Markets Cautious Ahead of Impending US Tariffs
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Whatever challenge comes next, let Microsoft help you keep pushing forward. For more details, visit Microsoft.com slash challengers. Bloomberg Audio Studios. Podcasts. Radio. News. Welcome to the Bloomberg Daybreak Asia podcast. I'm Doug Krisner. We had some weakness in U.S. equities in the last session as the market assessed the impact of the trade war. And later, we'll be joined by Gene Goldman. He is the chief investment officer at Cetera Financial Group.

But we begin in Hong Kong, where HSBC's Global Investment Summit has just wrapped up. Joining me now is Willem Sels. He is the global CIO at HSBC Global Private Banking and Wealth. Willem, thank you so much for making time to chat with us. There is so much conversation around tariffs, the economic impact that they will likely have principally, whether or not these tariffs will contribute to a higher level of inflation.

I'm going to imagine that you're trying to filter signal and noise here with the tariff conversation really amounting to a lot of noise at this point. How are you able to kind of find the signal in markets these days? Well, it's what our clients try to do as well. You mentioned the Global Investment Summit. We actually did a poll of 700 of our clients across private and retail banking. And what came out is that they see...

geopolitics as the number one driver of markets, 50% of clients. Then after that comes the fear of stagflation around 20% of clients. Then luckily there are two positive drivers, AI and China. And interestingly, very small percentage only that is concerned around the debt pile in the US. So that's potentially positive news. But I think, you know,

Just like clients, we don't know where the next step is going to be from the US administration. I do think the main impact of the uncertainty and the rapid changes in policy, that uncertainty is leading to likelihood of some businesses and consumers taking a wait-and-see approach.

And therefore, risk premiums go up and earnings growth and economic growth expectations probably come down a little bit. So we've cut two days ago, we cut our U.S. equity allocation from an overweight to a neutral, taking advantage of the bounds that we've seen over the last few days. So is that solely based on valuation?

Not so much on valuation. I think the valuations obviously have fallen quite significantly for the Magnificent Seven. They're way below the below the 10 year average for the for what we call the forgotten 493. They're about at a 10 year average. So they're not yet at the level where in and of themselves, low valuations make people step in. But I do think the reason for our

move was rather twofold. Number one, that the lack of confidence can lead to revisions to growth and earnings. And number two, that investors are generally also not yet underweight. Their confidence, investor confidence is very low, but investor positioning is not yet very low.

So are they favoring markets, let's say in Asia, I'm thinking of Japan, perhaps even South Korea, China, maybe there are opportunities now, you mentioned kind of high technology. Where is the bias favoring? Exactly.

The bias is towards Asia, is also the only region that we are overweight at this point in time. The enthusiasm is around China, in part because of course the deep sea canoes has triggered that realization that many people, you know,

didn't seem to have them. China has progressed quite rapidly in terms of technological evolution and everything that is related to that. So that's into manufacturing, that's into internet consumer leaders.

and so on. So that's the first leg driven by people that added to their positioning and that enthusiasm around technology. Now, the next leg is and the debate that we had at the conference was around how much is the new stimulus to the consumer going to lead to a broadening of that economic activity, because that is then going to lead to a second leg, I think,

you know, website for the Chinese market. Is there still a great deal of concern among your clients about the health of the Chinese consumer? Maybe they are healthy, but they are just, the sentiment is so weak right now. Is that a primary concern still?

So indeed, as I said, there is a debate around that. We are seeing the first inklings of the consumer feeling a tad, a little bit better, of retail spending being supported, of discounting being less. So less discounts mean a little bit more confidence from the part of the consumer related companies and so on. But it's of course, given the very low valuations,

It is that when you see those first inklings that people want to get into it. And so we are seeing evidence of hedge funds, for example, being quite actively looking for those opportunities as they expect that to be the next leg driving the Chinese market higher. Was there much in the way of conversation around money moving out of Asia to Europe?

Money moving out of the U.S. into Europe or U.S. allocations, right? U.S. portfolio allocations into Europe and also into Asia. So you have that rotation continuing to take place. And I think there is still scope for that to take place. Asian investors do also want to allocate to Europe. When I was here two months ago, I saw some of the most pessimistic views on Europe. And now it's much more positive, obviously, because of the German package.

but also the hope that even if it is mainly defense, this is going to lead to more R&D research and development that then can spill over into more competitiveness for Europe from a longer term perspective. Clearly, people are underweight in Europe as well, squaring that position, getting closer to benchmark and adding to it.

There as well in Europe, the question is going to be how much other reforms are there going to be as well, because obviously Europe needs to further integrate its capital markets and especially create one single market for services. The hope is that European leaders are going to use the collaboration on defense

to also then take initiative on other areas. That is obviously we will need to see, but some people are taking that as a positive and at least squaring their positions going back to neutral from an underway. So the markets are painfully aware of the trade tension between Washington and Beijing, and we know that China has been looking for new markets. Europe has represented a key market for Chinese goods for some time, but I'm curious as to whether or not

people in China are trying to fortify those relationships, given the current tension between Washington and Beijing. So certainly what could could happen is that, you know, when you have trade tariffs in certain from on certain countries, you can have trade diversion. So what that means is that some Chinese goods could end up in Europe. And this is one of the reasons why we expect inflation in Europe to continue to be reasonably low.

It's one of the reasons as well why we think there are opportunities in the European bond market. European bond yields have gone up significantly on the back of fears of more supply from Germany, but those are now attractive levels.

German bombs and actually UK guilt as well, you know, to us are attractive because some of those goods can end up in the UK, in Europe, and therefore inflation should remain reasonably well behaved there. So I'm curious in terms of topics at the HSBC Global Investment Summit, how did artificial intelligence enter into the conversation, particularly given the recent news on DeepSeek?

Oh, well, it features everywhere. And we also obviously had a lot of companies presenting from the services industries, from the manufacturing industries. All of them are saying that they are basically users of AI. And there are so many different examples there. So the enthusiasm from our clients has shifted from the AI enablers to the AI adopters.

And that is obviously leading to productivity gains across industries. But one of the industries that really benefits from it is the software industries rather than the hardware where that has been hit because people feel that there is going to be fewer and fewer semiconductors needed to do the same tasks.

tasks, the software industry really is gearing up to develop all of those applications for those different industries to really allow them to use AI to develop new products, to develop their customer services and so on. We'll leave it there. Willem, thank you so much for joining us. Willem Sels there. He is the global CIO at HSBC Global Private Banking and Wealth. Joining us here on the Daybreak Asia podcast.

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Welcome back to the Daybreak Asia podcast. I'm Doug Krisner. So we had some weakness for U.S. equities as the market considered the impacts of the trade war. The consensus view on tariffs seems to be that they will lead to higher prices, fewer options for consumers and fewer manufacturing jobs in the U.S.,

For a closer look now, I'm joined by Gene Goldman. He is the CIO at Cetera Financial Group. Gene's on the line from El Segundo, California. Thanks for making time to chat with us, Gene. Thanks so much, Doug. Give me your sense of where things stand right now in terms of the tariffs having an impact on equity market price action.

First of all, it's a great question, because clearly, the tariffs is the news du jour, basically the news of the year. For us, we're more optimistic than the markets. I do think tariffs are going to create a lot of market volatility, and we're seeing this already. But when we look at tariffs, we say three things. Why it won't be as bad

bad as the markets are worried about. Number one, I do think President Trump and the administration continues to talk about tariffs being retaliatory, not universal. That's a very important point. I think second of all is that if you look at other countries and their exposure to US imports, their imports to the United States, it's a greater percentage of those countries' GDP than our country, of course. So, it leaves room for negotiation. And third of all, if we just use 2018 as a base case,

During the tariffs then, stocks fell from peak to trough by about 16%. But keep in mind, we were back to pre-tariff levels by May of 2019. So yes, there's going to be uncertainty. Yes, there's going to be lots of market volatility. But we do think it's going to be a little bit less than expected. And today's announcement about tariffs, it's just more rhetoric really focusing on the fact that it's going to be retaliatory and less universal. Yes, there are going to be ramifications. I do think that, you know,

Consumers may not spend as much on cars. They're still going to buy cars, but maybe just not buy as many cars. But I do think there's very lack of response so far from the EU, the EU suggesting maybe potentially more negotiations.

If you think about the ramifications, US auto exports to the United States are not going to be wiped out because it's going to take some time for US production to ramp up. Also, demand for foreign autos is fairly priced inelastic. Then really, a 25% tariff doesn't necessarily wipe out the cost advantage of lower-cost exporters. What we're seeing, especially what we saw from Mexico today, we could see a weakening of foreign currencies versus the dollar.

I know that the tariff uncertainty creates volatility, but I think the good news is that we think it'll be less than the markets have anticipated. But when you consider where the Fed is in all of this, I mean, there are policy ramifications as well. We heard from the head of the Boston Fed yesterday.

This afternoon, Susan Collins, she was saying it looks inevitable that tariffs will boost inflation. And for that reason, it's likely appropriate to keep rates steady for longer. So when you consider the fact that we may be in a new regulatory regime on monetary policy, is not going to impact the equity market at all?

Yeah, so we go to the Fed. Okay, so if you think about the Fed, first and foremost, one of our key themes coming into 2025 was that the Fed would not be a good friend. The Fed would not cut rates as much as the markets anticipated. And if you look at the Fed, the Fed is seeing fairly significant

pretty good economic growth, stocks somewhat close to all-time highs, a pretty good labor market, but they're seeing above-target inflation. So even regardless of the tariff uncertainty, I still think they're going to be on the sideline for some time. We think the Fed, regardless of what happens, cuts rates only once or maybe not at all for this year. But the good news, going back to the market's sort of ramifications, we do think that returns this year are going to be good but not great. And what I look at is the fact that

The economy is-- we have modest economic growth, we have moderating inflation, we have a pretty OK labor market, and we also have double-digit earnings growth expected for the markets. The other bonus point is that the Fed is not going to be raising rates. In that type of environment, the market historically does good but not great. That's why our target for the S&P is still about 6% to 8% for the year or about 6,300.

from where it is right now. So beyond just kind of giving me the technicals and where the overall market is going to be in your view, what are the themes underneath that forecast? I mean, are you buying specific industries or sectors of the market right now and selling others?

Sure. So keep in mind, coming into the correction, we weren't surprised by the correction. We've been saying we expected a correction for some time. We were just surprised it took so long for the markets to actually have a correction. So with that in mind, we had sort of a, I guess I call it, I know it's opening day for baseball, but really using a basketball analogy, we were investing like Shaq, S-H-A-Q, a little bit biased towards small and mid caps, biased towards healthcare, biased towards alternatives, and biased towards quality names.

What we're doing now, especially with this market pullback, we're looking to boost some of our beta within our portfolio. So broadly speaking, we're reducing our liquid alternatives exposure in favor of global equity. We're also, from a positioning standpoint, we continue to be overweight value versus growth.

We also continue to be overweight small cap and mid cap. We do think that market breadth will continue to widen. And then from a sector standpoint, our favorite sectors continue to be healthcare. Healthcare, you have so much advances in biotech and personalized medicine and telehealth solutions. Really, it revolutionizes patient care. And we also like financial services, higher yields, somewhat of a steepening yield curve, sort of the

the economy not being as bad as the markets think, we think take that into consideration. Healthcare and financials will be a great opportunity in this environment. The sector that we would avoid, that we are really scared about, energy. We think energy, it's one of the best performing sectors even this year, but energy worries us because

Significant supply, we're at record levels of exports, record levels of drilling. And all of a sudden, drill, baby, drill puts more pressure. Where's the oil going to go? And you have Saudi Arabia, the UAE, both have come out recently and said, hey, if oil prices surge, we will be ready to put more supply on the market. Not a good sector for us to be in. Some of the recent sentiment data that we have seen on the U.S. consumer has been very weak. And I'm interested, Gene, to get your take on how you see the health of the American consumer right now.

One of our other themes was that the economy was moderating. We call it the gray moderation. And definitely, the economy is definitely slowing down. We just don't see a recession. We think recession worries are very overblown. Keep in mind, in January, it was the coldest January since 1988.

We also had a very extended flu season. So a lot of the weakness that we saw in January really affected weather-related industries, like construction, like services, like hospitality. And keep in mind, it's also January and February. Consumers tend to spend a little less money after the post-holiday season.

We are seeing February data and March data coming a little bit better than expected. And that's a good sign for us. We saw some PMIs come out earlier this week on the services side, well above expectations. So you take this into consideration. We just don't see a recession anytime soon, at least for this year. And I think that's an important connection because if you think about that,

A correction is a normal part of investing, once every 13 months or so. We just don't see a bear market, because corrections are when markets are worried about a recession. Bear markets occur when we actually have a recession. And we've only had three bear markets without a recession, 1962, 1987, and then 2022. So, we just don't see a recession, we just don't see a bear market.

So, your investment ideas seem focused primarily on the equity side, at least that's what I've heard so far. I'm curious as to whether you're finding opportunity in the fixed income space at all. Sure. Fixed income, broadly speaking,

We like fixed income, especially high quality, especially treasuries. You think with yields about 1.5% to 2% over inflation, they're pretty attractive. We continue to see strong foreign ownership of treasuries. They're driven by better yields, by the stronger dollar, and there's a huge retail demand for bonds. For our perspective, we do think the 10-year treasury is pretty close to the max.

The 10-year Treasury tends to max out around that year-over-year US GDP nominal rate. It's about 5%. We're pretty close to that upper end range on our end. The area that within fixed income that we do worry about, though, would be high yield. High yield, again, we don't see a recession, but what worries about high yield is that high yield

Spreads are so narrow right now. Pricing and everything being exactly perfect. And we don't think everything will be perfect. We think there'll be some bumps. And you saw corporate bankruptcies increase a little bit lately. But at the end of the day, we don't see a recession. But high-yield spreads are pricing and everything being super blissful, like a perfect game on opening day. And we just don't see that.

All right. We'll leave it there. Gene, it's always a pleasure. Thank you so much. Gene Goldman there. He is the CIO at Cetera Financial Group, joining from El Segundo, California, here on the Daybreak Asia podcast.

Thanks for listening to today's episode of the Bloomberg Daybreak Asia Edition podcast. Each weekday, we look at the stories shaping markets, finance, and geopolitics in the Asia Pacific. You can find us on Apple, Spotify, the Bloomberg Podcast YouTube channel, or anywhere else you listen. Join us again tomorrow for insight on the market moves from Hong Kong to Singapore and Australia. I'm Doug Krisner, and this is Bloomberg.

Thank you.

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