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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 Prisner. It's

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Speaker 2: Singles Day in China and parts of Southeast Asia and already.

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Speaker 2: E commerce giant JD dot Com said orders are up

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Speaker 2: nearly sixty percent, and JD also reported a forty percent

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Speaker 2: increase in the number of shoppers. Meantime, in the States,

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Speaker 2: the government shutdown is on a path to end as

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Speaker 2: soon as Wednesday. This is one reason why much of

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Speaker 2: the American equity market did move higher. We got some

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Speaker 2: perspective in Asia from Si Chow, financial advisor and managing

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Speaker 2: director at UBS Private Wealth. She spoke with Bloomberg TV

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Speaker 2: host Sherry On and April Hong.

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Speaker 3: Now.

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Speaker 2: The conversation began with a question on how Asia might

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Speaker 2: be impacted by a reopening of the US government and

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Speaker 2: the potential for more FED rate cuts.

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Speaker 4: I mean, this is a very good day today. Hopefully

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Speaker 4: the government shutdown is over and uh, you know, equity

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Speaker 4: rally should continue. We feel strong about the market still

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Speaker 4: and we feel that, uh you know, a lot of

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Speaker 4: the market will continue to drive up as especially key

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Speaker 4: drivers additional the rate cuts. As uh you mentioned, the

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Speaker 4: robust corporate earnings providing fundamental support and just growing AI

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Speaker 4: spending in general. So and of course the continue robust

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Speaker 4: growth in the US uh and evaluations are are looking

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Speaker 4: good in Asia and also international, So we hope this

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Speaker 4: global AI spending will continue to push markets.

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Speaker 1: Higher and which markets will benefit the most. It seems

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Speaker 1: these days the biggest two narratives are fed rate policy

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Speaker 1: at the moment and the tech rally that we continue

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Speaker 1: to see right exactly.

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Speaker 4: I think US, of course still the makeup caps a

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Speaker 4: lot of the law tech companies, but we actually find

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Speaker 4: China very attractive at this point, specifically China's tech sector,

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Speaker 4: and that's expected to deliver high single digit returns over

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Speaker 4: the next twelve months, and a lot of that are

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Speaker 4: supported again by the AI adoption, just chip localization in China,

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Speaker 4: and just in general, the earnings growth is very strong

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Speaker 4: in Chinese equities, so that's definitely an area that investors

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Speaker 4: can look into outside of the US. European equities is

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Speaker 4: also improving earnings, reasonable valuations and again supportive by global policies.

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Speaker 4: So I would say, you know, China Europe are some

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Speaker 4: of our main sectors outside of the US.

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Speaker 5: Just on Chinese tech it's become a bit of a

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Speaker 5: crowded trade after the valley. How diversified or how should

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Speaker 5: you be positioned perhaps to hedge against some of that.

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Speaker 6: Yeah, and that's a great question.

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Speaker 4: I think, uh, really the hedging would be not just

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Speaker 4: on the tech sector, but on the general markets, because

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Speaker 4: we do feel like there's you know, still a lot

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Speaker 4: of risk with the markets, especially geopolitical risk, uh, volatility,

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Speaker 4: and also just you know and hopefully rates does go

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Speaker 4: down as they expected. So a lot of the hedging

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Speaker 4: could just be you know, one of the asset classes

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Speaker 4: that we like is gold. Gold prices can continue to

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Speaker 4: climb further and the reason pullback and gold we feel

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Speaker 4: that just a pause and this ongoing bull run. So

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Speaker 4: I think, you know, you can still maintain cash on

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Speaker 4: the sides or maintain fixed income, but it's you know,

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Speaker 4: the payout on that, especially yields are going.

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Speaker 6: To get lower.

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Speaker 4: But if you can lock in higher yields with fixed

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Speaker 4: income right now, that's uh, you know, that's that's that's

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Speaker 4: probably another asset class that's probably more stable. But gold

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Speaker 4: would be a good hedge at this point. If you're

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Speaker 4: going to look outside of the equity markets, how.

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Speaker 5: Are you viewing ems overall, given the expectations of these

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Speaker 5: fat rate cuts and the dollar having struggled to rebound so.

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Speaker 4: Far right, And that's a good point, and it's especially

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Speaker 4: you know, with the geopolitical risk and volatility. We recommend

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Speaker 4: increasing tactical exposure to emerging market equities and specifically US

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Speaker 4: as I was mentioning China and also diversity find out

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Speaker 4: of China, India, Brazil, Indonesia. These are markets with strong

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Speaker 4: natural resources as well, which also drives into our themes

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Speaker 4: of AI power resources energy efficiency. I mean, so I

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Speaker 4: think em has has not been a market that has

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Speaker 4: been a focus, and this is a really good time

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Speaker 4: to start adding tactical exposure to emerging markets.

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Speaker 1: It's been interesting the resilience that we've seen in the

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Speaker 1: emerging markets, especially when advanced economies are really dealing with

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Speaker 1: the concerns around their dead loads. You mentioned European equities

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Speaker 1: and some opportunities there. What I'm watching here in Japan

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Speaker 1: is also how jgvs are under pressure because the demand

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Speaker 1: looks pretty tepid on those fiscal concerns. What are some

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Speaker 1: of the big trends there that you're watching.

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Speaker 4: I mean, I've seen some of the bigger trends, and

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Speaker 4: this is a great point, especially for emerging markets in Japan,

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Speaker 4: as you mentioned, are just kind of benefiting from the

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Speaker 4: structure and the drivers, including policy support. How strong is

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Speaker 4: the policy support for innovation and just technological self sufficiencies.

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Speaker 4: So again we feel that these emerging market regions are

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Speaker 4: getting a lot of support and they do want to

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Speaker 4: become technological self sufficient. So the overall theme is there

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Speaker 4: to drive growth in those markets.

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Speaker 5: We saw the ADP now coming out this week, so

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Speaker 5: investors have kind of been relying on private data. What

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Speaker 5: is your sense of before we get to the December

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Speaker 5: decision from the Fed, the extent in which we will

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Speaker 5: have data that would support a rate cut.

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Speaker 4: Yeah, I mean, I think we're most concerned with just

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Speaker 4: kind of the overall economy and the health of economy,

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Speaker 4: and you know, while the data is important, but we

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Speaker 4: really feel like the the you know, FED has resumed.

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Speaker 6: The rate cutting cycle.

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Speaker 4: And it's going to be still driven by a lot

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Speaker 4: of you know, concerns and especially concerns over a stoppling

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Speaker 4: labor market. So we're not too concerned with the rate

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Speaker 4: cut and expecting probably another fifty seventy five basis points

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Speaker 4: through the first quarter of twenty twenty six.

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Speaker 2: That is, she Chow, financial advisor and managing director at

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Speaker 2: UBS Private Wealth, speaking with Bloomberg TV host Cherry On

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Speaker 2: and Avril Hon on the Asia Trade. Now, in the US,

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Speaker 2: the equity market saw some rotation out of tech and

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Speaker 2: into drug stocks as the marketwade concern over valuations. In

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Speaker 2: a moment, we'll have a conversation with Dean Smith, chief

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Speaker 2: strategist and marketing officer of Folio Beyond 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. In the US, the Dow Industrial Average

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Speaker 2: closed at a record high today thanks to a jump

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Speaker 2: in shares of Merk. The stock was up four point

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Speaker 2: eight percent, gaining for a sixth straight session, and in

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Speaker 2: that time, Merk shares are up ten percent. Drugstocks today

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Speaker 2: benefited from a rotation out of tech. For a closer

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Speaker 2: look at market action, I'm joined by Dean Smith of

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Speaker 2: Folio Beyond. The firm manages ETFs Dean as chief strategist

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Speaker 2: and marketing Officer. Folio Beyond is based in New York City. Dean,

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Speaker 2: thank you so much for making time to chat. I'd

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Speaker 2: like to begin by getting your thoughts on this rotation

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Speaker 2: and the degree to which you think high tech valuations

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Speaker 2: have become more of a concern.

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Speaker 3: I think that the AI tech rally has really run

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Speaker 3: a long way. People are starting to get concerned about valuation.

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Speaker 3: We started talking about this, you know, six months ago.

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Speaker 3: It's finally starting to sync in that trees don't grow

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Speaker 3: to the sky, and so people are.

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Speaker 6: Taking a harder look at it, and they're maybe taking

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Speaker 6: a little money off the table. I don't think that's

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Speaker 6: a bad thing to do.

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Speaker 2: What's your biggest concern when you look at some of

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Speaker 2: the hyperscalers or any other company related to the AI trade.

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Speaker 6: Oh gosh, where to start.

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Speaker 3: You know, you've got the fact that the capital expended

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Speaker 3: your plans for these companies. The hyperscalers as well as

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Speaker 3: the AI companies and the chip companies. The whole street

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Speaker 3: are really enormous numbers. And now they've started to issue

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Speaker 3: some pretty big debt tranches, so we've seen some spread

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Speaker 3: widening there. I think that people are going to take

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Speaker 3: a step back here and look at the whole specter

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Speaker 3: and maybe start to rationalize a little bit how much

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Speaker 3: they've got allocated here and so the concern is that

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Speaker 3: the eyes are bigger than the stomach, so to speak,

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Speaker 3: that the reach for growth and expansion is just not

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Speaker 3: sustainable and people might have to start thinking about scaling

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Speaker 3: back some of these ambitions.

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Speaker 2: We've seen tremendous focus on the equity side when we

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Speaker 2: look at the AI story, but increasingly a number of

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Speaker 2: companies in this space have started to use debt to

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Speaker 2: finance their projects. But there are companies that are using

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Speaker 2: debt to find a lot of the buildout in some

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Speaker 2: of this infrastructure. Is that a concern that you may share.

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Speaker 6: Yeah.

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Speaker 3: I mean I think that credit spreads are tight. I

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Speaker 3: mean they've they've been tight for quite some time. I

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Speaker 3: think there's probably time for a reevaluation there as well.

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Speaker 3: I think that as the economy starts to slow. I

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Speaker 3: don't think that we're in a recession. I mean, there

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Speaker 3: are pockets of weakness here and there. We can talk

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Speaker 3: about the labor market if you like. But I think

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Speaker 3: that a stagflationary period here. I think inflation is going

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Speaker 3: to go higher than it is right now. I think

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Speaker 3: that the FEDS two percent target is off the table,

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Speaker 3: is really three and they may be allowing it to

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Speaker 3: slip even higher. So if you've gotten that sort of environment,

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Speaker 3: slow in growth, slower labor markets embedded, and creeping higher inflation,

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Speaker 3: that's got to cause some reevaluation in both equities as

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Speaker 3: well as debt.

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Speaker 2: So give me your probability of a rate cut in

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Speaker 2: December right now? Is it pretty much a coin toss?

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Speaker 6: You know, the Fed is in a really tough spot here.

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Speaker 3: Not only do they have the competing interests of a

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Speaker 3: softening labor market. We can talk a little bit about

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Speaker 3: some of the complications there and rising inflation.

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Speaker 6: They've only got the one tool.

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Speaker 3: My belief is that inflation is the greater risk. They

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Speaker 3: should not have cut last time. They probably it's probably

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Speaker 3: a coin toss for December, but they've got a lot

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Speaker 3: of political turmoil inside the board, and I think that j.

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Speaker 3: Powell has kind of lost control of the Fed and

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Speaker 3: he's going to be fighting internal battles to keep from

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Speaker 3: continuing to cut rates twenty five bases points in December.

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Speaker 6: As I say, I don't think he should.

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Speaker 2: It's interesting because obviously the government shutdown has left us

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Speaker 2: with a lack of economic data. We did have today

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Speaker 2: from ADP research indications that the labor market is shown

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Speaker 2: going further weakness in the second half of the month

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Speaker 2: of October. I'm wondering though, whether or not, given the

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Speaker 2: dynamics of what is happening in the labor market these days,

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Speaker 2: whether the prescription is lower interest rates, that seems to

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Speaker 2: be up for debate.

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Speaker 6: I think that's a great point.

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Speaker 3: If you look at the last numbers that we got

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Speaker 3: from the government, ADP is the only thing we've had

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Speaker 3: to work with. It's always been a very noisy kind

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Speaker 3: of signal. But if you go back to the last

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Speaker 3: numbers we got out the Labor Department, you'll see that

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Speaker 3: the biggest declines came from construction and to some extent, hospitality,

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Speaker 3: tech and the government. If you look at construction and

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Speaker 3: to lesser extent hospitality, that is very heavily populated with

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Speaker 3: undocumented workers. It just is now we've had a self

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Speaker 3: deportation bodies. Some people think it's a much as maybe

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Speaker 3: a million, two even a million and a half of

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Speaker 3: undocumented workers have left the United States, and that is

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Speaker 3: what has caused a lot of the dropping construction employment.

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Speaker 3: If you look at tech, we just talked about AI.

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Speaker 3: We know what's going on there, but the biggest decline

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Speaker 3: in job growth is actually coming from the government sector.

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Speaker 6: That's federal, state, and local.

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Speaker 3: At all levels, government hiring has slowed dramatically.

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Speaker 6: None of those three.

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Speaker 3: Sectors construction tech where government are going to be helped

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Speaker 3: by a twenty five or fifty basis point rate cut

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Speaker 3: in the Fed fund So the problems in the labor

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Speaker 3: market are more structural and not so much cyclical, not

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Speaker 3: amenable to changes in the Fed funds rate, which is

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Speaker 3: again why I say I really think they should need

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Speaker 3: to keep their eye on inflation rather than employment at

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Speaker 3: this point.

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Speaker 2: So the bond market was closed for Veterans Day on

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Speaker 2: Tuesday in the US. We have trading underway now the

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Speaker 2: Tokyo session, and yields are down across the curve. Given

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Speaker 2: what we were talking about a moment ago, and you

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Speaker 2: identifying the risk of stagflation as being a possibility, I'm

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Speaker 2: wondering whether or not you're just if you have to

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Speaker 2: be invested in the bond market right now that it's

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Speaker 2: all about shorter term duration.

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Speaker 3: Yeah, I mean, I think that buying duration here doesn't

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Speaker 3: make a lot of sense. We've been telling our investors

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Speaker 3: this for quite some time. If you look at when

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Speaker 3: the Fed stop raising rates. Go back to twenty twenty three,

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Speaker 3: we've had four rallies in the bond market, looking at

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Speaker 3: ten years and thirty years the longer.

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Speaker 6: End of the bond market.

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Speaker 3: Each of the rallies that we've had has been smaller

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Speaker 3: and shorter in duration than the one before it, So

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Speaker 3: there's less and less conviction about rates going lower. Inflation

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Speaker 3: is very sticky. It's well above the Fed's target. The

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Speaker 3: trend for interest rates, especially at the longer end of

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Speaker 3: the curve, is still the higher.

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Speaker 6: Not lower.

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Speaker 2: So the Bank of Japan has a rate decision in

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Speaker 2: the coming week, and these current dynamics are very interesting. Inflation,

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Speaker 2: as we know, has been above the boj's target for

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Speaker 2: over three years. The new Prime Minister would like to

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Speaker 2: see a lot more in the way of fiscal stimulus

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Speaker 2: given expectations of economic contraction. And now it seems the

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Speaker 2: level of public debt has become more of a concern

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Speaker 2: now we know in Japan public debt levels are more

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Speaker 2: than twice the size of the economy. I'm curious, Dean,

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Speaker 2: where you find yourself when you look at the level

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Speaker 2: of debt to GDP in the US.

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Speaker 3: Oh, I'm very concerned about the level of debt to

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Speaker 3: GDP in the United States. I think that the so

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Speaker 3: called one Big Beautiful Bill that was passed earlier this

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Speaker 3: year is going to dramatically increase the deficits and debt

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Speaker 3: over time. I'm concerned about the Fed's balance sheet, that

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Speaker 3: they had been on track to reduce their holdings of

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Speaker 3: treasury debt. They've decided that they're going to stop doing

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Speaker 3: that right now. You've got the issue with the tariffs.

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Speaker 3: There's a whole lot of underlying uncertainty and risk related

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Speaker 3: to how big the federal government's balance sheet should be.

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Speaker 3: And frankly, it's way too big and getting bigger. This

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Speaker 3: is a problem that's not going to be solved in

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Speaker 3: the next quarters or even years. This has been growing

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Speaker 3: for decades and it's going to take decades to fix it.

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Speaker 2: Indeed, before I let you go, when it comes to

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Speaker 2: corporate bonds, where are you finding opportunity? Is high yield

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Speaker 2: anything that you're playing with right now? Or are you

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Speaker 2: looking strictly at ig.

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Speaker 3: We've actually seen some value in some of the shorter

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Speaker 3: term and floating rate field debt. We think there's some

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Speaker 3: value there. We have been exposed to some of the routs.

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Speaker 3: We think that there's some interesting trades in that space. Corporates,

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Speaker 3: as I said before, have been very very tight. I

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Speaker 3: think that's a tougher market to navigate. But I think

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Speaker 3: that if we do have some sort of a stagflationary

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Speaker 3: period over the next several quarters or into twenty twenty six,

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Speaker 3: I think it's going to be pretty treacherous in investment grades.

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Speaker 3: I think you're going to see some real stress in

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Speaker 3: those markets.

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Speaker 2: What about the muni market right now?

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Speaker 3: The muni market, I mean, I feel like the states

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Speaker 3: and local governments for the most part are in reasonably

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Speaker 3: good shape. Now let's carry out that by saying we

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Speaker 3: just had a crazy election in New York. New York

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Speaker 3: is a massive issuer of municipal debt. We've found out,

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Speaker 3: if you didn't know already, that the free bus ideas

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Speaker 3: going out the window because they've already pledged those cash

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Speaker 3: flows to some revenue bonds. So again, municipals, I think

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Speaker 3: you've got to be really careful about picking your names.

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Speaker 6: I'd probably avoid New York right now if it was

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Speaker 6: up to me.

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Speaker 2: Dean will leave it. There are always a pleasure, Thanks

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Speaker 2: so very much, Dean Smith. There of Folio Beyond. The

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Speaker 2: firm manages several ETFs. Folio Beyond is based here in

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Speaker 2: New York City. Dean Smith with us 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 Single Poor and Australia. I'm Doug Prisoner and this

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Speaker 2: is Bloomberg