Neel Kashkari said it right. It's an open question, kind of how far
the Fed can really go. What do you think?
How much further do you think rates can actually go?
I was in a best case scenario, you're looking at a range of between five to
five and a half where the Fed will actually maybe take a ball sometime in
the next couple of quarters. So from the standpoint of obviously the
markets rallying and placing an upward R of Fed, in fact, cutting rates at some
point late next year, I think it's premature.
It's trying to undo what the Fed is trying to do, which is stating the
financial conditions to some extent and bring inflation under control.
So I think we still have some room to go before the Fed buzzes.
So, Neeraj, what do you do then? Now when, to your point, the Fed says we
think rates will peak at X, X, X, but that could change.
And with this deep into the tightening cycle, I mean, how do you formulate an
investment strategy around something that perhaps they don't even know where
they're going to go? So first of all, it's very important to
listen to the Fed, and I think there have been very clear in terms of the
communication with regards to their policy objective of and getting
inflation back under control. So from an investment strategy
perspective, I would say first of all, where you still want to be cautious, you
still want to be short, short on the duration side and you still want to be
closer to home in terms of risk. So from a part of the market that you
still can actually build, certainly some carry read as you say, you go up the
quality go you go up the capital stack and you stay closer to home in terms of
duration. But the short duration, investment grade
credit, you can start building some carry.
And as it rates well starts to come down, you can go then at that point out
and the duration go up and down the credit goes.
But if you are a little early to actually take that call right now.
I have to ask about just a dollar then. Do we have to ways out kind of the one
of the still key factors in whether we see that that risk rally sort of sustain
itself? So I would say there are two fundamental
factors, in fact, from a global perspective, which the U.S.
rates and rates fall alongside the US dollar.
And we do need to see some level of stabilization, which will only happen
once the market has a little more clarity with regards to the path of the
Fed policy cycle from here. So I think we need to see that before we
can see a sustainable rally in risk assets.
So at this point, what we are going through is more positioning drew shot
squeeze, which is hard to sustain at any rate.
I want to ask you about this week's events in the Chinese bond market.
And this backing up in yields and whether you think that might constitute
a problem for the banks and obviously went where you think yields go from here
on CBS. So overall, we're still a little caution
on CGI reason. That's more to do with the fact that
when you think about the Chinese economy, there's potential for some
upside risk. From a macroeconomic perspective there
as we go into next year and it's a combination of three broad factors.
The first is the zero Covid policy and how that evolves.
The second is the broad fiscal impulse and the credit growth in the system
where you have seen certainly a lot of focus in the last few weeks.
And the third is the stabilization of the real estate market, where we have
seen the sixteen point agenda coming in from the regulators to stabilize that
market. So you've seen some of that hope coming
back and blowing through the equity market, pushing the bond yields higher.
But I would note that the range of the Chinese government bonds.
If we take that 10 years, he'd be in the last 12 months has been 21 basis points
compared to 100 to 150 basis points for most developed market government bond.
So let's stick volatility in the right context here.
It's not good enough, I guess. Right.
Yeah. Let's talk about the sixteen point plan,
because I know BlackRock, you've been watching the property space very closely
here. Is it really the game changer, as some
are calling it, or does it not go far enough in addressing some of the
structural issues around the China slowdown story?
So I don't think it's a game changer necessarily, but it certainly is a
stabilizer. And if you look at all the details with
obviously more liquidity not ready to flow into the sector, both on
stabilizing the consumer demand in terms of property, stabilizing new home sales
as well as the start, as well as giving some lifeline to the higher quality
developers, it will bring over the course of next few quarters some
stability specifically in that year when you go to market.
With regard to the sector. But does it completely revise and bring
you back to where things were in the sector, both from a fundamental
perspective of the asset prices twelve, 18 months back?
I don't think so. Neeraj, looking into 2023, long
duration, high quality is what you're seeing potentially gives the best
returns. Is that contingent?
Well, that's contingent on what? Well, that's first of all, as we go back
to the fundamental building blocks of freights, rates fall in the dollar for
this part of the world, rates and rates fall for the U.S.
assets. I think it will be very important to see
stabilization there. But as we get into that stabilization
and maybe it's probably a second quarter, the second half sorry, long
duration, high quality assets, emerging markets in general, local markets in
emerging market contacts, there will be actually good performers in the
potentially second half of 23.