Speaker 1: Bloomberg Audio Studios, podcasts, radio News. Welcome to the Daybreak
Speaker 1: Asia podcast. I'm Doug Krisner. We have a rally underway
Speaker 1: in Japanese equities. This is after our Prime Minister, Sunday
Speaker 1: Takaichi managed a historic landslide win in Sunday snap election,
Speaker 1: and the local broadcaster NHK is reporting Takaichi's ruling Liberal
Speaker 1: Democratic Party has secured a two third super majority in
Speaker 1: the lower House. Now, the outcome gives Takeiichi a mandate
Speaker 1: to push ahead with some bold economic plans to fuel growth.
Speaker 1: So to help us understand what this outcome means from markets,
Speaker 1: we are joined by Shintaro Takauchi, portfolio manager at Matthew's Asia.
Speaker 1: Shintaro joins us from San Francisco. Thank you for being here.
Speaker 1: Can I get your take on whether or not you're
Speaker 1: really surprised by this outcome?
Speaker 2: In any way, the win itself is not that much
Speaker 2: of a prize, and the LDP Echane coalition securing a
Speaker 2: majority was widely expected. However, this level of landslide meaning
Speaker 2: that LDP alone securing the super majority of two thirds,
Speaker 2: which is basically the largest win since post World War Two.
Speaker 3: At least caught me as a surprise.
Speaker 1: So take is intending to do a lot in terms
Speaker 1: of stimulating the economy. She's going to accelerate talks on
Speaker 1: a tax cut for the sales of food. She's also
Speaker 1: pledging to ramp up defense spending. Is that really what
Speaker 1: the equity market is focused now on. I mean the
Speaker 1: largesse of the fiscal stimulus.
Speaker 2: Yes, I think last night's a landslide victory enables her
Speaker 2: administration to push for the agenda. The focus area of
Speaker 2: investments will be in growth areas such as science technology, semiconductors,
Speaker 2: defense industry, digital infrastructure.
Speaker 3: And also strategic supply chain resilience.
Speaker 2: And also at the same time, they have been announcing
Speaker 2: a tax cut on food and beverages only for the
Speaker 2: two years, so that is also an action, and I
Speaker 2: think the market is reacting on that.
Speaker 1: It's interesting if you look at the currency market today.
Speaker 1: When Asian trading began, the end showed a little bit
Speaker 1: of weakness, but I'm seeing a strengthening again right now
Speaker 1: at around one fifty six eighty. Is this really a
Speaker 1: part of her strategy to keep the end a little
Speaker 1: weak so that you can have some of the exporters
Speaker 1: benefit from that.
Speaker 2: I think in part the range between one hundred and
Speaker 2: forty to one hundred and sixty en to the dollar
Speaker 2: is our base case, and so long as it's within
Speaker 2: the range, I think the government is not making any
Speaker 2: kind of push like to low or you know, weaken
Speaker 2: the currency.
Speaker 3: At this moment.
Speaker 2: Another thing is the Minister of Finance, Satsuki Katayama, has
Speaker 2: reiterated the mention of the food sales taxes only for
Speaker 2: two years and will not issue fresh government bond for this.
Speaker 2: So I think this also helped not like a yeah
Speaker 2: and sliding too much.
Speaker 1: What are you seeing in the Japanese bond market and
Speaker 1: how may that impact some of the big banks in Japan.
Speaker 2: I think overall, currently the eel curve itself. You know,
Speaker 2: of course you're seeing the longer end of the bond
Speaker 2: yield spiking, but the shorter end is relatively stable at
Speaker 2: this moment. Although you know, compared to a couple of
Speaker 2: years ago, it's obviously higher, but it's still much lower
Speaker 2: than the inflation rate itself that is happening in Japan.
Speaker 3: I think overall, what.
Speaker 2: We need to watch, especially as an equity investor, is
Speaker 2: that the nominal GDP growth of Japan is for the
Speaker 2: first time in a very long while, is meaningfully growing,
Speaker 2: and we view nominal GDP growth is a proxy of
Speaker 2: top line growth of opportunity in domestic Japan. Nominal GDP
Speaker 2: in Japan has been stuck around five hundred twentyon yen
Speaker 2: for almost thirty years until it started to rise in
Speaker 2: the past four or five years.
Speaker 1: Global markets right now are consumed with the AI trade,
Speaker 1: and we know that SoftBank will be releasing earnings in
Speaker 1: the coming week. Will this give us any indication of
Speaker 1: what is happening in technology industries within Japan.
Speaker 2: I think a lot of currently a lot of the
Speaker 2: so called thematic names like the AI and defense. It
Speaker 2: is a fact that they're training at all time high
Speaker 2: valuation levels and the momentum is very i would say
Speaker 2: hot right now. However, if you look at the overall market,
Speaker 2: it is still trading at probably the high end of
Speaker 2: the ten year range. But also at the same time
Speaker 2: because of the top line growth that we're seeing as
Speaker 2: a market overall, and also the general improvement in corporate
Speaker 2: governance has actually enabled many of the Japanese corporates to
Speaker 2: improve their return on equities, so that is also leading
Speaker 2: to an upside in the evaluation of multiples in our
Speaker 2: view for japan market overall.
Speaker 1: Where do you stand on the deflation story in Japan?
Speaker 1: I mean, for a couple of years now, overall consumer
Speaker 1: prices have been moving higher. I think we're in I
Speaker 1: would call it a inflationary environment, but we know what
Speaker 1: the history is. For three decades at least Japan was
Speaker 1: mired in deflation. Have we begun to see a significant
Speaker 1: turn here? Is it a pivotal moment? Do you think?
Speaker 2: One thing about this landslide victory is that the current
Speaker 2: government and also the people in Japan actually supported Takaichi's
Speaker 2: agenda to basically grow itself for a very long time.
Speaker 2: Japanese government, understandably because of it's hired that the GDP
Speaker 2: ratio has more inclined.
Speaker 3: To basically shrink to fit.
Speaker 2: And that's one of the reasons why the inflation and
Speaker 2: also the nominal GDV growth of Japan has been so
Speaker 2: an emit or for multiple decades. But whether this takai
Speaker 2: is agenda will succeed or not, we shall see. But
Speaker 2: I think it's a bold move in the direction towards growth.
Speaker 2: That's a key difference compared to the other generations.
Speaker 1: So before the results of this snap election, the equity
Speaker 1: market in Japan was not far from record highs. Is
Speaker 1: being long Japanese equities and overcrowded trade right now, do
Speaker 1: you think or is there still a lot more in
Speaker 1: terms of upside?
Speaker 2: So currently the valuation level of MSCA Japan, for example,
Speaker 2: is trading about seventeen times for twelve month earnings, which
Speaker 2: is the high end of the tenure range. However, the
Speaker 2: earnings revisions the consistus earnings are trending up, mainly driven
Speaker 2: by the technology in the financial sector. And also going
Speaker 2: forward over the next two years, you're seeing three to
Speaker 2: four percent top line growth and high single digit to
Speaker 2: low double digit.
Speaker 3: Earnings growth for japan equities.
Speaker 2: So even at this evaluation level, it is not an
Speaker 2: overheat at this moment. And also another thing is I
Speaker 2: think the global investors are still well underweight Japan overall
Speaker 2: in terms of their allocations, and that hasn't changed for
Speaker 2: a very long time.
Speaker 1: So I mentioned the Takeiichi is planning to ramp up
Speaker 1: defense spending. When you look at that agenda, are you
Speaker 1: inclined to put money to work in certain Japanese defense
Speaker 1: contractors or would you look elsewhere.
Speaker 2: So we do have exposure in Japanese defense stocks, but
Speaker 2: also at the same time we're well aware of evaluation levels,
Speaker 2: so we are in basically we're mindful of the valuations,
Speaker 2: and we see opportunities in the growth areas that is
Speaker 2: trading at basically relatively lower evaluation levels. And that's where
Speaker 2: we focus on right now, because I think over the
Speaker 2: course of the last twelve months, it was all about
Speaker 2: momentum and a lot of times most expensive stocks did
Speaker 2: did the best. But I think in time these kind
Speaker 2: of like valuation differences should start to shrink.
Speaker 1: Last year, you know, well that Prime Minister Takeiichi made
Speaker 1: some comments on the defense of Taiwan, which upset leadership
Speaker 1: in Beijing, and in turn, China restricted group tourism to Japan.
Speaker 1: Are you seeing evidence of fewer tourists in Tokyo?
Speaker 3: I think for the Chinese tourists, the group tours are.
Speaker 2: Restricted at this moment, and you're seeing these monthly sales.
Speaker 3: Number of retailers seeing some impact.
Speaker 2: However, the individual tourists are still coming in although it
Speaker 2: has low down and also a lot of the retailers
Speaker 2: also companies that are exposed to the inbound tourism. Have
Speaker 2: been making efforts to diversify the source of inbound tourism
Speaker 2: not just from China, but also in other regions such
Speaker 2: as Korea, Taiwan, Australia and even the United States.
Speaker 1: So we heard from the Prime Minister after the snap
Speaker 1: election and she's looking forward to a visit at the
Speaker 1: White House in the spring with the aim of strengthening
Speaker 1: the alliance between Japan and the United States. When you
Speaker 1: look at that relationship, whether it's politics or trade, what
Speaker 1: do you come away with?
Speaker 2: I think Japan and the United States has has been
Speaker 2: an ally post World War Two, and generally the relationship
Speaker 2: has been has been very strong, and I think Taki
Speaker 2: is very committed to keep in the relations strong in
Speaker 2: that way. A lot of the Japanese companies have exposure
Speaker 2: to the US economy. While it is it is still
Speaker 2: the largest economy in the world.
Speaker 3: But I think, you know, Takaichi.
Speaker 2: Is trying to balance between the US and also you know,
Speaker 2: trying to improve the relationship with with with China as
Speaker 2: well after a hiccup earlier in her administration.
Speaker 1: Are you concerned about anything in the aftermath of this
Speaker 1: election outcome?
Speaker 3: I think over the mid to long term.
Speaker 2: Given that LDP has secured two thirds of the majority,
Speaker 2: you can also say that they became too strong. I'm
Speaker 2: hoping that they will not become too arrogant and push
Speaker 2: for too much too far. But I think the coalition
Speaker 2: party Ishan is working together and and you know, I
Speaker 2: hope that the Ishan Party will be a good balancer of.
Speaker 3: The l d P.
Speaker 1: Chintara will leave it there. Thank you so very much
Speaker 1: for helping us understand the nuances of the snap election
Speaker 1: that occurred Sunday in Japan, with a local broadcaster NHK
Speaker 1: reporting Prime Minister Takeiichi's ruling Liberal Democratic Party has secured
Speaker 1: a two third super majority in the lower House. Shintaro Takuchi,
Speaker 1: he is portfolio manager at Matthews Asia. On the line
Speaker 1: from San Francisco here on the Daybreak Asia podcast. Welcome
Speaker 1: back to the Daybreak Asia podcast. I'm Doug Chrisner in
Speaker 1: the US. This week, we'll get some key data points
Speaker 1: on the American economy, including that slightly delayed employment report
Speaker 1: for the month of January, and for the stock market.
Speaker 1: Momentum will be a factor clearly, especially when you consider
Speaker 1: the influence of those trend following algorithmic funds. Joining us
Speaker 1: now for a look at the price action is Greg Halter.
Speaker 1: He is director of Research at Carnegie Investment Council. Greg
Speaker 1: is on the line from Cleveland, O, thank you for
Speaker 1: being here. We ended last week with that powerful rally.
Speaker 1: I think the S and P five hundred was up
Speaker 1: two percent, finishing a week that had been characterized by
Speaker 1: quite a bit of volatility. How would you make sense
Speaker 1: of the tape on Friday?
Speaker 4: Well, we had quite a bit of volatility on the
Speaker 4: downside leading into Friday, and it appears that the dip
Speaker 4: buyers certainly came in in our perspective. You know, if
Speaker 4: you look at the at least the chart of the
Speaker 4: S and P and the Dow, they just gradually ticked
Speaker 4: higher throughout the day, almost closing at the high of
Speaker 4: the day with a little drop off at the end,
Speaker 4: but pretty amazing the turnaround and just the continual strength
Speaker 4: throughout the day.
Speaker 1: So we had the news from Anthropic last week on
Speaker 1: their new AI model that will allow applications more focused
Speaker 1: to certain businesses, and I'm thinking immediately of the legal profession,
Speaker 1: also financial research and analysis. That really hit many of
Speaker 1: the software stocks very hard.
Speaker 2: Last week.
Speaker 1: Are we kind of in a weird way running a
Speaker 1: risk of avoiding the message from anthropic when it comes
Speaker 1: to some of these software issues, or was that an
Speaker 1: overreaction in your view?
Speaker 4: It's hard to say. Obviously, time will tell. There's certainly
Speaker 4: been some big impacts. You know, look at Factset, you
Speaker 4: can take a look at Gartner simple It, which is
Speaker 4: down quite a bit as well. You know, some of
Speaker 4: these names have really taken a shell acking here, and
Speaker 4: whether or not that's warranted remains to be seen. I
Speaker 4: think the companies that have data access to data will
Speaker 4: be more valuable, if you will, but something like an
Speaker 4: Adobe where you can just create a prompt and maybe
Speaker 4: you know outmode what they do, they could be more
Speaker 4: at risk. And certainly that stock has been troubled for
Speaker 4: a good year now.
Speaker 1: Goldman Sachs has what it calls its panic index, and
Speaker 1: I think it was on Friday it reached nine point
Speaker 1: two to two, a level that's not far from maximum fear.
Speaker 1: Are you seeing any evidence that maybe, even with that
Speaker 1: rebound that we had Friday, that there is some complacencies
Speaker 1: setting in?
Speaker 4: Certainly possible from that standpoint, but you know, we've seen
Speaker 4: some pretty dramatic moves in other things, including bitcoins down
Speaker 4: fifty percent. On the other hand, gold and silver sore,
Speaker 4: the silver one from twenty to one twenty or higher,
Speaker 4: and O's pulled back to eighty or so. There's been
Speaker 4: a lot of volatility in other things besides stocks as well.
Speaker 4: And you have this whole predictions market, which is adding
Speaker 4: another level of I don't want to call it speculation,
Speaker 4: but I guess it's speculation or gambling or you know,
Speaker 4: making predictions on the future. On top of the zero
Speaker 4: day options, there's just a lot of ways for things
Speaker 4: to be traded these days that we certainly didn't have
Speaker 4: five years ago. And there's a lot of volatility on
Speaker 4: a day to day basis in general, either stocks and
Speaker 4: or commodities and or items if you will, bets if
Speaker 4: you will, And that's something we haven't had in this format,
Speaker 4: at least historically. So how that plays out, that's that's
Speaker 4: going to be very interesting to follow.
Speaker 1: So how are you dealing with that when you're putting
Speaker 1: capital to work in the market, or whether you're watching
Speaker 1: the positions that you've put on, let's say, on the
Speaker 1: long side of the trade, how are you handling the volatility.
Speaker 4: At Carnegie Investment Console, we're a traditional long only manager.
Speaker 4: We seek to find the best companies we can and
Speaker 4: have growing revenues, growing cash flows, growing earnings. Some of
Speaker 4: those are getting disrupted. You know, Adobe had been in
Speaker 4: our portfolios and we have exited over the last year
Speaker 4: or so. We look for companies that have some sort
Speaker 4: of mote that can continue to do well. Here you
Speaker 4: look at Google a year Alphabet a year ago, and
Speaker 4: that stock was kind of being left in the scrap
Speaker 4: peep and then all of a sudden, maybe not and
Speaker 4: it's done very well. So you just don't know. We're
Speaker 4: trying to play the role of time in the market
Speaker 4: is more important than timing the market, and we'd like
Speaker 4: to have diversified portfolios, so we're not placing bets on
Speaker 4: you know, three or four or five stocks.
Speaker 1: So let me get your view on the macro because
Speaker 1: we have a big week for US data that slightly
Speaker 1: delayed employment report for January, and then we have CPI
Speaker 1: data and retail sales as well. How you are you
Speaker 1: viewing the American economy.
Speaker 4: We think the economy is actually pretty in pretty good shape.
Speaker 4: I mean, I look at the Red Book sales numbers
Speaker 4: that come out every week, and it seems like it's
Speaker 4: up five six seven percent every week on a year
Speaker 4: over year basis. That seems to be good. You've seen
Speaker 4: a lot of we think employment of funds into manufacturing facilities,
Speaker 4: not just data centers. Because companies are able to write
Speaker 4: this off immediately, both the the equipment, the buildings, the
Speaker 4: R and D relative to the attacks bill, that's a
Speaker 4: huge incentive. So any company who's thinking about doing something,
Speaker 4: this gives them great impetus to be able to do that.
Speaker 4: You know, is this a one time booster or is
Speaker 4: this multi year? Certainly you don't build a factory in
Speaker 4: a week or a month or a year. It's going
Speaker 4: to take some time. So what we haven't seen is
Speaker 4: employment growth happening. It's just been kind of stagnant here.
Speaker 4: So that's the one rub. We also haven't really seen
Speaker 4: inflation from tariffs, which some had thought would happen. That
Speaker 4: hasn't happened yet. Will it happen, who knows. We do
Speaker 4: think that the US government spending needs to get under control,
Speaker 4: and if it doesn't, that could cause inflation down the road.
Speaker 1: So to what extent is there any degree of urgency
Speaker 1: to cut interest rates again. I mean, it seems as
Speaker 1: though the market's view is that the next rate cut,
Speaker 1: if one does occur, won't happen until June. Does that
Speaker 1: kind of sit with your thinking?
Speaker 4: It seems to be. I don't know if there's any
Speaker 4: great rush from that standpoint. The issue that needs to
Speaker 4: be addressed somehow, and it's probably a combination of factors,
Speaker 4: is the housing market. It's really been in a quagmire
Speaker 4: for a good four years. And I don't know how
Speaker 4: you solve that because you've had prices go up, rates
Speaker 4: have started to come down, but they're still high. Somehow
Speaker 4: we have to break this log jam, and I don't
Speaker 4: know what the answer is there. Law rates is our
Speaker 4: part of it, but certainly not the whole thing.
Speaker 1: Greg will leave it there, Thank you so very much.
Speaker 1: Greg Halter is director of Research at Carnegie Investment Council,
Speaker 1: joining us from Cleveland, Ohio here on the Daybreak Asia Podcast.
Speaker 1: Thanks for listening to today's episode of the Bloomberg Daybreak
Speaker 1: Asia Edition podcast. Each weekday, we look at the story
Speaker 1: shaping markets, finance, and geopolitics in the Asia Pacific. You
Speaker 1: can find us on Apple, Spotify, The Bloomberg podcast, YouTube channel,
Speaker 1: or anywhere else you listen. Join us again tomorrow for
Speaker 1: insight on the market, moves from Hong Kong to Singapore
Speaker 1: and Australia. Prisoner and this is Bloomberg.
Speaker 2: Mm hmm