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

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Speaker 2: Welcome to the Daybreak Asia podcast. I'm Doug Krisner in Asia.

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Speaker 2: Today the spotlight is going to focus primarily on Japan, China,

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Speaker 2: and South Korea on the final trading day of the week.

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Speaker 2: That's because former Commonwealth countries will be closed for good Friday. Volume,

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Speaker 2: I think it's fair to say will likely be lighter

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Speaker 2: than usual across global markets, and that could produce some

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Speaker 2: exaggerated moves. In a moment, we'll look at the price

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Speaker 2: action here in the US with James demmert CIO at

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Speaker 2: Main Street Research. But we begin this morning in Singapore.

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Speaker 2: Joining me now is Bloomberg m Live strategist and friend

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Speaker 2: of the show, Mary Nikola. She's on the line from

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Speaker 2: the Lion City. I want to talk about Japan first,

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Speaker 2: and we can focus in a moment on trade talks

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Speaker 2: between the Trump administration and members of the Japanese delegation

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Speaker 2: that happened to be in Washington this week. Can we

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Speaker 2: talk about the latest inflation data for Japan? What are

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Speaker 2: you seeing right now?

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Speaker 1: Yeah, there's obviously price pressures that are still there. So

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Speaker 1: if you look at inflation X food and energy, you're

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Speaker 1: seeing that the numbers are around two point nine percent

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Speaker 1: for Japan, that seems quite high, especially given the route

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Speaker 1: of deflation that we've had for so many years and

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Speaker 1: now that we've seen and now we're seeing inflation pick up.

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Speaker 1: The problem is for Japan is that the tightening cycle

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Speaker 1: is likely delayed for some time, especially because of the

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Speaker 1: trade uncertainty so boj Governor Uada has repeatedly said that,

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Speaker 1: you know, there's a lot of uncertainty, and the markets

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Speaker 1: have almost completely wiped out expectations of further tightening. So

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Speaker 1: for example, probably a month ago, we were looking at

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Speaker 1: ninety basis points of hikes over the next year, and

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Speaker 1: now we're looking at sixteen. So it just shows you

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Speaker 1: the expectations that traders are seeing for the Bank of Japan.

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Speaker 1: And that's and obviously that a lot of that just

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Speaker 1: still hinges on trade policy.

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Speaker 2: Yeah, and I mentioned the fact that the Japanese trade

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Speaker 2: delegation was in Washington this week. Obviously the primary objective

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Speaker 2: is to come to some type of understanding, maybe to

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Speaker 2: strike a deal in the near term that would alleviate

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Speaker 2: a lot of the concern about economic weakness, particularly when

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Speaker 2: you look at companies that deal and steal and in

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Speaker 2: the automobile industry. Is there a sense if these tariffs

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Speaker 2: were to remain in place for a while, is there

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Speaker 2: a sense of how damaging that could be to the

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Speaker 2: overall economy.

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Speaker 3: Yeah.

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Speaker 1: I think the key thing for what we're seeing with Japan,

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Speaker 1: and that is going to remain under scrutiny is Japan

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Speaker 1: is obviously a close ally of the United States. So

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Speaker 1: how the US deals with Japan will be indicative of

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Speaker 1: how it deals with other allies, and I think that's

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Speaker 1: the key thing. So if we're looking that they're going

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Speaker 1: to remain punitive, then I think market sentiment is just

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Speaker 1: going to worsen as a result because Japan isn't getting

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Speaker 1: a good deal, And if an ally isn't, then who

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Speaker 1: exactly will which wor since the potential implications for what

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Speaker 1: is happening between China and the US. So even if

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Speaker 1: you get, let's say, for Japan, a good deal, there's

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Speaker 1: still some broader implications of a slowdown in growth just

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Speaker 1: because you have tensions between the world's two largest economies,

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Speaker 1: the US and China, And as long as that means

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Speaker 1: in place, that does have broader implications on the rest

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Speaker 1: of the world. And specifically for here in Asia where

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Speaker 1: a lot of these economies are more export oriented, so.

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Speaker 2: You would know better than I. Yesterday we learned that

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Speaker 2: as a part of the meetings that were taking place

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Speaker 2: between the Trump administration and the Japanese trade delegation, there

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Speaker 2: was no mention of the currency. What would the Trump

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Speaker 2: administration ultimately like to see Ian dollar yen? Do you think?

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Speaker 1: Yeah, they would love to see dollar yen a lot

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Speaker 1: lower from here, even though we've come a long way,

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Speaker 1: we're hovering around one forty two. And if you remember,

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Speaker 1: just a month ago, we were in one fifties or

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Speaker 1: so when we were talking about it reaching back to

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Speaker 1: one sixty. Now the market chatter is all about moving

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Speaker 1: to one thirty. And granted, there is this whole focus

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Speaker 1: on the yen moving in that direction, and it comes

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Speaker 1: part of the deal, and I think a lot of

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Speaker 1: it has to do with if you look at it

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Speaker 1: from a real effective exchange rate basis and how is

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Speaker 1: performing against its trading partners. The yen is quite undervalued

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Speaker 1: on a number of different metrics, so it does warrant

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Speaker 1: and it could allow for some appreciation. That's quite evident

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Speaker 1: with where it stands from that from the valuation perspective,

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Speaker 1: but at the same time it's very punitive. So if

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Speaker 1: you have tariffs on top of it and then you

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Speaker 1: have an appreciating currency, that's not good for the economy.

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Speaker 2: One of the stories that we were talking about here

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Speaker 2: in the States today Mary is President Trump saying that

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Speaker 2: he could force J. Powell from his position as FED chairman.

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Speaker 2: And it didn't stop there. Trump rebuked the notion that

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Speaker 2: the FED is independent. Can you give me a sense

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Speaker 2: of the reaction that you're hearing in Asia to these remarks.

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Speaker 1: I think it would definitely spook markets in the sense

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Speaker 1: of what we saw in the bond raut earlier. I

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Speaker 1: think it exacerbates it because it's always been seen as

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Speaker 1: the FED is independent from the administration. Once you start

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Speaker 1: calling the FED independence into question, that just puts greater

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Speaker 1: stress on the bond market, and bondvigitalantes are likely to

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Speaker 1: come out in full force as a result. So I

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Speaker 1: think it's quite a tricky situation to highlight some of

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Speaker 1: these things out in public, because it does spark fear

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Speaker 1: of how policy and policy credibility comes into play. And

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Speaker 1: of course we've already seen a transition away from US

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Speaker 1: assets because of policy credibility, because a lot of the

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Speaker 1: policy uncertainty is stemming from the US, and so you're

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Speaker 1: seeing the impact of of coming through on US equities,

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Speaker 1: on US bonds as a result, and that shift that

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Speaker 1: we're seeing into let's say, for example, the Euro, the

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Speaker 1: Swiss franc, and the Japanese yen as a result. So

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Speaker 1: I think that notion, especially if the Fed's credibility comes

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Speaker 1: into question, is only going to accelerate that shift away

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Speaker 1: from US assets into the likes of the Euro and

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Speaker 1: the Swiss frig.

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Speaker 2: Before I let you go, I want to just get

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Speaker 2: your thoughts on China, the degree to which this tariff

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Speaker 2: policy is going to have an adverse impact on the

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Speaker 2: economy and what the government in Beijing is prepared to

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Speaker 2: do to support the economy. Do we have any more

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Speaker 2: detail on that?

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Speaker 1: Not really, So we've had a lot of sound bites,

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Speaker 1: and the equity markets just at this point needs a

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Speaker 1: lot more than sound bites. So Q one GDP was strong,

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Speaker 1: but a lot of that you can credit to front

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Speaker 1: loading on exports ahead of the tariffs, and of course

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Speaker 1: now it's just seen as backward looking. So now the

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Speaker 1: focus is on what is happening to the Chinese economy,

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Speaker 1: especially with very punitive tariffs in place, and I think

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Speaker 1: unless we see some sort of actionable policy in terms

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Speaker 1: of whether it's physical or monetary, I think you're going

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Speaker 1: to see pressure continuing on Chinese equities. But I think

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Speaker 1: also the other thing too to focus on, and that's

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Speaker 1: been a big focus here in Asia is on the

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Speaker 1: CNY and the ongoing depreciation in the currency, and I

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Speaker 1: think you'll still see that orderly decline, nothing too drastic.

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Speaker 1: There have been some speculating of a thirty percent devaluation

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Speaker 1: that is obviously would spark greater instability, greater volatility, not

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Speaker 1: something that policymakers want, nor have they ever wanted any

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Speaker 1: sort of significant instability that would cause outflows in particular.

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Speaker 1: So I think what you'll see is a gradual decline

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Speaker 1: in the CNY to continue.

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Speaker 2: All right, Mary, good stuff, Thank you. We'll leave it there.

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Speaker 2: Enjoy the weekend. Mary Nicola there, Bloomberg Markets Live strategist

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Speaker 2: joining us from Singapore here on the Daybreak Asia podcast.

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Speaker 2: Welcome back to the Daybreak Asia Podcast. I'm Doug Chrisner.

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Speaker 2: It was a mixed day for the US equity market

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Speaker 2: before good Friday, when American markets will be closed, and

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Speaker 2: the benchmark seems to have settled into an uneasy calm

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Speaker 2: after a period of high volatility. Now some of the

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Speaker 2: market have sensed a bit of foreboding that this calm

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Speaker 2: will not last. Let's take a closer look. Joining me

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Speaker 2: now is James Demmert. He is the chief investment officer

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Speaker 2: at main Street Research. James, thank you so much for

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Speaker 2: joining us. I think it's obvious that market psychology has

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Speaker 2: been dominated by mister Trump's trade war. The big question

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Speaker 2: one at least, seems to be on the degree to

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Speaker 2: which this tariff policy has undermined confidence not only in

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Speaker 2: the our kind economy, but in risk assets as well.

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Speaker 2: What is your sense right now of where we are to.

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Speaker 4: Be with you again, Doug, and our sense is that

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Speaker 4: the market was way overdue for normal correction, which turned

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Speaker 4: into something much worse when those tariff announcement came out

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Speaker 4: much more dramatic than anyone expected, and that's why you

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Speaker 4: saw the S and P five hundred tumble to level

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Speaker 4: of five thousand, and that did spark a lot of fear.

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Speaker 4: And you know, in our view, probably the kind of

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Speaker 4: barishness that you see at market bottoms.

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Speaker 3: So since we've bounced off.

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Speaker 4: Those levels, there is definitely an uneasy feeling amongst investors.

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Speaker 4: I think a lot of people are worried that we're

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Speaker 4: going to go down to that level again, and maybe

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Speaker 4: much lower. In our view, the worst is probably behind

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Speaker 4: us relative to the tariffs anyway, in the market level,

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Speaker 4: but we might.

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Speaker 3: Retest those levels.

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Speaker 4: But you know, most importantly here, I think investors should

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Speaker 4: recognize from wherever the market gets stable, it starts to

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Speaker 4: go up again, it's probably going to be led by

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Speaker 4: a different group of stocks than what we saw last

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Speaker 4: year or the year before.

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Speaker 2: What is your sense about recession and whether or not

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Speaker 2: we're going to have an inflationary shock and maybe a

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Speaker 2: combination that leads to stagflation.

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Speaker 4: You know, stagflation is really the buzzword, and we think

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Speaker 4: that because it's so talked about, it's probably a lower risk,

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Speaker 4: and then there's always the possibility of a recession. And

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Speaker 4: our view when we really look at tariffs, I think

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Speaker 4: this is important for investors to consider. Even with the

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Speaker 4: extreme level of tariff's pre negotiating, that would shave in

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Speaker 4: our view, about three quarters or percent off a GDP

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Speaker 4: now right now, We're growing at two and a half

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Speaker 4: percent annually, so that takes us down, let's just say,

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Speaker 4: to one and a half or one percent growth, It

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Speaker 4: really doesn't take us to stall recession recession levels. So

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Speaker 4: our view is that a, yes, this will slow us

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Speaker 4: growth both, but not to recession levels. And even if

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Speaker 4: it got near there, Doug, let's say the labor market

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Speaker 4: really starts to crumble. The FED has got more than

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Speaker 4: enough ammunition to do things with the balance sheet or

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Speaker 4: cut rates, and I think they would to avoid any

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Speaker 4: sort of recession. So that's why I think investors want

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Speaker 4: to be careful here of you know, getting completely liquidated

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Speaker 4: from stocks, because the idea of recession is probably out

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Speaker 4: of the out of the out of the game as

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Speaker 4: far as we can see.

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Speaker 2: So you're talking about leadership changing, and I'm curious what

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Speaker 2: that looks like. I mean, are there areas of the

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Speaker 2: market now that you feel are more attractive, let's say,

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Speaker 2: than they were prior to this corrective phase that we

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Speaker 2: were in.

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Speaker 3: Yes, And you know, I consider it a new world order.

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Speaker 4: You know, it's you've got tariffs that are not going

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Speaker 4: to come off certain industries and sectors, and I think

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Speaker 4: those are the things that investors need to avoid, and

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Speaker 4: that where it's really acute is in the industrial stocks

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Speaker 4: such as Caterpillar that sells products all over the world,

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Speaker 4: or the autos. I'm sure those are going to be

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Speaker 4: very difficult, but if you think about it, at least

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Speaker 4: in the US. And we're also big advocates of investing

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Speaker 4: outside the US, and that's another thing that'll be different

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Speaker 4: than what we saw in the last couple of years.

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Speaker 4: But in the US, you look at companies like in

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Speaker 4: the financials, they are pretty much immune to tariffs, and

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Speaker 4: that would be anything like a JP Morgan.

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Speaker 3: Or Berkshire Hathaway.

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Speaker 4: Look at companies in the telecommunication space like T Mobile.

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Speaker 4: There's a lot of companies out there, McKesson and the

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Speaker 4: drug industry that are completely not affected by this. So

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Speaker 4: unlike some of the bad markets you and I have

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Speaker 4: gone through where it's a full blown recession, everything falls,

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Speaker 4: we think this is really a tariff related situation and

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Speaker 4: if you're selective, you can find companies that will benefit

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Speaker 4: or do fine through this, and that's kind of what

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Speaker 4: we're seeing. And then of course we think investors should

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Speaker 4: be allocated outside the US, which I'm happy to chat

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Speaker 4: about as well.

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Speaker 2: So before we go there, I'm curious to get your

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Speaker 2: sense on the period of time where the market can

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Speaker 2: tolerate a level of uncertainty as these negotiations get worked out.

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Speaker 2: What's interesting is whether or not there's a point when

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Speaker 2: the passage of time becomes problematic when no resolution has

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Speaker 2: been brought about.

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Speaker 3: I'm not sure.

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Speaker 4: And one of the things that I would would consider,

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Speaker 4: as you look at it as a market of stocks,

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Speaker 4: not a stock market. During the last you know, let's

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Speaker 4: say a few weeks, you see companies like McKesson acting gray.

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Speaker 4: You see companies like Netflix which reported obviously tonight and

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Speaker 4: had great numbers and stocks up six percent in.

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Speaker 3: The after hours.

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Speaker 4: We think that's that is a microcosm of the next

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Speaker 4: six months. If there was still uncertainty. You've got to

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Speaker 4: be not a passive investor. I don't even think an

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Speaker 4: index investor, but being maybe a stock picker.

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Speaker 3: Which is kind of our kind of market.

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Speaker 4: And there are great opportunities because a lot of these

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Speaker 4: stocks are immune, as you know, have been sold off

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Speaker 4: pretty dramatically, and that spells opportunity to step in. Yes,

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Speaker 4: it takes courage when you know the news in general

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Speaker 4: is so negative.

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Speaker 3: But if you look at some of these.

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Speaker 4: Businesses, they're pretty much immune to this and they're presenting

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Speaker 4: great opportunities.

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Speaker 2: Okay, so let's circle back now and talk a little

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Speaker 2: bit about the opportunities that you see offshore. Talk to

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Speaker 2: me about Asia first, Which markets or jurisdictions do you favor.

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Speaker 4: Well, we like develop markets because of liquidity, particularly when

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Speaker 4: you're in an uncertain world. So that draws us to Japan,

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Speaker 4: it draws us to China, and I know some people think, well, gosh, China,

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Speaker 4: Well that's right in the crosshairs. But if you look

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Speaker 4: at individual companies, particularly those that are well developed and

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Speaker 4: have liquidity, like BYD the electric vehicle operator.

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Speaker 3: You know, they don't sell.

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Speaker 4: Those those automobiles in the US, but they have significant

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Speaker 4: market share in China and in Europe, which will probably

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Speaker 4: to trade. So that's a great example there. I also

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Speaker 4: would look at great companies in Japan as another way

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Speaker 4: to find liquidity, in great brands, companies like Atachi. Now

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Speaker 4: there could be tariff issues with some of those stocks,

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Speaker 4: but many of them have fallen way further certainly discounting

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Speaker 4: whatever tariff implications there may be.

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Speaker 2: I want to get your senses to whether or not

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Speaker 2: you feel because of this trade war that's been happening,

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Speaker 2: particularly between Washington, let's call it Asia more broadly, it's

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Speaker 2: not just Beijing. I mean Tokyo was in the crosshairs

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Speaker 2: as well, and the Japanese trade delegation was just at

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Speaker 2: the White House the other day. Do you think this

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Speaker 2: kind of the way in which the Trump administration has

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Speaker 2: approached this has damaged those relationships beyond the point of

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Speaker 2: maybe a trust level that was there pre tariff.

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Speaker 4: I do, And I also think that it's created a

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Speaker 4: distrust among investors outside the US, and I think that's

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Speaker 4: something as investors in general, we want to consider what

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Speaker 4: is the excitement about investing in the US. I think

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Speaker 4: that shine has worn off, and I think that exceptionalism

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Speaker 4: that people talked about, you know, maybe a thing of

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Speaker 4: the past while this goes on.

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Speaker 2: At least, are you fully invested right now or you're

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Speaker 2: sitting on a little bit of dry powder.

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Speaker 4: We're about twenty percent under invested, and we're using that

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Speaker 4: as an opportunity to find value in the continued volatility.

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Speaker 4: I would expect though, that we'll probably be fully invested

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Speaker 4: over the next coming weeks, probably not months.

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Speaker 2: Okay, we'll leave it there, James, Thank you so much.

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Speaker 2: James Dembert there. He is the founder also the CIO

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Speaker 2: at Main Street Research. Joining us here on the Daybreak

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Speaker 2: Asia podcast. Thanks for listening to today's episode of the

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Speaker 2: Bloomberg Daybreak Asia Edition podcast. Each weekday, we look at

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Speaker 2: the story shaping markets, finance, and geopolitics in the Asia Pacific.

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Speaker 2: You can find us on Apple, Spotify, the Bloomberg Podcast

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Speaker 2: YouTube channel, or anywhere else you listen. Join us again

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Speaker 2: tomorrow for insight on the market moves from Hong Kong

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Speaker 2: to Singapore and Australia. I'm Doug Prisoner and this is

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Speaker 2: Bloomberg