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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 Chrisner. Investors

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Speaker 2: Sentiment across the Asia Pacific seems a little mixed, Equities

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Speaker 2: are confined, and cryptocurrencies do remain volatile. All of this

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Speaker 2: as markets look to this month's rate decisions from both

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Speaker 2: the Fed and the Bank of Japan. Today's outperformer once

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Speaker 2: again is the South Korean equity market. Earlier today we

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Speaker 2: had the Bank of Korea reporting a revised GDP growth

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Speaker 2: number of one point three percent. That's quarter on quarter,

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Speaker 2: making for the fastest pace of growth in nearly four years.

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Speaker 2: And that's where we start our conversation with Frederick Newman.

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Speaker 2: He is the Chief Asia Economist at HSBC. He's also

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Speaker 2: co head of Global Research for Asia. Fred spoke with

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Speaker 2: Bloomberg TV host Paul Allen and Avril Hong.

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Speaker 3: So, when it comes to growth and the inflation dynamic mix, Deeale,

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Speaker 3: which do you think we should be more worried about

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Speaker 3: in Asia?

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Speaker 4: Well, you know, if you look at the headline GDP numbers,

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Speaker 4: they were very strong in the last quarter, beating to

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Speaker 4: the upside in most Asian economies. But but the foundation

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Speaker 4: is more fragile than in the Peers because exports on

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Speaker 4: the AI hardware area they're doing very well. We're seeing

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Speaker 4: certainly rising equity markets. Maybe top end consumption is doing okay,

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Speaker 4: but broader consumer spending just isn't firing up, and we're

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Speaker 4: seeing some signs of sluggish investment coming through as well.

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Speaker 4: So despite the very encouraging headline growth picture, it doesn't

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Speaker 4: look like these economies are going to generate any inflation,

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Speaker 4: and so if there's any kind of crack in the

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Speaker 4: export picture, then central banks will need to cut interest

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Speaker 4: rates across much of the region, at least emerging Asia. Japan,

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Speaker 4: of course, isn't exciting option. Maybe Australia is an exception

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Speaker 4: as well. But broadly, inflation will likely surprise to the

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Speaker 4: downside over the coming year.

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Speaker 3: Do Asia central bangs have that space to cut and

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Speaker 3: how important does that mean we need to see that

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Speaker 3: coming from the Fed in the first half of next year.

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Speaker 4: Well, there's an interesting divergence here because the US is

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Speaker 4: probably sitting on more sticky inflation pressures than much of

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Speaker 4: Asia is.

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Speaker 5: If you look at core.

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Speaker 4: Inflation across much of the region, think India for example,

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Speaker 4: Think Indonesia economy has really seen very low corn inflation.

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Speaker 4: China is of course toying with deflationary pressures, and that

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Speaker 4: all that suggests that actually the inflation set up in

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Speaker 4: Asia is.

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Speaker 5: Different from the US.

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Speaker 4: Now, what might happen is that the US Federal Reserve

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Speaker 4: is not going to cut rates at all next year,

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Speaker 4: but Asia will.

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Speaker 5: Continue to have to cut rates.

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Speaker 4: So we see this divergence here potentially in monetary policy

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Speaker 4: trajectories and es.

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Speaker 5: This rarely happens, but.

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Speaker 4: It will of course have implications for EFX markets, and

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Speaker 4: it will just signify how the US is well exceptional.

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Speaker 6: On the topic of China, you know you mentioned deflation,

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Speaker 6: we also had those very weak pmis over the weekend

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Speaker 6: as well. But today we've got Finance chief Land Phone

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Speaker 6: calling for policies to boost consumption, speed, innovation as well.

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Speaker 6: Do you anticipate we might see some stimulus in China

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Speaker 6: in twenty twenty six?

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Speaker 4: We almost certainly will have to see some stimulus because

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Speaker 4: the trajectory in the last few months has been towards

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Speaker 4: weaker and weaker growth, and if you just extrapulate that

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Speaker 4: into twenty twenty six, there would have a challenge meeting

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Speaker 4: growth targets around four and a half five percent. Of course,

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Speaker 4: we don't know the growth target yet, but it would

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Speaker 4: certainly mean the economy undershoots is broad trend, and therefore

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Speaker 4: it's almost baked in that we.

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Speaker 5: Get some stimulus.

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Speaker 4: The question is how large are these packages going to be,

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Speaker 4: And probably we going to be in a period where

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Speaker 4: we just have incremental marginal stimulus just to provide enough

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Speaker 4: to put a floor onder growth, but nothing that kind

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Speaker 4: of generates a growth impulse and inflation impulse for China,

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Speaker 4: let alone for the rest of the world.

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Speaker 6: Well, there's a risk that China perhaps exports deflation, as

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Speaker 6: you say, but some of the other big economies in

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Speaker 6: Asia are also spending big. You know, we're expecting a

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Speaker 6: big fiscal package shout of Japan. South Korea has just

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Speaker 6: announced a very chunky budget with a focus on AI

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Speaker 6: and other critical industries as well. Do you see this

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Speaker 6: potentially becoming a trend.

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Speaker 5: It is a bit of a trend.

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Speaker 4: In fact, not just in Northeast Asia, but even in

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Speaker 4: Southeast Asia.

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Speaker 7: You're seeing a.

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Speaker 4: Bit of a tail towards potentially more populist fiscal policy

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Speaker 4: in the sense that it is aimed at consumers, is

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Speaker 4: less aimed at infrastruction, for example. So there's a bit

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Speaker 4: of a fiscal expansion creeping in even in Southeast Asia,

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Speaker 4: and that is of course aimed at reducing the cost

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Speaker 4: of living burden for average consumers. It's designed to revive consumption,

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Speaker 4: which has generally been quite sluggage. Question is are these

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Speaker 4: packages big enough to obviate the need for central banks

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Speaker 4: to cut rates outside of Japan?

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Speaker 5: Probably not.

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Speaker 4: Yes, there are is fiscal easing, but in terms of magnitude,

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Speaker 4: it's not gonna let central banks off the hook not

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Speaker 4: to cut interest rates.

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Speaker 3: Fred to your point about the inflation picture, maybe surprising

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Speaker 3: to the downside next year. To what extent might that

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Speaker 3: be offset by some of the import inflation we might see,

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Speaker 3: Given how currencies, even with the dollar soft, some of

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Speaker 3: them still look pretty vulnerable and weak.

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Speaker 4: You're right, we have seen very weak currencies in some

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Speaker 4: Asian markets. India comes to mind here, Carea's currency of

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Speaker 4: course being somewhat weak as well. Now that means that

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Speaker 4: there is some degree of import inflation. But the broader

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Speaker 4: pictures because oil prices globally are down, because food price

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Speaker 4: pressures are easing, and because there's just very little local

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Speaker 4: demand to tighten labor markets. We're not going to have

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Speaker 4: a major impact from that currency depreciation, and so center

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Speaker 4: banks who are traditionally worried about effects depreciation might at

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Speaker 4: some point conclude, Look, maybe the currency depreciation is just

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Speaker 4: baked in. We have to focus on the price trends,

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Speaker 4: and the price trends are kind of undershooting what we

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Speaker 4: want long term from our inflation target, and that would

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Speaker 4: kind of raise then the pressure to start to ease

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Speaker 4: monetary policy. Again, markets are not necessarily pricing this in

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Speaker 4: at the moment, but we feel that the growth rist

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Speaker 4: and inflation risks such that there's certainly room for most

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Speaker 4: central banks in Asia continue to cut rates into twenty

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Speaker 4: twenty six.

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Speaker 3: What about the uneven rate of growth within economies that

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Speaker 3: are AI heavy? Is there anything that policy makers can

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Speaker 3: do to perhaps even out of the growth a little.

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Speaker 4: I think you're right, and that's a sort of key phenomenon.

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Speaker 4: It's sort of we're seeing a K shaped recovery in

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Speaker 4: some of these markets. Think of Taiwan's economy eight percent growth,

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Speaker 4: eight point two percent growth last quarter, but if you

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Speaker 4: look at consumer spending not very strong, and of course

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Speaker 4: that's because as you say most of the growth is

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Speaker 4: driven by Ai hardware, exports of chips, et cetera, but

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Speaker 4: it's not really trickling through to the broader economy. Labor

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Speaker 4: markets are relatively soft. We're seeing consumer spending being sluggish

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Speaker 4: as well.

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Speaker 5: What can governments do.

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Speaker 4: It's partly dial up fiscal stimulus, and we're seeing a

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Speaker 4: tilt and fiscal stimulus towards consumer support. Of course China

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Speaker 4: has led this, but in Taiwan, for example, we're also

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Speaker 4: seeing that with the hand out of vouchers for households,

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Speaker 4: for example, spending vouchers, and we might see more of

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Speaker 4: that across the region.

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Speaker 5: Just to try to even out a little bit the growth.

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Speaker 4: Drivers, because the K shaped recovery ultimately implies very imbalanced

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Speaker 4: growth and that's not healthy in the long term.

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Speaker 2: That was Frederic Newman of HSBC, speaking earlier with Bloomberg

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Speaker 2: TV host Paul Allen and Avril Honn 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. Stateside, we had a cautious rebound in

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Speaker 2: US equities. A portion of today's risk taking seemed to

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Speaker 2: be tied to a rebound in cryptocurrencies, we had Bitcoin

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Speaker 2: recovering most of Monday's decline, rising by more than five

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Speaker 2: percent to just under ninety two thousand dollars in New

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Speaker 2: York trading.

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Speaker 5: Now.

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Speaker 2: Analysts we're saying the rebound offered a brief respite in

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Speaker 2: a month's long route, but sentiment, they say, is still fragile.

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Speaker 2: On the equity side, we had the S and P

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Speaker 2: rising for the sixth time in seven trading days. Markets

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Speaker 2: are still awaiting the last few economic reports before next

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Speaker 2: week's FED decision. We'll get that PCEE data on Friday. This,

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Speaker 2: as you know, is the Fed's preferred measure of inflation.

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Speaker 2: For a closer look at market action, I'm joined by

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Speaker 2: Chris Zacharelli. He is the chief investment officer at north

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Speaker 2: Light Asset Management. Chris is on the line from Charlotte,

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Speaker 2: North Carolina. Thank you for making time to chat. Can

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Speaker 2: we begin with the inflation story. I'd like to get

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Speaker 2: your view.

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Speaker 7: What is it?

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Speaker 8: Yeah, I think those concerns are warranted, you know, clearly

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Speaker 8: with what we've seen with services inflation and to some

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Speaker 8: extent goods now with tariff for twenty twenty five, inflation

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Speaker 8: has been coming down from the highs obviously from a

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Speaker 8: couple of years ago, but has really started to kind

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Speaker 8: of stick along at that level, right in the high twos,

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Speaker 8: depending on how.

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Speaker 7: You're looking at, whether it's the PD or looking at

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Speaker 7: the CPI.

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Speaker 8: But you know, clearly it doesn't seem like inflation is

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Speaker 8: going to get down to the two point zero percent

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Speaker 8: target anytime soon.

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Speaker 7: However, you know, maybe just being in.

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Speaker 8: The twos is good enough for some of the committee,

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Speaker 8: I think next week, even if they cut rates, which

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Speaker 8: looks increasingly likely based on the interest rate probabilities, I'm

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Speaker 8: sure there's a possibility of dissent and possibily a couple

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Speaker 8: of descent for that reason alone. You know, as the

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Speaker 8: committee ways unemployment versus price stability.

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Speaker 7: Clearly the Committee.

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Speaker 8: Has been weighing a little bit more unemployment and keeping

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Speaker 8: the labor market as their highest priority. But clearly there's

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Speaker 8: a lot of Fed governors were uncomfortable with where the

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Speaker 8: inflation picture is and where may be going.

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Speaker 2: So the two year yield was done about two basis points.

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Speaker 2: Today right now we're around three point fifty. A lot

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Speaker 2: of that is a reflection of the bet for a

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Speaker 2: Dubvish FED in the new year. We're also going to

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Speaker 2: have after the first of the year the name of

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Speaker 2: President Trump's choice for FED share when JAYE. Powell's term

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Speaker 2: expires in May. Are we going to see a much

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Speaker 2: more dubvish FED? Do you think going forward?

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Speaker 8: Well, clearly, whoever Trump does pick for the FED share

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Speaker 8: will be significantly more duvish than Powell. And Powell has

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Speaker 8: been cutting interest rates, so you can't say he's been

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Speaker 8: in the inflation camp. So yes, I think we're going

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Speaker 8: to see the FED have a tone that continues to

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Speaker 8: emphasize inflation, empathize unemployment over inflation. So you know, at

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Speaker 8: the top of the FED, in terms of the President,

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Speaker 8: it's going to be dubvish, But obviously it's the entire committee,

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Speaker 8: and we'll see how the committee acts next week in

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Speaker 8: terms of whether or not we get a so called

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Speaker 8: hawkish cut with a twenty five base points reduction in

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Speaker 8: rates and then a number of descents, and then we'll

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Speaker 8: have to see next year how well the new FED

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Speaker 8: chair is able to corral the rest of the members.

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Speaker 8: Because it is a committee, it's not completely decided by

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Speaker 8: the share.

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Speaker 2: Of course, one of the things that we do know

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Speaker 2: is that the optimism around lower interest rates is underpinning

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Speaker 2: the equity market. Do you expect that to be the

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Speaker 2: story going forward, particularly as we look into the early

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Speaker 2: part of twenty.

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Speaker 8: Six It does appear that way, and I think it's

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Speaker 8: really important to distinguish between, you know, whether the FED

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Speaker 8: is cutting rates or raising rates, so to the extent

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Speaker 8: that it's really a choice between keeping rates constant and

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Speaker 8: cutting rates. Of course, all things being equal, the equity

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Speaker 8: markets and you know, the short term fix income markets

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Speaker 8: are going to appreciate lower rates. But as long as

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Speaker 8: the equity investors are able to see continued earnings growth

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Speaker 8: the resilient consumer, even if interest rates stay the same

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Speaker 8: and there's no risk of the FED raising rates to

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Speaker 8: fight inflation, I.

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Speaker 7: Think it's still positive backdrop for equities.

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Speaker 8: So I wouldn't be surprised to see someone's momentum continue

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Speaker 8: into the new year.

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Speaker 2: So I think it's fair to say that some of

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Speaker 2: the risk taking that we saw in the equity market

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Speaker 2: today seem to be hied to a rebound in crypto.

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Speaker 2: When you look at Bitcoin as one example of the

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Speaker 2: crypto space, what do you learn from its price action

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Speaker 2: and how does that help guide your choices? When you're

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Speaker 2: putting new money to work, let's say, or making adjustments

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Speaker 2: in your equity trading.

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Speaker 5: You know.

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Speaker 8: So for us, when we look at the price at bitcoin,

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Speaker 8: let's say, or other or just the crypto market in general,

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Speaker 8: it is really a risk barometer to us. I know,

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Speaker 8: for a long time people were saying it's a digital gold,

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Speaker 8: it's a it's a way.

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Speaker 7: To diverse by against inflation.

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Speaker 8: And we've seen that in some gate that that's been true,

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Speaker 8: but largely for this year, if you look at the

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Speaker 8: price of gold versus the price of bitcoin, it seems that,

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Speaker 8: you know, it's not really a digital gold in a

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Speaker 8: literal sense. It doesn't really mirror the inflation fighting prospects

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Speaker 8: of gold.

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Speaker 7: It really is a risk barometer.

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Speaker 8: So, you know, we look at the price of bitcoin

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Speaker 8: or cryptocurrencies in general, you know, similar to how you

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Speaker 8: look at the vics. Maybe maybe it's the inverse of that,

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Speaker 8: but the idea is you're really looking at you know,

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Speaker 8: are we in a risk taking market or are we

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Speaker 8: in in a market where people are getting more fearful.

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Speaker 7: So to some.

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Speaker 8: Extent you can really look at you know, crypto is

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Speaker 8: a real time barometer for risk taking in general.

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Speaker 7: Generally speaking, you know, we're.

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Speaker 8: Making a lot of our investment decisions on a strategic

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Speaker 8: basis and doing an asset allocation framework. But absolutely if

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Speaker 8: you're looking at you know, how to put money to work,

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Speaker 8: you know, taking the consideration some technical analysis and other

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Speaker 8: factors within the market, RSI, et cetera.

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Speaker 7: It's it's one more factor to look at, and it.

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Speaker 8: Is helpful from a short term timing point of view

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Speaker 8: to see where markets are.

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Speaker 7: From a risk taking point of view.

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Speaker 2: So we're about three years now into the story around

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Speaker 2: artificial intelligence. It seems as though the sky is the

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Speaker 2: limit right now. Where are you right now in understanding

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Speaker 2: the AI trade and its durability?

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Speaker 8: So the trade is something that you know, clearly a

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Speaker 8: lot of people have been talking about all year in

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Speaker 8: terms of whether or not we're in a bubble and

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Speaker 8: you know, how our valuations are they too stretched? And

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Speaker 8: you know, clearly in November we saw a lot of

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Speaker 8: those fears, you know, materialize in terms of people a

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Speaker 8: little bit concerned about some of the more speculative aspects.

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Speaker 8: We think the underlying trend.

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Speaker 7: Is still there. We obviously see you.

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Speaker 8: Know, Nvidia, Microsoft, Amazon, Google, especially lately the Alphabet's company

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Speaker 8: continuing to have momentum in the stock market, and we

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Speaker 8: think that momentum in stock rices is underpinned by fundamentals.

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Speaker 8: There's clearly a lot of artificial intelligence spending and so

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Speaker 8: for that theme to play out, you know, we've moved

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Speaker 8: from chips to applications. You know, clearly open AI and

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Speaker 8: chat KPT are the are the poster child for you know,

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Speaker 8: the first round of AI. But we think an AI

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Speaker 8: spread throughout the economy makes its way into other sectors

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Speaker 8: and other industries, that's where you're likely to see the

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Speaker 8: best brisk.

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Speaker 7: Reward opportunity going forward.

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Speaker 8: I do think there's a lot of specultive plays around

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Speaker 8: the edges, and we saw a lot of the air

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Speaker 8: get let out of that bubble in the previous month.

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Speaker 8: But you've seen the MAG seven you know, slow down,

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Speaker 8: but really not stumble and if anything, you've seen that

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Speaker 8: really pick up the charge and go forward. So we

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Speaker 8: do think that MAG seven, that large tech trade will continue,

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Speaker 8: and we think it's too soon to file on the

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Speaker 8: deck now for artificial intelligence at this point.

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Speaker 2: Okay, but that said, if you are seeing amazing gains

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Speaker 2: in some of the MAGS seven names would you be

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Speaker 2: inclined to reduce a little bit of risk right now,

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Speaker 2: lock in some of those gains and maybe redeploy and

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Speaker 2: look at some of the other four ninety three.

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Speaker 8: Yes, I do think that makes sense, and I think

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Speaker 8: part of it is just good risk management, you know,

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Speaker 8: as those that portrait of your portfolio grows to a

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Speaker 8: larger and larger weight just through its own socc returns,

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Speaker 8: it does make sense to trim. Again, we've never advocated

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Speaker 8: for overweighting the Mac seven, and likewise we wouldn't advocate

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Speaker 8: for draftically cutting your exposure to the Max seven. There's

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Speaker 8: a reason why there's so much interest in those companies,

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Speaker 8: and as I mentioned, you know, unlike the nineteen nineties

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Speaker 8: where a lot of the expecuative stock didn't have earnings

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Speaker 8: or even revenues in some cases, you know clearly the

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Speaker 8: MAG seven has fantastic revenue growth and very good earnings

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Speaker 8: growth as well. So it makes sense to continue to

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Speaker 8: be invested in most of those names, if not all

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Speaker 8: of those names. But we are trimming a little bit

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Speaker 8: at the edges, just more pure risk management point of view.

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Speaker 2: So you mentioned that valuations may be a little bit stretched.

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Speaker 7: I do hope.

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Speaker 2: I'm not putting words into your mouth, but I'm wondering

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Speaker 2: whether or not this is also a time if you're

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Speaker 2: looking to diversify, to examine what's happening in markets offshore,

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Speaker 2: maybe in Asia or Europe or Latin America.

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Speaker 7: Yeah.

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Speaker 8: Absolutely, you know, again to go back to the valuation point,

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Speaker 8: you know, clearly it's much more expensive than it has

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Speaker 8: been over the twenty year average. You know, if you're

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Speaker 8: looking at twenty two point nine times earnings, you know,

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Speaker 8: versus you know, a more typical sixteen to seventeen over

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Speaker 8: a longer timeframe, or even even high teens, low twenties

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Speaker 8: over let's say the more recent five six years.

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Speaker 7: It's still a little bit high.

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Speaker 8: Nothing like what we saw in the late nineties in

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Speaker 8: terms of the overall market. But generally speaking, you know,

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Speaker 8: you are seeing pretty rich valuations, fair to maybe slightly

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Speaker 8: overvalued for some of these really good quality companies, and

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Speaker 8: potentially overvalued for some of those other companies which are

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Speaker 8: more speculative.

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Speaker 7: So, yes, we do think it makes sense to diversify.

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Speaker 8: We've always been a believer in spreading out beyond just

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Speaker 8: the S and P five hundred, both in the US,

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Speaker 8: within midcaps and small caps, and we do think internationally

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Speaker 8: there's still opportunity. Clearly, developed markets have done very well

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Speaker 8: this year, and even emerging markets have done have also

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Speaker 8: done well, and we do think that will continue, and

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Speaker 8: we think it makes sense not only to have that

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Speaker 8: diversification in place all year long, but as you head

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Speaker 8: into twenty twenty six, I don't think you've missed it

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Speaker 8: in terms of continuing to diversify a little bit away

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Speaker 8: from the US and just broadening out that portfolio more globally.

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Speaker 2: Chris, before I let you go, as you look to

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Speaker 2: those markets offshore, are there themes that you could identify?

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Speaker 2: Is it still kind of a tech play right now

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Speaker 2: when we're talking about AI, particularly markets in Asia.

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Speaker 8: So yes, Looking over in Asia, I would say it's

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Speaker 8: a little bit more tech focus. Looking in Europe, I

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Speaker 8: think there's still opportunities within industrials, within financials. You know

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Speaker 8: clearly that change from a lot of the European governments

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Speaker 8: to focus a little bit more on funding their own

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Speaker 8: defense and starting to invest in defense.

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Speaker 7: We think defense companies have done pretty well.

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Speaker 8: This year, they can continue to do well into next year,

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Speaker 8: and likewise, we think the entire European complex.

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Speaker 7: It's had a one year recovery.

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Speaker 8: You know, twenty twenty five, versus lagging the United States

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Speaker 8: for many, many years.

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Speaker 7: We think that can continue.

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Speaker 8: Into twenty twenty six, where you'll continue to see European

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Speaker 8: markets and Asian markets key pace or potentially out outpace

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Speaker 8: the S and B five.

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Speaker 7: Hundred next year.

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Speaker 2: Okay, Chris, well leave it there, Thank you so much.

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Speaker 2: Chris Zacharelli is the Chief investment Officer at north Light

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Speaker 2: Asset Management, joining from Charlotte, North Carolina here on the

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Speaker 2: Daybreak Asia Podcast. Thanks for listening to today's episode of

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

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