Transcription
I believe one thing the market might be wrong about is its continued reliance on the old ways of interpreting Fed results. This will likely lead to a sharp decline, similar to commodities when their cycle ends. It's like commodities, you see. Looking at chip stocks, I see that when the cycle ends, it's over. It's a cycle. I think everything is coming together: the reopening, the consumption has fallen this much, and it's a 5-year plan that must be implemented. They will have to be brave enough to lower interest rates and simultaneously implement measures to stimulate consumption. And we bought consumption stocks at a very low point. This week is a test of nerve for various assets. If anyone has been observing, you'll notice that since the beginning of the week until today, risky assets like stocks, gold, oil, and crypto have all been sold off. Especially AI stocks, whether in America or Asia. They have adjusted downwards. Even though there has been some recovery today, we see that gold prices are close to breaking $4,000 per ounce. Asian stocks have also recovered somewhat, but there is still concern. What is happening to all risky assets that are being sold off simultaneously? Initially, we thought oil falling would make gold rise, but it turns out both gold and oil are falling together, hand in hand. Asian stocks are falling, AI stocks are falling, and crypto is also falling. Today, we will discuss whether the market is closing. Before, when the "narrow channel" opened, it was "on," but now it's closed. All risks are gone. They are selling off risky assets and going into cash. Is that what's happening today? We are joined by Khun Natthaphon, Assistant Managing Director of Investment Strategy at Krungthai Asset Management. Let Khun Natthaphon explain what's happening in the market. Hello, Khun Natthaphon.
Yes, hello, P'Naew. Hello. Oh, it's the 24th, Wednesday the 24th of June. Today, we've invited Khun Natthaphon to discuss because we've been observing all investment asset markets, whether it's AI stocks, gold, oil, or crypto. It appears that these four assets have been falling for a day or two, Khun Natthaphon. When we thought oil was falling, gold would rise, but gold also fell, and oil fell again. What is happening to these assets now? Are they entering a mode of selling risky assets and holding cash?
What has intervened is the Fed's meeting results. The key issue is the introduction of the new chairman, Kevin Watch.
Yes.
Kevin Watch has a framework, a new framework for the Fed's decision-making. We can see that the statement after the meeting has been halved, it's shorter. He believes that communicating a lot, giving opinions, forecasting interest rates will go this high or that high, known as forward guidance, he doesn't like it. He wants to go back to the era of the late Chairman Greenspan, where after a meeting, they would simply state whether rates would rise or fall. I agree with this. Giving too many expectations, or when a certain number of committee members point to dots and then try to find the midpoint, and then predict where interest rates will go, is not very effective. Because if the Fed's opinions, given continuously, contradict market sentiment, they have to adjust constantly, reducing the Fed's credibility. As I often say, the Fed is a follower. It's a follower of past trends. When people ask if the Fed will do this or that, I tell them to look at the economic data.
Yes.
When the time comes, the economic data and market expectations will determine the Fed's opinion. Forward guidance or even the dot plot is useless. I think this makes a lot of sense. Another thing is what he said when he first came in, that he wants to use new data, a new way of looking forward, rather than relying on economic data that has already been released, which is like looking in the rearview mirror. I agree with this. A significant mistake by the Fed was not many years ago.
Transitory inflation. The Fed, under Powell's leadership, believed that inflation after the reopening was only temporary, but it turned out not to be temporary. So, they had to raise interest rates by 75 basis points, multiple times.
Which caused market turmoil. This is a mistake that led to reforms in decision-making and, in fact, reforms in management, including handling insider trading, which needs reform. But what concerns investors is the Fed's decision-making. I would use the term "more proactive."
Instead of being backward-looking, relying on data, looking at old data too much.
It's more proactive. And he used a lot of language about controlling the inflation target.
Yes. He talked a lot about bringing inflation back to the target in the latest meeting.
That's reducing the importance of forward guidance and emphasizing the target. And the market believes it. The market gives him credit.
This means he won't sit there and say how much interest rates should be, but I will emphasize one thing:
Yes. I will control inflation to reach the 2% target. That's enough.
The market believes this because the market immediately thinks that if inflation comes in higher than expected, they anticipate interest rates will rise without the Fed having to say anything.
Speaking less seems to give more power. Therefore, what has returned, as I've said before, is that the dollar has returned as a safe haven. The narrative about abandoning the dollar and so on, I think it's time to stop. It's been a long time.
And US bonds have returned, they are stable. We see that yields haven't continued to rise. Yields have fallen somewhat, but the fall is limited because we haven't seen weak US employment data yet. US employment data is quite strong. So, yields are falling, but not much. They are not rising either. There's a narrow channel opening, oil has fallen.
And people might be looking at other components of inflation. Now, yields seem to be... if we guess the sentiment of bond investors, they might be worried if yields will rise further. For example, Apple said they will increase mobile phone prices, right? Because chips are expensive, they can't afford it. But does it depend on chip prices? The investment in AI infrastructure, if it's not possible, the prices of raw materials needed will rise, which could be a source of inflation. So, there is still some concern about inflation. And I think one thing the market might be wrong about is its continued reliance on the old ways of interpreting Fed results. Seeing the dot plot, the standard deviation of rates rising, saying interest rates will rise once this year, and believing it, and pricing it into the market. I think this is an opportunity. And it can explain why things seem to be falling together. There's concern about liquidity. If people think the Fed will raise interest rates, if they are serious about inflation...
Inflation is significantly above 2%. If they are serious, how much will they have to raise interest rates? Think about it directly. And they think interest rates will rise twice. The latest was that a major US bank said interest rates would rise three times this year. In November, October, December.
Like this.
Is this really true?
I don't believe it.
I don't believe it because, besides oil falling, the key factor that will affect inflation concerns, like chip prices affecting mobile phone prices and electronic device prices, how much further can they rise? This is an important question. There are already some signs, like what happened in the Korean market yesterday. Does it indicate that the chip shortage, which was said to continue rising, will reach a certain point? Like Apple's price increase. I read it like this. Let's see if it makes sense.
Yes.
I think this way. For example, Apple.
They said they will increase mobile phone prices, increase their device prices because chip prices are rising. Let's assume, for example, if they think chip prices will continue to rise, and they announce a price increase for mobile phones like this. If prices continue to rise, what do they have to do? They have to raise prices again, right? How many times will they have to struggle to ask for price increases and ask for price increases again?
Yes. And they've been doing this for a long time, only announcing a price increase now.
The second scenario, I think it's possible that they can see that chip prices are nearing their peak and are about to fall. So why increase prices? If they say they can increase prices now, and when chip prices fall, they will profit.
This price increase announcement, if chip prices fall, they lose the right to announce a price increase, right?
Yes.
If chip prices fall, what will you do? Right? So, don't think that...
But is it a temporary fall?
You, is it a temporary fall? Is this temporary?
Meaning chip prices will fall?
Chip prices.
I don't think so. I think chips are like other commodities. When it's a cycle, people say, "Oh, it will rise like this, like that." And then they adjust their targets upwards.
But at some point, it reaches the point it should be, right?
Yes.
For those who buy, those who use it, it becomes unbearable. There will start to be things like this. For example, how many times can they increase mobile phone prices?
Yes.
And when real demand starts to weaken, speculative demand, the demand from hoarders, if they get a signal that it's not like that anymore, the speculative demand that was there will turn into supply.
Those who hoarded will sell.
Yes. Not only will it disappear, but it will also become supply. Those who hoarded will sell.
So, when that time comes, people will rush to sell, and it will be like the end of a supercycle for commodities. It ends like that.
Yes. So, if this is indeed the case, besides the potential change in market players, the chip stock cycle is ending. I'm waiting for the bubble to burst. I think it's definitely a bubble, and it must burst. When it bursts, there will be a rotation. We need to find new groups. And another thing is that the source of inflation will disappear. Inflation won't come anymore. The outlook for interest rates will change. Interest rates won't need to rise anymore.
If this is the case, one thing that can be played, even though it's an asset I believe is in a long-term downtrend, is gold. There might be a dead cat bounce, a small upward movement in a large downtrend.
Yes. Because the outlook on interest rates might be wrong. You should buy gold now. Buy gold now and wait for the outlook on interest rates to change. Then, when gold recovers, sell it. Don't hold it. You can definitely play one game. But for this, buying gold now and planning to sell in a few months, I'm not very confident. But I think it's interesting enough to speculate on, though it carries risk. It's not like entering a major cycle.
But another thing I find more interesting is if the reopening, the reopening, is similar to the city reopening a few years ago during COVID. It led to a rotation from work-from-home groups to lockdown groups. Those who were good were abandoned, and people bought reopening stocks. Could this reopening lead to something similar? Because when the channel was closed, there was too much uncertainty, consumption was bad, consumption stocks were also bad, and people only focused on AI investment.
Until it reached this point. And I believe it's a bubble. If the bubble bursts, people will likely rotate back to themes focused on consumption.
Yes.
I have two things: 1 is Global Brand Luxury. And another is China/Hong Kong. The performance of these stocks is vastly different from China A-shares, like day and night. China A-shares are in a bull market and moving forward. But Hong Kong, Hang Seng, only became a bull market yesterday. It fell 20%.
Because a large number of Hong Kong stocks rely on consumption.
Yes. They played the AI theme, which is investment, AI infrastructure, AI supply chain, all investment. And people played those in the China A-share market. But many Hong Kong stocks, large ones, clearly rely on consumption as drivers. Even internet stocks, if you look at their core, their revenue sources, they must rely on consumption. That's why they are sluggish, heavily impacted. And another thing is the crackdown by the Chinese government on cross-border investment.
Yes.
Illegal platforms that Chinese people like to use to invest abroad, including Hong Kong. So, money flowed back. After the crackdown, this week, I believe the Chinese authorities instructed Hong Kong regulators to propose to China to open up more, to allow more Chinese people to buy Hong Kong stocks. There will likely be an increase in listings and so on through the Stock Connect. And another thing is allowing Chinese people to buy IPOs in Hong Kong. There will soon be a Chinese IPO, a large Chinese IG company, listing in Hong Kong. This is a proposal before the IPO sale of this Instagram China stock in Hong Kong.
This will lead to a new wave of Chinese investment into Hong Kong.
Meanwhile, China A-shares are in a bull market. So, I think...
The best opportunity now is better than gold. It can be a long-term investment. It's likely China/Hong Kong, or if it's a fund, it's an All China fund. It invests in everything, but the largest proportion will be in Hong Kong, ADRs in America.
And a smaller proportion, a little bit of AR. Mainly SH in Hong Kong.
Actually, there's no problem. There are only two things. First, because consumption is not very good, it's the group that everyone turned to AI. But even AI comes from consumption. Second, the crackdown on platforms. These are the main two reasons. But is Hong Kong's stock market at its lowest point? If you ask me, I think so. I'm hesitant with this market because when I invest, I allocate to China, including both Hong Kong (All China) and A-shares. For long-term holding of several years, I focus on buying in lagging markets. Last year, I focused on buying A-shares. This year, I'm focusing on buying Hong Kong and holding long-term. This week, I'm looking at what I believe is close to the bottom, actually this week. Because there's news that I like and see as a buying opportunity. What news did I see in the past two weeks?
Over 100 million Chinese people.
Will be unable to pay their debts. Did you see the news?
Oh, I saw the news.
News like this, I remember from the past, many years ago, news that scared people about China's debt, China's debt. These are often the points where you should buy stocks.
Yes.
This is a personal observation. When foreign news outlets report on China's debt, saying "Oh, China's debt is very scary," it's a signal that stocks have fallen a lot, and it's a point to enter. In the past, when I saw the first signal, it was:
Over 100 million Chinese people will be unable to pay their debts. This is news that stimulates me to want to buy. And I think it's likely the bottom for Chinese stocks, which are in this group. If Chinese people can't pay their debts, it's bad news for consumption, right?
Exactly.
And this happened after China's retail sales, Chinese retail sales, contracted in May, the first contraction in three years. Without this news, it wouldn't be so close. When sales contracted for the first time in three years, the news came out that over 100 million Chinese people can't pay their debts. These are two signals that I think are likely the bottom for China/Hong Kong stocks, which focus on Chinese consumption. And Chinese consumption is not just about expecting a recovery as usual. It's about...
It's in the 5-year, 10-year long-term plan.
Yes.
It's a plan to increase the proportion of consumption.
In China's GDP, reduce the role of exports and production, increase the proportion of consumption. Exports are currently booming. So, in the 5-year, 10-year plan, they must stimulate consumption. And one thing they are serious about is allowing the yuan to strengthen. A stronger yuan makes consumers stronger and exporters weaker, right?
But even so, exporters are still strong, and consumers are still weak. This means they still need to do other things. Why haven't they done them? During the past period, there was a lockdown. Oil prices were high. They had to stimulate. It was difficult to stimulate because inflation would surge in the short term. But now the channel is open. The meeting with the US is over. They have a more equal status than before. Are they ready to implement the 5-year plan, which they definitely must do? When will they do it? The channel is open. There's a slight hiccup: Kevin Watch came, and the market thought he was hawkish. This...
Yes.
Caused a slight stumble because a strong dollar would make them hesitant to lower interest rates to stimulate the economy. They wouldn't dare to do it if the dollar was strong. Let's wait. Let's wait for the outlook on interest rates to change. If people believe less, think, "Oh, only one hike is enough, or no hike." The dollar stops strengthening. I think everything is coming together: the channel is open, the meeting is over, consumption has fallen this much, and it's a 5-year plan that must be implemented. They will have to be brave enough to lower interest rates or implement measures simultaneously to stimulate consumption. And we bought consumption stocks at a very low point. So, everything is coming together, like the stars aligning.
I think Chinese A-shares, China/Hong Kong stocks, are the best buying opportunity of a lifetime.
Yes. And gold. Now, Khun Natthaphon, regarding gold, oil, and AI stocks, they all fell together a moment ago. You mentioned that the signal is the interest rate. Chairman Kevin Watch came to the meeting, and he's the new person who will handle interest rate decisions. We'd like to ask, is this decline a sell-off to reprice assets? If there's a trend of rising interest rates, do all assets need to be repriced? Based on what we've seen.
Hmm. First, I think it's a change in expectations, which I reiterate, is an expectation I believe is incorrect. Interest rates will not rise. Therefore, this decline is like everything is falling, but it's overlapping.
With another thing, it's about rotation. It's like everything is falling, but we have to choose. When it recovers, if the expectation of interest rates is incorrect, only certain things that will be new leaders should recover. If there's a reopening, meaning the channel is open, and previously there were things that were the only game in town, like AI infrastructure investment, and it's not a bubble, then it should burst, right? So, new leaders emerge: consumption brands in Hong Kong, or something else that drives consumption. Or even Indian stocks, which are consumption-related. Those that have been sluggish for a long time, people only rushed into AI investment. I think it's an investment-to-consumption rotation. If we look at the big picture, old themes that disappeared will emerge, and new themes will emerge that align with both. The old disappearing themes will be investment. The new ones that will attract investor interest will be those linked to consumption, whether it's Hong Kong, India, or even...
Thailand? Or something else that's not AI.
Yes.
You asked, is the adjustment downwards in many assets just a normal correction, or is it because the Fed is withdrawing money, raising interest rates? Is it not related to liquidity?
I'm currently focusing on three possibilities. 1 is rotation, as mentioned. I've positioned the portfolio accordingly.
That it will be a change in players to consumption. 2 is about the Fed, which is a serious matter. The Fed's reserve management program, which injected a lot of liquidity since the fourth quarter of last year, has significantly decreased. They are injecting less liquidity.
The US Treasury, which bought bonds in the Treasury Buyback program, is buying about half as much. This is a direct and straightforward reason for increased market volatility and higher VIX. I'm also watching to see if this will continue to expand. The tightening of liquidity, meaning liquidity is tight. Is it expanding further? We're looking at many things. Are short-term US bond yields continuing to rise? In the last 24 hours, 2-year yields have started to fall. But we need to keep watching daily to see if 2-year yields, for example, rise again. If they rise again, it will indicate that liquidity is truly tight, and the Fed might be too strict from the market's perspective. Which could be triggered by news like Kevin Watch's speech in Congress. If he says something that scares the market, it could lead to liquidity tightening and a sell-off of everything, regardless of the theme. This is possible, but do I believe it? I don't think so. I think people are misunderstanding Kevin Watch. He's not a hawk.
Not a hawk by my definition. He's not a mad hawk who wants to crush the market, make the dollar much stronger, or anything like that. I don't think so. People are expecting Kevin Watch to be a hawk, even though Kevin Watch, remember, came from Donald Trump. Before, people thought Kevin Watch would take over Donald Trump's job, right? So, he came to lower interest rates, right? Now, they think the opposite, that Kevin Watch is a hawk who will raise interest rates.
It's not like that. He has proven that the Fed relies on data, but if the data indicates that inflation will fall, he won't stubbornly raise interest rates.
That's all.
So, I think the market is misinterpreting Kevin Watch as a hawk. I don't think so. So, if he genuinely surprises by being hawkish and crushes the market, which I don't think will happen.
Another thing, the dollar is tight, the dollar is strong, the Fed is too hawkish, right? Which I don't think is the case. The next event is the labor market.
Next, we will see labor market data again. People are not talking about it now because, well, people are not losing jobs, right? AI is not laying off many people. People are complacent. But remember, US labor market data is very low. There are seasonal factors that cause statistical problems. Since COVID, the data has been difficult to trust. There have been massive revisions afterward.
Yes.
I don't know how reliable the labor market data is. And every time, we have to be careful. If the data suddenly reverses, and unemployment explodes, that changes the picture. It becomes a scenario of deflation. Now, oil is falling, which is a leading indicator. If the labor market is bad, the market might enter a long-term deflationary mode. It will completely reverse from people thinking interest rates will rise, bond yields will rise a little, stocks will be a bit sluggish. But if yields reverse, if they have peaked and are falling due to a drastic change in expectations, like suddenly people are unemployed, oh my, that's worse than rising yields. Stocks will be dumped massively. And people will rush into bonds. This is the third scenario: deflation, which must stem from a surprise in the labor market, a sharp increase in unemployment, or revisions to the data, which is possible because the data is low. This is scenario 3: deflation. Scenario 2 is a hawkish Fed, which I think doesn't make much sense, and the market is currently worried about. The first is nothing much, just rotation. The AI bubble has burst, and there's an investment-to-consumption rotation, moving towards global brands, consumption stocks, and so on. Which I've positioned the portfolio for the first one most strongly.
Yes.
Right.
Okay, so there's nothing much else.
It's a change of leadership, but it's still stocks. A change of leadership, but remember, if AI stocks really fall, they will drag the market down first because they are all index-heavyweight stocks, right?
But after that, you need to position well. If you interpret it as not deflation, not a hawkish Fed, then you need to put it into stocks that you think will be the next leaders. Not just holding cash.
Yes. But there's the expectation. Khun Natthaphon, expectation is also important. If most investors expect inflation to rise in the future and the Fed to raise interest rates, then we ask in advance, if the Fed keeps interest rates at around 3% for a long time, and perhaps signals a pause, not mentioning rate cuts at all. Besides risking various assets, could it also risk the financial system? And what the US is currently very wary of is private credit. There are types that cannot be redeemed, or there are limits on redemption. How much can be redeemed? Is this scary?
Private credit, I think it will be used as an excuse for a sell-off.
Oh.
Yes. By itself, it's not difficult to solve. If there's a problem or a crisis, it will be a mini-crisis, and there might be a period of time for it to happen before the Fed steps in with its many tools. I think private credit problems can be contained, but a mini-crisis can occur. If something happens, and it takes days for the Fed to intervene, it's more about the time. But investors who have learned will want to crush it. Stocks will fall for other reasons, but private credit will be used as an excuse.
Yes.
For selling off. But by itself, it's not difficult to solve. But it can be used as an excuse. These things can happen. It could be like... now there's the World Cup in America, and Ebola, and so on. It's all possible. So, private credit, I see it that way. It can be picked up and used as an excuse, as fuel for a sell-off. But by itself, it's not a real problem. The real problem, I think, is... what should I call it, a problem or something? I think what I'm quite sure about is that the chip bubble must burst. That's all. Interest rates are not the problem. I think Watch has reasons, and he won't do anything too extreme. Anything that is too extreme. Think about Kuroda. Uh, Uwe, Uwe, Uwe, when he first came in, the Bank of Japan, he communicated incorrectly. Remember, Black Monday happened then, many years ago.
He said, "Oh, 1% is not a wall. 1% is already here. 1% is not a wall. We can raise interest rates further." And the market went crazy, selling off heavily. This happens only occasionally. A communication error, which could happen. Award comes in, makes a statement in Congress, and people misinterpret something or intentionally misinterpret it to sell off. This can happen when the market is high and there's a bubble about to burst. Anything can be used as an excuse to sell off heavily, making the market look like it's crashing, a crisis. In reality, behind the scenes, the market is trying to change players. But at first, it looks like everything is falling. So...
It's hard to say if we should hold cash. If we hold cash, and it really happens, it's the best.
Then you can buy new themes at a very good price with full pockets, right?
But if it doesn't happen, if people know the trick, the opportunity...
Yes. If it happens like that, and it doesn't fall, and you hold all cash, you miss the opportunity, right?
I would call it shifting to new themes. If it falls together, it's okay. Just bear with it. But abandoning old themes and chasing old themes, like buying chip stocks or something, I won't do that. It's too dangerous. I will buy stocks, shift to themes in advance. If I'm right, then I can continue with the theme.
Consumption. And the Chinese market is attractive now because it's close to the bottom.
And Khun Natthaphon, why do you like Chinese stocks so much? Because when you look at the premium...
In this game, it doesn't have to be China. But anything that relies on consumption and is not driven by investment. Because I believe the expectation of investment in AI is a bubble that has gone too far. But any stock, whether it's American or European, that relies on consumption, I think it's very sluggish. Or even the Indian market, a market that is prominent in consumption, right? It's all sluggish. Why China/Hong Kong specifically? Not China A-shares. China A-shares will need to adjust a bit. If the AI bubble bursts, the part that bursts must burst, and then we'll play the consumption theme in A-shares, which exists. But Hong Kong is almost pure. Large companies are all about consumption. I like Hong Kong because it's a consumption theme that is currently sluggish. It's a contrarian bet. Consumption will return because inflation is falling. Consumption will return. There's momentum from falling inflation. We just need inflation to fall, and consumers will have more power. And if there's momentum from other themes that have ended, it should bring momentum to bring flows in.
In simple terms, we like things that are at a point where they are about to turn upwards, not...
Yes, it's a turnaround play. It's one style. It's not to say which is better than the other. But I'm not a momentum player. Someone who is a momentum player would say, "What's rising? What's rising further? What has a premium? What has momentum?" That's the momentum play thinking.
I look for something that has a clear turnaround.
Yes. But now, these three assets are falling. Is it just a normal correction? Not a severe drop?
I think several factors are overlapping. People are focusing on the Fed, and we have to wait for the clarification of what Watch will do. I don't see him as a hawk. He's proactive. He can raise or lower interest rates. He can be kind. But the market is too worried. I'm playing with this, but it's the facade. Beneath it is...
What is more significant, what is more serious, is the rotation.
Yes.
So, this round is the world of rotation. Yes, yes. I give more importance to rotation. And we have to handle temporary situations, short-term situations, which is the concern about liquidity. I think the market might be too worried. What is more serious is rotation. This is my assumption, and it needs to be proven.
Okay, so we see all assets falling now. It's a preparation to move money to new assets. This period, we are selling assets because risky assets have already risen a lot. Today, we invited Khun Natthaphon to clarify our doubts. And what should we do? Khun Natthaphon said this is not a time to stop investing altogether, but a time to find good quality assets at low prices during this period. And there are Hong Kong stocks, Chinese stocks, which can be bought. But we still need to wait for further proof. Thank you, Khun Natthaphon, for joining us today. Thank you very much.
Hello. Hello.
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