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

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Speaker 2: This is the Bloomberg Daybreak Asia podcast. I'm Brian Curtis

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Speaker 2: along with Doug Krisner, join us each day for the

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Speaker 2: stories making news and moving markets in the Asia Pacific.

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Speaker 2: You can subscribe to the show anywhere you get your

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Speaker 2: podcasts and always on Bloomberg Radio, the Bloomberg Terminal, and

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Speaker 2: the Bloomberg Business app where you have David Chow coming

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Speaker 2: up next, Global Market Strategists Asia Pacific at Invesco to

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Speaker 2: make some comments here on the markets. David, thanks very

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Speaker 2: much for joining us. So we were just hearing there

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Speaker 2: about some of the churn that we've seen in markets,

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Speaker 2: the rotation underway on wallstret Not sure if that's completely

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Speaker 2: the picture elsewhere, but let's start there. Do you like

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Speaker 2: that rotation?

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Speaker 3: I do.

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Speaker 4: I do like this rotation because I think that we've

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Speaker 4: certainly hit the peak of expectations for AI. Kind of

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Speaker 4: this AI euphoria is taking a bit of a breather,

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Speaker 4: and that's because perhaps the productivity gains that were promised

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Speaker 4: with this new technology have yet to be seen. There's

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Speaker 4: recently been some reports casting some doubt on the ultimate

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Speaker 4: impact for AI, but I still am a firm believer

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Speaker 4: in AI, and I think that the effects will take

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Speaker 4: a little longer than expected. We have to look at

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Speaker 4: back paste technological innovations. You know, things like the steam

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Speaker 4: engine took seventy years to fully be implemented and see

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Speaker 4: gains in the economy. The dot com boom took around

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Speaker 4: fifteen years. So I think that it could could take

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Speaker 4: perhaps a couple more years before we see the full

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Speaker 4: impacts of AI. And I think that this will continue

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Speaker 4: to be a very dominant theme. But right now we

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Speaker 4: could be in this kind of a plateau period, this.

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Speaker 2: Rotation that we're seeing. I wonder whether or not the

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Speaker 2: earning season might turn this trade on its head if

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Speaker 2: the earnings from those laggards don't match well.

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Speaker 4: I think that we've continued to see earnings upgrades in

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Speaker 4: almost all things AI related, and I don't think that

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Speaker 4: that's going to to to hit a pause button anytime soon.

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Speaker 2: If we look at David, I sorry, sorry, let me

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Speaker 2: cut you off, because I wasn't really talking about AI.

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Speaker 2: Wanted to go back to the rotation trade for the moment.

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Speaker 2: And one of the things that we might see from

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Speaker 2: the earning season, which is you know upon US now

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Speaker 2: is that some of these companies have bounced ten to

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Speaker 2: fifteen percent in this rotation, won't have the earnings to

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Speaker 2: actually match up with the games.

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Speaker 4: Well, that's that's yet to be seen. So far, earnings

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Speaker 4: from the financials in the US have been stellar due

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Speaker 4: to trading revenues, and I think that's a that's a

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Speaker 4: good indicator in terms of kind of the health of

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Speaker 4: the earning season. Earnings estimates overall for the S and

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Speaker 4: P you know, have been okay so far this year,

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Speaker 4: and I think that earnings are going to look better

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Speaker 4: next year as kind of the US economy slides from

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Speaker 4: more of a contractionary to more recovery stage later on

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Speaker 4: this year.

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Speaker 2: So, in terms of the AI trade, we know the

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Speaker 2: big companies providing chips like Nvidia and broad Common others

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Speaker 2: have performed very well. Do you expect them to continue

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Speaker 2: once we see earnings in this quarter? And then how

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Speaker 2: do you look at some of the other beneficiaries of

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Speaker 2: the AI trade in terms of making your approach on

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Speaker 2: a portfolio construction.

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Speaker 4: Well, I think that this continues to be the most

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Speaker 4: exciting investment theme that we have seen in a while.

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Speaker 4: And I think that AI will continue to be very dominant,

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Speaker 4: and I think that it will be the principal reason

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Speaker 4: why us TOCs should rally next year. I think that

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Speaker 4: this has kind of a multi leg, multi year tail.

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Speaker 4: Now that doesn't mean that it's going to be a

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Speaker 4: smooth slope upwards, because we're going to enter a period

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Speaker 4: where there continues to be some doubts as to what

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Speaker 4: the overall impact for AI is going to be, you know,

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Speaker 4: in terms of improving productivity for companies and for the

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Speaker 4: overall total factor productivity for the American economy. But that

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Speaker 4: that's not to say that that earnings estimates could could

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Speaker 4: be a little bumpy for the time being. Perhaps similar

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Speaker 4: to electric vehicles, we have early adopters that that you know, first,

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Speaker 4: you know, spent money and and and the capital expenditures

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Speaker 4: to get there, and then there's kind of a wait

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Speaker 4: and see period which I think we could be entering

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Speaker 4: into AI perhaps later on this year, before that that

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Speaker 4: trend starts to reaccelerate again when when the technology becomes

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Speaker 4: more mature.

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Speaker 2: Yeah, okay, so stick with that momentum trade. Another momentum

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Speaker 2: trade is Japan. How do you like Japan going forward?

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Speaker 2: And let me just throw a wrinkle in there. Can

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Speaker 2: you know, if we do see rates starting your head

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Speaker 2: up from the bo J and the yen strengthens, can

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Speaker 2: the equity market handle that.

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Speaker 4: Well, we're becoming we're becoming a little more selective with

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Speaker 4: Japanese equities given the performance levels that we've seen both

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Speaker 4: last year and this year. And this is what I

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Speaker 4: like for Japan. I would continue to like financials in

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Speaker 4: Japan because bank stocks are likely to benefit with the

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Speaker 4: BOJ hiking rates perhaps as soon as you know, in

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Speaker 4: a couple of weeks and then one more time in October.

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Speaker 4: But at the same time, inflation is picking up in

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Speaker 4: Japan and that's going to continue to put pressure on

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Speaker 4: domestic consumption. And because inflation is going to outweigh wage

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Speaker 4: growth over the summer period, and I think that domestic

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Speaker 4: consumer related companies uh could could take a hit. At

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Speaker 4: the same time, we like real estate because rates that

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Speaker 4: that real rates continue to be negative, and you know

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Speaker 4: who benefits the most in terms of negative real rates

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Speaker 4: that so that's developers, construction and and real estate.

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Speaker 2: Just a quick kind of fundamental question, how easy is

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Speaker 2: it for foreigners to buy real estate in Japan?

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Speaker 3: Well, there are certain.

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Speaker 4: There's certain investment opportunities where you can invest in the

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Speaker 4: land and build your property. There are apartment buildings that

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Speaker 4: you can invest in. So it's much easier to invest

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Speaker 4: in in hard assets in Japan than in other places

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Speaker 4: in Asia.

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Speaker 2: Okay, so it brings us to China. This is a

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Speaker 2: big week there with the third Planum underway up in Beijing.

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Speaker 2: Are you expecting any broad changes to come out of

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Speaker 2: this meeting and if so, you know what will they

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Speaker 2: be and what would you.

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Speaker 5: Like to see?

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Speaker 4: Well, I'm not I don't expect any material changes or

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Speaker 4: reforms to be brought. These are these kind of like

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Speaker 4: a more medium to longer term economic policies that will

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Speaker 4: be but that will be hammered out. So I think

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Speaker 4: that if the market, I don't think the market is

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Speaker 4: expecting any kind of near term policy changes, either through

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Speaker 4: things like monetary physical stimulus that's likely to come perhaps

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Speaker 4: at the end of July in the in the Poluit

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Speaker 4: Bureau meeting. But during this third Planum this week, we

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Speaker 4: look to see if there's any kind of tinkering around

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Speaker 4: with tax reform or the hookoh or the household registration

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Speaker 4: reform or you know, local debt uh for giveness or

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Speaker 4: restructuring reforms. So I think more so to do with

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Speaker 4: these kind of medium to longer term components of the economy.

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Speaker 2: Might we have seen a bottoming out of earnings.

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Speaker 4: Well, we've seen a very long stream of earning misses

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Speaker 4: in China, and I think that with current valuations at

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Speaker 4: these levels, you know, I think that the chances for

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Speaker 4: a positive surprise are greater than a negative surprise. I

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Speaker 4: think that expectations are so low at this point, and

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Speaker 4: so so we're we're cautiously optimistic that we'll continue to

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Speaker 4: see more stimulus come out over the next month or two.

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Speaker 4: Because the first quarter was was pretty good, it exceeded

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Speaker 4: expectations in China for for GDP growth. Second quarter was

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Speaker 4: a bit weaker than expected. So I think that means

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Speaker 4: that we'll see more stimulus efforts in the third quarter,

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Speaker 4: which means that Chinese equities are likely to rally.

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Speaker 2: All Right, David, thank you very much for being with

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Speaker 2: us here live on the program. It's David Chow, global

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Speaker 2: market strategist for the Asia Pacific at Invesco. Joining us

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Speaker 2: out is Mike Dixon, head of Research and product development

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Speaker 2: at Horizon Investments. To take a closer look at markets. Well,

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Speaker 2: I think a lot of people would champion this Mike

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Speaker 2: broadening in the market, but if you really boil it down,

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Speaker 2: it's kind of like selling quality stocks and buying lower

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Speaker 2: quality stocks.

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Speaker 1: Yeah.

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Speaker 3: I mean, when you look at the economy data that

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Speaker 3: we've gotten recently, it certainly certainly makes sense. We're basically

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Speaker 3: just staring this Goldilocks off landing right in the face.

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Speaker 3: And I think this inflation report that we got just

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Speaker 3: last week was obviously super important for that. Over the

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Speaker 3: last five days, you've seen a historic outperformance of small

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Speaker 3: caps over you know that tech heavy NASDAC, and we

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Speaker 3: think that's you know, very much warranted given the fact

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Speaker 3: that the market's fully pricing in that September cut h

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Speaker 3: and the data firmly supports that, especially with strong retail

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Speaker 3: sales and you know, I hear you talking of course

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Speaker 3: Amazon Prime day. The consumer is very healthy right now.

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Speaker 2: I wonder though, if the earning season doesn't turn this

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Speaker 2: trade on its head, because you're going to get from

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Speaker 2: the likes of Nvidia and Broadcom and AMD and and

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Speaker 2: others like Qualcomm, you're going to get stronger. And we

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Speaker 2: haven't had any warnings or any indicators that you know

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Speaker 2: that this thing is is sagging.

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Speaker 1: Uh.

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Speaker 2: Do you think then that you know this will see

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Speaker 2: money flowing back into them.

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Speaker 3: Well, it's certainly possible. When you look at you know,

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Speaker 3: Earning's estimates, they have they have creeped up a good bit.

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Speaker 3: So there's certainly a lot of expectations kind of already

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Speaker 3: built in to these names. But when you look back

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Speaker 3: the last couple of quarters, they have more than delivered on,

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Speaker 3: you know, surprising to the upside while also providing that

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Speaker 3: forward guidance of growth that that has kept their momentum going.

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Speaker 3: You know. However, when you look just more broadly at

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Speaker 3: the market, as the big theme this year has been

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Speaker 3: just massive concentration, and I don't think I think it

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Speaker 3: would actually be quite healthy if we saw a little

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Speaker 3: bit of a pause in some of these megacap names

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Speaker 3: and allow the rest of the market, you know, such

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Speaker 3: as small caps, you know, to catch up, because they

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Speaker 3: have just been getting absolutely crushed compared to those big

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Speaker 3: mega cap counterparts. So that would be a really healthy,

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Speaker 3: you know, leveling out of some of the market sentiment lately.

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Speaker 2: Shed some light on this, I'm a little curious because

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Speaker 2: we know that the stock market is a forward looking indicator,

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Speaker 2: and we know that investors have been looking forward to

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Speaker 2: rate cuts from the FED for a very long period

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Speaker 2: of time. We've we've seemingly known that those cuts are coming.

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Speaker 2: It seemed like a hike was you know, out of

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Speaker 2: the story for a considerable period of time. And since

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Speaker 2: we've already known that, then why all of a sudden

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Speaker 2: this change.

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Speaker 3: Well, when we look at the reaction, you know, at

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Speaker 3: the overall market level, I don't think it's mattered that much.

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Speaker 3: I mean, for example, just overall S and P is

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Speaker 3: up nearly twenty percent on the year, and if you'll

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Speaker 3: get the tier in the tenure, we're still we're still

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Speaker 3: a little bit up on where we started the year.

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Speaker 3: So we actually haven't net net had helped from you know,

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Speaker 3: falling rates to get the market where it is here.

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Speaker 3: But when you look up under the hood, there's been

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Speaker 3: you know, that massive divergence and so you know, take

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Speaker 3: some of the uh, you know, blue blue cap, blue

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Speaker 3: chip just large cap dividend payers, I mean, they're they're

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Speaker 3: barely up on the year, and then of course the

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Speaker 3: small cap companies, more cyclical oriented financials and a lot

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Speaker 3: of the stuff that we've seen doing really really strongly

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Speaker 3: over the last five days because now we actually have

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Speaker 3: a high level of confidence that these cuts are actually coming,

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Speaker 3: and the FED is also Pale has been very aggressive

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Speaker 3: about saying once they start cutting, they want to have

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Speaker 3: a series of cuts, and they don't necessarily want to

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Speaker 3: do a cut pause situation like what's happening in the Eurozone.

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Speaker 3: So I think that's this case.

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Speaker 2: So given all that, what do you want to jump

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Speaker 2: on in the short term versus being patient on.

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Speaker 3: Well, I think it definitely warrants broadening out the portfolio

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Speaker 3: a little bit right now. I don't think it's quite

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Speaker 3: time to go to go all in on the reversion trade,

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Speaker 3: but you know, taking some profits off of the megacap

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Speaker 3: growth and tech companies and redistributing that to the more

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Speaker 3: domestic focused small caps that have been that have proven

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Speaker 3: to be moved a lot more sensitive to rates. I

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Speaker 3: think that would be warranted right now given the data

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Speaker 3: flow that we've seen. That said, heading into earning season,

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Speaker 3: I don't want to completely discount the momentum and the

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Speaker 3: growth rate that those megacaps had, right so, you know,

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Speaker 3: I think it's time for a half step or quarter

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Speaker 3: step to rotate into some of the laggards on the year,

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Speaker 3: and we're going to have to see if they really

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Speaker 3: prove it through the next couple of weeks, whether or

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Speaker 3: not those valuations are warranted and those growth metrics are

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Speaker 3: you going to be delivered on.

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Speaker 2: So we've seen yields draw pretty significantly. Here the tenure

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Speaker 2: yield down to four point one six percent. The two

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Speaker 2: year was, you know, up over five percent, now at

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Speaker 2: four forty three. Let me pause it this and you

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Speaker 2: can you can tell me whether or not you think

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Speaker 2: it works that the bond market is sending us a signal.

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Speaker 2: It's telling us that no matter who wins the presidency

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Speaker 2: next year, the fiscal input is going to have to

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Speaker 2: be less. We just cannot keep running debt and deficits

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Speaker 2: like this. Is that part of the story.

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Speaker 3: I think it's you know, a little early to be

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Speaker 3: allowing the election necessarily to have an impact on asset

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Speaker 3: application this moment. You know, when it comes to the election,

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Speaker 3: there's a lot of policies at play. But this this

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Speaker 3: election season is far different than what happened back when

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Speaker 3: in twenty sixteen, because back then Trump was not expected

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Speaker 3: to win and no one really the market did not

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Speaker 3: expect that to happen, and his policies at that point

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Speaker 3: in time and their impact were relatively unknown. Well, now

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Speaker 3: we've had you know, Trump presidency, you know exactly who

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Speaker 3: the benefactors are going to be. But when you look

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Speaker 3: at Betty Markets and what the market expects as of today,

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Speaker 3: I mean, Trump is very much kind of expected to

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Speaker 3: be the winner with what we know now. So it's

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Speaker 3: uncertain exactly how much of that is already in the price.

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Speaker 3: And as we know, markets are going to respond to

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Speaker 3: you know, what happens relative to what's in the price,

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Speaker 3: not necessarily just based on what happens. So we're going

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Speaker 3: to have to watch that carefully. I think it's going

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Speaker 3: to be a lot less clear this time around what

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Speaker 3: the actual reaction is going to be.

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Speaker 2: Mike Dixon, head of Research and Product Development at Horizon Investments.

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Speaker 5: Bloomberg Opinion informed perspectives and expert data driven commentary on

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Speaker 5: breaking news.

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Speaker 2: Good morning, It is nine three pm on Wall Street,

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Speaker 2: nine forty three am here in Hong Kong, where I

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Speaker 2: am in I'm Brian Curtis in Hong Kong. It's time

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Speaker 2: to check in with Bloomberg Opinion. We're joined by opinion

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Speaker 2: columnists Minchin Pei, who has been writing about US China

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Speaker 2: relations in light of the presidential elections, We thought it

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Speaker 2: would be a good time to take a closer look

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Speaker 2: at some of the polly's policies that will be coming

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Speaker 2: from former President Trump and President Biden on China, on

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Speaker 2: the region, and on Taiwan. Minchin thanks very much for

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Speaker 2: being with us. Trump is cool to the idea of

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Speaker 2: protecting Taiwan from Chinese aggression, but I see from the

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Speaker 2: reaction in the Taiwan market this morning, we're only down

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Speaker 2: about a quarter of one percent, that investors don't seem

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Speaker 2: to be too worried about should we be.

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Speaker 1: We should not worry very much about what Trump says.

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Speaker 1: He keeps saying one thing and then doing another, so

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Speaker 1: he's totally unpredictable, and I think most people do not

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Speaker 1: believe at the moment in what he says. So the

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Speaker 1: market is reacting.

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Speaker 2: Rationally well, particularly in an area like that. But I

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Speaker 2: think we can believe that he would like to slap

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Speaker 2: sixty percent tariffs on China.

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Speaker 1: Oh yes, I think so. Trump has this sort of

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Speaker 1: double sided feature to his policy. On the one hand,

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Speaker 1: he's very tough on China in terms of trade. He

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Speaker 1: wants to cut China off from the US market. At

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Speaker 1: the same time, he does not care that much about

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Speaker 1: China's military might, especially where Taiwaan is concerned. There were

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Speaker 1: inconsistencies in there, because in his heart, Trump really does

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Speaker 1: not want to see China straw and powerful, and if

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Speaker 1: you see Taiwan to China, then China will become even

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Speaker 1: more powerful than it is today. So at the end

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Speaker 1: of the day, I think Trump will probably be tougher

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Speaker 1: on China where Taiwan is concerned. Then what he see.

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Speaker 2: I mentioned that Trump is cool to the idea of

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Speaker 2: protecting Taiwan from China. He's also cool to any American

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Speaker 2: efforts to punish Vladimir Putin. Is that something that will

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Speaker 2: further distance him from Europe?

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Speaker 3: For instance?

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Speaker 2: Oh?

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Speaker 1: Yeah, I think the war in Ukraine is much more urgent.

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Speaker 1: What haven't we say about Taiwan. Let's speak, there is

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Speaker 1: no war there and we have not seen China making

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Speaker 1: comprehensive preparations for invading Taiwan. By contrast, there is a

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Speaker 1: raging war in Ukraine that endangers Europe's security. So if

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Speaker 1: Trump stops US support or cuts you a support or

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Speaker 1: forces Ukraine to make a deal with Putin to put

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Speaker 1: his advantage. Then I think Europe will be very, very

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Speaker 1: worried and upset.

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Speaker 2: Now, Bloomberg is a very serious news organization, And in

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Speaker 2: the paragraph after the paragraph in our piece in Business

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Speaker 2: Week about Trump being cool to protecting Taiwan from China,

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Speaker 2: we write, and Trump in parentheses, who has a proclivity

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Speaker 2: to lie, insists he won't pardon himself if he's convicted

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Speaker 2: of a federal crime. You know, that's a very strong

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Speaker 2: statement by Bloomberg. Have we ever had a candidate that

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Speaker 2: such things were said of?

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Speaker 1: Yeah, well on Taiwan, we don't. I do not know

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Speaker 1: what exactly he says. So let's just look at Biden,

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Speaker 1: pop a guy what we consider honest. What have you

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Speaker 1: wanted to say about his his aging related issue. Biden

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Speaker 1: has said four times that the US would defend one,

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Speaker 1: but then his advisors would walk back. And when you

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Speaker 1: look at what Biden has said most recently, it actually

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Speaker 1: is different from what he's been saying before. So on

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Speaker 1: time one, you can see people all of the map.

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Speaker 1: So I think we have two sort of take a

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Speaker 1: step back and wait to see what exactly happens with

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Speaker 1: regard to Taiwan, and I think US policy makers, the

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Speaker 1: president on now will make their decisions depending on the circumstances.

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Speaker 2: Just briefly, we had JD. Vance talking about how China

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Speaker 2: was the number one enemy of the United States. We

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Speaker 2: know that vice presidents don't generally make policy, but is

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Speaker 2: this pairing together the two of them going to be

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Speaker 2: worrisome for China?

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Speaker 1: Oh? Yes, they're going to China will be very worried

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Speaker 1: about uh uh this pair because Biden no, no, sorry,

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Speaker 1: because Trump is very tough trade and if Man says

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Speaker 1: to Chinese an enemy, that means that you're going to

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Speaker 1: be tough on China militarily. Uh So this is not

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Speaker 1: going to be good news for China. And I think

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Speaker 1: some uh, the Republican leadership whatever, they need to keep

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Speaker 1: their rhetoric down. It helps nobody. If you are very

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Speaker 1: tough and you don't do much, then you lose credibility.

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Speaker 1: So I think they've they've got to watch what they say.

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Speaker 2: We've been asking all these questions. Uh if he wins.

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Speaker 2: Of course, this is predicated on if Trump wins. Uh So,

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Speaker 2: let me put it to you, mentioned who's going to

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Speaker 2: win nobody knows.

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Speaker 1: I think it really depends on what Sir Biden does

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Speaker 1: right now, Sir Biden, Well, Trump is riding high, but

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Speaker 1: still straighting the high months until election happens, So it's

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Speaker 1: an etunity in politics.

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Speaker 2: This is one dodging of the question that is totally justified.

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Speaker 2: Thank you so much, Minchin for joining us Bloomberg Opinion

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Speaker 2: columnus mintionin pay. You can read more on this and

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Speaker 2: other stories from Bloomberg Opinion at Bloomberg Opinion dot com,

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