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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 Prisoner. It's proving to be a

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Speaker 1: mostly positive day for equity markets in the Asia Pacific.

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Speaker 1: We had some strong tailwinds from the US where equities

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Speaker 1: advanced on the bed for a FED rate cut next month.

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Speaker 1: Let's take a step back and look at some of

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Speaker 1: the issues that have been driving the price section across

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Speaker 1: the Asia Pacific and many will continue to do so.

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Speaker 1: Joining me now is William Bratton. He has head of

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Speaker 1: Cash Equity Research for the Asia Pacific at BNP Peabah.

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Speaker 1: William is joining from our studios in Hong Kong. Thank

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Speaker 1: you for making time to chat with me. As we

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Speaker 1: both know, we're nearing an end of the year and

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Speaker 1: for the most part, markets have had to digest a

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Speaker 1: tremendous amount of information over the last eleven months. I'm

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Speaker 1: curious to get your take as to where we are

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Speaker 1: in terms of relative clarity, if I can call it that.

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Speaker 1: How much more do we have in the way of understanding.

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Speaker 2: Primarily on the tariff side. Suddenly, going into the beginning

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Speaker 2: of this year, there was a lot of uncertainty as

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Speaker 2: to where tarifs would set up, particularly US tariffs with

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Speaker 2: respect to the Asia. You know, the big Asian exporters.

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Speaker 2: We may not like where they've necessarily settled, but they've

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Speaker 2: definitely come in. You know, we know where they are, right,

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Speaker 2: So that's removed a degree of uncertainty in terms of

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Speaker 2: what the forward looks like. From a corporate point of view,

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Speaker 2: the visibility on the impact of tariffs is becoming slightly clearer.

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Speaker 2: So the challenge that they had going into the beginning

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Speaker 2: of this year was actually that nobody really knew how

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Speaker 2: tariffs either would be implemented or how they would flow

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Speaker 2: through the supply chains. So the reality is as of now,

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Speaker 2: you know, corporates do have more visibility on the impact

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Speaker 2: of sort of higher costs and how it sort of

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Speaker 2: filters through the supply chains. Is it perfect, No, it's not.

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Speaker 2: Is there still a degree of uncertainty as to what

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Speaker 2: the end costs will be or the end impact will

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Speaker 2: be is a better way of putting it. Absolutely.

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Speaker 1: Does that cause companies to kind of look to alternatives

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Speaker 1: outside or away from the US? Do you think is

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Speaker 1: there maybe an impulse to become less dependent on the

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Speaker 1: United States?

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Speaker 2: Well, there's a border I mean, unfortunately, there's a border

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Speaker 2: sort of challenge that corporates are facing, certainly here in Asia,

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Speaker 2: and the challenge is this whole sort of decoupling of

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Speaker 2: the US and China. So ultimately, corporates are starting to

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Speaker 2: look at the way that the US is sort of

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Speaker 2: enforcing its view of the world and the way that

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Speaker 2: China is enforcing its view of the world, and corporates

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Speaker 2: are having to think now about whether they make a

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Speaker 2: binary choice. You know, do they basically go with one

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Speaker 2: of the economies over the other, or do they sort

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Speaker 2: of run duplicated production systems, you know, do they have

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Speaker 2: a part of their business that's geared towards China and

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Speaker 2: a part of their business that's geared towards the US.

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Speaker 2: This is a real problem for Asian corporates, right because

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Speaker 2: it's a side with one country over the other, US

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Speaker 2: over China, or China over the US, or that not

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Speaker 2: side with. But they gear their systems or their production

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Speaker 2: towards those economies, then they effectively forego revenues in the

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Speaker 2: other market. And if they decide to run sort of

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Speaker 2: parallel duplicated networks or production systems, you actually end up

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Speaker 2: losing economies of scale and inco higher costs. So the

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Speaker 2: whole of Asia, you know, the whole of sort of

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Speaker 2: the Asian export system, including both corporates and countries, are

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Speaker 2: increasingly caught in this binary choice where the outcome long

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Speaker 2: term outcomes are not particularly positive. So what's happening is

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Speaker 2: that lots of corporates are sort of trying to do

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Speaker 2: as much they can in the current system. But longer term,

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Speaker 2: there are definitely concerns about the way that the global

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Speaker 2: economy is evolving and the subsequent impact on production costs

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Speaker 2: and relative competitiveness across much of Asia, and that's sort

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Speaker 2: of a longer term, sort of profound challenge facing the

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Speaker 2: region going forwards.

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Speaker 1: Can we bring artificial intelligence into the conversation, And I'm

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Speaker 1: curious about the way in which the technology is being

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Speaker 1: adopted by these firms and whether or not there is

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Speaker 1: an advantage. Maybe they're seeing greater productivity or maybe it's

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Speaker 1: too early to know.

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Speaker 2: I think it's far too early to know. You know,

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Speaker 2: the way that the way that most corporates are now

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Speaker 2: thinking about AI and advanced technology is more around cost control,

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Speaker 2: and you know, the ability to sort of get cost

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Speaker 2: efficiencies moving forwards. But I still think most corporates around

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Speaker 2: the region are still working out exactly how to maximize

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Speaker 2: the impact of this new technology. I mean, the immediate

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Speaker 2: winners are those who are supplying you know, the infrastructure,

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Speaker 2: whether it's chips or the other sort of supporting infrastructure.

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Speaker 2: But in terms of the buyer, it's still you know,

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Speaker 2: there's still some uncertainty as to what the use cases

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Speaker 2: is or are, and how the use cases improve profit

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Speaker 2: stability going forwards. So there's a lot of unknown still,

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Speaker 2: which is sort of complicating the whole sort of AI narrative.

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Speaker 2: I mean, the clear current winners in the near term

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Speaker 2: are very obvious, you know, those exporters into the US,

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Speaker 2: particularly into the US tech ecosystem. But in terms of

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Speaker 2: users and the buyers of technology, I think lots are

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Speaker 2: still trying to work out how to utilize it to

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Speaker 2: achieve longer term gains.

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Speaker 1: What about the level of confidence or maybe conviction that

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Speaker 1: China will ultimately begin to engineer products that can rival

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Speaker 1: what a company like let's say, Nvidia is able to produce.

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Speaker 1: Is there still that type of betting going on right now,

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Speaker 1: or do you just basically conclude at this point in

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Speaker 1: time the US has that technological superiority, and until China

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Speaker 1: has allowed greater access to those advanced semiconductors, I mean

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Speaker 1: the US has the advantage.

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Speaker 2: Across the board. The West has tended to underestimate the

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Speaker 2: ability of China to close technological gaps, so across the

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Speaker 2: board there has been a consistent tendency to assume that

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Speaker 2: the West's advantage in technology can be sustained and maintained

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Speaker 2: going forwards. The reality is that, depending on how you

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Speaker 2: slice and dice it, China has closed the gap in

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Speaker 2: numerous technologies and is head in many. Now there are

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Speaker 2: some where China is still clearly lagging the West or

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Speaker 2: leading edge Western technologies. However that be defined, and chips

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Speaker 2: are one of them. But my suggest I would strongly

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Speaker 2: recommend that people don't assume that that gap is maintained.

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Speaker 2: I think China is moving incredibly quickly to close the gap.

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Speaker 2: And you talk about advanced chips. The reality is that

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Speaker 2: China does not want any dependency on US technologies in

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Speaker 2: the same way the US doesn't want dependency on Chinese technologies.

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Speaker 2: There is a clear drive in both countries to put

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Speaker 2: a clear technological separation between themselves, and even if there

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Speaker 2: is an opportunity to acquire Western chips. I'm not convinced

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Speaker 2: that you know there would be substantial demand out of

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Speaker 2: China for those chips. The reality is that China wants

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Speaker 2: to have its own technological system. It wants to have

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Speaker 2: its own leading edge technologies, and it's closing the gap

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Speaker 2: across a whole slew of technologies at an incredible pace.

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Speaker 2: And just repeating this point, if I go back ten

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Speaker 2: years ago and I think about what people were saying

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Speaker 2: about Chinese tech and how quickly or slowly they would

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Speaker 2: take to sort of replicate or replace Western tech, China

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Speaker 2: has consistently surprised to the upside. It is easier to

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Speaker 2: identify texts where they haven't closed the gap than it

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Speaker 2: is to identify text where they're now not at the

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Speaker 2: same sort of leading edge or even actually a head

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Speaker 2: of leading edge technologies. They're at the forefront. If that

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Speaker 2: makes any sense.

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Speaker 1: It does, and as I'm listening to it seems like

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Speaker 1: more evidence of further decoupling. But I want to pivot

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Speaker 1: right now because the conversation began with geopolitics, and we've

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Speaker 1: got a situation right now between China and Japan that

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Speaker 1: seems to be a little tense after the Japanese Prime

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Speaker 1: Minister taka Ichi commented on Taiwan, and I'm trying to

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Speaker 1: get the sense of from a market participant what this

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Speaker 1: really means and whether there is an inherent risk here

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Speaker 1: that we need to explore.

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Speaker 2: So the problem being slightly gray head is I've seen

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Speaker 2: this happen multiple times before. The reality is there's always

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Speaker 2: a residual tension between Japan and China. We have these

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Speaker 2: flare ups on a sort of periodic basis. I wouldn't

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Speaker 2: from a market point of view, I wouldn't read very

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Speaker 2: much into it. It's basically, you know, both countries trying

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Speaker 2: to you know, define the boundaries as the sort of

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Speaker 2: political boundaries between them each of themselves. So I wouldn't

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Speaker 2: at this point read too much into the current flare up.

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Speaker 2: We've seen it before, We've had them, you know, we've

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Speaker 2: had these kind of spats before. Usually they calm down

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Speaker 2: after a period of time, when China or Japan has

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Speaker 2: made its point and they sort of stabilize. There is

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Speaker 2: a broader geopolitical issue, though, which is longer term. China's

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Speaker 2: relative positioning within Asia will continue to strengthen, will continue

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Speaker 2: to get more pronounced. Its influence and control within Asia

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Speaker 2: will continue to grow, and this definitely presents a major

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Speaker 2: challenge for the rest of the region's more minor powers

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Speaker 2: who have to navigate, you know, a change in balances

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Speaker 2: of power basically and which country has the influence and

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Speaker 2: over time over the next five to ten years, our

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Speaker 2: view is that China's relative sort of influence within Asia

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Speaker 2: and will continue to grow. It will become more know

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Speaker 2: the scale asymmetries that has will become more pronounced. The

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Speaker 2: US and the West will get more displaced over time,

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Speaker 2: and for countries like Japan and South Korea and others,

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Speaker 2: this is a major sort of geopolitical challenge that they

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Speaker 2: have to navigate over the next five to ten years.

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

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Speaker 1: William Bratton is head of Cash Equity Research for the

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Speaker 1: APEC at B and p PERIBAD. Joining us here on

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Speaker 1: the Daybreak Asia podcast. Welcome back to the Daybreak Asia Podcast.

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Speaker 1: I'm Derek Prisoner. The latest US economic data further cemented

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Speaker 1: bets on a FED rate cut next month. We had

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Speaker 1: the delayed report on September. Retail sales and if you

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Speaker 1: don't adjust for inflation, we had an increase of just

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Speaker 1: two tenths of one percent after several months of much

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Speaker 1: more robust spending. And at the same time, more current

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Speaker 1: data from the Conference Board showed consumer sentiment at the

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Speaker 1: lowest level in seven months, and the reading on consumer

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Speaker 1: expectations from the Conference Board over the next six months

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Speaker 1: is now at its lowest level since April. Joining me

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Speaker 1: now for a closer look is Jim Warden. He is

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Speaker 1: the CIO at the Wealth Consulting Group. Jim, thank you

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Speaker 1: so much for making time to chat with us. So

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Speaker 1: we had a rising equity market in States. On Tuesday,

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Speaker 1: the S and P picked up around nine tens to

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Speaker 1: one percent. Healthcare clearly out in front, while information tech

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Speaker 1: was weak. And it seems as though the market is

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Speaker 1: still going through some type of rotation. Is that the

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Speaker 1: way you see it?

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Speaker 3: Yeah, it certainly feels like a rotation.

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Speaker 4: You know, when I look at my screen, havis screen

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Speaker 4: that shows all three thousand of the Russell three thousand,

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Speaker 4: there's a lot of green, not a lot of red,

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Speaker 4: but the but that's not that doesn't look like what

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Speaker 4: the indexes would would indicate. Right when we see the numbers,

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Speaker 4: the percentage numbers, especially with Nvidia being a very large

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Speaker 4: weighting in most indices, so this is something that it's

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Speaker 4: almost like two markets within one. Obviously, the news on

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Speaker 4: Meta buying chips from Alphabet is kind of, you know,

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Speaker 4: the market's a little I believe, overacting a little bit

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Speaker 4: when it comes to AI. I'm really really happy to

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Speaker 4: see the breadth come out with some of these other names,

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Speaker 4: and like you said, healthcare and some of these other

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Speaker 4: sectors that really have not participated a whole lot this year.

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Speaker 1: I'm so glad you mentioned those AI chips from Google.

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Speaker 1: These are the tensor processing units known as TPUs. From

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Speaker 1: what I understand, they are specifically designed for certain AI

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Speaker 1: related applications, and maybe more importantly, these chips use less

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Speaker 1: power than in Nvidia's GPUs, those graphic processing units that

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Speaker 1: were originally developed for computer graphics. When it comes to

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Speaker 1: the GPUs, I think there's no mistaking the fact that

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Speaker 1: they are essential now when it comes to various AI applications.

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Speaker 1: You mentioned the report from the Information on Meta platforms

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Speaker 1: being in talks to spend billions of dollars on the

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Speaker 1: Google TPUs, so I'm curious as to how you understand

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Speaker 1: this development. And whether in your mind it represents any

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Speaker 1: sort of threat to Invidia's dominance in the market for

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Speaker 1: these AI chips.

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Speaker 3: I don't think it does right now.

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Speaker 4: I mean, they've they've got a backlog of roughly three years,

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Speaker 4: and you know, there's a lot of people trying to

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Speaker 4: just get their in Nvidia chips. It does kind of

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Speaker 4: bring the question when does this kind of shift right

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Speaker 4: We've also seen Broadcom perform really really well. That's another

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Speaker 4: one of our holdings. In addition to Nvidia, we also

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Speaker 4: own Alphabet, So like we own all of these names.

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Speaker 4: You know, we we don't believe that this is going

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Speaker 4: to be massive, but like the market is certainly looking

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Speaker 4: to this to see is there something big that comes

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Speaker 4: of it.

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Speaker 3: The evaluations, frankly, aren't that bad.

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Speaker 4: When I look at Nvidia as well as Google, you know, Alphabet,

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Speaker 4: and you know some of these other names. Pallunteer seems

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Speaker 4: to be a little bit stretched, but you know, what

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Speaker 4: they're doing with oncology seems to be really really different

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Speaker 4: than some of the other enterprise wide application uses for AI.

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Speaker 1: So, Jim, I'm going to imagine with names like Nvidia,

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Speaker 1: a company like Alphabet, you have locked in or seen

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Speaker 1: I should say, pretty handsome gains so far. Are you

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Speaker 1: tempted to lock in some of that profit now, maybe

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Speaker 1: reduce a little bit of risk, take some money off

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Speaker 1: the table, so to speak.

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Speaker 3: Yeah, that's a great question.

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Speaker 4: So, I mean, we look at our portfolios from a

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Speaker 4: risk management risk, you know, position sizing standpoint, and we

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Speaker 4: are constantly looking at, you know, not take not wanting

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Speaker 4: to take on too much risk.

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Speaker 3: We love these names.

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Speaker 4: Uh, you know, a lot of our quant driven portfolios

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Speaker 4: are are capped with the target of two point two percent,

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Speaker 4: and so when when these things go from two to

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Speaker 4: three three and a half, some of the smaller positions

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Speaker 4: have have done gone even higher. So we you know,

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Speaker 4: it's it's it's not that we don't like the names,

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Speaker 4: we just don't want to have that much exposure, certainly

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Speaker 4: a lot less exposure than the index.

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Speaker 1: So I mentioned the rotation into healthcare is one possibility.

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Speaker 1: Are there other areas of the market that you perceived

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Speaker 1: to be maybe a better value If you're going to

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Speaker 1: reduce some of your exposure to these big cap tech names,

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Speaker 1: where would you reallocate that capital.

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Speaker 4: Yeah, so we we continue to like industrials and we

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Speaker 4: can continue to like financials, but we've also added some

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Speaker 4: to utilities. We believe that you know, the tie in

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Speaker 4: with A and the need for energy and electricity is real,

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Speaker 4: and so there's thematically we're looking at some of those

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Speaker 4: different names, and you know, we don't want to just

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Speaker 4: have everything moving the same, right, So a lot of

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Speaker 4: what we're doing is quantitative driven.

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Speaker 3: So that means we're going to have some momentum, we're

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Speaker 3: going to.

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Speaker 4: Have some value, we'll have some quality, but we'll also

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Speaker 4: have some lower volatility and you know, some trend reversals,

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Speaker 4: some names that you know have really gotten beaten up

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Speaker 4: that are starting to come back to life.

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Speaker 3: We like this from a value standpoint. Particularly.

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Speaker 1: Let's talk a little bit about FED policy, because given

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Speaker 1: some of the data that we had today, I think

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Speaker 1: we had a further cementing of bets on a rate

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Speaker 1: cut at the December meeting. I think the probability right now,

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Speaker 1: if you look at FED fund's futures eighty percent probability

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Speaker 1: of a rate cut of twenty five basis points? Are

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Speaker 1: you comfortable with that? Are you worried about that? In

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Speaker 1: the face of the PPI data today that illustrated that

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Speaker 1: inflation is still an issue. I mean, perhaps the FED

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Speaker 1: is moving a little too aggressively. I get that the

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Speaker 1: labor market is showing weakness, but as recently as a

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Speaker 1: month ago, there was a lot of doubt about the

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Speaker 1: possibility of a rate cut, given the fact that there

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Speaker 1: was so much debate going on among FED policymakers and

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Speaker 1: inflation seemed to be a big worry.

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Speaker 4: Yeah. I mean, when you look at last week, I

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Speaker 4: think the FED fund's futures were pricing in like thirty

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Speaker 4: percent or less rate cut for next next month, and

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Speaker 4: now we're, as you said, eighty percent. We believe that,

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Speaker 4: you know, the risks are not perfectly balanced. We believe

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Speaker 4: there's more downside risk when it comes to the labor market.

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Speaker 4: We believe that you know, some of this inflation is

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Speaker 4: owner's equivalent rent that's kind of sticky, there's a lag

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Speaker 4: it's likely to come down. Certainly, the you know, the

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Speaker 4: policies with you know, immigration and demographics would would indicate that,

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Speaker 4: you know, there's some deflationary pressures, and certainly with AI

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Speaker 4: and productivity. Uh, the labor market, on the other hand,

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Speaker 4: we believe that this is likely weaker then the data

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Speaker 4: would would currently suggest, and so most of the conversations.

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Speaker 4: We're having lots of conversations with lots of other investment

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Speaker 4: managers and experts on this, and they believe that similar

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Speaker 4: that you know, there's it's better for the FED to

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Speaker 4: be proactive in cutting rates than to worry too much

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Speaker 4: about the inflation.

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Speaker 1: Jim, I'm wondering whether there's something to be said for

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Speaker 1: this debate as to whether or not lowering interest rates

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Speaker 1: is the right prescription for the weakness that we are

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Speaker 1: seeing in the labor market. And if you'll allow me,

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Speaker 1: I'm going to cite what we heard from HP Inc.

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Speaker 1: After the belt The company is going to cut between

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Speaker 1: four thousand to six thousand jobs through the fiscal year

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Speaker 1: twenty twenty eight by using more AI tools. So, yeah,

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Speaker 1: we're at the point where maybe we're in some sort

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Speaker 1: of regular business cycle that we're familiar with that would

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Speaker 1: justify cutting infrast rates. But there's also this new transformative

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Speaker 1: technology that's being embraced and the reality is it's threatening

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Speaker 1: to reduce the number of workers one hundred percent.

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Speaker 3: Agree with that.

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Speaker 4: And you know, one of the data that I read

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Speaker 4: was an executive over at b of A was saying

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Speaker 4: that you know, rather than you know, only a banker

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Speaker 4: only managing fifteen client relationships that could manage fifty, and

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Speaker 4: so that means you don't need as many people. Certainly

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Speaker 4: that would be something that would be a concern for

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Speaker 4: the labor market. I would say that that is a

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Speaker 4: concern for the probably the larger companies that have tens

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Speaker 4: of thousands of employees. But going back to the interest rates,

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Speaker 4: lower rates I think would help the smaller businesses, especially

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Speaker 4: those businesses that were financial conditions for them are a

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Speaker 4: little bit tighter. Uh, they're not as profitable as the

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Speaker 4: larger companies, and so that would really help.

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Speaker 3: It would help with.

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Speaker 4: Consumers some and so I think that you know, doing

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Speaker 4: that would would actually be helpful. That whether the FED

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Speaker 4: cuts or not probably isn't.

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Speaker 3: Going to impact the AI story.

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Speaker 4: That this is a fast moving train that you know,

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Speaker 4: you can slow it down some, but it's it's not

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Speaker 4: going to stop. You know a lot of the as

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Speaker 4: you know, a lot of these large companies are flesh

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Speaker 4: with cash, and you know, it's it doesn't really matter

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Speaker 4: for them what the rate is that they can easily borrow.

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Speaker 1: That's a good point. Jim will leave it there, Thank

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Speaker 1: you so very much. Jim Warden is the CIO at

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Speaker 1: the Wealth Consulting Group, joining us here on the Daybreak

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Speaker 1: Asia Pope. Thanks for listening to today's episode of the

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Speaker 1: Bloomberg Daybreak Asia Edition podcast. Each weekday, we look at

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

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