Let's get to our guests for this half hour. Mike Franklin. He's managing director and senior portfolio manager, A Man Your Life, and Mike was seeing a little bit of modest weakness on some markets. Today. We've got the Nick in positive Territory. You had a very whipstory kind of Dave for the US is does that risk really that we saw in the past couple of days done? Can you see markets holding onto those gains that we saw morning Pool. I think that we have to look at what's happened just before.
We've had the two correction in financial markets across most asset classes. We got to points at the start of this week where markets were oversold technically in position for some kind of bounce. And over the last few days we've seen two or three central banks take measures which has got the market somewhat excited. So if you take the Reserve Bank of Australia, they only raised interest rates
by twenty five basis points versus expectations of fifty. The Bank of Japhan has started to intervene in the FX market. The Bank of England intervened in the long end of the guilt's curve, so market participants. Some of them are saying, is the FED next? And if the FED is next, does that constitute a pivot? And if we see a pivot,
that would be quite constructive for risk appetite. Premature to conclude that the u S data is not giving them sufficient room to do that, but coming from oversould conditions, it's understandable that there are some market participants that are looking to take advantage of that opportunity. Yeah, the key question though, is the fit next. We've heard some pretty porkers remarks from Mary Daily and Raphael Bostick in the past a few hours, and Mary Daily also calling inflation corrosive.
They're giving no signs of a pivot at the moment, are they. We would look at the data on the inflation side, on the jobs market side to conclude that it is insufficient evidence for the Fed to start to talk a more softer tone. So some market participants may be disappointed if they don't see a slowing down of
rate hikes before the end of this year. And indeed, if you look at market pricing, it's still the expectation that the FED will move seventy five basis points again at the next meeting, So the conclusion that we would have a manual life is that it's still too early to expect a pivot. Yeah, that seventy five basis point cut November does seem to be pretty much baked in. But what about after that? We've we've got Raphael Bostick saying, well, we're going to get to four and a half percent
and then take a little breather. What happens next year? Though, it all comes down to what happens to inflation, and there the picture becomes a little bit unclear. There are certain categories within the inflation complex, such as energy, which will show via base effects a slowing down the momentum. But on the flip side, there are more persistent or stickier categories such as shelter or owner's equivalent rent which are showing material upside movement, as well as other categories
such as medical equipment of medical care. So if you fast forward a few months, it's likely that core inflation will may have peaked, but it's not going to come down at the kind of pace that some market participants are hoping for. Um. I want to start ap peeling that energy onion in a moment, but just before we get to that very quickly. Do you think we've seen Pete Dolly yet? Very good question. I mean, ultimately, the do that is a reflection of interest rate differentials and
by extension, inflation and growth differentials. So for the time being, the US economy is holding up reasonably well. The consumer is still optimistic, and therefore US consumer spending growth is still positive. As long as the US economy looks relatively robust against other regions, it's hard to call a complete top in the dollar. And Marc I said I wanted to talk about energy prices. We did, of course get the news as expected O Pick plus cutting supply by
two million barrels per day. But coupled with that, we do have the strong dollar that we mentioned where we left off. So what are the implications here for emerging market economies. You have to split the emerging market economies into those that are net produces and exporters of energy
and those that are net importers of energy. Those that are net exporters will actually be quite comforted by the decision that I Pick plus two yesterday and an increasingly tight physical market, whereas those emerging markets that are energy importers will concern themselves with what this means for the next round of inflation pressures. Should all prices continue to rise in the near term, there's a got more pressure
on countries like Japan as well. I mean, ultimately they have a release valve for that pressure via the currency, and they continue to adopt what appears to be a very very loose montary policy with air your curve control. So the extent to which this drives further weakening of the yen against other cross currencies at a pace that they're uncomfortable with, it may force them to interview more aggressively. Yeah. Of course, the supply cuts just going to stoke energy
price inflation as well. We do have inflation all over the place right now. What is going to happen? First, do we get inflation under control or is there going to be a global recession? I think we have to define what under control means. I mean, ultimately central bank inflation targets. If you take the US is a reversion towards a two percent inflation rates on the core PC measure. It's going to take some time to get there. If you look at previous inflationary cycles, it takes several quarters
rather than several months. To get there, and that perhaps creates a sufficiently wide window for growth dynamics to come under increasing pressure. Now you're and playing a defense and your portfolio, what does that mean exactly? Do you look at havens, do you look at bonds? How's your cash
allocation right now? Yeh, cash allocations are relatively high, and we've had to accept that when you see central banks so aggressively withdrawal liquidity from financial markets, it affects all asset classes, not just those risk assets, but also those more defensive assets. Traditionally, and we've seen this year traditionally defensive assets such as fixed income have not proven defensive. So we've had to appraise the macro environment. And we've
talked about an environment which is increasingly stagflationary. So which types of asset classes performed resiliently in an inflationary environments? And energy is one example there, not all commodities necessarily, because as you mentioned earlier, the US dollar can pose somewhat of a headwinds to other commodity asset classes. Yeah, it's a been a while since we've heard somebody use the term stagflation here. Do you have serious concerns about
global growth? At the moment. The extent to which central banks are in a very invidious position makes us concerned about the ability which they can restimulate growth anytime soon. So we are facing inflationary pressures, and not just at the reported level, but also at the core level, so inflation dynamics broadening out. They're also under significant pressure to effectively call off demand because they are unable to control supply.
And until those supply situations ease, particularly around physical commodities, which they don't look like they're easing anytime soon, then it creates a difficult environment for policymakers to try to strike a balance between inflation control and supporting growth. We were talking about one of our guests last hour as well about the risk of earnings recessions. When you cast your eye across the SMP and the data as well,
which companies are looking vulnerable to you at the moment. Well, I think we take a more sectoral approach and try to identify those sectors that are genuinely speaking quite supported in terms of their earnings dynamics in an inflationary dynamics.
So if you take the utility sector as an example, it tends to get costs passed through with its regulated price level, so there is a certain degree of defensiveness in their earnings trajectory, even when there are cost pressures coming from the energy side, and some some companies within the consumer staples sector have such strong market positions which enables them to have pricing power and pass on those
costs increases to consumers. On the flip side, we want to be avoiding those sectors where they're highly fragmented from a competition point of view, and generally speaking they default competing on price. Those are the types of the earnings complex which are vulnerable in this situation. Alright, Marc Franklin, we are out of time, but thanks so much for
joining us on the Bloomberg daybreak ages today. Mark Franklin is managing director and Senior portfolio manager and Manu Life Investment Management