YouSaid · the spoken record

David Chao

lines on the record: 31
first: 2017-04-07
most recent: 2017-04-07
sittings or episodes: 1
sources: podcast

Every line below is reproduced as it was said and linked to the record it came from. Nothing here is summarised or generated. Directory · Search · Corrections

“So far, they've done a good job of managing their way with a number of conflicting objectives. And the jury is still out as to whether that will continue, if there's going to be any mistakes made, et cetera. But so far, particularly in the last three to five years, I think the policymakers have done a better job than the more immediately bearish contingent in the market has expected.”
2017-04-07 · Goldman Sachs Exchanges · 'Peak Momentum' and a New Phase for Asian Stocks · IDENTIFIED FROM THE TRANSCRIPT
“Absolutely. Looking at the last 15 years or so. For sure. And I've had many conversations, particularly in the last four to five years, and oftentimes, particularly when we've had stress points like the renminbi mini devaluation, which we had twice, once in late 2015 in August, and again 2016 in January, where this really fanned the bearish sentiment and people were of the view that China was going to devalue, say, 20% imminently, and the economy is really going to have a so-called hard landing and so on. The policymakers have managed to diffuse that immediate threat, and the economy is actually printed somewhat better than consensus expected growth numbers, and the currency has been stable, and it looks as though the banks are continuing to earn sufficient pre-provisioned operating profits to continue to accumulate reserves against potential NPLs.”
2017-04-07 · Goldman Sachs Exchanges · 'Peak Momentum' and a New Phase for Asian Stocks · IDENTIFIED FROM THE TRANSCRIPT
“This spectrum in between of the more bearish and the more maybe sanguine, and I think it really turns on the view of the ability of policymakers to kind of manage their way out of this tricky situation that they've got themselves into.”
2017-04-07 · Goldman Sachs Exchanges · 'Peak Momentum' and a New Phase for Asian Stocks · IDENTIFIED FROM THE TRANSCRIPT
“Significant debt problem, as we all know, in the late 1980s and for the last two decades has stultified and had to recap the banks several times. But the key difference is that Japan wasn't growing. And so if you're not growing and you have a deflationary environment, your debt burden just sits there and it gets bigger and bigger and heavier and heavier. In China's case, fortunately, you do have a general inflationary environment. You still have underlying trend growth of 6, 6.5%. You can argue about the exact number, but it's still meaningful. And so if time is on your side when you are able to continue to grow your way out of that problem. And I think that's really where the debate is between the more pessimistic side of the market and the more constructive side. I don't think anyone is sort of fully polyano like China's no problems. And it's actually a very small portion of the market which is dogmatically of the view that China is going to quote unquote blow up in the very, very near term.”
2017-04-07 · Goldman Sachs Exchanges · 'Peak Momentum' and a New Phase for Asian Stocks · IDENTIFIED FROM THE TRANSCRIPT
“I think it really revolves around the longer term structural view on China. So the key hot button topic is credit and the significant amount of credit which accumulated. The Bears have a strong case to make that there has been this unprecedented debt boom. At least some part of it was inappropriately invested. There's been evidence of so-called malinvestment, moral hazard in terms of people diverting capital into various products, a wealth management or trust products that were probably over-guaranteed or missold. And so there's no doubt there's some mess that needs to be cleaned up. I think where the debate hinges is whether China can manage that cleanup process, so to speak, and whether it's got the time to kind of earn its way out of the problem. I mean, the good comparison between China and Japan, for example, is that Japan got into a”
2017-04-07 · Goldman Sachs Exchanges · 'Peak Momentum' and a New Phase for Asian Stocks · IDENTIFIED FROM THE TRANSCRIPT
“It's obviously a new kink in the system, so to speak. And I think the answer to that would maybe break down into two parts. A, how significant would that trade spat be if it was something that was, to get back to my little mental model on the right side of that spectrum, maybe sector specific and not systemic in its nature, then I think that that wouldn't really disturb things too much. On the other hand, if it was more of a full-blown trade war, and we strongly feel that if the US was to go and impose, for example, 45% across the board tariff on all Chinese goods, that China would certainly respond in kind. And that means that everyone would get bloodied and it would generally be bad all the way around, and most likely that would be something that would dominate the scenario that I mentioned earlier of a stable policy run-up.”
2017-04-07 · Goldman Sachs Exchanges · 'Peak Momentum' and a New Phase for Asian Stocks · IDENTIFIED FROM THE TRANSCRIPT
“And it apologes Exactly. And even there's been some talk among clients I've been speaking with about potentially some energy deal being done. Could China divert some of its energy purchases from the Middle East or elsewhere towards the United States? And that would be a big boost for some centerparts of the United States, which would also play to the political base. My larger point here is you can imagine a spectrum of outcomes. We can't handicap what those are going to be, although we do have a strong view that the probability the extreme negative ones is low because although China would be hurt more, the US would also be hurt by those, and that would obviously be antithetical to the larger ambition of having the US grow and having more job creation. So to your point about what do you do about that, we think that the situation of a low probability of a high negative impact event is something that if you have the capability of doing this, is best dealt with in option space, because options are basically downside insurance program, insurance protection.”
2017-04-07 · Goldman Sachs Exchanges · 'Peak Momentum' and a New Phase for Asian Stocks · IDENTIFIED FROM THE TRANSCRIPT
“solve the bilateral trade imbalance by encouraging China to buy more US stuff. And if that was the case, it would be a great win because it would be good for employment in the U.S. It would solve the deficit, would not the deficit, but they would improve it.”
2017-04-07 · Goldman Sachs Exchanges · 'Peak Momentum' and a New Phase for Asian Stocks · IDENTIFIED FROM THE TRANSCRIPT
“45% across the board systemic tariff increase that was discussed during the Trump campaign. We don't think either of these are likely, but they would be quite negative if they took place. Effectively, for those two, you've got a low probability chance of a very high impact event. And then much more towards the right end of the spectrum would be sector-specific tariffs or other forms of restraint, which would obviously hit the companies involved, but would not be systemic in nature. And we think the market could absorb that in its stride. And they would give the president the political announcement capability to claim a victory without having significant systemic disturbance. The other upside, by the way, which would be at the most positive end of the spectrum, would be if a deal was done to increase U.S. exports to China as a way of narrowing the trade gap. So instead of hurting China by constraining its imports into the United States, you could”
2017-04-07 · Goldman Sachs Exchanges · 'Peak Momentum' and a New Phase for Asian Stocks · IDENTIFIED FROM THE TRANSCRIPT
“Absolutely. I think a useful mental construct for thinking about this trade issue is to imagine a line segment with the left side being the most negative outcome and the right side being the positive one. And on that segment, you can position the roughly three or four broad categories of likely trade developments that may take place in the next weeks and months. At the leftmost part of that line, the most negative one would be the border adjustment tax. The reason why that is the case is that it would be profoundly disturbing or changing to the profits of a number of industries, and you would likely see a very significant increase in the dollar, which could have a lot of second and third order ripple effects around emerging markets. So that would be very disruptive. Also negative, but not quite as negative, would be the”
2017-04-07 · Goldman Sachs Exchanges · 'Peak Momentum' and a New Phase for Asian Stocks · IDENTIFIED FROM THE TRANSCRIPT
“Correct. The big importer. And the growth element is such a strong fundamental component of equity markets that a little bit higher rates, especially from the super low levels that we're at right now, are definitely absorbable. But after a certain period, and we can debate how much, but let's say historically about four hikes or five, then rates start going up enough that the market starts to say, well, hang on a second, the absolute level of interest rates is going up. We've already had our growth benefit. So the risk reward starts turning less favorable, and then it's much more of a problem. But I don't think we're quite at that stage now.”
2017-04-07 · Goldman Sachs Exchanges · 'Peak Momentum' and a New Phase for Asian Stocks · IDENTIFIED FROM THE TRANSCRIPT
“It all depends upon the magnitude. When we're coming off a low point in U.S. interest rates and you begin to tighten, and there's not too many examples of this in the last 20 years, but there are four or five periods when rates were cut and then the Fed began to raise. Historically, Asian markets tend to do well through the fourth Fed hike. And the narrative you can tell behind that is that when you're coming off a period of Fed cuts, which generally is because growth has been poor, that when you finally turn the corner and growth gets better, which then elicits a tightening of monetary policy, the initial first steps in that are absorbable by equity markets because they'll basically take the trade of better growth for a little bit firmer interest rates.”
2017-04-07 · Goldman Sachs Exchanges · 'Peak Momentum' and a New Phase for Asian Stocks · IDENTIFIED FROM THE TRANSCRIPT
“So the exchange rate gets a lot of attention, particularly here in the US. And as you said, tighter fed policy should increase over time. The value of the US dollar, which might make Chinese goods relatively more competitive. Higher rates, stronger dollar, that net neutral for China, in your view, over the long term.”
2017-04-07 · Goldman Sachs Exchanges · 'Peak Momentum' and a New Phase for Asian Stocks · IDENTIFIED FROM THE TRANSCRIPT
“You can never say you're fully inslated from a drawback. You can always paint a scenario where outside conditions can be contagious, and China is a volatile market, and investors can be skittish, so we wouldn't be so bold as to say that it would be fully inoculated from any external risks. I think in the current environment, we feel that in terms of the range that we've got for our expectations for the Fed, for the dollar, and for potential trade barriers, that we think those are manageable. To be more specific, the Fed seems to be signaling that it's interested in raising at a moderate rate, and it seems to be listening”
2017-04-07 · Goldman Sachs Exchanges · 'Peak Momentum' and a New Phase for Asian Stocks · IDENTIFIED FROM THE TRANSCRIPT
“Range on a cross-sectional basis that compare very favorably with other banking sectors across the emerging and developed markets, and therefore the nearer term, say over the next one or two quarters, risk-reward for the banks looks to be much more favorable than it did before.”
2017-04-07 · Goldman Sachs Exchanges · 'Peak Momentum' and a New Phase for Asian Stocks · IDENTIFIED FROM THE TRANSCRIPT
“It really is the improvement in the profits of the most stressed part of the manufacturing sector, which is the upstream part. And this is a direct consequence of the improvement in the nominal growth environment, and that's flowing through to their profits. So, for example, a year ago, the coal companies and steel companies were losing money, and now they're actually making very, very good profits. So the improvement in their cash flows means that they're much better able to service their debts, and that in turn means lower pressure on non-performing loans for the banks. And indeed, if you look at the recent results for the fourth quarter for the big banks, they all met or beat expectations, not just in profits, but also in NPL provisioning. So our argument is that the delta on the banks is clearly turned more favorable from an operating standpoint. The bank's valuations are priced at a significant low end of their, say, 10 or 15-year historical rates.”
2017-04-07 · Goldman Sachs Exchanges · 'Peak Momentum' and a New Phase for Asian Stocks · IDENTIFIED FROM THE TRANSCRIPT
“For whatever level of concern you have regarding the banks, that the near term delta, the change in the operating environment for the banks is undeniably positive. The key issue revolves around non-performing loans or NPLs as the acronym goes, and the encouraging development is that NPL formation, the incremental new nonperforming loans, has been tapering.”
2017-04-07 · Goldman Sachs Exchanges · 'Peak Momentum' and a New Phase for Asian Stocks · IDENTIFIED FROM THE TRANSCRIPT
“So we have significantly raised our view on the China banks, which is probably one of the more controversial opinions that we've been out with because there's a strong sense, particularly among Western investors, that the Chinese banks are under tremendous credit stress and there's a lot of risk associated with them. And the bigger picture is that China has accumulated a great deal of debt to GDP levels in rough numbers have gone from about 150% debt to GDP in 2009 to about 260% today, so it's a more than 100 percentage point increase. And typically, historically, when you've had that quantum of increase in debt levels in a fairly short period of time, that has been associated with credit stress or slower growth or currency weakness and so forth. So there are clear reasons for being on the concerned and cautious side with regard to the China banks. Our point, however, is that”
2017-04-07 · Goldman Sachs Exchanges · 'Peak Momentum' and a New Phase for Asian Stocks · IDENTIFIED FROM THE TRANSCRIPT
“The air to be more concerned about would be in those more downstream or midstream industries now taking higher input costs because of the improvement in commodity prices. And if they're not able to have the pricing power to pass those cost increases along, then their margins get squeezed. And so one area that from a regulatory standpoint could be at risk would be the utility sector because if they're taking higher energy input costs, for example, and they don't have the pricing power legally to kind of raise their tariffs, then they're going to get squeezed.”
2017-04-07 · Goldman Sachs Exchanges · 'Peak Momentum' and a New Phase for Asian Stocks · IDENTIFIED FROM THE TRANSCRIPT
“Correct. I mean, they were really under very substantial profit pressure, and many were losing money under that deflationary environment that we were talking about just a few moments ago. And with that turning, there's been a huge upswing in profits for that sector. I mean, getting back to those National Bureau of Statistics, January, February profits I was mentioning a couple of moments ago, they give you granular data on about 40 different sub-industries, and we coalesce those into five larger groups and rank them from upstream down to downstream. The upstream part of the economy is the one that most recently has been doing the best. So the delta has been most favorable there because of the switch in the nominal growth environment. For the consumer, that's kind of going along at more of a steady trajectory. It's a strong and inexorable trend in our view, and the particularly juicy part of that, so to speak, is the trend towards e-commerce, because not only do you have more consumption taking place, but there's more of that taking place.”
2017-04-07 · Goldman Sachs Exchanges · 'Peak Momentum' and a New Phase for Asian Stocks · IDENTIFIED FROM THE TRANSCRIPT
“Might help it at the margin, but I wouldn't say it's a significant driver. Put it this way, it's much more consequential for the upstream manufacturing part of the economy, the materials related, or the metal bashing, quote-unquote, part of the economy.”
2017-04-07 · Goldman Sachs Exchanges · 'Peak Momentum' and a New Phase for Asian Stocks · IDENTIFIED FROM THE TRANSCRIPT
“GS Research has written extensively about the improving prospects for the Chinese consumer and obviously the government's been very focused on individual consumption as a long-term driver of the economy. Does reflation over the short and medium term do anything to affect that transition towards a more consumer-led economy?”
2017-04-07 · Goldman Sachs Exchanges · 'Peak Momentum' and a New Phase for Asian Stocks · IDENTIFIED FROM THE TRANSCRIPT
“Fair point. So point number one is there's a link between nominal GDP and corporate earnings. There are also briefly is a link between nominal GDP and valuation, between nominal GDP and foreign portfolio flows. And then, of course, between nominal GDP and actual market performance itself. So the empirical evidence is very, very strong that you want to pay attention to the nominal growth environment.”
2017-04-07 · Goldman Sachs Exchanges · 'Peak Momentum' and a New Phase for Asian Stocks · IDENTIFIED FROM THE TRANSCRIPT
“So, you talk a bit about nominal GDP growth. Why does it make sense when it comes to equities to look at nominal growth as opposed to inflation-adjusted real GDP? And are there other economic indicators you're watching that show China's economic growth is about more than simply higher prices?”
2017-04-07 · Goldman Sachs Exchanges · 'Peak Momentum' and a New Phase for Asian Stocks · IDENTIFIED FROM THE TRANSCRIPT
“Well, I mean, the markets you can do with what the markets are going to do, but I was referring to stability in the real economy. So we don't think there are going to be a lot of policy surprises, no sudden moves in the renminbi, no sudden tightening or other kinds of capricious policy measures that might set the markets off foot. And then the third thing, just quickly, is that from a positioning and investor flow perspective, we think we've got the best setup for China, partly because we've got this so-called southbound connect coming in. This is the money coming in from mainland China into the Hong Kong Stock Exchange, which is unique to Hong Kong and is therefore a distinguishing positive factor. And secondly, when we look at a 1.2 trillion universe of mutual funds and look at how they're positioned in China, they're at the lowest level of allocation to China in over a decade. And since China is 25% of the benchmark, if China does well, we think that that money will need to close its underweight. And so that'll be another positive supporting force for the market.”
2017-04-07 · Goldman Sachs Exchanges · 'Peak Momentum' and a New Phase for Asian Stocks · IDENTIFIED FROM THE TRANSCRIPT
“Well, that's right. So against that backdrop, our view, our strategy has been to try to identify the parts of the region that have the most idiosyncratic positive support because of these cross-currents that are in the aggregate investment environment. And we think China exemplifies this or is the best example of this. Why? Three key reasons. Number one, as I just mentioned, you've got this nominal GDP improvement because of this change in the producer price index I was mentioning earlier. And that's giving China the best delta, the best change, as well as the best level of nominal GDP growth. And that's directly filtering through to earnings. So that's point number one. Point number two is that we have this concept of a policy put, i.e. there is a very important meeting politically in late October. It's the 19th Party Congress, and all the policymakers”
2017-04-07 · Goldman Sachs Exchanges · 'Peak Momentum' and a New Phase for Asian Stocks · IDENTIFIED FROM THE TRANSCRIPT
“So the punchline is that we think we're going from a period of really juicy good returns, which, as you said in your introduction, is the first quarter in Asia was the best in 206 years and the second best in the entire history of the index. We think we're going to a period where returns will still be positive, but decidedly more muted in their magnitude.”
2017-04-07 · Goldman Sachs Exchanges · 'Peak Momentum' and a New Phase for Asian Stocks · IDENTIFIED FROM THE TRANSCRIPT
“Now, if we map that onto the Asia-Pacific region, we can do the same thing. And if we look at our current activity indicator for Asia, that also looks like it's probably at its peak for the time being. If we look at the phases of the business cycle, and conceptually you can think of four phases where if you think there's a trend to growth, phase one would be when you're above trend and improving. Phase two would be above trend and accelerating. Phase three, of course, is below trend and getting worse. And phase four is when you're recovering. We've been in phase one above trend and improving. And typically over the past decade and a half, your average three-month returns during that phase is 7.9% for the MSCI Asia-Pacific X-Japan Index. In phase two, which is still above trend, but moderating, your typical returns are more like 1.5%. And we think we're going into that now.”
2017-04-07 · Goldman Sachs Exchanges · 'Peak Momentum' and a New Phase for Asian Stocks · IDENTIFIED FROM THE TRANSCRIPT
“This is a really important point, and thank you for asking this. The evidence that we've got first at the global level and then at the regional level. At the global level, we have a monthly GDP proxy. Technically it's called our current activity indicator, CAI, and that has improved in rough numbers the low 2% global growth level to over 4% currently. So the good news is that the global economy has clearly shown signs of improving in its growth momentum. The less good news is that the data surprises that have been coming out, which were consistently positive in the second half of 2016, have flattened out and they're no longer surprising on the upside. So there's very good evidence at the global level that this recovery in momentum we've had is probably peaking right now.”
2017-04-07 · Goldman Sachs Exchanges · 'Peak Momentum' and a New Phase for Asian Stocks · IDENTIFIED FROM THE TRANSCRIPT
“Some numbers on this at the beginning of 2016 that was minus 5.8%, very deflationary, and a function of the collapse in commodity prices and some other excess supply issues. The latest data point we have for February, it was plus 7.8. So in round numbers going from minus 6 to plus 8 is a huge shift in the inflationary environment, and that is directly flowing through into corporate earnings growth. And to give you just one number, there's a National Bureau of Statistics assessment of the profits of the industrial sector, both listed and unlisted. A great number of companies in the hundreds of thousands in China, mainland itself. And for January and February compared to one year ago, the profits were up 30.5%. 30.5. So that's a dramatic turnaround from the profit declines that we were seeing. And it's that shift in the corporate profit environment that is prepared.”
2017-04-07 · Goldman Sachs Exchanges · 'Peak Momentum' and a New Phase for Asian Stocks · IDENTIFIED FROM THE TRANSCRIPT
“Simply put, it means better returns. And the reason for that is that Asia, Extend, has been for the last five years, nearly six years, in a deflationary environment which has put a lot of pressure on corporate profits. The updated numbers, which are quite fresh, are that the period from 2011 to 16 inclusively earnings grew 2.6% on annual basis in local currency and just 1% in US dollar terms. So effectively for the past five, six years there's been very little corporate profit growth. Therefore, it's not surprising the index is basically chopped around and gone nowhere. The good news is that having come out of this period of deflation, and this is most significantly shown in the turnaround in Chinese producer price inflation, so-called PPI.”
2017-04-07 · Goldman Sachs Exchanges · 'Peak Momentum' and a New Phase for Asian Stocks · IDENTIFIED FROM THE TRANSCRIPT