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Speaker 1: Bloomberg Audio Studios, podcasts, radio news.

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

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Speaker 2: trading in the Asia Pacific is being influenced today by

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Speaker 2: some after the bell earnings in the US, Alphabet among them,

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Speaker 2: reporting second quarter cloud revenue above expectations. However, at the

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Speaker 2: same time, Alphabet raised its estimate on cap X by

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Speaker 2: roughly fifteen billion to as much as two hundred and

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Speaker 2: five billion for the year. For a closer look, let's

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Speaker 2: bring in Shai Balor. Shai is chief market strategist at

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Speaker 2: Futuream Group. Shai is for the moment, based in Seattle.

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Speaker 2: Thank you for making time. Let's talk about the Alphabet

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Speaker 2: because I think that what we're going to get here

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Speaker 2: in terms of reaction in the APEC, particularly among some

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Speaker 2: of the hardware producers, is going to be driven by

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Speaker 2: this upward revision in CAPEX for Alphabet. Wouldn't you agree

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Speaker 2: with that?

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Speaker 3: Yeah, I think the semis are probably the biggest winners.

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Speaker 3: I've had to pick a group after this earnings afternoon,

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Speaker 3: because it wasn't just Google. I mean Tessa also increased

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Speaker 3: their Capex commentary as well, but on Google specifically, I

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Speaker 3: mean they Buffler capex to fifteen billion dollars. But they

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Speaker 3: didn't just stop there, like they also need some comm

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Speaker 3: tare in twenty twenty seven that they anticipate spending even

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Speaker 3: more in that year, and even after that it could

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Speaker 3: extentively grow even faster. And I also think the comm

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Speaker 3: tair on temporarily renting more expensive instruction from outside providers

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Speaker 3: because Google cannot build its own capacity fast enough. That

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Speaker 3: just shows how much of an imbalanced supply and demand

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Speaker 3: still is at this stage.

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Speaker 2: So when you mentioned the chip makers and it comes

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Speaker 2: when it comes to Alphabet, I think of the TPUs,

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Speaker 2: the tensor processing units. This is a specific chip developed

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Speaker 2: by Google for certain AI related applications. Does it necessarily

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Speaker 2: give this TPU give Alphabet a significant edge in what

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Speaker 2: we're seeing unfold now in the AI landscape.

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Speaker 3: Yeah, I mean I think you saw it in their

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Speaker 3: Google Cloud numbers. It's kind of crazy to say at

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Speaker 3: the scale that Google Cloud's at, but it's growing eighty

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Speaker 3: two percent top line, and this is now a twenty

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Speaker 3: five billion dollar business. It's actually becoming twenty percent of

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Speaker 3: the toll revenue right now, So that segment is just

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Speaker 3: growing at a rapid pace. I think it's growing several

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Speaker 3: times as fast as the surf, YouTube and services side

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Speaker 3: of their business. So I think that that eighty two

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Speaker 3: percent top line growth combined with thirty six percent operating

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Speaker 3: margins is showing that this is a real roy like

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Speaker 3: their ability to control their AI economics because they own

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Speaker 3: so much of the vertical stack is being proven in

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Speaker 3: those Google Cloud fundamentals, and I think that it's they

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Speaker 3: had a very high bar to beat.

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Speaker 4: I think seventy percent was the wisp on Google Cloud growth.

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Speaker 3: They came in at eighty two percent, and not just

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Speaker 3: that margins, the operating incomes tripled year of a year

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Speaker 3: to an eight point.

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Speaker 4: Eight billion dollars.

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Speaker 3: So I think that this is like a rare combination

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Speaker 3: of top line growth and margin expansion that is just

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Speaker 3: being proven due to their ability.

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Speaker 4: Of controlling the chip costs their TPUs.

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Speaker 3: And even though they're falling behind the benchmarks in the Gemini,

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Speaker 3: that's totally fine because really the TPU was meant for

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Speaker 3: internal use. There was a brief period where there was

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Speaker 3: such an awkward supply demand imbalanced due to the Blackwell delay,

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Speaker 3: that TPUs were starting to get entertained as an external use.

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Speaker 3: But really it was supposed to be for internal and

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Speaker 3: I think that you're showing it in the cloud margins

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Speaker 3: of how efficient they are operating.

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Speaker 2: That we also heard from Tesla after the bell second

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Speaker 2: quarter earning short of the estimate from the street. I

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Speaker 2: think adjust a DPS around thirty three cents below the

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Speaker 2: fifty one that analysts had been looking for. There was

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Speaker 2: a strong quarter of auto sales, but this company is

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Speaker 2: dealing with some other headwinds right now. What's your feeling

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Speaker 2: about what Tesla is going through at the moment.

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Speaker 3: Yeah, I mean Taesla delivered by Quarda looked excellent, like

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Speaker 3: you mentioned, on revenue deliveries, but it was substantially weaker

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Speaker 3: on the automotive profitability. I mean, they clearly sacrificed a

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Speaker 3: lot of their margins in order to fulfill that delivery

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Speaker 3: number or be on the revenue number. I also think

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Speaker 3: that their energy margins was a bit of a disappointment

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Speaker 3: as well because of a couple one off situations that occurred.

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Speaker 3: But my main takeaway from Tesla is obviously their quarter

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Speaker 3: contained two very different stories. I think the automotive business

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Speaker 3: is producing a lot stronger demand, which is great to see,

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Speaker 3: but really disappointing margins. The long term autonomy piece is

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Speaker 3: actually receiving a lot more of its commercial signals that

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Speaker 3: I was surprised to hear on the conference call through

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Speaker 3: accelering FSC adoption and some timelines that looked a little

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Speaker 3: more near term in the long term, but the automotive

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Speaker 3: gross margins, if you exclude the regulatory credits, like, that's

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Speaker 3: the reason why the stock is down after after hours

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Speaker 3: right now, it's down four percent. It's just they're sacrificing

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Speaker 3: a lot to hit those delivery numbers. And I think

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Speaker 3: they're doing so because they're seeing the adoption FSD hit

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Speaker 3: fifty five percent and they want to sacrifice the near

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Speaker 3: term margins in order to get that software margin the

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Speaker 3: FSD side of the business.

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Speaker 2: So how is this company now focused on the Chinese market,

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Speaker 2: which for a while there I think was critical. It

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Speaker 2: seems far less critical these days, and we know what

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Speaker 2: the ev story is in China and how dominant Chinese

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Speaker 2: players have become in the industry. Has Tesla kind of

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Speaker 2: relaxed its position a bit when it comes to China.

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Speaker 4: Totally?

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Speaker 3: Has I think they wave the white flag on China.

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Speaker 3: I really don't think it's really a topic of conversation anymore.

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Speaker 3: In the internal circle of Tessa. I think that they're

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Speaker 3: clearly all about Robotaxi.

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Speaker 4: Humanoid.

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Speaker 3: It's like going from that slow then fast rollout of

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Speaker 3: cybercab like energy business China. They're just like they think

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Speaker 3: it's a secondary market that is just lost already due

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Speaker 3: to the Chinese competitors that are just absolutely killing on

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Speaker 3: that front, and they just think it's a bit of

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Speaker 3: a loss, cause I don't think it's at all on

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Speaker 3: top of conversations in the internal Tessa circle.

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Speaker 2: So we also heard from IBM after the belt things

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Speaker 2: weren't not really that surprising because we had the preliminary

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Speaker 2: results last week that indicated week sales for both infrastructure

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Speaker 2: and software, and a lot of people were a little

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Speaker 2: alarmed by that as maybe an indication that AI is

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Speaker 2: the bigger issue right now and IBM has been left

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Speaker 2: out of that story. The stock was down on that

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Speaker 2: news last week about twenty five percent. When the preliminary

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Speaker 2: numbers were released today, it seemed to confirm everything that

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Speaker 2: we learned last week. Where are you in understanding the

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Speaker 2: mainframe business and whether or not it's even relevant these days.

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Speaker 4: It's still somewhat, it's still relevant. I do believe that.

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Speaker 3: The issued IBM was more of us expectations. I think

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Speaker 3: entering the preliminary guidance that they revealed like a week ago,

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Speaker 3: like the stock did run up significantly. I think that

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Speaker 3: there was maybe some commentary that Anthropic is going to

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Speaker 3: become some kind of somewhat of a tailwind for red Hat.

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Speaker 3: I think there was even some commentary today that the

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Speaker 3: CEO mentioned that it would be like a ten billion

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Speaker 3: AR tam.

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Speaker 4: For red Hat.

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Speaker 3: So like the software side of the business for IBM,

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Speaker 3: shit in theory experienced talent from AI, and there was

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Speaker 3: somewhat of a bump in the stock price heading into

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Speaker 3: those prints in anticipation that there was going to be

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Speaker 3: some kind of AI beneficiary stance, but clearly that wasn't

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Speaker 3: the case. I think that you're seeing that there was

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Speaker 3: an execution myss on the management front at IBM.

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Speaker 4: They are very upfront about that.

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Speaker 3: I think that they're going to there experiencing a couple

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Speaker 3: of headwinds that are laid in the second quarter that

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Speaker 3: they're going to focus on how to get ahead of

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Speaker 3: in the following quarters. But end of the day, like

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Speaker 3: this is a stock that just has an absolute place

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Speaker 3: in the enterprise world. It's just the stock got ahead

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Speaker 3: of itself, and I think that their guidance had to

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Speaker 3: get taken down a bit. And you're seeing it wasn't

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Speaker 3: really an enterprise issue because Service Now had a really

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Speaker 3: strong earnings report today, So this does feel like an

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Speaker 3: IBM specific issue. And if software can go back to

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Speaker 3: growing ten percent, I think that'll be fine. It's just

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Speaker 3: management even today talked about that software revenues and grows

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Speaker 3: seven percent and twenty twenty six due to several delayed

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Speaker 3: software deals. Well, it's from what we're hearing, everything right

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Speaker 3: now is going towards either these frontier models or cybersecurity.

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Speaker 3: So I think that's there's only a finite amount of

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Speaker 3: dollars that can actually be spent on these IT budgets,

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Speaker 3: and unfortunately IBM is part of the bucket where it's

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Speaker 3: not as essential as the cybersecurity in frontier spendings.

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Speaker 2: Well, what about what we've been hearing from IBM regarding

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Speaker 2: quantum computing? Is it far too early right now to

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Speaker 2: make that bed in quantum computing?

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Speaker 3: Oh, this is not this decade thing in quantum I

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Speaker 3: think quantum is going to be a twenty thirty plus thing.

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Speaker 3: I think that you're going to see sovereign spend going

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Speaker 3: towards the space. I think that's that's going to create

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Speaker 3: this illusion that it's commercially ready due to these like

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Speaker 3: a lot of these calm chair and headlines on national

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Speaker 3: spending towards quantum due to security fronts or a lot

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Speaker 3: of this like research and development's happening in quantum. But

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Speaker 3: the commercial fronts on quantum will not be until at

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Speaker 3: least twenty thirty. We're just nowhere close to that. Even then,

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Speaker 3: it's going to be an incremental thing on workloads. It's

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Speaker 3: not going to be a replacement towards AI. I just

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Speaker 3: think that right now it's purely a sovereign spend angle.

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Speaker 4: That is fine.

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Speaker 3: I mean, the peer plays, like the ion Cues of

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Speaker 3: the world, they're going to do just because they have

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Speaker 3: a smaller base, the ray of change will be more

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Speaker 3: exponential for them due to this national spending foreign sovereignty defense.

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Speaker 3: But for an IBM or Google, even a Microsoft, it's

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Speaker 3: not going to be a need to mover for a decade.

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

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Speaker 2: your take on what you've heard from China regarding Moonshot,

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Speaker 2: This new AI model Kimmy K three seemed to rattle

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Speaker 2: the market quite a bit. It seems like a low

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Speaker 2: cost solution to the world of large language models. Does

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Speaker 2: it represent risks to companies like let's say Open AI

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Speaker 2: or Anthropic.

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Speaker 4: Yes, both of those absolutely. I believe so.

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Speaker 3: And I think that's great for the AI economy, bad

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Speaker 3: for those two duoplies on the model fronts, because I

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Speaker 3: think that right now they have a great They're obviously

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Speaker 3: have a ton of mind share and a great first

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Speaker 3: mover advantage. But I think you're seeing signs that there's

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Speaker 3: going to be a lot of creative ways to get

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Speaker 3: around the duopli bottlen that those two companies have, and

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Speaker 3: I think that that's going to be great for everyone

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Speaker 3: else because I think the clearest sign and that to

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Speaker 3: me after this Kimmy K three revelation, is that they

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Speaker 3: are computes constrain even right now. And I think that

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Speaker 3: it's really interesting that they're compete constraint right now because

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Speaker 3: Kimmy K three has already been trained, So the ball

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Speaker 3: next now peering when the companies try to serve the

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Speaker 3: model to users. At scale rather than while it's trying

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Speaker 3: to build that model. So that to me is like

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Speaker 3: the clearest signal that the next phase of the AI

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Speaker 3: cycle is going to be like driven by less number

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Speaker 3: of companies and more on like dozens thousands of other

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Speaker 3: companies that are going to be requesting more billions of

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Speaker 3: daily requests flowing through those models instead of just everything

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Speaker 3: going through these two models. So I think bad for

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Speaker 3: those two companies, but great for AI infrastructure companies.

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Speaker 2: All right, Chi, well leave it there, Thank you so

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Speaker 2: very much. Shaibalu Or is a chief market strategistic Future

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Speaker 2: and group joining from Seattle here on the Daybreak Asia podcast.

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Speaker 2: Welcome back to the Daybreak Asia Podcast. I'm Derek Prisner.

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Speaker 2: Semiconductor related stocks in the Asia Pacific or trading higher.

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Speaker 2: That's after Alphabet raised its estimate on capital spending, and

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Speaker 2: that's where we begin our conversation with Vikas. Pershad Vicos

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Speaker 2: is Asian equities portfolio manager at MNG Investments. He spoke

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Speaker 2: with Bloomberg TV host Sherry On and Heidi Stroud Watts.

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Speaker 5: We have a very.

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Speaker 1: Nuanced AI trade right now coming from the US. Right

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Speaker 1: when it comes to Alphabet, we saw this major cloud beat,

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Speaker 1: we had Tesla disappointing, we had IBM cutting guidance. How

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Speaker 1: does that necessarily translate into the Asian trade?

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Speaker 6: I'm warning Shoy it's a good place to start. There

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Speaker 6: are a few takeaways from the Google announcements. For me,

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Speaker 6: The first one is that the increase in capex should

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Speaker 6: come as a surprise. But for those who are expecting

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Speaker 6: the seven hundred and fifty billion dollars to grow perhaps

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Speaker 6: to a trillion dollars from the big five spenders in

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Speaker 6: the US for calendar twenty seven or maybe even early

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Speaker 6: twenty eight on a twelve month view, we're probably not

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Speaker 6: heading towards that number yet. That's number one. Second, we've

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Speaker 6: been investing not directly in the pix and shovels of

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Speaker 6: the AI trade this year, but the pixe and shovels

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Speaker 6: of those picton shovels. So what does that mean is

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Speaker 6: that we're looking for beneficiaries or companies that will benefit

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Speaker 6: even if the overall hyperscalar CAPEX pool doesn't grow very much.

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Speaker 6: So optical networking company, photonics based companies, some of the

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Speaker 6: advanced packaging companies. The underlying shifts and technology underway that's

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Speaker 6: what we're looking for in Asia. There are plenty of

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Speaker 6: opportunities still at this stage of the AI trade that

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Speaker 6: we've seen over the past four years. Also, what I

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Speaker 6: would say is that there's a lot of noise these days,

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Speaker 6: but if you look back, let's say you go back

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Speaker 6: to the April of last year when we had the

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Speaker 6: Trump tariffs released across the world, there have been a

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Speaker 6: few genuine signals. One of the real signals in recent

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Speaker 6: months was last week or over the weekend. With the

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Speaker 6: three model, our view is that there's going to be

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Speaker 6: a divergence between compute and memory demand. Computer is going

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Speaker 6: to become more efficient, and so we're revisiting our holdings

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Speaker 6: in the memory sector where we had been quite overweight

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Speaker 6: last year. We have been overweight in more recent months,

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Speaker 6: but we were revisiting that. So a lot to look

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Speaker 6: at in Asia. But I would say that the overall

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Speaker 6: takeaway is that we might see a deceleration in AI capecks,

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Speaker 6: hyperscaler capex, but that doesn't change the opportunity set for

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Speaker 6: long term active managers.

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Speaker 1: Yeah, it's very layered and nuanced to what you're saying

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Speaker 1: right now. Right, I mean, if we see a slowdown

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Speaker 1: because of what's happening across China. You will revisit memory,

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Speaker 1: but at the same time you're actually investing in the

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Speaker 1: picks and shovels of the picks and shovels. So for

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Speaker 1: investors who want to sort of unpack this, are there

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Speaker 1: any regions or markets where you would find more opportunities

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Speaker 1: And when it comes to future investments, would you go

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Speaker 1: into the Chinese tech sector itself as well, despite, of course,

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Speaker 1: some of the more fundamental issues with that economy.

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Speaker 5: Yes.

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Speaker 6: So to answer your last question first, whether an investor

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Speaker 6: is looking to allocate more capital to AI and tech

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Speaker 6: and hardware or just the economy, the companies of the future,

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Speaker 6: or if you just want to understand what's happening in

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Speaker 6: the world. I do think that you need to start

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Speaker 6: with China. The center of gravity of AI has already

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Speaker 6: been shifting towards Asia over the past few years. That

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Speaker 6: shift is accelerating, and it's moving from hardware and memory

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Speaker 6: to now the models themselves. If you look at the

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Speaker 6: recent announcements a recent being over the past year or so,

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Speaker 6: first from deep Seek in January February last year, and

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Speaker 6: now from Moonshot just a few days ago. The pace

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Speaker 6: of the acceleration in Chinese tech development is astonishing and

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Speaker 6: that will have implications for all the sectors that that touches.

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Speaker 6: So yes, we're spending more time in rellocating more capital

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Speaker 6: to accelerators GPU accelerators in China, to the semiconductor production

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Speaker 6: equipment companies in China. And also all this capital location

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Speaker 6: and the time and the research spent on China is

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Speaker 6: yielding a lot of learnings for Japanese companies, for Taiwanese

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Speaker 6: and Korean companies, many of whom are now more vulnerable

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Speaker 6: than they have been in the past. So there is

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Speaker 6: a shift underway in our portfolio, is a little bit

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Speaker 6: more caution on some of the North Asian names outside

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Speaker 6: of China, and more constructive views on China. Despite the

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Speaker 6: headline top down slowdown that we are seeing, there's a

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Speaker 6: very broad opportunity set in China and it's not just

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Speaker 6: about Ai. Same thing goes for other markets Japan. We

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Speaker 6: remain very constructive. Even though we're more than a decade

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Speaker 6: past the launch of Abbi's arrows. This might be the

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Speaker 6: most slowly reprising equity story in the world. The corporate

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Speaker 6: governance transformation in Japan if we look at India, some

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Speaker 6: stability in Q two after one of the worst quarters

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Speaker 6: for Indian equities in Q one, and there's a lot

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Speaker 6: to like in India as well. Seven thousand listed companies,

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Speaker 6: almost two thousand with a market cap over one hundred

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Speaker 6: million dollars. Every sector you can imagine is listed in India.

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Speaker 6: So the big three markets in Asia remain very exciting

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Speaker 6: for us. If we've taken some capital away in recent

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Speaker 6: weeks and months, it's been from to the other large

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Speaker 6: markets in North Asia, that's Taiwan and South Korea.

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Speaker 5: Because do you think there's now a tech stock put

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Speaker 5: in China with the national team returning with intervention.

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Speaker 6: It's a fair question. I would err on the side

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Speaker 6: of saying yes. And so when we look at valuations

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Speaker 6: in China, why are they so much higher now than

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Speaker 6: they have been in recent years. It's because of the

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Speaker 6: acceleration and tech spending. It's the acceleration of the progress

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Speaker 6: that we're seeing. Coming into this year, the expectations for

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Speaker 6: w wafer fab equipment expenditures was seen to be about

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Speaker 6: one hundred and twenty billion dollars with flatish growth or

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Speaker 6: limited growth in China six months into the year, we're

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Speaker 6: seeing very significant increases to those estimates overall, but especially

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Speaker 6: so in China. And so this is why the premium

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Speaker 6: are expanding for Chinese companies. But it's not just scarcity premium.

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Speaker 6: These companies are doing well. They're taking shared the Japanese

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Speaker 6: and Taiwanese and Korean companies that we speak to, whether

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Speaker 6: they are wayfer companies, spe companies, even memory companies now

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Speaker 6: acknowledge that there are vulnerabilities in their business models on

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Speaker 6: a longer term view, whether it's DM HBM or conventional

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Speaker 6: memory or nand or the etching and deposition equipment in

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Speaker 6: which the Japanese and the American companies have been leaders

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Speaker 6: for a long time. So yes, start with China, spend

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Speaker 6: time there, understand what's going on. And again it's not

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Speaker 6: just Ai. Pretty much anything that is happening within China

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Speaker 6: is touching sectors that has happened sectors outside of China,

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Speaker 6: whether you look at healthcare, pharma and biotech, defense, aerospace,

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Speaker 6: and then of course autos, ancillaries, renewables, the list is very,

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Speaker 6: very long.

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Speaker 5: I guess the question is when it comes to the

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Speaker 5: broader landscape for Chinese equities, it's helpful to have national

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Speaker 5: policy support right, and of course national AI ambitions as well,

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Speaker 5: But do you require a strong economic fundamental situation which

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Speaker 5: perhaps hasn't come through yet with the recent slowdown.

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Speaker 6: It wouldn't hurt. But if you look at our China

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Speaker 6: strategies and our portfolios in China, the top holdings are

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Speaker 6: not AI related companies. It's a very broad opportunity set

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Speaker 6: that we're seeing. We're seeing single digpees, double digit free

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Speaker 6: cash flow yields, high and rising dividend yields, reasonable earnings growth,

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Speaker 6: very smart capital allocation, much smarter than than we've seen

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Speaker 6: over the past five, ten, fifteen, twenty years. And so

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Speaker 6: our portfolio in China, the largest exposures are in banks,

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Speaker 6: in shipbuilders, in some of the retailers. Yes, of course

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Speaker 6: we do have exposure to tech tech hardware, and we're

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Speaker 6: doing our work on a broader universe of names as well.

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Speaker 6: But the opportunity to set again in China is very

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Speaker 6: broad for long term active managers. This is the right

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Speaker 6: time to look at China. If you look at China's

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Speaker 6: contribution to global trade and the global economy on one side,

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Speaker 6: there's a material dislocation between that and the allocation global

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Speaker 6: to Chinese equities in global portfolios, and we think that

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Speaker 6: that should normalize over time, and if it doesn't, it

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Speaker 6: just extends the opportunity set for long term managers like us.

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Speaker 1: Because before we let you go just super quickly, I

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Speaker 1: wanted your take on what we're seeing from the BOJ

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Speaker 1: sources selling Bloomberg that they could actually consider going even

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Speaker 1: at a faster rate when paced when hiking rates. Would

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Speaker 1: that alter your investment case for Japan?

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Speaker 6: Not really. We've seen the end go from one hundred

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Speaker 6: or actually around the time of Abbe's eras being launched

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Speaker 6: around eighty to now one sixty. We don't share, as

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Speaker 6: you know, we don't invest in the market. We invest

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Speaker 6: in stocks. We're not ignorant of the macro. At the margin.

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Speaker 6: It might impact how we see some of the exporters perhaps,

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Speaker 6: but our view is if you do your homework and

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Speaker 6: you bet on the right management teams with the right

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Speaker 6: business man in the right unit economics, you'll win over time.

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Speaker 6: But as you mentioning just before I came on on air,

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Speaker 6: there is a credibility question, so we'll see how the

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Speaker 6: market perceives this. They're being transparent. The headlines are out there,

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Speaker 6: but the end continues to weekend, so we do have

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Speaker 6: an eye on that, but it does not change our

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Speaker 6: long term enthusiasm for Japanese equities.

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Speaker 2: That was Vikas Pershad Asian Equities portfolio manager at m

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Speaker 2: ANDNG Investments, speaking earlier with Bloomberg TV host Sherry On

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Speaker 2: and Heidi Stroud Watts, bringing you their conversation here on

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

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

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Speaker 2: look at the story shaping markets, finance, and geopolitics in

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Speaker 2: the Asia Pacific. You can find us on Apple, Spotify,

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Speaker 2: the Bloomberg Podcast YouTube channel, or anywhere else you listen.

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Speaker 2: Join us again tomorrow for insight on the market moves

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Speaker 2: from Hong Kong to Singapore and Australia. I'm Doug Prisoner

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Speaker 2: and this is bloomb