Speaker 1: Bloomberg Audio Studios, Podcasts, radio News.
Speaker 2: Welcome to the Daybreak Asia podcast. I'm Dan Schwartzman. Doug
Speaker 2: Chrisner has a week off Asian stock slip Thursday after
Speaker 2: a recent tech led rally on w washreet paused crude
Speaker 2: oil edge lower as you run, reached an agreement with
Speaker 2: Oman on the Street or horror Mouz from more in
Speaker 2: the markets, Bloomberg's Heidi Shroud Watts spoke to Kerry Craig,
Speaker 2: Global Market Strategist to JP Morgan Asset Management.
Speaker 1: We were just sort of chuckling earlier about how you're
Speaker 1: getting the same thematic of questions from clients at the moment.
Speaker 3: What do they want to know?
Speaker 4: Yeah, it's a pretty consistent understanding of what's happening in
Speaker 4: the markets. Obviously, there's been all this investment around the
Speaker 4: aikpex theme, and it's all about when that comes to
Speaker 4: fruition in terms of thinking about that revenue generation and
Speaker 4: that return on that investment that you know, investors are
Speaker 4: grappling with the moment, and that's a big question because
Speaker 4: the time horizon on that can vary massively. Obviously, investors
Speaker 4: want to see that come through quicker, but it takes
Speaker 4: time for that builder to happen, for that adoption to
Speaker 4: really take place and see that benefit build through. So
Speaker 4: it's grappling with that horizon for that investment to really
Speaker 4: pay off. And the second question that really comes up
Speaker 4: is is who's going to win from all this? Which
Speaker 4: of the hyperscalers may be the one that comes out
Speaker 4: on top. Is it going to be the adopters of
Speaker 4: this technology in terms of improving productivity, enhancing margins, or
Speaker 4: how does it play through for the labor and how
Speaker 4: does it play through for workers as well, So a
Speaker 4: lot of questions there that come up consistently. I think
Speaker 4: our message is that this is an enduring theme when
Speaker 4: we think about AI and this capex. It's continually being
Speaker 4: revised higher and so far. And we look at the
Speaker 4: earnings for this season, they're very strong, they're good, so
Speaker 4: we don't see any need to shy away. But we
Speaker 4: are becoming more discerning in terms of how we think
Speaker 4: about the market, and so as investors, you can clearly
Speaker 4: see that in this quarter's earnings in terms of who's
Speaker 4: being rewarded and who hasn't. But you know, when we
Speaker 4: look at what's happening in North Asia. The supply chain
Speaker 4: is still very strong. It's very hard to see that
Speaker 4: being competed away, and so we still think about investing
Speaker 4: across the whole AI landscape in terms of the hyperscalers,
Speaker 4: the supply chain, the apps, everything that really does benefit
Speaker 4: from what is going to be a very long time
Speaker 4: frame on this theme.
Speaker 1: You do expect that the volatility is going to become
Speaker 1: more of a common theme, that the dispersion becomes more
Speaker 1: significant as well, right within the names that we've seen,
Speaker 1: you know, for a very long time going in one direction.
Speaker 4: Yeah, we've seen that dispersion come through on the mag
Speaker 4: seven as you've seen the performance in the first half
Speaker 4: of this year, and that money has been rotated around
Speaker 4: from hyperscalers to semiconductors to memory names, and so it's
Speaker 4: coming back around to some of the hyperscalers at the moment.
Speaker 4: But I think that's just indicative of the market trying
Speaker 4: to figure out who's going to be the biggest beneficiary
Speaker 4: of it. It has been about following that capex and
Speaker 4: going to the beneficiaries rather than spenders of that so far.
Speaker 4: But I think it's also saying to come back in
Speaker 4: terms of that valuation question. Valuations aren't challenging across the board.
Speaker 4: They're certainly not cheap, but they're not challenging. But we
Speaker 4: have seen that gap around the top ten stocks in
Speaker 4: the US relative to the rest of the market start
Speaker 4: to narrow and those where the earnings are again being
Speaker 4: quite strong. So we want to follow that earnings growth
Speaker 4: in terms of positioning.
Speaker 3: It's when you're in talk about that great big ball
Speaker 3: of money. I think that's an image that.
Speaker 1: We'd previously probably associated with something like the domestic Chinese market,
Speaker 1: but the circular funding aspect has been one that's booked
Speaker 1: investors as well. Right, what do you see is being
Speaker 1: the impact in debt financing and opportunities there.
Speaker 4: Yeah, that's come up as a pretty consistent question. I
Speaker 4: think it comes back to some of the correlation concerns
Speaker 4: around AI just permeating all these different asset classes and
Speaker 4: how you put that.
Speaker 3: Together in a portfolio.
Speaker 4: But certainly high level of issuance around investment grade for
Speaker 4: a lot of the IA on hyperscalar names this year.
Speaker 4: I think the pace at which it came through, you know,
Speaker 4: caused a little bit of indigestion for the markets in
Speaker 4: terms of the over subscription rates for some of that
Speaker 4: issuance tailing off, and we've seen spreads widen on some
Speaker 4: of those names, especially at the longer duration end of
Speaker 4: the issuance. And so I think that's again in line
Speaker 4: with thinking about what's the timescale for seeing this return
Speaker 4: on investment, particularly those cash flows start to go negative
Speaker 4: for a lot of these companies, But ultimately these are
Speaker 4: good quality companies.
Speaker 3: Leverage is packed up a little bit.
Speaker 4: But certainly not concerningometrics such as debt to e bit da.
Speaker 4: There again sort of in line with what we would
Speaker 4: think about. So it's an opportunity to pick up a
Speaker 4: little bit more income if we see that issuance becoming
Speaker 4: a little bit more structured and steady rather than surprising.
Speaker 4: I think the market can digest that because been a
Speaker 4: lot of flows into investment grade credit. Its still a
Speaker 4: lot of demand there, and I think it's a way
Speaker 4: to sort of play through a quality and a portfolio
Speaker 4: when we don't really have any concerns around the macroeconomic
Speaker 4: environment at the moment.
Speaker 1: China played a big role in terms of bringing this
Speaker 1: AI trade down to earth a bit.
Speaker 3: Does that mean you would be a little more opportunity.
Speaker 1: Opportunistic when it comes to the names in China, for example,
Speaker 1: given the cost and efficiency savings that we've been talking about.
Speaker 4: Yeah, the competitive angle and the token cost that's coming
Speaker 4: through has been obviously a focus in terms of thinking
Speaker 4: about adoption rates and that revenue generation. I think the
Speaker 4: advancements that are happening are just amazing. When you say
Speaker 4: the number of models that are coming out and how
Speaker 4: sophisticated they are. They're still a little bit behind in
Speaker 4: terms of what we're seeing in the US models, but
Speaker 4: they certainly are catching up, and they're doing so at
Speaker 4: a relatively lower cost for these open weight model in
Speaker 4: terms of tokens, but they do use a lot more
Speaker 4: tokens overall because of that. If I was looking at
Speaker 4: the Chinese markets today and thinking about how to invest it,
Speaker 4: I would be investing in line with those policy dynamics
Speaker 4: that the Chinese government is pursuing, and that is around
Speaker 4: you know, structural build out and thinking about supply chain
Speaker 4: for the AI theme.
Speaker 3: Investing in these big labs.
Speaker 4: That come out there in these open weight models, and
Speaker 4: more in line how that benefits broader into the economy.
Speaker 4: So some of the Internet names are starting to benefit
Speaker 4: and then also in terms of the greener side of
Speaker 4: the economy, there's still focusing a lot on that sustainable
Speaker 4: investment electricity to fund all this. So I think there's
Speaker 4: a few dynamics when it comes to the Chinese market.
Speaker 4: The real issue there is again around the housing the
Speaker 4: domestic consumer and how that's playing through, and that's again
Speaker 4: one of the struggles for both the market and the economy.
Speaker 1: You still want the inflation protection and in any sort
Speaker 1: of ideal portfolio, because it feels like investors, you know,
Speaker 1: so infatuated with the AI trade, have been mostly quite
Speaker 1: happy to ignore the risk of high energy prices.
Speaker 4: Yeah, it's been remarkable how quickly that oil prices come
Speaker 4: down on the scope for what could be quite a
Speaker 4: narrow deal to reopen the strait of hor moves. I
Speaker 4: think there's still a lot of I guess, operational risk
Speaker 4: we would say, in terms of shipping companies who want
Speaker 4: to go through that straight, any other costs that may
Speaker 4: be associated with having to go through it, in terms
Speaker 4: of what may be charged to pass through there, and
Speaker 4: also the insurance costs which can move higher as well.
Speaker 4: So all that was to us would suggest there should
Speaker 4: be a little bit more premium of risk and that
Speaker 4: oil price, and so we could see it go back
Speaker 4: up from today's level. But if it's it's around eighty
Speaker 4: five ninety dollars a barrel, that's probably not too challenging
Speaker 4: for their kminmic environment. It's more when we look at
Speaker 4: crackspreads and refinery costs, they're starting to move higher. When
Speaker 4: we start to think about gas prices or diesel prices,
Speaker 4: that's the bit that impacts the economy, and that's where
Speaker 4: we could see some inflation pressure come through. When we
Speaker 4: look at the inflation numbers around the world, it's been
Speaker 4: sort of a trend of disinflation. That's how much that
Speaker 4: gets derailed via this latest skirmish that's come through. We
Speaker 4: see those numbers start to come up. And with the
Speaker 4: central banks, I think they need to actually start to
Speaker 4: respond to these inflation shocks from the supply side, which
Speaker 4: they would typically normally look through.
Speaker 1: I've got President Trump working on his tariffs again, bringing
Speaker 1: that to the four again. It's interesting you have the
Speaker 1: ASEX at a record high. It's the heavy lifting coming
Speaker 1: from the old economy type stocks like the big miners.
Speaker 3: Is that a reasonable haven to me?
Speaker 4: I think it's good from thinking about some of the
Speaker 4: structural stories and demand for things like copper that could
Speaker 4: play through on the electrication side, that these are again
Speaker 4: sort of big stable companies that we see through. If
Speaker 4: you do get upside to growth from China, for example,
Speaker 4: that would be beneficial for.
Speaker 3: That part of the market.
Speaker 4: But I think it's more reflective of some of the
Speaker 4: more domestic concerns that are heading some of the domestic
Speaker 4: players in the Australian market, particularly as you look into
Speaker 4: the earning season. Here to be a big focus on
Speaker 4: domestic cyclicals, the housing market obviously linking into back into
Speaker 4: the banks and how they perform. Whereas when we look
Speaker 4: at the miners and what they're saying, you know, what
Speaker 4: is it saying that they're going to be driving a
Speaker 4: lot more of the earnings growth for this season at least,
Speaker 4: and so they's going to be quite a spread I
Speaker 4: think in the market for the earning season this year,
Speaker 4: and probably just like we saw back in February, a
Speaker 4: lot of volatility in terms of that sort of have
Speaker 4: and have nots that we saw come through there.
Speaker 2: Bloomberg's Heidi Shroud Watts speaking to Kerry Craig Global Market
Speaker 2: strategists at JP Morgan Asset Management, and we're bringing their
Speaker 2: conversation to you here on the Daybreak Aisia Podcast. Welcome
Speaker 2: back to the Daybreak Asia Podcast. I'm Dan Schwartzman. Doug
Speaker 2: Chrisner has the week off. As I mentioned earlier, Asia
Speaker 2: shares slipped as the AI rally paused from more on
Speaker 2: Chinese markets. Bloomberg's David and Glass and April Hank spoke
Speaker 2: to Ava Lee, head of Greater China Equities at UBS
Speaker 2: Global Wealth Management.
Speaker 3: What is the investment case you're making.
Speaker 5: Are we in the early innings of that rotation back
Speaker 5: into Chinese internet platform names.
Speaker 6: I think that already has you know, happened. I'm not
Speaker 6: saying that already done, but is just happening. We noted that,
Speaker 6: you know, the foundation models.
Speaker 3: I mean we are now have.
Speaker 6: I think three different companies rowing out their latest version,
Speaker 6: sort of proving that, you know, China AI, we're not
Speaker 6: too far behind, you know, the global piers.
Speaker 3: First thing.
Speaker 6: Second thing is, of course the overall e commerce space.
Speaker 6: People have been feared about the subsidies they've given to
Speaker 6: the food delivery companies come in and say hey, we
Speaker 6: are doing you know, sort of reducing the subsidies, so
Speaker 6: the worst in terms of earnings momentum or the subsidies
Speaker 6: the most that is already behind us. So that's the
Speaker 6: two things that you know, sort of lifting the sentiment
Speaker 6: of China.
Speaker 7: Tag okay, China takes a big bucket with many different
Speaker 7: different parts. Right now, I think Internet you've raised that
Speaker 7: from fifty second semis I think are still number one
Speaker 7: for you, correct, But do you have differentiade how you're
Speaker 7: looking at Chinese How what's the best way to play
Speaker 7: Chinese tack and Chinese AI at this point?
Speaker 6: Given that information, let me bring you from what global
Speaker 6: sort of looking at AI Right at the moment, everyone
Speaker 6: focusing on monetization, and I think that will also be
Speaker 6: the case for China. So whoever be able to deliver
Speaker 6: like crowd growth better than people expect margins better, These
Speaker 6: is the companies that people will focus on. And on
Speaker 6: top of that, some of them even have their own
Speaker 6: chips AI chips that they already developed. They able to
Speaker 6: sell it to other companies exactly what US has been doing,
Speaker 6: and that company would sort of be more supported in
Speaker 6: terms of evaluation.
Speaker 3: So now we're talking about show.
Speaker 6: Me the money, like you spent a lot already. China
Speaker 6: might not be the case, but they do spend as well. Right,
Speaker 6: So now who are about able to capture you know,
Speaker 6: the most benefit out of.
Speaker 3: These sort of spending. I think that's the how you.
Speaker 6: Sort of pick the winners versus the average.
Speaker 5: So how much catch up you thing is possible on
Speaker 5: the hung Stan tape because you look at EPs and
Speaker 5: other metrics, you know, things still look quite subdued.
Speaker 3: Well, we have to look at both sides.
Speaker 6: First, the margins of the cloud in China it's a
Speaker 6: lot lower than that of you, so we cannot say
Speaker 6: that Chinese valuations will be you know, matching that because
Speaker 6: we're talking about US thirty thirty over thirty percent China
Speaker 6: like teens margins, it's already a breakthrough compared to nine
Speaker 6: percent in the past.
Speaker 3: But having said that, when.
Speaker 6: You look at its own trajectory, I think at the
Speaker 6: moment we're talking about just slightly about average, so we're
Speaker 6: not yet at the level that very worrying. We're talking
Speaker 6: about closed to like high teens, high teens versus the
Speaker 6: earnings that they're going to deliver. We're talking about you know,
Speaker 6: close to twenty fifteen to twenty percent on a three
Speaker 6: year cagabasis. I think it's still very reasonable, so I
Speaker 6: don't worry too much about valuation, but be you know,
Speaker 6: realistic about how.
Speaker 3: Much they can narrow the gap against the USBN.
Speaker 5: Helpers also understand some of the you know, broader dynamic
Speaker 5: place because we are seeing today the costs be right
Speaker 5: getting hard hit. And this is you know, we where
Speaker 5: maybe we saw a bit of optimism surrounding the memory
Speaker 5: the momentum coming back. How are investors then allocating towards
Speaker 5: China with that in mind? And then within China as well,
Speaker 5: what are you seeing in terms of you know, the
Speaker 5: crackdown you're seeing on some of the tax issues. Does
Speaker 5: that also affect the hunting financial related stocks and then
Speaker 5: drive things further into hunsting tech.
Speaker 3: So within the entire AI space.
Speaker 6: Were regionally people very much into these certain memory trips
Speaker 6: in particular, But if you look at the past memory trips,
Speaker 6: sort of the bull market never lasts more than twelve months.
Speaker 6: This round is very special because you need a lot
Speaker 6: and then the market that doesn't have enough, so you
Speaker 6: have a substantial and growing demand and then supply you
Speaker 6: take time to catch up. But it will catch up eventually, right,
Speaker 6: and it's not just from career. Maybe China is doing
Speaker 6: some memory trips as well. So the situation is moving,
Speaker 6: so people need to monitor that and do not expect.
Speaker 6: Do not look at E because the E can disappear
Speaker 6: or lowered in you know, two to three years time.
Speaker 6: I think that's very important when you look at PEL right,
Speaker 6: sustainability of learnings. Apart from that, when you look at
Speaker 6: the entire monetization side, I talk about my foundation model.
Speaker 3: Now almost every.
Speaker 6: Week we have one or two new models coming through.
Speaker 6: So the competition is crazy. So when you sort of
Speaker 6: analyze the situation, we need to look at the competition's level,
Speaker 6: the how whether one will be able to dominate the
Speaker 6: market share, and then you can pick your stuff. It's like, oh,
Speaker 6: I know that they have the ecosystem. The ecosystem will
Speaker 6: not disappear. The people already rely on the you know,
Speaker 6: the chair, the payment they already develop happened, it's very
Speaker 6: tough for them to move. So I think this is
Speaker 6: also very important to understand. Now we're talking about AI monetization,
Speaker 6: who able.
Speaker 3: To capture this become a recurring earnings.
Speaker 7: If investors can't be bothered with all that. If that's
Speaker 7: just a headache picking the winners, are there other sectors
Speaker 7: that seem to be cleaner cut income? There's been returned
Speaker 7: to cyclicals and value recently fixed income. I don't know,
Speaker 7: like what else are what are we missing as we
Speaker 7: obsess over this.
Speaker 6: Recently we have been we have talked about this yield,
Speaker 6: you know, seeking for yield. Banks already have done very well.
Speaker 6: We start to see a bit of rotation. So you
Speaker 6: showed earlier a bit of rotation. Domestic insurance companies, you know,
Speaker 6: should be also gaining this. People seeking to invest and
Speaker 6: not necessarily to equity market all the way, right, they
Speaker 6: might seek for some investment product over by insurance companies.
Speaker 3: Domestic insurance company.
Speaker 6: So that is going to do well apart from that
Speaker 6: something so you actually started to do buy back and
Speaker 6: look at the share price.
Speaker 3: It really reflect that corporate.
Speaker 6: Governance, not just in China, I think also in Japan,
Speaker 6: a few Thinkapore.
Speaker 3: You know, we have some reasons.
Speaker 6: That these are even on a higher I mean, US
Speaker 6: tenure yields at four point six is not low. But
Speaker 6: people still you know, sort of think about what sort
Speaker 6: of a positive carry I can get from the diffident stocks.
Speaker 3: I think that's another element.
Speaker 6: Lastly, going overseas, we have been seeing certain sectors really
Speaker 6: already done a lot of work in the past in
Speaker 6: terms of breaking into the international channel, so they are
Speaker 6: able to gain margins because China, the involution the really
Speaker 6: creating very efficient margins within the space, so when they
Speaker 6: expand the goods very competitive in the international market.
Speaker 2: That was Avia Lee, head of Greater China Equities at
Speaker 2: UBS Global Wealth Management, speaking of Bloomberg's David and Glass
Speaker 2: and April hag And we're bringing their conversation to you
Speaker 2: here on the daybreakas podcast.
Speaker 8: Thanks for listening to today's episode of the Bloomberg Daybreak
Speaker 8: Asia Edition podcast. Each weekday, we look at the story
Speaker 8: shaping markets, finance, and geopolitics in the Asia Pacific. You
Speaker 8: can find us on Apple, Spotify, the Bloomberg Podcast YouTube channel,
Speaker 8: or anywhere else you listen. Join us again tomorrow for
Speaker 8: insight on the market moves from Hong Kong to Singapore
Speaker 8: and Australia. I'm Doug Prisoner and this is Bloomberg