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Welcome to the Bloomberg Daybreak Asia Podcast. I'm Charlie Pell Doug Prisoners off. This week it is shaping up to be a risk on day in the Asia Pacific week. Jobs date out of the US on Wednesday is helping to lock in expectations of a FED racout this month. Coming up. We get some market perspective from Timothy Moe, chief APEC Regional equity strategist at Goldman Sachs. But we begin in the States, where treasuries bounce back after a slide that put the thirty year yield close to five percent.
All eyes now turned to Friday's US jobs report, one of the last key data points before the Fed's quiet period next week. For more, we heard from Audrey Go, head of asset Allocation at Standard Chartered Wealth Management Group. She spoke with Bloomberg TV's Paul Allen and April Hon on the Asia trade.
Audrey, good to see you. Let's start off.
By what we're seeing in the long end on bonds and this debate that is underway. Is this ball or bears deepening and how much further are we going to see on.
This well thanks for having me. I think we expect
the long end to remain reasonably well anchored. So if we look at the range that we're looking at for the US thirty year treasury bond use, we are looking at the range of between the say four point eight we're our five point one percent, And if we look at the latest jobs opening data that will release overnight as well, we have basically continued to see moderation continued moderation in jobs market, where the number of vacancies which is available has struck to a ten month flow, and
we've also seen the vacancy to unemployment ratio, for example, a drop below one for the first time since Train twenty one. So what this means is now there are more unemployed workers than there are vacants, and to us, that's likely to continue to weigh on bond use over a longer term basis. Notwithstanding that we are seeing some short term spike at the moment in terms of the long end where the Treasury is concerned.
What is all this going to mean for the dollar argery, So for.
The dollar wise, I think we wouldn't be surprised if there were to be you know, some mild strengthening in the dollar in the very short term because of concern over physical risks fysical pressure among major central banks, not just in the US but globally in the Euro area
as well. But I think again over a six to twelve months horizon, given that the fat we're expecting them to deliver the rate cuts starting in September again and maybe another to the tree rate cuts for the next twelve months or so, we don't expect that to likely to add pressure in terms of the dollar for a dollar to be biased, or we could trajectory over twelve months horizon, But again then they're not looking for massive weweakening because economic data is still holding up recently well,
and if we were to look at US economic surprises, those are largely neutral right but still reasonably in a recently positive territory. So no measure shift from a dollar perspective, and really our advised investors is to treat the range in terms of bone YU where it comes to bond investors, and then from a dollar as well, largely range bound as well, maybe with a slight weakening bias.
In spite of the relative dollar weakness we are seeing.
The yen can't seem to catch a break. What is your sense of where we go from here?
I think EOG needs to strike a very delicate balance because on one end, if you look economic data Japan, Japanese inflation is clearly above two percent target roses three percent or three percent. Actually prices are part sticky, we're just also improving. So they are clearly pressed in terms
of the need to normalize the monetary policy. But at the same time, with all the uncertainty for your regards to one use as well as long end as well as you know, trade tensions with the US as well, I think they need to strike a relatively balancing act in terms of not unrestling the market. So for now we are expecting them to really to largely stay pad
in the upcoming September policy meeting. But over the next one year horizon we are probably we are biased to believe that they will be likely to continue hiking interestrate, maybe delivering one great height or maybe even two over the next plogment's horizon.
Audrey, A lot of asset prices are looking fairly elevated at the moment.
Where are you adding to positions?
So for us it remains a powerfolding for US, but given that the US equity markets have also scaled new high together with global equities, we are biased to believe that the markets are probably due for consolidation as it stands for now, and if there were to be any pullback in equity market, we are more We prefer to add within the Asian ex Shapen region know to be China as well, and China equities has also been doing quite well, being one of the better performers years to
data as well. But even compare evaluations between China as well as Asian relatives to global equities, these do treat a relative discount and also buffeted or supported by tailwinds from our buyers from a weaker years dollar and potentially moderate moderate, slightly lower in terms of one use or range dances of one use, and those are the factors
that tend to be quite supportive. Where Asian markets China equities arekincerned given a week of dollar till weed, which also allows center banks in this part of the world to really think about, you know, easy policies to you know, continue to support and pushing their economy as well.
We always talk a little bit more about Chinese equities because we're seeing very strong buying. We're also seeing rec what borrowing to fuel purchases, and opinion seems to be somewhat divided on how sustainable the raally is how do you view things?
So we are change equities and policy tail wings aside. We're also seeing some improvement and properate earnings. I think importantly, I think we have seen some shift and sentimental where consumers household are starting to maybe take up their maturing deposites or cash foldings and starting to really put them into the equity markets, which is really unseen over the last maybe three years or so, given the really poor sentiment around that. So on the back of that, we've
actually seen increased in accounts opening inpropriges in China. We've also started to see some decline in cash deposits be in the bank as well, and those also signs that tells us that some of these liquidity momentum related trade
in China can continue. But obviously, you know, I think shortened there a little overboard, so our preference is really for investors to really look to enter them on pullback, and valuations have also risen to about maybe above average one Dad dish above their five years average as well, so net network for pullback before re entering to the market.
Audrey, what are some of the risks that you think at this point markets are underappreciating.
I think, for one will be I think key will be maybe another flare out and treat tension because I think people are expecting TAKO to prosist, and I think that in itself is quite unpredictable because we wouldn't know what might be some of the new policy developments or rhetorics that may be up from the Trum administration. So so that's one key risk that I think people maybe underappreciating.
And second or host of first inflation. Then we've also recently seen a great high in terms of goal price as well, and clearly from it as a location perspective for our advisor investors is given these risks which are still quite about out there, we will also hold a poor allocation to go, which is one of the key diversified for portfolios.
Before we let you go, Audrey, I just want to get your thoughts also on some of the assaults that we've seen on fed independence with her from a number of voices today, the former Treasury Secretary Larry Summer's warning of a credibility crisis. Even the governors of the Bank of Thailand and Bank of England weighing in on this as well. But at what point do you see the
market start to worry about this? Where's the timeline and the threshold for the same sort of tantrum that we saw over US trade policy.
I think it we were to see even more traum normally into the Federal Reserve Government Board, I think that might be a key risk for the market to maybe decidedly turn more worrism on fat independence. I think for now it is a risk that is lurking in the background, but all from a setup of the board is still reasonably i would say independent, but of course subject to who the new nominees may be, and also whether Trump may be successful in removing Government Cook from the Council
as well. So that's really quite a key development for investory watching. But for now it seems that investors seems to be, you know, striking that off and seeing that as a background risk more than a key significant risk for asset prices.
All right, Audrey, go ahead of asset allocation at standard Chat of Wealth Management group. Thanks so much for joining us.
Welcome back to the Daybreak Asia podcast. I'm Charlie Peloton. This week for Doug Chrisner, we go next to Hong Kong, where Goldman Sachs in augural Asia Leaders Conference is underway. It was there that we heard from Timothy Moe, Goldman's chief APAC regional equity strategist. He shared his market outlook during a sit down with Bloomberg's April Hong.
Okay, let's start with what seems to be on a lot of investors' minds, the curve steepening.
How is that likely to affect Asia stocks using.
Well, generally a steeper Yeel curve is better for stocks, And in particular, what matters is the way that the Yeel curve steepens, and what we're expecting is this so called bull steepening, which means that the short end of the curve goes down, so you basically have the curve steepening.
But because rates are getting lower at the at the short end of the curve, we've done some statistical work on this and what we can see is that when you've got lower short us rates, short end us rates, which of course we expect with the upcoming FED meeting, we think the FED will start cutting again, and we think there will be three cuts this year and then
two more in the each quarter next year. That that, combined with the softer dollar, which we think will be the result in part rates coming down more than Asian rates, is typically a favorable backdrop for Asian stocks, particularly for markets like Korea, Taiwan, Hong Kong and the Philippines.
What about Japan, though, we saw how those.
Banks really got hammered yesterday.
How bad is the.
Much higher in global DM yields on the long end potentially going to be for their bond books typically?
Well, I want to break that down into two bits. So higher rates in Japan should be good for the banks. In fact, that's one of the reasons why we do like we do like banks because obviously, when rates are at the very low levels that they were in the yeal curve control, then the bank's earnings and margins were very, very compressed. So when you've got rates rising from a low absolute level and you also have a steeping of the eal curve, that typically a very very favorable environment
for banks. That's the reason why banks have done well. I think with regard to the steeping along end of the curve, then there's some concerns about are there signals there about Japan's fiscal ability to repay It's a large amount of borrowing toch about four hundred percent debt to GDP, and so I think that that has taken some of the edge off the banks which had done well previously.
So I think it's a bit of a reason for banks to have some profit taking, but overall, we still are favorable on the Japanese banks.
Do you see this as potentially a risk for markets that are more bank heavy, such as Australia?
Generally yes, I mean, so we're more cautious banks. If you look at our sector allocations, we generally are more in favor of, for example, the technology space, which obviously plays into the AI theme and so forth, some of the deeper cyclicals, and also some of the more defensive stocks that have higher yields. That's generally been how we're deployed in the environment that we're expecting where short end rates are coming down, that's generally not as favorable for banks.
And then if you unpact that, you see that some of the industries that are very bank heavy, like Indonesia, where the banking sector is over sixty percent of the MCAI Indonesia Index. Tight liquidity domestically as well as the rate environment that I just described is typically not good for their profitability. And so if you've got to constrain a profitability for the banks there and the sixty percent of the index, that generally put some weight on the
index overall. So we're underweight Indonesia. I part is the consequence of that.
Just picking out your point there.
Indonesia also in the past week seems to be reflecting these other risks are reminder of the risks and the ems.
How do you view that market overall?
Well, as I said, we've been underweight there, and obviously there's been political tension and demonstrations and so forth which have been weighing on the market. We actually think from a fixed income standpoint, a good deal of that is priced and if things come down as they appear to be doing, then there is some opportunity to receive rates, which which basically means to take a more constructive view
on faxed income. But still, when we stack Indonesia up against the rest of the region in terms of earning's growth and uncertainty about domestic domestic environment. We think they are better alternatives, particularly in North Asia where we're overweight China both A and H, overweight Korea, and overweight Japan. And I would note that those for those three markets
have done particularly well this year. The spread between them and some of the poor performing markets, which includes Indonesia which is another the worst performing market in the region, is over forty percentage points this year, which is double what the sixteen seventeen percent return on the MASCI indexes year today.
And you see further room to run on the liquidity driven rally on the mainland.
Yes we do, Yes, we do.
Are well.
We just raised our CSI three hundred target from forty five hundred and forty nine hundred, and that's about you know, load of mid teens upside from here, even after gaining eleven percent in the last month, in seventeen percent to date. And we've had a lot of questions with investors, particularly about our conference here, our Asian Leader conference, regarding you know, is the aclidity is the liquidity run has it gone
too far? We have a tool of developed which is a retail sentiment barometer which includes eleven to fifteen different indicators all about how liquidity and retail sentiment is performing on shore, and that suggests that, yes, retail sentiment has elevated, but it's nowhere near the extremes that we saw, for example, ten years ago, in twenty fifteen, or even in some of the recent spikes in the market. So we still think that the market's not overextended here and is further to run.
Is it also.
Partly to do with how policy risk in China has been compressed and perhaps partly to do with how the Chinese leadership the optics surrounding the stock market.
Do you think that is also potentially a driver here?
That's very much part of an input to our thought process. I mean, for example, when Teaching Ping met in February with all the tech leaders, that clearly signaled a shift in terms of the perhaps more repressive attitude towards private enterprises. We did a big series of reports a month or so ago basically calling for the sort of rejuvenation of the private owned sector, which is obviously is dominated in marketcap terms by many of the tech companies.
We really very much like these.
We have a group of stocks you called the prominent ten, which we very much favor, and that is part of our constructive view of partic on China, h shares, the offshore, the offshore stocks.
What about the policy risk that's coming out of the US. We've seen in the past week for those Chinese weave as for the chip names in Asia, they're getting revolved.
How big of a risk are you seeing?
Well, I mean, this is part of the more fraud geopolitical backdrop that we that we find ourselves in. And one of the ways that we find to translate that backdrop of elevated tension globally is to favor the defense spending theme. This is a theme that we've liked for well over two years. It's not more popular, it's done very very well. We have two baskets on this. It's a core Asia Asia defense and aerospace basket as well as the defense supply chain, and those are forty to
fifty percent this year. So we very much like this theme. Think it's a long term, five year, ten year structural trend. Short term that might be a little bit overextended, but in the longer run, we think that it's a theme to remain engaged in.
Short term overall, in the region.
We've also seen Asia extra pan how they've climbed from the April lows. Should we be bracing for some form of a correction if so, win Well.
Thanks using the question, Because we just introduced a new tool we call RADAR, which stands for Regional Asia Drawdown Risk Model, and it basically is a probabilistic regression model that assesses whether there might be some risk of a pullback in markets.
Of varying degrees.
And the punchline is that after the market, as you just said, the broader Regional Index is rallied over thirty percent from the April lows without any really any meaningful pullback just you know, not even five percent, just two three percent pullback at the max, and various momentum indicators being a bit stretched, and also valuations going from over a sanitary deviation cheap to a sanitation ridge. We think that the markets to probably overdo some sort of a digestion of those gains.
Typically September is.
A week month or the weakest month of the year.
So if you pulled all.
That together, it says there might be a risk of a bit of an air pocket in markets. But then we think that would allow investors to set up for what's typically a stronger fourth quarter. So our call here is the markets have done very well, they might pull back a little bit.
Here to varying degrees. Korea has already pulled back.
About five percent or so, and then we think it sets us up for good running at the end of the year.
Okay, so watch the month of September. How should we be hedging?
Well, we have some suggestions.
Not all investors can do this, but if you look at volatility that's gone down, the implied volatility for derivative contracts or derivative instruments, So whether it's in the form of a short data put or maybe a put spread, we think that that is a sort of tactical way as an overlay for investors who can do that to protect some of the downstide risking their portfolio, stay engaged and be able to position into what we think will be a better fourth quarter run for the end of the year.
Tim, always a pleasure, always amazing, great to have your insights.
Thank you so much.
Tim no Is, Chief afat Regional equity strategist at Goldman sach.
Thanks for listening to today's episode of the Bloomberg Daybreak Asia Edition podcast. Each weekday, we look at the story shaping markets, finance, and geopolitics in the Asia Pacific. You can find us on Apple, Spotify, the Bloomberg Podcast YouTube channel, or anywhere else you listen. Join us again tomorrow for insight on the market moves from Hong Kong to Singapore and Australia. I'm Doug Prisoner and this is Bloomberg