China Reopens Borders, Freight Innovations, Markets

joy to speak to you. And in these holiday thin trading sorts of days, why are we seeing stocks under pressure on a moment that we start to talk about China reopening. I think that there's a lot going on, and I think there's a lot of hangover from the inflation. Interest rates um, you know, continue to to creep up. Uh. And also I would also say that we're not taking

into account which is the big point, company earnings. The earnings are going to be a real issue going into the first quarter and that hasn't been priced in the market yet. So we've priced in what the feed is done, but we have in price in with the corporations have done yet and asked China's opening, and that's you know, somewhat of a big deal, but it's not big enough to move the market the way everyone's hoping it would. Kathy, I'm just reading your note this morning, boy, your Parrish,

I mean, I love your note here. Fire was the FED and raising rates ice is a resulting downward earnings revisions, um and that gets you too. Maybe you know the SMP can dip down to three thousand and just just so you know, folks, the SMPS at und right here, So that's a big move. So, Kathy, what do you think they're earnings risk really is in the smpis looking forward? What is the downside in your mind? Well, the downside is that that the companies have been kicking the can.

We were expecting them to come out with more realistic forward earnings last quarter and they didn't. So now that means it's going to come out this coming up quarter. And what what that means is we've got higher interest rates, so companies have to pay more to borrow. We have consumers who might be a little bit more concerned about spending, so that's also going to hit the bottom line of corporations.

And the final thing is it's the cost of good sold it's it's going up and somebody's going to have to take that into account. It doesn't look like the consumers are going to be buying into it, which means the corporations have to start to take part of the hit along with maybe raising some of the prices. I mean, let's talk about inflation, because the end of last week was the readings that looked like inflation was going in

the direction of travel that people wanted to see. Yes, we wanted to go faster, stronger, but we are starting to see a cooling in inflation. How optimistic argue that that remains the direction of travel from a consumer perspective. I actually am optimistic that the inflation is going to cool um definitely by you know, second half of the year, and that will help somewhat. But the problem is it's going to be hitting the consumers now and they are running out of all of the extra money that they

had to spend. They're putting things on credit cards. It's going to become a real problem next quarter, quarter after and from that standpoint, even though inflation will be cooling, it's still going to take the consumer a little bit of a time to you know, step back in and start buying again, Kathy, tough year four. Stocks were all aware of that, but it was an unprecedented tough year for bonds here. I'm looking at the two year though four point three four point three six should be buying

some bonds here. Absolutely, we we like bonds over stocks for for sure. And I will say when you look at the return of bonds this past year with corporate bonds, meaty bonds, I mean double digit losses in in bonds is you know, It's been unheard of for quite a long time, so it is a good buying opportunity. We started talking about buying bonds midyear and it's been paying off. And I think going into tree as well. Where else can you get these nice, you know, returns and without

the volatility. I think we're past the volatility and the bonds, so you'll get the return without the volatility and just clip your coupons for the time being, Kathy, I want to ask you, let's go gloss off full, what are the upside risks toward of this as a great piece out by Tom Onnic from an economic perspective, thinking about where some of the upside the things that we're not

planning on on the might look more positive. I mean, in some ways, maybe in the long term, this China reopening will be that where are you ensuring that you don't lose the upside as well as protecting yourself to the downside? Um? Absolutely, I think we have to. You know, we have short term and long term views, right so short term it looks a little bit more negative. Long

term is always a more positive view. We want our clients to be invested for the long term, but we also don't want to start jumping in before we think it's too soon. A stock market has always been a leading indicator of where the economy is going, and it will be one of the first things to come back quickly and fiercely before the economy turns. So what we don't want to happen is people to lose sight of that and wait until everything is picture perfect before they

start investing in the market. Again. That's why we like dollar cost averaging in these types of markets. That's why we like also taking advantage of dips and buying the dips, because if you're a long term investor and you've got a long term view, then you do want to buy at these lower prices today. How about high yield. You know, I don't mind taking a little risk out there, Kathy, but in the face of recession, would be unwise to

search for yield in the high yield market. Now you're talking to a girl who worked in the corporate bonds so um. You know, I did see quite a bit of high yield UM companies go into default in bankruptcies, so it is a possibility no corporates here. You always have that issue. So for right now, I'm I'm keeping my clients away from the riskier, higher yielding UM bonds and sticking with the more investment grade. Alright, good stuff.

We really appreciate that getting a good outlook for these markets. Kathy and twist On Morgan Stanley, managing director. Ready to say on the show today is Robert Felt is the founder and c of n Ride. Now and Ride developed self driving and electric trucks and of course the software systems that help them to use to monitor deliveries. And Robert, it's fascinating to have some time with you today. We

thank you, of course founded the business in Stockholm. Talk to us about what you've seen and the customers that you start to talk to, the Coca colas, the Little, the A b inbevs. The Mulla musks. How are these companies looking at supply chain bottlenecks in the future. First of all, thank you for having me. I think it's a fascinating point in the overall economy right now because what from our perspective, what we are seeing is that we don't really see that slow down happening right now.

A few of our customers, of course are seeing taking a longer time to make decision, But overall, for the transition here to electric and an autonomous I think there is a clear engagement there and I think that overall the consumer it will a little bit of downturn of the economy is not really starting to hit yet, and

that's what we are at least saying. So people are still doing business, and I think that a little bit of some sectoris we are a little bit less, But overall I think it's uh, we're not in a recession yet. We might be in next year, but overall it's still a lot of people doing business. Robert, I know your company recently raised five million dollars in equity in debt. What do you what are the use of proceeds there now?

But for us it's about scaling and more and more installing more capacity for doing a transport together with our customers. So we are deploying a lot of electric and autonomous transport vehicles as well as transport and the charging infrastructure to support it. You are currently of course prevalent across Europe, Sweden, Germany, the Benelucks and indeed in the United States. What all, China, What all of that five million dollars that you now get to put to work? Is it about global expansion?

Is it about alleviating some of those pressure points we've grown to know and to hate. I think it's something of a very interesting overall is that the supply chain for electric trucks as well as chargers and the whole infrastructure for all the constant electric and autonomous transport is still to be actually created. So I think that China

has a key point in being the supplier there. I mean, they come to we are in a very weird position from historically, but China, and my view, is actually leader in a lot of the electric both batteries as well, it's a lot of engines and also the maturity ecosystem when it comes to electrification. So for us it's China is an extremely important part of that supply. I think that the Western hemisphere needs to focus for it clearly to sort of say, catch up to the maturity of

the Chinese ecosystem when it comes to electrification and optimization. Robert, give us a sense of, you know, how much road freight on a global basis contributes to uh, you know, Global CEO two and kind of it feels like it's a big contributor and it really is right for some innovation one. I mean globally, it's that between seven to eight percent of global City two emissions come for heavy

road freight transport. And we are still in the same ecosystem that was created more than a hundred years ago now and I think that we're digital, electric and autonomous technology. We have the potential to actually rewrite that. And it's not about the size of the battery. It's not about creating a better truck. It's about creating a new infrastructure

for transport. And if you do, we see that between four of electric should be electric driven by the business case today, Robert, I'm gonna ask a sensitive question, but of course you're based well, you're helping found this business in Sweden and Germany in the Benelux countries that care an awful lot about climate change and the like. But the US has been known to be somewhat behind Europe in many ways, and of late many have felt particularly

in the supply chain headaches, particularly in the energy crisis. Look, just put that to one side. At the moment, we need to drill, baby, drill. We need to ensure that we've got energy security rather than this transition. How much has that help or hindered your business as we felt that effect at all. I I'm actually a little bit opposite to you than what you're stating in there. I think that this will happen first in the US due to the fact that it is driven by the business case.

I mean, what we see from customers of the customers in the US is that electrification is the best business case. If there is something that I I love with the US market, as if there is a business case, it will happen. I think that the European market are still struggling to change and make that change happen. But from our perspective, we're seeing a clear engagement and back to

energy security. The electric grid is more reliable than the prices of oil, and even if we have some fluctuations, and especially in Europe right now, it's actually a way of mitigating the dependencies of oil. And I think that if you have both those, it's better solution and it's a cheaper solution. This transition will go very quickly. So Robert, I think I get the whole EV thing. I just drove my first e V for Dee fifty truck. Was very cool, but I'm not so sure about this whole

automation thing. Explain your approach now. I actually I share your view there as well. I think that we have been chasing literally flying goats over the last ten years in the automotive industry, and I think that Google and Weymoux has been pioneering the whole industry, and I think that they've done and set the standard that's going to be the standard, but it's going to take a long time before it's actually bean we can actually deploy it

on rail roads. And that approach, that's our pure silicon value approach, has been a challenge since the start because it requires literally us to chase our own tail for

the whole industry. When we started the company, we took a different approach, and our ambition since the start has been to do bit by bit, find the right applications and find the right business cases to scale autonomous because if you look at a lot of other industries and a lot of other applications, for instance in factories and warehouses, we've been doing autonomous electric transport for more than thirty

years now, and that's we'd take a different approach. So I think that the technology why the industry has been pushing it, but I think when it comes to actually finding use cases and real applications to it, it actually has lacked a bit. And I think that's hopefully what we add to the equation. All right, Robert, great stuff. Really appreciate you taking a few minutes bring us up to speed on what you guys are doing over at and right Robert falk and Wright, a founder and CEO.

It used to say that Coustin brushed gears with us Iron g chief economist. Long time since I've spoken to you, so it is such a joy. I think you're out there in Frankfurt in between this holiday time talk to us about what China means for you from a global

economic perspective. This reopening story, well, it means lot. It means supply chain frictions in the very short run, because we have lifted restrictions right now, but it means we're going to see many, many sick cases, many sicknesses, and that will probably mean that people simply cannot show up

in the factories. But in the medium term, and that we talked probably end of Q one two three, this clearly means that supply chain friction should go away much paster than we initially thought because China is really giving up on on zero covit and that is good news for the global economy. As we are, you know, we are looking into a recession in Europe in two thousand twenty three, we even look into a recession in the US.

If China would now really start to recover starting second quarter two twenty three, this could help the global economy a lot. So Carston talked to us from the European perspective what this means, because that you know, such a big trading partner with the European Union and China, where where you know the first for some impacts on the

European economy. From yeah, I think in the in the very part term, um, I think that even lifting all the restrictions means that there will be more supply chain frictions. So I'm really looking into European industry and probably having more supply chain frictions over the winter. And the winter is already going to be a tough economic one in Europe. But then when we get out of the winter, when when when China is then somehow settling into this new

post euro covered reality. Um, this would clearly benefit the European industry, the European companies that are so dependent on input goods from from China. And showing some sort of statistics, I think in Germany more than fifty percent of the manufacturing sectors say that they are one way or the other depending on China. So clearly Germany but also Europe needs a growing Chinese economy. May he live in interesting times is the Chinese proverb actually that you quote at

the top of your note. And boy have we lived in interesting times in the last few years, but also in two and it's been not just a story of China, not just a story of global disruption, but notably one of Russia, Ukraine, of the impact on energy markets and the impact of the devastation that's reaked upon Europe in particular, and I'm interested at this moment as to whether you see with the warmest snap the weather slightly more temperate

in Europe than we were expecting. There has been an easing off of concerns around energy supply chains there, but talk to us longer term about how will your comfort levels look for Europe as an economy with respect to energy. I found out that actually it is not a proverb, but it is a curse to start with. But we're looking at at Europe and I think the picture changes by the week. Just one or two weeks ago we were saying this was actually a cold winter spell hitting

the entire region, or we saw happening as well. I think a week ago consumption gap consumption in Europe was clearly above historical averages. Again, so now it's turning around and we we we saw a temperature ship by almost twenty degrees, going from minus ten sellers to plus ten sellingers. So this would clearly help the reduction in gas consumption. And I think in any case shows us that there will not be an energy supply issue through this winter.

What we still have is an energy price crisis in Europe. Um and it will. It will determine how severe this winter recession will be. So it currently looks, I think a bit more positive, so that this recession is going to be a mild recession. But what is even more important in my view, especially for Europe, is what's going to happen in the second half of two thousand twenty three. Here we have many forecasters saying that Europe would return

to pre growth or pre pre crisis growth levels. And I'm a bit more cautious because I think we are still living in a period of high energy prices, We're still living in a period of structural change to global trade. So I'm a bit more concerned that the year of will really experience a more subdued recovery in the second half of twenty three and also in two thousand twenty

four the many currently expects. Carson, we recently had the Bank of Japan of all banks, kind of throwing the talent signal that it was opened higher rates and to fight inflation. So you know, along with the Bank of England, the e c B, and of course the US feder Reserve Bank. What do you think the next move is for this federal Reserve Bank? Given what we know now about economic conditions and now maybe another little data point

with China reopening. You know, you wouldn't argue that if if the Bank of Japan, of all the central banks start to become really concerned about inflation, I think there has to be a serious issue. And that's standime was the big story of two thousand twenty two. UM. I think that the Bank of Japan is also likely to join this UM, this group of western central banks UM

with hiking interest rates. UM. So the only quite with the Bank of Japan now starts what we see, what we see other central banks, particularly the FED, really making a pause or even stopping the hiking cycle already in the first quarter, we think they will. We think the Fed is gone a step in Q one. We I think it's become a bit more doubtful about the ECB because the e c B has been talking very harkishly

UM since the last meeting. Is over the last couple of days, it looks very likely if the ECB is going further than the fact that we will see more rate hikes coming in Europe even when the FEDS stops. I think interested and the big story for the second half two thousand twenty three will be whether central banks will actually dare cutting rates again or whether we will

really stay at a higher level for longer. I mean, it's worth saying that, of course the US has manages get its rates up a little slightly greater paced higher levels all told us as easy b already. But is that why do the Federal Reserve have the bandwidth to slow down in the first quarter that inflation is going in the direction it wants to. Is it more that's now seeing a bond market that doesn't have the bias

that it was used to. Particularly we start to see borrowing costs in Japan actually maybe even look attractive to the Japanese by themselves, I think. Um. In terms of that said, what what's going to happen is that inflation is going to come down faster than the FAT itself probably expects um. And that has to do with the real estate market, has to do also with the entire

inflation basket. So if the real estate market in the US that really starts to correct, and we see first the data points and you know suggesting that this is happening, headline inflation will come down very quickly. And this is then the big reason to pass. Turning back to to Japan, here we do have an economy that that could benefit from the opening up of China. Here we have an economy that is not suffering, as for example, the European

economy from higher commodity and energy prices um. This is an economy in which fiscal policy has done the tough work, I think for for almost two decades UM. So therefore it is likely that we will see the first policy rate high in Japan coming up. So, Carson, I have the Paul Sweeney Personal Inflation Index, otherwise known as a daily national average gasoline price, and it's down the three dollars and ten cents per gallon here, down from the

peak of five dollars UM. So here in the US at least inflation is in fact it has peaked, it is coming down. You can look across a several different metrics give us a sense of how it is in Europe. Do you expect it to be more more sticky in Europe? Yeah. If I look at Carson Justice personal inflation in next, which is sons partaty more than only gasoline prices UM,

I think we are somewhere close to the peak. And in in the first quarter of twenty three, we will see that Eurozone headline inflation will start to come down as energy prices are somewhat lower. As it is also you know, getting harder for companies to really pass through the higher production costs to two consumers, so we'll see a gradual retreatment by by inflamation. But still this means that I think on average inflation in the Eurozone will will come in at between six or seven percent in

two thousand twenty three. That is a lot and awesome. Means that there is an enormous, enormous pressure on purchasing power or the loss in purchasing power of European citizens. Alright, good stuff. We really appreciate getting your perspective there, Carston Razinski. He is the chief economist for I n G. Let's talk about it over the Charles, the Buses All Society General Equity Strategist, Charles, it is wonderful to have some

time with you. Happy holidays. Talk to us about well, when you are looking at a potential China reopening, what makes you think that the market is going to trade sideways? Well, look, it's a it's a balance between the news flow with the China reopening, which is somewhat of a posity but also issues the valuation side, And as far as the US is concerned, valuations being back on center stage is not slee a good thing. Um, if you think of it this way, you know, Europe is actually be outperforming

this year despite the US massively going down. So for me, this is kind of an US in theory. But what it shows that at last, and that's the good news for three, valuations start to matter. We've ended twenty five years of falling bond deals which went plods, people buying growth stops. Where's growth the US not Europe? And now that's the end of that long cyclement. Still at last, valuations and visit again today mean that so yes and

Europe gonna have a good time. Charles. You know, some folks are concerned, still concerned about earnings risk in this market in how do you view earnings in SMP? How much downside might there still be? Okay, overall flat on the earth, But that's I think the Roses scenario most likely down sort of just single digits. Um, So earning is at gonna go down. There's gonna be downgrades, um, you know across the board in many regions of the world.

I think that is expected. What we need is to see where there are pockets where investor sentiment is too thin devious sleep the volumes of anything today, so it's far too thredraw many conclusions, but certainly what we are you know, looking to um such just some places you can think of Japanese banks on the back of the last weeks new show, or some cycicals in Europe, we're actually values not fine, so I thinks we'll go down. We'll know this, yeah, price then not across the fro

talk to us about the individual you just mentioned. I think I heard you say Japanese banks there, but financials more broadly have been surprisingly underperforming, I mean down even though you have pushed higher. I'm interested in can you speak as broad brush as industry groups. Can you still say energy is gonna outperform like it did in this year? I mean, I think it's up to some six percent here to day, whereas everything else is in the red? Or do you have to be stock specific rather than

sector specific. Look, if you take the case of financials, as you've pointed out, to find rising fields, they've had appalling performance. What was the missing block. Missing block was economic growth, real growth. If you don't have real growth, rule banking sector, your insurance will not necessarily grow. And so our expectations that at some point can start to turn from an economic prospectivitience of real growth not none at all. And so financials in that you know circumstances

could not perform. If you get the energy sector, what it had for it was really totals shareholder returns diffidence because buybacks more than tend to say yield in a number of socks. So there has been a combination of do you have the valuation angel, yes or no? Energy todly have it? Banks had it? Sure has had it, but are you missing something growth? And if it's missing, you don't have performance. Our hope is that you start to see turn running real growth. Some of these reflation traits,

not staculation traits, do not perform. And Charles, you mentioned energy, I mean, I'm looking at some of these names like excellent and a lot of these things are fifty six. Have I missed that trade? Um the bulk of it, Yes, we'll still long that. I felt was still think that if you look at the cash generation that they offered the total she all returned that they offered on both sides of the Atlantic. Then I think, yes, that's still centered that we're happy to to hold. Where in globally

speaking at the moment, Charles is underrated. Do you think number one, the European consumer. What we've seen is a massive prise in the risks, remember around anything which had to do with Europe on the back of the war Ukraine and so people went away from the europe differency, from booms from European equities, and what we are seeing currently is that we seem to be going through that winter in a choppy way, but morale than scathed. And certainly what we have in Europe is one trilling euros

of access savings that stopped to be spent. And if look in terms of valuations, these guys tread at six, not one six, but six zero percent discounts to the stables sectors. So definitely it's a star general. People have rushed away thinking that the European consume was dead. It's not the case. And what we've seen is the rebound of the past few months. We think this has further

to go. Charles. Really since a great financial crisis and the equity markets, you know, the leading group has been technology, whether it's the fang stocks are more broadly defined tech. In a rising interest rate environment? Can that still be the case? Is this market maybe it starts to move higher at some point next year. Can techt be a

leader or not in a rising interest rate environment? The answer is no. The reason behind it is that the gap evaluation has to narrow because valuations, as it was starting earler own, start to matter. What you've seen today in the case of some of the ev names, we're mentioning the supplying change, disruptions here and there, what happens at the back of the COVID policy in China used to being be easy, some of these fears. That's one

side of the equation. The issue I have a look at the US market is that just five stops have been accounting for the bulk of the performance of the index because situation performance is massive in the West, and we still have a lot of gap in evaluation there. When you're close of the equity zero, you don't care paying of the growth. When things start to be expensive terms of financing this, think of stack, think of some

of the techniques. Then valuation of need that the rotation out of the expensive names, and you're putting on the screen here that now's that pass for them to go. What then, as we see interest rates rise, as we start to see the consumer maybe under pressures and waiting for some sort of growth, is it? I mean consumer discretionary down, consumer staples up? Are we are we in any way betting on a US consumer in the way that you're thinking maybe the European consumer is underrated now.

The way I look at it in the US is that I've much law advised. Some of the industrial names in the US supposed to consumer names. I think some of the financing conditions in the US can be fried Gile thinking in a ploye market. It's still a kind of a question mark. And what really what they need eventually in the end is the pivot from the FED and cut in rates. What the US industrials names need is obviously a raid cut, but they need is growth trade to come back. And I think the news flow

from China today goes to lost this. So if you think of it, industrials in the US is supposed to the consumer. In Europe, more of the consumer think of it also, not the inflation reduction acts some of the big moves on the policy front that we've seen in the US context really suggesting that many comp corporates will benefit from that spending from the state um in the West in terms of financing the green transition, and that's

one of our key convictions. Maybe surprisingly the US will be in place of green transition in twenty twenty three. It's not just about the European Green Deal, all right, great stuff, Charles, Well, appreciate you taking a few minutes of time there to check in with us. Charles day Bus Swan Society is General equity strategist. Joining us via zoom from Parish There. Thanks for listening to the Bloomberg Markets podcast. You can subscribe and listen to interviews of

Apple Podcasts or whatever podcast platform you prefer. I'm Matt Miller. I'm on Twitter at Matt Miller N seventy three and on Fall Sweeney I'm on Twitter at pt Sweeney. Before the podcast, you can always catch us worldwide at Bloomberg Radio.