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Speaker 1: Bloomberg Audio Studios, podcasts, radio News. Welcome to the Daybreak

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Speaker 1: Asia podcast. I'm Doug Krisner. We have a rally underway

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Speaker 1: in Japanese equities. This is after our Prime Minister, Sunday

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Speaker 1: Takaichi managed a historic landslide win in Sunday snap election,

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Speaker 1: and the local broadcaster NHK is reporting Takaichi's ruling Liberal

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Speaker 1: Democratic Party has secured a two third super majority in

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Speaker 1: the lower House. Now, the outcome gives Takeiichi a mandate

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Speaker 1: to push ahead with some bold economic plans to fuel growth.

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Speaker 1: So to help us understand what this outcome means from markets,

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Speaker 1: we are joined by Shintaro Takauchi, portfolio manager at Matthew's Asia.

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Speaker 1: Shintaro joins us from San Francisco. Thank you for being here.

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Speaker 1: Can I get your take on whether or not you're

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Speaker 1: really surprised by this outcome?

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Speaker 2: In any way, the win itself is not that much

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Speaker 2: of a prize, and the LDP Echane coalition securing a

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Speaker 2: majority was widely expected. However, this level of landslide meaning

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Speaker 2: that LDP alone securing the super majority of two thirds,

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Speaker 2: which is basically the largest win since post World War Two.

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Speaker 3: At least caught me as a surprise.

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Speaker 1: So take is intending to do a lot in terms

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Speaker 1: of stimulating the economy. She's going to accelerate talks on

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Speaker 1: a tax cut for the sales of food. She's also

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Speaker 1: pledging to ramp up defense spending. Is that really what

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Speaker 1: the equity market is focused now on. I mean the

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Speaker 1: largesse of the fiscal stimulus.

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Speaker 2: Yes, I think last night's a landslide victory enables her

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Speaker 2: administration to push for the agenda. The focus area of

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Speaker 2: investments will be in growth areas such as science technology, semiconductors,

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Speaker 2: defense industry, digital infrastructure.

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Speaker 3: And also strategic supply chain resilience.

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Speaker 2: And also at the same time, they have been announcing

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Speaker 2: a tax cut on food and beverages only for the

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Speaker 2: two years, so that is also an action, and I

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Speaker 2: think the market is reacting on that.

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Speaker 1: It's interesting if you look at the currency market today.

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Speaker 1: When Asian trading began, the end showed a little bit

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Speaker 1: of weakness, but I'm seeing a strengthening again right now

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Speaker 1: at around one fifty six eighty. Is this really a

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Speaker 1: part of her strategy to keep the end a little

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Speaker 1: weak so that you can have some of the exporters

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Speaker 1: benefit from that.

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Speaker 2: I think in part the range between one hundred and

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Speaker 2: forty to one hundred and sixty en to the dollar

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Speaker 2: is our base case, and so long as it's within

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Speaker 2: the range, I think the government is not making any

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Speaker 2: kind of push like to low or you know, weaken

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Speaker 2: the currency.

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Speaker 3: At this moment.

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Speaker 2: Another thing is the Minister of Finance, Satsuki Katayama, has

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Speaker 2: reiterated the mention of the food sales taxes only for

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Speaker 2: two years and will not issue fresh government bond for this.

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Speaker 2: So I think this also helped not like a yeah

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Speaker 2: and sliding too much.

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Speaker 1: What are you seeing in the Japanese bond market and

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Speaker 1: how may that impact some of the big banks in Japan.

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Speaker 2: I think overall, currently the eel curve itself. You know,

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Speaker 2: of course you're seeing the longer end of the bond

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Speaker 2: yield spiking, but the shorter end is relatively stable at

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Speaker 2: this moment. Although you know, compared to a couple of

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Speaker 2: years ago, it's obviously higher, but it's still much lower

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Speaker 2: than the inflation rate itself that is happening in Japan.

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Speaker 3: I think overall, what.

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Speaker 2: We need to watch, especially as an equity investor, is

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Speaker 2: that the nominal GDP growth of Japan is for the

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Speaker 2: first time in a very long while, is meaningfully growing,

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Speaker 2: and we view nominal GDP growth is a proxy of

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Speaker 2: top line growth of opportunity in domestic Japan. Nominal GDP

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Speaker 2: in Japan has been stuck around five hundred twentyon yen

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Speaker 2: for almost thirty years until it started to rise in

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Speaker 2: the past four or five years.

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Speaker 1: Global markets right now are consumed with the AI trade,

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Speaker 1: and we know that SoftBank will be releasing earnings in

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Speaker 1: the coming week. Will this give us any indication of

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Speaker 1: what is happening in technology industries within Japan.

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Speaker 2: I think a lot of currently a lot of the

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Speaker 2: so called thematic names like the AI and defense. It

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Speaker 2: is a fact that they're training at all time high

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Speaker 2: valuation levels and the momentum is very i would say

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Speaker 2: hot right now. However, if you look at the overall market,

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Speaker 2: it is still trading at probably the high end of

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Speaker 2: the ten year range. But also at the same time

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Speaker 2: because of the top line growth that we're seeing as

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Speaker 2: a market overall, and also the general improvement in corporate

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Speaker 2: governance has actually enabled many of the Japanese corporates to

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Speaker 2: improve their return on equities, so that is also leading

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Speaker 2: to an upside in the evaluation of multiples in our

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Speaker 2: view for japan market overall.

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Speaker 1: Where do you stand on the deflation story in Japan?

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Speaker 1: I mean, for a couple of years now, overall consumer

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Speaker 1: prices have been moving higher. I think we're in I

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Speaker 1: would call it a inflationary environment, but we know what

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Speaker 1: the history is. For three decades at least Japan was

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Speaker 1: mired in deflation. Have we begun to see a significant

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Speaker 1: turn here? Is it a pivotal moment? Do you think?

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Speaker 2: One thing about this landslide victory is that the current

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Speaker 2: government and also the people in Japan actually supported Takaichi's

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Speaker 2: agenda to basically grow itself for a very long time.

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Speaker 2: Japanese government, understandably because of it's hired that the GDP

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Speaker 2: ratio has more inclined.

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Speaker 3: To basically shrink to fit.

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Speaker 2: And that's one of the reasons why the inflation and

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Speaker 2: also the nominal GDV growth of Japan has been so

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Speaker 2: an emit or for multiple decades. But whether this takai

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Speaker 2: is agenda will succeed or not, we shall see. But

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Speaker 2: I think it's a bold move in the direction towards growth.

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Speaker 2: That's a key difference compared to the other generations.

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Speaker 1: So before the results of this snap election, the equity

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Speaker 1: market in Japan was not far from record highs. Is

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Speaker 1: being long Japanese equities and overcrowded trade right now, do

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Speaker 1: you think or is there still a lot more in

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Speaker 1: terms of upside?

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Speaker 2: So currently the valuation level of MSCA Japan, for example,

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Speaker 2: is trading about seventeen times for twelve month earnings, which

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Speaker 2: is the high end of the tenure range. However, the

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Speaker 2: earnings revisions the consistus earnings are trending up, mainly driven

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Speaker 2: by the technology in the financial sector. And also going

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Speaker 2: forward over the next two years, you're seeing three to

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Speaker 2: four percent top line growth and high single digit to

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Speaker 2: low double digit.

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Speaker 3: Earnings growth for japan equities.

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Speaker 2: So even at this evaluation level, it is not an

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Speaker 2: overheat at this moment. And also another thing is I

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Speaker 2: think the global investors are still well underweight Japan overall

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Speaker 2: in terms of their allocations, and that hasn't changed for

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Speaker 2: a very long time.

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Speaker 1: So I mentioned the Takeiichi is planning to ramp up

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Speaker 1: defense spending. When you look at that agenda, are you

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Speaker 1: inclined to put money to work in certain Japanese defense

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Speaker 1: contractors or would you look elsewhere.

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Speaker 2: So we do have exposure in Japanese defense stocks, but

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Speaker 2: also at the same time we're well aware of evaluation levels,

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Speaker 2: so we are in basically we're mindful of the valuations,

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Speaker 2: and we see opportunities in the growth areas that is

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Speaker 2: trading at basically relatively lower evaluation levels. And that's where

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Speaker 2: we focus on right now, because I think over the

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Speaker 2: course of the last twelve months, it was all about

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Speaker 2: momentum and a lot of times most expensive stocks did

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Speaker 2: did the best. But I think in time these kind

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Speaker 2: of like valuation differences should start to shrink.

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Speaker 1: Last year, you know, well that Prime Minister Takeiichi made

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Speaker 1: some comments on the defense of Taiwan, which upset leadership

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Speaker 1: in Beijing, and in turn, China restricted group tourism to Japan.

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Speaker 1: Are you seeing evidence of fewer tourists in Tokyo?

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Speaker 3: I think for the Chinese tourists, the group tours are.

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Speaker 2: Restricted at this moment, and you're seeing these monthly sales.

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Speaker 3: Number of retailers seeing some impact.

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Speaker 2: However, the individual tourists are still coming in although it

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Speaker 2: has low down and also a lot of the retailers

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Speaker 2: also companies that are exposed to the inbound tourism. Have

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Speaker 2: been making efforts to diversify the source of inbound tourism

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Speaker 2: not just from China, but also in other regions such

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Speaker 2: as Korea, Taiwan, Australia and even the United States.

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Speaker 1: So we heard from the Prime Minister after the snap

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Speaker 1: election and she's looking forward to a visit at the

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Speaker 1: White House in the spring with the aim of strengthening

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Speaker 1: the alliance between Japan and the United States. When you

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Speaker 1: look at that relationship, whether it's politics or trade, what

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Speaker 1: do you come away with?

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Speaker 2: I think Japan and the United States has has been

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Speaker 2: an ally post World War Two, and generally the relationship

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Speaker 2: has been has been very strong, and I think Taki

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Speaker 2: is very committed to keep in the relations strong in

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Speaker 2: that way. A lot of the Japanese companies have exposure

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Speaker 2: to the US economy. While it is it is still

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Speaker 2: the largest economy in the world.

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Speaker 3: But I think, you know, Takaichi.

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Speaker 2: Is trying to balance between the US and also you know,

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Speaker 2: trying to improve the relationship with with with China as

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Speaker 2: well after a hiccup earlier in her administration.

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Speaker 1: Are you concerned about anything in the aftermath of this

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Speaker 1: election outcome?

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Speaker 3: I think over the mid to long term.

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Speaker 2: Given that LDP has secured two thirds of the majority,

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Speaker 2: you can also say that they became too strong. I'm

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Speaker 2: hoping that they will not become too arrogant and push

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Speaker 2: for too much too far. But I think the coalition

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Speaker 2: party Ishan is working together and and you know, I

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Speaker 2: hope that the Ishan Party will be a good balancer of.

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Speaker 3: The l d P.

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Speaker 1: Chintara will leave it there. Thank you so very much

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Speaker 1: for helping us understand the nuances of the snap election

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Speaker 1: that occurred Sunday in Japan, with a local broadcaster NHK

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Speaker 1: reporting Prime Minister Takeiichi's ruling Liberal Democratic Party has secured

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Speaker 1: a two third super majority in the lower House. Shintaro Takuchi,

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Speaker 1: he is portfolio manager at Matthews Asia. On the line

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Speaker 1: from San Francisco here on the Daybreak Asia podcast. Welcome

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Speaker 1: back to the Daybreak Asia podcast. I'm Doug Chrisner in

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Speaker 1: the US. This week, we'll get some key data points

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Speaker 1: on the American economy, including that slightly delayed employment report

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Speaker 1: for the month of January, and for the stock market.

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Speaker 1: Momentum will be a factor clearly, especially when you consider

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Speaker 1: the influence of those trend following algorithmic funds. Joining us

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Speaker 1: now for a look at the price action is Greg Halter.

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Speaker 1: He is director of Research at Carnegie Investment Council. Greg

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Speaker 1: is on the line from Cleveland, O, thank you for

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Speaker 1: being here. We ended last week with that powerful rally.

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Speaker 1: I think the S and P five hundred was up

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Speaker 1: two percent, finishing a week that had been characterized by

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Speaker 1: quite a bit of volatility. How would you make sense

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Speaker 1: of the tape on Friday?

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Speaker 4: Well, we had quite a bit of volatility on the

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Speaker 4: downside leading into Friday, and it appears that the dip

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Speaker 4: buyers certainly came in in our perspective. You know, if

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Speaker 4: you look at the at least the chart of the

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Speaker 4: S and P and the Dow, they just gradually ticked

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Speaker 4: higher throughout the day, almost closing at the high of

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Speaker 4: the day with a little drop off at the end,

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Speaker 4: but pretty amazing the turnaround and just the continual strength

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Speaker 4: throughout the day.

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Speaker 1: So we had the news from Anthropic last week on

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Speaker 1: their new AI model that will allow applications more focused

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Speaker 1: to certain businesses, and I'm thinking immediately of the legal profession,

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Speaker 1: also financial research and analysis. That really hit many of

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Speaker 1: the software stocks very hard.

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Speaker 2: Last week.

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Speaker 1: Are we kind of in a weird way running a

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Speaker 1: risk of avoiding the message from anthropic when it comes

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Speaker 1: to some of these software issues, or was that an

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Speaker 1: overreaction in your view?

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Speaker 4: It's hard to say. Obviously, time will tell. There's certainly

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Speaker 4: been some big impacts. You know, look at Factset, you

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Speaker 4: can take a look at Gartner simple It, which is

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Speaker 4: down quite a bit as well. You know, some of

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Speaker 4: these names have really taken a shell acking here, and

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Speaker 4: whether or not that's warranted remains to be seen. I

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Speaker 4: think the companies that have data access to data will

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Speaker 4: be more valuable, if you will, but something like an

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Speaker 4: Adobe where you can just create a prompt and maybe

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Speaker 4: you know outmode what they do, they could be more

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Speaker 4: at risk. And certainly that stock has been troubled for

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Speaker 4: a good year now.

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Speaker 1: Goldman Sachs has what it calls its panic index, and

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Speaker 1: I think it was on Friday it reached nine point

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Speaker 1: two to two, a level that's not far from maximum fear.

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Speaker 1: Are you seeing any evidence that maybe, even with that

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Speaker 1: rebound that we had Friday, that there is some complacencies

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Speaker 1: setting in?

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Speaker 4: Certainly possible from that standpoint, but you know, we've seen

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Speaker 4: some pretty dramatic moves in other things, including bitcoins down

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Speaker 4: fifty percent. On the other hand, gold and silver sore,

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Speaker 4: the silver one from twenty to one twenty or higher,

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Speaker 4: and O's pulled back to eighty or so. There's been

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Speaker 4: a lot of volatility in other things besides stocks as well.

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Speaker 4: And you have this whole predictions market, which is adding

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Speaker 4: another level of I don't want to call it speculation,

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Speaker 4: but I guess it's speculation or gambling or you know,

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Speaker 4: making predictions on the future. On top of the zero

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Speaker 4: day options, there's just a lot of ways for things

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Speaker 4: to be traded these days that we certainly didn't have

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Speaker 4: five years ago. And there's a lot of volatility on

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Speaker 4: a day to day basis in general, either stocks and

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Speaker 4: or commodities and or items if you will, bets if

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Speaker 4: you will, And that's something we haven't had in this format,

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Speaker 4: at least historically. So how that plays out, that's that's

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Speaker 4: going to be very interesting to follow.

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Speaker 1: So how are you dealing with that when you're putting

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Speaker 1: capital to work in the market, or whether you're watching

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Speaker 1: the positions that you've put on, let's say, on the

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Speaker 1: long side of the trade, how are you handling the volatility.

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Speaker 4: At Carnegie Investment Console, we're a traditional long only manager.

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Speaker 4: We seek to find the best companies we can and

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Speaker 4: have growing revenues, growing cash flows, growing earnings. Some of

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Speaker 4: those are getting disrupted. You know, Adobe had been in

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Speaker 4: our portfolios and we have exited over the last year

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Speaker 4: or so. We look for companies that have some sort

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Speaker 4: of mote that can continue to do well. Here you

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Speaker 4: look at Google a year Alphabet a year ago, and

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Speaker 4: that stock was kind of being left in the scrap

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Speaker 4: peep and then all of a sudden, maybe not and

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Speaker 4: it's done very well. So you just don't know. We're

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Speaker 4: trying to play the role of time in the market

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Speaker 4: is more important than timing the market, and we'd like

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Speaker 4: to have diversified portfolios, so we're not placing bets on

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Speaker 4: you know, three or four or five stocks.

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Speaker 1: So let me get your view on the macro because

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Speaker 1: we have a big week for US data that slightly

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Speaker 1: delayed employment report for January, and then we have CPI

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Speaker 1: data and retail sales as well. How you are you

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Speaker 1: viewing the American economy.

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Speaker 4: We think the economy is actually pretty in pretty good shape.

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Speaker 4: I mean, I look at the Red Book sales numbers

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Speaker 4: that come out every week, and it seems like it's

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Speaker 4: up five six seven percent every week on a year

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Speaker 4: over year basis. That seems to be good. You've seen

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Speaker 4: a lot of we think employment of funds into manufacturing facilities,

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Speaker 4: not just data centers. Because companies are able to write

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Speaker 4: this off immediately, both the the equipment, the buildings, the

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Speaker 4: R and D relative to the attacks bill, that's a

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Speaker 4: huge incentive. So any company who's thinking about doing something,

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Speaker 4: this gives them great impetus to be able to do that.

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Speaker 4: You know, is this a one time booster or is

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Speaker 4: this multi year? Certainly you don't build a factory in

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Speaker 4: a week or a month or a year. It's going

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Speaker 4: to take some time. So what we haven't seen is

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Speaker 4: employment growth happening. It's just been kind of stagnant here.

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Speaker 4: So that's the one rub. We also haven't really seen

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Speaker 4: inflation from tariffs, which some had thought would happen. That

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Speaker 4: hasn't happened yet. Will it happen, who knows. We do

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Speaker 4: think that the US government spending needs to get under control,

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Speaker 4: and if it doesn't, that could cause inflation down the road.

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Speaker 1: So to what extent is there any degree of urgency

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Speaker 1: to cut interest rates again. I mean, it seems as

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Speaker 1: though the market's view is that the next rate cut,

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Speaker 1: if one does occur, won't happen until June. Does that

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Speaker 1: kind of sit with your thinking?

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Speaker 4: It seems to be. I don't know if there's any

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Speaker 4: great rush from that standpoint. The issue that needs to

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Speaker 4: be addressed somehow, and it's probably a combination of factors,

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Speaker 4: is the housing market. It's really been in a quagmire

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Speaker 4: for a good four years. And I don't know how

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Speaker 4: you solve that because you've had prices go up, rates

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Speaker 4: have started to come down, but they're still high. Somehow

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Speaker 4: we have to break this log jam, and I don't

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Speaker 4: know what the answer is there. Law rates is our

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Speaker 4: part of it, but certainly not the whole thing.

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Speaker 1: Greg will leave it there, Thank you so very much.

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Speaker 1: Greg Halter is director of Research at Carnegie Investment Council,

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Speaker 1: joining us from Cleveland, Ohio here on the Daybreak Asia Podcast.

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Speaker 1: Thanks for listening to today's episode of the Bloomberg Daybreak

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Speaker 1: Asia Edition podcast. Each weekday, we look at the story

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Speaker 1: shaping markets, finance, and geopolitics in the Asia Pacific. You

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Speaker 1: can find us on Apple, Spotify, The Bloomberg podcast, YouTube channel,

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Speaker 1: or anywhere else you listen. Join us again tomorrow for

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Speaker 1: insight on the market, moves from Hong Kong to Singapore

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Speaker 1: and Australia. Prisoner and this is Bloomberg.

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Speaker 2: Mm hmm