Well the underperformance in Chinese assets that you're expecting right now be helped by any of these policy moves that
we've finally seen. Good morning and great feedback Sherry. It is somewhat of a
relief for broader risk assets China included. But the recent easing that we've seen from China is really insufficient to
arrest the extent of the slowdown that we see. And that slowdown or the economic headwinds that China faces are really multi
faceted. Firstly the property market continues to deteriorate. The inflection is really being pushed back further and further
out. We see an impending export slowdown as foreign demand weakens. China is particularly exposed to supply shortages which
saw shortages of strategically imported goods. And China has also been exposed to significant capital outflow. Its adherence
to Covid 0 also sets back the rebalancing towards consumption. So a lot of challenges there and the market has been very
disappointed by the hesitant state of policy support to date. But we continue to see that policy divergence at a time when the
Federal Reserve is hiking rates. We saw this chart on the Bloomberg showing how the 10 year yield in China really
plummeted to more than three standard deviation. It's something that we haven't seen since the start of the
pandemic. Could this all for investors some sort of diversification
or what. How it's manifesting is really those interest rate differentials that are moving away from China's favor have
really played into the capital outflow picture that China is experiencing. It's not so much manifesting in the exchange rate
but the release valve is very much on the capital outflow front end. There is again very little signs of inflection especially
while the Federal Reserve is putting its pedal to the metal. The Fed Fed speak today especially after the easing and the CPI
inflation report that we saw last week has been very aggressive in pushing back on market expectations of an earlier than
expected pivot. So that does suggest some some warning to investors about embracing this imminent Fed pivot that is
helping to support the risk rally in the short term. See there's so much divergence in the markets right now.
Depending on the asset class and how they're gauging inflation and right outlooks as well as as you say as parts of the market
seeing that Fed pivot. We see Morgan Stanley J.P. Morgan disagreeing on the nature of this rally or is it just a pause in
the bear market. Where do you position yourself on that spectrum of expectation
really. I think what explains a lot of the divergence in views is perhaps the nuance of tactical versus strategic. So
tactically we have been expecting somewhat of a relief rally. The target. Let's look at the S&P 500 for instance has always
been the 200 day moving average and we're very close to that. Now some of the factors that have supported that as well
underpinned this short term rally have been an improvement in global liquidity conditions funding conditions as well. And
market volatility has has reversed course from significantly risk averse territory to almost risk seeking. So. So these are
very supportive factors in terms of the strategic medium to longer term perspective. We remain somewhat cautious.
The market is underpricing the duration of this material growth slowdown. We can dither about a recession or no no recession in
the binary call there. But the market is underpricing how long and prolonged this period of weak growth could be. Just as an
example the Federal Bank of New York does not expect a positive GDP growth until the first quarter of 2025.
You talk about the four ways the market hasn't properly priced of recession whatever that recession looks like. How do you
think that's been reflected in the most current earnings season and the guidance we've been getting.
Well the drawdown that we'd seen from say the January highs to the June lows has largely been one of multiple compression. And
that's fair enough. With the slower growth outcome and what you expect in tightening cycles but really very limited dent to
earnings expectations. And we do think that that does stand out and it looks a bit like a sore thumb really in terms of how it
stands out. And that could very well be the catalyst for the next leg lower. And that's why we're a little bit more cautious
in terms of the more medium term outlook.
So before we go let me take you to our live post question for this week and it has been kind of a topic and a theme that we've
been dancing around quite a bit in this conversation and other conversation. But it is recession. The cure to inflation is it
necessary. Nouriel Roubini was saying you either have unhinged inflation expectations or a hard landing or a recession in the
US. I'm going to cop out here a little bit and that is it completely
depends on your starting point. This likely recession that we're hitting into is largely supply driven. Supply shortages. This is
something that the global economy has not seen in decades. So the
elixir or the medicine is probably supply side related supply problems require supply solutions not something
that monetary policy is apt. And so driving a recession is really a poor and suboptimal outcome for the the conditions that
are plaguing the global economy. Currently.