How do you read the Fed policy outcome because Donald Trump has been demanding a 2.5% rate cut from the Fed. But the Fed verdict has been to keep the rates unchanged. How do you read this rate cut for now and the implications going ahead?
David Chao: Certainly there was no surprise over the outcome of the FOMC meeting yesterday. The Fed’s characterisation of the US economy remains roughly what it was six weeks ago, that the US economy is sound, but there are still concerns over what the tariffs may bring. Back in 2018, during the first tariff war, we did not really see any price level or inflationary impacts from the tariffs and that was because companies absorbed many of the tariffs instead of raising prices. But they also laid off some of their employees. So, the big question this time around as the tariffs continue to work their way through the system is, are consumers going to bear the brunt of it or will the suppliers and the stores do so?
I am intrigued about the reaction of the world markets to what is going on in West Asia. They are shunning and ignoring all that is happening. The only market which is most sensitive right now is crude and rightfully so, but not equities.
David Chao: Well, I think the equity market has retraced a lot of what it has lost since the Liberation Day and it reflects a continued risk-on sentiment. Now, the bond markets are a lot more wary of both the fiscal situation in the US and also the potential stagflationary winds that the US economy is facing. But we have just come out with our mid-year outlook and we are calling for diversification. We think that investors are overly exposed, overly concentrated in certain assets like the US equity market or even US dollar and we think brighter opportunities currently exist in European equities or in Asian credit.
Would you want to detail where within Europe you find opportunities and, of course, Asia as well?
David Chao: In Europe we continue to have greater fiscal stimulus in places like Germany, the UK, and also monetary stimulus. The ECB has recently cut rates. This further liquidity should boost the equity market. The defence spending addition that Germany has announced is likely to flow down to factories and materials, construction, and infrastructure. We broadly like European equities at these levels.
In Asia, the only times that emerging markets have outperformed developed markets over the past 10-15 years has been when the US dollar is weakening, local central banks are cutting rates and oil is below $80 a barrel. So, it makes a good case for investors to stay invested in India. If the West Asia conflict spreads to a wider region and oil goes above $80 that could certainly upset the apple cart for Indian equities and for Asian equities.
When you talk about diversification, is it also about diversifying into other asset classes? Is it just a regional call or is it also an asset class call?
David Chao: It means diversifying away from being overly concentrated and we know that foreign investors have been overly concentrated in US equities. The market cap concentration that US stocks have for MSCI Global Index is around 70-80%. The US economy is only around 20% of the global economy. I think reducing concentration, and looking at other places makes sense. I am not saying investors should be selling the US or that US assets are becoming less attractive, I just think that a broader diversification in one’s asset allocation is a prudent measure, especially in these times of uncertainty.When we look at some of the big cues, then yes, the Iran-Israel conflict, that story is developing, the big event with Fed that is over now, but the upcoming event is the tariff deadline, maybe which we are approaching 9th of July. As we approach this date, do you believe that the markets can once again get jittery or the investors have digested that the worst is behind with respect to tariffs?
David Chao: I think investors are a little too sanguine regarding the tariffs. I do not think that we are out of the woods yet on the tariffs. We were supposed to get a deal announced every single day during these 90-day reprieves. We only got three. It is unlikely that most countries will be able to sign deals before the deadline next month and that could mean more negative tariff headlines. But ultimately, I just want to remind everyone that tariffs are a near-term overhang that we are likely to move through later on in this year. That is when investors will start to focus on fundamentals, on growth, on corporate earnings. There are many bright spots in China, AI or Indian equities or European defence companies, or Asian credit, there are bright opportunities to be had.
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