Surveillance: Future of Hong Kong with Winters

the topic, the story of the moment. Can you take us inside the bank and tell us how difficult it is right now to keep talent happy, to retain talent, to keep stuff on your side. Yeah, it's it's it's a big challenge. And we know that that the great resignation is it's touching every industry, is touching every part of the world. And we we are speculating endlessly on on what's driving this. Is it lifestyle changes on the

back of the pandemic? Is that the fact that the world is flushed with UH and that cash is looking for ever greater talent thankfully for for for Santa Charter. While we we are above the trough levels of attrition in twenty where things really and people just so Downe was kind of back to normal in terms of levels of attrition. Of course, we needed to pay up, but we've also found ways to save money in other areas, so that net our expenses were more or less flat.

And we haven't reported our full year earnings yet, but up to the third quarter were more or less flat here on here and uh and I would hope that we could continue with that trend. I find the savings to to pay for ever more pricey talent. How sticky are these forces right now? So? How sticky do you think they are? I think there's a hope in a C suite on Wall Street that this is a one off story, payout walk away, we don't do this again next year. How sticky do you think it is? I

think they're sticky as the profits are sticky. So it's been an extraordinary year in in some aspects of the markets. And you saw from from from the US banks that have already reported the investment banking fees have have been fantastic. Um is that going to carry on? The fixed income businesses is also doing relatively well, but not as well as it did during the peak of the pandemic. I think if the profits are up, wages are gonna be up. That's the way it works on Wall Street Bill. How

do you lift revenue? How do you lift the share price? You've had a nice rebound here recently, you nowhere near the pandemic level with an e M exposure that you have, with the Hong Kong exposure that you have. What is the strategy to jump start to growth? Yeah, that's the big question. And like we're we are releasing our earnings in about a month and as part of that we'll be we'll be sharing our story with with how we accomplish exactly that, which just a couple of bits of backdrop.

I mean, we know, on the one hand, emerging markets, China in particular is out of favor with investors, uh in particular with Eculit investors, so that that clearly has an impact on our sharp price and others who have

a heavy Chinese component. On the other hand, we know that these are the drivers of global economic growth as we as we look at China with a with a probably steight me about expectations with still quite a little four percent GDP growth in the first quarter, he said, Wow, that's that's that's pretty tough relative to the pent that we've become accustomed to in China, but four percent is still pretty good in the global context, and especially given

the challenges the China faced in the early part of the year, and that will extend across Asia as we work through the pandemic effects and the like. But overall, the way that we lived profits is to continue to grow as we happen. We've been growing consistently now for several years. If we could exclude that, that that that impact of low interest rates, which is which is a real has a very high impact on the banking industry

and us in particularly Bill. Your website on Hong Kong, where you are hugely predominant, says here for good great there is no banker more qualified to tell us about the potential move from Hong Kong to Singapore. Can you predict western banks, the more larger commercial banks are going to be forced to jettison Hong Kong for other geographies, including your Singapore. I don't think so. I mean the the the long story short as in Hong Kong has been and is ever more so, the entry point to China.

It's it's the place that capital goes into and out of China and as and it's very much a two

way street now. As we see, there's been massive flows in particular into bond funds over the past couple of years in China, in less so into equity funds that will probably balance out over time, but there's also been a very substantial flow of Chinese money out and that's only going to accelerate with the advent of things like the Wealth Connected Program, which is designed to allow Chinese savers to to increase the proportion of their savings that they can hold in currencies other than R and B,

and that's going through Hong Kong. So Hong Kong is is absolutely solidified. If anything, it's I think it's in the strongest position has ever been in terms of acting as a gate where for capital in and out of China. Given the flows of capital, that's a pretty good gate

way to have. The Singapore also has tremendous advantages we know, and and Singapore is UH is trying to make itself as attractive as possible for not just international talent but also the regional talent and then Singaporean talent, and they're doing a very good job of that. So yeah, a bit of healthy competition. We figure is a is a good thing. We as you, as you point out, have

a very substantial presence in both markets. We intend to continue to have a substantial presence in both markets, uh and and we'll do everything we can to make each of them more attractive. Bill, Where's the biggest growth opportunity for you, especially given the fact that certain companies are thinking about diversifying supply chains globally. Yeah, the biggest source of growth, certainly by dollars, but also pretty close to the biggest source of growth by percent last year is China.

That will continue to be the case. Why is that? I that that sounds counterintuitive. You know, China's under pressure, and obviously if we if we listened to some of the rhetoric, you think that the China was on the way down. Actually, China is opening up. China is opening up to the rest of the of the world, to the rest of the region in a very substantial way.

And given the center charge role as a connector between the markets in which we operate, obviously one of which is China, that connect to roles is quite valuable for us. So I would expect to continue to see China as a as a real outsized contributor to our growth. Hong

Kong as well. The Hong Kong has coming off of a couple of very tough years, right two thousand nineteen civil disturbances, obviously the pandemic they hid all of us, but then compounded by the National Security Law and some of the the sanctions and other pressures that if at Hong Kong, it was a tough two thousand into twenty one.

Hong Kong is now back to all of the islands feet good strong drawing business for us, and we expect that will kick in, obviously both leveraging the kind of the China growth, but also in its own right, so that part of the world is stil a real driver for us. But you described yourself there as a connector, and I want to touch on something, something delicate, and I want to give you the best opportunity to talk

about it. I think increasingly it's getting more difficult looking at where the West is going and looking where China is going at the moment, the allegations of genocide coming from the administration, the industrial scale human rights abuses there, the allegations coming from the UK government, a place where your bank is listed, Bill, do you ever feel like you have to be a diplomat sometimes as well as the CEO when you operate in China? And what do

you think people are missing here? You're a company with a big presence in there. I'm sure you have to be very careful about what you say to maintain a presence there. At the same time you have these allegations of genocide. Bill. That sounds like a really tough position for a CEO to be in. How do you do it? Well, yeah, I did. I did once and my student days want to be a diplomat, and thankfully I I took a different route, but mostly because I needed to pay off

my my university student loans. Thank you seem a good way to do that. But the I don't think it would be a great diplomat, so I won't try to be a diplomat. What I will say is that that the role that we play is bringing couple together, bringing people together, bringing ideas together from all parts of the world. And we operate in over sixty countries. Through the course of history. Some of those countries have been in conflict with others of those countries, some of them been in

conflict with the UK. I got I got one final question. You're gonna run out of time here, Bill, you guys invented diversity standard Charter Bank for decades his live diversity. What is your strategic diversity mandate that you can teach other executives like, I don't know what we can teach anybody. I know what we've learned ourselves, which is that when you have a broader range of opinions around the table, you serve clients better, and you attract better people, and

you make better decisions. And yeah, thankfully we are in datas as you point out with you know, because we operate in so many different countries, We've got a workforce that comes from those countries, and we have clients that have very different buying patterns and in different cycles. Uh. The key is to try to harness that and bring as much of that to the table as you can at any point in time. I think we do a

pretty good job of that. We know we can do better, So I'm not sure we have anything to teach anybody, but we're happy to share our lessons built five more years is the answer we often get from an old colleague. If yours Jamie Diamond when we talk about succession and later in the bank can bail. I believe you've been there almost seven it's it's seven years and jo and Bill? Is that right? It's coming on? Set? Are you thinking

a little bit about succession now? Are you happy with everything you've done or do you think it's more to be done? Jonathan, the day you called me a forever CEO is probably the day I should shoot the head for the door. But no, the guy we've we've got. We've got a task to complete here. It is not complete. That's reflected to our share price, but also in our own sense that that we have more that we can deliver.

I want to get this thing done and uh and then hopefully whoever takes over from me will be will be will be taking something that's really very good shape. Any thoughts about going back to JP Morgan, It's that's something you'd ever roll out Bill in the future. I think the likelihood of that is about as low as you could possibly get. As great as that from this, I don't think the bell got to catch up Set.

As always, it's good to hear from you. A timely conversation with Bill Winters have standard shout at David mel Pass as a president of the World Bank, and we're thrilled at Mr mel Pass could join us this morning. David, I look at the World Bank website and you moder lyn growth to slow. How fragile is it right now? You and I have studied stan Fisher and other crises as well. How close to instability and emerging markets are we? Hi, Tom,

good morning. I think that's a big challenge because as as you slow down, the population grows are still fast in some countries, and the if you're not getting ahead, then the people look at it and say, what's in it for me? And that brings that brings the physical insecurity that we're seeing in some parts of the world. The solution is to grow more and to get higher per capita incomes as well as of course health programs, vaccinations, education.

All that goes with good development practices is the institutional integrity there for you and across the street the International Monetary Fund. Are these nations listening to you as they struggle with some of the financial challenges they have? So many countries do listen. But I think a big part of the challenges the global environment. It's you know, very unequal. People at the lower end of the income scales aren't simply aren't doing well because the wealth is concentrating, and

so that's a big problem. You can you can put in good, better policies in your country and still not see much in the way of results. That's a big problem, David. Given this backdrop where the recovery has been much slower and more painful in the developing world, how concerning is it that a wall of debt maturities is coming up for a lot of these nations. This is a challenge. You know, it was discussed in the last two years and by the G twenty, but frankly the progress installed

on that. So as we look at nine two UH, the the UH, the payment from the IDA countries that's the low income countries are going to be thirty five billion dollars. That's the payments on principle and interest, which is way beyond the resources of the countries. That creates added challenge because they need the money for other things

like fighting the pandemic. David, How concerning is it that amidst this backdrop you have seen persistent dollar strength, you have seen persistent inflation and base goods I mean basically painted scenario for us how this transpires of the rest of We know worldwide that inflation really subtracts from people that are on fixed income or on the bottom end of the income scale. And that's particularly true of developing countries.

So as the as prices go up, they just don't have enough money for food, for the basics, for for education and for health. You know, in in the developing world, the education because of the school closures, education has really slid backwards. That means the ability to read and and UH and write and so those are concerning UH. And that gets us to the to the end endpoint that the if interest rate hikes start, that's going to be really a double whammy. That inflation and the interest rates

are a challenge. I think it would be better if the central banks looked at the capital allocation around the world and looks for better ways to allocate so that not all of the money goes to the biggest corporations. Your previous story was just about Microsoft cash. David, you are is qualified as any World Bank president in history to look at, study and advise on dollar dynamics. Does the World Bank in the poor countries of the world. Just take the content of Africa's one example. How desperate

are they for a week dollar? Uh? They're The strong dollar really puts pressure on them because their currencies weaken and then capital doesn't want to flow to them. Plus prices go up more than they are in the United States. UH, So I wouldn't care drives it as desperate for a week dollar. What they What benefits everyone is when currencies are stable, and that starts with the dollar. Uh and long term stability, I think is is the strongest support

for development. So the countries want that. But right now, as we go into a probable interest rate hiking phase, uh, that adds uh. That adds to the dollar and makes the challenges bigger for the developing countries. As I say, I think the world needs to look at the capital allocation and ask why is so much of the money going to the rich end of the scale. How do we amend that? I mean, it's one thing to comment on it and to identify it, but how are we

proactive for a new capital allocation? Away from buying more apple shares? You have to think about small businesses. That means floating rate uh money, That means uh money at the short into the curve. But we have this oddity where the government is supporting existing businesses, existing people and demand and not so much the supply side. So that's problem one. And then on the central bank side, Uh,

they're they're allocating that. You know, they have four tools, they're only using talking about two tools that interst rate hikes. That hurts people at the short end of the curve because short interest rates go up first. Uh, and even more so in developing countries. Uh. And they're also talking about shrinking or tapering the size of the balance sheet. There are two more tools. One is the duration of the central bank holdings and one is regulatory policy. I

call it post monitorism. We're not really in a money supply world. We're in a very heavily regulatory world right now. It penalizes small businesses. So having an explicit focus by both fiscal and monetary policy that you want to support smaller businesses so they can help the supply chain. I

think that's critical and could help worldwide. David, given where we are now, given that these changes will take time to be implemented, do you think that the developing world complex can deal with four rate hikes from the federals are of this year. Uh. It's it's going to be really challenging. We already see it in country after country from the political side. You see it daily in the news. I think it would help if the Central Bank said

what the strategy is. Uh. You know, I really think they should be looking at the duration of their assets and saying they'll stop buying so many assets at the long end uh and have more of their mix be capital favorable, small business favorable. That helps developing countries. Mr melt Pass, thank you so much for joining us. David Melpiss, World Bank President, Bank of America adjusting to what they

see out there from sea to shining Sea. Sevita Subermanian joins US now US Equity and Quantitative Strategy at Bank of America Security. Sevita, I want to go to your latest research note where you dovetail in nicely the Subramanian misery index. When Brian moynihan wakes up every morning, he looks at the Subermannian misery indicator, and the reality is you look at consumer discretionary and you look at industrial and those are two big important sectors linked directly in

to rising labor costs. Absolutely these are two of the most labor intensive sectors of the SMP five. But oddly enough, these are the two sectors where analysts are forecasting all time peaks in margins by the third quarter of this year, which just doesn't really jive with what we're seeing in terms of tightness in the labor market in terms of as you pointed out, compensation expenses in almost every industry

starting to see really strong upward pressure. UM. You know, I I think that something's got to give this year, and it might be margins. That's where we think that analysts are too uh too optimistic, if you will, UM. So if you think about the corporate Misery indicator, UM, this is an indicator that we used to track whether margins are starting to see a squeeze and and whether earnings are actually gonna fault. And so far, so good.

So so far, we've seen prices generally keep up with costs um although this quarter we're starting to see that fray a little bit. And and we've seen unit volumes sales increase. So those three factors are the ones to watch. And when it starts to get problematic is when prices increased too much, demand starts to deteriorate and costs still creep higher. And that's what we're worried about as we

move into uh, you know, subsequent quarters this year. I think the good news says that a lot of the sectors in the SMP five hundred have become very labor light, like for example, you know, technology, even industrials. A lot of these sectors have automated a lot of that labor away. But there are still pockets of the market that we

think look dangerous from that perspective. AT did some wonderful work over the last twelve months on the labor intensitive the overall SMP five hundred, the change of it over the last not just few years, but over the last decade as well. I'm just wondering, then, the concentration of that you've worked through that work with me at the index level, what's the biggest challenge of the index level. You're at forty six hundred year end on the SMP.

What gets us there? We are we might get there today? Um, I think that, you know, I mean, here's the thing. I think that it's hard to be long the entire market when you've got all of the positive forces that have been playing through be an easy monetary policy, easy fiscal policy, super low interest rates, UM, you know, relatively healthy balance sheets of summers corporates, you've got um, you know, strong earnings acceleration off of a you know, global pandemic low.

All of those factors are basically slowing down. So I'm not barish on the SMP five hundred, but I think this is gonna be a year where we're gonna hit that a bunch of times, and you're gonna want to pick your spots. The way to pick where to invest this year is very very simple. Look for free cash flow. This is the most important factor in an environment of

tightening monetary policy. In our Qualt work, and you know, I'm a math person, So in our Qualt work, we've back tested all these different strategies of investing and we found that free cash flow to enterprise value is the single best way to pick a stock during periods during the first year of the FED tightening cycle. So create a Bloomberg screen, sort all your companies by free cash flow to enterprise value, and that would be the way

I would look for opportunities. And I think, what's interesting, if you give me one more minute on this is that when we saw that tech route the other week, it was just maybe, yeah, I can't keep track of time. Maybe a week ago we saw massive down in the in the NAS deck and UH, and then miraculously mid day, the free cash flow opportunities within that tech benchmark grew attractive enough for industris to start to leg back into tech.

So I think that's the type of market we're going to be in where you have to really watch these factors, look for free cash flow generation, and just be nimble. Volatility is great for for markets, for active managers, and I think that's where we're going to be this year, which is a reason why I was a little bit confused about your call that small cap stocks may outperform large cap stocks considering the fact that a number of different surveys at least have shown people are worried about

their margins more than large companies. They're worried about them handling supply chain disruptions and labor shortages. Can you explain why you're more bullish on these smaller consue? Absolutely, And I mean the bottom line is that from evaluation perspective, small caps are trading at a twenty five percent discount to large caps historically on average they trade at a two percent premium. You're right, Lisa, there's a lot of stuff going on in the small cap sector that could

be negative for margins. But my view is that's priced in. Where it's not priced in is in consumer companies and industrial companies, where these you know, larger companies are trading at close to all time highs in terms of evaluations.

So I think you're right that small caps aren't generally, um, you know that great in a labor inflation environment, although the work from our small cap team and Jill Hall has actually indicated that small caps generally outperformed large caps during periods of capex acceleration, uh, you know, pick up an inflation, even the early stages of a FED hiking cycle. So I think a lot of these things are coming into play. And then on top of that, the grady

is small caps are super cheap right now. We haven't seen this type of evaluation discrepancy since you know too wasn't And if you had bought the Russell in two thousand and short of the SMP, you would have made a lot of alpha over the next ten years. Interesting cal Sevita are best to you and the team as always wonderful Cevita Superman him there of Bank America. Let's get straight to this bond market debate. This conversation with

Kathy Jones, the chief fixed income strategist, a charge swab. Kathy, a wonderful friend of this program. Thank you for being with us this morning. I'm trying to work out, after how much work we've already done year today as interest rate hikes into this market, whether this is the beginning of the end or the end of the beginning of the conversation about higher interest rates. Yeah, you know, I think we are discounting a lot. We're looking more like

three rate hikes, not four rate hikes. But I think the focus really ought to be on the balance sheet. You know. That was the surprise that came out of the minute to the o MC meeting, that not only were they poised to raise rates, but there are poised to use the balance sheet as well. And I don't think the markets really quite figured out how exactly the

bed's gonna do that. Um, they haven't really revealed much to us, but that to me tells me how much they're going to try to maneuver the long end of the curve while raising rates at the short end. So I think, you know, three rate hikes, not four this year, but maybe an earlier start to the runoff of the balance sheet, maybe as early as June or July. And

that's going to have UM. I think implications for the markets, Kathy, very importantly, whether you look at the spread market two STAN or some odd spread you follow every day, or you look at the actual nominal yield or frankly the real yield. If you're having a cup of coffee with liz Anne Saunders and she turns you and says, where's the pivot point, where's the fixed income yield point where

things change? What do you respond? Oh? Boy? You know I would say if we get you know, real interest rates in the positive territory, UM, that probably is something that would be a pivot point for the market. But I think that if that happens, particularly of the short short term real rates move up, UM, we get a pretty good size flattening of the yield curve. And that's something the markets have to deal with. Can you predict

an inverted curve? I mean, do you have enough information yet to go to an inversion where the two year yield is it a higher yield than the tenure yield. Now, I don't think so, and I think that's where the balance sheet comes in. I think that there are ways that the FED can probably use the balance seat to avoid an inversion of the yield curve. So I we're not forecasting that now or for this year or even for next year. I think that that remains to be seen.

That wouldn't be our base case forecast. But you know, it's a risk to the market. You see the back end of the curve already flattening out as we talk about FED rate hikes that haven't even materialized yet. Although it's not just a FED rate hike that's gonna lead to at the higher base rate on that two year yield. I was reading a Goldman sax note as well as Morgan Stanley talking about how much of a rate hike

the runoff of the balance sheet will count for. In other words, is it going to be uh necessarily for rate hikes the equivalent of that with the balance sheet rolloff taken into effect. What's your view on that? I mean, is this a time to buy short term rates or do you think that it's appropriately priced based on that outlook? Of the balance sheet. Now, the thing the short end of the curve is probably appropriately priced um and I think there's a little bit more room on the long end.

But we're actually telling people to start legging into a little bit more duration. You know, we've been short duration for forever, it seems like for the last couple of years, and we're actually advocating starting to move into a little bit more duration at these levels because I think the FAT is going to have more difficulty hiking rates rapidly than than the market believes. And and we've got slowed down in the ECONO me coming, you know, because of

fiscal policy changes. Were already seeing some of the rollover in certain areas of the manufacturing sector. You mentioned China slowing down. I think that the expectation is very high for the FED to hype rates very rapidly, and I don't think that they'll be able to live up to that. In Kathy olsons oise, he's gonna see it. Let Kathy jumps that swamp. This is the Bloomberg Surveillance Podcast. Thanks for listening. Join us live weekdays from seven to ten

am Eastern on Bloomberg Radio and on Bloomberg Television. Each day from six to nine am for insight from the best in economics, finance, investment, and international relations. And subscribe to the Surveillance podcast on Apple podcast, SoundCloud, Bloomberg dot com, and of course, on the terminal. I'm Tom Keene, and this is Bloomberg