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Speaker 1: Bloomberg Audio Studios, Podcasts, radio News.

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Speaker 2: Welcome to the Bloomberg Daybreak Asia podcast. I'm Doug Chrisner.

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Speaker 2: On today's episode, I'll look at how the threat of

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Speaker 2: US tariffs is impacting the economy in China. Plus we'll

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Speaker 2: get some reaction to those minutes of the last FED meeting.

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Speaker 2: Coming up, we'll be hearing from Eric Lynch. He is

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Speaker 2: managing director at Sharf Investments. But we begin in Hong Kong.

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Speaker 2: Joining me now is Jenny Marsh, who leads Greater China

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Speaker 2: Eco Gov coverage for Bloomberg News. Jenny joins from our

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Speaker 2: studios in Hong Kong. So we know that the US

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Speaker 2: did hike tariffs by ten percent on all Chinese imports

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Speaker 2: in early February. Is it fair to say that that

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Speaker 2: came a little bit before Beijing was prepared for tariffs.

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Speaker 3: I would imagine Beijing was prepared for tariffs on day one.

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Speaker 3: You know, I remember that first day Trump took office

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Speaker 3: and sort of actually the surprise was nothing on China

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Speaker 3: on day one. Then of course on day two he

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Speaker 3: started talking about tariffs. But you know, I think despite

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Speaker 3: all of the sort of claims he's made about sort

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Speaker 3: of tariffs and chips and steel and the threats with

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Speaker 3: Canada and Mexico. China is the only country right now

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Speaker 3: that Trumps actually enacted at tariffon since he came into office,

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Speaker 3: and so while it's only ten percent right now, they

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Speaker 3: are sort of actually the first in the firing line,

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Speaker 3: and there's plenty more reason to think that more is

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Speaker 3: to come with that April one deadline hanging over them

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Speaker 3: for reviewing the first trade deal that Trump has ordered.

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Speaker 2: So, Jenny, I'm curious, how is the impact of these

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Speaker 2: US tariffs impacting sentiment right now in China.

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Speaker 3: It's actually kind of interesting because you know, the trade

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Speaker 3: has been there for a long time, but when you

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Speaker 3: speak to economists and sort of people on shore in China,

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Speaker 3: what they're actually talking about right now is Deep Seek.

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Speaker 3: And so this sort of surprise AI breakthrough from Deep Seek,

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Speaker 3: which was the consumer platform was unveiled the day Trump

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Speaker 3: came into office, has sort of given this massive sort

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Speaker 3: of boost to animal spirits. So it sparked I think

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Speaker 3: it was a one point three trillion rally in China stocks,

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Speaker 3: and then she is trying to sort of capitalize on

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Speaker 3: that momentum by meeting Jack mar for the first time

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Speaker 3: since the crackdown on his company back in twenty twenty,

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Speaker 3: and a whole other sort of range of sort of

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Speaker 3: tech luminaries earlier this week. So I think the sort

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Speaker 3: of the negativity from the prospect of tariffs is built in,

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Speaker 3: and people have been very prepared for that for a while,

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Speaker 3: and really they were facing a lot of sort of

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Speaker 3: pressures under Biden too, So in terms of sentiment, it

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Speaker 3: isn't this sort of gloomy, worried sentiment permeating China necessarily.

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Speaker 3: What actually is capturing the mood right now is the

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Speaker 3: AI breakthrough in this sort of momentum behind tech and

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Speaker 3: finally some hopes that the private sector might be getting

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Speaker 3: back into swing.

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Speaker 2: So I'm understanding that as a way to say that

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Speaker 2: she is capturing this moment. Two, maybe we make the

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Speaker 2: case that China can be less reliant on its export

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Speaker 2: economy and become a little bit more domestically driven on

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Speaker 2: the demand side, which is something that he has been

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Speaker 2: after for quite some time exactly.

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Speaker 3: And the meeting earlier this week, you know, he had

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Speaker 3: the bosses from Buid Chaumi, Deep Seek, you know, Jack

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Speaker 3: mal was there. It was really a display of like

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Speaker 3: these are all of our national champions which are rolling

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Speaker 3: out well beating innovations. You know, there's plenty of reason

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Speaker 3: to believe in this economy. And they have said that

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Speaker 3: bousting domestic demand is the number one priority this year,

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Speaker 3: you know, and that is the best way they can

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Speaker 3: insutate themselves from these habs that are coming by really

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Speaker 3: sort of driving up demand at home.

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Speaker 2: So next month in China will have the annual Plannary Sessions.

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Speaker 2: That's when the National People's Congress and the Chinese People's

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Speaker 2: Political Consultative Conference hold their annual meetings. This is known

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Speaker 2: as the Two Sessions. Is it likely that the relationship

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Speaker 2: between the US and China comes up for discussion during

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Speaker 2: this period, Well.

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Speaker 3: Foreign Minister Wan Yi will have his annual briefing, and

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Speaker 3: that's actually one of the only times in China that

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Speaker 3: any sort of senior official takes questions from foreign journalists. Obviously,

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Speaker 3: it's all very scripted and the questions are submitted in advance.

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Speaker 3: But for sure the trade will come up during that session,

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Speaker 3: you know. And I imagine Wan Yi, he was a

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Speaker 3: very very sort of seasoned top diplomat, he'll be very

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Speaker 3: very cautious and how he responds, but you know, it's

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Speaker 3: going to be one of the top top talking points

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Speaker 3: I imagine behind closed doors as well.

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Speaker 2: I remember when President She met with President Biden and

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Speaker 2: San Francisco a while back, and one of the things

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Speaker 2: that she aimed to do was try to increase foreign

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Speaker 2: direct investment into China, and some of the latest figures

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Speaker 2: that we have seen on inbound investment in China, I

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Speaker 2: think it's the weakest start that we have seen in

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Speaker 2: about four years. Right now, What do you think that

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Speaker 2: China can do that will allow capital if this is

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Speaker 2: even a possibility to allow capital from the US to

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Speaker 2: flow into China.

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Speaker 3: I think if they want to win back sort of

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Speaker 3: the confidence of American investors, they have to stabilize the

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Speaker 3: business environment. And you know, I think foreign companies, for

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Speaker 3: a start, have been asking for a long time for

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Speaker 3: a level playing field for their companies, so you know,

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Speaker 3: the same access to sort of procurement and bidding on

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Speaker 3: deals that state owned companies get, the same sort of preferences,

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Speaker 3: but also just stability. And that was really the big

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Speaker 3: signal from she meeting Jack maher Rady this week. Jack

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Speaker 3: mar was sort of the face, if you like, of

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Speaker 3: the regulatory crackdowns because he was the biggest target. I

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Speaker 3: mean that meeting was sort of taken by economists to

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Speaker 3: sort of signal that era of crackdowns is truly over

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Speaker 3: and there's a stable business environment here. The government is

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Speaker 3: going to give enterprises, private enterprises a free hand, take

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Speaker 3: his foot off the pedal, sort of really let enterprise

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Speaker 3: flourish and you don't have to worry about raids on

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Speaker 3: foreign consultancies or the rug being pulled under an industry

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Speaker 3: you just invested in, you know, with also the specter

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Speaker 3: of a trade war hanging over by actual ties, you know,

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Speaker 3: it is a hard job that she has to convince

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Speaker 3: American investors in particular, and American companies they're welcome. I mean,

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Speaker 3: particularly when the retaliation that China took towards Trump's initial

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Speaker 3: tariffs included an anti trust probe into Google, and that

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Speaker 3: was mostly symbolic because Google doesn't do much business in

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Speaker 3: China right now, but it was a signal to other

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Speaker 3: American companies that if this continues, then you know, their

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Speaker 3: fair game in the tit for tat responses.

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Speaker 2: Jenny, Before I let you go, I have to ask

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Speaker 2: you about President Trump's advisor elon Musk. We know that Tesla,

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Speaker 2: his electric vehicle company, has a big presence in Shanghai.

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Speaker 2: What is Musk's relationship with Trump and Musk's relationship with Beijing.

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Speaker 2: How does that kind of come together in understanding the

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Speaker 2: dynamics that may end up playing as we look to

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Speaker 2: the future now.

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Speaker 3: I think Musk is probably one of the most sort

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Speaker 3: of dubvish on China voices in Trump's ear. And it's

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Speaker 3: really notable actually that since Trump came to office, Musk

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Speaker 3: has said nothing about China. In the interview with Sean

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Speaker 3: Hannity that was aired yesterday, there was one question that

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Speaker 3: was put to Mask that was framed in a China context,

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Speaker 3: and he didn't answer. He mentioned the Taliban, I think

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Speaker 3: in response. Instead. He has huge business interests in China,

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Speaker 3: very very good ties with the Chinese government. When he

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Speaker 3: visits Beijing, they roll out the red carpet. He gets

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Speaker 3: meetings with Premier Li Chang, you know, And I think

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Speaker 3: the Chinese government see him as a very very useful

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Speaker 3: person in this administration because they have an interlocutor who

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Speaker 3: is directly into Trump's ear, who is a business person

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Speaker 3: with huge interest in China. So someone who has a

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Speaker 3: vested interest in maintaining business ties and who actually is

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Speaker 3: aligned with President Cheelead and paying on many many sort

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Speaker 3: of policy points, including their position on Taiwan. So I

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Speaker 3: think for Beijing, Mosk is a very useful person and

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Speaker 3: it'll be interesting to see how that sort of plays out.

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Speaker 2: Oh, no doubt about that, Jenny, Thank you so much.

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Speaker 2: Jenny Marsh, their team leader for Greater China ECO GOV.

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Speaker 2: Joining from our studios in Hong Kong here on the

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Speaker 2: Daybreak Asia podcast. Welcome back to the Daybreak Asia Podcast.

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Speaker 2: I'm Doug Chrisner, so Stateside. We got minutes of the

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Speaker 2: last FED meeting, and they show that officials want to

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Speaker 2: see further progress on inflation before making additional adjustments to

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Speaker 2: the target range for the FED funds rate. For a

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Speaker 2: closer look, I'm joined now by Eric Lynch. He is

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Speaker 2: managing director at Sharp Investments. Eric joins from Silicon Valley.

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Speaker 2: He's on the line from Los Gatos, California. Eric, thanks

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Speaker 2: for making time to chat with us. We know now

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Speaker 2: that the FED seems intent on holding rate steady. Do

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Speaker 2: you think that's a reasonable approach?

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Speaker 1: Yeah, I do, I do jog you know, and in fact,

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Speaker 1: if you think about it, since those minutes were recorded,

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Speaker 1: we've had another CPI print, and that print was going

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Speaker 1: in the wrong direction. We've now had four consecutive months

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Speaker 1: of increasing headline CPI core remains above three as well,

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Speaker 1: and now you have threats of tariff immigration. Fiscal spending

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Speaker 1: trajectory is still a concern, and that was referenced in

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Speaker 1: the minutes. So yeah, I think that the focus is

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Speaker 1: still on inflation risk.

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Speaker 2: One of the most interesting things that I've found in

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Speaker 2: the minutes the idea that maybe the Fed pauses or

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Speaker 2: at least slows down the runoff of the balance sheet

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Speaker 2: at least until the debt sealing drama is resolved. Now,

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Speaker 2: with that news today, we had a lift in prices

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Speaker 2: on the treasury market and in turn yields lower right

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Speaker 2: across the curve today. Not a lot, but I think

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Speaker 2: it's set the tone here and one of the things

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Speaker 2: I think that has been out there in the marketplace,

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Speaker 2: particularly with a lot of the commentary that we have

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Speaker 2: heard from Treasury Secretary Besson, that the Trump administration is

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Speaker 2: less dicerned about what the Fed does with the FED

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Speaker 2: funds rate, and the administration is a little bit more

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Speaker 2: focused on the ten year yield. So what do you

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Speaker 2: think the FED is doing here in maybe adjusting the

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Speaker 2: thinking on the unwind of the balance sheet.

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Speaker 1: You know, I think it could just be giving a

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Speaker 1: little bit of support, a little bit looser monetary policy,

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Speaker 1: just because there is such a lack of visibility surrounding policy,

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Speaker 1: whether that's in trade, whether that's in the fiscal spend

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Speaker 1: and the budget, the debt ceiling. As you referenced, you know,

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Speaker 1: there are immigration and that's impact. So there's just an

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Speaker 1: incredible amount of executive orders and news flows and it's

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Speaker 1: very hard to dimention. And so that does seem like

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Speaker 1: a prudent kind of way to kind of split the

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Speaker 1: balance between, you know, maintaining the FED funds rate where

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Speaker 1: it is, but also providing some loosening via the you know,

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Speaker 1: slowing down the runoff of the Fed's balance sheet.

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Speaker 2: So if you look at the action today, there was

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Speaker 2: weakness in home builder and construction material stocks. Toll Brothers

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Speaker 2: late Tuesday after the bell with a miss on revenue

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Speaker 2: and a very disappointing forecast, and then today we learned

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Speaker 2: that US housing starts slowed down in January. So the

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Speaker 2: builders are beginning to kind of blame maybe higher mortgage

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Speaker 2: rates as part of the problem. Where are you when

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Speaker 2: you look at the residential real estate market and perhaps

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Speaker 2: the indication that that may be giving you in terms

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Speaker 2: of putting more money to work in certain areas of

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Speaker 2: the US equity space.

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Speaker 1: Yeah, that's a great question. You know, this has been

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Speaker 1: a risk on market for a long time, Doug. You know,

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Speaker 1: multiples have expanded, you had the turn of mean stocks,

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Speaker 1: Bitcoin ran up, and so we do think it's time

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Speaker 1: to be a little bit more you know, conservative interest

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Speaker 1: rate sensitive higher for longer type plays like home building durables.

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Speaker 1: They are suffering, as you reference in a Soul Brothers

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Speaker 1: report and the Housing Stars numbers. But here's the thing

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Speaker 1: which we don't think is getting enough airtime. Q four

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Speaker 1: earning season is coming to an end soon and the

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Speaker 1: current run rate is about seventeen percent one seven year

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Speaker 1: of year earnings growth. So there are actually seven of

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Speaker 1: the eleven S and P sectors that are growing their

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Speaker 1: earnings by eight percent or more. It's being led by financials,

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Speaker 1: is being led by healthcare, is being led by communication

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Speaker 1: services and not just meta in alphabet, but things like

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Speaker 1: T Mobile and Disney and Fox News even so, this

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Speaker 1: is a broad based earnings recovery, and you know, our

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Speaker 1: opinion is you want to stick with things that have

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Speaker 1: quality earnings because of this very lack of visibility and

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Speaker 1: all this policy.

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Speaker 2: Let's talk a little bit about the AI trade. We

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Speaker 2: know that it had legs for quite some time and

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Speaker 2: really helped to power the market higher in the fourth

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Speaker 2: quarter of last year throughout much of twenty twenty four.

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Speaker 2: As a matter of fact, in Nvidia a big part

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Speaker 2: of that story. We're going to get earnings from Nvidia soon.

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Speaker 2: What are you expecting to hear from this company?

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Speaker 1: You know, I expect it to still be very strong.

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Speaker 1: You know, they've basically already kind of forecast that they've

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Speaker 1: sold out all of their Blackweld next generation AI chips

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Speaker 1: for calendar twenty five. They've consistently outperformed their guidance the

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Speaker 1: last four or five quarters by several percentage points. If

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Speaker 1: you look at the capex read throughs from Meta and

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Speaker 1: Alphabet and the like from Q four, they are increasing

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Speaker 1: capex generally by a third and twenty five versus calendar

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Speaker 1: twenty four. So I think this is going to be

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Speaker 1: a very good quarter. You know. The real question is

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Speaker 1: what happens to Nvidia in the outer years, in the

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Speaker 1: outer quarter, should I say how much inferenced computing do

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Speaker 1: we really need? What does the deep seek kind of

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Speaker 1: news mean for competition going forward to in video?

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Speaker 2: Well, you mentioned deep seek that takes us to China.

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Speaker 2: Are you interested in opportunities offshore right now?

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Speaker 1: Yeah, we certainly think that there's been a you know,

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Speaker 1: historically widespread and multiples between US stocks and non US stocks,

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Speaker 1: you know, China. Obviously some structural issues and economic issues

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Speaker 1: at play there, so we're a little bit less interested

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Speaker 1: in China, but we do like some of the Asian

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Speaker 1: countries stocks, Korea, Japan, Europe seems to have trough. Japan

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Speaker 1: is finally getting inflationary again. Economy is kind of lukewarm

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Speaker 1: as well as Europe. But things do seem to have troughed,

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Speaker 1: And so you've got earning these estimates increasing overseas off

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Speaker 1: of multiples that are about ten turns lower, you know

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Speaker 1: than the S and P five hundred eight to ten.

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Speaker 1: So that does set up for a good risk reward

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Speaker 1: and in case in point, you know, a lot of

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Speaker 1: these stock markets, I think if Germany think of France,

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Speaker 1: you know, are up much much more than the US

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Speaker 1: markets here.

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Speaker 2: Today, I'm wondering whether or not you think it's maybe

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Speaker 2: a little too risky to take a position in the

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Speaker 2: bond market. If we can agree that there is a

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Speaker 2: risk of inflation being stubborn here, the Fed seems to

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Speaker 2: be on hold for the time being. The market may

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Speaker 2: be looking at one more RT sometime in twenty twenty five,

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Speaker 2: perhaps at the latter end of the year. Are you

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Speaker 2: avoiding the bond market right now?

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Speaker 1: Yeah, we would still be playing around the short end

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Speaker 1: of the curve. You know, that's still a pretty nice yield.

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Speaker 1: There obviously is a you know, a place for a

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Speaker 1: very conservative investors' asset allocations to have some exposure to

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Speaker 1: high quality bonds more short term and nature, in our opinion,

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Speaker 1: intermediate at best. But yeah, generally speaking, we still think

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Speaker 1: because you had such concentration in the tech names in

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Speaker 1: the US megacap names the last several years, what you're

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Speaker 1: seeing in the market in the eperties year to date is,

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Speaker 1: you know, Max seven is of one percent, s and

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Speaker 1: P's up four. Value stocks are up, six, small caps up,

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Speaker 1: you know, around three or four. There's a lot of

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Speaker 1: good things that you can buy outside of the concentrated

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Speaker 1: expensive stuff in the tech space that offer better risk rewards.

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Speaker 1: In our opinion, if inflation stays sticky, interest rates are

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Speaker 1: higher for longer, probably get a better better risk reward

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Speaker 1: than you do in bonds.

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Speaker 2: Okay, we'll leave it there. Eric, always a pleasure. Eric

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Speaker 2: Lynch there. He is Managing director at Sharf Investments, joining

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Speaker 2: us from California here on the Daybreak Asia Podcast. Thanks

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Speaker 2: for listening to today's episode of the Bloomberg Daybreak Asia

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Speaker 2: Edition podcast. Each weekday, we look at the story shaping markets, finance,

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Speaker 2: and geopolitics in the Asia Pacific. You can find us

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Speaker 2: on Apple, Spotify, the Bloomberg Podcast YouTube channel, or anywhere

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Speaker 2: else you listen. Join us again tomorrow for insight on

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Speaker 2: the market moves from Hong Kong to Singapore and Australia.

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Speaker 2: I'm Doug Risner and this is Bloomberg