Surveillance: China Growth May Be Flat, Kasman Says

stimulus response coming out of China. It's just easy to get your hands around the possible fallout from the containment effort. Much harder the process. What's your base case at the moment? Well, the base case here is that we have a huge disruption that's very narrowly based in China and a few other countries. In the month of February and in the first quarter, we have Chinese growth getting down to want

it could even be flat on the quarter. Sequentially, global growth gets down to the lowest level we've seen since the global financial crisis. But the effects on the U S and Western Europe are pretty small, and they're not one way. Remember that Chinese demand coming down also lowers global energy prices at lowers global interest rates, which actually

is a plus for consumers in the UH in the West. UM. But the bottom line, I think is that this is going to be extremely disruptive, but it is not going to derail what we will actually believe is a pretty positive story for the global economy. In let's get some numbers, Bruce, Q one, what is it at in China? UH sequentially about one percent? Q two nine and a half percent.

That's a massive v That's a massive be All you really need is that by the time we're sitting here at the end of March, the virus is starting to fade and produces are starting to make up the lost output that they had in the month of February in early March. That's that's the way it happened after Tohoku.

That's the way it happened after Stars. You just have to believe, and this is the real call, is that this doesn't spread and become a global event over the next two Have you ever seen that in your study your Puch Columbia where you go from one to nine in a hundred days. We see it all the time. Whenever you have this, Usually it's not on a macro basis. But you see these events where you have storms, where you have shocks. We have a couple of weeks down

and then a quick rebound. It's like Whenlan wins, I mean the Italian economy shifts. I'm not sure we rebound. I will say there is a question also how much this rebound is predicated on more stimulus from central banks. Um, it's not predicated on more stimulus, but we might get some more stimulus. It is predicated on the idea that the Chinese government comes in here and prevents any credit problems coming from the disruption, and that they continue to

provide stimulus. But that's more of an issue around growth in the second half of the year. Which you really just need is for factories to open up and people to start moving around again in the month of March. Not now, but as we look over the next four to six weeks, we have to be comfortable that things start to get more normal and you comfortable. I'm not as comfortable as I'd like to be, and I don't

want to ignore the downside risk here. I think what you have in the market is a small but very dangerous risk factor that things turn out to be unprecedented in terms of how it plays out. John, this is what I'm struggling with. It's one thing for industrial production to come back, It's another thing for services. It's another thing for the Starbucks stores that are closed. I don't understand from that perspective, Bruce, how we get how we

compensate for those lost business opportunities. We don't compensate for it. We gradually recover. And remember, in growth terms, going from having a factory shut down to a factory operating at seventy or having a Starbucks shut down to a Starbucks opening but still having fifty or six of the of the flow is a big change in growth. And I

want to emphasize this. We we live in a world where we talk about growth, but the level of activity is going to be lower than it would have been probably all the way through the end of the year in China, and very small amount though on the global basis. We're coming with Europe not Quants was struggling. If you're looking for one percent out of China in Q one and you have a European economy nest stole speed, yeah,

do you get a v shak recovery in Europe? Well, I wouldn't call the European recovery v shape because I don't think Europe is going to get hit by the same disruptive effect. But I actually think what we're missing is we're watching the weak data in Europe. Is that the idiosyncratic drags that have hit the UK have hit Germany around the global drag from trade conflicts fading is I think setting us up for Europe being the biggest

surprise to the upside Europe. Swiss this morning, Tom, lowest level since the Swissies ripping the Euros breaking down, Bruce, what is the quantitative linkage of all these economies if you're having a beverage of your choice with Vice German Clarada or with Sherman Powell? What are the linkages of Mercedes Benz flat on its back in Germany versus You know that we're hearing reports of the chance of the exchequer stepping aside? Is that right, John? Yeah, we're just

getting that confirmed. I mean, the challenge, the resigning tone, the cacophony of the news out there. How linked does all this or is it really idiosyncratic? Well? I think the the way to look at what happened in two thousand and nineteen is we had a set of country specific factors and hitting in Europe around the global story around US China trade. And now what we think we're

seeing is that global shock begin to fade. And we're also believing that the Brexit shock, along with you, okay, fiscal stimulus, the German auto industry shock, which has proved to push German inventories to super low levels, is going to be coming together to provide some fuel on the issue of China. And I think this is really important. The difference between having factory shut down for three or

four weeks and three or four months is huge. The supply chain can handle two or three weeks without a serious disruption, but if you extend this out for a few months, then the world looks very different and the dynamics of spillovers begin to come much more serious. You guys still the cost house out of China this morning down for the month of January, and the association that puts these numbers together looking for another drop of thirty sent in the month of February, biggest drop ever for

the month of January. And this is exactly where my mind when which is the question is how does this bleed over into Germany? How does this bleed over into global auto demand? But here's the point, We're gonna start to see data coming in for January and February, and particularly February, it's gonna look horrible. And then the real question is how much does it bounce back in March.

If you're a German producer and you think the Chinese sales pullback is about the virus and it's gonna last four or five weeks, you don't stop production, You build inventories for that period and you continue more normally. The question isn't going to be coming back to normal relatively quickly for something drowning and happy? This week we've had three major bulls in the bull market. You're coming in, you're happy on a lift as well. I got Valentine's to day to small, So I'm ready to fall off

a cliff into negativity. Okay, help me here. How does David Kelly and others at JP Morgan, how do they take your optimism and bring it over to markets? Can you link Chasman optimism twelve months out into market optimism? Yeah? I think are sure? I think we have to obviously price in that risk, and we don't ignore that small risk.

But I think if you're sitting as an investor and you think that as I do, by the time we're sitting here in June and July, we're not going to be talking about viruses, but we're gonna be talking about lifting the global economy, then risky acids are gonna do relatively well, and we're gonna be watching the world pick up in a broad based way. And that's as a relatively simple but it's not necessarily ignoring some small tere

risks that we have to deal with. Here. Here's the way it is, Folks, Global Wall Street, Friday afternoon and into Friday evening. You will wait for the research note from Bruce cas and Michael Fairli and the rest JP Morgan John Bruce grab to catch up of the Bruce cask, the JP Morgan chief economists wait and get on the likess with markets front and sentence home. A new method for testing the coronavirus in Hubei leading to a spike

in coronavirus cases. Yeah, and the methodology of the body count. And this is of course done undercast what they built a hospital in what ten days or something? I mean this is crisis proportions in a new ratios, new mathematics this morning that everyone's adjusting to. We have been so advantaged to speak to Peter Hotez of Baylor, of Anthony Fruit,

she arguably America's giant in immunology. And now we speak again with Dr Rohn of uc L. She began at the University of Washington in their world class microbiology program. She still has Malachi Green under her fingernails from micro one oh one years ago at Washington, and she is truly definitive on virus and particularly some of the oddities of the acclaimed cat virus and research from years ago. Dr Rohan, wonderful to have you back with us today.

What have you learned in the last week about this virus? Well, things have changed quite considerably, even overnight. So things were looking a little bit predictable. It looked as if the virus, although it was still going strong in China, appeared to be heading toward a plateau. But overnight that all changed and it's looking now as if there may be many more cases than we initially thought because they've now revised

the ways they're diagnosing the patients over there. I calculated the illness rate on one of the cruise ships, not the one in the Gulf of Thailand. It's something in the vicinity of six percent of the ship is sick. What is and I use this word as an amateur, what is the virulence of this virus as compared to things you've seen before. Well, it's definitely highly infectious, so

it's a very contagious virus. However, despite all of the scary things that we're hearing from China and Wuhan, at the moment, it still looks as it's the lethality right, it's not greater than that of say, seasonal influenza. That doesn't mean it's a pussy cat. Seasonal influenza in the US alone kills twelve to sixteen thousand people a year, but we have immunity to influenza. It's an old virus.

So if if the coronavirus gets that same kind of foothold as as our seasonal flu with the same fatality rate, we we could be looking at a lot of people dying. Speak for Wall Street and for investors in financial markets, that seems to be this morning, at least relatively speaking. A lack of faith in the data coming out of China. Now, are they under reporting? Those are the questions that I'm

hearing consistently. I think one worry is that the top US health experts that want to join an international group heading to the center of the coronavirus outbreak in China said they still haven't had an answer on whether they'll be allowed into the country. What's happening in terms of getting that foreign help into the country to get more hands on that data. It's really difficult. I mean, I don't think they're necessarily under reporting because they're trying to

hide things. I think Wuhan, in particularly upper center, is in complete chaos. Now other other cities in China are better off, but still everybody's on lockdown. It's nobody knows what's going on, probably not even the Chinese. We can't really necessarily blame them for this. It's it's out of control in Hubai Province, and I think until we have any idea of how contagious this is and how how well their lockdown has worked, it probably is quite dangerous

to travel there. Dr Orohn. What questions you need to see answer to determine whether we're getting towards some sort of Plateau, Well, we need to know how many people are infective. This has become increasingly difficult now because initially outside of China, we were using the very old, reliable method of contact tracing. We knew every single individual who had traveled to China. We were tracing them in their contacts.

But now with with the recent developments in the United Kingdom, where we've had this man who went to a Singapore and then he went to a ski chalet in France and he inadvertently infected a number of people even though he wasn't showing any symptoms himself. That's really scary because I think the cats out of the bag now. We can no longer trace every last person that has been

in contact with this virus. And given that the symptoms are so non specific, you know, a cough, a fever, And if you don't know you've been in contact with somebody from China, how on earth are you going to know that you need to get tested. It's a really difficult proposition. I think if we're starting to lose a

little bit of control outside of China. Dr Rohn, what do you think of China's decision to revise the way they diagnose cases and their new tally they released overnight, and I mean it's it's been confusing for everybody who's tracking the calculations. But actually I totally understand why they've done it. That the test itself is not very reliable. It can take at least three goes before you're before a positive test is actually reliably recorded. You know, it

has this false negative rate. Um they really need to know who's got the virus, and the test isn't reliable and they're overwhelmed. So they've they've gone back to the old fashioned medical way of doing it, which is looking at symptoms, looking at the lung scans and you know, saying, you know it quacks like a duck, it must be a duck. You know, these people are in the center of an episode of an epidemic. They've got the symptoms, they've got bad lungs. Let's just say they've got the virus.

I mean, that makes sense to me. More and more companies are pushing out their travel curves. We've heard from several air lines now that are talking about not restarting flights into the mainland until perhaps April, the end of April. It's been a controversial question amongst the community that you're in that I've asked several guests and got several different answers to where the travel curbs actually help from your perspective,

do they? You can never get a straight answer from a scientist, but I will say, I mean, I think obviously a travel plan is going to help. You know, if if you keep infected people out of your country or potentially inspected people out of your countries, it will help it. But at what cost? You know, what economic cost can any other country afford to do this draconian lockdown that the China has done. I don't think we can.

It's not reasonable and it's probably not warranted. Yet You're in a classroom U c L. You've got a piece of chalk in your hand, and you're scaling the illness level of this virus with things our listeners no worldwide. Okay, right, I'm gonna go back to virulence. How deadly, how how sickly, how virulent is this virus versus other compares we have? Yeah, I've got to keep going back to the seasonal influenza model.

I mean, it is looking to be just as contagious as flu and just as lethal people don't think of flu as a dangerous incredibly dangerous, as I mentioned, killing up to sixteen people in the US. Okay, but but do we have a hysteria about the seasonal flu like we have about China. No, we don't because seasonal flu, most of us have immunity to flu. Flu circulates around, you know, sometimes we get it sometimes, So the key You're not to interrupt, doctor, but this is absolutely critical.

Your major concern is the globe does not have the immunity to this virus like it does to the flu. John Farrell had three weeks ago. Yeah, this is this is what I'm worried about. So it can sweep through the spulation because the population has absolutely no resistance the brand new virus. It's just jumped from the animal. Again. It could mutate, but it may not be completely stable. It might become more virulent. We really have no way of knowing. It's a huge unknown. Doctor. I hate to

say it, but we have a patient here. John Farrell has one final question. Dr Jennifer. Right, I'm going to let speak to the doctor trying to cause travel. Dr Chaffer wrote microbiologists for University College London, John, why don't you bring in the Andrew Shapes because the math in his research reports is just outstanding. Love catching up with Andrew C. Smorgan, Stanley's chief cross assets strategist. He joins us Now, Andrew, why are people still confident about the

global economy and global markets this year? Well? I think because there were some pretty powerful tail winds that were operating before these recent public health concerns. The base effects, given how Week twenty nineteen was make it makes it easy to show improvement. Inventory levels in China and Europe and other places were low, and fiscal policy in addition to monetary policy, is getting easier this year. Japan, China, Russia, India, the UK, They're they're all going to ease fiscal policy.

So you know, the way that we think about this is, I think we still have a global recovery that is delayed rather than derailed. And I think you have some potential that the market still gives the benefit of the doubt to the global economy and looks past kind of a weak months or two of data. But I think the risk lies actually a little bit further out if

that temporary disruption becomes something bigger. How much is the weakness that we're seeing in the data due to the coronavirus, and how much is just underlying weakness that people are just overlooking. Well, I think it's interesting. I think in terms of weakness from the coronavirus itself, I think that's still to come. I think that the data that will reflect that is is what we're going to see over the next month. And I think some of the initial

readings of that data. Um, if we look at Korean import and export data or data directly related to China, they're they're quite quite bad. They show quite severer shifts in demand and consumption. Now, I think in the background of that, you know, some of the data really was looking better until this, until this happened. But I think it reflects a global economy that's still very uneven, where

the pace of growth is uneven. I think some of the questions about the fiscal policy response and how quickly that will come online this year that where there's also a lot of uncertainty around that. You've been the place to look to for the last two years Andrew to understand the dynamic of the US versus the rest of the world from the slow down in early that started

an ASA and started to spread globally from there. Walk me through that dynamic now, because as I see things at the moment, the US is looking good relative to everywhere else. Does it stay that way through well? I think these these recent public health concerns ironically probably do help keep the US relatively supported. Verse versus the rest of the world, the US has less of a direct economic impact. The US is seen as as a as a safe haven, both on the equity side, the fixed

income side, and the currency side. But if we take a step back and we think of the broader full year trends in terms of where inventories are, in terms of where fiscal policy is is shifting, just in terms of where the base of growth was. That all that looks better in the rest of the world. And so I still think on a full year basis you could see the rest of the world look better, but that's

certainly been delayed by these effects. You know, it was the Brown mathematician we go Matthew and partial differentials paragraph two of your important note handrew sheets. You are defined by value expansion valuation expansion in two thousand nineteen. What's the history of trying to get out front a valuation shrinkage in a given year, this year and next year. How do you do that? Well, okay, I think it's

it's very hard. Right. The the efficacy of trying to invest based on valuation alone is very good with a five or ten year horizon, but very bad even with a twelve month horizon. And so you know, look, we even as as much as we all want to buy things cheap and seldom expensive, that history says that history says that that over six or twelve months, that that often just just doesn't work. So look, that's why we're focused on some other factors. I think that's why we're

looking for signs at some of the relative momentum shifting. Andrew, it doesn't work over six or twelve hours, which is one protest before we let you go, Can we bring some life into one of the most talked about interviews that at least I've heard about for a long long time. It's Greg Peters, formerly of Morgan Stanley, sitting across from

a young Andrew Sheets who could draw cartoons. And Greg Peters is sitting there thinking, you know what, I like this kid, and I could use this in our research, which is why some of this research became world famous in credit markets are on the financial crisis because Andrew Sheets could take these stories and make little cartoons excuse me, and they're like really good carton fantastic And to this day, Greg paide Is still talks about have you ever done

a cartoon for Mr Gorman? Not not not directly, but look, Greg wasn't was an excellent um was an excellent strategist. He was an excellent analyst. And I think he always tried to think about markets in in a different way and I think that's maybe, maybe hopefully why he decided to take that risk. The tone you just heard their folks from Mr Sheets is like if you leave Morgan Stanley, it's like you don't exist, just like God. I think they were still on a talking basis. Greg's are always

a great analyst. We're on best buds basis with Mr Gorman. I highly recommend a cartoon for Mr Gorman. Andrew Sheets, thank you so much, Andrew, thank you. I'm gonna give Paul Sweeney's opinion on this before our guest hangs up on us. I am biased. There's there's different kinds of equity strategists, and Paul, some come from economics great, and others come from following an industry and following a sector. And I really really listening listen to the people who

were analysts before they were equity strategists. I think it it clears the mind to be right and do occasionally be wrong on right. And that would be Tavis McCourt, technology guy exactly. Raymond James, institutional equity strategist, joins us on the phone. Tavis, thanks so much for joining us here. You know, coming into the year after a move up in the SP nineteen, a lot of folks were saying, all right, expectation wise, let's thank mid maybe it's mid

to high single digit returns for the equity of markets. Well, here we are already up four and a half percent in mid February. What is your take for kind of performance expectations people should have equity markets? Well, I think the virus has has has really upset um expectations, right.

I mean that this market over the last month feels a lot like the trade war market, where you've had emerging markets under pressure, UH, risk free yields under pressure, commodities under pressure, and yet equities kind of kind of levitate um. But they do it in a very liquidity centric way, so that the money is just pouring into the most the most liquid index isn't even even within the S and P the most liquid names within the index.

And I expect that will reverse once once UM, once the impact of the viruses is behind us several months from now. UM. But but I think that's probably the biggest theme that's changed versus now versus versus you know, six weeks ago. So does that suggest here, given the uncertainties out there, large cap growth, let's just stick with it. Let's not try to find pockets of value, whether that's small cap or emerging market. Yeah. I'm actually a big

believer in finding pockets of value UM. And and and you know, I call it kind of a rotation back in the cyclicals and the small caps. I suspect it's going to happen when when earnings most expectations start to broaden out across the economy and UM that was starting to happen in December and January, and coronavirus has basically

delayed that. UM. You've got a very significant dislocation in in in UH global economic growth UM, which which is basically pushing pushing money back into kind of liquid saper bond proxies. I hate to go to your core knowledge, but what does technology do? I mean, some of these stocks are priced to perfection and other ones are, you know, barely under price to perfection. I mean, what's your your your appetite for marginal share purchase of the various and

sundry technology subsectors out there. Yeah, there's there's a lot of um interesting things going on in the tech sector right out. But I think the primary reason why it's outperformed the last couple of years it's just very very material share share buy backs, much more as a percentage of cash weal from operations than than other sectors. And and and that'll start to wane this year and next, but I think that's kind of kept kept the sector

um performing very well even when when we're subpar. Okay, well said, But as the margin persistent, I mean, everybody got wrong the persistent margins of Apple. Is it a proven margin persistency where you have to price in the present value of all that future share buy back from those ample cash flows. Yeah, and you basically had twenty years roughly of of accelerated share buy backs happen in in in roughly two years because of all the of all the cash that was off shore, so so that

that benefited the sector UM and the other things benefited sectors. Look, the earnings have been better. Like if you're looking for a cyclical kind of UH resurgence and earnings growth, of all the cyclical sectors, UH, the tech is the one where earning has gotten better because because frankly the supply change are tighter so so so it tends to feel in market demand a lot factor than than sectors like like industrial and so UM that the earnings trend is

helping out the sector well. But the one thing I would point out Tom is because I did this yesterday, I thought it was fascinating if you look at the the large cap versus small cap bias across every sector UH in the and in kind of a broad Russell three thousand, three thousand index, large caps in tech have outperformed small caps in tech by t UH since the trade war stars. So it's it's that the the text story is not universal across that very specific to large

cap tech. I want to go out the belly on your Paul Sweeney. But the bottom line is there's this idea that share buybacks is not a good use of free cash flow. And you know, I know, I know, it's various company company, but the bottom line is these people are mint am I wrong. They're minting money, minting cash. And you know, as a growth company, as a tech company, as Tabs Wells knows, you'd like to see them reinvesting back in their own companies because that's where the growth is.

But some of these companies, it's just so much cash, like like an Apple sixty billion a free cash flow, what do you do with it? So, Tavis, as we think about just kind of evaluations overall in the market, we've got to be getting pretty rich here. I mean, you think about the performance we had in SMP that it was with little to no earnings growth whatsoever. So doesn't that suggest that valuations here in the market overall are stretched. Well, it's it's it's a really bifurcated story

that it did. If you look at the SMP five trailing trailing pees um, we've really only been more expensive than we are today during a period of time that we now call the tech bubble um. Whether or not that will be you in history as as a tech bubble or not we'll see. But if you look at mid Captain small cup and says, Um, we're not exceptionally cheap like we were last summer. We're not at twenty year lows like we were, but we're still kind of slightly below the medium of of twenty of the last

twenty years. So so so the market is again it's got a very significant, uh, liquidity bias to it, and and that makes larger stocks more expensive when you look at kind of valuations in history than than smaller stocks. And you mentioned liquidity, I'm thinking about liquidity in the global marketplace. Is that created you know, there's been some concern that that has created asset bubbles and that may even include US equity markets. How was that on your

your list of concerns? You know, I would say it was it was. It would have been zero concern two years ago because there really was no evidence that there that that you had this kind of large cap bias to returns or to or to valuations. Um, it's modest. Now, Um, we we've had basically two consecutive years, a little little over two years is a really significant pe inflation in large caps relative to smaller caps, which we had not

seen for the previous seventeen eighteen years. So um, I wouldn't say it the first thing on the concern list, but it's worth paying attention to now, and definitely colors the that the valuation talk, because it's hard to say stocks expensive. You know, you can say the hundred largest stocks are expensive, but but broadly stocks are kind of Okay. Before I let you go, then what is your called

twelve months out? I mean, we're up twentysomething percent last year, four or five percent this year, and we're down right now negative one o nine on the Dow with the market's trading folks, But twelve months out, can you get all double digit on us? Tavis? I think we can. I think the big story in the market is going

to be rotation versus overall index performance. Um that that the you know, we may get a little appreciation over the course of twelve twelve months in in the SMP, but I think that the big the big story is going to be how the turns really start to rotate into some of these cyclical sectors and into small cap

indexes as earnings growth broadens out. We had a real earnings earnings recession in a lot of parts of the economy in in two thousand nineteen, and that recovers after the coronavirus, so that it will be several months from now. I suspect you're gonna see this really big rotation in UM within the equity indexes. Tamas, thanks so much. Tamas McCart with us. Raymond James, thanks for listening to the Bloomberg Surveillance podcast. Subscribe and listen to interviews on Apple Podcasts, SoundCloud,

or whichever podcast platform you prefer. I'm on Twitter at Tom Keane before the podcast. You can always catch us worldwide. I'm Bloomberg Radio