Speaker 1: Bloomberg Audio Studios, Podcasts, radio news. This is the Bloomberg
Speaker 1: Daybreak Asia podcast. I'm Doug Krisner. You can join Brian
Speaker 1: Curtis and myself for the stories, making news and moving
Speaker 1: markets in the APEC region. You can subscribe to the
Speaker 1: show anywhere you get your podcast and always on Bloomberg Radio,
Speaker 1: the Bloomberg Terminal, and the Bloomberg Business app.
Speaker 2: Well, we've gotten a few surprises in terms of economic
Speaker 2: data out of both the China and Japan over the
Speaker 2: past couple of months. For instance, we had to pick
Speaker 2: up in Japan's exports. We also had to pick up
Speaker 2: in Chinese exports. Joining us now for some discussion about
Speaker 2: what we're doing is Chen Wong, chief Asia Pacific Economists
Speaker 2: at the Vanguard Group with us live here on the program.
Speaker 2: So we looked at those export numbers from China and
Speaker 2: we decided that maybe we shouldn't read too much in
Speaker 2: At least Bloomberg Economics was saying that some c factors
Speaker 2: at play there, and a few a few other reasons
Speaker 2: to think that way. What about your take on the
Speaker 2: latest with the Chinese economy.
Speaker 3: Well, I think the exports actually has been did a
Speaker 3: very key growth driver for China you know, over the
Speaker 3: you know, past several months, right, you know. So one thing,
Speaker 3: I definitely think there is a you know pickup in
Speaker 3: terms of a global a global consumer demands, right you know,
Speaker 3: or capital spending. You know, this is actually reflected not
Speaker 3: just in China's export number, but also general export oriented
Speaker 3: you know, Asian economies.
Speaker 4: Right.
Speaker 3: On the other hand, I also feel like there is
Speaker 3: a push for China right to you know, export is
Speaker 3: exacts a capacity right China's industry policy made in China
Speaker 3: twenty twenty five, they made so much investment and production pickup,
Speaker 3: but domestic demand is really weak, so they have to
Speaker 3: rely more on the exports that right to, you know,
Speaker 3: to absorb those excess capacity. So I think that's where
Speaker 3: the exports is pretty strong, especially in volume terms. I
Speaker 3: think it's growing like ten to fifteen percent in volume
Speaker 3: terms about this year, even though the extra price actually
Speaker 3: is you know, deep in deflation. I don't think this
Speaker 3: is sustainable. There is no like unlimited demand for China products. Right.
Speaker 3: And also there's going to be three tensions you know
Speaker 3: down the road. US already impost tariff and then you know,
Speaker 3: Europeans joined in suits and you know, we see that
Speaker 3: Turkey is also imposing tariff on China's CV as well,
Speaker 3: So I think this is not something that's going to
Speaker 3: sustain down the road.
Speaker 1: What about the deflation story. We'll get inflation data for
Speaker 1: China in the week ahead. Factory gate inflation is expected
Speaker 1: to do slow to one and a half percent. That
Speaker 1: would be the smallest drop in prices since February twenty
Speaker 1: twenty three. But it's deflation nonetheless. Is your sense that
Speaker 1: we're beginning to find the bottom right now? Or is
Speaker 1: there risk that this deflationary trend turns into doo a
Speaker 1: deflationary trap?
Speaker 2: Right?
Speaker 3: I think it's an interesting story about China's you know,
Speaker 3: inflation with deflation story. Right. So when you look at
Speaker 3: China's growth, you know, at this moment when they have
Speaker 3: such a big investment boom, production boom, right, it immediately
Speaker 3: lived up is demand for you know, capital goods, commodity,
Speaker 3: especially industry metals. So on that front is actually inflationary, right,
Speaker 3: That's why China's commodity impults actually has been holding up
Speaker 3: in spite of the property down tern But on the
Speaker 3: other other hand, when you have so much production capacity
Speaker 3: and domestic demand is pretty weak, then you know, this
Speaker 3: kind of supply pressure is generating you know, a significant
Speaker 3: deflationary pressure as well. Right, So I think the is
Speaker 3: somewhat mixed. But you know, overall, if you look at
Speaker 3: the CPI, you know you would have say, yes, you know,
Speaker 3: the hat my CPI is probably likely to you know
Speaker 3: who were around, you know, zero positive. But if you
Speaker 3: look at the whole goods CPI, it's still likely to
Speaker 3: be in the deflation of territory.
Speaker 2: Well, in China, the policy is basically directed at the
Speaker 2: state sector.
Speaker 4: More than the consumer sector.
Speaker 2: I mean, that's been what we've been seeing, and it
Speaker 2: sort of raises a question about whether dungshall pings to
Speaker 2: get rich is glorious still holds in China because the
Speaker 2: policies don't. I mean, I think it's probably cynical to
Speaker 2: say that Chijinping doesn't want people to get rich.
Speaker 4: He wants the state owned enterprises to get rich. But
Speaker 4: you know, that's some of the things that you hear
Speaker 4: from people.
Speaker 3: Well, I think over the past several years you do
Speaker 3: see a shift right in terms of China's policy priority,
Speaker 3: right in terms of their goals. So instead of saying, oh,
Speaker 3: you know, we allow some people to get rich. First.
Speaker 3: Now you do see more emphasis on you know, like
Speaker 3: so called common prosperity, right, you know, you just want
Speaker 3: to make you know, like there's more emphasis on income equality,
Speaker 3: national security, you know, many other things. Right, So I
Speaker 3: definitely see there is a shift in terms of the
Speaker 3: policy goes, you know, instead of the growth rate itself,
Speaker 3: but also on growth quality. So I do see that's changing.
Speaker 3: And also I think on the other hand, from a
Speaker 3: technical perspective, right, when the government want to support the
Speaker 3: overall growth picture, then you know, pusting up investment is
Speaker 3: actually much faster, much more effective than you you know,
Speaker 3: trying to stimulate up the consumption when consumers are lacking
Speaker 3: the confidence when they get the money, they would rather
Speaker 3: just say rather than spend.
Speaker 1: Yeah, that's particularly true where you young people are concerned.
Speaker 1: I would imagine when you're dealing with an unemployment rate
Speaker 1: that is so high in China.
Speaker 3: Indeed, I think, you know, we see this new unemployment
Speaker 3: new use unemployment rate number, right, fifteen percent, still high.
Speaker 3: But even you know, I think we shouldn't just focus
Speaker 3: on one indicator to gauge the overall labor market condition.
Speaker 3: I think in China what is more concerning for the
Speaker 3: young generation, it's actually the declining labor force participation participation rate. Right,
Speaker 3: So when you see that they are not confident about
Speaker 3: the future, about the labor market or you know, job prospect,
Speaker 3: then they become discouraged and they stay home prepared for
Speaker 3: civil servant exam or graduate program exam. Right, So they
Speaker 3: literally just drop out from the labor market. So I
Speaker 3: mean that just show you the sentiment in the labor
Speaker 3: market is pretty weak.
Speaker 2: So miss Wong, do you think that the government should
Speaker 2: and could do more more on messaging to build up
Speaker 2: hope in the Chinese dream?
Speaker 3: Yeah, I mean, I think the key here is really
Speaker 3: when you look at the economy right and look at
Speaker 3: the labor market. I think ultimately the most important thing
Speaker 3: is still about overall economic growth. Right, So when you
Speaker 3: have a stronger economic economy, then obviously that's gonna you know,
Speaker 3: create more jobs and bring more hope and income to consumers. Right,
Speaker 3: So in that way, you can actually build a positive
Speaker 3: self fulfilling cycle. But then you know, going back to
Speaker 3: say what they can really do, Number one, I think
Speaker 3: they can really they need to be more aggressive, right
Speaker 3: in terms of the government intervention in the economy to
Speaker 3: engineer a decisive turning point. And second, I think the
Speaker 3: private sector bring the animal spirit back. Private sector is
Speaker 3: really the key.
Speaker 2: Yeah, that would be great, great to see for sure,
Speaker 2: and thank you so much for joining us Chian Wong,
Speaker 2: chief Asia specific economist at Vanguard Group with us. So
Speaker 2: a very interesting picture, and we have James Abate, Managing
Speaker 2: director and chief investment Officer at Center Asset Management to help.
Speaker 4: Us clear up the picture a little bit.
Speaker 2: James, thanks very much. So a sort of big reaction
Speaker 2: to the jobs report in the treasury market, not so
Speaker 2: much in the stock market. And I mentioned in our
Speaker 2: in our papers review just a few moments ago that
Speaker 2: Bloomberg Intelligence says rates, while important, are not actually factoring
Speaker 2: in as much as artificial intelligence is.
Speaker 4: Your thoughts on the overall environment, Well, let's.
Speaker 5: Just look at the employment report. As you mentioned, two
Speaker 5: hundred and seventy two thousand jobs were added, which was
Speaker 5: way above expectations. I think more importantly to the FED
Speaker 5: was the fact that wages were up four point one
Speaker 5: percent from a year ago, and in reaction to that,
Speaker 5: we saw the ten year yield move up to four
Speaker 5: point four percent, and in essence, what this did is,
Speaker 5: obviously the FED is meeting this week, there's no cut
Speaker 5: on the table for this month. July's cut is off
Speaker 5: the table. In terms of what the market is pricing
Speaker 5: in September is now fifty to fifty in November seems
Speaker 5: to be the only indicative cut. Obviously, the only wildcard
Speaker 5: we have is the CPI released this Wednesday. But I
Speaker 5: think you know, one of the key points that you
Speaker 5: pointed out as well was the fact that it's very
Speaker 5: difficult to reconcile the Payrolls report to the Employment Household Survey,
Speaker 5: which indicated that yes, the unemployment rate rose to four
Speaker 5: percent and the participation rate fell to sixty two point
Speaker 5: five percent. So you know, the household survey showed four
Speaker 5: hundred and eight thousand jobs lost, which is seven hundred
Speaker 5: thousand jobs difference to the Establishment survey.
Speaker 1: What does that do in terms of the way you're
Speaker 1: approaching markets right now? If you look at the bond market,
Speaker 1: I mean, clearly it's kind of a very hawkish tone
Speaker 1: in terms of the implication for FED policy. Maybe we're
Speaker 1: lucky we get two rate cuts this year, but that
Speaker 1: big spike and yield definitely sending a message but what
Speaker 1: does it do you do your strategy? How are you
Speaker 1: approaching markets?
Speaker 6: Now?
Speaker 5: Yeah, I think you know, we've got We went into
Speaker 5: the year under the assumption that the FED was not
Speaker 5: going to cut rates unless it was in reaction to
Speaker 5: some type of financial or geopolitical crises. And we stick
Speaker 5: by that, and you know, we survey, you know, all
Speaker 5: the companies that we invest in and look at. I
Speaker 5: think one of the key things for US is looking
Speaker 5: at the consumer, because the manufacturing sector remains in slight
Speaker 5: contraction or even stall speed if you want to call
Speaker 5: it that no recession, but vulnerable to some type of
Speaker 5: demand shock. And you could even argue on a positive
Speaker 5: side that the cyclical economy's bottom but not yet entered
Speaker 5: into an upturn. But more importantly, the consumer, which dominates
Speaker 5: the US economy, we're starting to see, you know, stress,
Speaker 5: and particularly when you're looking at a lot of value
Speaker 5: seeking behavior in lower and middle income consumers at this
Speaker 5: point in time. Deutsche Bank had their Global Consumer Conference
Speaker 5: this week and you know, Spice Company McCormick used the
Speaker 5: term that I'm going to continue to use, which said
Speaker 5: financial anxiety in the last couple of months has really
Speaker 5: spiked in the United States, and it's something that they're
Speaker 5: paying a lot of attention to. And that was a
Speaker 5: consistent theme that we saw with all the companies that
Speaker 5: are consumer facing.
Speaker 2: I'm curious what do they mean by financial anxiety? Is
Speaker 2: do they mean just general economic people feeling comfortable about,
Speaker 2: you know, their job and their money and that sort
Speaker 2: of thing. Where do they mean actually tied to markets
Speaker 2: and to for instance, their returns.
Speaker 5: You know, when you look at antidotal information, right you
Speaker 5: see IRA hardship withdrawal spiking higher. When you look at
Speaker 5: adjustable rate mortgages, they're resetting now because many buyers who
Speaker 5: use the justle rate mortgages and bought in twenty twenty
Speaker 5: one or on that three year maturity schedule of resetting
Speaker 5: what the rate is I think across the board what
Speaker 5: you're starting to see, whether it's particularly in the lower
Speaker 5: and middle income consumer some degree where the rise in
Speaker 5: interest rates has created like this frog boiling in a
Speaker 5: pot of water, and it's just starting now to get
Speaker 5: to a temperature with the consumers starting to feel that
Speaker 5: anxiety that we touched upon.
Speaker 1: So if you're right, I mean we're going to get
Speaker 1: the I think University of Michigan sentiment figures at the
Speaker 1: end of this week. Say you're right, James, and the
Speaker 1: FED is going to begin factoring that into its decision making.
Speaker 1: They want to see a soft lending I would imagine,
Speaker 1: is inflation at a point that is within the comfort
Speaker 1: zone where the FED could justify cutting interest rates right now,
Speaker 1: not yet.
Speaker 5: I think they could only justify a rate cut with
Speaker 5: inflation elevated above their two percent target. If you saw
Speaker 5: let's say, another regional bank issue, a real estate issue
Speaker 5: that manifested itself in the banking sector. Everything at the
Speaker 5: end of the day always makes us way into the
Speaker 5: financial services sector in terms of stress. So I think
Speaker 5: the FED can only use that justification to actually cut
Speaker 5: rates in the face of north of two percent inflation.
Speaker 2: I mentioned Bloomberg Intelligence. I got to go back to
Speaker 2: this because this is slightly different angle. They actually referred
Speaker 2: to AI as kind of driving things, but they said
Speaker 2: it's clearly now well extended and almost hinting that it
Speaker 2: was overvalued. And so a lot of people seeing what
Speaker 2: Nvidia has done, they're clearly worried about this. But you know,
Speaker 2: if you kind of refer back to nineteen ninety nine,
Speaker 2: we did get a warning from Cisco, but it still
Speaker 2: took a while and we haven't had a warning yet
Speaker 2: from Nvidia. Are you comfortable, at least if you're playing
Speaker 2: tech to carry on until you get a warning.
Speaker 5: Well, having been in one of the very few people
Speaker 5: who are still managing money today and managing money back
Speaker 5: in the nineties, not only managing US equities, but also
Speaker 5: I was head of global sector funds, including running three
Speaker 5: different technology funds at that point in time. You know,
Speaker 5: for now in Vidia has a monopoly on semiconductor chips
Speaker 5: that's needed for the computational power for AI. I think
Speaker 5: what contrasts today versus back in the late nineteen nineties
Speaker 5: is that all the presentations I recall anyway that you know,
Speaker 5: we're industrial in their nature, they stress return on investment.
Speaker 5: You looked at enterprise resource planning ERP systems like SAP Oracle.
Speaker 5: You know, all the presentations back then were justifying what
Speaker 5: the return on investment would be for companies who undertook this.
Speaker 5: I think Silicon Valley feels like it's in this fake
Speaker 5: it till you make it. You know, mantra that's still
Speaker 5: in place, and you know, one of the key things
Speaker 5: for us that when we talked about AI in our
Speaker 5: insight piece Spring and Summer, is that we wanted to
Speaker 5: really try to understand what the efficacy of these investments
Speaker 5: being made today and what are we going to start
Speaker 5: to see chief financial officers you know, exert more and
Speaker 5: more influence on budgeting in a way from you know,
Speaker 5: this field of dreams, build it and they will come
Speaker 5: kind of mindset. And that's the thing that we're really
Speaker 5: focused in on in terms of, you know, looking at
Speaker 5: AI systems that are using proprietary data versus open source
Speaker 5: and trying to understand at what point will people you know,
Speaker 5: genuinely start to look at this and say, hey, where
Speaker 5: what is the return on investment that we're getting from
Speaker 5: all this money that we're plowing out. And unfortunately for
Speaker 5: other tech companies like Salesforce and Accenture, the consulting guys,
Speaker 5: AI is hoovering up all the IT budgets for almost
Speaker 5: every company out there, and it's it's causing a lot
Speaker 5: of segmental stress within the technology sector.
Speaker 2: Yeah, for sure, I mean software in particular, are a
Speaker 2: lot of those companies are down quite significantly twenty five percent.
Speaker 4: Even so it's.
Speaker 2: It's you say, it's hoovering up a lot of business. James,
Speaker 2: thanks for joining us again. James Abote, Managing Director, Chief
Speaker 2: investment Officer, Center Asset Management. Joining us now on the
Speaker 2: program is Redmond Wong, chief China strategist at Saxo, with
Speaker 2: us to take a closer look at well China in particular.
Speaker 2: So Redmond, thank you for being with us. We know
Speaker 2: that China is relying on exports and manufacturing and sales
Speaker 2: abroad to offset some of the weak consumer spending. So
Speaker 2: far it seems to be working to a small degree.
Speaker 2: Is this the right policy in your view?
Speaker 6: Hi, fans by doctor and I think, yeah, expot seems
Speaker 6: just have been, uh you know, doing pretty all relative
Speaker 6: well with us to pick up in the domestic consumption.
Speaker 6: So yes, I thank you. This continue to be one
Speaker 6: of the we had the government we'd like to push.
Speaker 6: Of course, there's some pushback from the outside on all
Speaker 6: those allegations of access capacity and so on. But I think,
Speaker 6: but one major thing I need to pinpoin is, uh
Speaker 6: the reconfiguration of the training pattern. I mean, you have
Speaker 6: been seeing the growth example in May you see the
Speaker 6: growth export growth in China and the seventh poor and
Speaker 6: six percent year on year growth. Actually half of it
Speaker 6: is actually of growth growth is actually accounted for by
Speaker 6: the growth to export to Arzian country and in some
Speaker 6: of the Yeah, I think that's the one key things
Speaker 6: they change power of training, Parlor and and and the
Speaker 6: and and and the pattern of trade.
Speaker 4: Redmond.
Speaker 1: I think we can agree that domestic demand in China
Speaker 1: remains weak. Is there a policy prescription that the government
Speaker 1: can use to try to revitalize domestic demand? Do you
Speaker 1: think other than lowering interest rates?
Speaker 6: I think they have tried CLI many front and many policies,
Speaker 6: like for example in the octose and the EV and
Speaker 6: so on, and uh they just you know, roll out
Speaker 6: in late April under one in the training uh subsidies
Speaker 6: and so on. But and also they also encouraging a
Speaker 6: lot of those guys a household home, opliances purchased in
Speaker 6: the in the rural area and all those things. But
Speaker 6: I think the key thing for China, I think pretty
Speaker 6: much is really bringing back the confidence of the product
Speaker 6: sector and also the household expectation of the future income
Speaker 6: and the stability. So I think a lot depends on
Speaker 6: uh more stability especcively on the expectation of the regulatory
Speaker 6: frameword war than on any individual policy or or any
Speaker 6: uh so, I think I think we have I mean,
Speaker 6: I know, I mean, we cannot really hope on any
Speaker 6: one of those is a meeting. But but but it's
Speaker 6: still the July Panety section is still carrying something orton
Speaker 6: uh sec low and I think the market should pay
Speaker 6: attention to it well than just on individual policies.
Speaker 2: Redmond, if you look at artificial intelligence, it has really
Speaker 2: juiced up the US economy more so than Europe and
Speaker 2: more so than Asia. If China were looking for some
Speaker 2: sort of killer app or something to get the animal
Speaker 2: spirits going. This kind of rides on the back of
Speaker 2: Doug's question about policy. But is there something out there
Speaker 2: that might get people excited to start spending again, and
Speaker 2: if so, what would it be.
Speaker 6: I think it's once again, it's really having from the household.
Speaker 6: It's really on the outlook on employment and also on income,
Speaker 6: and so that is I think the key questions really
Speaker 6: for employment and income, what then any subsidies or and
Speaker 6: the policy just for the sake of a boosting consumption.
Speaker 6: So I think I think you know it's in China.
Speaker 6: The close you make it always had those cut traffic
Speaker 6: lights of things. I mean, it's the good thing, but
Speaker 6: there's has been the case for for for for years,
Speaker 6: and uh, when the economy doing not that well, they
Speaker 6: we elect we lack a lot of baculatory film world
Speaker 6: and give some green light even to the part sector
Speaker 6: or as you mentioned, to the technology sector and so on.
Speaker 6: So that probably can help as well.
Speaker 1: One of the criticisms UH levied against China and its
Speaker 1: current situation on the part of both the US and
Speaker 1: Europe has been this issue of overcapacity. How how serious
Speaker 1: a problem is over capacity in China and what will
Speaker 1: it take to kind of bring things into balance To
Speaker 1: the extent that the US and Europe are not outraged
Speaker 1: by what China is trying to.
Speaker 6: Do, I think really really need to look at the
Speaker 6: whole things. Is more in the context of dis cover
Speaker 6: global de risking, resawing.
Speaker 1: The soring.
Speaker 6: You know, it's it's basically is what we call is
Speaker 6: a geo economic I mataation trend that has been going
Speaker 6: on since over the last few years. So and so yeah,
Speaker 6: I mean I think China that's certainly because it's in
Speaker 6: industrial policies. I mean, it's one of the focus has
Speaker 6: been over the last few years the industrial policy there definitely,
Speaker 6: of course there might be some misallocation resources. You build
Speaker 6: up capacities in a way that may not be the uh,
Speaker 6: you know, it's what the economy wand needs, but at
Speaker 6: the same time you may also lacking something in other sectors.
Speaker 6: So I would call it's more like a misallocation resources
Speaker 6: more than really access capacity. And so but going back
Speaker 6: to your question external and one, I think this pushback
Speaker 6: would be actually will continue because that's not just in
Speaker 6: the US, but in Europe is actually elevated to not
Speaker 6: just on economic consideration, but it's actually on the national
Speaker 6: security and consideration. So that's why it's the duo economic trend.
Speaker 6: It's not just an economic trend.
Speaker 2: Well, something that would be safe on the national security
Speaker 2: front would just be domestic travel. Could domestic travel get
Speaker 2: things moving a little bit? And if so, how do
Speaker 2: we play that in the markets?
Speaker 7: Uh?
Speaker 6: I mean it's when people have more inc I mean
Speaker 6: it's a domestic trophic Defini is a positive and it's
Speaker 6: but at the same type, I think the boss fundamental
Speaker 6: is still on income and also on expectation. Uh. Then
Speaker 6: you know, just as you know, one or two order
Speaker 6: cover consumption. I mean, but back to the basic I mean,
Speaker 6: the growth uh for economy by the end of the
Speaker 6: day is the capitol accummindation and also more production and
Speaker 6: not just consumption.
Speaker 2: All right, Redmond, thanks so much for joining us here
Speaker 2: live on the program. Redmond Wong, chief China Strategistic saxone
Speaker 2: joining us now to define this complicated picture that we
Speaker 2: have mentioned is Brian Krai as president of Sharp Investment.
Speaker 4: Brian, thank you very much for joining.
Speaker 2: Is so big reaction in the treasury market to the
Speaker 2: jobs report, with yields popping in the mid teens, not
Speaker 2: so much in the equity arena stocks taking it kind
Speaker 2: of in stride.
Speaker 4: Why the difference, Yeah.
Speaker 7: I mean, I think you know, US stock investors are
Speaker 7: still really focused on AI and earnings, and his growth
Speaker 7: has come in pretty well, whereas obviously, as you said,
Speaker 7: rates have ticked up a bit, although if you look historically,
Speaker 7: you know, a ten year round four and a half percent,
Speaker 7: that's actually, you know, still historically very low compared to
Speaker 7: the average over the last fifty sixty years.
Speaker 1: You mentioned the AI trade there in Vidia will begin
Speaker 1: trading on Monday on that split adjusted basis. So when
Speaker 1: the company reported quarterly earnings, they announced that ten for
Speaker 1: one split. Are you still enthusiastic? Maybe you never were.
Speaker 1: I'm going to just go out on a limb here.
Speaker 1: Are you still enthusiastic on the AI trade in anything
Speaker 1: related to it?
Speaker 7: I mean, AI is going to be a very interesting technology,
Speaker 7: but from an investor perspective, obviously these stocks are very expensive.
Speaker 7: You mentioned Apple will have an important day on Monday
Speaker 7: for them. We're looking at Oracle coming out next week,
Speaker 7: and we think that's a cheaper way to play AI.
Speaker 7: It's roughly in line with the S and P multiple,
Speaker 7: but you're really seeing their growth accelerate as they're also
Speaker 7: taking advantage of AA growth in their services.
Speaker 2: I can tell from your notes though, that you're sort
Speaker 2: of you're sort of feeling like nineteen ninety nine ish
Speaker 2: a little bit here, and that we're kind of getting
Speaker 2: to that moment. The one thing I would I would
Speaker 2: counter that argument with is that we did get a
Speaker 2: warning a Cisco warned in December of nineteen ninety nine,
Speaker 2: and the stock continue to go up until March. We
Speaker 2: haven't had a warning from Nvidia yet. Do you think
Speaker 2: it's at least safe to wait until we get some
Speaker 2: warning from one of the big practitioners.
Speaker 7: You know, for sure, it's likely that fundamentals on the
Speaker 7: AI trade, particularly names like in Video, are going to
Speaker 7: post very strong earnings for a while. I would point out,
Speaker 7: for in Video holders that twenty four percent of the
Speaker 7: revenue are coming from two companies, one of which is Microsoft,
Speaker 7: and Microsoft and others are aggressively looking for alternatives. So
Speaker 7: it's really hard to say when you know the fever
Speaker 7: will break in terms of the AH trade. I mean
Speaker 7: your kind of implication as well, maybe investors can wait
Speaker 7: until they get a warning, and that may or may
Speaker 7: not work. But you know, if you look at sort
Speaker 7: of what we're looking at more is the average stock,
Speaker 7: and if you look at the average stock over time,
Speaker 7: and that is the average TK, the SP five hundred,
Speaker 7: typically you've gotten out performance. But last year and this
Speaker 7: year you've seen the S and P, which is a
Speaker 7: market cab weight of really outperforming the average stock. So
Speaker 7: we think there's better opportunities outside some of those big
Speaker 7: AI leaders that everyone's talking about right now.
Speaker 1: So Brian mentioned that very strong employment report and the
Speaker 1: push higher in yield across the curve in the Friday
Speaker 1: session where are you right now in terms of the
Speaker 1: FED cutting interest rates and how important is that in
Speaker 1: driving this market higher.
Speaker 7: Well, this is kind of a two part question. In
Speaker 7: terms of the Fed, we actually believe rates are going
Speaker 7: to stay higher for longer. It's going to take a
Speaker 7: little while to sort of break the fever pitch. You've
Speaker 7: gotten mixed reports, but generally speaking, things having come off
Speaker 7: as fast as the Fed would like, so we think
Speaker 7: rates will probably stay higher for longer. The reality is,
Speaker 7: if you look at rates, as I mentioned earlier, four
Speaker 7: and a half percent on the tenure is not actually
Speaker 7: very high in historical context, and so we think rates
Speaker 7: will be higher for longer. In terms of stocks, we
Speaker 7: actually think higher rates longer term will be good for value.
Speaker 7: If you look at historically when rates are above four percent,
Speaker 7: value tends to out reform growth. So we actually think
Speaker 7: that even though there's a big AI trade going on,
Speaker 7: longer term investors should be thinking about value stocks, which
Speaker 7: have been sort of left for dead the last ten years.
Speaker 2: You know, a few economists have kind of waded into
Speaker 2: sort of controversial areas by saying that high interest rate's
Speaker 2: actually good for the economy. A lot of people that
Speaker 2: never got any yield on any of their savings for
Speaker 2: such a long time, going back to two thousand and
Speaker 2: seven or so, are finally getting some and it's helping
Speaker 2: with spending. I'm curious about your take on it. I
Speaker 2: don't want to sound glib and saying deep buy that,
Speaker 2: but I mean, is there some sense in that?
Speaker 4: Yeah?
Speaker 7: No, I think there is. There's an interesting book that
Speaker 7: came out just recently called The Price of Time that
Speaker 7: goes into historical rates over the last three thousand years,
Speaker 7: and I think if you really look at the data,
Speaker 7: there is definitely some argument to be made that lower
Speaker 7: rates just in some ways sort of distort the economy,
Speaker 7: and ultimately higher rates will be good for savers, will
Speaker 7: be good for certain types of businesses. It might actually
Speaker 7: help to make sure that people are making good capital
Speaker 7: investments as opposed to just speculating when you can basically
Speaker 7: get money for free. So I would say that that's
Speaker 7: a very plausible type of argument that some economists are making.
Speaker 1: So what's the house view over at Sharf on markets offshore?
Speaker 4: Right?
Speaker 5: Now?
Speaker 1: Move away from the United States and let me know
Speaker 1: what you're thinking, particularly as it relates to Asia.
Speaker 7: Yeah, I mean offshore markets are very interesting in that
Speaker 7: they traded a much lower multiple than the US, so
Speaker 7: that you've got to valuation support there. The problem has
Speaker 7: been earning's growth, and then you've also had situations like
Speaker 7: China where the government has really turned sort of unfriendly
Speaker 7: for investors. So it's been really not a good place
Speaker 7: to be the last several years. However, we do think
Speaker 7: there's some opportunities in the rest of the world. We
Speaker 7: own a number of stocks outside of the US. One
Speaker 7: that I would note in particular is Samsung. It's the
Speaker 7: largest tech company, one of the largest tech companies in
Speaker 7: the world by revenue. That's really a stealth way to
Speaker 7: play AI because of their memory and you know, if
Speaker 7: you look at demand for AI servers is supposed to
Speaker 7: grow thirty to thirty five percent a year. That's definitely
Speaker 7: going to help samsung semi connector division. And yet it's
Speaker 7: trading just over book value around eleven twelve times earnings.
Speaker 7: So you know, if this was a US company would
Speaker 7: probably be trading it, you know, three times where it
Speaker 7: is today. So we think that's an opportunity investors big
Speaker 7: advantage of.
Speaker 2: We did have a dollar pop in addition to yields
Speaker 2: and that that's a little worrisome for some markets out here.
Speaker 4: Hong Kong almost certainly will trade lower.
Speaker 2: Today because of the exchange link. So it's important to
Speaker 2: look at the data that we got and see what's real.
Speaker 4: You had the establishment.
Speaker 2: Survey with that big number two in seventy two thousand,
Speaker 2: but the household survey has had unemployment rising up to
Speaker 2: four percent.
Speaker 4: Which one is right.
Speaker 7: Well, time will tell they're probably both somewhat right. But
Speaker 7: you know, we think that economy is still reasonably strong.
Speaker 7: But you know, from our companies that we're listening to,
Speaker 7: it seems like there is a little bit of a
Speaker 7: slowdown starting to prop late up. That doesn't mean necessarily
Speaker 7: if I'll be able to cut rates in the short
Speaker 7: term though, but you know, eventually the economy will roll
Speaker 7: over and you'll get a cut and rates. I would
Speaker 7: say probably later in the year.
Speaker 4: Yeah.
Speaker 5: Yeah.
Speaker 2: Bloomberg Economics looked at the data and came away and said,
Speaker 2: we still think the US labor market is cooling, so
Speaker 2: it is interesting. Thank you Brian for joining us. Brian Krawez,
Speaker 2: President of Sharp Investment.
Speaker 1: This has been the Bloomberg Daybreak Asia podcast, bringing you
Speaker 1: the stories making news and moving markets in the Asia Pacific.
Speaker 1: Visit the Bloomberg Podcast channel on YouTube to get more
Speaker 1: episodes of this and other shows from Bloomberg. Subscribe to
Speaker 1: the podcast on Apple, Spotify, or anywhere else you listen
Speaker 1: and always on Bloomberg Radio, the Bloomberg Terminal, and the
Speaker 1: Bloomberg Business app.