Tim Moe, chief Asia Pacific equity strategist for Goldman Sachs Research, says recent economic data indicate global growth has perhaps reached "peak momentum." While that could mean more modest returns for equity investors going forward, there is still value to be found in Asia, he argues, most notably in China.
This podcast was recorded on April 3, 2017.
This podcast should not be copied, distributed, published or reproduced, in whole or in part. The information contained in this podcast does not constitute research or a recommendation from any Goldman Sachs entity to the listener. Neither Goldman Sachs nor any of its affiliates makes any representation or warranty, as to the accuracy or completeness of the statements or any information contained in this podcast and any liability therefor (including in respect of direct, indirect or consequential loss or damage) is expressly disclaimed. The views expressed in this podcast are not necessarily those of Goldman Sachs, and Goldman Sachs is not providing any financial, economic, legal, accounting or tax advice or recommendations in this podcast. In addition, the receipt of this podcast by any listener is not to be taken as constituting the giving of investment advice by Goldman Sachs to that listener, nor to constitute such person a client of any Goldman Sachs entity.
Copyright 2017 Goldman Sachs. All rights reserved.
This is an unofficial transcript meant for reference. Accuracy is not guaranteed.
This is extra
the Goldman Sachs, where we discuss developments currently shaping markets industries in the global economy, I'm Jake Seaward Global, had of corporate communications here
for the global reflation trend that supported rising equity markets to start years been broadly felt in Asia. Pacific with the embassy I Asia, Pacific Ex Japan index, which is a key regional benchmark, shown its best returns,
in the first quarter of this year in twenty six years, my guest
tomorrow is the cohesive macro research in Asia and the Chief Asia Pacific regional equity strategies for Goldman Sachs Research. We'll talk about what expects to do.
I've market performance going forward in the region and key issues.
Facing chinese stocks to welcome to the programme is a great pleasure to be here
TIM, you ve, identified three dynamics and are likely to influence equity performance in Asia. Pacific in the coming months. At the top of the list is the reflation trend
What does the return to a more normal inflationary environment mean for investors in Asia, Pacific,
report means better returns and the reason for that is
add Asia, extra pan has been
for the last five years, nearly six years.
Deflationary environment which has put a lot of pressure on corporate profits.
the updated numbers which are quite fresh or that the period for
Two thousand eleven, sixteen Inclusive Lee
screw two points
percent on an annual basis in local,
see, and just one percent in the US dollar terms so effectively for the past five six years, there's been very little: copper profit, Grove,
therefore surprising, the index is basically chopped around and got nowhere. The good news
come out of his period of deflation,
and this is most senior
It was shown in the turnaround in chinese producer price inflation, suckled, p p, I
put some numbers on this at the beginning of twenty. Sixteen that was mine is five point: eight percent, very deflation, Arie and the function of the collapse in commodity prices and some other xs
issues, the latest data point we have four February. It was
seven point. Eight, so around
we're going for minor. Sixty plus eight is a huge shift in the
commissioner, environment- and that is directly flowing through
into corporate earnings growth and to give you just one number there is
National Bureau statistics. Assessment of the profits of the industrial.
After both listed and understood a great number of companies and hundreds of thousands Chinamen China may lead itself and for
in February, compared to one
ago- the profits from three point: five percent- thirty point, five so
that's a dramatic turn around from the prophet decline we were seeing and it's that shifting
corporate profit environment, that is propelling equity markets, now
So that's a good news. You ve, also written that we seem to be entering a phase of peak momentum, went to come
the global and regional growth. How can you make
determination and what might mean for equity investors in the short and medium term. This is a really important points and thank you for asking this the
evidence that we ve got first at the global level and then at the regional level. At the global level, we have
a monthly GDP proxy technically called our current.
Video indicator see I, and that has improved from in rough numbers below two percent global growth level, too
for four percent. Currently, so the Good NEWS that the global economy is clearly shown signs of improving in its growth momentum,
the less good news is that the data
prizes they ve been coming out, which were can
definitely positive. In the second half of twenty sixteen have flattened.
And no longer surprising on the upside so
There is very good evidence at the global level that this recovery in momentum we ve had, is probably peeking right now now
that onto the Asia Pacific region, we can
the same thing, and if we look at our current activity indicator for Asia that also
looks like it's probably at its peak for the time being. If we look at the
phases of the business cycle and conceptual you can think of four phases where, if you think there's a trend to growth, phase
one would be when you're above trend in improving phase two would be
of trend in decelerating. Faced, we of course is below trend again.
worse, a vase force when you're recovering we ve been in phase one,
trend and improving and typically over the past decade and a half your average three month returns during that phase is seven point. Nine percent for the Embassy Asia, Pacific,
Japan Index in phase two, which is still above trend, but moderating your tip
returns are more like one point: five percent and we
we're going into that now. So the punchline
Is that we think we're going from a period of really juicy good
turns which, as you said in your introduction, is
quarter in Asia was the best in twenty six years. The second best meet our history. The index. We think we're going to have
read where returns will still be positive, but decidedly
more muted in their magnitude? So, given that
drop you and your colleagues recently upgraded chinese equities overweight. How do these trends we
in talking about a line with that view, is there still more value to be gained from us
it's so against a backdrop, our view
Our strategy has been to try to identify the port
the region that
the most idiosyncratic positive support because of these costs.
words that are in the aggregate investment environment and
China exemplifies this or is the best example of this. Why three key reasons number one
as I just mentioned, you ve got this nominal gdp improvement because of this change
in the producer price index I was mentioning earlier and that's giving China the best.
delta, the best change, as well as the best level.
Nominal GDP growth and that's directly filtering through two earnings set point number one
point number two is that we have this concept of a policy put I e
There is a very important meeting politically in late October, the Nineteenth Party Congress and all the policy mix
that we speak to indicate that, in the run up to that stability is gonna, be top of mind is, can be the priority. So
think we ve got every little likelihood of surprises in the policy front.
stability in the real economy or yes, markets were all I mean the markets. It can do the market to get to do, but I was referring to stability in the real economy. So we don't think that can be. A lot of policy surprises no said moves in the rim and be no sudden tightening or the kind
capricious policy measures that
said the markets off foot and in the third thing, just
ITALY is that from a positioning and investor flow perspective, we think we ve got the best set up for China, partly because
Got the so called southbound connect coming in this is the money coming in from mainland China into the Hong Kong Stock Exchange, which, as you know,
to Hong Kong and is therefore a distinguishing positive factor, and secondly, when we look at a one,
you truly universe of mutual funds and look at her
their position in China. There are the law
levelled allocation to China in over a decade, and since China is twenty, five percent of the benches
If China does well, we think that that money will need to close its under way, and so there will be another positive supporting force for the market
so. You talk a bit about nominal GDP growth. Why does it make sense when it comes to equities? Tools?
nominal growth, as opposed to inflation, adjusted real GDP and other other.
comic indicators, you're watching that show China's economic growth is about more than
simply higher prices. The reason
Looking nominal GDP is that historically, there's a much higher coral
She between Nano GDP, growth and various drivers of equity market performance. The most important one, of course, has corporate earnings,
and there's just empirically a much higher link between the nominal growth environment and corporate revenues. Then there has been.
In real growth and corporate revenues. Only think about a few mama
that makes total sense, because stock markets are not real
inflation, adjusted so you're, getting a price
coming through the revenues and earnings, as well as those dark prices. So I know it may be a so called money illusion, but it matters with the price goes up. Price goes out particular economy that transacts, mostly in its own currency, fair point gap
point about one is the link between nominal GDP and covered earnings, the roles,
Briefly, is a link between normal GDP and evaluation between Nominal
he p and foreign portfolio flows and then, of course, between
more GDP, an actual market reform itself. So the empirical evidence is very strong that you want to pay attention to the nominal growth environment.
She S. Research has written extensively about the improving prospects for the chinese consumer and,
see, the government's been very focused on individual,
option a long term driver of the economy.
Does reflation of the short medium term do anything to affect that transition towards a more consumer led economy. It might help it
at the margin. But I wouldn't say it's a significant driver put it this way, much more consequential for the Upstream
manufacturing part of the economy, the
materials related or the metal back
inquired uncle partly economy, because the old ESA, we correctly I mean they- were really under very substantial profit pressure and many were losing money under that divide.
Environment. They were talking about just a few moments ago and with that turning there's been a huge upswing in profits for that sector may getting back to those national beer statistics general, very profitable
couple moments ago, they give you granular data on about forty different sub industry,
we coalesce those into five larger groups which in rank them from
cream down downstream the upstream
The economy is the one that was recently has been doing the best, so the delta has been most favourable there because of the switch in economic growth, environment,
for the consumer desk.
Going along it more of a steady trajectory. It's a straw.
An inexorable trend in our view, and the particularly juicy part of that so to speak, is the trend
E commerce is not already have more consumption taking place, but there's more of that technically
on line so that the product that giving much stronger growth for e commerce then bricks and mortar Commerce- that's really the sweet spot in terms of the
restoring not all companies will benefit from higher inflation in you mentioned some industries that might benefit disproportionately. What's
actors might underperform. Given the conditions you have outlined, the elderly
more concerned about would be in those more down
stream in midstream industries now taking higher input costs because of
improvement in commodity prices and if their
able to have the pricing power to pass those cost increases along. Then the margins get squeezed
and so one area that from a regulatory standpoint could be at risk, would be the utility sector because either
getting higher energy input costs, for example,
and they don't have the pricing power,
legally to a kind of to raise their tariffs. Then they're gonna get squeezed.
So there's been I've seen a lot of concern about the debt load of chinese bags and that's been a topic that ban under discussion, put it amongst investors, but others as well for a long time. What gives
conference, but the outlook for that sector this year. So we have
significantly raised our view in the China banks, which is probably one of the more controversial opinions that we ve been out with, because there is a strong sense petition,
western investors that the chinese banks are
tremendous credit stress and there is a risk associated with them and the boy
The picture is that China has accumulated a great deal of dead that GDP levels in rough numbers of government.
And fifty percent debt to GDP in
two thousand and nine to about two hundred sixty percent. Today's, with more than half a percentage point increase, and typically historically, when you ve had that quantum of
increasing debt levels in a fairly short period of time,
been associated with credit stress or slower growth or currency weakness and software. So there are clear reasons for being
concerning cautious side with regard to China, banks our point, however,
is that for
whatever level of concern you have regarding the banks that then
your term delta? The change in the opera
If I am for the banks is underlined
the positive, the key
you revolves around not performing loans or impels, as the acronym goes and the
Urging development is that in pale formation, the incremental
new, not performing loans as been tapering
and what's driving that improvement in their not performing want
It really is the improvement in the profits of the most stressed part of the manufacturing sector, which is the upstream part, and
as a direct consequence of the improvement in the nominal
of environment and that's flowing through too
profit, so, for example, a year ago the coal come,
these steel companies were losing money and
actually making very good profits, so
proven in their cash flows means. Are there
better able to service their debts.
turn means lower pressure on not performing loans for the banks, and indeed
look at the recent results for the fourth quarter for the big banks. They all met or beat expectations. Not just
profits, but also in the provisioning. So
or argument is that the delta on the banks is clearly turn more favourable from an operating stand
Lloyd, the bank's valuations are priced at a significant low end of their say, ten or fifteen years. To arrange
cross sectional basis. They compare very favourably with other banking sectors across the emerging developed markets and therefore the
nearer terms over the next one or two quarters risk reward for the banks looks to be much more favourable than it did before.
Stock about some of the risks to view and China, which means those talks with the United States, the FED
signal that it's likely to raise its benchmark interest rates at least twice more this year,
higher. U S, interest rates, typically attract investors
way from developing markets is Chow
insulated enough to avoid
The big drawback, you can
say, you're fully and later from a drawback. You can always paint a scenario where outside conditions can be contagious and joy
is a volatile market and investors can be skittish, so we wouldn't be so bold as to say that it would be fully inoculate from any external risks.
In the current environment. We feel that in terms of the rain,
tat we ve got for our expectations for the fair for the dollar and for potential trade barriers that we think
those are manageable to be more specific, the feds
to be signalling. That is
did in raising at a moderate rate, and it seems to be
Ning responsive to developments in the economies
is almost this feedback loop. That says that if the
U S, economy turns out to be not as strong as may be. People had been expecting, perhaps because some of the fiscal stimulus of
current administration may not be enacted either as swift
or has significantly as may be. The market have been expecting in the fourth quarter than corresponding the FED. My dial back the pace of its industry
likes and correspondingly also. The dollar would therefore not rallies much if the FED and raising rates, to the extent that the market and earlier thought so
within a an acceptable band of fate
increases in dollars, strength or sense is that
China, specifically in other parts of Asia, more broadly, would be able to take that in its stride.
As long as the underlying corporate profit growth dynamic, is in place, which we think it is. So
It really gets live attention, particularly in the U S, and is
had terrified policy, should increase overtime, devalue, the? U S, dollar, which might make Chinese?
relatively more competitive hiring.
Stronger dollar, that net neutral for China. In your view of the long term,.
It all depends on the magnitude when we're coming off a low point in
U S interest rates, and you begin to tighten and did not too many exam
those of us in the last twenty years, but therefore, five periods, when rate recorded in the FED, began to raise historically, aid
Mortgage tend to do well through the fourth FED Ike and
The narrative you can tell behind at is that when you're coming off a period of FED cuts which Jos because growth has been poor, that when you ve done,
from the corner- growth gets better, which then elicits a tightening monetary policy definition
first steps in that are absorbed.
Bob. I equity markets, because the basic you take the trade of better growth for little bit firmer in
straight and stronger demand corrected. Big importer and the growth element.
Such a strong, fundamental compose
have equity markets that alone, but higher rate, especially from the super low levels that we're at right now or definitely absorb able. But after a certain point,
weird and we can debate how much but, let's say historically about four hikes or five, then
rate start going up enough that the markets
to say, lying on a second? The absolute level
Trade is going up, voting had our growth benefit, so the risk rewards darts turning less favourable and then it's much more of a problem, but I dont think were quite at that
age? Now, let's talk eleven about trade present from so far stuck mostly to rhetoric with regard to trade, although the rhetoric spin strong he
they announced some executive orders in the space
He hasn't forgotten about the issue and how are you advise inclines to manage the vast uncertainty around trade? Are there any
and posts out there that you're looking at as a potential clarifying point. Absolutely, I think, a useful mental construct for thinking about
trade issue is to imagine a line
agreement with it.
By being the most negative outcome on the right side being the positive one and on that site
you can position the roughly three or four broad categories of likely trade developments that may take place in the next weeks and months at the left. Most part of that line, the most negative one would be the border adjustment tax. The reason why that is the case
is that it would be profoundly disturbing or changing to the profits of a number of industries
you would likely see a very significant increase in the dollar, which could have a lot of second third or rebel affects around emerging markets. So that would be very
relative, also negative, but not quite as negative, would be the forty five percent across the board systemic tariff increase that was discussed during the trunk.
Pain. We dont think either. These are likely, but they would be quite negative effect of place effectively for those two. You ve got a low probability chance of a very high impact event and then
much more towards the right into the spectrum would be sector specific terror
for other forms of restraint which allows a hit the companies involved but would
be systemic in nature, and we think the market could absorbed that in its stride and they would give the president the political announcement capability
to claim victory without having significant systemic disturbance, gather,
by the way, which would be the most positive end of the spectrum would be if a deal was done to increase yours exports to China as a way of narrowing the trade gap, so instead of
hurting China by constraining its imports in the United States. You could solve the bilateral trade imbalance by encouraging China by more. U S stuff, and if that was
the case. It would be a great when, because it be good for employment in the EU, as it would solve the deficit in aid without the deficit, but the daddy
this would improve it. There's been a party is having some precedent for that. The path we are opening up to you as agriculture, exultingly, etc, and even there's been some talk among clients, have been speaking with about protectionism. Energy deal being done good, try to divert some of its energy purchases from
Middle EAST or elsewhere towards the United States, and that would be a big boost for some Centre Party United States, which would also play to the blood
I base my Lord your point as you can imagine a spectrum of outcomes we can handicap with
can it be that we do have a strong view that the probability-
extreme negative ones, is low, because, although Chow
he'll be hurt. More deals would also be heard by those in that would obviously be antithetical to the larger ambition of having the, U S grown, having more job creation.
go to your point about what you do about that, we think that
the situation of a low, problematic
hi, negative impact event is something that, if you have the capability of doing, this is best dealt with an option space, because options are basically downside. Insurance programme insurance protection against, as I just said- a low price
Lloyd? What high impact of it you talk a little bit about the meeting is fall Channel, hostess, Nineteenth National Congress of the Communist Party
and this is only twice a decade event. Their government leadership changes are usually house. You out
The current policy put these talked about earlier surrounding this year's vat.
an you pointed out that in the past equity markets
perform reasonably well in the run up to the Congress. How does the butt
angel for trade dispute with the United States, a fact that usually,
recently reliable framework.
it's obviously a new king,
system so to speak, and I think the answer to that would maybe breakdown in two parts.
How significant with that trade spat be, if
where is something that was to get back to my
mental model on the right side of that spectrum, maybe sector specific in that systemic in his nature, then I think that that wouldn't really
start things too much. On the other hand, if it was more of a full blown trade war- and we strongly-
you bet. If the? U S was to go and imposed, for example, a forty five percent across the board tariff on all chinese goods that
It would certainly respond in kind, and that me
that everyone would get bloodied and it would generally be
bad all the way around and most likely. That would be something that would dominate.
the scenario that I mentioned earlier of a stable policy run up, so it is a wild card and that's why we think that having some serve downside protection, if one is able to, is a sensible,
At this point, I said to him: you know, views on China cannot lay between extra.
even within our own firm. When you talk to our clients,
What are the issues where you see the broadest difference of opinion and
how does a dynamic impact, your pro
as an analyse chatting with these firms. I think it really
revolves around the longer term structural view on China. So the key pot button topic is credit.
The significant amount of credit which accumulated and the bears
a strong case to make that there has been this unprecedented debt boom,
at least some part of it was inappropriately invested
been evidence of so called Mal investment
moral hazard in terms of people diverting capital into various products, a wealth management or trust products that were probably over,
guaranteed or Miss old, and so
no doubt there, some mess that needs to be cleaned up, and I think, with the debate in
is, is whether
and it can manage that clean up process, so to speak
and weathers got the time to kind of on its way out of the problem and the good comparison between China, Japan for
apple is that Japan got into a significant.
Problem, as we all know, in the late Nineteenth Eightys and the last two decades
notified and had to recap the bag several times, but the key did
is that Japan wasn't growing and serve
growing into a deflationary environment, your debt burden just sits there to get bigger and bigger every heavier in China's case. Fortunately, you
You have a general inflation environment. You still haven't lying trend, growth of six percent. You can argue about the exact number, but it still meaningful.
So if time is on your side, when you are
to continue to
grow. You re out of that problem and I think that's really
The debate is, between the more pessimists,
side of the market in a more constructive side.
Anyone is sort of full.
Pollyanna, like China, no problems and is
a very small portion, the market, which is dogmatically of the view that China is going to court on core blow up in the river in your term
but there is this spectrum in between of the more bearish in the more baby sanguine, and I think it really turned
on the view
the ability of policy makers to kind of,
manage their way out of this tricky situation that have got themselves and in so far
policy makers have met or beaten expectations absolutely in the last fifteen years or so. For short,
I've had many conversations partake in the last forty five years
and oftentimes, particularly when we ve had stress points like the renminbi many device,
nation, which we had twice once in late twenty fifteen in August and again, twenty sixteen.
January, where this really fan thee
Bear sentiment. People are of the view that China was going to devalue, say twenty percent imminently
the economy, is really can have a so called hard landing and so on and so far
The policymakers have managed to diffuse
who's. That immediate threat,
The economy is actually printed somewhat better than consensus, expected growth, numbers and
Currencies been stable and it looks as though the banks, or continue to earn sufficient pre provision operating profits to continue to accumulate reserves against potential MP. Also
So far they have done a good job of managing their way with a number of conflicting objectives.
We still out as to whether that will continue if this can be any mistakes made etc, but so far taken the last three to five years. I think the policymakers
done a better job than the more immediate.
Bearish contingent. The market, as expected, TIM thanks for
many us again fascinating. Thank you very much appreciated
That concludes this episode of exchange. The Goldman Sachs. Thank you very much.
listening and we hope you join us again next time this spot gasters recorded on April. Third, two thousand. Seventy all price references and market forecasts correspond to the date of this recording. This podcast should not be copied distributed, published or reproduced in whole or in part. The information contained in this package does not constitute research or recommendation from
Goldman Sachs Entity to the listener. Neither Goldman Sachs nor any of its affiliates makes any representation or warranty as to the accuracy or completeness of the statements or any information contained in this podcast, and any liability, therefore, including in respect of direct indirect or consequential loss or damage, is expressly disclaimed. The views expressed in this podcast, or not necessarily those of Goldman Sachs and Goldman Sachs, is not providing any financial, economic, legal, accounting or tax advice or recommendations in this podcast. In addition, the receipt of this podcast by any listener is not to be taken as constituting the giving of investment advice by Goldman Sachs too. That listener, nor to constitute such person a client of any Goldman Sachs Entity.
Transcript generated on 2021-10-14.