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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 Chrisner. Equity markets across the Asia

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Speaker 1: Pacific are advancing despite some weakness in the US, and

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Speaker 1: today a lot of focus on Japan because Monday we

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Speaker 1: had the BOJ Governor Uwaita talking up the prospect for

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Speaker 1: a rate hike. Money markets now suggest an eighty percent

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Speaker 1: probability of the BOJ raising its policy rate on December nineteenth.

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Speaker 1: Just a week ago that probability was below twenty five percent.

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Speaker 1: And speaking of central banks, we've got the Fed's decision

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Speaker 1: on December tenth. Now we know that EM stocks and

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Speaker 1: currencies have been benefiting from expectations for a FED rate cut.

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Speaker 1: For a closer look now at EM I'm joined by

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Speaker 1: Joey Young. She is head of product management and marketing

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Speaker 1: at Market Vectors. Index's joy joining from just outside of

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Speaker 1: New York City. Thank you for making time to chat

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Speaker 1: with me. We know that EM equities generally speaking, are

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Speaker 1: on track for their best year since about twenty sixteen,

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Speaker 1: I think, and it's interesting that these gains have occurred

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Speaker 1: against a backdrop of not only higher tariffs, but a

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Speaker 1: struggling Chinese economy. How do you make sense of that?

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Speaker 2: I think one you you know, it's an emerging market,

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Speaker 2: so there are risks, whether it's to data or individual companies.

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Speaker 2: But not all companies within China are an investible which

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Speaker 2: is where we had started probably at the end of

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Speaker 2: last year, until we saw that. You know, these are

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Speaker 2: companies that benefit from AI and we see that in Ali,

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Speaker 2: Baba and concent and these are also companies that are

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Speaker 2: participating in the same growth stories that are driving develop

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Speaker 2: markets such as gold. You know, gold miners in China

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Speaker 2: have done extremely well. So investors have to look carefully

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Speaker 2: not just at the country, but the themes within the country.

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Speaker 2: And even China is an interesting case because when investors

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Speaker 2: consider China, we're seeing a lot of domestic Chinese stocks

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Speaker 2: now listed in Hong Kong, so you know, you should

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Speaker 2: include these Hong Kong listed names that are exposed to

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Speaker 2: domestic Chin Chinese economics, so you know whether that's good

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Speaker 2: or bad.

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Speaker 1: So that's the trade essentially. Maybe you focus on things

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Speaker 1: like artificial intelligence or robotics in terms of the Chinese

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Speaker 1: equity market, but you avoid things with a lot of

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Speaker 1: exposure to domestic demand, which as we know has been stalling,

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Speaker 1: and the housing market at the same time remains under duress.

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Speaker 2: Yeah, I mean, essentially, these are the risks that you're

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Speaker 2: taking in emerging market, whether it's China or even Indian.

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Speaker 2: We saw India again in twenty twenty four had just

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Speaker 2: the superb outperformance and it's looking expensive now. But within India,

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Speaker 2: you know, digital economy is doing well, and so we

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Speaker 2: think that investors, you know, should focus within India on

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Speaker 2: things like digital economy and infrastructure.

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Speaker 1: So we mentioned artificial intelligence as it relates to China.

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Speaker 1: But as you well know, the intricacies of the supply chain,

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Speaker 1: whether you're talking about high bandwidth memory chips or the

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Speaker 1: chips that Nvidia produces manufactured by TSMC and Taiwan, a

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Speaker 1: lot of the raw materials that are necessary to produce

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Speaker 1: those semiconductors, all of this is very interrelated, and I'm

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Speaker 1: wondering how you're approaching that right now, whether you're looking

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Speaker 1: at markets like Taiwan, like South Korea as a way

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Speaker 1: to leverage that AI trade.

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Speaker 2: Absolutely, so, I think if you think about emerging markets

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Speaker 2: as a whole, was kind of written off. You know,

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Speaker 2: people were under allocating to emerging markets so they had

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Speaker 2: higher risk premiums because you know, you know, most investors

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Speaker 2: thought that they would be negatively impacted by the tariffs,

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Speaker 2: but as we know, these terrors still have you know,

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Speaker 2: a lot of noise in there. There's been taco you know,

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Speaker 2: strategies and reversals and terroriffts.

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Speaker 3: And we've seen that.

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Speaker 2: Emerging markets and aggregate have adapted really well to the

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Speaker 2: tariff noise because they've been able to either pivot away

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Speaker 2: from some of the noise by trading towards China or

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Speaker 2: the rest of the world, and they have also been

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Speaker 2: beneficiaries from the west of the world trying to put

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Speaker 2: pivot away from the US, and that includes you know,

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Speaker 2: countries like Taiwan, which is still a significant part.

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Speaker 3: Of the ai story, as well as Korea.

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Speaker 2: And Korea is another interesting case where at the beginning

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Speaker 2: of the year we were talking about martial law and

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Speaker 2: crisis in the government, so a lot of people shied

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Speaker 2: away from Korean markets. Year to day, Korea is the

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Speaker 2: highest performing country in the market. So I think investors

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Speaker 2: have to be constantly reassessing, repricing the risks that they've

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Speaker 2: placed in some of these countries.

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Speaker 1: I'm curious about Vietnam right now, the country seems to

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Speaker 1: be on the cosp of being a frontier market, maybe

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Speaker 1: early stage em How do you look at Vietnam these days?

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Speaker 2: I think Vietnam is also another one of these growth stories,

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Speaker 2: not just on the back of fundamentals, because they've restructured

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Speaker 2: their debt and they've invested in the infrastructure.

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Speaker 3: They are also beneficiaries of.

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Speaker 2: The China alternative manufacturing story. But again, as you mentioned,

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Speaker 2: they're on the verge of graduating from front tier market

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Speaker 2: to emerging market status, and that's going to be a

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Speaker 2: benefit with trade shifts and allocations towards you know, this

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Speaker 2: country coming into the broad emerging market class. And again

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Speaker 2: this is kind of the overall emerging market story is

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Speaker 2: that you know, some of these countries and both equities

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Speaker 2: and bonds have you know, seeing really good restructurings and

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Speaker 2: financial discipline to the point that some of these debt

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Speaker 2: are even better than their developed market counterparts.

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Speaker 3: And you know, we're seeing now they're.

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Speaker 2: The adults in the room, given the.

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Speaker 3: High level of debt and developed markets.

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Speaker 1: I'm so glad you brought up the debt side of

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Speaker 1: the story because I'm wondering how you feel about EM

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Speaker 1: debt or EM credit broadly speaking.

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Speaker 2: At the moment, and again, not all emerging markets are

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Speaker 2: the same, but at the moment, there are some really

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Speaker 2: high quality emerging market country debt because they've been restructuring

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Speaker 2: and improving over the years, they've really brought their debt

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Speaker 2: levels down, you know, relative to what we're seeing in

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Speaker 2: developed markets, and they're benefiting from the dollar weakness because

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Speaker 2: their barring costs are also shrinking.

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Speaker 1: So, Joey, you pointed out that it has been a

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Speaker 1: pretty good year for em broadly speaking, and I'm wondering

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Speaker 1: whether it would be prudent now in the final month

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Speaker 1: of the year to take a little bit of risk

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Speaker 1: off the table. Is this a time to d risk?

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Speaker 1: Do you think?

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Speaker 2: Well, essentially, everybody seems to be de risking at the

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Speaker 2: moment given the volatility increase in volatility that we're seeing.

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Speaker 2: But I think again, investors think in terms of calendar year,

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Speaker 2: but you know, you really have to take a longer

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Speaker 2: view when you're thinking about your strategic allocation in terms

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Speaker 2: of de risking itself, depending on what your portfolio shape

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Speaker 2: looks like. But I think investors are also when they

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Speaker 2: took take a broader longer term view, you know, it's

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Speaker 2: you know, markets are still like we talked about markets

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Speaker 2: coming down today, but markets are still trending up. It's

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Speaker 2: up sixteen seventy percent year to date, and this is

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Speaker 2: on the back of two strong, you know, over twenty

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Speaker 2: percent return years, and it's very unusual to see three

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Speaker 2: strong years in a role with volatility so low. So

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Speaker 2: you know, one of two things have to happen. Either

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Speaker 2: returns have to come down or volatility needs to go up.

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Speaker 2: And if that's the case, you have to readjust your

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Speaker 2: own position, given your risk tolerance.

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Speaker 1: Does it suggest to you in any way that they

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Speaker 1: what you've justici described as an illustration that there is

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Speaker 1: still ample liquidity in the system and what we are

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Speaker 1: seeing in price action may be a reflection of that.

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Speaker 2: I think it's a reflection of the nervousness in the

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Speaker 2: markets as they're waking up to the fact that they

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Speaker 2: may you know, not have priced in the full picture

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Speaker 2: of the risks that are in some of these assets.

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Speaker 2: You know, AI n video. These are all risky assets,

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Speaker 2: you know, as well as bitcoins, So investors need to

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Speaker 2: really understand what their risk tolerance is and what they're

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Speaker 2: pricing in to some of these companies they're invested in.

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Speaker 1: Joy will leave it there always a pleasure. Thank you

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Speaker 1: so very much. Joy Young is head of product management

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Speaker 1: and marketing to market Vector Indexes. Joy joining from just

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Speaker 1: outside of New York City. Here on the Daybreak Asia podcast.

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Speaker 1: Welcome back to the Daybreak Asia Podcast. I'm Doug Chrisner.

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Speaker 1: A bit of uneasiness seemed to grip the US equity

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Speaker 1: market in the last session thanks to a sell off

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Speaker 1: in cryptocurrencies. We had Bitcoin dropping more than six percent

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Speaker 1: in New York trading to around eighty five thousand, and

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Speaker 1: that decline forced liquidation of nearly a billion dollars of

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Speaker 1: leveraged crypto positioning for closer look at the price action,

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Speaker 1: I'm joined by Tim Pagliara. He is founder, chairman and

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Speaker 1: also the CIO at Cap Wealth. Tim joining from just

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Speaker 1: outside of Nashville, Tennessee. Tim, thank you so much for

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Speaker 1: joining us. I'd like to begin by getting your take

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Speaker 1: on the correlation between crypto and certain pockets in the

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Speaker 1: equity market that may be described as a little risk here.

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Speaker 4: You know, it's it's really hard to say, Doug. I mean,

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Speaker 4: there's lots of rumors about you know the impact that

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Speaker 4: tightening regulations in China and Asia are having in general

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Speaker 4: on crypto, so you know it's a risk off trade.

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Speaker 4: Bill Ackman suggested last week that it potentially is some

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Speaker 4: deleveraging margin type calls. People that have been attracted to

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Speaker 4: crypto in one sense have been leveraged into some of

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Speaker 4: these other names, and you know when it all starts collapsing,

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Speaker 4: so to speak. That's what happens when you get a

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Speaker 4: broad sell off in an asset like that.

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Speaker 1: We also had a backup in yields today right across

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Speaker 1: the treasury curve, more so at the long end. This

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Speaker 1: seemed to be tied to a little bit of volatility

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Speaker 1: in the Japanese set market. Overnight two year borrowing cost

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Speaker 1: on the short end of the curve in Japan jumped

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Speaker 1: above one percent for the first time in seventeen years.

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Speaker 1: So it seems as though the market is now better

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Speaker 1: prepared for the possibility that the Bank of Japan is

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Speaker 1: going to hike interest rates, maybe as soon as this month.

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Speaker 1: We'll have to wait and see. But when you look

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Speaker 1: at the treasury market here in the US, how does

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Speaker 1: it peer to you, particularly as we've got a Fed

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Speaker 1: decision less than two weeks away.

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Speaker 4: Well, I think it's you know, our market, our treasury

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Speaker 4: market is stable. You know, as we all know, the

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Speaker 4: FED doesn't control the long end of the curve, but

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Speaker 4: they can't impact the short end of the curve. What

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Speaker 4: you mentioned about Japan is is interesting and it's it's

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Speaker 4: part of a much bigger problem because they're having to

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Speaker 4: unwind a trade that has worked for a number of years.

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Speaker 4: Where you know, in Japan they essentially have a tax

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Speaker 4: on their pension funds because their pension funds are required

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Speaker 4: to own Japanese securities, and so they set that rate

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Speaker 4: at very It's been at a very very low rate

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Speaker 4: for years and years, and then they created an arbitrage

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Speaker 4: by buying US treasuries, so they were making a spread

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Speaker 4: and financing their deficits. So their deficit they're off the charts.

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Speaker 4: It's two hundred percent of GDP. And so that's a

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Speaker 4: situation that we watch very closely. And how much the

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Speaker 4: Japanese economy can absorb with higher rates now that inflation

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Speaker 4: is back and their deflationary spiral has stopped is something

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Speaker 4: of significant concern on a macro global basis.

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Speaker 1: So I mentioned the FED decision that happens on December tenth,

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Speaker 1: This Friday, we're going to get the Fed's preferred measure

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Speaker 1: of inflation, the PCEE reading. It's expected to show, at

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Speaker 1: least if you look at the Bloomberg Survey, that inflationary

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Speaker 1: pressures may be stable, but they're still sticky and above

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Speaker 1: that two percent target. Do you think it's a foregone

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Speaker 1: conclusion that we're going to get a quarter point cut

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Speaker 1: in rates.

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Speaker 4: I think we'll get this quarter point cut, and then

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Speaker 4: after that I think it is wait and see. They'll

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Speaker 4: get more data. You know, there's a lot of indications,

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Speaker 4: for example, with auto loan delinquencies, rising, inventories among the

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Speaker 4: car manufacturers, other things that would suggest that the employment

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Speaker 4: situation is slowing and would justify some type of move

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Speaker 4: on the Fed's part. The other thing that's important I'm

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Speaker 4: looking at not so much interest rates, but the money

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Speaker 4: supply and the quantitative tightening really needs to stop because

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Speaker 4: we're in an artificial intelligence war, a build out that's

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Speaker 4: going to take trillions of dollars, and so we're not

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Speaker 4: even halfway through that, and so we it's almost a

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Speaker 4: national security issue at this point that we're allowed to

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Speaker 4: finish that and then deal with some of the fallout

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Speaker 4: that inevitably comes from one of these boom and bus cycles.

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Speaker 1: Yeah, we had another deal in the AI space today,

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Speaker 1: Nvidia investing about two billion in the chip does design

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Speaker 1: software maker Synopsis. Where are you right now in this

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Speaker 1: AI trade? Do you think it's still viable? Are we

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Speaker 1: maybe wrong in expecting some type of moderation or a

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Speaker 1: pullback here at least in the near term.

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Speaker 4: Well, it's it's very difficult when you look at the

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Speaker 4: amount of money that's going to be invested. One of

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Speaker 4: the firms put out an article about seven trillion dollars

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Speaker 4: in AI spending, would suggest that you need one and

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Speaker 4: a half trillion dollars worth a profit to support that,

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Speaker 4: and that becomes very problematic. If you took all the

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Speaker 4: dividends and all the stock buybacks at the mag seven

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Speaker 4: and you stop them, that gets you just under six

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Speaker 4: hundred billion dollars, you know. So there's a lot of

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Speaker 4: money that has to flow into that space and complete it.

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Speaker 4: Our favorite name and we classify it as a deep

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Speaker 4: value name in AI relative to everything else, is a

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Speaker 4: company called Lumen. Once these hyperscalers are in full operation

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Speaker 4: and they're moving data. The existing network is not fast enough,

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Speaker 4: it's not secure enough. It needs tremendous build out. And

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Speaker 4: there's over one hundred over one thousand hyperscalers that have

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Speaker 4: adopted Lumen and they have the largest independent fiber network

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Speaker 4: basically in the country, possibly the world. Right now, all

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Speaker 4: of these hyperscalers are going to have to connect. They

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Speaker 4: move data at four hundred megabytes per second. In your home,

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Speaker 4: you're moving data at four hundred megabits per second. So

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Speaker 4: Luhmen transmits data between these centers eight times faster than

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Speaker 4: what you can get in your home. And that's what's

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Speaker 4: going to be necessary to really support this. It's the

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Speaker 4: train tracks of moving data between these big centers.

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Speaker 1: As I'm listening to, I'm wondering whether or not a

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Speaker 1: company like Luhman would use artificial intelligence to manage the network.

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Speaker 4: Absolutely. In fact, they entered into an agreement with Palenteer.

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Speaker 4: Alex Karp and Kate Johnson. We're in an interview recently

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Speaker 4: and Alex Karp called Luhman the backbone of the AI revolution.

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Speaker 4: So it just naturally follows. We've been consistent about this.

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Speaker 4: You go from chips to the applications and the software applications.

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Speaker 4: But then you've got to be able to move that data.

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Speaker 4: You've got to move it at a commercially reasonable pace.

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Speaker 4: It has to be secure. Luhman has Internet has security

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Speaker 4: provisions between these centers that are gaining widespread adoption. In fact,

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Speaker 4: Microsoft last week announced that they were going to use

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Speaker 4: their Defender offering to bolster Internet security. Microsoft has been

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Speaker 4: in an agreement with them. They entered into it over

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Speaker 4: two years ago. Corning entered into an agreement with Lumen

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Speaker 4: two years ago to provide Lumen with ten percent of

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Speaker 4: all the fiber they could produce over the two to

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Speaker 4: three year period. So there's more coming. And like I said,

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Speaker 4: we've got to finish it. It's like a subdivision with homes.

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Speaker 4: They've been on temporary power, they've been on temporary water

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Speaker 4: and sewer, they get their occupancy permit. Now they have

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Speaker 4: to be lit up. And that's what's going to happen

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Speaker 4: over the next twelve months to three years, and all

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Speaker 4: of a sudden, it's going to be a big issue.

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Speaker 4: And I think the market's recognizing that.

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Speaker 1: So, Tim, you and I both know that December is

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Speaker 1: historically a very good month for the equity market. A

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Speaker 1: first day of trading here, we were negative across the board.

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Speaker 1: Does that cause you maybe to take a breath and

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Speaker 1: to say, hmmm, I'm wondering about how we're going to

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Speaker 1: finish the month of December. Will we get a Santa

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Speaker 1: Claus rally here? How are you feeling about equities going

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Speaker 1: into the end of the year.

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Speaker 4: Well, I think the Federal Reserve will help, you know,

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Speaker 4: with a rate cut, but I don't think that will

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Speaker 4: you know, be enough stimulus. I think what's happening right

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Speaker 4: now in the market, I think is very very healthy

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Speaker 4: because people are asking questions. Finally, you know, you've seen

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Speaker 4: a company like Ocklow, who admittedly they have a bright

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Speaker 4: future in providing you know, small reactor nuclear power to

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Speaker 4: meet electricity demands, but they don't they don't even have

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Speaker 4: a system operational yet. They're still on the roughly on

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Speaker 4: the drawing board. And it got up to over twenty

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Speaker 4: two billion dollars worth of market cap, no earnings, no revenue, nothing.

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Speaker 4: So I think you're going to continue to see companies

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Speaker 4: like that pair back as some of the speculative aspect

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Speaker 4: of the market, you know, starts to wind back down.

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Speaker 4: So I think it's healthy. Yeah, we may not, you know,

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Speaker 4: get what everybody wants. In terms of a Santa Claus rally.

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Speaker 4: My view is that the market will be very muted

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Speaker 4: between now and your end.

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Speaker 1: Tim will leave it there always a pleasure. Thank you

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Speaker 1: so very much, and if I don't speak to you

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Speaker 1: before then, happy holidays. Tim Pagliara's founder, chairman and CIO

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Speaker 1: at cap Wealth, joining from just outside Nashville, Tennessee here

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Speaker 1: on the Daybreak Asia podcast. Thanks for listening to today's

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Speaker 1: episode of the Bloomberg Daybreak Asia Edition podcast. Each weekday,

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Speaker 1: we look at the story shaping markets, finance, and geopolitics

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Speaker 1: in the Asia Pacific. You can find us on Apple, Spotify,

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Speaker 1: the Bloomberg Podcast YouTube channel, or anywhere else. You listen

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Speaker 1: again tomorrow for insight on the market moves from Hong

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Speaker 1: Kong to Singapore and Australia. I'm Doug Prisoner and this

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Speaker 1: is Bloomberg