Tracking the Catalysts for Asian Market Outflows
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Welcome to the Bloomberg Daybreak Asia podcast. I'm Doug Krisner. President Trump's tariffs on U.S. imports of steel and aluminum have sparked retaliation, both from the European Union and Canada as well. Markets are now bracing for those reciprocal tariffs from the Trump administration. They are set to be announced April the 2nd.

So how are EM investors setting up before then? Joining me now is Vivek Subramaniam. He is founder, also the CEO of TH Global Capital, joining us from London. Vivek, thank you so much for making time to chat with us. I think all major Asian markets have seen outflows into the month of March.

South Korea, Taiwan, outflows in those jurisdictions seem to have accelerated a bit in recent weeks. And I'm wondering whether that's all about tariffs or whether there's something else afoot. Look, I think clearly the developments over the last few days have spooked markets, particularly the significant sell-off in the U.S.,

Our view is that, and of course, that also flows have within EM have been interesting. Last year, everybody wrote off China.

And then with the rise of deep seek, lots of capital flowed into China and out of India. And we think that in general, you know, this too will pass as far as the impact of tariffs is concerned. Yes, we are in for a few months of pain. But really, you know, what we are focused on is actually, you know, finding opportunity in this pain.

Because valuations are a lot more attractive. I'm wondering whether the opportunities are in China. I mean, you mentioned the deep seek story, but we also have to recognize the annual Congress that just concluded. And it seems as though leadership confirmed what people were hoping for, expansionary fiscal policy. Does that cause you to become a little bit more bullish on the China story?

Well, look, the Hang Seng tech index has risen by 35% year to date. So those have been significant gains. And, you know, obviously the rise of Chinese AI models have boosted market sentiment, as have Presidency's engagement with business leaders, including Jack Ma, which have improved investor confidence. Continued reforms and stimulus also are expected. And there have been flows to China from other emerging markets.

What we need to see going forward is, first of all, AI developments like DeepSeek haven't yet significantly impacted earnings. And we now need to see that positive impact and actual numbers. The expectations really are just 2% to 3% EPS upgrades.

And also, you know, more confidence and clarity is needed on China's regulatory policy towards big tech and the tech sector as a whole. So next week, we'll have the earnings from Tencent. How do you evaluate the larger companies, whether it's a Tencent or even Alibaba? Are there opportunities there? And I'm thinking as it relates to AI, some of the cloud computing that those companies are involved in.

Yeah, there are certainly opportunities, especially because a lot of software in China is still on-prem and the migration to the Cloud is a key opportunity.

And that is essential for AI. So in general, we believe that the easy money has been made in China. And obviously, the developments are great for the Chinese tech sector. But we'll need to actually see follow-through action over the next year based on developments.

fundamentals. You mentioned a moment ago that money was moving away from India and back to China. How do you evaluate the Indian market right now? Right. So, you know, India, we believe, is one of the most attractive EM markets, if not the most attractive market. We believe that it remains less exposed to trade risks than smaller export heavy economies, given that it's quite insulated. It's very domestic oriented. The

The economic outlook for India is really the GDP growth forecast. It was 7.8% last year. It's expected to be 6.4% in the current year and then gradually accelerating from next year to 6.5%.

It remains the fastest growing large economy outperforming, you know, peers like the US, which are growing at, you know, over 2% and Eurozone in China, which is growing at 4.5%. A lot of key indicators have picked up in India. And we believe that the worst is either behind us or will be behind us in the next two to three months. The Nifty index is

is roughly 20 to 500. There could be some downside to say 20K or 19,500. Our technical view is that 19,500 is probably where the bottom is. And we expect that to be reached in the next two to three months.

Obviously, don't hold us to it. Okay. Hard to call the bottom. But we think that we've got into an attractive zone in India where one should start nibbling and perhaps loading up as...

the next, you know, couple of months pass. So what are the industries in India that you want to have exposure to right now? Is it the banking component? Is it more tech related or focused on the consumer? Which is it? The key themes, you know, that we are focusing on India are financials, which are, which should grow, you know, higher than GDP growth rates. And there's, you know, there are a lot of many attractive companies there. Obviously, you know, the last,

A couple of decades have produced some stupendous winners in financials in India. For example, Bajaj Finance, which was a 1,700 bagger over the last 20-odd years, and also stalwarts like HDFC Bank. And we see that in spaces like housing finance, the non-banking financial sector,

sector and selectively banks. There are some exciting companies out there. There's also the digitization team. India is going through a massive phase of digitization and there are plays around that. And that includes, you know, payments and e-commerce adoption.

and also selectively consumer discretionary. Vivek, before I let you go, I know you're in London there, so I'd like to get your take on the movement of money into European markets, one. And two, how are people in the UK feeling right now about what seems to be a global trade war? I think people in the UK are feeling...

feeling pretty good about uh you know uh stammer's recent visit to the to the us and uh you know what seems like a diplomatic uh win and we are feeling somewhat insulated you know as a as a result also of course you know europe european markets seem to have done decently in uh in recent months so you know certainly seems like a glimmer of hope uh or more uh for europe after

a long phase of underperformance. A long phase. I think that's an understatement. Vivek, thank you so much for joining us. Vivek Subramaniam, founder, CEO of TH Global Capital, joining from London here on the Daybreak Asia podcast.

I'm Alpine skier, Michaela Schifrin. I've won the most World Cup ski races in history. But what does success mean to me? Success means discipline. It's teamwork. It's the drive and passion inside of us that comes before all recognition. And it's why Stiefel is one of the fastest growing global wealth management firms in the country. If you're looking for success, surround yourself with the people who will get you there. It's

At Stiefel, we invest everything into our advisors so they can invest everything into their clients. That means direct access to one of the industry's largest equity research franchises and a leading middle market investment bank. And it's why Stiefel has won the J.D. Power Award for Employee Advisor Satisfaction two years in a row.

If you're an advisor or investor, choose Stiefel. Where success meets success. Stiefel Nicholas & Company, Inc. Member SIPC and NYSE. For J.D. Power 2024 award information, visit jdpower.com slash awards. Compensation provided for using, not obtaining the award.

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Welcome back to the Daybreak Asia podcast. I'm Doug Krisner. Most of the equity market gained ground today after two days of heavy losses, and today's advance followed a cool reading on consumer prices. Even so, I think it's important to point out the risk of inflation rearing back up. We have seen a series of tariffs, and as a result, prices are expected to rise

on a variety of goods. That could test the resilience of American consumers and, by extension, the broader economy. For a closer look, joining me now is Burns McKinney. He is managing director, also senior portfolio manager at NFJ Investment Group. Burns on the line from Dallas, Texas. How are you feeling about the price action over the last couple of days, Burns?

A lot of what we're seeing the last couple of days, just really, I hate to say it, but a lot of us getting back to policymakers. You know, we, you know, one way we like to think about the Trump presidency is that, you know, and this is going back to the way it was in 2016 during Trump 1.0, but

You have sort of imagine the angels on the shoulders. You have the good Trump and the bad Trump. On one side, you have things that the market likes, like tax cuts and deregulation. And then on the other side, you have tariffs and trade wars. And early, I think shortly after the inauguration, investors were focused a bit more on potential for tax cuts. But

Of late, the narrative has really shifted to tariffs as well as just the uncertainty around those tariffs. I think that one of the things that the market doesn't like, it doesn't like uncertainty as much as anything. And, you know, when you have, you know, tariff impositions and then reprieve and tariff and reprieve. Yeah, I've been kind of laughing. I haven't seen anything this on again, off again since Ross and Rachel on Friends. But the markets definitely don't like that a whole lot.

You know, after the election, I think many in the market were of the view that the threat of tariffs were nothing more than a negotiating strategy. But now it seems like we're into something that's much more ideological. Does that concern you?

It absolutely does. I think that again, tariffs can be useful as a tool or a negotiating tactic, but really as a means to an end rather than an end in and of itself. And I noted that one of the things that you think, well, what are the impacts? And one of the macro effects is that uncertainty that I was just speaking of may lead companies to pause capital investments and slow down acquisitions and slow down hiring.

And of course, really the biggest factor is how does this impact Fed policy? And the question that investors have is whether the Fed is focused a little bit more on the inflationary impacts of the tariffs, which might cause a deposit just rate cuts for longer, or whether it's focused on the longer term impacts that may slow future growth. I think that the Fed is in wait and see mode and trying to be data dependent. So we don't necessarily expect

a cut in the near term. But that's really the place where investors should probably focus on is the impact on the Fed. That's interesting to me because I think markets right now are still fully pricing in the first quarter point rate cut in June. And I think in total, there's about 67 basis points of easing that has been factored in for all of this year. But you're of the view that the Fed is still going to kind of

just drop back and adopt more of a wait-and-see approach? Is that it? You know, we don't expect one in the near term, but probably June is, I think, what is being priced in. I think, you know, two to three cuts this year is probably what would be expected. And that's a great example of exactly how the market is viewing this because, you know, as recently as a month ago, markets were only pricing in one cut. And so now I think that, you know, what that is telling us is that the markets are actually focusing a bit more

on the economic growth and the slowing of economic growth of tariffs more so than even the inflationary impacts. But in general, I think that what investors can look at is that tariffs, if you look at history, they can be stagflationary. I think that that's one of the great-- and the fact that investors are starting to price in a little bit higher likelihood of a recession this year. Now, it's still less than 50%, but you

There's certainly a wait and see mode. It's very, very difficult to predict what's going on. You could get a boost in the markets if we call it the Trump put comes back into play as the president maybe looks at the stock market as a scoreboard to help influence policy decisions. So it seems, though, that the health of the labor market is really the next great test for the growth story, right? Absolutely.

That is. And at least the good news there is that the labor market has stayed solid. You had 150,000 jobs last month. It's down a little bit from some of the recent months. But nevertheless, I think one of the things that the economy can stand on is the fact that you're still looking at unemployment hovering pretty close to 4%. And we saw just yesterday that the number of job openings had crept up. And so that we're at a place now where

The number of job openings is pretty close to equal to the number of those seeking, you know, filing unemployment, which is, again, down from where it's been in recent years from the post-COVID surge. But it really puts us in a place that we're probably even better off there than we were in 2019. And the consumer has certainly been a workhorse.

So take everything that you've been saying and formulate an investment strategy. What would it look like? Well, the first thing, when we start formulating an investment strategy, especially for longer-term investors, the first thing you have to focus on is what are valuations right now? If you go back a year ago, markets were in many ways climbing a wall of worry. We were afraid of a recession with an inverted yield curve. We were afraid of high inflation and uncertainty.

certain election. And as of opening in this year, you had a lot of multiple expansion and valuation expansion that drove the markets up to north of 20% last year. That's the second big year in a row. Going forward, markets are still probably priced a little bit for complacency. You have valuation metrics are high. The way we're looking at this year is that if last year was, think about

football game, you know, the quarterback threw the ball 40 yards downfield. You saw the same thing in 2023. This year and next year might be because of those high evaluations, more like the good old-fashioned

run the darn ball and three yards in a cloud of dust. I think investors, you certainly don't want to fight an accommodative Fed. You don't want to fight tax cuts either. But investors should probably expect more muted returns going forward. And so we wouldn't sell the market, but maybe focus on some areas that might be a little bit more defensive. Dividend paying stocks, you're starting to see perhaps a broadening of returns and maybe a paradigm shift away from some of the mega cap tech.

towards areas like companies that are paying and growing dividends. I'd like to get your view on the American consumer. Recently, we heard from both Delta Airlines, American Airlines. They're very concerned about a pullback in travel, leisure travel, and by extension, that did some damage to hotels, also a company like Airbnb. How do you understand the American consumer right now in terms of their health? Well,

Well, again, you know, job openings are still solid. And so, you know, I mean, but at the same time, you are starting to see, you know, you mentioned some of the travel companies that sounded alarms. You know, Walmart was another one. I think it was a couple of couple weeks back, whereas, you know, they tend to be a bellwether for consumer spending. And they suggested that it is going to be a little bit softer. That said,

I think that the good news there with respect to the consumer is that we're starting from a point of having a little bit of cushion. You know, the consumer spending has been fairly solid to the point that, you know, if we're seeing signs of softness now, we could be softening to something that after, you know, big surges that we've had in 2022, 23, you know, maybe something that's a little bit more long-term sustainable going forward. Yeah, just a bit.

If you come out trying to run a marathon, you know, five minute mile, you're going to burn up pretty quickly. But if you kind of come out at a little bit more measured pace, it could allow us to maybe push off any sort of hard landing for a little bit longer. So mortgage rates have come in a bit as well. I mean, that's got to be another positive. It is. You know, I think that that's certainly a positive. That said,

housing valuations are still fairly rich. And so even with lower mortgage rates, which the economy certainly needs, I think that's something where the economy overall might not necessarily expect to get a big boost from housing, which is certainly a huge part of the economy.

Are you inclined to look offshore, given everything that we've been describing here and some of the turbulence that's been associated with kind of the equity market behavior as it relates to questions over the impact of tariffs, where we go in terms of earnings, the inflation story, where the Fed is and all of this? I mean, are you inclined to maybe look to a place like Europe or is that trade pretty much already been effectively put to good use?

No, I think there's a lot of meat on the bone there as far as the overseas trade. You've had circumstances where U.S. equities have been, you know, this concept of U.S. exceptionalism has allowed U.S. equities to outperform over five years and 10 plus years. And that's not necessarily going to be unwound in the span of a month or two. And, you know, you have very historically wide valuation discrepancies whereby, you

you know, places like Europe or even the emerging markets trade in line with to even discounts to their historical averages, whereas the U.S. is trading at a premium. And, you know, one of the things that I think might be driving some of that near-term outperformance of overseas stocks of late has been that, you know, whereas, you know,

you know, the U.S. is seeing, you know, the Fed pausing versus, you know, in the EU, monetary policy may be a little bit easier. Yeah.

Going forward. And so there's a lot to like there. But it really, again, starts and finishes with with, you know, lower. I mean, obviously, European equities have historically traded at a discount to the United States. But that discounts as wide as we've seen in a long time. Last question before I let you go, I'll give you 20 seconds to answer. Will we fall into recession here in the U.S. this year?

The odds are still against it. Now, the odds have been climbing over the last couple of months, and there are fears of a hard landing or stagflation, but we're still looking at certainly less than a 50-50 chance of a recession this year. Employment's fairly solid, and you don't want to fight the Fed, and the Fed could revert to easing mode again.

Burns, always a pleasure. Thank you so much. Burns McKinney there. He is managing director, also senior portfolio manager at NFJ Investment Group, joining from Dallas, Texas, 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 story 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. ♪