Live on Bloomberg TV

00:00LET'S BRING IN OUR NEXT GUEST PART OF OUR WEALTH MANAGEMENT ASIA. MAKE SENSE OF THE MARKETS. IT IS ABOUT YIELDS RIGHT NOW. CRACKS YES. THAT IS WHAT IT IS ALL ABOUT. A REPRICING OF RISK ASSETS. SOME OF IT IS WARRANTED. WE SAW STRONG TECHNOLOGY SECTOR. BUT IT IS ALL ABOUT THE FED CATCHING UP AND COMING OUT WITH A HAWKISH PIVOT IN DECEMBER. AND OTHER FED SPEAKERS REITERATING. BECAUSE THEY NEED TO MOVE. U.S. INFLATION WILL BE 4.6%. BUT WE DO SEE IT SEQUENTIALLY GETTING BETTER. FROM 6.8% WHERE IT IS NOW, MAYBE CLOSER TO 2.6 BY Q4. BUT THE OUTLINES WILL BE INFLATION AND SUPPLY CHAINS WATCHING DURING THE YEAR. HASLINDA: WHERE ARE THEY GOING FORWARD? > > OUR TWO YEAR YIELD TARGET IS 1.25%. IT HASN'T CHANGED IN THE LAST COUPLE OF MONTHS. NOW IT IS LOOKING MORE APPROPRIATE. TENURE YIELD IS 2%. YIELDS CAN OVERSHOOT OR THE FORECAST CAN CHANGE. 1.2 5% ON THE TWO-YEAR IS PRICING IN THE RATE INCREASE FORECAST, FOUR RATE HIKES. SO WE ARE GETTING THERE. WE THINK THE TWO-YEAR FORECAST IS APPROPRIATE, GIVEN WHERE WE THINK THE FED WILL BE MOVING IN THE COMING MONTHS. 10 YEAR YIELD TARGET DEPENDS ON WHAT THE LONGER-TERM GROWTH IS. THE DEBATE IS MOVING TOO QUICKLY ARE NOT FAST ENOUGH. 10 IS THE BAROMETER. THAT IS MOVING UP, WHICH IS GOOD. AT THE SAME TIME, THERE'S A LIMIT TO HOW FAST THEY CAN MOVE, GIVEN THE CURRENT ENVIRONMENT. HASLINDA: THE EQUITY MARKET GETTING IMPACTED BY HIGHER YIELD. I'M WONDERING WHETHER EARNINGS SEASON CAN BRING SOME. IF IT CAN PROVIDE THE SUPPORT THEY ARE LOOKING FOR? > > IT COULD. WITH THE U.S., WE WILL GET A DAY OF NUMBERS. MAYBE 8% THIS WEEK, BUT WE ARE LOOKING CLOSELY AT MARGINS. GROWTH IS PICKING UP. EVEN THIS YEAR SLOW WAS ABOVE TREND. THAT WILL BE KEY. I THINK THERE WILL BE MORE DISPERSION IN BETWEEN SECTORS. SECTOR CALLS ARE KEY. WE HAVE BEEN LONG ENERGY AND OTHER CYCLICAL SECTORS. IT IS ALSO ABOUT QUALITY AND PRICING POWER. WHICH COMPANIES CAN RAISE PRICES MORE THAN COSTS ARE GOING UP. AND THAT WILL CREATE DISPERSION. IT WILL BE INTERESTING TO SEE THAT IN THE COMING WEEKS. RISHAAD: GIVE ME A SENSE OF HOW YOU PERCEIVE THE NEXT FEW MONTHS. UNCERTAINTY IS OF THE FED, IT VARIES. WE COULD SEE ANOTHER MUTATION OF COVID-19 AND HOW IT IS CAUSED. IT IS BOUND TO CAUSE VOLATILITY WITH THESE CONCERNS. HOW DO YOU REALLY PREPARE YOURSELF? > > WITH THE VARIANT, SOMEWAYS OMICRON IS GONE. GOOD NEWS IT'S IT IS SHORTER. CASES DOWN 40%. SOUTH AFRICAN CASES DOWN 80%. NEW YORK CITY DOWN 30%. HOSPITALIZATIONS MUCH LOWER. BUT IT IS UNKNOWN WHETHER WE GET A WORSE VARIANT OR MORE TRANSMISSIBLE. BUT THIS IS PLAYING OUT RIGHT NOW THAT IT IS MORE TRANSMISSIBLE BUT MUCH HIGHER VACCINATION RATE. BUT IF WE STEP BACK, WE ARE IN A HIGHER HOLD ENVIRONMENT. MORE OF THE FED INTEREST RATE EXPECTATIONS, WAGE INFLATION. WE THINK IT WILL HAVE A BIGGER IMPACT ON THE MARKETS FOCUSING ON GOING FORWARD, ASSUMING WE DON'T HAVE A DISTURBING VARIANT. THAT IS KEY. THE FED DOESN'T WANT WAGE INFLATION AND OTHER INFLATIONS GETTING EMBEDDED. WHEN WE LOOK AT FIVE-YEAR FORWARD INFLATION EXPECTATIONS, THEY HAVE NOT GONE UP AS MUCH. IT IS A CYCLICAL REBASING OF INFLATION. THEN WE GO CLOSER TO TRENDS. AND THAT WILL IMPACT. BUT IT MEANS MORE BALL, MORE INTEREST-RATE BALL CREATING MORE SECTOR VOLATILITY IN EQUITY MARKET. IT AFFECTS LONGER DURATION SECTORS. AND WE HAVE FOCUSED MORE ON CYCLICAL. RISHAAD: WHEN IT COMES TO TAPERING, THIS IS TAKING PLACE IN UNCHARTED WATERS. 2020 ONE WAS PROBABLY UNPRECEDENTED. IS THE ECONOMICS TEXTBOOK REALLY A PROPER GUIDE? WE MAY HAVE MANY UNINTENDED CONSEQUENCES, GIVEN WHERE WE HAVE COME FROM. > > HISTORY DOESN'T REPEAT, IT RHYMES. IN THE FED HAS BEEN REWRITING THE PLAYBOOK SINCE 2009. SO YOU HAVE TO LOOK AT PAST HISTORICAL DATA WITH THAT AIR OF CAUTION. NORMALLY, EARLY INTEREST RATE CYCLE EQUITIES OUTPERFORM. BY ROUGHLY 5%. SO WE ARE EXPECTING LOWER RETURNS. BUT THE PACE OF THE RAY RICE -- RATE RISES WILL BE HIGHER. THEY WERE FROM A QUARTER TO 2.5 INCHES, BUT SLOWLY. AT THE SAME TIME, GLOBAL GROWTH IS STRONGER. MUCH STRONGER THAN 2018, AS WELL. THAT IS THE DIFFERENCES. WE THINK THE DISPERSION IS KEY, BUT ALSO THE DIVERSIFICATION. WE HAVE ALSO BEEN LOOKING AT REAL ASSETS. LOOKING AT HEDGING PROPERTIES. GOLD IS A HEDGING PROPERTY. BUT UNDERWAY GOVERNMENT BONDS. HOPEFULLY THERE WILL BE A TIME TO BUY GOVERNMENT BONDS DURING THE YEAR. PEOPLE NEED INCOME AND CREDIT. THE ONE PLACE TO GET YIELDS. HASLINDA: STILL WITH US, OUR GUEST. THE PBOC SAYING IT WILL USE MORE TOOLS OPEN UP MONETARY TOOLS IN A WIDER FASHION. ARE YOU LOOKING AT THAT RATE ON THURSDAY TO BE CUT OR NOT? > > IT MAKE SENSE AFTER THE CUT TO SEE HOW WE ARE CUT THIS WEEK. WE ALSO EXPECT ADDITIONAL EASING MEASURES. ANOTHER RATE CUT POSSIBLE AS WELL AS OTHER CUTS. THEY WILL HAVE AN IMPACT ON THE HOUSING MARKET. THE TOOL IS IMPORTANT. WE CAME INTO DECEMBER. AND WE HAD THE MEETING. THEY SET THE TONE WE ARE MOVING AWAY FROM DELEVERAGING TO STABILIZING GROWTH. SO IT WILL NOT BE THE KIND OF STIMULUS WE SAW COMING OUT. BUT IT IS PUTTING GROWTH. EXPECTATIONS ARE LOWER ON CHINA GROWTH. SO THIS PUTS A FLOOR. CREATING SOME DISTORTIONS IN THE SUPPLY CHAIN. A SHORT-TERM IN CONSUMPTION. BUT THIS IS REQUIRED FOR THE CHINA ECONOMY. HASLINDA: HOW BIG A CUT IS NEEDED TO BRING BACK CONFIDENCE, ESPECIALLY IN THE CREDIT SECTOR? CHINA CUTTING BY 10 BUSINESS POINTS, AND INVESTORS WERE NOT HAPPY THIS WEEK. > > INVESTORS HAVEN'T BEEN HAPPY FOR A WHILE. IT HAS BEEN PAINFUL. WE LOOK AT THE LAST FOUR PROPERTY CYCLES, BASED ON THE CURRENT DATA OF PRICES AND PEAK SALES, WE THINK THE PROPERTY MARKET CAN BOTTOM IN THE MIDDLE OF THE YEAR. SO WE STILL HAVE SOME PAIN TO GO. MARKETS ARE DISCOUNTING MECHANISMS. YOU LOOK AT ASIA HIGH-YIELD OR THE PROPERTY SECTOR, YOU ALREADY ARE PRICING 35 OR 40% DEFAULT RATES. THAT HAS DRAWN UP HIGH EXPECTATION. BUT WE WILL HAVE 20 OF DEFAULT, LEVERAGE PROPERTY DEVELOPERS. THEY WILL NOT BE SAVED BY THE RATE HIKES. BUT IT IS ABOUT STABILIZING THE ECONOMY. THE KEY IS THE SIDE WITH SOME FEARING IS REAPPEARING. THAT IS THE KEY THING THEY DON'T WANT TO SEE. IT WILL BE MUCH MORE COSTLY. AND THEY ARE MOVING MORE DECISIVELY. RISHAAD: THAT IS THE POINT I WANTED TO ADDRESS. ABOUT SYSTEMIC RISK. WIDE-RANGING STATEMENT FROM THE DEPUTY GOVERNMENT BELYING THE TRUTH IN SOME WAY. SO WIDE RANGE. MAKES YOU THINK THEY ARE SEEING SYSTEMIC PROBLEMS AND PERHAPS THINGS ARE A BIT WORSE ON THE GROUND THAN THE DATA SHOWED. > > THE DATA -- THERE WILL BE A BIT OF A HIT INTO THE NEW YEAR CELEBRATION, GIVEN PEOPLE CANNOT TRAVEL AS MUCH. BUT IF YOU LOOK AT CHINA ECONOMIC SUPPLIES, THEY ARE BEATING EXPECTATIONS. CREDIT IMPULSE INDICATORS JUST TURNED TO POSITIVE. THAT IS WHAT YOU NEED TO SEE. YOU ARE SEEING THE SECOND DERIVATIVE OF THE DATA GETTING BETTER. AT THE SAME TIME, THEY NEED A FLOOR. LOOK AT CHINA CREDIT DEFAULT SWAPS, THE CHINA CURRENCY, IT IS NOT THE INDICATING STRESS ON A SYSTEMIC LEVEL. BECAUSE EXPORTS ARE SO STRONG, CURRENT ACCOUNT IS GOOD. SO WE ARE NOT SEEING -- PRIOR PROPERTY DOWNTURN, WE HAD A SIGNIFICANT WEAKNESS IN THE CURRENT STATE. AND WE LOST $1 TRILLION IN FX RESERVES IN CHINA. SO WE DON'T SEE THAT STRESS. BUT WE SEE AN IMPULSE SLOWDOWN. RISHAAD: ABSOLUTELY. HOW IMPORTANT WAS THE NEXT CHINESE EARNINGS SEASONS? LIBBY A BETTER GAUGE AS TO HOW CORPORATE CHINA IS PERFORMING? GIVE US A SENSE OF THE MACRO CLIMATE. > > IT IS DEFINITELY IMPORTANT. PEOPLE WILL BE LOOKING AT THAT SIDE, IN TERMS OF A MARGIN, AND HOW LONG THE CONSUMPTION HIT WILL LAST. IN THE MEDIUM-TERM, EARNINGS MATTER. THERE'S A HIGH RISK PREMIUM ON TECHNOLOGY BECAUSE WE DON'T HAVE THE DETAILS. BUT THERE HASN'T BEEN ANYTHING DRAMATICALLY NEW. BUT SOME OF THE RISK PREMIUM CAN START TO EVAPORATE. AT THE SAME TIME, SOME AREAS IN THE MARKET THAT ARE STRONG IN POLICY ACTION, SMALL MID-CAPS IN CHINA PERFORM WELL. WE HAVE BEEN HIDING OUT IN CHINA MID-CAPS. THERE WERE UP 15%. IT IS NOT LEVERAGED SO MUCH REGULATORY. AND THEY WERE IN POLICY POSITIVE AREAS. THEY ACTUALLY BELIEVE IN OUTPERFORMING IN CHINA.

No schedule data available.

BNP Paribas' Bhayani on the Fed, Yield Targets

BNP Paribas Wealth Management's Asia CIO, Prashant Bhayani, discusses investment strategy and yield targets given the prospect of monetary tightening from the Federal Reserve. He speaks with Haslinda Amin and Rishaad Salamat about his market outlook on "Bloomberg Markets Asia." (Source: Bloomberg)

More From Bloomberg Markets
All episodes and clips

QuickTake
Explaining the world with Bloomberg News
More episodes and clips