China: 'Pessimism is enormous' on country's economic slowdown, strategist says

all right well President Biden taking aim at China this week warning that its economy is a ticking Time Bomb the president appointed to recent challenges including weak growth as evidence that the Chinese economy is in trouble come on what this means for investors we want to bring in Martin Schultz he's Federated Hermes head of international Equity Group Martin it's great to see you here so it's no secret that China's recovery has been struggling to say the least what does this mean though for investors is it way too early for investors to write off any investment opportunity within China well Shawna thanks for having us um so at Federate Hermes here we've actually been visiting China a lot the last few months and you're absolutely correct that it's been a really tough road in fact I think the one takeaway that we had in our recent visits is that the pessimism is just enormous um whether it's the consumer investors on the ground private investors um obviously the market has been in a tough slide economically you've got property Market you have again lack of confidence again both on the consumption side as well as on the investment side and so it's been tough but we think that um as of about two or three weeks ago the government started to really notice um some of the issues that have been out there for us investors for quite some while that indicate that they may actually be taking some steps right now to change their policy and that's very very important because at the end of the day policy prescriptions in China have been very very important to the property markets which then in turn have led to a fairly strong long economic situation and for us I think this contrarian View of being um you know now thinking that China will actually outperform is probably one that we're behind yet Martin with that said I mean how significant do you think some of these reforms are likely to be certainly a lot of focus on the real estate market right now given where it's been um you know to to what extent can any of these policies um be help stimulate the economy and how big are they likely to be well in the past they've actually been very big and I think for the last 10 years the government has tried to kind of step back into Kiko I think that's a very good question because at the end of the day um China is not growing nearly as fast as it once was as we all know it is the world's second largest economy um and on top of that they've got some demographic headwinds they have to grow Rich before they grow old and they're growing old very quickly so the government has a bunch of levers little less than what they used to uh but on the monetary policy front they've started to kind of just jiggle a little bit but they've got the ability there to cut rates uh much like some really Emerging Market Banks such as Brazil and other places around the world they've got that policy flexibility and then on the property markets they really can they just moved some of the goal posts they um for example during covid you had to have an 80 percent cash down payment to get a mortgage that's now down to 30 to 40 percent so they do have lovers to continue to knock that down but again they are dealing with these demographic headwinds but still remember that um it's China is an economy in the nation that is so urbanizing there are a lot of people um still moving to the cities uh and so you still have this job creation and this household formation situation that will continue to drive this economy forward Mark what do you think is a realistic timeline from an Investor's perspective when you're trying to identify investment opportunities over there what looks most attractive how do you view that recovery timeline and what this recovery phase is going to look like well as you know Sean it's been very frustrating um we actually started to go even away to China Last Summer with the expectation that code restrictions would be lifted earlier we also thought that some of the regulatory overhang would go away quicker that's now starting to happen but I think in the meantime obviously we lost some confidence or investors have lost constant confidence if you will so we believe for the next two to three years and even from a technical perspective a child looks very very interesting uh because it has been in such a funk for such a long time so we think the next six to 12 months and therein lies from our perspective really a focus on internet Commerce consumption names um that we like the alibabas of the world if you will the 10 cents of the world companies that we think that will generate some really strong earnings going forward and because the valuations are so low the expectations are so low that we think they will be out baby outperform longer term Martin outside of China you've talked about other opportunities in Emerging Markets particularly looking around Central Bank policy I think you're the second or third guest this week to talk about Brazil as a potential opportunity when you consider monetary policy there but talk about how you're viewing other central banks in this context and where the good Investments are sure so the Emerging Markets fronts you're absolutely right Brazil is one of the places that we've been overweight for quite some time our top down country allocation process which we utilize is basically gets us to focus on those markets that are undervalued and have the least amount of risk and Brazil fits into that category and you know you know they've been very using very conventional monetary policy so they've been ahead of the game ahead of the FED had the ECB and so they've been really a central bank and uh obviously political politics aside a market that we think will continue to do well and those companies that have the ability to leverage obviously declining rates are going to win the most um and so but on the other hand you know there's been one Central Bank out there in Japan that is really trying to navigate the yield control curve control situation and so we think Japan is also a place not obviously in the Emerging Markets but one that we think will generate some decent upside returns for investors in the next few months and years Ryan let's talk about what's going on with oil with crude and not only here in the US but really on a global scale because International Energy agency the iea out earlier today saying the OPEC plus Supply cuts that they could potentially drive oil prices even higher they went on to say that June was a record month year in terms of world oil demand we've seen this study rise in the price of crude up now seven weeks in a row how are you looking at this just as in terms of a potential headwind to the economic recovery not only here in the U.S but also when we talk about China and other areas of the world the international picture as well yeah Charlotte that's a really great question because oil at the end of the day for both consumers as well as producers obviously attacks if it goes up relatively it's going down so we do expect oil to stay stable and potentially rise part of that is because we think the global economy is bottoming and starting to grow and in fact China thus far has not been a big buyer of oil I think the biggest issue is that here in the U.S we've been selling oil from the Strategic petroleum reserve and so there is this if you will a game being played between the oil producers and the us as it relates to oil price but again I think if we see um the U.S not entering a recession if the recession Europe is fairly shallow as we expect then we do expect that demand will increase and you know as this ESG or environmental kind of focus in the green World continues obviously this transition period is going to be very long uh carbon unfortunately energy are going to continue to be a big part in the source of energy for the world's economy and so we think that energy prices will be higher than expected and what that's going to lead to is particularly as in the case of the fed that's going to lead to higher inflation rates and we saw this in the PPI numbers today we think that we'll continue um and so I think investors on the one hand they're seeing inflation rates come down pretty quickly and that's a good sign but I think it's going to be a little stickier Than People expect and that's probably the one one if you will risk that we see out there and again as oil prices remain high or at least these levels or higher um obviously that as I mentioned earlier is a tax on the average consumer or or producer and so that's something we need to watch out for and it may mean that rates around the world will remain higher than expected because of that situation yeah that certainly adds to concerns about inflation re-accelerating so when you're talking about where prices are likely to remain I mean the iea says it could be go it could go even higher in terms of demand this month um is your base case here that they do remain elevated into year-end we do believe that they will remain elevated again partly part of that has to do with the geopolitics and what happened with Saudi Arabia and Russia and some of the other swing producers right now you know the problem is the U.S for many years was that swing producer but right now uh for several reasons we are not that swing producer to the degree that we were once before in the last several ten you know seven ten years ago um and so for the near term we do expect that we will see uh elevated prices at these levels are higher Martin when it comes to the US and the readings that we got on inflation this week we got PPI the producer Price Index this morning coming in hotter than expected and that contrasts to what we saw yesterday from CPI when once again we saw inflation pressures at least easing more than the street had been looking for what's your read on these two conflicting reports and what that tells us just about the fed's long fight against inflation in the path forward yeah you're into you're basically highlighting a very uh interesting phenomena which is that um interest rates are generally coming down much quicker than expected but it's not a one-way Direction one-way street so to speak obviously uh post covet and supply chain issues that we've had and some of the other uh machinations within um the uh the economy um we do think that inflation is coming down but it will remain stickier than expected and so in that vein again I think that the central banks I mean you look at what's happening in the UK the bank of England uh even in in Canada uh and in Australia there being much more um careful about where they take interest rates based on some of these inflation numbers so obviously the risk is that higher rates will drive um the global economy or in this case the U.S economy into a potential recession but in the in the near term I think fighting inflation is going to be the number one task and that's what they're focused on so in that debate Martin which Camp are you in are you in the camp that that expects a mild recession at least given how elevated rates are likely to remain you know what Federated Hermes we were expecting a recession earlier in the year and I think we've decided that um because of where we are in the economic cycle and the monetary policy cycle what we're seeing um elsewhere we do think that if we have a recession that will be not it will be delayed until much later probably late 2024. we'll see if that comes to fruition but right now the markets are telling us again obviously at the end of the day we are seeing some economic data that is very weak but on the other hand we're also seeing uh some other data above economic as well as Market oriented where we're seeing the market broadening out and we're seeing a situation which was getting so far away from um this um and you know we could be in a very different situation if you think about monetary policy in the past usually between nine and 18 months you saw some type of effect on the economy um it may be less pronounced now because of disinter radiation and it may be because the economy is just postcoded economy that is one that is growing there's catcher in a catch-up phase that will continue to to move forward unlike past cycles and so we do expect that we'll see some slowdown next year but probably not a recession at this point all right optimistic tone here to end uh the conversation Martin Schultz always great to get your perspective Federated Hermes head of international Equity Group thanks thank you

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Length: 12min 9sec (729 seconds)

Published: Fri Aug 11 2023