We talk about you know what some banks can do what governments can do to
support the currency but it's not really that it is really about when the Fed
pivots and signals that perhaps its rate rises are ready to to ease.
Exactly. This could last for a little bit.
Incredibly strong U.S. economy and aggressive fed.
We do feel the U.S. dollar is ultimately quite expensive.
So I think over time it will normalize. But as long as that this imbalance
exists I think it could keep strengthening.
So a real problem for investors and corporates alike.
What is overtime. How much longer.
How much higher can the dollar go. I think this could easily move into 2013
before we see sort of a stabilization of currencies.
So when you take a look at the Chinese yuan inching ever closer to that
psychological level of seven. Do you see that impacting how companies
look at the growth potential. How China looks at its growth potential.
It's interesting. Yes.
That because while there's so much volatility and effects in rates in
commodities actually what we do see is companies doing more and more global
business. I think that's a real positive news
about the day. The globalization keeps going in the
corporate world. We may see some conflicts on the
political side but corporates through social media through e-commerce are
doing business increasingly global. And that's what we're spending a lot of
time on. And currency moves obviously something
they need to manage. But it's not something that changes
their long term strategy. What is the long term strategy.
What are you hearing from your clients. Yeah exactly what I said.
I think they want to be global. If I see you when we're helping Chinese
company in Latin America European companies coming to China this idea that
we're going to do global ISE you don't see it at the corporate level.
They need to you know be close to the customer producing the countries where
they are selling the product. So we see a lot of that.
So that's what we're working on with clients every day.
In the short term there's some acute issues and that is managing risks around
that fax rates and commodities and also looking at the funding because this
whole volatility has put a lot of pressure in some segments of the
corporate world on the funding requirements.
So this is exactly what I wanted to get to.
This is rich in Hong Kong by the way. You got margin compression compression.
The era of free money is at an end now. How do you actually make yourselves more
efficient make yourselves more dynamic in order to mitigate those shrinking
margins. Yeah you're right.
Exactly at a time when margins are going to get under pressure.
It's actually more difficult to be efficient.
Particularly on the working capital front.
Corporates are facing numerous pressures.
You know just in time has moved to just in case they're holding on more
inventory you have more risk and better than that price risk.
And your funding cost has just gone up dramatically you know with short term
rates peaking probably at three and a half from pretty much zero.
So and then you also have suppliers that you no longer have the leverage over.
They used to have because you need them in this day and age.
You want them to prefer you over orders. You need to ensure certainty of supply.
So all that together makes managing working capital
very very difficult. But we're working with clients to try
and optimize. So should have a look at either these
capital markets because at the end of free money they're also becoming less
friendly let's put it that way. How do you ensure that you have no
revolving lines of credit which is not going to get blocked.
I suppose. Yeah we see a lot of clients indeed
putting on more liquidity and because of the capital markets being somewhat
volatile they tried to do it in a loan market.
So you see a lot of increases in our chefs.
You see a lot of short term liquidity facilities particularly in sectors that
are exposed to commodities and margin calls related to commodities.
You also see clients trying to tap the term loan market which is still
reasonably accessible and better priced than the capital markets.
A couple of RTS obviously reprised dramatically both for treasuries but
also spreads. And you've seen the effect of the high
yield issues is down 80 percent. Emerging markets are down 50 percent and
high grade markets are open but it's costing a lot more.
I will say on the cost of it though we have to get out of this thinking that
the last 10 years was the normal was the norm.
So in a sense you know 3 percent long term rates.
We may look back into your time and say that was quite attractive.
What do you see rates headed in the next 12 24 months.
We think the reason we priced at this stage given the Fed action and the
economic outlook. But we do actually think as a firm that
we're going to go into a 10 year period or longer of higher inflation.
And if you add to that real interest rates of you know 2 2 and a half percent
we actually don't think it would be unthinkable to have short tenure rates.
It's five and a half percent. That won't be for this year won't be for
next year. But you could see a trend there if
inflation indeed stabilizes at a higher level than we historically have seen it.
And it's all the debate about whether a recession is coming or not.
What's your own take on it. Can the Fed engineer a soft landing.
We're hopeful because you know both consumers and businesses are in great
shape in the US. So that's an important one.
Europe I think the governors are gonna spend a lot of money to make up for the
cost of energy. So that may offset some of the pain
that's going on there. So I think we have a good chance that
both blocks economic blocks you know sort of skimp into recession but not the
sort of aggressive scenarios that we've seen in previous selves.
Are we perhaps underestimating the weakness in China that could impact the
rest of the region and the rest of the world.
Interesting. I think China has fueled the growth of
the world for many years. You know we used to see 8 percent growth
in China that benefited all of us around the world.
We won't see that in the future. You actually it's it's difficult now and
it may bounce back next year to 4 or 5 percent.
But over time China will grow 5 percent 4 percent 3 percent.
That's sort of zipcode. So yeah I think that we will have to
live with the idea that global growth will not be fueled as much by China as
it was in the last decade.