Expert: Kerry Craig – J.P. Morgan Asset Management – State of global markets and what it means for investors

[00:00:14] Welcome to another episode of Equity Mates, a podcast that follows our journey of investing. Whether you're an absolute beginner or approaching Warren Buffett status, our aim is to help break down your barriers from beginning to dividend. My name is Bryce and as always, I'm joined by my equity buddy, Ren. How you going? 

Alec: [00:00:30] I'm very good, Bryce. I am excited for this interview. There is a lot going on at the moment in markets. We all know that and we're lucky enough that we get to speak to experts and try and make sense of it. And we've got a great expert today to help us get our heads around it.

Bryce: [00:00:47] That's it. It's our pleasure. And with great excitement, we welcome Kerry Craig to the studio. Kerry, welcome.

Kerry Craig: [00:00:53] Hi, How you guys doing today? 

Bryce: [00:00:54] We're very well. How are you? 

Kerry Craig: [00:00:55] Very good. Thank you. I appreciate being called an expert. I don't think I've been called that before. 

Bryce: [00:01:00] Well, you're more more of an expert than we are. That is absolutely reality. Yeah. So Kerry is a global market strategist at Jp morgan. And before working at Jp morgan, he worked in economic research positions in the New Zealand government and in the UK pension industry at Jp morgan. He is responsible for offering thought leadership and explaining market data and trends to Jp morgan's investment team and the broader investing community. Thanks to Jp morgan for sponsoring this episode as well. And today we're looking at the state of global markets and what it means for investors. [00:01:36][35.0]

Alec: [00:01:36] But before then, Kerry, it's your first time on the show and would love to get to know you a little bit. And we always like to start with the story of someone's first investment. We generally find there's a good story or a good lesson that comes out of it. So to kick us off today, what was the story of your first investment? [00:01:54][17.8]

Kerry Craig: [00:01:55] My first investment was actually I think my my mother had put some money into like a savings bond or something that I got when I turned 18. It wasn't very much. It was like a few hundred dollars. As I matured, I got the cash and I decided I was going to invest it in the stock market. And I had been reading about a company in the press that sounded good. They sound like they were growing. And I basically this is way before we did online brokering and I was living in a small town, New Zealand. I rang up a brokerage and went through and bought some of these stocks and that company no longer exists. And that was like the worst investment ever. And my lesson I quickly realised was that I just did not know enough about individual companies to really go in and and want to invest on individual stocks. So since then, my philosophy has always been about other people who know way more about companies. Do that for me and I'll focus more broadly on my goals and investing and having the right mix of asset classes to try and achieve that, rather than sort of worrying about, Do I own the stock or that stock? And I just I leave that up to the real experts out there to try and figure that out. [00:03:05][69.7]

Bryce: [00:03:05] MM So Kerry, you've worked across New Zealand, the UK and Australia. What have been some of the key lessons you've learnt, some of the key differences between the markets? Yeah, talk us through that. [00:03:18][12.7]

Kerry Craig: [00:03:19] One similarity that's very true across all those markets is that people love houses and they have too much of a home bias in their portfolios. So and in England, everyone was just thinking about the 4100 and that was the biggest weight in their portfolio, even though it's dominated by financials and images, companies similar in Australia. Obviously one thinks about the ASX 200 and the equity market here and in New Zealand it's kind of a mix between New Zealand and Australian stocks. So there's way too much home buyers and people's portfolios and I think that is the biggest mistake because they overlook so many growth potential opportunities in their portfolio that come from investing offshore. And it's a pretty natural bias to have like you, you invest in things that seem familiar, that you recognise, that you see. But I think that's a really good starting point. But if you're really thinking about how to grow a portfolio over time, you really need to look more broadly around the globe for where those opportunities really are going to come for and just cast the big sneaky cat. [00:04:16][57.2]

Bryce: [00:04:16] The Footsie is a fascinating one. It's an index that I feel like it just never moves. Am I right? [00:04:21][4.5]

Kerry Craig: [00:04:22] Yeah, it's a strange one. It's. It's dictated by currencies as much as anything else in terms of how things perform. It's also unusual because it's in the UK and where it is right next to Europe. People focus just on the UK and the footsie, but they ignore what's happening in continental Europe and the potential there. So it's an unusual one from a geographical perspective as well. In terms of where the companies generate their revenues. It's not really reflective of the UK economy, which is I guess true about many equity markets around the world, but it's a bit more severe in that case if you want to think about it. [00:04:53][31.1]

Alec: [00:04:54] And I'm also whenever we get a New Zealand guest on the show, we love to talk about the New Zealand start up saying and the technology companies coming out there because it just feels like New Zealand punch above their weight. Obviously Xero is the big one, but like Stryker translations, we've had them on the show, they're from New Zealand as. Well, let's go. What's what's in the water over the. How are you guys country 4 million producing so many good companies. [00:05:18][24.5]

Kerry Craig: [00:05:19] I think it's just the fact that, you know, we I was there two weeks ago to see family for the first time in a very long time. But, you know, you just feel so far away. You go down and you, like, literally feel like you're at the bottom of the world. And so I think there's the mentality that you have to strive and try and do something amazing to really get a global presence on a global stage and to get recognised. And I think there's that definitely that mentality and a lot of businesses in New Zealand, they're not thinking well and I think in New Zealand they're thinking how do I become big around the world? It's just that, yeah, I think it's the geographical isolation and potentially also just a motivation to be more global in nature. [00:05:56][37.3]

Bryce: [00:05:57] So Carry Jp morgan has just released their guide to the market. Before we get into the nitty gritty. What would be some of the just headline key takeaways? [00:06:05][8.4]

Kerry Craig: [00:06:07] The biggest themes in the questions we've been getting from clients the last three and six months? Really, really a few things like basically where's the bottom in equity markets? You know, is that coming out there yet when it comes to thinking about inflation and how high bond yields and interest rates are going to go? And the third one is really how close are we to a recession? Those are the big questions that everyone's grappling with. And if you look at the market on a daily basis, which I would urge you not to do, if you look at the market on a daily basis, you know, it's either inflation's winning and going to be too much or gross losing and it's not going to be enough of that. And those are the things that are pushing and pulling on markets at the moment. And you're at that point where there's not real clarity on which way it's going to go. You've got a really strong inflation of where the US yesterday, which had weaker data coming through around many countries. And so it's not clear which way the market is going to go. And in the background it's all about, you know, what central banks are going to do in reaction to higher inflation and we see growth. So it's a really tough time to be an investor and just thinking about how to position in this environment because it's quite unusual. We don't have central banks, don't have you back anymore more propping up the markets like they have for the last few years. They're kind of like, you're on your own now. It's better market forces. [00:07:19][72.6]

Alec: [00:07:20] Yeah. So if people aren't familiar with Jp morgan's Guide to the Markets, it's released every quarter. And if people love charts and data, it's their dream. I think it's about 70, 70 slides of every chart you could imagine across all asset classes, in all geographies. You said one of the most common questions you're getting from clients is where's the bottom or are we at the bottom? And one of the first charts on the in the park is about the S&P 500 being at an inflexion point. Can you talk to us about that? If you can answer, are we at the bottom? That would be great. That would be a real step for us on the podcast. But yeah, talk to us about I guess, are we in an inflexion point? And I mean, what's to come as much as we can predict an unpredictable market? [00:08:05][45.4]

Kerry Craig: [00:08:06] Unfortunately, I don't I don't think we're at the bottom just yet in what's been driving equity markets down or what's been pulling them down has been valuations. I mean, you can break down the return components of equities into dividends, valuations, earnings and currency movements if you're looking at that as well. And what's really been dragging on the outlook or dragging on equity markets this year has been valuations like at the start of the year, equity markets and particularly parts of the equity market growth stocks in the US were really expensive because interest rates were low and now when interest rates start to rise, those valuations don't look so compelling because discounting them back at a higher rate, yes, it's about those forward earnings and discounting them back so it become less with less now and then suddenly you also think about the growth outlook being weaker as well. So that's not usually that great for equities. You want higher growth for equities to go up and this drags valuations down. The equity valuation on the S&P 500 is down 27% to the first six months. This year it's down 30% on the ASX 200 in the first six months of this year. That's a big headwind. But now what you haven't seen is earnings expectations really changed. So the next sort of downward pressure on the market is really going to be about analysts sort of looking at the growth prospects for the economies around the world, thinking about the revenues that are going to come in, and also thinking about the cost pressures that come from rising input prices, higher wages, commodity prices, and worrying about margin compression as well. So I think that that scope for earnings to be downgraded as is probably what's going to keep pressure on equity markets and why it's too soon to say, oh yeah, have troughed, everything's going to go up from here. That's a very much near-term view. I think the difference is that for a lot of people that we speak to and again myself, I'm a long term investor on this and market, so I'm not thinking about what I'm going to sell next week. I'm thinking about like, how can I grow my wealth over a number of years? Markets are cheaper than they've been for a very long time, and that's actually very positive for thinking about longer term margins. [00:10:04][118.3]

Alec: [00:10:05] The two key points of valuation, what what multiple are we willing to pay and then what what the earnings actually. And we've seen the, you know, the multiple compress. But we're entering earnings season in Australia. We're in confession season with the companies that are about to release poor earnings, start to come hat in hand to the market and say, sorry, what are you guys saying at J Pay, not just in Australia and New Zealand but around the world? We've seen what the multiples compress are. We starting to see earnings look a little bit shaky. [00:10:38][33.4]

Kerry Craig: [00:10:39] So what we've actually seen is that analysts haven't really changed their earnings expectations too much this year. Maybe it's because they're, like everyone else looking for a clear indication of where things are going on inflation and growth. But you haven't seen that big shift in terms of a big drop in earnings expectations. So through the middle of the year, when we look at consensus earnings expectations for the US is still around 10%. We would expect that to be like 5% and that's what we think we target for full calendar year earnings. We can see scope for them to come down but you know, we think that if the inflation is still there, if you still have growth, I mean nominal growth is still good, that's actually positive for revenues with the pressure comes in, the margins, those higher costs that are coming through are going to squeeze those margins and that's going to bring those earnings down. And then you're going to have distortions around just a surge in earnings going to the energy sector, which is also sort of lifting the overall market earnings. I think if you strip those out, things would actually look a lot, a lot weaker as well. But as we look back over history over the last 100 years, and it's pretty rare to get a calendar year where you have both earnings being negative and valuations being negative in terms of drag on the market. So it doesn't happen that often and it sort of gives us some sort of scope to think, well, if it did happen, it would be really unusual. [00:11:54][75.1]

Bryce: [00:11:54] Yeah, right. Wow. Well, it could be quite a historic period. We going to could I could say so. Kerry, you just mentioned there, if inflation is still there and you said that the top one of the second questions your clients come with is, have we seen the peak of inflation? Obviously, there's debate around whether or not we have we've just seen numbers coming out of the US overnight, 9.1% year on year for June. So what's JP thinking about in terms of inflation? Are we at the top? Where to from here? [00:12:25][30.1]

Kerry Craig: [00:12:25] It kind of varies by market. Obviously in Australia I mean we think inflation's still going to go up and here in lower level because of energy prices and food prices and a lagging effect of the housing market on the components of energies, other components of inflation, excuse me. So it's likely to keep rising here until the end of the year. And also because we only get it every quarter, it's it's harder to really judge what's happening in the US. Inflation is probably pretty close to pace. I mean that was a really strong number that we just came out over 9%. But if you look at some of the breakdown in the core components, they actually rolled over. So it is about food prices, it is about energy prices and a little bit about housing as well, which is driving those prices up and those big ticket items. It's caused inflation to surge earlier in the year like used cars and new car prices didn't come off. Right. So some of that transitory stuff that people talked about late last year, it is actually starting to unwind now. It just took a lot longer than expected. And so we would think that those core rates of inflation do start to soften over the course of this year. Headline inflation probably still going to be elevated, but maybe not 9% because of the the downshift we're seeing in oil prices, for example. I think the biggest challenge with inflation is that it's going to come down really gradually and so we are going to have inflation that is higher and that's going to keep those central banks wanting to keep tightening the policies and making sure that it's sort of hitting back towards those 2% targets because at 9% with some way from it. And so I think that's the difference. It's not just about the peak, it's about where inflation lands. [00:13:56][90.6]

Alec: [00:13:56] Yeah, I was listening to a podcast talking about this whole inflation story and obviously last year everyone was like, inflation is transitory. This year everyone was like, Alright, it wasn't transitory, it was structural. But if we zoom out and let's say 20 years from now where we're talking again and we say inflation started to rise in April 2021 and it peaked in July 2022. And by the end of 2022, it was back to sort of two, three, 4% in the fullness of time would probably say, oh, that that actually does look quite transitory. [00:14:30][33.9]

Kerry Craig: [00:14:31] It is temporary or transitory, whatever word you want to apply to it, because by its very nature, inflation as a comparison, prices year on year basis, it's rolled out. But it's also transitory in the fact that it's been successive waves of things that actually created the inflation. So it had covered the supply disruptions, created China because of that, the massive surge in demand for goods, as we saw here, was second home and it was buying things like Amazon, for example, that faded out as we went back to thinking about spending on services. And then you had the reopening. And so that was another transitory impact. And then you had macro and come through, you had China lock out various cities, which is impacted supply chains again. And then unfortunately, it had the. War in Ukraine, which is commodity prices and food prices as well. So there has been successive waves of transitory factors that have just kept inflation up, but they all will fade. And so you're absolutely right. As we think about the end of this year and next year, inflation levels will have like 4%. But if we think about what that is compared to what has been in the last decade will be to have enough inflation. It looks very high. [00:15:33][62.2]

Bryce: [00:15:34] Where does JP think that central banks, particularly the Fed, will take rates sort of by the end of the year? There was commentary overnight that, you know, there's a chance that they'd bump at 100 basis points next time they get the chance. Really? Yeah. Oh, well, yeah. [00:15:46][12.9]

Kerry Craig: [00:15:47] So what do you think. Go that one. [00:15:49][2.6]

Bryce: [00:15:50] Yeah. What do you what are your thoughts on that. [00:15:52][2.0]

Kerry Craig: [00:15:53] Are we, we're looking at a target of about three and a half per cent on a Fed funds rate by the end of the year. Will they do 100 basis points in the next meeting in a couple of weeks or they do 75 basis points? Is the markets really kind of pricing an accepted, if you are put that way and then they do another 75 basis points in September? I mean, it's kind of a semantics, to be honest, because they get to the same point. It's just how fast they get there. The challenge with doing 100 basis points and obviously they could because they've said we're leaving everything open would be the shock it creates to markets and having to adjust for that. And then sort of really thinking about, well, how high could they go? Because, you know, just before the inflation hit, the market was very much in line with what the Fed had been saying, where they were going with interest rates and things become more palatable. It's not just a peak in inflation that we're looking at. It's the peak in central bank hawkishness, hawkishness that they want to become. Okay, we're going to start tapering down these rate hikes to 50 basis points, 25 basis points, and the market being comfortable with that. So I think the sticker shock from saying 100 basis points, which does not happen at all very often, would be something the market would be really difficult to digest. So I think they're probably more likely to go 75 and then maybe sort of push towards another 75 in the meeting instead of coming down at 2 to 250 or something like that. [00:17:09][75.9]

Alec: [00:17:09] I mean, look, we're not a property or housing podcast here, but when we talk about in a hundred basis points rise and and I feel like there's a bit of commentary coming out of the US around from home builders saying that the market's softening a little bit over there. Are they going to see the housing price fall that Australians can only dream about, what Australian millennials can only dream about. [00:17:30][20.4]

Kerry Craig: [00:17:32] Because at that point everyone loves property. You know, there's a few things we look at and we think about the US economy and a cycle and some of the cyclical sectors and housing is one of them. It's not like flashing red or anything in terms of of the problems there. And you got to remember the way the mortgages work there, you can fix your mortgage for 30 years and not worry about it. So if you've had the opportunity to do that in the last 12 months, when rates are much lower, you don't really worry about rates going up so much. It's people going into the market. How much price is going to fall really depends on the sort of structural imbalance in the housing market. And there is an undersupply of houses in the US. All that migration that happened out of the cities during Kobane into other areas like the Sunbelt, the fact that companies are moving to more tax friendly states or where they think their workers are going to live and that good access to them, that's created a real demand problem where there's not enough supply. And so those structural imbalances will actually keep prices at least create a smaller prices, in our opinion. That could be an investment opportunity as well. We think about rental income and is is one of the reasons we think that there's probably less risk around the collapse in the housing market in the US more than anything else, that creates inflation, shelter costs like rents and housing related costs 30% of the inflation basket in the US. So any weakness there actually translates to lower inflation. And so you do want to see that housing market slow to bring down that inflation. So the Fed will be looking at what's happening in the housing market quite closely, but I think it'll collapse by any means. [00:18:57][85.3]

Bryce: [00:18:58] You see the headlines are, you know, Australian housing under pressure, Sydney down 0.1% for Australia. [00:19:07][9.0]

Kerry Craig: [00:19:07] Just want to be involved in houses too, you know. Go on. [00:19:10][2.9]

Bryce: [00:19:11] So come on guys, tell us something real. [00:19:13][1.8]

Alec: [00:19:13] It's unbelievable. I think Sydney was down 0.2% from Corelogic's data, but rents up 9%. Yeah, just can't win. [00:19:21][8.0]

Kerry Craig: [00:19:21] Yeah. [00:19:21][0.0]

Bryce: [00:19:22] So Kerry, sort of outside of inflation I guess, what else are markets pricing in at the moment from Jp morgan's point of view and I guess more interestingly, what do you think markets are missing at the moment? [00:19:34][11.8]

Kerry Craig: [00:19:35] It's interesting when you look across asset classes about the recession view. All right. So markets are pricing in a recession to different levels like you look at the equity market and say, oh, that's really reflecting a quite a strong probability of a recession. You look at the spread between the two in ten year yields in the US and the fact that it's negative now. And that's like that's an indication of a recession. You look at the credit market like investment grade credit or high yields, and the spreads have widened a little bit, but not nearly recession levels, you think? Well, they're not worried about recession. What the market is pricing in really varies about which part of the market you look at, too. By and large, I think that they're thinking of. About how close we are to that recession view. And when we look at it, those risks have definitely increased. But I think there's scope to say that we're not really there on a global recession at all yet. We think about how markets are behaving and that creates opportunity. If you think, well, equity markets gone too far, so we it upside risk or if you think about credit's actually relatively well priced and we don't think spreads are going to blow out because we didn't see that recession. So good income and protection opportunities there. So I think there's that narrative in terms of if you really worry about recession, which part of the markets are reflecting and which for aren't, and how you take advantage of that. The second thing we think when we look at what are the risks out there is actually negatively another big energy shock, right? So obviously gas supply to to the eurozone from Russia, they have to put in that maintenance period for the Nord Stream one pipeline. At the moment, there's a fear that devastate it. Right. And that would have a big impact on energy prices in Europe. That would ripple around the world, particularly Asia, where they tend to move closely. And then there's also the potential that you see further retaliation of the sanctions around oil price caps. And you could get a big jump in oil prices again. And I think that energy shock would be something that would do very much to bring you into recession when you're when you're so, so close to being close to zero. So it's like riding a bike. The slower you go, the easier it is to fall off. And it wouldn't take much of a shock to actually knock you over at the moment. So the big upside risk to inflation, I think is something not really reflected in markets right now. Mm. [00:21:39][124.2]

Bryce: [00:21:40] Fascinating. [00:21:40][0.0]

Alec: [00:21:40] I like, I like the bike analogy. I haven't heard that one before, but this makes a lot of sense. [00:21:44][3.3]

Kerry Craig: [00:21:44] Yeah. My analogies don't get cleared by compliance costs a. [00:21:49][4.8]

Bryce: [00:21:50] Lot about well, they should clear them. And that's the show. Before we turn to discussion on macro forecasts and a few questions around China and then where JP are finding opportunities in the market at the moment, we're just going to take a very short break to hear from our sponsors. So, Kerry, the value of macro forecasts. Now, you're a market strategist and we've been having a bit of a chat here at Equity Mates over the last sort of week or so, trying to sort of figure out whether or not all the headlines that we see and everything that's going on actually, you know, deserves the brain space that it sort of consumes when it comes to particularly retail investors. And, you know, we're asking the question, is it as bad as people think or have we reached sort of peak pessimism? So what would be your sort of response to those thought starters? [00:22:39][48.4]

Kerry Craig: [00:22:40] It comes back to time horizon. I think that, you know, for many people and as well, I think the earlier I said, you know, if you had the opportunity, don't look at the markets every day because most people aren't trading on a daily basis. They're not looking at the value of their house every day. For example, you know, they look at it is it gone up since last year? And it should be the same with your portfolio. So I think when it comes to a lot of these forecasts, just think about your time horizon and what matters to you when you're an investor. And for a lot of us, it's it's multiple years we think about investing over. And so a lot of that volatility we experience now, a lot of the forecasts say, oh, we're going to fall into recession in the next few months. They're less meaningful. In fact, if you look across history in terms of recessions or bear markets and contractions and expansions in the economy, you know, an average expansion is five years or more. And on average, a contraction or recession is less than one year. So the relatively short periods of time we think about the market going up and those expansionary periods and the of the exception to the rule. The second thing I would say about this is that while the headlines say and macro forecasts might be thinking about a downshift in recession, a lot of it has to do with how deep it will be and how long it's going to last and the severity of it. And I think for the younger investors out there who are looking well, Italy's historical once in a year, 100 events in the last couple of years can be right. They're thinking about the depths of their recession from the pandemic, which was very painful and very severe. If you go to the back of the GFC, which was this massive systemic shock around the world that came from the subprime crisis in the US, those were exceptions to how recessions usually look and so we might head for recession. It might be actually very mild. There's few really big structural imbalances in the economies around the world today, which would need to be fixed by a really large recession. And so it could be the case that we get a recession. It's not that deep, it's not that long, and it doesn't have the same big impact on companies that everyone's expecting it to. So it's not just about those forecasts that, say recessions or where we're headed. It's always about how deep and long it's going to be as well. [00:24:42][122.1]

Alec: [00:24:43] On that point around the there's not that many like structural imbalances. The the one thing that I'm really trying to get my head around and I guess sort of reconcile is, you know, on one hand there's negative data and inflation headlines that but also the stock market numbers really tell that story. But then on the other hand, the employment market is just ripping along and, you know, like participation rates are at all time highs, unemployment rates are at all time lows. There was some data that came out of the US recently that layoff rates are less than 1%. So like there might be some hiring slowdowns, especially in like the tech sector, but in terms of people getting laid off or fired, it's like not really materialising. And I just try and reconcile that information with like the chart in the news around a recessions coming and I just struggle to put two and two together. So Kerry, you're the expert. Help me understand. [00:25:36][53.5]

Kerry Craig: [00:25:38] Working for the next day. It sounds like it doesn't it doesn't make sense. It doesn't add up. You don't you don't get a recession without rising unemployment or a slow and material slowdown. Employment growth. I mean, that's also part of the stagflation argument. You know, people say we're getting towards stagflation, too much inflation, not enough growth. The third part of stagflation is actually rising unemployment. And that's what you don't have at the moment. You've got, as you rightly said, record high participation rates here in Australia. You've got almost two job openings for every unemployed person in the US at the moment. There's serious demand for for people, some of that structural, some of its demographics, older people, retiring people are very tired during COVID as they just wanted to spend more time with family, whatever they're moving about. You haven't had the same incentive to come back. And perhaps again, COVID related reasons are keeping out of the labour market. There is definitely demand out there for the workers. And so, again, that sort of lessens the impact of thinking about the recession. When you think, well, people are still earning money, there's a good chance that their wages will go up a little bit because of that demand. There are certain rules out there that central banks have looked at and said, if you get a unemployment rise of 2.5 percentage points, so if it goes to a bit above four in the US, that that would actually be enough for a recession, even though the unemployment rate is still very low. I think what everyone has looked at over time is that that relationship, those historic relationships between the economy and the labour market or inflation in the labour market, just just have. Haven't held up like they expected them to. That's Philip's kid, for example. And so this is questioning how those relationships play through in the past. I mean, technically, in a couple of weeks when we get the GDP numbers out of the US, they could be negative. And technically you'd had a recession because you had a negative first quarter. But it doesn't really feel like a recession when you still have strong labour markets. So it comes back to how you define these things more broadly. So I think that the labour market and the strength we're seeing and actually is very much a positive for the economies around the world, not just in the US but here in Australia. Over in Europe they have very low unemployment rates. So it's a very much a point of strength for thinking about how resilient the global economy has been in the face of all these shocks. [00:27:45][126.8]

Bryce: [00:27:46] So China has obviously been a sort of a pretty big talking point given their aggressive approach to COVID zero. But subsequently, it feels like they're just starting to open up a little and I guess change that policy and that hopefully will have good implications for Australian commodities at least. So what's JPMorgan's view on China's sort of approach at the moment towards COVID and the ongoing impact that's going to have globally? [00:28:13][27.7]

Kerry Craig: [00:28:14] China is actually and the broader Asia region is trying to reopen is actually one of our preferences right now. So if we think about where we see growth kind of comes to that point I made earlier around avoiding home bias, you know, China's at a very different point in its cycle than say the US like they've had that much later wave and having to deal with the variant. Now reopening kind of things like coming around the idea of the fact that they going to have to live with COVID rather than trying to stamp it out completely. But they're not quite there yet. Obviously, you have to think about the vaccine as they rolled out the vaccination rates amongst elderly, the pressures it's creating. But it does seem like we could be moving away from those massive city wide lockdowns that we do want to get away from and something maybe more localised. And so that's quite positive for that reopening. And we're seeing in the data, right. You're seeing a lot of retail sales to get success and this will pick up the same people wanting to get out there and spend again. And you're also getting massive support on the policy side. So very low cash rates to make it easier for banks to lend. The issuance of local government debt is running at a really accelerated pace compared to prior years. The fiscal spend as well and credit being pushed into the economy. But they're doing it in quite a managed way because they are worried about the property sector they're trying to deliver to the economy overall. They don't want the money going to the wrong places. So that's why you're not seeing this big surge in growth. That's why they're doing it. And quite a you know, if you look at the Chinese equity market, valuations are really cheap. There's still some great growth stories in the companies coming out there and you should see that demand come back through. And it is, as you rightly mention, could have a positive impact on the broader Asian region in the Asia-Pacific region, so that demand for commodities coming back through how it feeds into the external sector and many Asian economies as well as domestic demand we see coming through there. So it's a pretty much a bright spot for the world. We think about what's happening in the US and Europe. So we have a very favourable take on what's happening in China at the moment. The only caveat to that is that policies and officials haven't really been super clear that they're they're not going to lockdown cities just yet. So I think if those case numbers do start to accelerate from here and we don't see that city wide lockdown, that'll be a very positive view for the market. But we haven't really seen just how they're going to treat a new outbreak. And that would be the only thing that really presents a risk at the moment for us. [00:30:31][137.1]

Alec: [00:30:32] One thing about China that you know, that was about a month last year where we all became experts in Chinese property development. And, you know, the leverage with Evergrande and it's $300 billion in debt and, you know, they defaulted on something. They've been trying to deleverage. But the whole sector is, I guess, overborrowed and overbuilt. We we came across some stuff in the office earlier this week that there's 90 million empty homes or apartments in China, which is enough to fit the whole country of Germany or the whole country of the UK, which is pretty crazy. How do you think about, you know, the opportunity of reopening in on the stimulus and what that could mean for the equity markets, while at the same time China is trying to manage this, I guess de-leveraging in the property development and the real estate sector. [00:31:19][47.5]

Kerry Craig: [00:31:20] Yeah, I mean, as I say, it's amazing how quickly we can move from being experts at one topic to the other, always just being expert in virus mutations. But the property sector, I mean, it's it's comes down to like how local governments generate taxes and selling of land to property developers and the incentives that were put in place to expand so quickly as well as the deleverage that we're using. And obviously the property sector is very large in terms of the Chinese economy. So it did become a bit of a systemic issue that China is now trying to control. They have eased up on some of those pressures they were putting on the property developers. You have seen credit start to flow. You haven't seen them being necessarily bailed out in a big way, but they're definitely easing back on some of the regulatory process coming through. And at the same time, they're making it a bit easier for households to. Consumers actually go out and buy those homes in terms of some of the tax incentives they're putting through and some of those red lines that they had drawn being removed. So they're definitely easing up on that. I don't think it's going to go away. It's going to take many years to get rid of that leverage. And so that sort of stock of houses and demand tend to balance itself out. That's in China. They don't think about one two years. They think about the appliance economy for five years. They are thinking about the longer term. And so the Chinese goal was always to have a sustainable environment for the economy to go in, and they're probably willing to accept a bit of near-term pain to achieve that. And it comes back to that long term view and the planning they put into the economy, which is quite obvious if you think about just how short term some governments look at their own economy or how fast politics changes in places like Australia. So I think it will be a case of those target growth rates coming down as they deal with that. But again, the fact they are dealing with it is actually quite positive in thinking about the opportunity in the Chinese equity market and these big overhangs maybe not being such a risk as they were in the past. So I think there will be scope for good long term returns coming out of China given the valuations in the markets have fallen so much. [00:33:14][114.1]

Bryce: [00:33:14] That carry a few compliance team won't let your analogies pass. There's definitely no way that they're going to let you give us some individual stocks. But if we can close the interview. Well, let's just before we get to our final three questions, if if you're able to at least shed some light on where Jp morgan strategists are saying opportunities in the market without giving stocks specifics, we'd love to hear your thoughts on that. [00:33:42][27.5]

Kerry Craig: [00:33:42] The opportunities as yet to present themselves and think about how we treat asset allocation right now, it's very balanced, is very focussed on quality. We're looking for those trends to come through. And when it comes down to thinking about equities and where we see the greatest opportunity it's going to be on companies that have pricing power and cost control. So as you mentioned earlier, like, you know, some of the tech stocks are, you know, getting rid of stuff as they try to cost those companies cost because they're the biggest cost to the material and energy companies and too many industrials, anybody to pass those on. So we're looking at those a little bit more closely, but it's all about operational leverage. So it's really difficult to say buy this sector by value, by growth. It does become much more nuanced than thinking about bottoms up analysis and which companies are being unfairly penalised given the earnings outlook is actually still pretty good, not three or five year basis just because of a one year view. We actually see better opportunity in credit markets right now. So we'd be looking at the fact that investment grade credit spreads have widened a little bit, that, you know, in the US investment grade space there any basically in line with your average over the ten years you're to get quite a good yield pick up over treasuries and it's a quality asset. It's not something that's going to damage your portfolio, it gives you a bit of balance and we're probably pushed out. And to think about high yield bonds as well, we are again spreads on thinking about a recession. You've got really decent yields coming from those again, which is something people always need. And if there is a case of thinking about a recession that's not so deep and not so severe, if it does come, then your default rates aren't going to be as high and you're actually going to do better there. And moreover, these companies have had really good opportunities to refinance their debt for many years when interest rates were really low. So they're not really facing this massive level of maturity that's going to hit them and suddenly think about having to refinance. It's a higher interest rate, so they're definitely focussed more on the credit space right now than equities overall if we're looking for opportunities in the market. But again in equities, I think that barbell between quality in the US and in quality and Australia companies and in growth in Asia and China is a really good way to think about a portfolio right now. [00:35:43][120.7]

Alec: [00:35:43] Nice. I love that. Well, Kerry, we started we started the interview by joking that you haven't been called an expert before. I'm confident after this interview you will be called an expert again because you've shared a lot of great insight with us. And we really appreciate you taking the time. We have almost reached the end of our time, but we do like to finish with the same final three questions before we get into them. If people want to read Jp morgan's guide to the market for the quarter or if they want to read more from you or follow you online, is there anywhere in particular they should go? [00:36:17][33.7]

Kerry Craig: [00:36:18] Yeah, just check out our website. All information is freely available. We want people to use it. We don't protect it behind firewalls or paywalls or you don't have to be a financial advisor, for example, to look at it. It's just all there. It's designed for people to use. If you do love charts, as you mentioned, is things about having trouble sleeping or is good to have a flip through if anything is probably too much information. But go to the Jp morgan Asset Management website. That's the best place to get a lot of research and have a look and it's all freely available up to well. [00:36:46][28.3]

Alec: [00:36:47] We'll get stuck into these final three questions. And the first one is, do you have any books that you consider a must read. 

Kerry Craig: [00:36:54] Well enough puzzling about this question? I don't read a lot of financial books. I mean, I think it's from spending all my days reading financial research and looking at markets. I tend to to read too many science books at home. I didn't. Legends about the all black team recently. I think that's a really good book just to thinking about being a team and some really good principles to live by. I think if you wanted to look at some materials that would be increasingly important for thinking about the markets today. There is something at our website called The Principles of Long Term Investing and probably very familiar to people, you know, diversification, thinking about the long run time horizons, thinking about how dividends and reinvestment really add to that. Those are the principles that really do set home today. And I drew out the best profile of the returns, I think, from here on out. So I think that would be something of a different urge people to go and look at more than anything else. 

Alec: [00:37:45] So I'd love that. And very true to form to get a All Blacks reference in in the interview. 

Kerry Craig: [00:37:54] Because that's a place, I guess. 

Alec: [00:37:55] Now, we we said your compliance time is going to let you talk about any individual stocks in terms of investment opportunities. But this question isn't about a company as an investment opportunity. This is about a company just based on who it is as a company, its competitive advantage, its quality. So with that caveat in mind, what's the best company you've ever come across? 

Kerry Craig: [00:38:20] The company I've ever come across is the one that listens to its customers and its investors. And I can give you an example of a company that I think is quality and makes sense for what's happening today is a big issue, obviously, around the world. As we think about sustainability, we think about environmental costs of climate change. Yes, it scarcities. But there's another big one. And if you take a company like Deere, they in agricultural company, they very much focussed on how they can deliver for their customers in their business in terms of that environmental aspect, that food quality aspects and also how they can sort of return for their investors. And they do that through building technology and AI into the machinery. So they're getting higher crop yields, they're using less water and use fertiliser, which is great for farmers and agriculture produces using machinery and they're going to be something that stands out in that sector when they're thinking about what's going to deliver in terms of those longer run a business opportunity. So I think that there's a clearly an example of a company that's thinking about the consumers and customers and their investors and also the broader environment and how they're going to deliver on that. And I think that's a great example of a longer term company that's going to continue to be a standout within that sector. So again, coming back to investments, if you can find those companies within sectors around the world, those are the ones that are going to really perform over the long term and actually continue to be okay for these very volatile periods that we're having at the moment. 

Alec: [00:39:41] And then final question. If you think back to your younger self making that first investment in the New Zealand company that no longer exists. So what advice would you give to your younger self? 

Kerry Craig: [00:39:53] I would just say, yeah, I mean, I took I started early like I was 18. I thought that was a pretty good start. I took it into the markets, but I wish I'd done more. So I did that one and then I kind of left it. I wish I had actually done more and just kept investing in other things. And what I do now is what I should have done when I was younger. I just I continue investing in the markets every month. I don't look at it. I just continue to put money away. I know things go off of my time horizon and I wish I had started doing it at a much younger age in terms of just being continued and investing, rather than just putting some money in and waiting and hoping something good happens that I'd just be more involved in the market. So my message to my younger self is like, Don't spend your money on surfboards. Go and buy more stocks to buy just to myself. That's okay. 

Bryce: [00:40:40] Well, Carrie, thank you so much for for sharing your time with us today. We've taken a lot out of this episode. There's plenty to cover in global markets at the moment. And you've helped us to make some sort of sense of of a lot of the big topics. So very much appreciate your time. And again, thank you for Jp morgan for supporting this episode as well. So we look forward to it, hopefully catching up again at some point in the future. 

Kerry Craig: [00:41:01] So yeah, thank you very much for having me on today. It was an absolute pleasure. Thanks.