00:00 Hello and welcome. This is BQ Prime. I am Agam Vakil and we are taking stock of all
00:06 that is happening globally, especially given what we have seen from the Federal Reserve
00:12 overnight. Well, to take us through, understand what we've seen, what the Federal Reserve
00:17 means and the implications that it may have on markets, specifically in Asia perhaps,
00:22 we have with us Audrey Gore. She is the Head of Asset Allocation and Thematic Strategy,
00:27 Wealth Management Group with Standard Chartered. Audrey, good morning and thanks so much for
00:32 joining in. I'm just going to straight up start with the Federal Reserve. We know that the rates
00:39 were kept unchanged but we also have a relatively hawkish Federal Reserve Chairman talking to us.
00:47 What do you make of the commentary and what's the road ahead?
00:50 Well, thanks for having me and good morning everybody. So, the Federal Reserve,
00:55 Fed Chair Powell basically kept interest rates unchanged at the overnight policy meeting.
01:00 And if you look at the statement, in fact, the statement was largely the same from the prior
01:04 month. I think what's more interesting is the significant revision that we have seen
01:09 to their dot plot, which is their economic and interest rates forecast expectation. So,
01:16 if you look at how they have tweaked their forecast, they have in fact revised up,
01:20 grow stronger. So, this growth of origin about 1%, but they've revised it to just over 2%.
01:26 And then from a labor market perspective as well, they've also revised it lower in terms
01:31 of unemployment rate, where unemployment rate has been revised down to 3.8% from 4.1% initially.
01:38 And I think that in part due to the very strong or rather resilience that we have seen among
01:43 consumer, which continue to drive consumption as well as keeping the wage or keeping the labor
01:49 market very, very healthy. And I think more importantly in terms of the forecast is also
01:55 the expectations in terms of inflation. So, we have seen both headline inflation and core inflation
02:00 creeping lower since June last year. And in fact, in this current estimates by the Federal Reserve
02:06 as well, they've also revised down the core PCE down to about 3.7% from over 4% this year.
02:13 But they've kept the 2024 expectations largely unchanged. So, I think net-net, I would say a
02:19 hawkish pause, but it's not all bad because I think it could be quite constructive when it
02:23 comes to bond investors, given our expectation that we're probably quite close to the peak
02:27 of the Fed hiking cycle for now. Right. Audrey, I'm going to talk about equity specifically.
02:32 Firstly, when it comes to developed markets against emerging markets,
02:38 where would your allocation be? How would your allocation be? And how do you see these markets
02:44 develop and move perhaps over the course of the next year? So, for now, we have a slight preference
02:51 in terms of where developed markets are concerned, namely we are overweight on the US as well as
02:55 Japanese equities. I think US are quite key, which is the resilience of its consumer, which we are
03:00 still continuing to see today, even after 5.25% of rate hikes over the last 18 months or so. So,
03:08 that's one key area that we like and we believe that there is still some momentum, at least until
03:12 the end of the year, before we start to see weaker data feeding through into concerns over corporate
03:16 earnings. The other area we like in developed markets is Japanese equities. I think this is
03:20 really one bright spot among global equities today because unlike many of the other equity
03:26 regions, Japan actually is one key country which really wants to get its inflation higher so that
03:31 it can emerge from the last 30 years of deflationary environment that it has been.
03:36 And if it is successful in doing so, what that means is we should then start to see
03:41 higher nominal growth feeding into higher revenue and eventually corporate profitability as well.
03:46 And that should really help Japanese equities to outperform the other key regional equities.
03:51 And then when you come to emerging markets, I think really China is the big elephant in the
03:56 room, right? Because so far, economic growth has been quite lackluster from the beginning of the
04:01 year till now. Obviously, we have seen some small signs of stabilisation in August activity data,
04:07 but there is still some sense that policy makers will need to do a lot more versus the piecemeal
04:13 stimulus that we have seen coming through over the last couple of months. So net-net from an
04:17 Asian perspective, we are largely neutral. Right. Audrey, also when it comes to developed markets,
04:24 how would your allocation be ideally between debt and equity?
04:30 Okay. So in this case, from a developed market perspective, we have roughly balanced allocation,
04:36 maybe slightly more tilt towards equity market in our moderate or balanced,
04:40 moderate portfolio. And I think if we think about it, both actually have panned out quite well for
04:47 us because when I look at our balanced portfolio today, it is up, say, a circle about 7 over
04:53 a percent, which obviously lagged the robust performance that we have seen in say equities
04:58 market, but certainly outperforming what we have seen in bonds, largely speaking.
05:02 But we are slightly balanced here. And obviously, we will take a data dependent approach, given that
05:08 we are at this part of the business cycle where we might either be transitioning to a lower growth
05:15 and potentially even a recession, which is our base case for the US. We have a 55% probability
05:21 of a US recession by the first half of the year. But again, if you look at the probability,
05:25 it's almost like a flip of a coin as well, which is why from an allocation perspective,
05:29 we keep a largely balanced allocation between both asset classes.
05:32 Right. Well, then to shift focus towards Asian markets, how do you rate some of your larger
05:41 economies like China and compare it to India in terms of fund flows, your expectations, how
05:48 valuations in these markets are, what's the way forward? And in this case, I'm talking specifically
05:54 about equities. Okay. So I think India is a market where we have a structurally bullish view on.
06:01 So if there is any significant pullback in the Indian significance, for example,
06:07 we'll be keen to use the opportunity to average in because I think there's a few
06:11 good structural drivers going on for India. For example, the reforms that they have undertaken,
06:17 the countries undertaken to make the countries more attractive to say manufacturers to house
06:22 their sourcing activity over here. Also the fact that the rupee is a lot more stable as well
06:28 compared to in the past. And I think above all, if you think about it, the ongoing geopolitical
06:33 tension between China and largely the Western part of the world also meant that other markets,
06:38 for example, India will send a benefit as companies think about making their supply chain
06:44 more resilient by relocating some of their existing manufacturing facilities, say from
06:50 China to India. So India is one area that we like. Obviously the valuation has always been quite high
06:56 and I think in the near term, despite the inflation is probably also a concern.
06:59 But having said that it is one market that will be happy to average in on debt. So that's for India.
07:04 And then for China, I think we have a rather lukewarm view if you think about it, because I
07:10 think there is a few things which are, if we look at the key pillars of growth in China, there's
07:15 property, there's export and of course there's a domestic consumption which are key drivers to
07:20 China's growth. And two out of the three pillars are quite weak, I would say. As we all know,
07:28 the property market prices have been falling and the confidence of house homeowners or home buyers
07:33 are very, very low after a recent spate of, say, defaults by property developers. So that in itself
07:39 is likely not going to be a strong sort of a driver for growth in the next six to twelve months.
07:44 If you look at exports, again, the trade tension with developed markets, namely the US,
07:49 also will weigh on exports as well. So even though we have seen a significant, some decline in the
07:54 UN, has not really translated to robust export growth, which historically, say back in 2000s,
08:01 has been a very, very strong growth driver. And if you look at domestic consumption, that has
08:05 been the one holding up China's growth. But again, it's quite, it's a bit more lukewarm than expected,
08:11 also because I think people are a bit more adverse at the moment, even home prices are falling and
08:16 they just came out of COVID and they didn't really get that much of a stimulus check as what consumers
08:22 have gotten, say, in the West. So net net from these three pillars perspective, I think we have
08:26 a rather benign view when it comes to China. So overall, a neutral allocation.
08:29 All right, we'll leave it at that. Thank you so much for joining us and taking us through your
08:34 views on the global markets. But with that, it's a wrap on this view as far as the global markets
08:42 are concerned. But there's lots more lined up on BQ Prime. So stay tuned and we'll keep bringing you more.
08:48 Transcribed by https://otter.ai
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