Let's quickly have a look at what I want to start with just the U.S.
inflation print because it's absolutely key for every single asset class.
Could we see a big surprise to the downside.
And that actually also brings us to the question of the day which is will
assets. How will assets perform.
Often U.S. inflation.
The thing is Tim what are you looking at.
Could you see a surprise to the downside.
If so what will happen. So I will ask question.
And obviously there is a potential for a downside.
And our view is that U.S. inflation probably has peaked and will
start to come off for many of the reasons that were just discussed that
there are some transitory factors that that that oil prices and and brought in
particularly at the at the pump for the US consumer have come down et cetera.
But the real sticky bit of inflation is of course in the labor market.
And that's where there's some progress that's been made.
But a lot more that has to be has to be accomplished.
One of the issues or the indicators that we look at is the gap between job
openings and the labor force that this labor wage gap left labor and job
openings gap. That's coming down.
And that's actually the key to a soft landing that if it did if the the gap
comes down but you want to have a corresponding significant rise in
unemployment that's kind of the narrow path to a soft landing which is what our
U.S. economists are broadly expecting.
But the key point to make here is that if the market gets happy about an
optically better inflation print and starts to rally that's going to mean
that financial conditions ease which means that the burden on the Fed remains
that much more significant. So this is sort of negative feedback
loop between the market feeling good about the future and the Fed needing to
persist and maintain higher rates for longer in order to really guide the
economy into the into that soft landing. So our bottom line is that we think the
market's correct in pricing in seven basis points for next week's hike.
We then think there'll be another 50 another 25 in the November and December
meetings respectively. But the key difference between our views
and the market is really next year that we think we'll get to about a 4 percent
Fed funds level. But we're going to stay there next year
where the market is still pricing in some easing next year albeit less than
before. And that we think is still on the
optimistic side. And here's why.
We think that markets will still equity markets.
We still need to go to work to do before we really square
the circle between high high prices inflation and the worry the Fed needs to
do in order to get it down. So Tim let's get to what's been
happening in this part of the world and I think that this is the latest paper
that you've been writing about and talking about Asia Pacific Equities
having a decade of underperformance. Give us a sense of why that is the case
and whether there's a turnaround in prospect anytime soon.
So the bottom line is we think there are reasons to be moderately more
constructive. And what we've done in this paper which
is quite detailed and obviously enough time to go all the on all the details of
it here is to note that there was very clearly a decade of underperformance of
Asia versus developed markets most significant against the U.S..
When you look at the numbers it's really because earnings delivery fell short in
the last decade compared to the one or two decades before that the 1990s and
the noughties when earnings growth on a compound basis was between 12 and 14
percent. And that dropped down to about 7 percent
in the last decade and is even worse than that because most years were
actually 4 percent UBS growth and below with just to two exceptional years in
the course of an entire decade. The reasons for that of super super
quick are that the positive booth boost from trade that really was very
prevalent especially for China in the early 2000s when China joined the WTO
that basically you know we kind of got through that and the contribution from
trade diminished interest rates fell which really hurt the financial sector
which is about 30 percent of earnings. Commodity prices fell which sort of
lowered overall nominal GDP which tends to have a positive correlation with
earnings growth. And I think very importantly the impact
of technology disruption or that sort of rapid technology change which was so
powerful and positive for the U.S. market was much more of a headwind for
Asian companies who more price takers than price setters and required a great
deal of adjustment on the part of those Asian corporates.
Looking forward we think that there's been some adaptive response by Asian
companies and also there's been some index composition shift which has taken
place. And in addition we see the intraday
cycle having changed which is more now of a tailwind for the important banking
sector. So if you put all that together we think
that on a forward kind of trend basis they will be able to grow perhaps it
maybe 10 10 percent over the next five years compared to the 7 percent compound
rate that we saw in the past decade. And given the fact that markets have
corrected so much and a lot of the talk of the excess of the of the previous
bull market has been it's been eradicated.
That probably sets the stage for somewhat better performance.
Well fundamentally in price terms on a 20 basis points that's basically the the
construct of the paper we've done. Yeah.
Thirty seven pages Tim you and your team of course right back to that.
I guess here in the short term MSCI Asia X Japan negative two point two percent
is the consensus full year EPS estimate. You still think that's optimistic.
OK so for the MSCI Asia-Pacific X Japan index we're looking this year at 7
percent growth. Overall consensus and our numbers this
is this is good. As of as of Friday's close it's 9
percent. So I'm not quite sure where the number
that you just quoted is is from. But looking at the bottom of numbers
which we look at in pretty robust and considerable detail.
Those are the numbers. The Delta is that in the past two months
since the beginning of the third quarter there's been about a 2 percent decline
in the consensus 20 22 estimate significantly focused on the negative
side in Hong Kong and Australia. And actually the positive side we've
seen some upgrades and ISE. China in particular is where we've got
the biggest variance in our numbers versus consensus.
We're at zero for this year. For China consensus just most recently
was at about 70 percent. That's not come down to about 5 or 6
percent. We still think this year the downside
for reasons that end. And it was just mentioning before this
this particular conversation which is that you've got the drag from Covid
you've got some some less of a forceful contribution from trade.
And and of course you've got where you've got these 0 Covid lockdowns.
So and the property market having come under pressure.
So you've got a number of sort of near-term issues which you don't think
consensus is fully reflected in their numbers.
Yeah. Yeah.
Tim maybe just clarified to you. I think these are that's a top down
number which we mentioned early. I mean we can bump our heads on on on on
the data. I mean at some point.
Last question for you. Indonesia outperformance this year.
Does that continue or do you start fading that outperformance.
What are you expectations there on that market.
It's a great question. We've actually been asking that
ourselves. We went overweight Indonesia last year
when we upgraded Dow Jones for the first time in a decade late last year.
And we're overweight. Indonesia and Singapore very happy.
Indonesia is the top performing market this year.
And you always kind of wonder at what point do you kind of edge the sidelines
and and book your gains. We still think that the investment case
for Indonesia is still pretty good. Earnings growth is still going to be in
the mid teens. The market is not trading at inflated
valuations. We still very much like the banks which
are a significant and prominent part of the of the index.
There are a couple of near term issues. Obviously this this repricing of of
domestic fuel prices which will have some flow through to inflation and
obviously that's causing bank to go to Indonesia to raise rates.
But those are all well within our expectations.
So I think we're we're content to stick with the constructive view for a while
longer until the prospects for some other parts of Asia which have been
under pressure notably Korea Taiwan look a little bit better but we don't think
we're quite there yet. So for the time being we'll stick with
our constructive view in Indonesia.