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Sheldon Macdonald and Nathan Sweeney talk about the topics driving the markets in their weekly Monday update.
Monday Espresso Podcast - 8th January 2024
[00:00:00] Nathan Sweeney: Good morning, everybody, it is Monday, the 8th of January. Today, I'm joined by Ben Jones, our EM and Asia Fund Analyst. Good morning, Ben.
[00:00:08] Ben Jones: Morning, Nathan.
[00:00:10] Nathan Sweeney: We'll get some insight from Ben in a second, firstly, let's quickly recap on what was driving markets last week. As always, there's quite a lot happening, so let's dive straight in.
[00:00:21] Nathan Sweeney: Markets actually started the year on the wrong foot, so they got out of the wrong side of the bed last week, so why was that? What was driving markets last week?
[00:00:32] Nathan Sweeney: Firstly, we had minutes from the US central bank or the federal open market committee as it's known, and those minutes showed that basically the participants of that investment committee, are not looking to cut interest rates as quickly as the market was hoping.
[00:00:50] Nathan Sweeney: So ultimately, we saw that the central bank in the US towards the end of last year, they signaled that, look, we're making good progress on inflation. We're going to start reducing interest rates next year, but the market tries to interpret that itself. And the market thinks, well, if the central bank is cutting rates, does that mean that there's a potential recession coming?
[00:01:09] Nathan Sweeney: So the market started to price in more interest rate cuts than the central bank wants to implement. And because we've seen these minutes come out from the meeting, it's just reaffirming to the market, don't get ahead of yourselves on this, we want to cut rates, but it's not going to happen as soon as you expect.
[00:01:26] Nathan Sweeney: The market thought interest rates were going to start coming down in March. It will happen this year, but it's not going to happen in March.
[00:01:33] Nathan Sweeney: Now, the other thing to happen last week was we saw the release of the jobs numbers, so ultimately, this is the unemployment rate in the US.
[00:01:43] Nathan Sweeney: And the key takeaway from that is actually the economy is still strong, people are being hired. Unemployment is low. So this reconfirms what the Fed is saying, look inflation is less of a concern, but the economy is strong.
[00:01:54] Nathan Sweeney: So ultimately when you kind of look at it from that perspective, that's pretty much a good thing because you have falling inflation, which allows central banks to cut interest rates.
[00:02:03] Nathan Sweeney: But you still have a strong economy, and a strong economy supports jobs, which means people employed, people able to spend, and ultimately that means you should have robust corporate profits because the economy is not weak.
[00:02:21] Nathan Sweeney: So for us, we think it's just a bit of an overreaction from markets last week, but for me, one of the most important things over the course of this week is coming up this Saturday.
[00:02:31] Nathan Sweeney: So we have elections in Taiwan and that's why we've got Ben on the call this morning, so Ben is our EM and Asia analyst. So tell us a little bit about the election, Ben, and why is it so important?
[00:02:43] Ben Jones: Yeah, sure, so it comes at a pretty important time because of the ongoing tensions with China, who obviously don't recognize Taiwan as independent, and they've been increasingly putting pressure on them, and the election really could shape the country's future relationship with China.
[00:02:57] Ben Jones: So, Taiwan is quite a strategically important country because of semiconductors, and they're used in pretty much all electrical devices, like mobile phones, computers, as well as things like military and medical equipment as well.
[00:03:10] Ben Jones: So Taiwan produces over 60 percent of the world's semiconductors, and more than 90 percent of the advanced ones.
[00:03:16] Ben Jones: The biggest manufacturer, which is also known as a foundry, you might have heard of it, it's TSMC, and they have a 56 percent share of the global market, and they're especially involved in manufacturing advanced chips used by the likes of Apple, Nvidia, and other companies.
[00:03:31] Ben Jones: So one thing to note is how expensive it is to build and run these foundries, as they rely on high skilled and long hours of labour, so it wouldn't be as efficient to have them in the West. So you can't just pick up and move the supply chain elsewhere, the world is reliant on these established foundries in Taiwan.
[00:03:46] Ben Jones: So chips are clearly important to the US, China, and the rest of the world, and that makes Taiwan important too.
[00:03:51] Ben Jones: But it's also important from a military perspective, because it forms part of the first island chain, which is basically a chain of US friendly countries, along with the Philippines, Japan, and South Korea.
[00:04:02] Ben Jones: So by controlling Taiwan, China also sees it as an opportunity to increase its influence over Asia. They would have control over important shipping routes, and along with controlling the semiconductor supply chain, they would have leverage to influence a large portion of the global economy.
[00:04:16] Nathan Sweeney: Okay, that's fascinating, so you can really see how microchips are quite important strategically and this is why there's so much fuss about Taiwan and particularly as we get closer to that election.
[00:04:27] Nathan Sweeney: So let's focus a bit on the election itself. So who are the candidates?
[00:04:31] Ben Jones: Sure. So I'll start with the ruling party right now and that's the Democratic Progressive Party or the DPP.
[00:04:37] Ben Jones: And the current president, Tsai Ing-Wen, has served two terms so she's unable to stand for re election. So the three candidates we have standing are Lai Ching Te, who is Taiwan's vice president, and they're vying to keep the DPP in power, and the DPP is seen as having the most firm stance against China of the three parties.
[00:04:55] Ben Jones: They're open to talks with China, but they believe Taiwan is a sovereign state separate from China, and they want to strengthen relations with the US, and they want to increase their defenses to deter any attacks from China.
[00:05:06] Ben Jones: We then have Hou You-yi, who is the candidate for the Kuomintang party or the KMT, and they're in favor of having more engagement with China and potentially strengthening economic ties.
[00:05:17] Ben Jones: So they see the TPP stance as dangerous and argue that it could lead to conflict.
[00:05:21] Ben Jones: And then finally we have Ko Wen-je, who is the Taiwan People's Party candidate, or the TPP, they position themselves as a middle ground between the other two candidates.
[00:05:29] Nathan Sweeney: Fascinating stuff. So what's the likely outcome actually? Because I think that's quite important.
[00:05:34] Ben Jones: Yeah, well, if we look at the polls, the DPP are comfortably ahead. So recent poll from La Formosa puts them at 39. 6%, followed by KMT at 28.5%, and then TPP trailing at 18.9%.
[00:05:48] Ben Jones: So polls obviously aren't always accurate, but it looks like the DPP will take the win. So the base case is that Lai wins and we have some form of the status quo continuing and the Taiwan will look to push forward as leaders in the tech space with semiconductor manufacturing and they'll also look to form closer ties with the US.
[00:06:05] Nathan Sweeney: Okay, so, you know from a portfolio perspective, should we be doing anything?
[00:06:09] Ben Jones: Yeah, so, as I mentioned, we don't really see polls as tradable events because elections are inherently unpredictable, so we haven't made any changes in portfolios. But the base case is that the DPP remains in power and that we see some continuation of the approach of the current government.
[00:06:25] Ben Jones: If the KMT wins the election, we could see a change in relations with China in the medium term where we would monitor any developments. But either way, given the massive potential political and economic ramifications, we are closely watching this.
[00:06:37] Nathan Sweeney: Okay, thank you for that, that was really insightful and actually for any of our listeners out there, if you'd like to learn a little bit more about this, there's a great book called Ship Wars by Chris Miller. You can get that as an audiobook on Spotify or obviously Amazon, etc. But definitely worth knowing a little bit more about that space.
[00:06:54] Nathan Sweeney: So let's take a quick look at the week ahead, you know, apart from that election which takes place this Saturday, we also have GDP figures out in the UK, and so they will be coming out for November, and we're expecting a little bit of a small increase in the economy.
[00:07:09] Nathan Sweeney: And apart from that, there isn't too much coming out, we do have inflation data in the US, so there will be a bit of a focus on that. Is inflation continuing to come down? Is it leveling off? So thank you for listening today, and we will catch up with you again next week.