WEBVTT - Oil Climbs on Middle East, Japan Earnings Outlook

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<v Speaker 1>Bloomberg Audio Studios, Podcasts, Radio News.

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<v Speaker 2>Welcome to the Daybreak Asia podcast. I'm Dan Schwartzman. Doug

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<v Speaker 2>Christner has the week off oil extended its games on

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<v Speaker 2>reports that Iran a tacked quote hostile targets in the

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<v Speaker 2>Strait of Hormuz, reviving inflation concerns. We also see this

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<v Speaker 2>real bifurcation of expectations with this deal with Oman as well.

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<v Speaker 2>Under a proposed Iran and Oman agreement, Tehran intends to

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<v Speaker 2>ban US and Israeli ships from the Strait and require

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<v Speaker 2>compensation from hostile countries to use it. In the States,

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<v Speaker 2>attention now turns to the US employment report on Friday for

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<v Speaker 2>clues on the federal reserves policy path. For more in

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<v Speaker 2>the markets, Bloomberg's Heidi Stroud Watts spoke to Lori Calvacina,

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<v Speaker 2>head of US Equity Strategy at RBC Capital Markets.

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<v Speaker 3>It has felt like an exceptionally exhausting number of factors.

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<v Speaker 4>What's type of mind for you at the moment, So look.

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<v Speaker 5>In as I've been here this week talking to Australian Investment,

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<v Speaker 5>We've been talking about the FED, We've been talking about tech,

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<v Speaker 5>we've been talking about the midterm elections, and I think

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<v Speaker 5>against the backdrop of all that, right, it's just where

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<v Speaker 5>valuations are. And we actually think if you look at

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<v Speaker 5>like US versus non US, you've gotten to a really

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<v Speaker 5>interesting place again. Basically, you know, after this burst of

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<v Speaker 5>geographical leadership or broadening, we saw the US is actually

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<v Speaker 5>looking cheap on a five year basis versus rest of world.

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<v Speaker 5>So we do think that helps dampen, you know, some

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<v Speaker 5>of the challenges we're dealing with on a day to

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<v Speaker 5>day basis.

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<v Speaker 3>Yeah, you can take a look at the chart that

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<v Speaker 3>is looking at as sort of quality factors, right, even

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<v Speaker 3>if you still have to deal with the momentum the gyrations.

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<v Speaker 3>When it comes to the chip trade in particular, we

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<v Speaker 3>are seeing kind of a lid being kept on volatility

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<v Speaker 3>measures as we've seen the quality of value factors actually

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<v Speaker 3>improve of the US. Where do you see that because

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<v Speaker 3>tech actually, if you guess go by the lofty earnings expectations,

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<v Speaker 3>looks pretty cheap in DM.

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<v Speaker 5>Yeah, so you know, look, I would just say on

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<v Speaker 5>the quality factor, I cover both large cap and small

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<v Speaker 5>cap in the US, and we've been seeing high earnings

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<v Speaker 5>quality outperform for a bit now, and we're starting to

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<v Speaker 5>see in the large cap space as well. We've been

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<v Speaker 5>highlighting that to investors this week, saying this is a

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<v Speaker 5>time to be more selective and you can think about quality,

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<v Speaker 5>you know, not just as a quant factor, right, but

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<v Speaker 5>in selection of management teams and just being more discriminating

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<v Speaker 5>within whatever sector you're in. And your point on technology,

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<v Speaker 5>I mean, you know, I think in the financial community

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<v Speaker 5>we often say tech tech is hiding in a bunch

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<v Speaker 5>of different sectors. Communication services, consumer discretion is where most

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<v Speaker 5>of the Internet names are. We're having a little bit

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<v Speaker 5>more challenges on free cash flow. But if you look

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<v Speaker 5>at the tech sector itself, which is largely Semis hardware software,

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<v Speaker 5>it's a cheap sector now, I mean that's not something

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<v Speaker 5>we could say even you know, a month or two ago,

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<v Speaker 5>and so we've actually been pointing people to that sector

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<v Speaker 5>and we've said, look, you know, the Semis SMP Semis

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<v Speaker 5>have come back down to five and thirty year averages.

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<v Speaker 5>Software is getting close to historical lows. That doesn't mean

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<v Speaker 5>every stock within that sector is going to be a winner,

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<v Speaker 5>but it is a place where value has been unlocked.

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<v Speaker 5>And at the end of the day, if you're a

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<v Speaker 5>longer term investor, you want to look at these volatility,

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<v Speaker 5>you know, sort of situations in the market and and

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<v Speaker 5>look where value has been unlocked and try to find opportunity.

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<v Speaker 3>When invite you know, in software there's now been talked

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<v Speaker 3>about you start seeing some of the software names taking

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<v Speaker 3>up AI in more of an efficient way. And that's

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<v Speaker 3>obviously a little bit more of a ball signal. But

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<v Speaker 3>the specifics of this is really interesting. Right. I think

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<v Speaker 3>I ready note that he said, you know, you need

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<v Speaker 3>to look for the picks and shovels of the pigs

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<v Speaker 3>and shove rights trade.

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<v Speaker 4>Right, what about the trickle down trade? Is that happening

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<v Speaker 4>across it? The broadening when you're saying that you need

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<v Speaker 4>to be more selective.

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<v Speaker 5>You know, we have you know, our view on the

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<v Speaker 5>broadening trade has been a little bit different than most strategists.

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<v Speaker 5>You know, I think a lot of strategists came into

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<v Speaker 5>this year saying it's time for the market to broaden,

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<v Speaker 5>and we said, you know, we think this is more

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<v Speaker 5>of a tug of war and you're going to see

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<v Speaker 5>a back and forth between kind of the old leadership

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<v Speaker 5>and kind of you know, the rest of the market.

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<v Speaker 5>And we've had a few twists and turns in that already,

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<v Speaker 5>and I think that, to be honest, we got to

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<v Speaker 5>a situation a couple months ago where kind of the

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<v Speaker 5>old AI tech megacat growth leadership got overvalued. I think

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<v Speaker 5>that valuation problem has been largely solved. And one of

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<v Speaker 5>the things we're seeing on our data as we go

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<v Speaker 5>through earnings is that if you look at a broader

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<v Speaker 5>basket of AI stocks, that you've seen a tremendous kind

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<v Speaker 5>of upside surprise and the earning's growth for twenty twenty six,

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<v Speaker 5>and it's still showing a lot of superiority versus the rest.

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<v Speaker 4>Of the market.

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<v Speaker 5>And so one of the things we've said is that

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<v Speaker 5>until the rest of the market can give you a

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<v Speaker 5>better earning story, we think you're just going to flip

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<v Speaker 5>flap back and forth between the two. And when you

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<v Speaker 5>get the valuation problem on one, you'll go into the other,

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<v Speaker 5>and then when you solve that, you'll go back again.

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<v Speaker 5>And I think that's what we're in the middle of

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<v Speaker 5>right now. Frankly, how much of the views.

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<v Speaker 3>On US tech quality value full costing is that being

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<v Speaker 3>challenged by the China Ai story.

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<v Speaker 5>Look, I think you know, as we kind of go

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<v Speaker 5>back and look at some of the things we've heard

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<v Speaker 5>from the administration in the US. They've made it clear

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<v Speaker 5>that they're sort of fusing economic security and national security

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<v Speaker 5>and they want the US to win the AI race.

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<v Speaker 5>So that's something that's been coming up a bit this

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<v Speaker 5>week as well when we're talking about US tech. But

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<v Speaker 5>I think it is also, you know, a source of volatility,

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<v Speaker 5>right when we get some of these news developments that

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<v Speaker 5>sort of challenge that idea of the US doing well

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<v Speaker 5>on that front.

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<v Speaker 4>And we touched a little bit on the.

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<v Speaker 3>How many questions are you being offed about the FED

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<v Speaker 3>outlook because obviously we had another sort of instance to

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<v Speaker 3>be concerned about FED independence. Joe Walsh is obviously in

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<v Speaker 3>a difficult situation, right, do you feel like the market

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<v Speaker 3>is underestimating the inflation and the energy impact?

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<v Speaker 5>So look, I'll say our rate strategist, Blake Gwenn does

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<v Speaker 5>not have any hikes in his forecast over the next

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<v Speaker 5>twelve months.

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<v Speaker 6>Now.

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<v Speaker 5>He will also tell you that the bar is Lofer hikes,

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<v Speaker 5>so you know, he recognizes that it's a fluid situation

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<v Speaker 5>and we have to keep an eye on the data,

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<v Speaker 5>We have to keep an eye on additional FED speak

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<v Speaker 5>in the future. But look, I think the reality is that,

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<v Speaker 5>you know, the bond market is expressing some worry and

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<v Speaker 5>frankly worries that I'm not necessarily seeing expressed in the

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<v Speaker 5>equity market. I think the press conference last week, you know,

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<v Speaker 5>that has come up in meeting after meeting this week,

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<v Speaker 5>and I've been pointing people to a chart that basically

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<v Speaker 5>looks at how the stock market performed in the US

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<v Speaker 5>after Bernank, Yell, and Powell took over. And guess what,

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<v Speaker 5>just like Warsh, they had a rough first couple of

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<v Speaker 5>months on the job from a stock market perspective, But

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<v Speaker 5>with all three of those, the market was hire a

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<v Speaker 5>year after they stepped into the job. So you know,

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<v Speaker 5>we've looked at the facts that the market has essentially

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<v Speaker 5>been trading sideways at least until this week when it's popped,

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<v Speaker 5>But it had been short of trading sideways ever since

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<v Speaker 5>Warsh took over.

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<v Speaker 4>By historical standards, that is not unusual.

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<v Speaker 5>It does take financial markets time to get used to

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<v Speaker 5>a new way of doing things.

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<v Speaker 2>That was Lori Calvacina, head of US Equity strategy at

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<v Speaker 2>RBC Capital Markets, speaking of Bloomberg's Heidi Shroud, Watts and

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<v Speaker 2>we're bringing their conversation to you here on the Daybreak

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<v Speaker 2>Asia podcast. Welcome back to the Daybreak Asia Podcast. I'm

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<v Speaker 2>Dan Schwarzman. Doug Chrisner has a week off. Over the

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<v Speaker 2>last several days, Japan had several companies report earnings. Da Nishihada,

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<v Speaker 2>chief Japan equity strategists for JP Morgan Securities, spoke to

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<v Speaker 2>Bloomberg's cherry On about her outlook on the Japanese earning season.

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<v Speaker 6>Cool fourth earnings are very very strong, as you said

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<v Speaker 6>about more than half of the major companies have reported.

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<v Speaker 4>And sales growth in.

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<v Speaker 6>Ear is fifteen percent and NETT income gross is fifty percent.

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<v Speaker 6>They are stronger than the pier in US and Europe.

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<v Speaker 6>And we have to remember that the strong growth earnings

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<v Speaker 6>growth was realized under high oil prices. Japan is all

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<v Speaker 6>important company, which means corporate pricing power is you know,

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<v Speaker 6>has become very strong structurally in my view, and the

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<v Speaker 6>driver of earnings grows, as you say, is broadening beyond

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<v Speaker 6>the AI, semi banks, trading companies, wholesale companies and the machinery.

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<v Speaker 1>Also the driver I was going to say, I mean,

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<v Speaker 1>how much of the strength are you seeing across the

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<v Speaker 1>board at a time when we've discussed the supply chain disruptions,

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<v Speaker 1>rising costs, and of course not to mention on the

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<v Speaker 1>backge of everything is also tariff costs still in play

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<v Speaker 1>at the moment, right, So, I.

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<v Speaker 6>Mean Japan's price transfer ratio has under the differational economy

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<v Speaker 6>has been fifty percent compared to eighty nine to ninety

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<v Speaker 6>percent in US so and now start of the twenty

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<v Speaker 6>twenty three it's jumped up to seventy percent, and even

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<v Speaker 6>under the difficult phases in a US tariff in two

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<v Speaker 6>susan twenty five or higher old prices this year, actually

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<v Speaker 6>this price transfer ratio down just a bit like sixty

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<v Speaker 6>eight or so, so still higher than you know, fifty

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<v Speaker 6>percent in the differational economy. So that makes corporate earnings

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<v Speaker 6>it's still strong. We compute it as impact by higher

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<v Speaker 6>old prices this time is will be something like six

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<v Speaker 6>percent point down. But actually, I mean market consensus is

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<v Speaker 6>continued to upward the division even after this much.

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<v Speaker 1>Do businesses themselves understand the strength of their business right now?

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<v Speaker 1>The issue with Japan has always been cashwoarding, right business

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<v Speaker 1>is not spending on the future and not paying there's

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<v Speaker 1>the salaries of employees, so you can see a virtual

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<v Speaker 1>cycle of wage growth as well. We've seeing that change

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<v Speaker 1>in mindset.

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<v Speaker 6>Yes, long growth is now six percent, which is recorded

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<v Speaker 6>high these days.

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<v Speaker 4>So which is this is because.

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<v Speaker 6>Of the growth of the corporate appetite to growth investment

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<v Speaker 6>It has just started. This is I think in related

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<v Speaker 6>with a government promotion of growth investment. Corporate governance now

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<v Speaker 6>focus on how corporates use excess catch in the balance sheet.

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<v Speaker 6>So one way is to use for growth investment. Another

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<v Speaker 6>way is to increase which you know, both of which

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<v Speaker 6>should lead to a better economy, that circular circle of

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<v Speaker 6>good economy.

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<v Speaker 1>How are they viewing the length the strength of the

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<v Speaker 1>end right now?

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<v Speaker 4>One fifty eight.

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<v Speaker 6>Yeah, but from a ReSpectacle of equity markets, actually dollar

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<v Speaker 6>ym beilau one sixty is okay, you know, I mean manageable.

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<v Speaker 4>A corporate assumption.

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<v Speaker 6>For twenty six f y dollar yen is one fifty

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<v Speaker 6>two with conservative bias, and one fifty is the last

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<v Speaker 6>year's average. So our break given dollar M for households

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<v Speaker 6>real income gross is one sixty. So of course Takaha

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<v Speaker 6>administration's physical expansion continue yen weakening pleasure. But we also

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<v Speaker 6>heard last last month that government hint a potential GPIF

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<v Speaker 6>investment shift and we saw japan US joined the EXXS intervention.

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<v Speaker 6>So such through funds policy would be some supportive factor

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<v Speaker 6>to reduce a father yen weakening.

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<v Speaker 1>Appreci shaping morgancy in the yen year end.

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<v Speaker 4>Yeah, one sixty four year.

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<v Speaker 1>Okay, despite everything that has happened.

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<v Speaker 6>There from now still you know, four months from now.

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<v Speaker 6>So but there is also you know, risks in a

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<v Speaker 6>short term, and such a government address should keep in

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<v Speaker 6>a bit strong strong.

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<v Speaker 1>Yeah, not to mention, of course, bog decisions as right

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<v Speaker 1>when it comes to these businesses. We talked about the

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<v Speaker 1>strength of the semiconductor side of things, and we talked

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<v Speaker 1>about the broadening of the machinery other sectors like banks

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<v Speaker 1>as well. Are there any outstanding to you that you

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<v Speaker 1>think have more potential going forward?

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<v Speaker 6>Yes, I overweight bunks from structured perspective, life, from medium term,

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<v Speaker 6>you know, time horizon. Some investors see the banks evaluation

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<v Speaker 6>current PB one point five times, PE fifteen times already

0:11:50.960 --> 0:11:51.600
<v Speaker 6>pricing to.

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<v Speaker 4>Bog rate hikes. So what else?

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<v Speaker 6>But my view is, you know, long growth is one thing.

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<v Speaker 6>This is the start of this call of strong growth investment.

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<v Speaker 6>Another thing is potential deposit shift. Deposit shift makes the

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<v Speaker 6>banks who has resilience to deposit beta longtime rates rising

0:12:12.480 --> 0:12:18.000
<v Speaker 6>or upgraded cyber attack can be winner. Through this process,

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<v Speaker 6>I think deposit yield rong ill will be normalized from

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<v Speaker 6>a level under theferational economy. That is categorist that has

0:12:27.000 --> 0:12:29.720
<v Speaker 6>not been in EPs or ALOE.

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<v Speaker 7>That was Rija Nichi had a chief japan equity strategist

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<v Speaker 7>at JP Morgan Securities, speaking of Bloomberg Sharry On and

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<v Speaker 7>we're bringing their conversation to you here on the Daybreak

0:12:39.000 --> 0:12:39.880
<v Speaker 7>Asia podcast.

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<v Speaker 8>Thanks for listening to today's episode of the Bloomberg Daybreak

0:12:45.559 --> 0:12:48.920
<v Speaker 8>Asia Edition podcast. Each weekday, we look at the story

0:12:49.000 --> 0:12:53.320
<v Speaker 8>shaping markets, finance, and geopolitics in the Asia Pacific. You

0:12:53.360 --> 0:12:57.480
<v Speaker 8>can find us on Apple, Spotify, the Bloomberg Podcast YouTube channel,

0:12:57.600 --> 0:13:00.600
<v Speaker 8>or anywhere else you listen. Join us again tomorrow for

0:13:00.720 --> 0:13:04.240
<v Speaker 8>insight on the market moves from Hong Kong to Singapore

0:13:04.640 --> 0:13:08.400
<v Speaker 8>and Australia. I'm Doug Prisoner and this is Bloomberg