Finding Opportunities in Emerging Markets
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Welcome to the Bloomberg Daybreak Asia podcast. I'm Doug Krisner. Following today's print on producer prices here in the U.S., markets in Asia are bracing for tomorrow's report on U.S. consumer inflation. We'll be hearing from Rob Hayworth. He is with U.S. Bank Wealth Management. We'll do that in a bit. But let's begin in Hong Kong. That's where we find Raoul Chata, founder and CIO of Shikara Investment Management.

I think we can agree, you and I, that 2024 was especially challenging for many EM markets across the Asia-Pacific. We know that China was very much a big part of that story as it continued to struggle. And whether or not the theme of U.S. exceptionalism was a factor, we can debate that. But I'm wondering, if you look out this year, 2025, how does the APAC region look to you?

So, Doug, I'm more hopeful than what the markets are baking in today for the Asian region. And the reason for being more hopeful is I don't think the worst case scenario for tariffs plays out for Asia because, look, the inflation is going to impact the U.S. Those tariffs, eventually the price is going to be owned by the U.S. I live in New York. And trust me, it's

The inflation is literally killing us over there. Things are super, super expensive. And when you travel around the world, you realize how outrageously priced things in the U.S. are. So clearly the worst case on tariffs doesn't play out. What we're seeing is ex-U.S., some of this disinflation coming through. That was coming in product prices until Q3 of last year is coming in services also. So somewhere that kind of comes through.

strength is a form of tightening. Rates have moved up to nearly 4.8%. So that slows down the economy. So I think clearly we

We've seen the worst for Asian markets. I'm wondering what you're hearing about the situation in China. We had credit data the other day that was a little disappointing. New loans in China for 2024 declined for the first time in 13 years. Now, we know that the government is taking steps. We can talk more about that in a moment. But I'm curious as to what you're hearing from people in Hong Kong about the situation on the mainland.

So clearly, what's going to get used to China growing at a much lower levels, the numbers are going to be somewhere around 3%. And that's how we build our portfolio. Our portfolio for China is Chinese companies in the cosmetic sectors like Proia gaining share from the multinational corporations. Our portfolio in China is Chinese companies who are extending their global footprint. So whether it's EV or the other parts of the chain, I think that's the interesting proposition.

As investors, we've got to get used to this new world, which is China's flowing. What has changed at the margin is over the last 12 months, the Chinese government's become a lot more positive towards businesses. They want to get the animal spirits back from a business investment perspective, from a consumer confidence perspective. But all these things are going to take time. I mean, for those of us who've been in markets long enough know that

Exorcists take their own time to clear up and we're going through one of those processes in China. Yeah, so the consumer confidence perspective I think is key where sentiment is concerned. Obviously that's been one of the missing pieces, right?

And yesterday we had one of the security regulators in China pledging more support for the equity market. And we know that officials also reiterated support for both the currency and the Chinese bond markets as well. It seems like there have been very conscious steps taken to try to address this issue of sentiment, weak sentiment at the retail level. Do you think it's been enough?

see again um ideally one would have wanted uh 10 of gdp as a stimulus to take care of all these things i think the number which one is hearing from um

China is somewhere around 3 to 4 percent, so that's much lower, but that's their different style. They don't want to do what was done in 2008 and a repeat of that. They're mindful of the dead GDP ratios which are here. But clearly, if you put all these events over the last 12 months, whether it's asking the local governments not to chase the entrepreneurs for unnecessary tax liabilities, etc., whether it is kind of trying to have an amicable relationship with the U.S.

Yesterday, there was news of China looking to send the TikTok US business to Elon Musk. I think that should be positive. Earlier, China was like, that business cannot be sold. So I think a lot of these positive reinforcements are coming through. You see a lot of countries getting visa-free access to China. So what happened around COVID was China's contact with the rest of the world almost went to negligible. So I think that is now getting resumed. So all these are little positives which add up. I mean, funding the local governments

so that they can pay their employees and so that they do not kind of miss on the salary payments is clearly a big positive. What other markets right now look attractive to you in the Asia-Pacific? I'm curious about Indonesia. I'm also curious about your take on Vietnam.

So I think ASEAN is clearly attractive, though ASEAN gets impacted all the more with Vietnam from these tariffs coming through, which is why if you see, Vietnam has not gone anywhere. But look, that market has been literally flatlined for last five years. Valuations are super attractive. So once some of these tariffs are baked into in terms of the market participants, sentiment, etc., that is a market one would like to add.

India is a market we've liked for a while. It's structurally a strong story in this world of slow growth. India will continue to show 5% to 6% growth. And last three, four months, because of the cyclical downturn we are having in India, it's providing a good entry opportunity, particularly for small mid-caps, etc. So right now what we're doing in India is adding to our large caps. But I think another 15% down for small mid-caps, they become attractive again.

So Raul, when you're having meetings with clients in Asia right now, I'm curious about the one question that you're being asked most frequently. What is it?

so i think um the tariffs are on minds of everybody uh what happens in terms of rates is is the question commonly asked and which is which is where our point is in coming uh months we'll get clarity on both and and we are a lot more sanguine than the markets on this and our view is a lot of negatives are priced in them so almost everybody is positioned in u.s whereas what we believe is things should improve um but

particularly in the Asian part of EMs. And that should be positive for investors who are positioned for that. Raul, we'll leave it there. Thank you so much. Rahul Chadha, founder and CIO of Shikara Investment Management, joining us from Hong Kong here on the Daybreak Asia podcast. Capital Ideas, conversations with Mike Gitlin from Capital Group, features our top investment professionals sharing what drives them in today's market. Get stories and actionable insights. Subscribe wherever you get your podcasts. Capital Client Group, Inc.

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Welcome back to the Daybreak Asia podcast. I'm Doug Krisner. Stateside markets seem to be unwilling to make any big bets in front of tomorrow's report on U.S. retail inflation. Today's report on wholesale inflation was a bit cooler than forecast. The producer price index up two-tenths of one percent from the month before. That was half expectations.

Perhaps more importantly, the core PPI was unchanged. Big question now, how will these data play into the Fed and its thinking on the path forward with rate cuts? To answer that question, I'm joined by Rob Hayworth. He is Senior Investment Strategist at U.S. Bank Wealth Management. Rob joins us from Seattle. Thanks for making time to chat with us. What's your sense of where we stand right now in the fight against inflation here in the U.S.?

Yeah, Doug, great to be with you. The fight against inflation is going okay, but it certainly could be better. We're certainly seeing that inflation probably remains elevated somewhat this year, even though we don't foresee an acceleration. We think it's going to be hard to get that last mile down to the Federal Reserve.

certainly what we're seeing in the short term is higher fuel costs, higher energy costs, higher food costs, because we're seeing shortages. We're seeing some supply challenges when it comes to eggs, for example, due to the avian flu. We're seeing low inventories in the U.S. for energy. So we're seeing some pressure there. And then we'll have to see if the labor market can loosen up and let wages keep creeping lower to help

push down on those core inflation prints later in the year. But for now, it looks like it's going to be kind of stubbornly elevated. A big unknown is whether some of those economic policies from the incoming Trump administration will be inflationary. And I'm thinking primarily of the tariff story. What's your sense of that?

Well, we're certainly seeing the market react a bit to that every day as news comes out. First and foremost, it's coming down to tariffs and how much, how quickly, how soon. The good news, it seemed like this morning, was that it's going to be a more extended implementation rather than a rapid implementation of tariffs, which I think would be helpful to the market so that they're not seeing that inflationary pressure right away.

It's just hard for us to handicap what the policies are going to be as they come out fairly quickly. But that's certainly a risk to the market that could push prices higher if we see significant tariffs, especially early on. I think the other challenge remains the labor market. If we see a significant shrinkage in the labor market because of deportations,

That's also inflationary from a wage perspective. That could be a challenge, too. And I think we're all just kind of waiting to see what what's really enacted as we get into the first couple of weeks of President-elect Trump's new term. Very little movement in the bond market today. We've got a 10 year with a yield that is sub 480. Do you think it's likely that we could test 5 percent this year in 2025?

I think that's absolutely a risk and that's a risk that would be concerning to the equity market from a valuation perspective. We saw this earlier last year when we tested 5% on the 10-year and we had a pretty decent decline in the equity market. I think it's a concern when it comes to borrowing costs and the ability of especially smaller companies to refinance.

And I think it's a concern for valuation multiples as you're really getting into some attractive levels where investors may start to think they're better off in bonds than stocks at that point.

That's certainly an area we're watching closely. We think it remains a risk to the equity market if we start to see those levels. And I'm wondering about whether any shift in the yield curve could either help or hurt some of the big banks. We're going to hear tomorrow from Citigroup, along with Goldman, Wells Fargo and J.P. Morgan in terms of their latest earnings. Do you have a sense of what we're going to get in terms of guidance going forward?

We don't have a great sense of what we're going to get in terms of guidance, but what we're certainly looking for, Doug, is what's going on with the consumer and business spending and loan trends. Are banks still easing up on lending terms? That's something we heard from the senior loan officer survey, that that would be helpful for the economy. And what's happening with net interest income, and certainly a steeper yield curve, is often helpful when it comes to these companies. So,

So that's certainly something we're looking very closely at over the next couple of days as we get an awful lot of financial firms reporting very quickly here. What about fewer regulations? Would that be helpful as well?

Generally, it would be. Well, I know there's a lot of talk about easing regulations across a number of industries, including the financial services industry. That could certainly be helpful to companies as we move forward, but that's probably a longer-term issue compared to what we're seeing, what we'd like to see right now in terms of loan growth and how is the consumer progressing after such a strong expansion already.

We've got crude oil, and this is New York crude, WTI, just under $80 a barrel. We know that the president-elect is committed to increasing domestic production. Is the energy space something that you want to be exposed to this year in a major way? No, we're probably a little mixed on that in that, one, yes, we may be able to get more output, but these companies have been –

very adept at managing their balance sheet over the past year and figuring out how to return capital to shareholders without over-investing. And so we haven't had the boom-bust cycles of oil output that we've had in the past. And I think that companies are

ARE STILL ON THAT PATH OF STRONG FINANCIAL MANAGEMENT, WHICH WE AS SHAREHOLDERS CERTAINLY APPLAUD, BUT I THINK IT'S TOUGH TO SAY THAT OIL PRICES ARE GOING TO BREAK OUT AND REALLY CAUSE A BIG RUN HERE IN OIL PRICES, AND I THINK IT'S TOUGH TO SEE THEM FALL APART HERE. ONE, U.S. INVENTORIES ARE QUITE LOW. TWO, OPEC STILL HAS A COUPLE MILLION BARRELS A DAY IT WOULD LIKE TO ADD TO THE GLOBAL MARKET, SO THAT KIND OF PUTS A CEILING

on prices. And then from a floor perspective, we're still refilling the strategic petroleum reserve. So this is probably more of a range bound price market as we look into the rest of the year. So you're talking about returning capital to shareholders. I'm wondering about dividend plays. Is there a lot of attraction right now in the dividend space for you?

We really probably have a two pronged approach to this where one, we'd say for the longer term technology is vital to own from the growth perspective and the portfolio and the revenue growth perspective. It is garnering a lot of investment.

buy companies and that should continue. And two, you're right, we are looking at income plays. Energy would be a part of that, but utilities really as well, particularly because we're seeing utilities needing to invest more money to develop a

facilities to create more electricity to support this artificial intelligence investment boom. So we think there's there's room for both those in your portfolio. Before I let you go, Rob, I got to get your take as to whether or not you're seeing opportunities offshore right now, particularly in emerging markets. Is there value there still?

Yeah, we certainly think there is value in global markets, and part of that is driven by the elevated valuations we have here in the U.S. Really, U.S. growth, the U.S. performance over the rest of this year, we think, requires significant earnings growth rather than multiple expansion again this year. And that means we're seeing that it's somewhat attractive to look offshore, particularly given the recent strength in the U.S. dollar that may not be replicated. So, yeah,

you know, it's not the same growth story outside the U.S. that it is inside the U.S., but we think there is reason to consider some of those value plays outside the U.S. Rob, thanks for being with us. Great insights from Rob Hayworth there. He is the Senior Investment Strategist at U.S. Bank Wealth Management. Joining us 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.

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