Let's get to Robert Hoffman, our guest to who joins us from Singapore. Robert is head of investment Counselors for South Asia at City Private Bank. Robert, thanks for being with us. I don't know whether you've been to the office yet, but I'm sure through your smartphones some clients have been in touch. They've seen the selldown and US risk assets. They've got a lot of questions about recession, earnings contraction. UM, what kind of questions are you fielding
at this moment from your clients? I think, good morning, Thank you very much for having me. I think the very first part of this is this is seasonal and we typically see a slowdown in trading and a slowdown in volumes at this time, and that's no different this year.
The big releases of economic data rolling through over the last couple of weeks, they certainly have had an impact on markets and direct positioning from clients, but by and large, clients are willing to sit this one out through the end of the year until the next big data releases start rolling in early January. The one notable exception is
what we're seeing in China. UM. Interestingly is we saw before the Chinese reopening and the announcements of the Chinese and Hong Kong reopening, we seen net sellers of Chinese equities, and given the run up we've seen an equity markets here in China, we would have expected those flows to change, but actually what we've seen is selling into that strength from clients who now have excess cash positions. So it just further reinforces the theme clients are sitting in a
lot of cash waiting for next year to start. And prospect this for next year, what do you anticipate that cash is gonna end up being deployed. Well, we obviously fixed income markets have absorbed a lot of this with with the rise and interest rates over the course of this year and in the expectation for continuing FED pressures on interest rates in the first half of next year. Uh,
it's certainly going to attract more and more capital. So I think clients are happy to sit on cash until there's more clarity around the economic picture and the the endpoint for where the FED is going to stop. But also I think that the focus will shift in the new year as we get more and more clarity around the Chinese reopening and the potential for reopening with with Hong Kong and more broadly to the to the global
trading environment. We'll see, But I think there's a lot of dry powder there that could be put to work very quickly, and so that's why we're fairly optimistic heading in the next year for some parts of the world, but relatively subdued on western countries such as the US as well as UK and and more broadly in the Eurozone over the winter. So do you think the picture on the mainline is not going to be really clear in the way that it ought to be, let's say,
for six months from now. I mean, it seems like this, this reopening, given the COVID infection situation, is going to be something that's going to unraveled and fits and starts. Yeah. Look, if you look to the U S right now, it's it's not just COVID itself, it's that people have really been protected and insulated from viruses and illness more broadly, and you're seeing this resurgence of illnesses which were typically very benign and mild, all of a sudden, affecting a
vast swath of the population in the US. China is going to go through the same experience here, but on an accelerated path. But just because given that that they've been through this process longer they've had they've they've lost
a little bit of that immunity. Um they're going to be some fits and starts over the course of the first quarter, But largely, the biggest issue for us is that this is such a rapid change in policy, and it's happened so quickly that it's it's hard to tell what the next big appid changes are or the speed with which they could happen. So again, we're optimistic, but we're it's hard to find a direct line as to
where we want to go. I will say the travel and leisure sector sectors as well as the services sectors are certainly ripe for investment at this point, and this is where client should be looking to expand their holdings. And what about the materials sactive because we've had a few bullish calls around expectations around commodities prices for three, Yeah,
a bit more nuanced there. I think the housing sector and we've gotten some stimulative measures there, but the overhang on the housing sector right now it could be a long lived problem, and that is going to really affect some of the materials demand their onshore in China, and given the weakening the weakening situation in Europe as well as in North America, that's likely not going to change
very quickly. However, other commodities, like energy commodities, coal, oil gas, these are areas where there could be a rapid acceleration in pricing and and I guess in a strange way that actually probably worsens the environment for the FED to be able to make decisions going forward with their rate policies. They try to combat inflation on that front because it's
such a feed through to other asset classes. So how do you want to be exposed to markets or economies that are connected with the China and the trade dynamic. I mean, Paul is talking commodities, He's thinking Australia, I'm imagining and then I'm thinking, uh, North Asia, I'm thinking Japan, I'm thinking South Korea, I'm thinking Taiwan. At the same time, do you do you want to be able to to strategically put money to work in markets that are reliant
on trade with China. I don't know that that's a direct line that you want to use as the catalyst for driving, but it certainly is an accelerant for why you'd want to have exposure to different economies. Australia, absolutely, I think that there's a real compelling case there for investment. However, equity markets have already valued a little bit of that in and so you're seeing richer valuations in that market.
I do think the currency, the Azzi dollar is probably right for the best appreciation, so on a risk adjusted basis, that might be the most attractive asset class within the Australia market over the course of the next year. Japan, again, they they have not had the pressures as far as raising rates, so they've seen a weakening in their currency that is going to take a toll on some of
their corporate earnings over the coming months. Therefore, and Japanese equities might be a little bit challenged here in the short term. Albeit the end again, the same story around currency markets could actually be the real investment opportunity there
in the near term. Other economies Singapore, Indonesia, Uh, there are opportunities, I think, and you're going to see that resurgence of service and travel help to lift those markets as well as other economies around the world have reopened, but of course had to grapple with pandapics amount excuse me, and rising inflation. Is this something you see in China's future? Absolutely.
I looked no further than the travel sector. I think one of the areas of concern for for for us here in Singapore as we sit today, is that it's hard to get flights into to pay a reasonable cost given some of the inflationary pressures we've seen on those travel services. As that market begins to reopen, you can't immediately flip the switch and get new pilots to hop into airplanes, or get new capacity at runways at airports.
So there are gonna be some real logistical challenges that we're going to face in the coming months, and there's certainly going to be some inflationary pressures on some of those countries and some of the surrounding economies, and I think that's one of the areas of focus that we're gonna have. How do you work through that and how
do you actually benefit as an investor from that. It's interesting you make that point because here in the States we had that disappointing retail sales number, but a part of that data indicated that there is a shift now towards greater spending on services. And and then I'm looking at a new story that we had in the Bloomberg terminal talking about the customer service agents at Southwest Airlines. They've approved a new five year contract twenty general wage
increase over four years. So maybe we're underestimating the stickiness of these inflationary pressures, particularly when it comes to services. And what does that say about maybe underestimating the resolve that central banks will have to have to get it back in the box. Yeah, and look higher for longer is definitely a risk, and this is maybe one of the most underappreciated risks as we head in the next year. But it's not a focus that I think investors are
pricing in today. Uh, look at Lenar's earnings last night in the US, where they came out and said all of the weaknesses that we had, all of the constraints and pent up issues that we had, are actually now supply gluts, so labor is coming back in and we're able to hire workers. So there are going to be some sectors where there's been that runaway inflationary pressure that will start to be subdued in the first half of next year. It just remains to be seen how pervasive
that is. Given the backdrop of China quickly re entering the global trade economy, might be a good moment to talk about your top risk for three, what do you see? We have lots of risks were monitoring. We talked about this in our midyear outlook, and we're going to mention it again in our two thousand and twenty three outlook, which is there have been a lot of little fires that have burned throughout the course of two some of
those have become big fires. So the COVID situation in China, the question is is what what are the next big fires to to really erupt? And and there are so many issues, whether it's the trade negotiations between the U. S and China, or it could be geopolitical tensions, and that again China tends to come to the forefront strengthening China, where you've seen a more silent central government here recently.
If that should change and they become a little bit more hawkish on the policy front, uh, it remains to be seen what the impact will be on economy, but it certainly would be an overhang. And then the final one that I think we're all monitoring right now is that the Federal reserve as much as they want to increase rates and we're seeing a softness in the CPI data.
What if that CPI number stays high and the Fed does have to go higher than expectations, it could create some negative consequences for everybody's for it seems to be a consensus view that it's going to be a first half weakness second half strength. That could actually delay that story into okay, ten seconds on that last point to sign a probability of of that that that the Fed has got to continue going in a way that the market doesn't anticipate. And we've got that pegget about fifteen
percent right now in our probability spreadsheet. Robert, good stuff, Thanks for dropping by our studios in Singapore. Robert Hoffman, head of Investment Counselors for the Asia Pacific at City Private Bank. This is Bloomberg