Speaker 1: Bloomberg Audio Studios, Podcasts, radio News.
Speaker 2: Welcome to the Bloomberg Daybreak Asia Podcast. I'm Dog Krisner.
Speaker 2: Equity markets in the Asia Pacific are poised for gains
Speaker 2: in the Thursday session. This is after the latest print
Speaker 2: on US inflation matched expectations and that seemed to ease
Speaker 2: concerned about an imminent rate hike from the Fed. We
Speaker 2: had the S and P five hundred coming within striking
Speaker 2: distance of a record high. Chip makers rallied and that
Speaker 2: seemed to lift the Nasdaq one hundred to a one
Speaker 2: month high. Coming up, we'll hear from Aaron Si, senior
Speaker 2: multi asset strategist at Pictet Asset Management. But we begin
Speaker 2: in the Lion City. Joining me now is Mark Cranfield,
Speaker 2: Bloomberg m Live strategist. He joins from our studio in Singapore.
Speaker 2: I appreciate you being here and can I ask for
Speaker 2: you to give me a kind of your sense of
Speaker 2: what's going on with the Japanese yen. I mean, it
Speaker 2: seems like two weeks ago you had the US in
Speaker 2: Japan essentially surprising the market with a coordinated intervention. It's
Speaker 2: is it too much to say that this has failed?
Speaker 3: I wouldn't say failed. They bought some time. I mean
Speaker 3: there was a possibility that if they had done nothing
Speaker 3: but not again, would have just continued to grind higher.
Speaker 3: And who knows where the top side could could be
Speaker 3: Under those circumstances, If you allow traders to think that
Speaker 3: the market's become a one way bet, you could risk
Speaker 3: sending it to unprecedented levels, and of course the contagion
Speaker 3: risk as well. It may have spread across Asia, other
Speaker 3: currencies may have got involved, may have gone global, It
Speaker 3: may have stirred up markets in Europe and South America
Speaker 3: as well. So certainly the consequences of doing nothing could
Speaker 3: have been quite extreme. If the let's say the yen
Speaker 3: had drifted onto one seventy one eighty something like that, you
Speaker 3: could have had a global crisis on your hands. So
Speaker 3: certainly they bought themselves some time. Clearly, from a big
Speaker 3: picture point of view, unless monetariy authority comes alongside currency intervention,
Speaker 3: you will not get a long term impact on the
Speaker 3: currency unless the Bank of Japan steps up and does
Speaker 3: its job and convinces investors that it is ready to
Speaker 3: really take rates to the neutral level to address the
Speaker 3: inflationary problems. In Japan, then people will start to say, Okay,
Speaker 3: both hands are clapping together. Here, We've got full commitment
Speaker 3: from the Central Bank, from the monitor authorities. Everything is
Speaker 3: coming together. Here we are it's a change in direction
Speaker 3: of the end. Until you see that, then the yen
Speaker 3: will basically stay as an undervalued currency.
Speaker 2: So, speaking of hands, what if the FED were to
Speaker 2: essentially sit on its hands and do nothing in a
Speaker 2: rate environment, that may argue for higher interest rates. If
Speaker 2: the Fed were to just remain on hold for a
Speaker 2: while longer, does that necessarily provide a little bit more support.
Speaker 3: Maybe not that much. The issue is that the markets
Speaker 3: can see there's a bit of a disconnect here. We
Speaker 3: just just last night we had the the budget deficit
Speaker 3: numbers came out above four hundred billion for July when
Speaker 3: it was forecast to be three hundred something, more than
Speaker 3: twenty five percent above forecast. That number is extraordinary and
Speaker 3: it doesn't seem to have a cap just investors are
Speaker 3: not convinced that the US authorities are trying their best
Speaker 3: to rain in the deficit in the United States. That
Speaker 3: means that the long end of the treasury curve will
Speaker 3: continue to be under upward yield pressure. We saw yesterday
Speaker 3: the ten year auction needed the highest yield since two
Speaker 3: thousand and seven to get the bonds cleared, and we
Speaker 3: have a thirty year auction coming to day. Prospects are
Speaker 3: not great for that thirty year auction today. As long
Speaker 3: as you have that continuous upward pressure in the long
Speaker 3: end of the U s Treasury yal curve, it will
Speaker 3: gradually filter through even towards the shorter maturities. Regardless of
Speaker 3: whether the Fed is on hold or not on hold
Speaker 3: the bond, Thenjilantis will decide for themselves where they say
Speaker 3: interest rates should be. And of course, at a certain level,
Speaker 3: high yields will support the US currency, so that makes
Speaker 3: the carry trade more attractive again for the Japanese and
Speaker 3: other currencies as well, not just the Swiss frank. We're
Speaker 3: seeing under pressure as what relative pressure at the moment
Speaker 3: as well, So whether the FED keeps on hold for
Speaker 3: the rest of this year or not, the Treasury yr
Speaker 3: curve will decide for itself where it thinks is the
Speaker 3: fair compensation based on the inflation data it sees, based
Speaker 3: on the budget deficit in the United States and other factors,
Speaker 3: which will it always affect the bond market regardless of
Speaker 3: what the central Bank does.
Speaker 2: So I'm curious as to whether or not you suspect
Speaker 2: that we could see another intervention on the part of
Speaker 2: monetary authorities in Japan, maybe not in coordination with US authorities.
Speaker 2: And if we wind up in that situation, is there
Speaker 2: the risk that Japan could essentially sell US treasuries to
Speaker 2: raise dollars?
Speaker 3: They really really appear to have sold some treasuries to
Speaker 3: help with the most recent intervention that seems to have
Speaker 3: already happened, so you would expect that should they need
Speaker 3: to intervene again, that's the first place that we go.
Speaker 3: They haven't. Although Scott Besson was talking about this FEMA
Speaker 3: situation where they could go to borrow essentially money through
Speaker 3: sup arrangements to get the US dollows they need without
Speaker 3: needing to sell US treasuries, that issue was raised, the
Speaker 3: Japanese don't seem to have taken any advantage of that
Speaker 3: so far. Maybe they will be pushed into into a future,
Speaker 3: but traditionally they will wear down their sovereign investments before
Speaker 3: they get to such issues. So from the Japanese point
Speaker 3: of view, yes, if they need to do arrest their
Speaker 3: intervention again, you would expect the first place they will
Speaker 3: go is to reduce some of their holdings of US bonds.
Speaker 2: So in terms of the macro story in Japan, we
Speaker 2: have a lot of economic data in the coming week,
Speaker 2: including second quarter GDP figures. Give me a sense of
Speaker 2: your read on the Japanese economy right now. How are
Speaker 2: things holding up?
Speaker 3: It's going well. I mean, Sanaei Takichi, the Prime Minister,
Speaker 3: has got a clear objective of reflating the Japanese economy.
Speaker 3: They're getting fantastic investments because of they do have some
Speaker 3: AI sectors which are very attractive at the moment. So
Speaker 3: you've got companies like Taiwan Semiconductor, biggest chip maker in
Speaker 3: the world, making huge investments into Japan to build plants
Speaker 3: to help to maintain it's amazing production. It's already production levels.
Speaker 3: People are buying whatever chips they make, and their order
Speaker 3: books are full well into twenty twenty seven. They can
Speaker 3: make as many chips as the world can take, and
Speaker 3: Japan is now becoming a big base for them. So
Speaker 3: you're seeing and that's just one example of companies who
Speaker 3: are going to the specialized kind of AI products which
Speaker 3: Japan can produce. So that's very very good for the economy.
Speaker 3: And under Takichi, the government has a clear sense of
Speaker 3: what it needs to be done to get the Japanese
Speaker 3: economy back on track, and we're beginning to see signs
Speaker 3: of it already. Japanese companies are making very good profits.
Speaker 3: Company at stock market's pretty brilliant, and of course the
Speaker 3: relatively weak yen helps their situation. I think that's partly
Speaker 3: what investors can see is that Japan doesn't have a
Speaker 3: very big incentive to change the direction of the yen.
Speaker 3: If they can keep it a relatively weak but stable
Speaker 3: that's the ideal environment for Japan. So for them to
Speaker 3: really change the mindset that the yen is suddenly a
Speaker 3: strong currency that doesn't really suit them at the time
Speaker 3: this time anyway.
Speaker 2: All right, Mark, good stuff, Always a pleasure. Thank you.
Speaker 2: Bloomberg's Mark Cranfield, m Live Strategist, Joining from our studios
Speaker 2: in Singapore here on the Daybreak Asia podcast. Welcome back
Speaker 2: to the Daybreak Asia Podcast. I'm Doug Krisner. Information tech
Speaker 2: shares are higher in early Asian trading. That's after the
Speaker 2: Philadelphia Semiconductor index rose two and a half percent in
Speaker 2: the US session. There were some disappointments after the US close.
Speaker 2: Cisco Systems earnings failed to impress, and Cerebraus Systems reported
Speaker 2: a decline in sales for its hardware business. For a
Speaker 2: closer look at the AI trade and markets more broadly,
Speaker 2: we spoke with Aaron Sai. He is senior multisset strategist
Speaker 2: at Pictet Asset Management. Aaron spoke with Bloomberg TV host
Speaker 2: Heidi Stroud Watson sherry on on the Asia trade.
Speaker 1: Aaron, really great to have you with us. Let's start
Speaker 1: off with these sort of AI heavy markets. We're seeing
Speaker 1: that recovery in the Korean markets again. What do you
Speaker 1: make of the volatility and where do you see the
Speaker 1: opportunities in these AI heavy spaces like Korea by extension,
Speaker 1: also a bit in Japan Taiwan for example.
Speaker 4: Yeah, I mean, the good thing is that we have
Speaker 4: managed to digest a historical unwind in the momentum trade.
Speaker 4: And part of the reason we have why equity back
Speaker 4: at an all time high despite that is there is
Speaker 4: an element of a rotation within the AI space. If
Speaker 4: you look at the AI trade, we think we're already
Speaker 4: in the third phase of the trade. The first phase
Speaker 4: was the rising tide lifted all AI boats. Anything with
Speaker 4: an AI in the ticker went up. The more capex
Speaker 4: the better. That then transitioned into a phase where we
Speaker 4: saw rotations between hyperscalers and capex beneficiaries, and that has
Speaker 4: played out for pretty much the last year. Where we
Speaker 4: are today, we think is going to be a more
Speaker 4: nuanced phase where single stock differentiation and dispersion matters. We
Speaker 4: think if you take the hyper scalers, for instance, they're
Speaker 4: going to tread a very fine balance between keeping capex up,
Speaker 4: but still because they're now relying on the market for
Speaker 4: additional capex spending, they would have to continue to provide
Speaker 4: evidence for monetization. So it's a fine balance, and we
Speaker 4: don't think all companies can pull that off equally well.
Speaker 4: So that's why we're kind of seeing the dispersion between
Speaker 4: names at the single stock level, and we think that
Speaker 4: would continue. But overall, by and large, we still think
Speaker 4: that we are in the early innings of the capex
Speaker 4: built out. We are going to have cycles around it.
Speaker 4: Of course, we have digested a fair bit of uncertainty
Speaker 4: in the AI ecosystem and we're reasonably constructive now, but
Speaker 4: it's important to be selected.
Speaker 1: Does the broader monetary policy backdrop, particularly if we have
Speaker 1: inflations daying benign as recent reading seems to suggest, does
Speaker 1: that paint a longer runway when it comes to how
Speaker 1: much more we could see from the AI rally.
Speaker 4: Absolutely so, in a way we had the perfect print
Speaker 4: on yesterday. It was in a way a dull print.
Speaker 4: But sometimes boring is good because what that lets you
Speaker 4: do is then focus on the micro, on the fundamentals
Speaker 4: of the AI ecosystem, and that we think is still
Speaker 4: very wrong. Right, So we're still in the middle of
Speaker 4: the first genuine earnings up cycle since the commodity supercycle.
Speaker 4: We are in a phase where demand is hive and
Speaker 4: supply is constrained, and companies are earning what we can
Speaker 4: call super normal profitability. So what you don't need is
Speaker 4: for the macro picture to moddel that story too much,
Speaker 4: which is why it's important that the US long end
Speaker 4: bond deals remain contained. So we were getting a little
Speaker 4: worried about the FED kind of withdrawing forward guidance and
Speaker 4: the bond market not digesting that very well. But given
Speaker 4: that we've had a couple of soft prints, as you say,
Speaker 4: that kind of definitely is is a sigh of relief
Speaker 4: for the market, and that lets the focus go back
Speaker 4: to the micro fundamentals.
Speaker 1: We spoke a little bit about, you know, obviously not
Speaker 1: all companies are going to thrive in this new era.
Speaker 1: More scrutiny on AI spending. Where do you prefer to
Speaker 1: place your bets then? Is it still overweight when it
Speaker 1: comes to the US? Are you looking more at a
Speaker 1: diversification in China, for example, because that's obviously where that
Speaker 1: major threat is also coming from.
Speaker 4: Yeah, so we still are relatively constructive of the US.
Speaker 4: We think the earnings upswingers is quite strong. We expect
Speaker 4: about thirty percent earnings growth this year. That's quite a
Speaker 4: powerful tailwind. But the real differentiator of performance within equity
Speaker 4: markets would be along sector lines. We think not so
Speaker 4: much between regions, because if you think of a team,
Speaker 4: if you're constructive memory, you'd probably consider Micron and Skhinex
Speaker 4: if you're constructive broadening out of the AI team into
Speaker 4: data centers and spending of data centers. If you're looking
Speaker 4: for cap goods names, we wouldn't differentiate too much between
Speaker 4: a Schneider Europe or a Caterpillar in the US for instance.
Speaker 4: For US, it's not really a regional diversification but more
Speaker 4: about being in the right sector. So we still selectively
Speaker 4: constructive tech. We think that the AI ecosystem broadens out
Speaker 4: from here, but we're also constructive banks banks, both across
Speaker 4: emerging markets and the US, and finally, we like areas
Speaker 4: of industrials as well.
Speaker 1: I wanted to also ask about what we're seeing with
Speaker 1: treasury markets. We've got that thirty year auction coming up soon.
Speaker 1: Where do you see yields? You've talked about the potential
Speaker 1: for becoming unanchored from here.
Speaker 4: Right So thankfully we've got a couple of soft prints.
Speaker 4: We had a soft labor market print and we had
Speaker 4: a pretty benign CPI print, So that kind of takes
Speaker 4: the heat of what was the central debate in the
Speaker 4: bond market, which was the sudden withdrawal of forward guidance.
Speaker 4: Essentially means that bond managers now have to continue doing
Speaker 4: their job with one less tool in their toolkit, something
Speaker 4: they've relied on on for pricing, for pricing bonds, and
Speaker 4: especially if you think of the long duration they're demanding
Speaker 4: and I think rightfully so, an additional uncertainty premium, given
Speaker 4: that it's not obvious what the new framework is going
Speaker 4: to be or even what the new right data series
Speaker 4: is going to be in terms of inflation for them
Speaker 4: to look at. So I think in a way it's
Speaker 4: a sigh of relief that we had a couple of
Speaker 4: soft prints because the conversation moves away from what is
Speaker 4: happening in the long end in terms of the term premium,
Speaker 4: and the data is letting some of these hikes which
Speaker 4: were previously priced and unwind. So that's giving some relief
Speaker 4: to the bond market. So we would be a bit
Speaker 4: more uncomfortable if the data picks up again, and then
Speaker 4: it's back to how the wash FED decides to signal
Speaker 4: their framework going forward.
Speaker 1: You talked about outdated notions of sector and styles. How
Speaker 1: does that play into how you're investing at the moment.
Speaker 1: Can you give us an example.
Speaker 4: Right, So, coming back to the hyperscalers, I mean, if
Speaker 4: you think of the traditional definition of how benchmarks like
Speaker 4: LENESSEI I look at it. You have Amazon, for instance,
Speaker 4: in consumer discretionory, you have Meta in communication services, you
Speaker 4: have Microsoft in software and information technology. So if you're
Speaker 4: following a strictly top down approach of selecting asset allocation
Speaker 4: first and then regions and then sectors what you often
Speaker 4: do or you're going into buckets which don't very well
Speaker 4: capture the opportunity set. So if you want to be
Speaker 4: constructive hyperscalers and if you want to diversified basket, you
Speaker 4: need the ability to invest across a few different sectors.
Speaker 4: So the world has moved on, markets have moved on
Speaker 4: in terms of these definitions, these labels not really being
Speaker 4: fit for purpose anymore, but we are still catching up
Speaker 4: in terms of how the nomenclature works. So that's why
Speaker 4: it's important not to be straight jacketed by some of
Speaker 4: these definitions. And as another kind of the point, there
Speaker 4: is the importance of value as as growth. We think
Speaker 4: is overestimated today. I mean in the past this used
Speaker 4: to be the single different single biggest differentiator of performance
Speaker 4: within equities. We think that'll be no longer the case.
Speaker 4: If you think of AI, if you think of electrification.
Speaker 4: These are broad mega themes which have winners on both
Speaker 4: the value side and the growth side of the market.
Speaker 4: So it's no longer about just picking one style definition
Speaker 4: or sticking strictly to sector definitions, but having the ability
Speaker 4: to be flexible and nimble and not be straight jacketed
Speaker 4: by outdated labels.
Speaker 2: That was Aaron Size, senior multi asset strategist at Pictet
Speaker 2: Asset Management, in conversation with Bloomberg TV host Cherry On
Speaker 2: and Heidi Stroud Watts, bringing you their conversation here on
Speaker 2: the Daybreak Asia Podcast. Thanks for listening to today's episode
Speaker 2: of the Bloomberg Daybreak Asia Edition podcast. Each weekday, we
Speaker 2: look at the story shaping markets, finance, and geopolitics in
Speaker 2: the Asia Pacific. You can find us on Apple, Spotify,
Speaker 2: the Bloomberg Podcast YouTube channel, or anywhere else you listen.
Speaker 2: Join us again tomorrow for insight on the market moves
Speaker 2: from Hong Kong to Singapore and Australia. I'm Doug Chrisner,
Speaker 2: and this is Bloomberg