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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. The

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Speaker 2: US government shutdown appears to be nearing an end. Today

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Speaker 2: is day forty, making it the longest in US history,

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Speaker 2: and now we are told a group of moderate Senate

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Speaker 2: Democrats has agreed to support a deal to reopen the government.

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Speaker 2: This is after the Senate released three government funding bills

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Speaker 2: for the next year as a compromise, but none address

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Speaker 2: the impending expiration of subsidies for the Affordable Care Act.

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Speaker 2: We are told Democrats have secured a pledge by Republicans

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Speaker 2: to vote on a bill to renew the Affordable Care

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Speaker 2: Act tax credits by mid December. Now we are also

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Speaker 2: being told that the Senate is set to hold a

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Speaker 2: procedural test vote at midnight Eastern time, and if that

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Speaker 2: vote were to succeed, the Senate would still need the

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Speaker 2: consent of all members to end the show shut down quickly.

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Speaker 2: One senator can force days of delays and votes. And

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Speaker 2: in the moment, we'll look at the impact of the

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Speaker 2: shutdown on the US economy with Chris Carey, his portfolio

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Speaker 2: manager at Carnegie Investment Council. We begin this morning in

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Speaker 2: Singapore with Bloomberg's Paul Dobson, our executive editor for Asia Markets. Paul,

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

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Speaker 2: begin with what seems to be a recovery in tech

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Speaker 2: stocks across Asia after last week's sudden drop. What do

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Speaker 2: you see happening?

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Speaker 3: So the market had a little bit of a crisis

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Speaker 3: of confidence over the past week in terms of those

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Speaker 3: valuations for the tech companies for their AI related narrative

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Speaker 3: in general, and whether we'd gone too far and the

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Speaker 3: valuations were over stretch, which led to volatile trading r

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Speaker 3: a down day followed by an upday and swinging backwards

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Speaker 3: and forwards quite dramatically and quite strong moves in either

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Speaker 3: direction in the tech heavy Asia gauges the COSTB in

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Speaker 3: particular Middlesa, Japan, Taiwan. Seeing that kind of EBB and flow,

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Speaker 3: you know, on the one hand, you've got people that

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Speaker 3: are saying that, you know, that is just time to

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Speaker 3: take some profits here because the market has had such

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Speaker 3: a strong run up and had gotten frothy. But the

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Speaker 3: flip side of that is there are plenty more people

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Speaker 3: waiting to buy any dip hungreeds. This get in there

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Speaker 3: and get these opportunities because they believe in that long

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Speaker 3: term AI narrative, and so that sort of tension has

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Speaker 3: been playing off one against the other for much of

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Speaker 3: the past week. It doesn't seem like it's completely resolved yet,

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Speaker 3: but we are in a more positive mindset at the

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Speaker 3: start of this week, it seems from the early price action.

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Speaker 2: I'm curious as to what analyst is saying. It's not

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Speaker 2: unlike the situation here in the US where you have

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Speaker 2: an extreme concentration of these big tech names in the

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Speaker 2: regional benchmarks. As a couple of examples, TSMC I think

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Speaker 2: now accounts for over forty percent of the tai X

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Speaker 2: and then if you look at the waiting of Samsung

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Speaker 2: and s k Heinex in South Korea together, those make

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Speaker 2: up around thirty percent of the cost be Is this

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Speaker 2: cause for concern.

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Speaker 3: Only if the trade unrevels, right, I mean, you definitely

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Speaker 3: have market concentration risks. And yet, like you said, it's

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Speaker 3: the same in the US where the Magnificent seven has

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Speaker 3: been leading so much of the gains in the overall

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Speaker 3: market this year. So yes, if the market turns against

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Speaker 3: the AI narrative, then it will lead to a broader

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Speaker 3: drag on gauges, and that could turn into a sort

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Speaker 3: of self fulfilling kind of a spiral lower because it

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Speaker 3: would force people to liquidate and maybe from the other

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Speaker 3: parts of the market as well. I'm not sure though,

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Speaker 3: that it's an entirely negative thing, because you know, we

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Speaker 3: have seen such strong gains for so many of the markets,

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Speaker 3: and particularly South Korea, it's been on an absolute tear

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Speaker 3: this year. It's not only got the AI narrative, but

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Speaker 3: it's also got the government behind it. Are kind of

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Speaker 3: almost almost egging it on. They want the career discount

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Speaker 3: to disappear, They want more people to invest in domestic stocks,

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Speaker 3: They want to smooth out all of the dysfunctions that

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Speaker 3: have been there in terms of company ownership and favor

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Speaker 3: shareholder interests. More so, that has its own narrative as

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Speaker 3: well propelling it. And I think you know, region wide

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Speaker 3: in Asia, yes, the technology companies have been dominating, but

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Speaker 3: there have been other positive narratives that have also been

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Speaker 3: taking the market higher. And so even something that doesn't

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Speaker 3: have a lot of tech in it, like the Straight

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Speaker 3: Times Index for Singapore, has been continually setting record highs

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Speaker 3: this year as well.

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Speaker 2: Over the weekend. China reported consumer prices unexpectedly increased in October.

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Speaker 2: I think you have to point to the National Day

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Speaker 2: holiday right in early October that really was responsible for

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Speaker 2: boasting a lot of domestic demand. Do I have that right?

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Speaker 3: It seems like that's one of the main contributing factors.

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Speaker 3: And also I think that the gold jewel reprice has

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Speaker 3: a disproportionate effect on it, because obviously gold has been

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Speaker 3: on this humongous ball run for most of the year.

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Speaker 3: It doesn't change that overall narrative that China still needs

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Speaker 3: to do more to beat this kind of disinflationary headache

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Speaker 3: that it's grappling with at the moment. And we have

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Speaker 3: a long story out there on the wire today that

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Speaker 3: really digs into how all the prices of the goods

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Speaker 3: that a regular consumer buys have actually probably fallen more

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Speaker 3: than the official data would have you have. You think so,

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Speaker 3: And it sort of gets at that idea that you know,

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Speaker 3: it becomes again a sort of self fulfilling because prices drop,

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Speaker 3: wages drop, and then that kind of creates, you know,

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Speaker 3: sort of like economic gloom basically, so still more needed

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Speaker 3: probably to snap China out of that mindset.

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Speaker 2: I'm glad you mentioned that because at the end of

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Speaker 2: the week we'll get the monthly activity data that obviously

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Speaker 2: that includes retail sales and industrial production. Do we have

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Speaker 2: a sense of what we may learn at the end

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Speaker 2: of the week.

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Speaker 3: Ah, well, probably, it's hard, you know, kind of to

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Speaker 3: break this out. What I do think is interesting, though,

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Speaker 3: is that for all that the domestic economy doesn't look

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Speaker 3: super hot at the moment, China's financial markets have actually

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Speaker 3: been having a pretty decent ride of late. You've got

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Speaker 3: the un trading at the strongest levels further year against

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Speaker 3: the US dollar, but also against a bunch of other currencies.

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Speaker 3: On the crosses, it's looking stronger too. You've got stop

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Speaker 3: market has seemed relatively resilient, and the text story in China,

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Speaker 3: the domestic stocks seem to be doing well because China

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Speaker 3: set out this you know, kind of very clear path

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Speaker 3: where it wants more independence, it wants to be more

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Speaker 3: self sufficient, and it wants to push its industrial strategy

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Speaker 3: as well. So that is helping actually the stop market.

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Speaker 3: And then even on the bond side, So they did

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Speaker 3: a dollar bond sale last week, and the bonds yield

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Speaker 3: that they got for it was on a par with

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Speaker 3: US treasuries and then traded through it in the secondary market.

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Speaker 3: This week they're coming with eurobond, so it will be

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Speaker 3: really interesting to see how that prices as well.

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Speaker 2: Also this week the earnings Ali, Baba, JD, dot Com

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Speaker 2: and ten Cent. I think that's likely to give us

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Speaker 2: more insight when you're looking at kind of the domestic

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Speaker 2: demand story.

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Speaker 3: Right, yeah, Yeah, it's crunch tied. A lot of a

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Speaker 3: lot of the market inputs are all coming together, and

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Speaker 3: those will be interesting to tell us again, like you said,

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Speaker 3: about the strength and demand in the domestic economy. And

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Speaker 3: also you know, I think the market will be looking

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Speaker 3: to see what are they doing in terms of capex

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Speaker 3: and in terms of AI development, because that's the sort

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Speaker 3: of second part of the business model and the one

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Speaker 3: where the people are looking for the growth. I guess.

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Speaker 2: So before I let you go, Paul, later today the

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Speaker 2: BOJ is going to release a summary of opinions from

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Speaker 2: the October meeting. Are we going to learn anything about

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Speaker 2: whether or not we are closer to let's say, a

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Speaker 2: December rate hike? Do you think from these minutes.

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Speaker 3: The PJ is just so cautious, right, So we do

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Speaker 3: know that there are some dissenters who are pushing for

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Speaker 3: the rate hike to get done. There's just an infinite

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Speaker 3: amount of caution from the Bank of Japan with good reason.

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Speaker 3: You know, it's taken so long to get inflation going.

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Speaker 3: They don't want to snuff it out, and they don't

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Speaker 3: want to cause too many headaches for the rest of

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Speaker 3: the economy, which where growth isn't particularly hot at the moment,

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Speaker 3: You've got the government talking about wanting to do more

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Speaker 3: stimulus in order to create growth that's above government bond yield,

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Speaker 3: so that it can get down debt that way, which

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Speaker 3: you know, if it works out, would be all well

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Speaker 3: and dandy. But then so that gives the boj that

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Speaker 3: sort of background where if it wants to, it should

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Speaker 3: be able to raise interest rates. But the problem is

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Speaker 3: it also, you know, doesn't want to immediately head off

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Speaker 3: any benefits that the sort of extra fiscal stimulus might do.

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Speaker 3: So I don't know if we'll learn much more on that.

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Speaker 3: I think they're waiting for more data, particularly on wage

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Speaker 3: growth and whether that can remain resilient and robust. But

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Speaker 3: you know, our experience over the last year is that

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Speaker 3: the Bank of Japan tends to chicken out, So if

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Speaker 3: there is anything that comes along the pipeline the discourage

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Speaker 3: it in the meantime, then it will probably still err

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Speaker 3: on the side of causion.

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Speaker 2: All Right, Paul, thank you so very much. We'll leave

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Speaker 2: it there with Paul Dobson, Bloomberg's executive editor for Asia Markets,

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Speaker 2: joining from Singapore here on the Daybreak Asia podcast. Welcome

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Speaker 2: back to the Daybreak Asia Podcast. I'm Doug Prisner, and

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Speaker 2: as I mentioned earlier, the US government shutdown appears to

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Speaker 2: be nearing an end. It's already delayed the release of

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Speaker 2: two monthly employment reports, and this week's readings on both

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Speaker 2: inflation and retail sales for the month of October will

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Speaker 2: likely be delayed as well. Now the absence of official

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Speaker 2: data is certainly going to complicate the debate about whether

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Speaker 2: another rate cut is needed. That will of course take

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Speaker 2: place at the fed's December meeting. Let's bring in Chris Carey.

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Speaker 2: He is portfolio manager at Carnegie Investment Council. Chris, thanks

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Speaker 2: for making time to chat with me. So, as I mentioned,

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Speaker 2: we have this key vote tonight at midnight, and maybe

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Speaker 2: some posit sitive momentum developing on ending the shutdown, but

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Speaker 2: as I mentioned, we're still likely to be without official data.

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Speaker 2: Is that the way you see it, I wouldn't be surprised.

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Speaker 1: We're pretty fortunate though that, despite we don't know when

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Speaker 1: the government shut down is going to end, it's the

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Speaker 1: longest one we've ever had in recorded history. Now, we're

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Speaker 1: very fortunate that nowadays there are plenty of alternative data

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Speaker 1: sources from third parties that have been able to give

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Speaker 1: us a bit of an insight into inflation metrics, unemployment,

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Speaker 1: so and so forth. And you know, I think now

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Speaker 1: versus ten years ago, in this situation that we're sitting in,

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Speaker 1: it we be you know, there'd be a lot more uncertainty,

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Speaker 1: and I'd be a lot more difficult. So I'm pretty

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Speaker 1: grateful from that. Who knows when we'll actually get that data,

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Speaker 1: you know, the FED themselves it's a pretty tough job,

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Speaker 1: given the fact that for as long as I can remember,

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Speaker 1: they're always saying how data dependent they are. Now there's

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Speaker 1: no data, so it sucks to be them. But I'm

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Speaker 1: not sure when we're going to get it, but it's

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Speaker 1: definitely something that is top of mind for a lot

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Speaker 1: of people. I think we're fortunate though that there's been

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Speaker 1: a prolonged period of sub three percent, especially core pc,

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Speaker 1: which is the Fed's target measure of inflation. If we

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Speaker 1: are in a much higher inflacial environment and we're having

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Speaker 1: the shutdown, I think it would be a lot more

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Speaker 1: of a ding to investor confidence.

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Speaker 2: I'm curious to get your sense of the damage that

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Speaker 2: may have been inflicted as a result of the forty

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Speaker 2: days that the government was shut down. New York Fed

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Speaker 2: Bank President John Williams, in an interview with the FT,

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Speaker 2: was focused on the financial strain among lower and middle

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Speaker 2: income Americans, and he was basically saying, hey, that could

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Speaker 2: threaten the resilience of the American economy. I think he

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Speaker 2: has a point there, right.

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Speaker 1: Yeah, he does have a point one hundred percent. And

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Speaker 1: it's those people on the lower end of the scale

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Speaker 1: that need the assistance, and it's a real shame that

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Speaker 1: they haven't been able to get that thus far. But

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Speaker 1: also conversely, you've seen that the vast majority of spending

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Speaker 1: is by their top ten to twenty thirty percent of earners,

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Speaker 1: and you really do see that for those their consumer confidence,

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Speaker 1: their sentiment is drastically differ different from those on the

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Speaker 1: low end of the scale, and so companies that are

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Speaker 1: able to benefit from those with larger wallets and more

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Speaker 1: premium brands aren't really seeing any sort of impact to sales.

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Speaker 1: But as I mentioned the note that I sent over

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Speaker 1: to you, you're seeing that a lot of consumers are

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Speaker 1: trading down and that they're going to more value orientated products,

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Speaker 1: and that companies themselves aren't necessarily always hitting the forecasts

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Speaker 1: that were anticipated. As a result that people are there's

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Speaker 1: a lot of certainty brewing, and that as a result

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Speaker 1: of that, they might be foregoing purchases or trading down.

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Speaker 1: So I was, you know, also saw that news before

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Speaker 1: I hopped on here too, and so I'm hopeful that

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Speaker 1: the shutdown does come to an end soon, as I

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Speaker 1: think it will bring a lot of peace to many Americans,

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Speaker 1: many consumers.

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Speaker 2: We can talk about the earnings portion in a minute,

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Speaker 2: but let's talk about the wealth effect. To go back

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Speaker 2: to that Williams interview, he was focused on acknowledging that

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Speaker 2: wealthier households have indeed benefited from higher stock prices. Give

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Speaker 2: me your sense of where the equity market goes from here.

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Speaker 2: I mean, there's been so much optimism about productivity gains

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Speaker 2: being driven by AI. There's also a lot of conversation

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Speaker 2: around over investment and maybe even a bubble in pockets

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Speaker 2: of the equity market. How do you view the landscape.

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Speaker 1: I'll never use the word bubble given where we are

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Speaker 1: right now, just given that, I think it's when you

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Speaker 1: use that word's that's based on the fact that the

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Speaker 1: fundamentals just cannot justify what what sort of an environment

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Speaker 1: that we're in. And you you know, if we want

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Speaker 1: to talk about some porters of the market Max seven,

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Speaker 1: for instance, the cash flows that they're generating far outstrip

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Speaker 1: their capex when that line intersects, and that's not the case,

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Speaker 1: I think, then you know, we're working to have that

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Speaker 1: sort of discussion. But even over the last three four years,

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Speaker 1: it hasn't been the case that we've seen. It's just

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Speaker 1: been up into the right of the entire time. I think.

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Speaker 1: You know, people's memories are very short, thinking back to

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Speaker 1: April or to twenty twenty two where Google, Amazon, other

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Speaker 1: names got cut in half. You know, the average since

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Speaker 1: the eighties, the average draw down intra year in stocks

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Speaker 1: is what fifteen percent, and you know, ending the year

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Speaker 1: typically we'll be up around ten to part eight percent.

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Speaker 1: We're up fourteen percent so far this year, and most importantly,

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Speaker 1: earnings have continued to do well. They've beat the average

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Speaker 1: ten year estimates in terms of earnings being higher, revenues

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Speaker 1: being higher through the bulk of this earning season thus far.

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Speaker 1: And it was the same story last year, sorry last quarter,

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Speaker 1: where analysts were a lot more pessimistic and there was

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Speaker 1: an additional surprise to the upside. There's definitely some cracks

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Speaker 1: here and there, especially in certain industries, and I'd mentioned

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Speaker 1: that a little bit earlier, but overall, whilst it might

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Speaker 1: be a little bit uncomfortable in the midst of it,

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Speaker 1: it always is, but this is nothing all that extraordinary.

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Speaker 1: Profit margins have risen from where they used to be

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Speaker 1: previously as well, and so you know, from a PE basis,

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Speaker 1: you could rationalize that, well, it does make sense.

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Speaker 2: What I was going to ask about that. I mean,

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Speaker 2: if you're looking at Nvidia trading fifty five times earnings

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Speaker 2: forward to PE is something just under forty two. If

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Speaker 2: you look at the overall market on a historical basis,

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Speaker 2: that seems pretty stretched, maybe a little.

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Speaker 1: Expensive, yeah, exactly, And that's why these companies have to

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Speaker 1: make sure that they can put up the results to

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Speaker 1: show that, you know, the valuations are justified. I think

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Speaker 1: of you know, a handful of companies the serling seasons

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Speaker 1: that have got absolutely demolished because they haven't been able

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Speaker 1: to put out the numbers. I think that's definitely a

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Speaker 1: worthwhile concern. What is important for companies like in the videos. Okay,

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Speaker 1: obviously they have their handful of core customers that continue

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Speaker 1: to spend, But from then on, our actual individual businesses

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Speaker 1: utilizing AI, and more importantly, are they continuing to renew

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Speaker 1: those contracts with those companies, And I think overall business

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Speaker 1: spending shows that they are ramp has you know, the

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Speaker 1: company has great insights into AI spend within the economy,

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Speaker 1: and our businesses continuing to hold onto these contracts versus

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Speaker 1: you know, they just try it out and see if

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Speaker 1: it works. But contract values continue to increase, and you're

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Speaker 1: also seeing that, you know, retention rates for software year

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Speaker 1: and year continue to increase. So that's the first place

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Speaker 1: I'd look. Once you see individual business spend starts to deteriorate,

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Speaker 1: then I think that definitely opens up the question of

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Speaker 1: have we maybe misvalued or misjudged these companies. But so

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Speaker 1: far they continue to put up record results, and you

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Speaker 1: know that's, let's reflected.

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Speaker 2: We're still in the early innings of adoption, right, But

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Speaker 2: if you look at the at the end user for

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Speaker 2: a moment, have we seen enough there on the productivity front,

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Speaker 2: a front two to kind of warrant things.

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Speaker 1: I think so. I think in some in some areas,

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Speaker 1: it's not the case that we're taking large swaths of

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Speaker 1: you know, employees out of these companies and that AI

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Speaker 1: is replacing their jobs. But I think you are starting

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Speaker 1: to see more and more that these investments are paying off.

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Speaker 1: It is slowly, but surely. I don't think that this

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Speaker 1: is going to be something by you know, this time

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Speaker 1: next year, we're going to be a radically different different environment.

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Speaker 1: But you know, this this moment, I don't think we're

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Speaker 1: we're you know, we're not off to the races. But

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Speaker 1: there definitely does seem to be use cases full of software.

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Speaker 1: I think even within my own industry, within my own job,

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Speaker 1: there's plenty of ways that it's made you myself more

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Speaker 1: efficient in the things that I have to do on

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Speaker 1: a day to day basis. And you know, only a

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Speaker 1: small fraction of employees that these companies are using it,

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Speaker 1: and I'm not yet seeing any signs, at least from

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Speaker 1: a business sand perspective that it's not you know, that

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Speaker 1: it's not rational.

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Speaker 2: So help me with an investment strategy. Do I if I've

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Speaker 2: been holding on to some of these AI names for

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Speaker 2: a while and I've realized pretty terrific returns at this

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Speaker 2: point in the cycle, do I want to maybe reduce

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Speaker 2: my exposure a little bit? Are there other areas of

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Speaker 2: the market that you think represent better value right now?

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Speaker 2: I mean, what's the strategy that you're using.

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Speaker 1: I mean, ultimately, when it comes to our clients, it's

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Speaker 1: you have an allocation that you're you're you're set to

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Speaker 1: because you're you're dependent on these these funds for retirement

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Speaker 1: or whatever it may be. And so there's nothing wrong

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Speaker 1: necessarily with taking a little bit of risk off the

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Speaker 1: table and continuing to do so. And you know, diversification

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Speaker 1: I think has been more important than ever this year.

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Speaker 1: You know, finally holding into national stocks for the first

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Speaker 1: time paid off in many many years that I can

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Speaker 1: think of, And so I think that it's important to

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Speaker 1: you know, from from an investor perspective, if this was

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Speaker 1: to get cut in half as a as has happened

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Speaker 1: for you know, many of the mag seven names over

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Speaker 1: the last couple of years, or in case it's Navidia,

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Speaker 1: but more than half, would you be okay? You know,

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Speaker 1: how do you practice a regret minimization in that respect?

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Speaker 1: And so being able to take some off the table

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Speaker 1: and diversify is necessarily a good thing. But this conversation

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Speaker 1: you would be having during environment like this where stocks

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Speaker 1: are within five percent of full time highs, not when

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Speaker 1: they're down twenty percent. That's the wrong time for rebalance.

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Speaker 1: But that's easier said than done, right, But I mean,

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Speaker 1: think back to April, and think back to twenty twenty two,

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Speaker 1: and think back to twenty twenty, twenty eighteen. Those are

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Speaker 1: all horrific points in time to rebalance, and so for

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Speaker 1: our clients, it's about being proactive, not reactive.

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Speaker 2: Okay, Chris, we'll leave it there. Thanks so much. Chris

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Speaker 2: Carey is portfolio manager at Carnegie Investment Council, joining us

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Speaker 2: here on the Daybreak Asia podcast. Thanks for listening to

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Speaker 2: today's episode of the Bloomberg Daybreak Asia Edition podcast. Each weekday,

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Speaker 2: we look at the story shit being markets, finance, and

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Speaker 2: geopolitics in 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 Chrisner,

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Speaker 2: and this is Bloomberg.