Webinar Replay

The Global Edge: How Will China's Covid Re-opening Impact Global Markets?

February 16, 2023

During this Office Hours replay, Kevin Flanagan (Head of Fixed Income Strategy), Jeff Weniger (Head of Equity Strategy), Aneeka Gupta (Director, Macroeconomic Research), and Nitesh Shah (Head of Commodities & Macroeconomic Research) cover China's Covid re-opening and how it could affect global economies and the markets. In addition, they focus on how investors' decision-making process could be impacted.

This discussion can be supplemented with the latest Global Edge publication.

This event was simulcast on Zoom.

Hi everyone. Thank you for joining today's Global Office Hours titled, The Global Edge: How Will China's COVID Reopening Impact Global Markets, where you will hear from Wisdom Trees, Kevin Flanagan, head of Fixed Income Strategy, Aneeka Gupta, Director of Macroeconomic Research, Nitesh Shah, Head of Commodities and Macro Economic Research, and Jeff Weniger, Head of Equity Strategy. So with that, let me turn it over to Kevin Flanagan to get us started.

Kevin Flanagan:
Thanks, Irene. Hello everybody. Thanks for joining us on our Global Edge piece here about China and potential impacts. What should investors, advisors be looking at in the environment we're in and certainly here in the US. And we'll get Nitesh and Aneeka to comment on it shortly.

Things have changed dramatically here early in February from where we were to begin the month to where we are now, looking at the whole narrative, how it's shifted basically from, okay, we're going into a recession, Fed's going to raise rates maybe one more time, then cut sooner rather than later. The next thing you know, we get a blockbuster jobs report, a couple of hotter than expected inflation numbers and everything has been sort of turned upside down. Quite interesting.

So I'd be curious to see, once I'm done with the intro, I'm going to hand it over to Jeff as well to see what kind of impact are we seeing, and this is all kind of ex China. We always look at these economic reports, ex food and energy, ex this, ex that. What we're talking about early on here, what is the investment landscape ex China, and then dig deeper into that because this is certainly a factor that we haven't had to confront or really have in the overall global investment landscape for a while now.

Now, China is back on the main stage. And certainly when you're looking at its impact over the course of more recent history, it is something that we definitely need to take into consideration. On that front, just real quickly, for one of the first times, there had been some glimmers in the headlines about the Fed and whatnot, but just the other day you actually started seeing some Fed officials opining as well. Not that it will impact, I don't think immediate policy decisions, but it's coming on everybody's radar at this stage of the game.

So what we like to do in these Office Hours, for those of you not familiar, to make it as interactive as we can. We've already had some pre-submitted questions we're going to start tackling on and fire away, ask those questions as they come in and we will get to them without a doubt.

So I'm going to ask Irene if you could call up that first polling question and I'm going to pass the baton over to my good friend and colleague out in the heartland of the Midwest and the US, Jeff, and then we'll turn to the other side of the Atlantic and bring in Aneeka and Nitesh. So Jeff, take it away.

Jeff Weniger:
Okay, we will read that. And in the context of some of the things that Kevin just mentioned to kick this thing off here, two reports came in this morning, two US reports that are notable for the viewer because knowing Nitesh and Aneeka, there's going to be a lot of inflation on this call, especially with, as we're getting into it I said, "Aneeka, you better get into some copper action on this call because that is a big question, what happens to base metals with respect to China?"

So what we had this morning was we had an upside surprise on US PPI came in at plus 0.7, consensus had been at 0.4. So again, just some more of this hotness coming out of some of the US inflation indicators. Call it what, Kevin, two weeks ago when we had the 517,000 jobs, which surprised the street notably in US data. So we'll try to get some EU, some US, some LATAM, you name it, as it pertains to the China reopening.
Now, for some context before we get to the poll question number one, remember the China reopening was one of these things that was a question mark on markets, starting to rise in the conversation around November-ish. When you go back through the archives, you could see The Economist writing and thinking aloud about maybe ending zero COVID as early as November 17th. Then the surprises, all the surprise announcements started to come in December. And now we are now, call it 10, 12 weeks deep into our collective acknowledgements that China is coming out of this and trying to get to the bottom of whether or not this is inflationary, deflationary and so on.

Before we get to the poll question number one, the other US data point that came in this morning was an ugly one, Philly Fed manufacturing, that was a negative 24.3, and that looked like, I believe we were when we were looking at it before this call, it's something like a second quarter, third quarter of '08 type number, aside from the big smack down there during COVID. So ugly weakness out of the Philly Fed, heat out of the PPI numbers. Imagine that. Confusion abounds in the economic data.

Poll question number one, we've got five choices. Do you think China's COVID reopening is a big deal? Okay, choice A, yes, it is one of the top bullish portents for economic activity in 2023. B, yes, but I worry that it won't be as bold as many expect. Okay. C, I'm wishy-washy. We always like to give everybody that choice too, because tough stuff here. D, no, China has a property bubble unwind to contend with. And E, no, this is investors grasping for something positive in a tough global economy.

Okay, so go ahead and answer that so we can ruminate on how wrong you were in answering and we'll see what everybody came up with. What do you think Nitesh? There's three or 400 people on this call. What do you think they're going to answer?

Nitesh Shah:
My personal view is number one. It's one of the most bullish things, especially in my corner of the world looking at commodities. And we've all collectively written a piece of the Global Edge on this topic, on how the China reopening affects various asset classes. Got that chapter there on China. And it's clear to see, if you want to throw a picture up, slot page number 13, China is the largest consumer of almost every major commodity out there.

So we've gone through several years of a recovery in post COVID for most of the world. 2021, 2022 was a recovery period for most of the world, but that was all in the absence of China being a participant. China was still in zero COVID policies around then. Now, China is opened up. It will have an outsized impact on commodity markets. So it is huge. And just going, thinking about what's happened already in 2021, 2022, even the absence of China, biggest drivers of inflation during those years was commodity prices. Food, energy prices were very, very strong in those years, partly due to the war in Ukraine.

But imagine adding that third factor into that, the China reopening. That's just going to exacerbate some of the frictions already in there. So when it comes to economic activity and the activities that are pushing prices higher, I think China is going to be extremely important.

Now, China's played a role in recoveries in the past. If you look at the Asia crisis, 1998, '99, China was the white horse coming in, pushing the Asian economy out of that period. The great financial crisis, 2008, a lot of people say, well, effective loads of QE and...of QE. Arguably, China, with its outsized spending program, probably did more than any of those central banks.

I think in 2023, China's reopening maybe not as big as any of those. It's got a real estate hangover to deal with, which will hold things back and also the rest of the world is not growing as fast, so it's not consuming as much Chinese goods. But I do think that the reopening and the stimulus that's coming out of China will be very meaningful. So that's my position.

It'll be interesting to see where the rest of the audience are thinking. But I think China has repercussions beyond commodities and it'll be good to hear what are you thinking about how China's reopening is impacting things on the ground in the US?

Jeff Weniger:
Okay, let's have Aneeka go ahead and respond to poll question number one.

Aneeka Gupta:

It looks really interesting. It looks like 51% of the audience believe that yes, it is going to be quite an important reopening deal, but it won't be as bold as many expect. And I think that that just tells us the China reopening story is the big swing factor, which is why we identified it as the core part of this piece in Global Edge.

Jeff Weniger:
What's your answer, Aneeka? Mine is, I'm wishy-washy. That's my answer. I'm wishy-washy.

Aneeka Gupta:

So you're basically with the consensus that we're seeing. I actually am tilted more in line with the 29% of the audience, which believes that it is the top bullish portent for economic activity. We've already seen that rebound take place just in one month. And as we've seen economic data so far coming out of China has been quite positive, be it in total social financing, the PMI data, the downward trend in actual COVID cases, which is the most important sign everyone is looking for, even travel data is looking a lot more positive coming out of the Lunar New Year.

So I think these are good signs. I think it's going to be volatile. There's no denying that. But it's going to be an important factor for the economy this year.

Kevin Flanagan:
I think it would've been interesting, I don't think we can do it, but just to throw it out there to see if you could have broken down the answers from our US versus our global audience, that I think you would see different responses for sure.

I would argue right now that here in the US, that probably most investors are not focusing on the China reopening. Jeff, to what you mentioned before, they're looking at hotter, little bit hotter than expected inflation reports. That was not envisioned. I think the investment community here in the US, once we started seeing that peak in CPI PPI, was thinking that's just going to continue. And you find out it's not always a one-way street. And that the focus being, yes, we're going to go into some kind of a recession and the Fed's going to make a policy mistake, it's going to have to cut rates sooner rather than later. And China was somewhere in the background as an issue.

And I would say, correct me if I'm wrong, you three with me on this call here, is that I think once you get out of the US and you go on the other side of the Atlantic or the other side of the Pacific, I'm thinking it's more of a topic that investors or advisors are considering or talking about, that here in the US we're being a little bit more insular, which is interesting because this is something that can all of a sudden come back into play.

So that, for arguments sake, say, I know we have a question coming on it before, and one of the questions that came in earlier was, could China push US inflation higher? So it won't be that I think the US investor will be focused or concerned that China's going to push the US inflation higher. But if it does come in hotter than expected and you find out one of the reasons was China, goods inflation comes back and Nitesh, to your point on commodities, here in the US goods inflation has dropped off and it's all on the service side of the equation. So people will be looking at it, I think more in the rearview mirror, what the impact was on US economic numbers rather than looking or being preemptive about it.

So I'd be curious, Aneeka and Nitesh to here to hear your views. Is it something that is more front of mind in Europe and in your conversations that you're having?

Aneeka Gupta:

So we're definitely seeing that play out in European Equities in a very big way, Kevin. China accounts for nearly 6% of revenue exposure coming out of China. And the last time we had this call we had extremely negative sentiment towards European Equities. Since October, we've had a very strong rebound. We've had four consecutive weeks of inflows coming into European Equities. And this has all really been on the back of the China reopening story, Europe's prudent management of the energy crisis over the winter period. We've also had a lot more favorable weather conditions and it's all really been helping Europe as it's maneuvered the situation over the winter season.

And right now as we look forward, I think the biggest risks are the credit cycle, which is being led by monetary policy. And as we all know, the ECB remains extremely hawkish at this point in time. That could be a big headwind for European Equities. But that being said, at the same time, getting that strong reopening story from China will be very beneficial for Europe and its economy. And at the same time, the big factor that also will play a very strong role is the fiscal stimulus coming out of Europe. We've seen government expenditure as a share of GDP rise to 60% versus 45% at the start of the Covid pandemic. So I think these are very important tailwinds that Europe could be benefiting from.

Jeff Weniger:
Okay. Let's answer some of these questions. There's a ton. Nitesh, don't worry. I'm going to tee you up here. Read from UBS. Read from UBS. China is the world's largest importer of both food and energy. How will reopening affect the global supply demand equation?

Nitesh Shah:
Yeah, absolutely. Great question. That chart showed earlier on just showed how big China is from the demand standpoint. And it's clear that if we were in tight markets during 2022, full commodities, in the absence of China being a real participant, when China becomes a participant, it's going to get even tighter. Especially when we look at metal markets, but even look at food and energy, there's lots of supply deficits there. So what I mean by that is demand for the goods are greater than the supply. And so you have to eat above ground inventory of those and the inventory is thinning down. So once China reopens, the inventory numbers are likely to fall even faster. There's a little bit of a nuance here because on the energy side, there's lots of other things interacting, right? Because you have got Russia that's being ostracized from the developed markets, G7 markets, in terms of its crude and oil products.

There is a tightness that one part of the world faces, but China is still importing a lot of Russian product even though those extraterritorial so-called sanctions or price caps are being put in by G7 countries. But China's been finding a way of importing it in, so it's got decent amount supply there. So it may not heat up prices as much as one would've expected because it probably built up some inventory and is getting some access to some of the Russian product a little cheaper. But there's limitations to how much the control on Russia without those price caps start kicking in and those products being taken off the market.

On the food side, yes, we've seen a very strong run up in prices in the first half of 2022 last year. Then a lot of agricultural food prices started to cool down in the second half of 2022, coming into this year. But China uses these times quite opportunistically when prices fall to build up its own inventory. And as China grows, it's likely to draw down a lot of the inventory that it built up. So we think there's definitely a case for China pushing the prices of all these commodities off. But once again, when it comes to balances, yes, we're going into greater deficits.

Kevin Flanagan:
So there's a question from Kevin from Connecticut. That's me by the way. Nitesh or Aneeka, whoever wants to take it. Am I going to be paying higher prices to fill my car with gas later this year.

Jeff Weniger:
In the US.

Kevin Flanagan:

In the US. Well, no, I mean in the US or say in Europe, either one. Are we going to be paying more to fill our cars with gasoline later this year?

Nitesh Shah:
I'd say possibly more than you are paying today, just because while crude oil prices have weakened compared to say this point a year ago, the product market, so everything you make from crude oil including diesel and gasoline, they're quite tight because the refining capacity hasn't quite adjusted across the world. And then in addition, last week, when the EU put into place these bans on Russian product exports, that's tightening up the market even more. So I think as a result of that product crisis, so everything made out of crude oil, is just going to tighten generally across the board.

Set against that is the macro headwinds, right? If economic activity does weaken, and if you have the Fed almost inducing a goods price, a recession to be able to counter the inflation pressures, then obviously you'll probably get a little bit of weakening of gasoline. But if we are right that the Fed could pivot somewhere around the middle of this year, that could mean that gasoline prices could be higher for longer.

Kevin Flanagan:

So Jeff and Aneeka, let's go to the next polling question since we're on this whole inflation aspect to this. Let's see what you, the audience, are thinking about this from the relationship. So Irene, if you could call that up. I believe it does have to really get to the heart of the matter of what we've been discussing in the first part of this office hours. Do you think inflation could reemerge? So Aneeka and Jeff, let me turn this part over to you guys.

Jeff Weniger:
And as we do that, there were some things along these lines, let's see if we can tie it in with these things. So Ronald says, what effect will China's reopening have on US oil prices and production specifically in the next six months? Ronald wanted to know, but feel free to say the next year or two or three. So we'll tie that into this one. Somebody else asked about China pushing inflation. That was Edward. That's going to be generally answered in here. Okay, so we'll tie those in. So we'll try to talk oil production in the context of some of this. All right, do you think inflation could reemerge from the China factor? Now that's interesting, Kevin, because we're saying reemerge, that presupposes that it's gone away. Let me move this way so I can actually see your face. We have a plus 6.4 is the year over year on the US although there are some indicators.

For example, Texas manufacturers, right? The second most popular state in the US, Texas is number two in manufacturing, surprise surprise, behind California. 30.7 is the percentage who are saying on future prices paid higher, only 30.7. That is a recessionary type indicator. Texas manufacturers saying 6.4 on CPI will be tumbling down as their PPIs come tumbling, but not according to that PPI report from this morning, which was a piping hot one.

Okay. Do you think inflation could reemerge from the China factor? Choice A, and let's have Aneeka field this. A, absolutely. The second-largest economy was locked down for nearly three years. Choice B... I typed these questions up by the way. Choice B, perhaps, but China's reopening will alleviate all or most of the supply chain problems. And yes, we need to talk supply chain on this call. C, I'm sorry, I wasn't informed inflation had gone away. And D, no, inflation is trending downward and China won't be much of an offset. Okay, Aneeka, what are you thinking here?

Aneeka Gupta:

I think it's a very tough question. I'll be interested to see what the audience has to say. My take on it is it's going to be really data dependent. You've got this push and pull and this strong tug of war taking place. Yes, I would be more inclined to say the second-largest economy of the world has been locked down. And don't forget the pent-up savings that are already managing to reach their way to Europe's luxury goods market. And those pent-up savings are going to be spent. But the important question, and we've tried to address that in the global edge report, is where are those savings more likely to find their way into? Is it going to be in the housing sector or is it going to be in more of the consumer-led sectors? Is it going to be in the tech space?

Where is it actually going to be? And I think based on that, we're going to see less of an impulse into the housing sector and more of an impulse in more of the consumer-led sectors. And I think that will obviously have a very important impact on the rest of the economy. I think supply chain problems have alleviated to a great deal. So I think that would be more of a positive factor in terms of relieving some of those inflationary pressures. But in terms of demand coming out from China, I think that will be more inflationary for the globe this year.

Jeff Weniger:

Give us more on the housing situation. We do have that property unwind. It's been five quarters now of home price declines there. And you started to touch on it because there was that question about that shift. For 10, 20 years it had been infrastructure, let's build some roads, some high speed rail. And now there is that vibe. Is it like an American style consumption impulse that the state is trying to push? What exactly are we getting at here with China?

Aneeka Gupta:

Well, it's different this time to put it a little succinctly, Jeff. What we've seen in the past, as you've mentioned, is a broad infrastructure rebuild and physical assets such as property has been a source of security for Chinese investors. But we're clearly seeing a change in mindset. That could also be very closely in line with the fact that we are seeing housing across the globe begin to decline. So it's house prices, not just here in London and in the UK, but we're seeing that take place in Europe, we're seeing it in Canada, we're seeing it in the US, we're seeing it across the globe. And we're also likely to see that in China. So I think the perception of the local Chinese investor is changing, which I believe there is going to be more demand going to consumer-led sectors as opposed to the housing sector.

I think the second key factor that was highlighted by our Chinese economist was relating to the point that the government is trying to do everything it can to prop up two very important sectors of the economy, the energy sector as well as the housing sector. But there will be a distinction made within the housing sector between low quality developers as opposed to high quality developers. And that distinction is very important because that just tells us that there will be a cost to pay and we might see the low quality developers actually not get that much of help and support from the government. So I think those two factors are really important to keep in mind in terms of how much of a support are we going to get from the government in terms of propping up the property sector and how much do Chinese investors actually still believe in the Chinese housing sector.

Nitesh Shah:
I can add to that. I think on the real estate side, I think the policy that the Chinese government is trying to push is to at least get half-finished projects completed. They don't want to encourage a whole vast load of extra new projects to start up. They don't want to go back to sort of the 2008 period of making those kinds of really bold stimulus, but at least what's half finished, get them completed. And it actually matters in terms of what gets stimulated at the end. Because when a housing project is about to get completed, that's when you get copper wiring being put in, piping being put in. That's when the light goods, the refrigerators, the washing machines, all those things have been bought. And that tends to lean a bit more onto the consumer side to.

And that tends to lean a bit more onto the consumer side too, or at least in my looking at commodities once again, into the base metals rather than the kind of bulk metals, like iron ore.

So this time will be different because it is, once again looking at more of a domestic stimulus, but more towards the consumer end of the spectrum rather than the mass, building highways and railroads kind of stimulus that they've done in past periods.

Kevin Flanagan:
Oh sorry Jeff, I was just going to say, one of the things we were talking about in the Global Edge piece was impacts here, one of them being trade. Here in the US, if there's anything bipartisan here in the US on a political basis, it is that there is continued annoyance, for a lack of better way of putting it. Some would say people are angry or mad, about the ongoing trade deficit with China.

And specifically, getting back to supply chains, what we saw with COVID, that we should be able to produce more domestically here and not to have to rely on China.

And when you focus on it from the export side of the ledger, one of the things that we were looking at was not imports, not the trade deficit. It would be what would be a positive to GDP?

Remember, net imports is actually a negative contribution. What you want to see are the exports moving out. And China's up there with their numbers on a pre-COVID basis. Let's just look at it from pre-COVID.

But the European Union, Canada, North America, even England is clipping on the heels of exports to China here, with respect to the numbers for the US.

So I was curious, when we're having this kind of discussion, is the same type of, let's call it bipartisan political focus here in the US, where chip manufacturing, we want to bring it back here in the US. Is there, Nitesh and Aneeka, is there that same kind of sentiment in the European Union, that we need to be relying less on China in the supply chain mechanism and that we should start doing things more here at home? Or for you two, more here within the European Union. We should be manufacturing more within Europe, within our boundaries, rather than having to rely on China.

Is that a discussion that you see being had over there on the other side of the Atlantic?

Nitesh Shah:

It is. But I think it's largely led because of the US reaction. So the Inflation Reduction Act in the US is all about on-shoring lots of production that goes into the energy transition.

So all the electrolyzers that need to be built, or the electric vehicles, the infrastructure around that, that's what the Inflation Reduction Act in the US promotes. And it wants to make sure that a large part of the value chain in building that takes place in the US.

That has kick-started the European Union to say, "Hold on, we're going to lose out on..." It's not just China that loses out from the US policy, European Union loses out on that policy. Because econ export, it's manufactured goods into that value chain.

So the European Union is now thinking of doing something similar, and it will obviously impact inputs from China. But it's happening in a slightly indirect way.

The European Union already started having some of these discussions back in 2020, when they realized that, when COVID led to all the shutdowns, the supply chains for so many goods were so complicated and had lots of China component to it, that it made operations very, very difficult.

So even a few years ago, they started to think about trying to simplify that supply chain, onshore a bit more of that supply chain. But really, the IRA in the US is probably going to kick it up several notches now. And we're likely to see more announcements coming from the European Union on how exactly it aims to promote and subsidize a lot of the industries over here. Aneeka, you had more thoughts on that?

Jeff Weniger:
I wanted to ask, we've got a couple that have come in, they're correlated, one from Chuck and one from, I got to find it over here on the side, about the investability of China. "The increasing political tensions," this is Chuck. Thank you, Chuck. "With the increasing political tensions, including the possibility of a Taiwan invasion, how secure are US investors," and let's say global investors, "investments in these Chinese companies?"

And then someone said, "To what extent will China still be investible for US and European institutions?" Now this is a very tough one. Let's see if Aneeka's got some opinions here.

Kevin Flanagan:
So I noticed, Jeff, you threw that to Aneeka. It's a very tough one. I love how you deflected that over to her.

Jeff Weniger:
I'll also give some opinions after.

Kevin Flanagan:

Now I'm just joking.

Aneeka Gupta:

Well, I think, just mentioning in terms of US-China trade relations, I think that remains front and center. And obviously we've had so many articles floating around on unidentified objects floating around in the sky, and allegations were made to China, and that's obviously all being taken away. So that did relieve some of the pressure.

But just coming back to your point on relations between EU and China, we've seen Germany, which is the largest economy in Europe, actually reach out to China at the depth of the energy crisis over the winter period, and actually tap into their industries for production taking place on the ground in China because it was too expensive in Germany.

So I think it's different for different economies. If anything, we've seen actually Germany improve ties with China. And this is coming at a time when net trade deficit is at its all time low, versus China at this point in time.

So yeah, it's a changing trend. And Germany just needed to do what it had to do when it was at the depth of the crisis over the winter period.

Jeff Weniger:
And with respect to the situation with the investability of China, we feel this frequently. This comes up a lot. I think a lot of actors were pretty surprised by the way that the NATO alliance pretty much shunned all Russian assets in the last 12 months.

At Wisdom Tree, we wrote all those equity holdings down to zero in our emerging funds, and I think that that may have taken China aback.

Now remember, when you're dealing with an emerging fund, you can have 50, 60, 70% China, and China knows that it needs Western capital.

Additionally, if you look at China's recent actions here with respect to ending COVID Zero and the way they've tried to do some of this public outreach, they've reached out to the Koreans and the Japanese, for example, and said, "Hey, let's ease these restrictions. We want you to come back and visit. We want you to come and take a vacation here." That type of thing. Because I think that they realize that they need to have a little bit of an outreach.

Now with respect to the balloons, one of the theories floating around was that, you put this thing in such plain sight because you want it to be discovered. If you wanted to be more discreet, you don't make it so that I could walk outside of my house and see this spy balloon up in the sky, and this was an attempt to perhaps maybe reign in some of those meetings that were supposed to take place and maybe put those on hold. So that's a little bit of one of those side notes on that.

But in terms of the investability of China, I think that they have come to realize like, "Whoa, we better be careful what we do because eventually the Western actors will maybe just divest." We do have precedent for that in the 1980s with respect to South Africa and apartheid. So it's been done now twice, with South Africa and with Russia.

I don't know if the three of you have anything else on that view, or if any other questions have popped in. Take note, we're 38 minutes into the call.

Kevin Flanagan:
Yeah, Jeff, that's a great point. Let's spend the rest of the time, because I think this is just the hot button topic, right? It's Central Bank policy. And that's the last polling question, if you could call that up please, Irene. What is the Fed, the ECB, the Bank of England... And I would love, Aneeka and Nitesh, to get your thoughts on the Bank of Japan. And could that be a possible wild card as we move forward as well?

But let's look at this polling question here, and see what type of an impact or whatever, would you expect from the Fed or Bank of England or ECB?

I'll take it from the Fed side. As I think I alluded to earlier, I think the Fed here is focused purely on the domestic side of the equation for now.

If there is some ramifications that come washing on the US shores from China reopening, but look at it from that perspective. The Fed's not going to make a policy decision here based upon China reopening. Powell and company have made it extraordinarily clear, they are in full data dependent mode.

So that creates a whole environment for volatility as well. Because to the point that we've been talking about, blockbuster jobs report, CPI report here, PPI report there. If they come in different than expectations, one way or the other, you are going to elicit a visible market reaction, which is exactly what we've seen at this point in time.

So right now, if you're looking at it, Powell and company are sitting there in the Eccles Building in Washington DC, over the last couple of weeks looking at these numbers. They're saying probably, "Our dot plot doesn't look so off kilter here, where the market thought it was." All of a sudden five, 10 as a terminal or a median target for Fed funds seems quite possible. And that would be another quarter point in March and another quarter point in May.

Remember, people would say, "Well, if things are a little bit hotter here, would they go back to 50?" I don't think that's the case. That genie is out of the bottle. Once they went from 75 to 50 to 25, it's now, how many more 25s do you get?

I don't think the Fed's going to go back and then all of a sudden say, "No, we're going to hit you for 50." That would be, in my opinion, very surprising.

But I would love to hear your points of view on, not just the ECB, but as I mentioned before, I think something we're going to need to talk about, and I've had a number of conversations on this just within the last week or two. People here asking me, "What about the Bank of Japan? Is that a wild card?"

So not even China's reopening, but what about the Bank of Japan? So as we're waiting for these results, let me pass it on over to you.

Aneeka Gupta:
Yeah, I think Japan is an interesting theme for this year. We've seen quite an improvement in the GDP for the economy. And that's largely been driven based on consumer-led growth.

I think what the world tends to forget is, the West has enjoyed its reopening story. We've seen that play out in 2021 and 2022.

The East on the other hand, has not enjoyed that reopening story, and that is what is going to kick in this year. And that's going to be the big swing factor of how well that actually materializes.

Now if you think about Japan right now, many hotels and restaurants are booked out weeks in advance. What the government is trying to do is that they're trying to encourage domestic tourism. They're subsidizing national travel discount programs, and they're offering lower priced accommodation.

To try to contextualize that, we're seeing a surge in foreign tourists come.. Japan since that restriction was lifted in October 11th. We found non-resident household spending rise 211% quarter on quarter in Q4 of 2022.

So that's just giving you an idea of the domestic boost you're getting to GDP growth just in Q4 after the travel restrictions have been removed.

Now, that being said, we all know that Japan is a heavily export driven market. So if the rest of the world begins to slow, that is going to impact Japan. Which is why the government is doing everything to spur the domestic economy.

That being said, I think we are going to get data to remain quite soft, which would not justify a significant policy change this year.

Let's take into account the new Governor, Mr. Ueda, that has been appointed. In my opinion, he seems like a technocrat. He's going to be fairly data driven. He seems fairly balanced, but yet, he does have quite a dovish tilt. And it's interesting, his appointment, which is in complete contrast to Amamiya, who was actually supposed to be the highly contested new Bank of Japan Governor. So I think they've put somebody in place there, Mr. Ueda, who would be more in line with the government's way of thinking. And let's not forget the government rankings, Kishida's rankings, at this point in time, are at an all time low. So he's going to do whatever he can to get someone on board, in the Bank of Japan, who is going to do what he wants, which is definitely not try to tighten policy. So I know we're quite against the consensus, but that's the view that I share.

Jeff Weniger:


Nitesh Shah:
I think, yeah, I guess there's two parts of your question, what's happening in Japan and obviously changing a leader there obviously, the Bank in Japan. Is probably an exit strategy from past going to the future. But looking at the European part of that question, I think one of the key data points, well key signals we've seen this week, European commission, so not the ECB itself, but the European Commission upgraded its GDP forecast for this year. And it's looking like the European Union is going to avoid recession. Now, don't get me wrong, growth is still going to be quite low. It's going to be a little uncomfortable, but with that growth setting not being as miserable as previously expected, that means that the ECB can possibly focus a little bit more on killing inflation. That possibly means rates can rise to a higher terminal level, possibly for longer.

So that gives the ECB a lot more conviction on the ground. And once again, ECB is grappling with a similar problem to the US, not of the same scale, but labor markets are tight. And looking at all the inputs to what could push up inflation, when labor markets are tight, that means wage demands tend to be higher. I sit here in the UK and we got strikes every week for the next six months at least. And then, you've got a similar sort of story in other parts of Europe. And that does mean that the wage cost spirals are likely to remain. Whether that can be broken is a key question, because in Europe and in US and other places, labor markets have probably structurally changed. A lot of people just left the labor markets at a certain point, and whether we can ever get those people back in again is the question. So whether central banks are targeting an unreleased inflation target in the first place is another question, but assuming that they are targeting that, the growth number is given a bit more conviction to raise rates more.

Jeff Weniger:
There was a question here from Reese about the strong US dollar, it's about the Europe or globally, but let's make a strong US dollar as it pertains to emerging markets. Now, the dollar seems to have peaked, theoretically, four months ago. The last time we've reached a super strong dollar, a dollar that was ready to roll over after hitting a real effective exchange rate that was so high was back in '01. So 22 years ago. And if it started to get long DM or EM, relative to the US around '01, that was a good time to enter that position, until about '07, '08. And so, I'll ask either of the two of my British colleagues here, are we on the precipice of some rotation into emerging at the expense of the S&B 500, on account of some dollar bear thesis?

Aneeka Gupta:
I definitely think so, Jeff. We've had emerging markets just remain in a lackluster growth environment for the past two years. And I think, now that we've got the China reopening story, alongside peak dollar, we're also seeing inflows rebound in a very strong way for international markets ex US. And that's really being led by Europe and emerging markets. I think there are very strong tailwinds that could benefit emerging markets moving into 2023. And also, we've been looking very closely at the valuation discount between Chinese technology stocks versus US technology stocks, and they've just only marginally begun to correct.

Many of you might remember, at the middle of 2021, we saw the crackdown on the Chinese technology sector, and that began with the Jack Ma’s and IPO. We've now seen a few tailwinds come in with permission for his consumer unit to actually be allowed to expand. And I think that that is a symbol in the right direction, where we could see a bit of alleviation coming from the government, especially on the technology sector, which is contributing in a very big way to GDP. And I think that's going to be quite interesting to look at within emerging markets as well.

Jeff Weniger:

All right, a couple things that I just jotted down here in these final minutes. Nitesh, we're at 49 past the hour. China earnings, the street, it appears that US earnings are going to probably be net declining in 2023. We're seeing year over year now declining, certainly, when you x out energy in the US. China's earnings will be on the rebound, and that's generally the situation with emerging earnings in general, according to street consensus consensus in 23. When Nitesh was talking about labor market, the labor market in the United States, piping hot right now. I hypothesize it will roll over. We'll see. But man, oh man, it is really hot right now. 3.4 in US unemployment, similar situations in Europe. But remember, the Chinese have something that would be theoretically working out for the inflation story, in that it's not piping hot there, it's a weaker labor market there.

Somebody had asked earlier on the call about the action since this incident year over Lake Huron and Yukon and Montana with these balloons. The action is general... We're going about two weeks worth of action, so I don't know if it's worth anything,. But generally, chopping downward in Chinese equities. But then, again, it's been kind of just a rough tape in general. And then, also something that was not addressed on the call, time permitting, I don't know if we have time for it, the big thing, it's more like a 10 or 20 year situation is, you keep coming back to it every time you mention it, that China just reported net population loss. This was a big deal in terms of the news cycle and the headlines. That's more of a structural issue. So I'd like to toss to any of the three of you a minute or two to discuss this demographic situation in China.

Nitesh Shah:

I think the demographic situation, it has been a long time coming. We know that the one child policy of years ago would lead to that declining in population, but I think there's multiple other structural changes going on in China as well that we need to also consider. China, from the early two thousands, became that mercantile country. It was producing goods in its borders to export to the rest of the world. It became the manufacturer to the rest of the world. I think, going forward, China will probably look towards becoming much more of a consumer, and I think the events of this year are accelerating that. We are seeing, with this reopening, it's going to be a much more consumer led economy. And what we may find is that it doesn't need such a large labor force to maintain strong growth, because the source of its economic growth is changing, is moving up the value chain in its production, and therefore can produce higher GDP numbers with less inputs in many ways.

So I think that's a particularly interesting component, and once again, I think a lot of what China may deliver in the next few years really leans into that energy transition. They may be producing a lot more high value goods, that are useful for the energy transition and probably break the mold, in terms of the strategies that other countries, like Japan or Korea or other countries, have taken in their development. So I think there's a lot to watch out for China, where I think the fact that the population is declining may not be that damaging to its growth.

Aneeka Gupta:
I'd also add, while China's population has declined, I think it's worth noting that India's population has actually surpassed China at 1.42 billion. And not only has its population surpassed China, but also its growth has surpassed China. And looking at India, within the emerging market space, there's also quite interesting for investors, as we've seen the dollar peaking, India actually benefit over the course of 2022, with China actually being closed for most of the year, we've seen a number of companies actually move their workforce and their operational to India. You have a larger workforce in India actually speaking English, easier to converse with. So I think also the demographics within India actually benefit and are much more favorable when you compare it to China. So I think India stands to benefit in a big way from this change in demographics.

Jeff Weniger:

Okay, Kevin, we're at 54 past the hour. What you just watched is we call this office hours. It's typically a US broadcast, with people like me and Kevin talking about the CPI reports, that type of thing. You can find that on the website, on the US website. We're doing three more in the month of February. And then, what do we do this? Quarterly, we bring on our British compatriots and do these big global pieces. This was called The Global Edge, the document that I kept bringing up, that the four of us wrote, with a lot of help from our colleague, Liqian Ren as well in Philadelphia. Kevin, I'm going to wrap it up, unless you have any final comments.

Kevin Flanagan:
Thanks everybody.