José Rasco, chief investment strategist at HSBC Private Bank, joins Business Insider’s Sara Silverstein to discuss his outlook for the market. Rasco still likes U.S. equities on the strength of earnings, GDP, and the stability of inflation. However, he says if you want to invest in an area where there is going to be growth, you want to be in Asia. Following is a transcript of the video.
Sara Silverstein:So just to start, overall markets, US equity markets, do you think that they’re overvalued still?
José Rasco:You know and that’s the interesting thing that happened here. We had a repricing. What we’ve seen is the markets havere-adjustedto this new environment where the administration, very late in the business cycle has decided to expand fiscal policy. So that policy response isgoing to lead to slightly higher inflation in terms of wages and slightly higher interest rates, and the market had to respond to that.
So we still like U.S. equities, they went on sale for a bit. We’ve re-calibrated. Some sectors have done better than others. I.T. for example has done very well, which it did before, but then we’ve seen some repricing towards other sectors that can handle at higher inflation at higher interest rates and we still think the markets are good this year. Earnings are going to be strong.
Silverstein:And overall, you like theUSas much as global, or where are you looking for equity opportunities?
Rasco:Well we like theUS, there’s no question about it. We think that given the strength in earnings and the strength in GDP and the stability of inflation, and theFedmoving slowly, we think that theUSis a good place to be, but if you want to invest in an area where you’re going to see growth, and that’s one of the reasons to invest in equities right, is we want to be in Asia. We see growth there in excess of6%in China,6.5-7%in China, in excess of7%in India, positive demographics in India, and a great deal of spending on an infrastructure and technology so those are very positive drivers for us.
Silverstein:And how does that impact U.S. markets, the growth in Asia?
Rasco:Well I think if you look at one of the initiatives for example, in India is the digitization plan. And that is something where they are developing, they did it a few years ago, digital I.D. cards for everyone. So they are becoming online, digital, and they are therefore purchasing a lot of I.T. services and products, that a lot of this stuff gets made here. In addition, you’re seeing in China the same thing. A great deal of spending on infrastructure, the One Belt One Road for example, which is a massive infrastructure project-trillions of dollars a year for the next ten years, and they are building roads, essentially think of Marco Polo on a bullet train, and that’s what we’re seeing. We’re seeing the time of goods to market is being reduced dramatically by this project. Think of years ago, if you had been alive when the Chinese were building the Great Wall, would you not want to invest in the timber and cement companies that were making it? That’s what we’re in the middle of right now. So we like China for that infrastructure,because don’t forget when you invest in infrastructure, you create jobs, wealth, and you keep inflation under control.
Silverstein:And talk to me about inflation overall around the world. What does it look like and how big of an impact is it really going to have?
Rasco:Well it’s been muted in this business cycle in large part because growth has been dampened as well, so you haven’t seen that explosion of inflation that we usually see. Globalization is still out there right. So we see that downward dampening effect on wages. In addition, we’reatthe beginning, right, the beginning not at the end of this technology revolution as you know, from your other work you do. And I think if you look at that, that is not disinflationary, that is going to be deflationary.
So we do see some upward bias to inflation, but modest, and our economist says theFed is raising ratesonly three times this yearisa result. So inflation up, but under control and what’s really interesting is if you look at emerging markets, there we’re seeing inflation that was in6, 7%range, is down now to1.5, 2%per year. They already went through their period where they raised wages a lot in China for example, but seven years ago. Now what we’re seeing is a far more stable growth of inflation, and they’re trying to reform to get into the capital market so they have to keep it under control.
Silverstein:So generally speaking things look pretty good for equities all around the world. What could derail this upward cycle that we’re seeing?
Rasco:There’s a bunch of things, right?Number one is: Can earnings and growth outpace the risk we see in higher inflation and interest rates?And for now we think that answer is definitely yes. At some point, like any business cycle, at some point, that becomes more iffy and markets try to sniff that out in anticipation but we think for now we’re fine. We thinkforthe balance of the year equities here will grow well, and even better in Asia as I mentioned.
Europe,we see opportunity as well in Europe,because don’t forget that infrastructure spending we’re seeing in China and India in particular, that is positive for materials, companies and countries in places like Africa and Latin America, basic commodities, and it’s very good for finished goods manufacturers in places like theUSand Europe.
So to oversimplify,it’s good for everybody. That doesn’t mean it’s up forever, at all.I mean we’re going to see this continued back and forth between theFed talking about raising interest rates and therefore markets trying to absorb that higher term structure of rates, that’s going to continue. So we see more volatility this year than we’ve seen in the last eight no question about it. But at the end of the day, we think we’re still up.
Silverstein:Can you expand on your thesis behind China?
Rasco:Well China is at an inflection point where they have some negative demographic issues going on due to the one child policy of years ago. That’s starting to reverse, but more importantly they’re at an inflection point because they need to increase productivity and they need to continue to spend to create jobs. So what we’re seeing is this One Belt One Road for example. That’s a major global program where they’re spending trillions of dollars a year and trying to build this program out for the next decade. This is something that you’re going to see shipping costs reduced, you’re going to see time of goods to market reduced from central China to Istanbul.I think it went from like three weeks to less than five days,so that kind of productivity bounce is going to be huge for that market and for the markets that are surrounding it. It’s going to touch about two thirds of global GDP. It is a major infrastructure project and it’s going to have positive effects on commodity producers in emerging market countries in Africa and Latin America in particular, and they continue to demand finished goods from theUSand Europe to help produce this road.
Now what this road and the shipping lanes in the South China Sea, et cetera will do, is they will improve productivity and as a result we will see better multiples and better opportunities in Chinese markets and we’re going to see more bonds floated in markets, not just in China,but in Europe and theUSas well.So there will be opportunities forcorporate bond investors as we go forward. These are major global companies that will be issuing bonds, sometimes inRMB, sometimes in other currencies, but they will be issuing these bonds to help pay for these projects and these projects are going to be lasting for quite a while. So that’s a major thing.
The other part of it is, China has had a great deal of pollution over the past 25 years as they built out using antiquated methods of energy production and all that coal,et cetera. They are making major strides in energy production and using alternatives, and cleaning up the environment and then,last but not least is the digitization of the economy. If you look at some of the larger companies that are out there providing logistics and services like an Alibaba, companies like that, we’re seeing tremendous gains in productivity, and they’re reaching into sectors as far flung as food, and like we’re seeing here with Amazon, food, healthcare, et cetera. So, real opportunity where the Chinese consumer is now using the digital wallet a lot more than western consumers are. And don’t forget, in China I think less than a quarter of the population hassmartphonescurrently. That number is set to explode over the next decade which means use of digital products, and consumer ecommerce is going to soar. Are you familiar with Singles’ Day?
Silverstein:Oh yes, absolutely.
Rasco:So Amazon has its Prime Day, where they did a billion dollars in sales last year in July 11th. Singles’ Day last year, Alibaba did 18 billion in sales. That shows you, even though they’re at their infancy in terms of ecommerce, the middle class in China is set to explode, and the ramifications on global trade, companies here that produce products they want to buy, is absolutely monstrous. So that digital combined with the infrastructure spending provides growth, income, wealth and it should provide some stable inflation as well which is all good for markets.
Silverstein:And what do you think everyone is getting wrong about the markets?
Rasco:In terms of the equity markets?
Silverstein:In terms of any markets. Because you also cover bonds,right?
Rasco:I think if you look at fixed income, right, a lot of people think it’s the end of fixed income. “Fixed income is dead.”Fixed income, you could’ve done pretty well in different fixed income markets last year.Munisin theUSfor example. And if you look abroad you see a lot of emerging market debt, where there is tremendous opportunity. Those spreads are still pretty wide, so you can get a lot of upside if you’re willing to take slightly more risk by going into emerging markets. Ten years ago, if you look at emerging market bonds, corporates, that was a very small and illiquid market. And you took a lot of what they calltail-whip risk. Today, emerging market bonds, according to different groups out there, different major broker dealers, sayabout three quarters of emerging market bonds are investment grade, and the market is about a trillion and a half dollars, in terms of depth and breadth. So, it is a very different market than it was10years ago, and you’re going to see a lot of corporate bond issuance as these infrastructure projects go out there, and you can capture some pretty good yields and you know what you’re buying because it’s a corporate bond. So we like emerging market bonds.
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