the latest sales figures that we had on housing, and you come away with the idea that this slump and residential real estate is only deepening right now, so the government, it would seem, has to take more action. Wouldn't you agree with that?
I totally agree. I think they announced a package of measures in April. At the time, it seemed like a step in the right direction. The intent of that decision was, of course, to sort of get the housing stimulus out of the way for the July meetings, the third penum that focuses on structural reforms, so they didn't want to
have to focus on housing. In hindsight, it's clear that whatever the three hundred billions rescue package for the real estate tector was insufficient, and they've also moved to alleviate some of the macroprudential rules to basically facilitate people buying houses and speculating in real estate in Tier one cities.
But that's not enough either, So they were Anecdotally, we do hear that some luxury real estate developments in first year cities like Shanghai have been sold within two weeks of launching, but those you know that anecdotal evidence isn't translating yet into system wide appreciation. So we are not seeing home prices in first year cities stabilizing as a result,
so it remains anecdotal at this point in time. The only way around it will be, you know, if they inject enough liquidity into the system that you see a recovery in consumption. And of course, you know, if first year cities start to stabilize, people might be more inclined to shift investments away from government bonds and ultra safe options like high dividend stocks from state tone enterprises two sort of slightly riskier, but you know, very traditional outlets
like real estate in first year cities. But sentiment is still very weak, so we are not seeing that yet.
Yeah, no doubt about that. And one of the key questions I think for Japan, given the fact that China is such a large trading partner, to what extent is the weak Chinese economy holding back Japan? Do you have a sense of that?
I do.
Actually, we've priced this into the outlook. I think a lot of exporters in Asia have benefited from stronger US demand in the first half of the year. The expectation now is that US demand is starting to normalize in the second half of the year, we are going to have positive growth, but we are seeing domestic consumption significantly below two percent, and so with that should come phasing out of that tailwind that Asian exporters including Japan, have
benefited from in the first half of the year. A few months ago, the expectation was that, you know, the China story, the recovery of you know, real estate prices benefiting consumers, and then normalization and consumption in China, that that should begin to kick in the second half of the year, partially offsetting some of the weakness from the US.
But it is just going to take longer than that, and so for all of the major exporters in the region, including Japan, I think in the second half of the year, external demand is going to be a net drag on their economy.
Carlos, good stuff. Thank you so much for making time to chat with us. Carlos Casanova. He is senior Asia economist at upp. Anne Barry is with us. She has founder also managing partner at Thread Needle. Joining us on the line from here in New York City. It's been too long. Thanks for making time to chat with us. I hope you're doing well, I know you as an expert when it comes to kind of private markets. We
can put that aside for the moment. Can you share with me your view on what you see where public markets are concerned right now?
Doug. It's great to be back, so thanks, thanks for having me on. And I think this is a timely conversation, Doug, because the markets have been such a roller coaster and slightly unpredictable in terms of what kinds of news it's rewarding and what kinds of news it's punishing at the moment, Doug. So we took a look at last week. My expression was no good beat went unpunished. Nvidia got punished in the market despite the strong report, retailers did despite the
strong report. And it tells me that now is the moment to really look for thematics, to look for fundamentals. Bisector and I've got thoughts in a couple of them, But the overarching point here is it's not about responding to earnings anymore. It's about getting back to themes that we can stand behind for the long run.
Does the narrative around a soft landing enter into this thinking at all? Do you think is that a little separate.
I think it does enter into it because I think it means that we are going to get rate cuts, that perhaps we're a little bit deeper, a little bit faster,
doug than we had thought about before. And so when I come back to these thematics, I asked myself, well, which kinds of sectors stand to gain one from that reduced long term rate outlook, and two from the good secular trends and so software in the public markets one area I've been looking at specifically at these names that are one interest rate sensitive, but two where there's a real thesis around providing one stop shop solutions, particularly for
medium and small sized enterprises, people like workday in sales, sport and pallel to networks. So I've been spending a lot of time looking at those businesses.
What do you think about software companies relative to the AI story? Should we look at that together?
You know?
Do you and I talked about in the past, I've been somewhat skeptical about the AI story, and I've certainly had a perspective back to your opening line that in the private market, AI valuations have been well into bubble territory for a long time, and incidentally, I think the recent roomored one hundred billion dollar valuation for open AI falls into that bucket. So I've been skeptical. I've been
applying applying that skepticism to the public market. So the kinds of companies I've been looking at again like the workdays of sales forces, and also companies like trade Desk,
which is a digital marketplace for connected TV ads. These are companies that at some point may benefit from AI in terms of productivity to lift margins or in generative AI to get the revenue generation up, but they're not dependent on AI driving the increasing scale I expect them to experience, so I think it's been quite important to separate them.
I'm curious as to whether or not you think companies the ones you've just described there these startups would be more inclined to go to a larger player and for that player to become acquisitive, rather than from the startup to go to raise capital through an IPO. Is that right?
That's such a great question, and let's talk about IPOs. Everyone thought at the beginning of this year, once we saw Reddit go out into the market and IPO, once we saw Rubric go out into the market, which was in the spring of this year that Q four of twenty twenty four would be the moment that the IPO window opened up. And at the moment, to be honest, there aren't signs quite yet that there's going to be
this blossoming of IPO activity that folks were expecting. It feels as though electoral uncertainty is still squashing the IPO market a little bit, and there's a little bit of wait and see going on. So I do think that there's a whole slew of privately held companies that have got slightly impatient investors who pumped a lot of cash into them in twenty twenty one twenty twenty two, who are saying, look, you can't bank on an IPO outcome here,
Let's really go and try and get some synergies. Let's sell to let's sell to a strategic and get a clean, clean exit, rather than if you're an investor and you wait for your portfolio company to go public, your subject to lock up, so you have to sell down over time. So I think a strategic sept just a strategic exit, it is looking increasingly attractive.
We're a little more than two months away from the election. How do you think that's entering into the thinking in terms of people that are really playing this market right now.
It's such a good question, and one of the conversations I'm having a lot with folks Doug is what does the Harris trade look like versus the Trump trade? And you know the moment in time when it looked as though former President Trump and and Vice President his vice
president nominee J. D. Barns were getting traction. It looked as though the market was stilling to double down on things like energy and defense, classic sort of Trump or Mark trade stock with Vice President Harris, Doug gaining momentum. And we just had the Bloomberg voice over here on your show that the Gats narrowing and the likes of Michigan. It's getting a little uncertain because there isn't a clear
Harris trade yet. It's really unclear which sectors stand to gain most from Vice President Harris becoming president and which dand to lose because her policy position at the moment seems to be business as usual, which doesn't really provide a catalyst for much change, to be honest. So I think it's we need to get a little bit closer to the time.
I know you're going to be heading off to Germany soon. Give me your sense of what that conversation is going to be, like, what do you hope to discover when you're in Berlin.
Well, I'm going to be talking to a lot of CEOs there, Doug, of the global department stores, the likes of Nordstrom, the lights of Carda Bay in Germany, the likes of Central and Thailand. And one of the key areas of dialogue is going to be what is the state of the global consumer? And if we look at what the US data has been saying. You cited the inflation data now starting to come in where economists had expected.
But if you listen to the earnings calls we had last week, there was a sense in the US at least that the consumer is feeling pressured. We heard that on the Abercrombie and Fitch earnings call. We heard that on the Gap earnings call, we heard that on the Coal earnings call, all saying we've had a run of decent activity, but the consumer is really starting to feel pressured and is shifting towards value. I'm really curious to hear whether that trend, Doug is continuing in other markets
in Europe and in Asia as well. The second thing I'm looking at is how much more digitization the retailers are leading into. And I discussed when I went to the similar conference last year. Last year, a big theme is retail media, department stores and other retailers looking at their email distribution list, their instore digital screens to find inventory to sell for advertising. Really curious to see if that's been gaining traction as we digitize more and more.
So I'm going to circle back to politics and try to include it in our conversation around global retail right now visa v tariffs. I mean, this is something that Donald Trump is advocating. What would that mean to the outlook? Do you think in the view of these global department store CEOs, how would the notion of tariffs? How would they respond? Do you think?
Well, it's certainly called added complexity when it's come to supply chain management. And it's interesting because we saw today that the Biden administration has been delaying announcements on China tariffs, even though we've seen Canada step up to the plate. I'll give you a really specific example, Doug, for how
I've seen this create complexity. I'm involved in a manufacturing business and a client came to us recently and off for a quote for us to provide a certain kind of product, and we really had to go back and say, well, look, if we source from China, which is what this client is used to, then, given where the tariffs have been and where they could go, that's going to force us into producing one price level to them, which could force them to go to another geography completely to go and
source a coming to us in the US. And so we're having to double down on the work on looking at other places in Asia, other places in South America to provide components for that particular client. So I do think it's going to add more and more complexity to supply chains, which shifted a lot under the Trump administration.
If there's a second wave of that, Doug, I think it's going to add perhaps a little bit of a delay around the fight against inflation that's been going fairly well in recent months.
Last question before I let you go, and I'm going to ask you to respond at about twenty seconds here, and maybe that's a little unfair. No matter Trump or Harris is the bet for greater reshoring.
The bet is the greater restoring, no matter which one.
Absolutely all right, Always a pleasure and take good care. I hope to see us soon. And Barry is founder. I'm also managing partner at Thread Needle. Joining us here Barbara and Bernard founder and the CIO at Windcrest Capital. She joins us from the Bahamas. Thanks for making time to chat with us. I got to go back to what we learn Friday with that PCE. It seems to me like inflation is really under control. I think the FED is comfortable with that notion. Now they pretty much
have telegraphed a rate cut for September. The key question is whether or not there is going to be a pickup in the degree to which the labor market has been deteriorating. That may determine the magnitude of easy going forward. Talk to me about your view on the US jobs market. How well do you think it's holding up?
Well? Thanks so much for having me on this evening. I think you know it has held up in The FED is obviously very dependent on data, so I think the US jobs report later this week will be very instructive. I mean, when you think about what's priced in I think sixty five bits of cuts by year end, and so whether that number changes that your guess is as good as mine at this point.
So are you pretty much in the soft landing camp then that the FED has been successful in avoiding recession.
Well, I think what we have right now is sort of a Goldilocks type scenario right where the soft landing narrative is certainly building momentum, and you know, you have dissinplation trend right that, coupled with the price hikes that are you know, that are being called for in September, has just given a lot of complacency. So that's my bigger concern as a more micro investor than a macro investor.
But yeah, we all know what complacency and consensus can back fire very quickly, and we saw that at the beginning of August and then you know, the market just roared back. So a the thing that concerns me is these Teflon like qualities because I don't think they're normal. And September has historically been a very volatile market month in the markets, so I don't think it's any time to be complacent in here. But what changes that, Like,
what's a catalyst right, That's that's the harder question. And I feel like right now the market's just sort of fidgeting, if you will, with trying to find the next big theme to take it higher. We're at all time high, is essentially right, So how does the market go up another twenty five percent from here? And if you think about what has led to the gains in the market over the last few years, it's always been thematic. Right. We had the tech platforms and they were just the
best model ever, so crowded. Then obesity drugs and everyone piled in, and then of course this year you had Ais you know, saved the day and everyone thought, wow, all these productivity gains. Of course, the markets can go on forever, my fear, although those have all worked in their great themes. Right, But the expectations for growth and all of those themes are high, and so are the valuations. So as a value investor, what I tend to think is overpriced right now is growth.
Is there some degree of concern about the election maybe looming over the market. I'm not saying that that could be the catalyst to create the kind of second guessing that you're talking about to say that the market would correct.
Great, it's a great question, right, And what we've seen is a month in politics is a long time. Yeah, you know, six weeks ago, the Trump trade was doing so well, and you know, and then Biden stepped down and Camela's you know, support has has truly been remarkable, that grounds fall, that she's got behind her, and so who knows. I don't have a crystal ball, but so I wouldn't I wouldn't place bets based on you know, I wouldn't invest based on the outcome of an election.
I think that's certainly somewhere. I don't have an edge.
Yeah, but if you look at economic plans, Kamala Harris what she would like to accomplish through her economic agenda, and whether that means that tax hikes, virtue that, you know, whatever is a part of the tax code right now in terms of those Trump tax cuts would not be extended. President or Vice President Harris has basically said that that she would like to be able to do more I
think on the fiscal side. And then former President Trump is talking about the issue of tariffs is a way of combating a lot of the the export favoritism maybe that China enjoys, right, now do you think that either one of those things could spell trouble for the bond market?
Well, the ironies, I think they're both inflationary, like higher taxes, terroriffts. Those are all inflationary at a time when you've got a very data dependent FED. So if you have higher inflation, our rate's going to come down as much as being priced in. So that's where the politics will matter. But you know, again, people say things and do things differently, and I think we would just have to wait to
see on that one. But they're both definitely inflationary, which is a risk to the narrative that rates are coming down.
Where are you finding opportunity in markets these days? Barbara?
So, I think if we carry on in a Goldilock scenario, what will happen is this very narrow rally will broaden out. So if you look at the S and P five hundred twenty times next year's earnings, you compare that to the equal weight at SMP, which is trading at sixteen times. Right. So I think what lower rates will do is bring money into sectors and geographies that have underperformed during this
higher rate environment. And when I think of what's underperformed, I really think it's emerging markets and capital intensive industries, and the anomaly there is, you know, a very capital intensive industry is mining. So I think lower rates help that, and we have been able to identify opportunities where not only is the stock cheap, but it has a catalyst and then you have hopefully this tailwind of lower rates
and hopefully the economy continuing to grow. Of course, the numbers we just got out of China this morning are always worrying for commodities investors because that it tends to be the tail that wigs the commodity job. But if I just give you an example of how b up some things have been in that sector. We like copper because we think the energy transition tailwinds are undeniable and
we like the demand supply asymmetry there. But if you look at a stock like twenty nine Medals, which is an Australian listed primarily copper producing company, share price has fallen from three dollars and sixteen cents in April of twenty two to thirty seven cents now. And part of that was just a force of nature. They had a flood in one of their two minds, and so if you look at that on a normalized basis earnings, and
you think, well, lightning doesn't strike twice. You know, do you have a self help story here with a new CEO who's highly incentivized and it has a lot interests that are aligned with ours. He's making great progress in terms of addressing the uncertainties in the stock, whether it's the additional equity raise or debt restructuring or timing an amount on insurance payout claims. You still have one of their two minds, which is producing, so it's not like
there's no cash flow. And so you look at twenty twenty four being a transition year, twenty twenty five reflecting earnings that the mind that is in production right now early twenty twenty six were being told the mind that's out of production due to this you know, historical flood if you will coming back on online, and then in twenty twenty seven you get a full year of operations
at both minds. So what I like to do is, I think time is one of the few arbitrages left in investing, and if you can have a longer time horizon, you can sort of assess the company on a normalized earnings basis. So I look at a company like that that used to trade on seven times EBITDA on twenty twenty one and now it's on you know, one point eight times f YO two earnings, and that's not an
evy to EBITDA basis. So if it only went back to half of the ebit donald well that it used to trade on, you have over one hundred percent outside. So those are kind of examples of trades where I feel like I have a margin of safety, where I've got a tailwind at my back with a structural earnings growth, and I see green shoots in copper price markets. So that's I think you have to get creative right now. It's a tricky market.
I think we can.
I don't know what the next big trend is, so I've got to be micro and find self help stories.
Okay, we'll leave it there, Barbara, It's always a pleasure. Barbara and Bernard, founder CIO at Windcrest Capital, joining from the Bahamas. This has been the Bloomberg Daybreak Asia podcast, bringing you the stories making news and moving markets in the Asia Pacific. Visit the Bloomberg Podcast channel on YouTube to get more episodes of this and other shows from Bloomberg.
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