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Speaker 1: Bloomberg Audio Studios, podcasts, radio News.

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Speaker 2: Welcome to the Bloomberg Daybreak Asia Podcast. I'm Doug Krisner.

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Speaker 2: The US equity market has posted a fifteen trillion dollar

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Speaker 2: rally from those April lows, and today Wall Street defied

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Speaker 2: calls for a breather. The S and P five hundred

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Speaker 2: hit it's twenty eighth record of the year, and tech

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Speaker 2: led the way. Nvidia rallied four percent after announcing an

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Speaker 2: investment of up to one hundred billion dollars in open Ai. Now.

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Speaker 2: The aim here is to build next generation open AI

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Speaker 2: data centers powered by Nvidia's advanced AI chips. Man Deep

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Speaker 2: Singh is Global head of Tech Research at Bloomberg Intelligence.

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Speaker 3: When I look at Nvidia, clearly, you know they're at

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Speaker 3: a two hundred billion dollar round rate, growing exceptionally well,

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Speaker 3: and they have to keep up the growth rate. So

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Speaker 3: now that they can't really sell to China market or

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Speaker 3: at least there's uncertain they have to find those avenues,

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Speaker 3: and the biggest avenue is open ai.

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Speaker 2: That is Bloomberg's Man Deep sing there. Now, this deal

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Speaker 2: will boost open AI's ability to train models like chat, GPT,

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Speaker 2: and it will also strengthen Invidia's dominance in AI. In

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Speaker 2: a moment or two, we'll get some perspective from the

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Speaker 2: Asia Pacific. We'll hear from Daniel Lamb, head of equity

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Speaker 2: strategy at Standard Chartered Wealth Solutions, but we begin here

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Speaker 2: in the States. Joining me now is Michael Green. He

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Speaker 2: is chief strategist at Simplify Asset Management. Michael, thank you

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Speaker 2: so much for making time to chat with me. I

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Speaker 2: mentioned a moment ago the twenty eighth record high of

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Speaker 2: the year for the S and P five hundred. That's

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Speaker 2: a pretty astounding statistic right now, given the fact that

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Speaker 2: we're looking at lofty valuations I think around twenty five

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Speaker 2: times earnings for the overall S and P. Are you

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Speaker 2: a little concerned about where we are in terms of

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Speaker 2: the overall market?

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Speaker 4: Well, I am concerned and would emphasize that the earnings

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Speaker 4: that we're reporting and that valuation is against extraordinarily elevated

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Speaker 4: earnings in the technology sector. If we look more broadly

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Speaker 4: at the market, the Russell two thousand, for example, the

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Speaker 4: generally accepted accounting principles gap earnings have now actually turned negative.

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Speaker 4: That typically only happens during periods that are recessionary or

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Speaker 4: near recessionary conditions. The question now becomes is this narrowness

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Speaker 4: in terms of the earnings performance is it going to continue?

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Speaker 4: And unfortunately, I'd point to things like the vendor financing

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Speaker 4: that you just highlighted, where in video is taking an

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Speaker 4: equity stake in open Ai. Open Ai is using that

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Speaker 4: equity infusion to buy in video products. That's a game

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Speaker 4: that only goes on for a certain period of time.

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Speaker 2: I remember Cisco Systems doing something similar back in the

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Speaker 2: nineteen nineties. How are you hedged right now against your

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Speaker 2: concerns that maybe we enter an environment of a little

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Speaker 2: bit of equity market weakness.

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Speaker 4: Well, one of the things that we do, the product

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Speaker 4: that I manage for Simplify is a high yield product.

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Speaker 4: There we're able to take advantage of a couple of

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Speaker 4: feet features in the high yield space, but one of

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Speaker 4: which is to apply and overlay to that that we're

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Speaker 4: creating a hedge that's targeted at credit spread widening without

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Speaker 4: the negative cost associated with CDs. Now, to be totally fair,

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Speaker 4: we're actually concerned enough that credit spreads have been driven tighter,

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Speaker 4: particularly in the paper markets, which suggests that there's a

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Speaker 4: shortage of new issuance paper to refinance existing expiring paper.

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Speaker 4: That means the paper that's left in the market, the

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Speaker 4: high yeld that's left in the market, is being bid

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Speaker 4: extraordinarily tight. That's true not only in absolute terms, but

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Speaker 4: also now relative to say high yield CDs, which remains

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Speaker 4: above three hundred, while the high yield cash market is

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Speaker 4: actually in the two sixty range. That's an unusual divergence,

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Speaker 4: and we would suggest that that basis suggests there's more

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Speaker 4: concern than the market currently has.

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Speaker 2: Very interesting today we had three different FED presidents warning

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Speaker 2: against further rate cuts, basically all pointing to the idea

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Speaker 2: that inflation still is an issue. I understand that there's

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Speaker 2: weakness in the labor market, and that certainly was the

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Speaker 2: justification for last week's quarter point rate cut. How are

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Speaker 2: you feeling about the FED right now vis a VI

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Speaker 2: both the job market and inflation.

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Speaker 4: Well, I think on the inflation front that's where my

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Speaker 4: concern sits as well. There's a seasonal pattern to inflation

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Speaker 4: that is supposed to be canceled out with the BLS adjustments. Unfortunately,

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Speaker 4: that uses a trailing five year period and because of

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Speaker 4: the disruptions of the pandemic and the Russian invasion of Ukraine.

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Speaker 4: We've gotten a very asymptomatic or atypical I'm sorry, inflation

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Speaker 4: pattern that is creating lower than expected inflation during the summers,

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Speaker 4: when we traditionally would have seen high gasoline prices to

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Speaker 4: offset travel. Now we're actually seeing the inflation relatively low

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Speaker 4: in the summers, rising in the fourth quarter as more

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Speaker 4: and more companies have become accustomed to price hikes to

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Speaker 4: offset inflation. My expectation is that that is going to

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Speaker 4: play through. We'll start to see that data in October.

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Speaker 4: That very well may derail some of the thoughts that

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Speaker 4: the Fed is going to be more aggressive, in line

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Speaker 4: with what Stephen Moran spoke about today.

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Speaker 2: Yeah, he thinks the neutral rate is around two and

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Speaker 2: a half percent. He thinks we're well well above that

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Speaker 2: and very restrictive right now. Does he have a point

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Speaker 2: or is he basically carrying water for what the administration

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Speaker 2: would like to see.

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Speaker 4: Well, I think, unfortunately the answer is both, and candidly,

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Speaker 4: his analysis that he released today said, I did the

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Speaker 4: calculations today to support the indication of rate cut expectations

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Speaker 4: and the terminal rate that I produced last week, and

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Speaker 4: so unfortunately that suggests that it was political, and now

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Speaker 4: he's scrambling for an explanation behind it. Unfortunately, I actually

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Speaker 4: agree with his explanation. I think with the labor force

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Speaker 4: growth having basically turned to zero, you're hearing your own

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Speaker 4: power and others refer to the incredibly low level of

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Speaker 4: job creation. That's saying effectively the same thing. The only

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Speaker 4: thing that we really have for us at this point

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Speaker 4: is productivity. What puts us right back into the camp

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Speaker 4: of is the AI boom going to deliver or instead,

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Speaker 4: is the construction associated with the AI inflating GDP and

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Speaker 4: when that begins to retreat. If I'm correct about my

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Speaker 4: concerns on financing or other components, then we can see

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Speaker 4: the weakness in economic activity manifests itself in an accelerated fashion.

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Speaker 4: So I actually lean towards Moran's point. I think he's

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Speaker 4: ultimately correct that the interest rates are too high, but

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Speaker 4: I think unfortunately he presented it in a way that

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Speaker 4: suggests it was largely political in nature.

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Speaker 2: I'm wondering whether or not you think it's a little risky.

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Speaker 2: We were talking about elevated valuations for the US equity

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Speaker 2: market to seek shelter. If you're going to remain exposed

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Speaker 2: to equities in markets outside the US, and whether or

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Speaker 2: not there is a risk that if we get some

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Speaker 2: sort of downdraft in this states, that that could then

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Speaker 2: in turn spread to other markets. So that kind of

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Speaker 2: trying to remain diversified maybe in the current setting is

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Speaker 2: not a real strong strategy.

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Speaker 4: Well, I think there's two separate issues associated with it. One,

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Speaker 4: we actually saw evidence of something that I continually emphasize

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Speaker 4: in discussions, which is the increasing inelasticity of the market,

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Speaker 4: basically large price changes to relatively small fault flows in volume.

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Speaker 4: European markets rallied sharply in the February time period in

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Speaker 4: response to the idea that the European Union is going

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Speaker 4: to dramatically increase defense spending, et cetera. That's a good

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Speaker 4: indication of that. We saw similar behavior in the Russell

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Speaker 4: two thousand around the June time period when it was

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Speaker 4: believed that we were going to see additional stimulus and

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Speaker 4: that tariffs were going to be removed. Those are really

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Speaker 4: just reflections of relatively small sums of money moving to

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Speaker 4: try to take advantage of those insights that in turn

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Speaker 4: causes prices to rise dramatically, and so while I will

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Speaker 4: not say that it's impossible for European stocks to perform

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Speaker 4: while US stocks are not performing, the suggestion that I

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Speaker 4: would emphasize is that ultimately the slowing economy in the

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Speaker 4: United States, as the consumer to the world, represents a

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Speaker 4: key risk to almost all economies. The traditional expression is

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Speaker 4: when the US sneezes, the rest of the world gets

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Speaker 4: a cold. I think that's even more true in an

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Speaker 4: environment in which the trade deficits are running as large

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Speaker 4: as they have been running.

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Speaker 2: I'd like to get your take on what's been happening

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Speaker 2: with the gold market and the degree to which central

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Speaker 2: banks have been large buyers here, and whether or not

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Speaker 2: that in itself represents a little bit of risk, which

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Speaker 2: is to say, if there is a downdraft and central

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Speaker 2: banks need to fund some type of action, whether it's

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Speaker 2: to defend a currency or maybe even prop up problems

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Speaker 2: in their respective bond markets, that gold could be vulnerable.

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Speaker 4: So I think there's definitely some vulnerability that exists. Again, gold,

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Speaker 4: very much like the inflation pattern that I was emphasizing,

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Speaker 4: was influence by the events of June twenty two, when

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Speaker 4: the US government decided to take Russia's reserves in the

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Speaker 4: form of treasuries that sent an alarm bell to China

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Speaker 4: and other countries that potentially oppose the United States. Under

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Speaker 4: various circumstances, they began to diversify their reserves quite aggressively.

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Speaker 4: No longer flowing them in the trade deficit receipts that

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Speaker 4: they have because they're running a trade surplus with the

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Speaker 4: United States, they redirected those flows into gold, powering a

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Speaker 4: gold move that has now been picked up by the

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Speaker 4: US retail public and is advancing rapidly, even as interest

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Speaker 4: rates aren't confirming this type of move. We're seeing no

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Speaker 4: real indication of genuine inflation fears. Instead, this appears to

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Speaker 4: be very aggressive speculation continuing a move.

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Speaker 2: Michael will leave it there. Thank you so very much

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Speaker 2: for making time to chat with us. Michael Green is

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Speaker 2: the chief strategist at Simplify Asset Management, joining us here

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Speaker 2: on the Daybreak Asia podcast. Welcome back to the Daybreak

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Speaker 2: Asia podcast Time Derek Krisner. The US equity market has

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Speaker 2: been up now for three straight weeks, and expectations for

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Speaker 2: those fed rate cuts have been a big part of

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Speaker 2: this story. We had one analyst today over at Goldman Sachs,

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Speaker 2: saying that investors should be responsibly bullish on stocks. For more,

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Speaker 2: we heard from Daniel Lamb. He is head of equity

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Speaker 2: strategy at Standard Chartered Wealth Solutions. He spoke with Bloomberg

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Speaker 2: TV host Sherry On and April Hong on the Asia trade.

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Speaker 5: US stock's doing well, Daniel, we are seeing a lack

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Speaker 5: of volatility, though, what do we do with that information?

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Speaker 5: How should we be positioning well?

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Speaker 6: From volatility front? This really macro versus micro Okay, So

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Speaker 6: with the macro front, we already know that the job

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Speaker 6: numbers are not looking so good, so that prompt you know,

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Speaker 6: the comment from you know, from the Fed overnight about

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Speaker 6: being more aggressive on the rate cut. Okay, but on

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Speaker 6: that front is actually a double edged sword where basically

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Speaker 6: the fat wants to cut, but they're also wary of

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Speaker 6: the return of inflation. And let's not forget right back

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Speaker 6: until to one. They've lost a lot of credibility by

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Speaker 6: saying that inflation is transitory, Okay, so they don't want

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Speaker 6: to make the similar mistakes again right now. On the

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Speaker 6: other hand, micro fund, of course you're saying it's great,

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Speaker 6: we know that Nvidia is powering up again. Investing in

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Speaker 6: open AI and that brings the whole sector up. Okay,

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Speaker 6: So it's macro versus micro. So what's going to win out? Well, basically,

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Speaker 6: the way we see it is that on the pullbacks,

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Speaker 6: on any pullbacks of US equities, especially on the tech side,

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Speaker 6: one should we be adding because we do see that

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Speaker 6: this investment in AI is a structural story. So bio

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Speaker 6: dips on tech.

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Speaker 5: Okay, bio dips. You said, bring the whole sector up?

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Speaker 3: Right?

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Speaker 5: What interesting is some of these sleepier trades in tech

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Speaker 5: they've researched. You look at Oracle, you look at some

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Speaker 5: of these chip equipment names. What is your assessment. Do

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Speaker 5: you think this is because there is enough AI demand

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Speaker 5: to lift all boats? Or is this because some of

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Speaker 5: the market leaders are getting too expensive and then people

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Speaker 5: are searching for secondary trades.

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Speaker 6: Well, I would say that the market leaders in what

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Speaker 6: they do are the ones that one should be seeking after.

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Speaker 6: It's because the fact that you know AI investment is

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Speaker 6: benefiting you know, the biggest players, and not necessarily all

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Speaker 6: the players can make it. I mean, that's going to

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Speaker 6: be the evangelity, right, So if your bound dips, you

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Speaker 6: should be going for the biggest player on each of

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Speaker 6: the field right for the medium to the longer term.

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Speaker 1: Given the tech exuberans in the US, we're also seeing

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Speaker 1: those tech names across Asia rally. But at the same time,

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Speaker 1: wrongly speaking, MSCI Asia now perhaps headed for its best

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Speaker 1: annual our performance over the S and P five hundred

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Speaker 1: and twenty seventeen or so. What's leading to that divergence

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Speaker 1: or perhaps that our performance here in the Asian benchmarks

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Speaker 1: and could we see that continue three year end?

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Speaker 6: Well, it has to do with the weakness in the

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Speaker 6: US dollar because typically if the dollar is on the

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Speaker 6: down trend or if it's not going stronger, then other

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Speaker 6: equity markets in the rest of the world can benefit, right,

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Speaker 6: So in this case is Asia this year and the

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Speaker 6: way we see it is that the dollar is probably

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Speaker 6: going to be staying on the week side of things, right,

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Speaker 6: So this is why we do see that in twelvence

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Speaker 6: time is going to be around say around in ninety

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Speaker 6: five to ninety six level. They're for the foreseeable future, right,

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Speaker 6: So basically that means that Asia would still have you

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Speaker 6: more upside to go, especially you know, the variation gap

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Speaker 6: is still big, right versus history?

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Speaker 1: Does that include Korean stocks because they've seen an incredible rally,

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Speaker 1: and of course we talk about Samsung, we talk about

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Speaker 1: sk Heinis. But at the same time, it seems that

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Speaker 1: geopolitics may not be on its side. We're talking about

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Speaker 1: that trade deal and concerns about the investment packag into

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Speaker 1: the US pretty much stalled at the moment.

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Speaker 6: Well, for Korea, if you look at where it was,

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Speaker 6: say twelve months ago versus now compared to its own history,

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Speaker 6: it is not looking so inexpensive anymore. So right now,

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Speaker 6: I remember that the MSCI career is trained at a

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Speaker 6: round ten and a half times PE for it looking

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Speaker 6: pe and that's actually pretty much, you know, on the

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Speaker 6: average side of things right versus history. So from that perspective,

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Speaker 6: the low hanging fruit in Korea is over, and what

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Speaker 6: we are advocating is that one should be trimming down

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Speaker 6: some of the excessive profit the main careing equities and

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Speaker 6: rotating into other markets. China is still looking good, still

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Speaker 6: looking cheap at this moment in time.

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Speaker 5: What in China specifically, Daniel, Well.

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Speaker 6: We're looking at areas like technology, primarily so the Internet

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Speaker 6: technology space, and we feel that that versus the US,

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Speaker 6: tech has still got some upside goal, there's still some ketchup.

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Speaker 6: Of course, China is developing its own semiconductive side of

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Speaker 6: things and encouraging companies we're using those, So from that

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Speaker 6: perspective we do like the prospects there. Also, you know,

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Speaker 6: the consumption pattern in China is changing, okay, So previously

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Speaker 6: they are looking at spending on the big ticket items.

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Speaker 6: Now they're looking at spending on the smaller ticket items,

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Speaker 6: and those smaller ticket items consumption are the ones that

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Speaker 6: we like also.

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Speaker 1: And that is a very interesting take because when we

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Speaker 1: talk about especially the mastic economy in China, we're still

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Speaker 1: very much concerned about the property sector. So could we

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Speaker 1: see that being supported by just these consumption patterns changing

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Speaker 1: and Chinese demand domestically.

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Speaker 6: Well, the fact that the properly side of things is

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Speaker 6: probably going to be stalling right at these levels means

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Speaker 6: that in terms of what people spend the money on,

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Speaker 6: it's going to move to other items. So the property

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Speaker 6: sector is probably going to be stalling at these levels

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Speaker 6: in terms of near term upside unlikely at this moment

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Speaker 6: in time, right, if we're stalling at a steady.

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Speaker 5: Level, Daniel, just one quick final question for you, I mean,

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Speaker 5: do you think this is a value that needs a

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Speaker 5: cut from Chinese authorities, a cut from Chinese authorities, because

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Speaker 5: the worry also is that that could further stall what

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Speaker 5: some think is a bubble in the stock market.

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Speaker 6: In terms of bubble wise, if you look at the

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Speaker 6: margin financing side of things in China domestics, it is

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Speaker 6: high on an absolute basis, but that should be compared

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Speaker 6: against the market capitalization. Okay, so right now the margin

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Speaker 6: financing is as high as what we saw in two

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Speaker 6: one five when the government came in and cool down

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Speaker 6: the markets, and that led to a big correction at

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Speaker 6: that time. But if you compare that to the market

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Speaker 6: capitalization now, it is actually not at a high level.

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Speaker 6: So in the near term, we still do not see

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Speaker 6: a significant cooling measures from the government to bring down

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Speaker 6: the stock market. So we believe that again for China,

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Speaker 6: it's going to be a bidomed deep mode for investors.

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Speaker 1: Daniel Man, I'm good to have you with us, head

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Speaker 1: of Equity Strategy, sound a Chartered Wealth Solution.

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Speaker 2: Thanks for listening to today's episode of the Bloomberg Daybreak

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Speaker 2: Asia Edition podcast. Each weekday, we look at the story

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Speaker 2: shaping markets, finance, and geopolitics in the Asia Pacific. You

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Speaker 2: can find us on Apple, Spotify, the Bloomberg Podcast YouTube channel,

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Speaker 2: or anywhere else you listen. Join us again tomorrow for

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Speaker 2: insight on the market moves from Hong Kong to Singapore

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Speaker 2: and Australia. I'm Doug Prisner, and this is Bloomberg