May 6, 2024 • 22 mins
Featuring:
Brian Jacobsen, Chief Economist at Annex Wealth Management, on with his outlook on markets.
Oriana Skylar Mastro, Center Fellow at Stanford's Freeman Spogli Institute for International Studies, on Chinese President Xi Jinping's trip to Europe.
Mary Nicola, Bloomberg M-LIV strategist, on her story "China’s Stocks Rally Is Becoming Harder to Ignore."
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Episode Transcript
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Speaker 1 (00:02):
Bloomberg Audio Studios, podcasts, radio news.
Speaker 2 (00:09):
This is the Bloomberg Daybreak Aisia podcast. I'm Doug Krisner.
You can join Brian Curtis and myself for the stories,
making news and moving markets in the APAC region. You
can subscribe to the show anywhere you get your podcast
and always on Bloomberg Radio, the Bloomberg Terminal, and the
Bloomberg Business app.
Speaker 3 (00:26):
To take a closer look at markets and economic growth
for leading countries around the world and the region is
Brian Jacobson, with US chief economist at Annex Wealth Management. Brian,
the weaker not weak, but the weaker non farm payrolls
report took a little pressure off for those who are
really worried that strong growth will keep inflation higher in
(00:48):
thus central banks higher. But the thing is inflation remains sticky.
Do you believe that we'll get a drop in inflation
numbers that might match what we saw in j.
Speaker 4 (01:01):
Yes, we do. Yeah. So here at Annex on our
Investment committee, we were looking at some of the data
and it does seem to us that the first three
months of twenty twenty four we've seen those upside surprises
with inflation. So it's just still too hot to handle,
But underneath the surface, there is still that goods price
deflation that is taking place, especially with durable goods. It
(01:24):
does appear as though wage growth has really moderated, and
so perhaps that is then going to lead to service
sector prices actually shifting from that rather high inflation to
something a little bit more tepid. So we actually are
optimistic that the first three months of twenty twenty four
are not a prelude to what to expect for the
(01:47):
balance of the year. So we do expect to see
decline in inflation pressures here.
Speaker 2 (01:53):
So if inflation is coming down and growth is softening
ever so slightly, what does that mean for the equity market?
And are you playing this solely on the fact that
there will be a little bit more liquidity added when
rates come down. I mean, shouldn't we be concerned about
the quality of earnings going forward?
Speaker 4 (02:10):
We're always concerned about the quality of earnings. One of
the things that we oftentimes focus on when we're looking
at individual equities for client portfolios is to make sure
that we have confidence that those companies are going to
be able to maintain or expand their margins relative to
their industry peers, and so that's kind of like an
initial screen that we really like to look at, and
(02:33):
we are a little concerned about the health of some
of the areas as far as the vulnerabilities to a
consumer slowdown. Maybe that's one of the reasons why you're
to date in ETF like XLY, which is the sector
ETF for consumer discretionary, has been underperforming the broader market.
So much is because not that the consumer isn't doing
(02:55):
well now, but it is likely that they're going to
be coming under further press sure as the year goes on.
With the wage data that we saw, I think that
it almost validates that idea. You only saw a point
two percent month on month increase in wages three point
nine percent year on year, and we still have relatively
high inflation, so the real purchasing power of consumer incomes
(03:19):
isn't growing as fast as what it used to.
Speaker 3 (03:22):
I wonder whether or not the little bit of softness
that we see in the consumer might be offset by
strength and industrial because we have this other whole trend
of you know, obviously with AI and with industrialization and
reshoring and all of that, that that might be propping
up the economy because we fear about the consumer, and
(03:44):
yet the numbers overall are sort of okay.
Speaker 4 (03:48):
It's absolutely correct, and really you can see this in
the ISM data. The ISM Manufacturing index was below fifty
for sixteen months in a row, then we briefly went
above fifty, and now we dip back below it. At
the same time, the ISM services index was above fifty,
and now we just recently went below it. We actually
(04:08):
believe that we will be seeing manufacturing beginning to get
some of a footing here because of some of the
investment in artificial intelligence, maybe the efficiency gains that can
come from that government spending on infrastructure. So there are
some things that we believe can really help the industrial area,
and industrials is one of those sectors that we do
(04:30):
have a preferred view on, along with materials. They have
underperformed for a while. Valuations to us look fairly reasonable,
as reasonable as what they can be in this type
of environment, and so we actually do think maybe the
baton is being handed from the consumer to more manufacturing
and industrial for growth.
Speaker 2 (04:51):
So we've focused a lot in this conversation on the
equity side. I'm wondering how you view fixed income under
these conditions. That we've been describing.
Speaker 4 (05:00):
It continues to be challenging. It seems like really it
does depend a lot on government deficits Treasury refunding operations.
As far as you know, the quarterly refunding report was
about in line with expectations, so that was encouraging. We
think that maybe the US Treasury has gotten some religion
as far as being attentive to what the market is
(05:22):
actually expecting and trying not to make any adverse surprises
on that front. But really we don't see a huge
upside for bonds in general. We think that it's an
environment where it's more about clipping the coupon. And really,
if you think about a year from now, where are
we likely to be with the Fed funds rate, probably
(05:44):
maybe one hundred basis points lower. Perhaps that means the
tenure Treasury can go down fifty basis points, maybe seventy
five basis points on a good day. That's a decent
capital appreciation. But really we're viewing bonds more as for
just where is it that you can get that good income,
and a lot of that we're finding is more on
the shorter term investment grade side of things.
Speaker 3 (06:06):
If I could throw a little shade on my earlier question.
You know, among the adages that you know, we all
put a lot of faith in, don't fight the FED,
and also that the consumer is about seventy percent of
the US economy. Given that question and your answer is
that relationship changing a little.
Speaker 4 (06:24):
Well, not necessarily for the markets really, if you're absolutely
right as far as with the economy. So, economic growth
in the United States is heavily dependent upon the consumer. Now,
when it comes to corporate profitability, the earnings per share
of the S and P five hundred, that's where we
think that it's really more important about the global growth story.
Are we going to see some sort of maybe reacceleration
(06:47):
in China Europe emerging from their recession. So really it's
more about manufacturing and global growth as opposed to just
purely consumer spending that's likely to drive EPs or earnings
per share for the S and P five hundred or
even the broader market.
Speaker 2 (07:02):
Well, Brian, I'm glad you mentioned China and Europe because
my next question had to do with opportunities that you
may see offshore. Is there anything that's a compelling buy
right now offshore?
Speaker 3 (07:13):
Oh?
Speaker 4 (07:13):
Well, for US, we actually do like emerging market debt.
We think that maybe the currencies can appreciate from here
decent coupon income, and even China, a lot of people
have kind of thrown in the towel on them, declaring
it to be uninvestable. But yet the valuations may be
maybe a good area for us to be looking at
for longer term investments.
Speaker 3 (07:33):
All right, Brian, thanks so much for joining us here
on the program. Always learn a lot when you come on.
Thank you for being with us. Brian Jacobson, Chief Economists
at Annex Wealth Management. One of the top stories of
the day, Chinese President Jijinping has arrived in France and
(07:55):
will begin today a three nations swing through Europe. This
is all to try to improve relations with Europe at
a time when relations have been a little strained and
very tough with the United States. Joining us now for
some discussion of this is Oreana Schuyler Mastro, a fellow
at Stanford University's Institute for International Studies. With us, we
(08:17):
heard from Emmanuel Macron asking for a reset in French
or European China relations. We can interpret that in a
number of ways. I think a lot of people are
curious here at the outset of this trip Oreana. Whether
or not Europe is going to continue with the process
of toughening its stance on China, or whether or not
(08:38):
it's going to use this trip as a way of
trying to smooth things out, Well.
Speaker 1 (08:44):
That's a great question. I'm an expert on China and
not on Europe, but if I had to speculate, I
think even the view that Europe has been tough on
China is a little overblown. The reason that China is
going to a place like France, for example, is that
they have gotten these signals from Europe that these countries
are to a degree prioritizing their economic relationships with China,
(09:05):
and so there is an opening here for the Chinese
to try to dangle some economic benefits in front of
US europionallers, allies and partners and hope that these countries
will consider more of those economic interests over the strategic
interests that the United States wants them to keep in mind,
whether it's pressuring Russia on Ukraine or putting more pressure
(09:25):
on China in this sort of strategic competition that is
currently ongoing between Beijing and Washington.
Speaker 2 (09:31):
Well, Washington and Brussels seem to be pretty unified when
it comes to the issue of Chinese over capacity on
the manufacturing side. You mentioned war in Ukraine. Do you
think President she is trying to find a chink in
the armor, so to speak, and drive a wedge in
that to try to create maybe a little bit more
differential between Europe and the US.
Speaker 4 (09:55):
Well.
Speaker 1 (09:55):
Absolutely, I think there's a lot of commentary from the
Chinese side that they do believe if they strengthen political
cooperation and economic interdependence with Europe, they could use that
kind of as a bargaining ship, warming relations between China
and Europe to stabilize the relations with the United States.
And so it is kind of a multi step, multi
tiered strategy that in the end gives them an upper
(10:17):
hand in the competition with the United States and ideally,
from their perspective, reduce some of the pressure that the
United States and its allies is putting on China in
the economic and trade sphere, of course, but also in
the military strategic sphere.
Speaker 3 (10:31):
Something that has languished a bit between China and Europe
is a bilateral investment treaty. Do you expect to see
any progress on that during these five days.
Speaker 1 (10:43):
I think we would be hard pressed to see progress
on that in these five days. That it is from
the Chinese respective hopefully a first step to be able
to push some of those initiatives through right things that
were already signed, but we don't see a lot of
implementation happening, and so maybe there'd be some sort of
agreement for or further discussions or further talks about implementation.
(11:03):
That would be seen as a big win. But if
anything comes from it to make progress in the bilateral
investment treaty, it will be in incremental stuff.
Speaker 2 (11:13):
You could make the case that there's maybe a little
bit of difference between where France is and Germany happens
to be on the manufacturing stuff. I mentioned the ev
There is also the medical device issue, but I think
that France and Germany are pretty aligned when it comes
to war in Ukraine. Do you think there's any way
that they could get China to take a tougher stance
(11:34):
where Russia is against Russia in what's happening in Ukraine.
Speaker 1 (11:40):
I think unless there is some real cost to China
for its closer military strategic relationship with Russia, the Chinese
are not going to see it in their best interest
to pressure Russia and create that distance between them. So
it's only if they thought there were going to be
some significant economic costs, like European countries, we're going to
put some sort of sanctions, secondary sanctions on China for
(12:03):
their support of the war, that the Chinese would consider
moving away. But from now, if it's just kind of
a naming and shaming thing or diplomacy and just you know,
criticizing them for the policy, I don't think that's going
to be a significant enough disincentive from their perspective, given
everything they get from that relationship with Russia.
Speaker 3 (12:24):
Is there frustration on the Chinese side about you know,
relations now between China and Europe, and China and the
US having shifted a little bit more of the ideological
side and not so much on the practical side they're
doing business side. Is that something that is tangible?
Speaker 1 (12:44):
I think it is. The United States has been trying
to argue that this is not just a conflict of
unfair trade practices or even territorial disputes and conflicts in Asia,
but we have a China that is a threat to
the liberal international order, and the United States with its
analyies and partners who tend to be liberal democracies have
(13:04):
different interests from the autocracies of the world like China
and Russia or North Korea that are coming closer together.
So China has tried it for the past twenty five
years through a variety of strategies that I lay out
in my book coming out next month. Up start how
China becomes a great power to create that divide and
say this is not an ideological battle because they don't
(13:25):
want European countries in the United States to form this
type of coalition and to prioritize things like human rights.
Then these ideological battles over economics. So during this trip,
they're going to try to push this idea that it's
much better to do business with China and ignore some
of those factors.
Speaker 2 (13:41):
What do you see as the biggest risk to China
in following the trajectory that you lay out in your book.
Is there one major potential pitfall?
Speaker 1 (13:52):
Well, I think the biggest pitfall is I lay out
in the book that they were able to build power
largely by doing different things in the United States. Does
we see under Shijenping the reason they've done that. One
of the reasons is they were trying to avoid a backlash.
But domestically, you now hear this argument being made that
no matter what China does, there's going to be pressure
from the United States. So they're no longer prioritizing playing nice.
(14:15):
And if that's the case, it does seem like they
have more incentives in the future to be more aggressive,
and they also have incentives to abandon some of their
smarter strategies that were more effective. And so what that
means is, on one hand, we can expect a more
aggressive China in the future, but on the other one,
that is not going to be quite so successful in
their pursuit of power as they have the past twenty
(14:35):
five years.
Speaker 3 (14:36):
You know, we always had an ideological angle, you know,
we had the annual NFN tussle between the US and China,
but then it switched to more on the practical side.
What do you think change things.
Speaker 2 (14:47):
Back to the ideological very quick?
Speaker 3 (14:50):
The single biggest thing, and.
Speaker 1 (14:52):
I think we came to the realization that China, you
can't create a distinction between the ideology, the economics, the military,
any of it. China has a brand strategy that brings
all those components together. And so if we're going to
protect US interests and allied interests. We have to consider
all those components together as well.
Speaker 3 (15:13):
Arianna, thanks so much for being with this. Oreana Schuyler Mustro,
a fellow at Stanford University's Institute for International Studies.
Speaker 2 (15:27):
The bold case for Chinese equities appears to be more
compelling than it has for a long time, and investors
seem to be gradually dipping their toes in despite what
is being called the scars, the deep scars of last year.
Mary Nikola joins us now. Mary is Bloomberg m Live
strategist who joins us from our studios in Singapore. It's
(15:48):
always good to chat with you, And I'm wondering, is
this something that's going to be durable in your view
or is this maybe just a quick sort of recovery
that may resume. I mean, the weak trend would reach
zoom before it's too long from now.
Speaker 5 (16:03):
Yeah, I think this time around, there's just a few
more catalysts to help support this rally. So if you look,
we know valuations have been cheap, that's nothing new for us,
but look at some of the other factors. So take
for example, the equity risk premium, which is the difference
between the earnings yields for equities and the government bond yields.
(16:24):
They're actually showing you that you are getting compensated for
taking risk. So that's one factor, and it's actually has
been improving. It's above its five year average, so there's
a case there that you're getting compensation. The second factor
is that you are hearing more support from policymakers. And
again we have heard this numerous times, but this time
(16:46):
the Pull Up Bureau was focusing on two things that
you know, for someone for someone like me, got excited,
which is the fact that they're looking at ways to
help with consumer demand and they're looking at ways of
figuring out what's going to happen with housing. Obviously we
know these are the two issues that have been the
underlying key thing that has been dragging down the economy.
(17:09):
So they're now targeting those two things, and that's what
they mentioned at the Pull Up Bureau meeting that closed
out on Tuesday.
Speaker 3 (17:17):
Completing units that are in the process of being built
and getting those two people walk us through how that
winds up being also adding to the bolishness.
Speaker 5 (17:27):
Yeah, absolutely, so there's so much supply out there there's
also a lot of people who haven't gotten their apartments,
and obviously that's weighing on sentiment. The fact that you know,
we've seen a lot of that move from property and
they're looking for ways to put their wealth in gold.
That's another factor. Obviously that's been weighing on the equity markets.
(17:47):
But if the government takes charge of, you know, making
of delivering on a lot of these housing projects two
people and putting them back in their hands, that is
a big, big positive support for the average consumer.
Speaker 2 (18:01):
I'm glad you mentioned gold because Brian and I were
talking earlier about a story in the New York Times
over the weekend Chinese consumers have flocked to gold really
fast here. I mean, I think they're buying a hand
over fist as confidence in traditional venues like real estate
and inequities have faltered a bit. Do you think this
is also a temporary phenomenon.
Speaker 5 (18:21):
You know, there's there's a lot to be set for
gold at this point, especially if you're seeing and your
expectations are that, you know, growth is going to continue
to be on the weaker side. That's just the long
term trajectory for China growth, right, So it has nothing
to do with anything else, but this is where we're
heading from a long term perspective. So you have that
(18:44):
supporting gold, not to mention you're expecting currency weakness, bond
yields are quite low, so and then the housing market
you still don't have the confidence to jump back in.
If you think about it, where the most you know,
the average Chinese put their wealth. They put their wealth
in the housing market, and that's really lost a lot
(19:05):
of dampened their confidence. So for now it's going to
be about gold of where they can put their wealth,
and that seems to be a beacon of stability. So
they're going to always have that little bit on the
side as a part of let's say, their portfolio.
Speaker 3 (19:22):
In the overall picture, about looking at a little bit
more in terms of bullish conditions for Chinese equities. We
haven't talked too much before about some sort of China
discount like we've seen with Korea for a long time.
And if that is permanently baked in, how much of
a constraint does that offer?
Speaker 5 (19:43):
Yeah, I mean there is because of the fact that
you've had all this piecemeal stimulus that's come through and
nothing has really gotten people excited or really gotten things
going from a growth perspective. So to some degree, there
is there is a concern about the unwinding of a
lot of the stimulus that they have put in or
(20:05):
some of the regulations that they may impose, because we
have to also remember the start of the rally was
really based on the trading regulations and the buying from
the national team, so now it just needs another oomph, right,
So they've been putting it through the nine point Plan
where they're trying to help with companies give out better
dividends or improve their profitability and really focusing on that,
(20:29):
and that's absolutely crucial and absolutely critical in terms of
looking at valuations. So it's all about the follow through
and it's going to continue to be about that.
Speaker 2 (20:38):
So when we were talking about gold a moment ago,
you linked it to the weak currency. Well, the weak
currency has been a positive where the export economy in
China has been concerned, and there's been a lot written
recently on how strong that is. Is there a risk
that that trend could maybe adjust a bit, soften a
bit if the currency were to recover.
Speaker 5 (21:01):
I don't think so. I think there's been an export
boom more globally. So we've seen it not only in Korea,
in Taiwan, and obviously they have the AI backing them,
but at the same time you still have this export
global boom and an export recovery. We've seen it in
a lot of the numbers across this region, especially in
let's say intermediary goods and final goods as well. So
(21:24):
that's going to continue. And if you look at the CNY,
sure against the dollar, it's weekend, but if you look
at it across versus other currencies, it's actually been doing
pretty well, and yet the exports have been holding up.
Speaker 2 (21:37):
Mary, it's a pleasure to have you on the program.
Thanks for joining us. Mary Nicola, Bloomberg m Live Strategist.
Speaker 3 (21:44):
This is the Bloomberg Daybreak Asia podcast, bringing you the stories,
making news and moving markets in the Asia Pacific. Visit
the Bloomberg Podcast channel on YouTube you get more episodes
of this and other shows from Bloomberg. Subscribe to the
podcast on Apple, Spotify, or anywhere else you listen and
always on Bloomberg Radio, the Bloomberg Terminal, and the Bloomberg
(22:06):
Business App.
Bloomberg Audio Studios, podcasts, radio news.
Speaker 2 (00:09):
This is the Bloomberg Daybreak Aisia podcast. I'm Doug Krisner.
You can join Brian Curtis and myself for the stories,
making news and moving markets in the APAC region. You
can subscribe to the show anywhere you get your podcast
and always on Bloomberg Radio, the Bloomberg Terminal, and the
Bloomberg Business app.
Speaker 3 (00:26):
To take a closer look at markets and economic growth
for leading countries around the world and the region is
Brian Jacobson, with US chief economist at Annex Wealth Management. Brian,
the weaker not weak, but the weaker non farm payrolls
report took a little pressure off for those who are
really worried that strong growth will keep inflation higher in
(00:48):
thus central banks higher. But the thing is inflation remains sticky.
Do you believe that we'll get a drop in inflation
numbers that might match what we saw in j.
Speaker 4 (01:01):
Yes, we do. Yeah. So here at Annex on our
Investment committee, we were looking at some of the data
and it does seem to us that the first three
months of twenty twenty four we've seen those upside surprises
with inflation. So it's just still too hot to handle,
But underneath the surface, there is still that goods price
deflation that is taking place, especially with durable goods. It
(01:24):
does appear as though wage growth has really moderated, and
so perhaps that is then going to lead to service
sector prices actually shifting from that rather high inflation to
something a little bit more tepid. So we actually are
optimistic that the first three months of twenty twenty four
are not a prelude to what to expect for the
(01:47):
balance of the year. So we do expect to see
decline in inflation pressures here.
Speaker 2 (01:53):
So if inflation is coming down and growth is softening
ever so slightly, what does that mean for the equity market?
And are you playing this solely on the fact that
there will be a little bit more liquidity added when
rates come down. I mean, shouldn't we be concerned about
the quality of earnings going forward?
Speaker 4 (02:10):
We're always concerned about the quality of earnings. One of
the things that we oftentimes focus on when we're looking
at individual equities for client portfolios is to make sure
that we have confidence that those companies are going to
be able to maintain or expand their margins relative to
their industry peers, and so that's kind of like an
initial screen that we really like to look at, and
(02:33):
we are a little concerned about the health of some
of the areas as far as the vulnerabilities to a
consumer slowdown. Maybe that's one of the reasons why you're
to date in ETF like XLY, which is the sector
ETF for consumer discretionary, has been underperforming the broader market.
So much is because not that the consumer isn't doing
(02:55):
well now, but it is likely that they're going to
be coming under further press sure as the year goes on.
With the wage data that we saw, I think that
it almost validates that idea. You only saw a point
two percent month on month increase in wages three point
nine percent year on year, and we still have relatively
high inflation, so the real purchasing power of consumer incomes
(03:19):
isn't growing as fast as what it used to.
Speaker 3 (03:22):
I wonder whether or not the little bit of softness
that we see in the consumer might be offset by
strength and industrial because we have this other whole trend
of you know, obviously with AI and with industrialization and
reshoring and all of that, that that might be propping
up the economy because we fear about the consumer, and
(03:44):
yet the numbers overall are sort of okay.
Speaker 4 (03:48):
It's absolutely correct, and really you can see this in
the ISM data. The ISM Manufacturing index was below fifty
for sixteen months in a row, then we briefly went
above fifty, and now we dip back below it. At
the same time, the ISM services index was above fifty,
and now we just recently went below it. We actually
(04:08):
believe that we will be seeing manufacturing beginning to get
some of a footing here because of some of the
investment in artificial intelligence, maybe the efficiency gains that can
come from that government spending on infrastructure. So there are
some things that we believe can really help the industrial area,
and industrials is one of those sectors that we do
(04:30):
have a preferred view on, along with materials. They have
underperformed for a while. Valuations to us look fairly reasonable,
as reasonable as what they can be in this type
of environment, and so we actually do think maybe the
baton is being handed from the consumer to more manufacturing
and industrial for growth.
Speaker 2 (04:51):
So we've focused a lot in this conversation on the
equity side. I'm wondering how you view fixed income under
these conditions. That we've been describing.
Speaker 4 (05:00):
It continues to be challenging. It seems like really it
does depend a lot on government deficits Treasury refunding operations.
As far as you know, the quarterly refunding report was
about in line with expectations, so that was encouraging. We
think that maybe the US Treasury has gotten some religion
as far as being attentive to what the market is
(05:22):
actually expecting and trying not to make any adverse surprises
on that front. But really we don't see a huge
upside for bonds in general. We think that it's an
environment where it's more about clipping the coupon. And really,
if you think about a year from now, where are
we likely to be with the Fed funds rate, probably
(05:44):
maybe one hundred basis points lower. Perhaps that means the
tenure Treasury can go down fifty basis points, maybe seventy
five basis points on a good day. That's a decent
capital appreciation. But really we're viewing bonds more as for
just where is it that you can get that good income,
and a lot of that we're finding is more on
the shorter term investment grade side of things.
Speaker 3 (06:06):
If I could throw a little shade on my earlier question.
You know, among the adages that you know, we all
put a lot of faith in, don't fight the FED,
and also that the consumer is about seventy percent of
the US economy. Given that question and your answer is
that relationship changing a little.
Speaker 4 (06:24):
Well, not necessarily for the markets really, if you're absolutely
right as far as with the economy. So, economic growth
in the United States is heavily dependent upon the consumer. Now,
when it comes to corporate profitability, the earnings per share
of the S and P five hundred, that's where we
think that it's really more important about the global growth story.
Are we going to see some sort of maybe reacceleration
(06:47):
in China Europe emerging from their recession. So really it's
more about manufacturing and global growth as opposed to just
purely consumer spending that's likely to drive EPs or earnings
per share for the S and P five hundred or
even the broader market.
Speaker 2 (07:02):
Well, Brian, I'm glad you mentioned China and Europe because
my next question had to do with opportunities that you
may see offshore. Is there anything that's a compelling buy
right now offshore?
Speaker 3 (07:13):
Oh?
Speaker 4 (07:13):
Well, for US, we actually do like emerging market debt.
We think that maybe the currencies can appreciate from here
decent coupon income, and even China, a lot of people
have kind of thrown in the towel on them, declaring
it to be uninvestable. But yet the valuations may be
maybe a good area for us to be looking at
for longer term investments.
Speaker 3 (07:33):
All right, Brian, thanks so much for joining us here
on the program. Always learn a lot when you come on.
Thank you for being with us. Brian Jacobson, Chief Economists
at Annex Wealth Management. One of the top stories of
the day, Chinese President Jijinping has arrived in France and
(07:55):
will begin today a three nations swing through Europe. This
is all to try to improve relations with Europe at
a time when relations have been a little strained and
very tough with the United States. Joining us now for
some discussion of this is Oreana Schuyler Mastro, a fellow
at Stanford University's Institute for International Studies. With us, we
(08:17):
heard from Emmanuel Macron asking for a reset in French
or European China relations. We can interpret that in a
number of ways. I think a lot of people are
curious here at the outset of this trip Oreana. Whether
or not Europe is going to continue with the process
of toughening its stance on China, or whether or not
(08:38):
it's going to use this trip as a way of
trying to smooth things out, Well.
Speaker 1 (08:44):
That's a great question. I'm an expert on China and
not on Europe, but if I had to speculate, I
think even the view that Europe has been tough on
China is a little overblown. The reason that China is
going to a place like France, for example, is that
they have gotten these signals from Europe that these countries
are to a degree prioritizing their economic relationships with China,
(09:05):
and so there is an opening here for the Chinese
to try to dangle some economic benefits in front of
US europionallers, allies and partners and hope that these countries
will consider more of those economic interests over the strategic
interests that the United States wants them to keep in mind,
whether it's pressuring Russia on Ukraine or putting more pressure
(09:25):
on China in this sort of strategic competition that is
currently ongoing between Beijing and Washington.
Speaker 2 (09:31):
Well, Washington and Brussels seem to be pretty unified when
it comes to the issue of Chinese over capacity on
the manufacturing side. You mentioned war in Ukraine. Do you
think President she is trying to find a chink in
the armor, so to speak, and drive a wedge in
that to try to create maybe a little bit more
differential between Europe and the US.
Speaker 4 (09:55):
Well.
Speaker 1 (09:55):
Absolutely, I think there's a lot of commentary from the
Chinese side that they do believe if they strengthen political
cooperation and economic interdependence with Europe, they could use that
kind of as a bargaining ship, warming relations between China
and Europe to stabilize the relations with the United States.
And so it is kind of a multi step, multi
tiered strategy that in the end gives them an upper
(10:17):
hand in the competition with the United States and ideally,
from their perspective, reduce some of the pressure that the
United States and its allies is putting on China in
the economic and trade sphere, of course, but also in
the military strategic sphere.
Speaker 3 (10:31):
Something that has languished a bit between China and Europe
is a bilateral investment treaty. Do you expect to see
any progress on that during these five days.
Speaker 1 (10:43):
I think we would be hard pressed to see progress
on that in these five days. That it is from
the Chinese respective hopefully a first step to be able
to push some of those initiatives through right things that
were already signed, but we don't see a lot of
implementation happening, and so maybe there'd be some sort of
agreement for or further discussions or further talks about implementation.
(11:03):
That would be seen as a big win. But if
anything comes from it to make progress in the bilateral
investment treaty, it will be in incremental stuff.
Speaker 2 (11:13):
You could make the case that there's maybe a little
bit of difference between where France is and Germany happens
to be on the manufacturing stuff. I mentioned the ev
There is also the medical device issue, but I think
that France and Germany are pretty aligned when it comes
to war in Ukraine. Do you think there's any way
that they could get China to take a tougher stance
(11:34):
where Russia is against Russia in what's happening in Ukraine.
Speaker 1 (11:40):
I think unless there is some real cost to China
for its closer military strategic relationship with Russia, the Chinese
are not going to see it in their best interest
to pressure Russia and create that distance between them. So
it's only if they thought there were going to be
some significant economic costs, like European countries, we're going to
put some sort of sanctions, secondary sanctions on China for
(12:03):
their support of the war, that the Chinese would consider
moving away. But from now, if it's just kind of
a naming and shaming thing or diplomacy and just you know,
criticizing them for the policy, I don't think that's going
to be a significant enough disincentive from their perspective, given
everything they get from that relationship with Russia.
Speaker 3 (12:24):
Is there frustration on the Chinese side about you know,
relations now between China and Europe, and China and the
US having shifted a little bit more of the ideological
side and not so much on the practical side they're
doing business side. Is that something that is tangible?
Speaker 1 (12:44):
I think it is. The United States has been trying
to argue that this is not just a conflict of
unfair trade practices or even territorial disputes and conflicts in Asia,
but we have a China that is a threat to
the liberal international order, and the United States with its
analyies and partners who tend to be liberal democracies have
(13:04):
different interests from the autocracies of the world like China
and Russia or North Korea that are coming closer together.
So China has tried it for the past twenty five
years through a variety of strategies that I lay out
in my book coming out next month. Up start how
China becomes a great power to create that divide and
say this is not an ideological battle because they don't
(13:25):
want European countries in the United States to form this
type of coalition and to prioritize things like human rights.
Then these ideological battles over economics. So during this trip,
they're going to try to push this idea that it's
much better to do business with China and ignore some
of those factors.
Speaker 2 (13:41):
What do you see as the biggest risk to China
in following the trajectory that you lay out in your book.
Is there one major potential pitfall?
Speaker 1 (13:52):
Well, I think the biggest pitfall is I lay out
in the book that they were able to build power
largely by doing different things in the United States. Does
we see under Shijenping the reason they've done that. One
of the reasons is they were trying to avoid a backlash.
But domestically, you now hear this argument being made that
no matter what China does, there's going to be pressure
from the United States. So they're no longer prioritizing playing nice.
(14:15):
And if that's the case, it does seem like they
have more incentives in the future to be more aggressive,
and they also have incentives to abandon some of their
smarter strategies that were more effective. And so what that
means is, on one hand, we can expect a more
aggressive China in the future, but on the other one,
that is not going to be quite so successful in
their pursuit of power as they have the past twenty
(14:35):
five years.
Speaker 3 (14:36):
You know, we always had an ideological angle, you know,
we had the annual NFN tussle between the US and China,
but then it switched to more on the practical side.
What do you think change things.
Speaker 2 (14:47):
Back to the ideological very quick?
Speaker 3 (14:50):
The single biggest thing, and.
Speaker 1 (14:52):
I think we came to the realization that China, you
can't create a distinction between the ideology, the economics, the military,
any of it. China has a brand strategy that brings
all those components together. And so if we're going to
protect US interests and allied interests. We have to consider
all those components together as well.
Speaker 3 (15:13):
Arianna, thanks so much for being with this. Oreana Schuyler Mustro,
a fellow at Stanford University's Institute for International Studies.
Speaker 2 (15:27):
The bold case for Chinese equities appears to be more
compelling than it has for a long time, and investors
seem to be gradually dipping their toes in despite what
is being called the scars, the deep scars of last year.
Mary Nikola joins us now. Mary is Bloomberg m Live
strategist who joins us from our studios in Singapore. It's
(15:48):
always good to chat with you, And I'm wondering, is
this something that's going to be durable in your view
or is this maybe just a quick sort of recovery
that may resume. I mean, the weak trend would reach
zoom before it's too long from now.
Speaker 5 (16:03):
Yeah, I think this time around, there's just a few
more catalysts to help support this rally. So if you look,
we know valuations have been cheap, that's nothing new for us,
but look at some of the other factors. So take
for example, the equity risk premium, which is the difference
between the earnings yields for equities and the government bond yields.
(16:24):
They're actually showing you that you are getting compensated for
taking risk. So that's one factor, and it's actually has
been improving. It's above its five year average, so there's
a case there that you're getting compensation. The second factor
is that you are hearing more support from policymakers. And
again we have heard this numerous times, but this time
(16:46):
the Pull Up Bureau was focusing on two things that
you know, for someone for someone like me, got excited,
which is the fact that they're looking at ways to
help with consumer demand and they're looking at ways of
figuring out what's going to happen with housing. Obviously we
know these are the two issues that have been the
underlying key thing that has been dragging down the economy.
(17:09):
So they're now targeting those two things, and that's what
they mentioned at the Pull Up Bureau meeting that closed
out on Tuesday.
Speaker 3 (17:17):
Completing units that are in the process of being built
and getting those two people walk us through how that
winds up being also adding to the bolishness.
Speaker 5 (17:27):
Yeah, absolutely, so there's so much supply out there there's
also a lot of people who haven't gotten their apartments,
and obviously that's weighing on sentiment. The fact that you know,
we've seen a lot of that move from property and
they're looking for ways to put their wealth in gold.
That's another factor. Obviously that's been weighing on the equity markets.
(17:47):
But if the government takes charge of, you know, making
of delivering on a lot of these housing projects two
people and putting them back in their hands, that is
a big, big positive support for the average consumer.
Speaker 2 (18:01):
I'm glad you mentioned gold because Brian and I were
talking earlier about a story in the New York Times
over the weekend Chinese consumers have flocked to gold really
fast here. I mean, I think they're buying a hand
over fist as confidence in traditional venues like real estate
and inequities have faltered a bit. Do you think this
is also a temporary phenomenon.
Speaker 5 (18:21):
You know, there's there's a lot to be set for
gold at this point, especially if you're seeing and your
expectations are that, you know, growth is going to continue
to be on the weaker side. That's just the long
term trajectory for China growth, right, So it has nothing
to do with anything else, but this is where we're
heading from a long term perspective. So you have that
(18:44):
supporting gold, not to mention you're expecting currency weakness, bond
yields are quite low, so and then the housing market
you still don't have the confidence to jump back in.
If you think about it, where the most you know,
the average Chinese put their wealth. They put their wealth
in the housing market, and that's really lost a lot
(19:05):
of dampened their confidence. So for now it's going to
be about gold of where they can put their wealth,
and that seems to be a beacon of stability. So
they're going to always have that little bit on the
side as a part of let's say, their portfolio.
Speaker 3 (19:22):
In the overall picture, about looking at a little bit
more in terms of bullish conditions for Chinese equities. We
haven't talked too much before about some sort of China
discount like we've seen with Korea for a long time.
And if that is permanently baked in, how much of
a constraint does that offer?
Speaker 5 (19:43):
Yeah, I mean there is because of the fact that
you've had all this piecemeal stimulus that's come through and
nothing has really gotten people excited or really gotten things
going from a growth perspective. So to some degree, there
is there is a concern about the unwinding of a
lot of the stimulus that they have put in or
(20:05):
some of the regulations that they may impose, because we
have to also remember the start of the rally was
really based on the trading regulations and the buying from
the national team, so now it just needs another oomph, right,
So they've been putting it through the nine point Plan
where they're trying to help with companies give out better
dividends or improve their profitability and really focusing on that,
(20:29):
and that's absolutely crucial and absolutely critical in terms of
looking at valuations. So it's all about the follow through
and it's going to continue to be about that.
Speaker 2 (20:38):
So when we were talking about gold a moment ago,
you linked it to the weak currency. Well, the weak
currency has been a positive where the export economy in
China has been concerned, and there's been a lot written
recently on how strong that is. Is there a risk
that that trend could maybe adjust a bit, soften a
bit if the currency were to recover.
Speaker 5 (21:01):
I don't think so. I think there's been an export
boom more globally. So we've seen it not only in Korea,
in Taiwan, and obviously they have the AI backing them,
but at the same time you still have this export
global boom and an export recovery. We've seen it in
a lot of the numbers across this region, especially in
let's say intermediary goods and final goods as well. So
(21:24):
that's going to continue. And if you look at the CNY,
sure against the dollar, it's weekend, but if you look
at it across versus other currencies, it's actually been doing
pretty well, and yet the exports have been holding up.
Speaker 2 (21:37):
Mary, it's a pleasure to have you on the program.
Thanks for joining us. Mary Nicola, Bloomberg m Live Strategist.
Speaker 3 (21:44):
This is the Bloomberg Daybreak Asia podcast, bringing you the stories,
making news and moving markets in the Asia Pacific. Visit
the Bloomberg Podcast channel on YouTube you get more episodes
of this and other shows from Bloomberg. Subscribe to the
podcast on Apple, Spotify, or anywhere else you listen and
always on Bloomberg Radio, the Bloomberg Terminal, and the Bloomberg
(22:06):
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