The Bid logo
Listen

Listen to The Bid – BlackRock’s investment podcast

The Bid breaks down what’s happening in the world of investing and explores the forces changing the economy and finance. From stock market outlooks and mega forces to geopolitics and technology, BlackRock speaks to thought leaders and industry experts from around the globe about the biggest trends moving markets.

Subscribe to The Bid wherever you get your podcasts and never miss a single episode

Dynamics Down Under: Deciphering APAC's Economic Landscape (LIVE Episode)

 Episode Description:

In the ever-evolving tapestry of geopolitics and economics, the Asia-Pacific region stands at a pivotal juncture. In this special episode, we took The Bid down under to record this episode live in Sydney. Wei Li, Global Chief Investment Strategist for BlackRock joined Oscar Pulido to discus the intricacies of high inflation, emerging competing geopolitical bloc, how a momentous global election year will impact Asia-Pacific region and what opportunities investors can expect from the region.

Written Disclosures in Episode Description:

This content is for informational purposes only and is not an offer or a solicitation. Reliance upon information in this material is at the sole discretion of the listener.

For full disclosures go to Blackrock.com/corporate/compliance/bid-disclosures

 

TRANSCRIPT:

<<THEME MUSIC>>

Oscar Pulido: Welcome to The Bid, where we break down what's happening in the markets and explore the forces changing the economy and finance. I'm your host, Oscar Pulido.

In the ever-evolving tapestry of geopolitics and economics, the Asia-Pacific region stands at a pivotal juncture. Structural shifts are underway, redefining global dynamics, and the emergence of competing economic and geopolitical blocs takes center stage, reshaping alliances and influencing international relations.

Not only has the region been grappling with high inflation post the global COVID pandemic, it's also an historic election year, with over 70 elections globally that could have seismic implications for economies. And as we anticipate the outcomes, we're compelled to examine the economic implications, opportunities, and potential pitfalls that arise at the intersection of politics and finance.

In this special episode, we took The Bid down under to record this episode live. Wei Li, Global Chief Investment Strategist for BlackRock joined me at the event in Sydney. Wei and I discussed the intricacies of high inflation, emerging competing geopolitical bloc, how a momentous global election year will impact Asia-Pacific region and what opportunities investors can expect from the region.

Wei, thank you so much for joining us on The Bid.

Wei Li: Thanks for having me.

Oscar Pulido: And Wei welcome to Sydney, Australia. We are down under recording another episode of the podcast.

Wei Li: So exciting to be here!

Oscar Pulido: And we're also in live in front of a live audience. and I'd like to bring them into the discussion. G’day, Sydney!

AUDIENCE: G’day!

Wei Li: I feel like I'm on the Friends set. This is so cool.

Oscar Pulido: I did a little research before this, just out of curiosity. I know you flew in from London. I came in from New York. It turns out both of those cities are 10,500 miles from here, so thanks for meeting me halfway. Let's get into the discussion around markets. You're obviously the global Chief Investment Strategist for BlackRock and the BlackRock Investment Institute. Your colleague Alex Brazier and many others have talked about the year ahead with an optimistic tone. But given that we're in the Asia Pacific region, what are some of the major stories in this region that you are following?

Wei Li: Absolutely, so this more upbeat sentiment extends to our view of the APAC region as well. And as I think about the main stories that, are playing out our kind of look at it geographically from the perspective of what's happening in Japan, India, and also what's happening in China.

So very quickly Japan, depending on which index you're looking at, it's just broken out from the all-time high last set in 1989. So, it's really taken a long time to get where we are and we think that there is more for the rally to go, because the first leg was driven by macro development, the economy exiting long time deflationary mindset. From here on the micro development on a corporate level, are likely going to drive the next leg higher, and we're excited about that.

In terms of India, this morning we talked about mega forces. the likes of AI, digitalization, geopolitical fragmentation, they are all forces benefiting India, at the moment. Yes, valuation is not particularly cheap, but, these structural forces have long runway and we think that this country is really standing out at the moment in terms of what's happening to China, is a bit of a more nuanced story, In the run-up exiting from the pandemic, consumers have been somewhat disappointing in terms of their willingness to spend, which is why equity markets didn't really deliver the sort of recovery that many were hoping for. Maybe now there is a window, given very cheap valuation, to respond to stimulus, measures, but the long-term structural challenges still exist for the country. So, it's more of a nuanced story, but definitely one that not only impacts APAC, but also emerging markets broadly.

Oscar Pulido: So, you touched on Japan, India, China, mega forces. So, I'd like to get into all of those things maybe in a little bit more depth, but why don't we start with India. We recently had Catherine Kress as a guest on the podcast, talking about the geopolitical environment. She described India as a multi aligned country, one that has not chosen sides amongst the economic blocks that are being established around the world. We know it's also a country that is growing demographically, financially, going through a lot of, evolution. So, talk to us a little bit more about India's investment opportunity.

Wei Li: So, if we think about the theme geopolitical fragmentation, India definitely has demonstrated its ability to interact with multiple, and potentially, differently aligned economic blocks, right? So, thinking about its interaction with the US, with China and their respective spheres of influence and that is an advantage in this increasingly polarized world.

In terms of other geopolitical forces, you think about the strength of consumer lending. You think about younger population in India and in the rise of the middle class. You also think about the incredible penetration of digitalization, UPI- unified payment interfaces- it's really incredible in terms of the progress that they have made. So again, this is not a market that is cheap because the progress is clear for all to see, but we definitely think that the representation of Indian market, in broader emerging market benchmark, has more room to grow. You look at a population, it's just overtaken China as the most populous country in the world. And that's just the start. So, we definitely think that it's one to watch out for.

Oscar Pulido: You and I both live in parts of the world where the demographic discussion is about an aging population, but you described India as a younger population and having a divergence maybe from much of the developed world. You also mentioned China. We cannot have a discussion around the Asia Pacific region without discussing China- it's the largest economy. So, talk a little bit more about your macro viewpoint, and the investment viewpoint that you have on China.

Wei Li: So far over the tactical horizon, consumers have not been very confident to spend given policy ambiguity. And also, some of the tailwinds for Chinese economy during the pandemic, when it was the factory of the world, they were fading away exports dropping off as the rest of the world switched back on. And obviously the real estate overhand has just been such a sentiment dampener.

So, over the near term it hasn't been great last year, but we're seeing signs of policy support coming through, targeted to start, but now a bit more coordinated. Is this the bazooka that is needed for the country to turn around? I think it's too early to say that. I think for us to really get index level wide kind of confidence, we need deeper cuts, we need greater fiscal spend, and we also need more meaningful resolution in the property sector, which is really hard to come by. So, it's hard to see Chinese equity market right now, as more of a long-term investment.

There can be a trade given how cheap valuation is, but is it the attractive long-term investment in a whole portfolio context? I would put a question mark around that and over the longer term, there are structural challenges around Chinese long-term productivity and growth because of aging population. By the end of this decade, Chinese economy growing was a 300, which is not that much more attractive than the US for example.

So, for reasons like this, we are thinking about China as a as a tactical opportunity right now, but even then, we're neutral, not overweight. We're starting to see some flows coming back into this market but in more speculative fashion and also, international investors need to feel more comfortable about the market before we can really see a meaningful sustained turnaround.

Oscar Pulido: And you mentioned policy response, fiscal and monetary, that's been a common theme it seems like in recent years for economies around the world. The importance of policy in terms of the trajectory of markets. we're here in Australia, as I mentioned, a country that has sometimes or often been dubbed the 'lucky' country. And I think, if I'm not mistaken, a country that hasn't experienced a recession in something like 30 years. I'm not sure how that's possible, but it's also a country that is grappling with higher inflation like much of the world. So, what's your outlook on Australia?

Wei Li: Well, the trade-offs facing policy makers worldwide, exist in Australia as well. So, in this new regime of structural supply constraints, policy makers are finding themselves having to sometimes balance inflation fighting versus, labor market versus growth and that balance, that delicate, balancing act and trade off exist in in Australia as well.

 We are in an environment of lower trend growth. We're in an environment of structurally higher inflation. We're in an environment of structurally higher rates, that applies to Australia as well. You talked about it, avoiding recession for such an enviably long period of time.

But the trend growth in Australia is lower compared to pre pandemic in our assessment. So, inflation has also come down, it has come down a long way, goods deflation contributing to a large part of that. But the service component of inflation, what drives that, we're talking about wage, we're talking about rents, they have shown signs of persistency too. So yes, we are expecting rate cuts in the same way that we're expecting rate cuts from the fed, but perhaps later in the year and also not as many as what we have seen in the past. So, a general trend of new regime, new environment for central banks. That applies here too. But you're right, it's a lucky country!

Oscar Pulido: Right, so while it might be a great distance from countries like the US and the UK, it seems to have a lot of similarities post pandemic. Uh, that you talked about in terms of, inflation growth and what it means for interest rates.

Wei Li: And because the world is becoming increasingly intertwined. Yes, we're talking about maybe globalization, not making further progress, but even stalling at the current pace of, exporters percentage of GDP globally, we're talking about, it steadily increasing to now more than 50%. That's quite a high degree of intertwined connectivity and that's why we have similar patterns in the US, in Europe, in UK, and in Australia for that matter.

Oscar Pulido: Can we go back to the mega forces, something that the BlackRock Investment Institute has really coined those five, so I imagine you must wake up in the middle of the night, thinking about these five mega forces. Things like the future of finance, geopolitical fragmentation, demographic divergence, artificial intelligence, and transition to a low carbon economy. Mm. I've memorized them myself because we've covered them a lot on the podcast. So how do these five mega forces, touch the Asia Pacific region? Are they all relevant or are some more relevant than others?

Wei Li: They're actually all relevant. And I would also say that some of the mega forces that are typically associated with not so positive investment consequences are acting as a tailwind in the case of APAC.

So, let's start with geopolitical fragmentation, because that's typically something that just sounds so negative, not like we're talking about geopolitical risks and how much more geopolitical risk premia that needs to be baked into market pricing.

So more broadly, when we talk about geopolitics, it sounds negative, but if you look at the likes of India, the likes of Vietnam that have benefited from reshoring and shifting of supply chain, Asia has stood to benefit from that. So that's on the geopolitical front.

In terms of AI, obviously China has a role in that, but the strategic confrontation between us and. China has made it harder to harvest that theme in the context of the Chinese investment universe. So instead, I look at Taiwan, I look at South Korea as beneficiaries of this trend, and these equity markets are starting to respond to that as well. So that's two of the mega forces.

And then if you think about the aging population, we already talked about India overtaking China as the most populous country in the world. And then low-carbon transition. India actually stands to benefit from potential acceleration of decarbonization after the election. So, it's something that we're paying close attention to.

So, this year is a big election year, obviously everybody's talking about the US election, but India is going through election too and we're expecting a bit of a continuity in policy. And once we have this big event moving into the rear mirror, we actually are expecting re-acceleration of the pace of India as growing as a bigger hub of energy, renewable energy production and decarbonization pace. So that's likely going to gain more traction with greater capital expenditure too.

Future of finance has a role in India too, if you think about digitalization, but also the greater, consumer spending and the role of private credits and also the evolving role of banks in lending and it has just been growing at incredible pace.

So, when you bring all of that together, I mentioned India probably a dozen times doesn't come as a surprise that it's one of our overweight countries. It's not cheap, but it's expensive for a reason, and we continue to think that it deserves a good-sized allocation in portfolios.

Oscar Pulido: You touched on a lot of countries, you did mention India a little bit more, but, I guess it's not surprising that the five mega forces in some way, shape or form touch the Asia Pacific region because the Asia Pacific region is quite broad, not just geographically, but it is, very heterogeneous in terms of, economies and stock markets and actually Japan, which would be good to get your thoughts here because Japan is both a large economy and a large stock market, but has been very out of favor for a long time. And when we spoke to Belinda Boa recently, one of our senior investors, in Singapore, she made a very bullish case for Japan. I think one of your recent pieces talked about Japanese equity prices are high, but they could go higher. So, talk a little bit more about what's changed in Japan that makes you more bullish?

Wei Li: Yeah. So, I talked about how the axis from deflationary mindset has really been the first catalyst in terms of Japanese equities staging the comeback and ultimately getting to where, we are, right now. and precisely because of that, precisely because it took such a long time for the economy to come through and for markets to come through. We do think that the Bank of Japan is going to be very careful in its, exit from the very low and lose monetary policy environment.

So, everybody's looking at Bank of Japan starting to hike rates and maybe meaningfully, move it higher. We think that they're going to err on the side of caution just so that they are not responsible for killing the exit from deflationary mindset too early, which is why we think that they're going to hike rates later than market expects, and they're also going to hike less than markets expect.

So, that in itself already is a bit of a boost to further kind of momentum. And then in terms of how we want to play this next lag, I think there are some interesting themes that we can position for. Like the broad market obviously have benefited but as we think about the beneficiaries of the corporate governance reform- the Tokyo Stock Exchange reform- companies that are positioned for that is one way of slicing and dicing, the market another way, as kind of economy stabilizes and inflation meaningfully comes through a nominal earnings are strong, a nominal growth is going to start to build having exposures to domestic players, that are benefiting from domestic recovery, that's another way of kind of thinking about, slicing and dicing the Japanese market.

And then as we think about re-shoring, friend-shoring beneficiaries of reshoring as a theme is another way to think about the Japanese market. I think there is room to be active along those lines that I just talked about in the same way that actually that there is huge room to be active in the Chinese market.

But the broad market in Japan, we also like right now we like the whole top-down benchmark. We think that there is more what is misunderstood, given that Japanese equities have come a long way, is that maybe, oh, it's expensive given how much it has rallied, if you look at earnings revision momentum. Japan actually is currently outpacing that in Europe, in the UK, and also in the US. In terms of earn revision, Japanese equities are really well positioned and at the same time, given the still prevalently low-rate environment from an equity risk premium perspective, which is actually our preferred way of looking at valuation, because that considers the rate environment, not just the multiples itself, because rates are still low. Japanese equities are still offering attractive equity risk premium. So yes, it has done well, but it's not as expensive as you would've thought. Looking at price appreciation, which is why we still like it.

Oscar Pulido: And so, when you put all this together, what does this mean for investors who are interested in the Asia Pacific region? What are some things you would tell those individuals?

Wei Li: Yeah, so as I reflect on our conversation here, I think I mentioned India many times. So that's definitely a country that I think deserves to be considered even standalone in the context of portfolio construction. So, India, we like. We talked about mega forces, more broadly. So yes, country is one way that we slice and dice the universe. But as we construct portfolios that are, positioned for mega forces, I think going at it from a sector perspective, maybe even on a stock selectivity perspective, is a more precise way of playing these mega forces. So, we're working with our, colleagues within, RQA to construct, RQA is our internal risk analytics, team to construct portfolios from a bottom-up perspective, selecting stocks that are well positioned to benefit from these mega forces is another way that we are thinking about playing Asia as well.

And then we so far only talked about stocks- equity market. Actually, we also like, bonds, but that goes beyond Asia emerging market, for example, we're talking about an environment where policy rates are coming down, growth is, reasonably robust. So that benefits emerging markets more broadly but given, the higher volatility in stocks from a risk adjusted return perspective, we actually like EMD better than EM equities from a top-down perspective. So that's one additional consideration I want to throw into the mix as we construct portfolios.

Oscar Pulido: Well, and at the very beginning you said country's one way to do it, but it does pay to be more granular, more precise. And that actually goes along with the outlook that your team have published at the beginning of the year of this being an environment where precision and granularity, is important.

 I know you're very used to doing live television and I'm used to watching you on live television. I know you always do a great job on that. You did a great job on the live podcast as well. Thank you, wave for joining us on the Bid.

Wei Li: Thanks for having me.

AUDIENCE: [Applause]

Oscar Pulido: Thanks for listening to this episode of The Bid, if you’ve enjoyed this episode check out our recent episode with Liz Koehler, where we talk about how the younger generation is looking to the future and considering their own retirement outlook approaches.

<<THEME MUSIC>>

<<SPOKEN DISCLOSURES>>

This content is for informational purposes only and is not an offer or a solicitation. Reliance upon information in this material is at the sole discretion of the listener.

For full disclosures go to Blackrock.com/corporate/compliance/bid-disclosures

MKTGSH0324U/M-3441502

Dynamics Down Under: Deciphering APAC's economic landscape

Wei Li, Global Chief Investment Strategist for BlackRock joins host Oscar Pulido in Sydney to discuss the intricacies of high inflation, emerging competing geopolitical blocs, how a momentous global election year will impact Asia-Pacific and what opportunities investors can expect from the region.

 

 

 

Discover more episodes and insights from thought leaders