WEBVTT - Markets React to Takaichi's Historic Supermajority

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<v Speaker 1>Bloomberg Audio Studios, podcasts, radio News. Welcome to the Daybreak

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<v Speaker 1>Asia podcast. I'm Doug Krisner. We have a rally underway

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<v Speaker 1>in Japanese equities. This is after our Prime Minister, Sunday

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<v Speaker 1>Takaichi managed a historic landslide win in Sunday snap election,

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<v Speaker 1>and the local broadcaster NHK is reporting Takaichi's ruling Liberal

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<v Speaker 1>Democratic Party has secured a two third super majority in

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<v Speaker 1>the lower House. Now, the outcome gives Takeiichi a mandate

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<v Speaker 1>to push ahead with some bold economic plans to fuel growth.

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<v Speaker 1>So to help us understand what this outcome means from markets,

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

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<v Speaker 1>Shintaro joins us from San Francisco. Thank you for being here.

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<v Speaker 1>Can I get your take on whether or not you're

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<v Speaker 1>really surprised by this outcome?

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<v Speaker 2>In any way, the win itself is not that much

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<v Speaker 2>of a prize, and the LDP Echane coalition securing a

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<v Speaker 2>majority was widely expected. However, this level of landslide meaning

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<v Speaker 2>that LDP alone securing the super majority of two thirds,

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<v Speaker 2>which is basically the largest win since post World War Two.

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<v Speaker 3>At least caught me as a surprise.

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<v Speaker 1>So take is intending to do a lot in terms

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<v Speaker 1>of stimulating the economy. She's going to accelerate talks on

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<v Speaker 1>a tax cut for the sales of food. She's also

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<v Speaker 1>pledging to ramp up defense spending. Is that really what

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<v Speaker 1>the equity market is focused now on. I mean the

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<v Speaker 1>largesse of the fiscal stimulus.

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<v Speaker 2>Yes, I think last night's a landslide victory enables her

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<v Speaker 2>administration to push for the agenda. The focus area of

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<v Speaker 2>investments will be in growth areas such as science technology, semiconductors,

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<v Speaker 2>defense industry, digital infrastructure.

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<v Speaker 3>And also strategic supply chain resilience.

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<v Speaker 2>And also at the same time, they have been announcing

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<v Speaker 2>a tax cut on food and beverages only for the

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<v Speaker 2>two years, so that is also an action, and I

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<v Speaker 2>think the market is reacting on that.

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<v Speaker 1>It's interesting if you look at the currency market today.

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<v Speaker 1>When Asian trading began, the end showed a little bit

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<v Speaker 1>of weakness, but I'm seeing a strengthening again right now

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<v Speaker 1>at around one fifty six eighty. Is this really a

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<v Speaker 1>part of her strategy to keep the end a little

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<v Speaker 1>weak so that you can have some of the exporters

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<v Speaker 1>benefit from that.

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<v Speaker 2>I think in part the range between one hundred and

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<v Speaker 2>forty to one hundred and sixty en to the dollar

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<v Speaker 2>is our base case, and so long as it's within

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<v Speaker 2>the range, I think the government is not making any

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<v Speaker 2>kind of push like to low or you know, weaken

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<v Speaker 2>the currency.

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<v Speaker 3>At this moment.

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<v Speaker 2>Another thing is the Minister of Finance, Satsuki Katayama, has

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<v Speaker 2>reiterated the mention of the food sales taxes only for

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<v Speaker 2>two years and will not issue fresh government bond for this.

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<v Speaker 2>So I think this also helped not like a yeah

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<v Speaker 2>and sliding too much.

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<v Speaker 1>What are you seeing in the Japanese bond market and

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<v Speaker 1>how may that impact some of the big banks in Japan.

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<v Speaker 2>I think overall, currently the eel curve itself. You know,

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<v Speaker 2>of course you're seeing the longer end of the bond

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<v Speaker 2>yield spiking, but the shorter end is relatively stable at

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<v Speaker 2>this moment. Although you know, compared to a couple of

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<v Speaker 2>years ago, it's obviously higher, but it's still much lower

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<v Speaker 2>than the inflation rate itself that is happening in Japan.

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<v Speaker 3>I think overall, what.

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<v Speaker 2>We need to watch, especially as an equity investor, is

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<v Speaker 2>that the nominal GDP growth of Japan is for the

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<v Speaker 2>first time in a very long while, is meaningfully growing,

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<v Speaker 2>and we view nominal GDP growth is a proxy of

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<v Speaker 2>top line growth of opportunity in domestic Japan. Nominal GDP

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<v Speaker 2>in Japan has been stuck around five hundred twentyon yen

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<v Speaker 2>for almost thirty years until it started to rise in

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<v Speaker 2>the past four or five years.

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<v Speaker 1>Global markets right now are consumed with the AI trade,

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<v Speaker 1>and we know that SoftBank will be releasing earnings in

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<v Speaker 1>the coming week. Will this give us any indication of

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<v Speaker 1>what is happening in technology industries within Japan.

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<v Speaker 2>I think a lot of currently a lot of the

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<v Speaker 2>so called thematic names like the AI and defense. It

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<v Speaker 2>is a fact that they're training at all time high

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<v Speaker 2>valuation levels and the momentum is very i would say

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<v Speaker 2>hot right now. However, if you look at the overall market,

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<v Speaker 2>it is still trading at probably the high end of

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<v Speaker 2>the ten year range. But also at the same time

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<v Speaker 2>because of the top line growth that we're seeing as

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<v Speaker 2>a market overall, and also the general improvement in corporate

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<v Speaker 2>governance has actually enabled many of the Japanese corporates to

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<v Speaker 2>improve their return on equities, so that is also leading

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<v Speaker 2>to an upside in the evaluation of multiples in our

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<v Speaker 2>view for japan market overall.

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<v Speaker 1>Where do you stand on the deflation story in Japan?

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<v Speaker 1>I mean, for a couple of years now, overall consumer

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<v Speaker 1>prices have been moving higher. I think we're in I

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<v Speaker 1>would call it a inflationary environment, but we know what

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<v Speaker 1>the history is. For three decades at least Japan was

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<v Speaker 1>mired in deflation. Have we begun to see a significant

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<v Speaker 1>turn here? Is it a pivotal moment? Do you think?

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<v Speaker 2>One thing about this landslide victory is that the current

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<v Speaker 2>government and also the people in Japan actually supported Takaichi's

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<v Speaker 2>agenda to basically grow itself for a very long time.

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<v Speaker 2>Japanese government, understandably because of it's hired that the GDP

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<v Speaker 2>ratio has more inclined.

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<v Speaker 3>To basically shrink to fit.

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<v Speaker 2>And that's one of the reasons why the inflation and

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<v Speaker 2>also the nominal GDV growth of Japan has been so

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<v Speaker 2>an emit or for multiple decades. But whether this takai

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<v Speaker 2>is agenda will succeed or not, we shall see. But

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

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<v Speaker 2>That's a key difference compared to the other generations.

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<v Speaker 1>So before the results of this snap election, the equity

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<v Speaker 1>market in Japan was not far from record highs. Is

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<v Speaker 1>being long Japanese equities and overcrowded trade right now, do

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<v Speaker 1>you think or is there still a lot more in

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<v Speaker 1>terms of upside?

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<v Speaker 2>So currently the valuation level of MSCA Japan, for example,

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<v Speaker 2>is trading about seventeen times for twelve month earnings, which

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<v Speaker 2>is the high end of the tenure range. However, the

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<v Speaker 2>earnings revisions the consistus earnings are trending up, mainly driven

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<v Speaker 2>by the technology in the financial sector. And also going

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<v Speaker 2>forward over the next two years, you're seeing three to

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<v Speaker 2>four percent top line growth and high single digit to

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<v Speaker 2>low double digit.

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<v Speaker 3>Earnings growth for japan equities.

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<v Speaker 2>So even at this evaluation level, it is not an

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<v Speaker 2>overheat at this moment. And also another thing is I

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<v Speaker 2>think the global investors are still well underweight Japan overall

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<v Speaker 2>in terms of their allocations, and that hasn't changed for

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<v Speaker 2>a very long time.

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<v Speaker 1>So I mentioned the Takeiichi is planning to ramp up

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<v Speaker 1>defense spending. When you look at that agenda, are you

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<v Speaker 1>inclined to put money to work in certain Japanese defense

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<v Speaker 1>contractors or would you look elsewhere.

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<v Speaker 2>So we do have exposure in Japanese defense stocks, but

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

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<v Speaker 2>so we are in basically we're mindful of the valuations,

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<v Speaker 2>and we see opportunities in the growth areas that is

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<v Speaker 2>trading at basically relatively lower evaluation levels. And that's where

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<v Speaker 2>we focus on right now, because I think over the

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<v Speaker 2>course of the last twelve months, it was all about

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<v Speaker 2>momentum and a lot of times most expensive stocks did

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<v Speaker 2>did the best. But I think in time these kind

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<v Speaker 2>of like valuation differences should start to shrink.

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<v Speaker 1>Last year, you know, well that Prime Minister Takeiichi made

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<v Speaker 1>some comments on the defense of Taiwan, which upset leadership

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<v Speaker 1>in Beijing, and in turn, China restricted group tourism to Japan.

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<v Speaker 1>Are you seeing evidence of fewer tourists in Tokyo?

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<v Speaker 3>I think for the Chinese tourists, the group tours are.

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

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<v Speaker 3>Number of retailers seeing some impact.

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<v Speaker 2>However, the individual tourists are still coming in although it

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<v Speaker 2>has low down and also a lot of the retailers

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<v Speaker 2>also companies that are exposed to the inbound tourism. Have

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<v Speaker 2>been making efforts to diversify the source of inbound tourism

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<v Speaker 2>not just from China, but also in other regions such

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<v Speaker 2>as Korea, Taiwan, Australia and even the United States.

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<v Speaker 1>So we heard from the Prime Minister after the snap

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<v Speaker 1>election and she's looking forward to a visit at the

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<v Speaker 1>White House in the spring with the aim of strengthening

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<v Speaker 1>the alliance between Japan and the United States. When you

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<v Speaker 1>look at that relationship, whether it's politics or trade, what

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<v Speaker 1>do you come away with?

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<v Speaker 2>I think Japan and the United States has has been

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<v Speaker 2>an ally post World War Two, and generally the relationship

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<v Speaker 2>has been has been very strong, and I think Taki

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<v Speaker 2>is very committed to keep in the relations strong in

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<v Speaker 2>that way. A lot of the Japanese companies have exposure

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<v Speaker 2>to the US economy. While it is it is still

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<v Speaker 2>the largest economy in the world.

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<v Speaker 3>But I think, you know, Takaichi.

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<v Speaker 2>Is trying to balance between the US and also you know,

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<v Speaker 2>trying to improve the relationship with with with China as

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<v Speaker 2>well after a hiccup earlier in her administration.

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<v Speaker 1>Are you concerned about anything in the aftermath of this

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<v Speaker 1>election outcome?

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<v Speaker 3>I think over the mid to long term.

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<v Speaker 2>Given that LDP has secured two thirds of the majority,

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<v Speaker 2>you can also say that they became too strong. I'm

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<v Speaker 2>hoping that they will not become too arrogant and push

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<v Speaker 2>for too much too far. But I think the coalition

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<v Speaker 2>party Ishan is working together and and you know, I

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<v Speaker 2>hope that the Ishan Party will be a good balancer of.

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<v Speaker 3>The l d P.

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<v Speaker 1>Chintara will leave it there. Thank you so very much

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<v Speaker 1>for helping us understand the nuances of the snap election

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<v Speaker 1>that occurred Sunday in Japan, with a local broadcaster NHK

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<v Speaker 1>reporting Prime Minister Takeiichi's ruling Liberal Democratic Party has secured

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<v Speaker 1>a two third super majority in the lower House. Shintaro Takuchi,

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<v Speaker 1>he is portfolio manager at Matthews Asia. On the line

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<v Speaker 1>from San Francisco here on the Daybreak Asia podcast. Welcome

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<v Speaker 1>back to the Daybreak Asia podcast. I'm Doug Chrisner in

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

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<v Speaker 1>on the American economy, including that slightly delayed employment report

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<v Speaker 1>for the month of January, and for the stock market.

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<v Speaker 1>Momentum will be a factor clearly, especially when you consider

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<v Speaker 1>the influence of those trend following algorithmic funds. Joining us

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<v Speaker 1>now for a look at the price action is Greg Halter.

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<v Speaker 1>He is director of Research at Carnegie Investment Council. Greg

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<v Speaker 1>is on the line from Cleveland, O, thank you for

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<v Speaker 1>being here. We ended last week with that powerful rally.

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<v Speaker 1>I think the S and P five hundred was up

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<v Speaker 1>two percent, finishing a week that had been characterized by

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<v Speaker 1>quite a bit of volatility. How would you make sense

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<v Speaker 1>of the tape on Friday?

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<v Speaker 4>Well, we had quite a bit of volatility on the

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<v Speaker 4>downside leading into Friday, and it appears that the dip

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<v Speaker 4>buyers certainly came in in our perspective. You know, if

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<v Speaker 4>you look at the at least the chart of the

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<v Speaker 4>S and P and the Dow, they just gradually ticked

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<v Speaker 4>higher throughout the day, almost closing at the high of

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<v Speaker 4>the day with a little drop off at the end,

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<v Speaker 4>but pretty amazing the turnaround and just the continual strength

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<v Speaker 4>throughout the day.

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<v Speaker 1>So we had the news from Anthropic last week on

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<v Speaker 1>their new AI model that will allow applications more focused

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

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<v Speaker 1>also financial research and analysis. That really hit many of

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<v Speaker 1>the software stocks very hard.

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<v Speaker 2>Last week.

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<v Speaker 1>Are we kind of in a weird way running a

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<v Speaker 1>risk of avoiding the message from anthropic when it comes

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<v Speaker 1>to some of these software issues, or was that an

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<v Speaker 1>overreaction in your view?

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

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<v Speaker 4>been some big impacts. You know, look at Factset, you

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<v Speaker 4>can take a look at Gartner simple It, which is

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<v Speaker 4>down quite a bit as well. You know, some of

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<v Speaker 4>these names have really taken a shell acking here, and

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<v Speaker 4>whether or not that's warranted remains to be seen. I

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<v Speaker 4>think the companies that have data access to data will

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<v Speaker 4>be more valuable, if you will, but something like an

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<v Speaker 4>Adobe where you can just create a prompt and maybe

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<v Speaker 4>you know outmode what they do, they could be more

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<v Speaker 4>at risk. And certainly that stock has been troubled for

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<v Speaker 4>a good year now.

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<v Speaker 1>Goldman Sachs has what it calls its panic index, and

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<v Speaker 1>I think it was on Friday it reached nine point

0:14:13.320 --> 0:14:17.000
<v Speaker 1>two to two, a level that's not far from maximum fear.

0:14:17.840 --> 0:14:21.320
<v Speaker 1>Are you seeing any evidence that maybe, even with that

0:14:21.440 --> 0:14:25.600
<v Speaker 1>rebound that we had Friday, that there is some complacencies

0:14:25.720 --> 0:14:26.280
<v Speaker 1>setting in?

0:14:28.800 --> 0:14:32.880
<v Speaker 4>Certainly possible from that standpoint, but you know, we've seen

0:14:32.880 --> 0:14:37.520
<v Speaker 4>some pretty dramatic moves in other things, including bitcoins down

0:14:37.600 --> 0:14:41.280
<v Speaker 4>fifty percent. On the other hand, gold and silver sore,

0:14:41.520 --> 0:14:44.720
<v Speaker 4>the silver one from twenty to one twenty or higher,

0:14:45.000 --> 0:14:47.800
<v Speaker 4>and O's pulled back to eighty or so. There's been

0:14:47.840 --> 0:14:52.280
<v Speaker 4>a lot of volatility in other things besides stocks as well.

0:14:53.000 --> 0:14:58.440
<v Speaker 4>And you have this whole predictions market, which is adding

0:14:58.480 --> 0:15:02.760
<v Speaker 4>another level of I don't want to call it speculation,

0:15:03.000 --> 0:15:06.480
<v Speaker 4>but I guess it's speculation or gambling or you know,

0:15:06.560 --> 0:15:09.800
<v Speaker 4>making predictions on the future. On top of the zero

0:15:10.200 --> 0:15:13.720
<v Speaker 4>day options, there's just a lot of ways for things

0:15:13.800 --> 0:15:17.240
<v Speaker 4>to be traded these days that we certainly didn't have

0:15:17.360 --> 0:15:21.600
<v Speaker 4>five years ago. And there's a lot of volatility on

0:15:21.720 --> 0:15:27.160
<v Speaker 4>a day to day basis in general, either stocks and

0:15:27.480 --> 0:15:32.400
<v Speaker 4>or commodities and or items if you will, bets if

0:15:32.440 --> 0:15:37.040
<v Speaker 4>you will, And that's something we haven't had in this format,

0:15:37.120 --> 0:15:41.400
<v Speaker 4>at least historically. So how that plays out, that's that's

0:15:41.440 --> 0:15:43.560
<v Speaker 4>going to be very interesting to follow.

0:15:43.880 --> 0:15:46.080
<v Speaker 1>So how are you dealing with that when you're putting

0:15:46.120 --> 0:15:48.920
<v Speaker 1>capital to work in the market, or whether you're watching

0:15:48.960 --> 0:15:51.840
<v Speaker 1>the positions that you've put on, let's say, on the

0:15:51.880 --> 0:15:55.560
<v Speaker 1>long side of the trade, how are you handling the volatility.

0:15:56.080 --> 0:16:01.640
<v Speaker 4>At Carnegie Investment Console, we're a traditional long only manager.

0:16:02.360 --> 0:16:05.920
<v Speaker 4>We seek to find the best companies we can and

0:16:06.160 --> 0:16:11.760
<v Speaker 4>have growing revenues, growing cash flows, growing earnings. Some of

0:16:11.800 --> 0:16:14.520
<v Speaker 4>those are getting disrupted. You know, Adobe had been in

0:16:14.560 --> 0:16:17.680
<v Speaker 4>our portfolios and we have exited over the last year

0:16:17.720 --> 0:16:21.200
<v Speaker 4>or so. We look for companies that have some sort

0:16:21.240 --> 0:16:24.840
<v Speaker 4>of mote that can continue to do well. Here you

0:16:24.840 --> 0:16:28.360
<v Speaker 4>look at Google a year Alphabet a year ago, and

0:16:28.400 --> 0:16:31.880
<v Speaker 4>that stock was kind of being left in the scrap

0:16:31.920 --> 0:16:35.120
<v Speaker 4>peep and then all of a sudden, maybe not and

0:16:35.240 --> 0:16:38.720
<v Speaker 4>it's done very well. So you just don't know. We're

0:16:38.760 --> 0:16:44.160
<v Speaker 4>trying to play the role of time in the market

0:16:44.640 --> 0:16:47.480
<v Speaker 4>is more important than timing the market, and we'd like

0:16:47.560 --> 0:16:51.640
<v Speaker 4>to have diversified portfolios, so we're not placing bets on

0:16:52.040 --> 0:16:53.960
<v Speaker 4>you know, three or four or five stocks.

0:16:54.320 --> 0:16:56.440
<v Speaker 1>So let me get your view on the macro because

0:16:56.440 --> 0:16:59.880
<v Speaker 1>we have a big week for US data that slightly

0:17:00.160 --> 0:17:03.920
<v Speaker 1>delayed employment report for January, and then we have CPI

0:17:04.040 --> 0:17:07.680
<v Speaker 1>data and retail sales as well. How you are you

0:17:07.800 --> 0:17:09.320
<v Speaker 1>viewing the American economy.

0:17:10.359 --> 0:17:14.520
<v Speaker 4>We think the economy is actually pretty in pretty good shape.

0:17:14.960 --> 0:17:17.760
<v Speaker 4>I mean, I look at the Red Book sales numbers

0:17:17.760 --> 0:17:19.520
<v Speaker 4>that come out every week, and it seems like it's

0:17:19.600 --> 0:17:22.800
<v Speaker 4>up five six seven percent every week on a year

0:17:22.840 --> 0:17:26.800
<v Speaker 4>over year basis. That seems to be good. You've seen

0:17:27.040 --> 0:17:35.360
<v Speaker 4>a lot of we think employment of funds into manufacturing facilities,

0:17:35.480 --> 0:17:38.639
<v Speaker 4>not just data centers. Because companies are able to write

0:17:38.720 --> 0:17:43.879
<v Speaker 4>this off immediately, both the the equipment, the buildings, the

0:17:44.000 --> 0:17:47.159
<v Speaker 4>R and D relative to the attacks bill, that's a

0:17:47.240 --> 0:17:50.800
<v Speaker 4>huge incentive. So any company who's thinking about doing something,

0:17:51.400 --> 0:17:54.000
<v Speaker 4>this gives them great impetus to be able to do that.

0:17:54.840 --> 0:17:56.760
<v Speaker 4>You know, is this a one time booster or is

0:17:56.800 --> 0:18:00.280
<v Speaker 4>this multi year? Certainly you don't build a factory in

0:18:00.320 --> 0:18:03.119
<v Speaker 4>a week or a month or a year. It's going

0:18:03.200 --> 0:18:06.719
<v Speaker 4>to take some time. So what we haven't seen is

0:18:07.040 --> 0:18:11.040
<v Speaker 4>employment growth happening. It's just been kind of stagnant here.

0:18:11.080 --> 0:18:14.600
<v Speaker 4>So that's the one rub. We also haven't really seen

0:18:14.800 --> 0:18:19.479
<v Speaker 4>inflation from tariffs, which some had thought would happen. That

0:18:19.520 --> 0:18:22.760
<v Speaker 4>hasn't happened yet. Will it happen, who knows. We do

0:18:22.840 --> 0:18:27.200
<v Speaker 4>think that the US government spending needs to get under control,

0:18:27.359 --> 0:18:31.280
<v Speaker 4>and if it doesn't, that could cause inflation down the road.

0:18:31.920 --> 0:18:34.800
<v Speaker 1>So to what extent is there any degree of urgency

0:18:34.920 --> 0:18:37.479
<v Speaker 1>to cut interest rates again. I mean, it seems as

0:18:37.520 --> 0:18:40.680
<v Speaker 1>though the market's view is that the next rate cut,

0:18:40.800 --> 0:18:44.199
<v Speaker 1>if one does occur, won't happen until June. Does that

0:18:44.280 --> 0:18:45.959
<v Speaker 1>kind of sit with your thinking?

0:18:47.400 --> 0:18:49.000
<v Speaker 4>It seems to be. I don't know if there's any

0:18:49.040 --> 0:18:54.280
<v Speaker 4>great rush from that standpoint. The issue that needs to

0:18:54.320 --> 0:18:58.800
<v Speaker 4>be addressed somehow, and it's probably a combination of factors,

0:19:00.320 --> 0:19:03.640
<v Speaker 4>is the housing market. It's really been in a quagmire

0:19:03.800 --> 0:19:07.560
<v Speaker 4>for a good four years. And I don't know how

0:19:07.640 --> 0:19:11.359
<v Speaker 4>you solve that because you've had prices go up, rates

0:19:11.480 --> 0:19:15.080
<v Speaker 4>have started to come down, but they're still high. Somehow

0:19:15.080 --> 0:19:17.200
<v Speaker 4>we have to break this log jam, and I don't

0:19:17.200 --> 0:19:20.959
<v Speaker 4>know what the answer is there. Law rates is our

0:19:21.119 --> 0:19:23.200
<v Speaker 4>part of it, but certainly not the whole thing.

0:19:23.600 --> 0:19:25.560
<v Speaker 1>Greg will leave it there, Thank you so very much.

0:19:25.760 --> 0:19:29.919
<v Speaker 1>Greg Halter is director of Research at Carnegie Investment Council,

0:19:30.080 --> 0:19:34.280
<v Speaker 1>joining us from Cleveland, Ohio here on the Daybreak Asia Podcast.

0:19:35.680 --> 0:19:39.040
<v Speaker 1>Thanks for listening to today's episode of the Bloomberg Daybreak

0:19:39.200 --> 0:19:42.560
<v Speaker 1>Asia Edition podcast. Each weekday, we look at the story

0:19:42.640 --> 0:19:47.000
<v Speaker 1>shaping markets, finance, and geopolitics in the Asia Pacific. You

0:19:47.000 --> 0:19:51.119
<v Speaker 1>can find us on Apple, Spotify, The Bloomberg podcast, YouTube channel,

0:19:51.240 --> 0:19:54.240
<v Speaker 1>or anywhere else you listen. Join us again tomorrow for

0:19:54.400 --> 0:19:57.879
<v Speaker 1>insight on the market, moves from Hong Kong to Singapore

0:19:58.280 --> 0:20:02.000
<v Speaker 1>and Australia. Prisoner and this is Bloomberg.

0:20:03.560 --> 0:20:09.560
<v Speaker 2>Mm hmm