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Speaker 1: Bloomberg Audio Studios, podcasts, radio news. Welcome to the Daybreak

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Speaker 1: Asia podcast time Doug Krisner. US equities hit all time

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Speaker 1: highs in the last session. That was on optimism for

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Speaker 1: a US China trade deal. It was over the weekend

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Speaker 1: that negotiators lined up a trade framework ahead of an

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Speaker 1: important meeting this week between Presidents Trump and she on

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Speaker 1: the sidelines of the APEX summit. For a closer look,

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Speaker 1: let's bring in George f Thplus. He manages a multi

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Speaker 1: asset growth and income fund for Fidelity. George is based

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Speaker 1: in Singapore. Thank you so much for making time to

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Speaker 1: chat with me. Eventually we'll get to US China and

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Speaker 1: I want to get your perspective on the Chinese markets.

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Speaker 1: But I'd like to begin with Japan because President Trump

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Speaker 1: is in Tokyo as I speak. He's meeting with Japanese

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Speaker 1: Prime Minister Takeiichi. When you look at this relationship through

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Speaker 1: a kind of geopolitical lens, George, what are you seeing?

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Speaker 1: Does it necessarily represent opportunity in the Japanese equity market?

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Speaker 2: Of course, geopolitics can impacts of economies in many different ways.

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Speaker 2: In the past years, it's you know, trade war has

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Speaker 2: been has been a very important driver of risk, but

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Speaker 2: also return across Japan, across China, and across many markets.

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Speaker 2: For US when it comes to looking at Japan, we

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Speaker 2: think the domestic situation is the most important driver right now,

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Speaker 2: and if anything, where we're getting sort of more constructive

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Speaker 2: on Japan and Japanese equities, where we have two key focuses.

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Speaker 2: The one is Japan banks and the other one is

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Speaker 2: Japan midcaps. But the key story about Japan for US,

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Speaker 2: the big, sort of key story is Japan is undergoing

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Speaker 2: a massive transformation whereby after thirty years of everyone being

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Speaker 2: used to sort of referring to Japan as now inflation

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Speaker 2: or low inflation, or whenever there has been inflation, it's

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Speaker 2: typically been bad inflation, important energy important inflation. This time around,

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Speaker 2: Japan is seeing very different dynamics. It's seeing high wage inflation,

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Speaker 2: it's seeing stick inflation, good inflation, it's seeing the services

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Speaker 2: PPI it's accelerating, and we're seeing kind of this inflation

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Speaker 2: sort of well above the central banks target at a

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Speaker 2: time when the politics seem to be stabilizing. Now we've

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Speaker 2: got a government with high approval rates. Deals have been

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Speaker 2: made with the US and hopefully sort of. We don't

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Speaker 2: see any any upset or up front, given Trump is

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Speaker 2: in Japan right now and more physical is probably on

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Speaker 2: on its way looking at sort of what the current

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Speaker 2: government has been communicating, and what that means to us

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Speaker 2: is that probably the Bank of Japan is behind the

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Speaker 2: curves when looking at inflation, and that means that Japanese banks,

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Speaker 2: where lending growth is on improving trajectory in the economy,

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Speaker 2: the domestic economy is doing well, we expect the Bank

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Speaker 2: Ofapan is behind the curve and as a result, Japanese

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Speaker 2: banks or for a lot of upside. It's been a

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Speaker 2: volatile trade, but directionally we think Japanese banks have a

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Speaker 2: lot of upside. So that's one leg of our trade.

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Speaker 2: The other leg, which we're increasingly embracing kind of in

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Speaker 2: recent weeks, is Japanese midcaps and white Japanese midcaps because

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Speaker 2: you know, a lot less sensitivity to what happens in

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Speaker 2: the end, because Japanese midcaps are typically and historically have

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Speaker 2: been a lot more domestically focused. Kind of the revenue

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Speaker 2: streams a lot more domestically focused, and at a time

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Speaker 2: when Japan is seeing strong wage inflation, fiscal stimulus, and

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Speaker 2: we think Japanese midcaps are in the sweet spot. And also,

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Speaker 2: you know, Japan has been a long story of corporate reforms.

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Speaker 2: It's an ongoing story. It's a great story. We love it,

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Speaker 2: we embrace it. But now we're increasingly seeing some of

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Speaker 2: these reforms starting to touch sort of beyond the large caps,

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Speaker 2: you know, the midcaps and potentially even the small caps

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Speaker 2: at some point sort of being beneficiaries of that. So

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Speaker 2: quite a few hill winds there and the market that

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Speaker 2: we're embracing, and it's not particularly expensive, to be honest,

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Speaker 2: Japan is not expensive sort of broadly speaking, whether it's

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Speaker 2: the large cups, the banks, or the midcaps. It's one

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Speaker 2: of the cheaper markets out there when it when when

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Speaker 2: it comes to its d MPs. So it's got you know,

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Speaker 2: it's got the valuation argument, it's got an improving fundamentals argument,

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Speaker 2: and and and and the politics are also going in

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Speaker 2: the right direction. So this is this is a trade

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Speaker 2: or kind of a trade that has two legs that

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Speaker 2: we're embracing.

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Speaker 1: So the end has been very weak. You mentioned that

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Speaker 1: you believe the g B o J is behind the

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Speaker 1: curve here. What if we get a little bit of

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Speaker 1: strengthen the currency. How might that impact the big multinationals

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Speaker 1: in Japan that rely a great deal on exporting.

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Speaker 2: So yes, the the the end has been a week.

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Speaker 2: I I personally expect that that's later in the year

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Speaker 2: or perhaps early next year. We're going to see a

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Speaker 2: bit of a reversal now because you've got a Bank

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Speaker 2: of Japan or you know, Japan, which is probably the

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Speaker 2: very one of the very very few countries around the

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Speaker 2: world that is on a on a hiking cycle. It's slow,

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Speaker 2: it's delayed at times, but directionally, the Bank of Japan

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Speaker 2: will be will continue to hike at a time when

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Speaker 2: the rest of the world, and especially via the US,

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Speaker 2: everything of the dollars sort of young cross. You know,

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Speaker 2: the US is has recommenced, has recommenced on its easy

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Speaker 2: path after a year of a break. And if we

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Speaker 2: also look at sort of the fed composition, it's increasingly

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Speaker 2: becoming more dovish. So you just look at the sort

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Speaker 2: of two you know, the interested differentials, and we expect

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Speaker 2: to see at some point in some yen strength. What

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Speaker 2: will that mean for the large caps. Historically, you know,

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Speaker 2: for for the past ten fifteen years, it's fair to

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Speaker 2: say that Japanese corporates have been a lot more sensitive

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Speaker 2: to the end, but it's important to remember that, you know,

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Speaker 2: before that there was less sensitivity. And if anything, if

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Speaker 2: we look at the past of the year, year and

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Speaker 2: a half or so, we also have seen a bit

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Speaker 2: less sensitivity when it comes to the large caps and

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Speaker 2: the end, the relationship is still there, but it's not

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Speaker 2: as strong as it was. So I expect at the

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Speaker 2: large sort of exporters to be a bit more immune

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Speaker 2: to young strength if we end up seeing the global

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Speaker 2: cycle accelerating, and this is our view because you've got

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Speaker 2: you know, the FED is essentially easing in a cyclical

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Speaker 2: reacceleration that will help lift all boats in the US

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Speaker 2: and beyond, and at the time when a lot of

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Speaker 2: trade dollers are happening, we expect sort of the global

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Speaker 2: cycle to accelerate and Japan should be a key beneficiary

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Speaker 2: of that. But you know, given kind of what I

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Speaker 2: mentioned earlier about sort of Japan banks and Japan midcaps,

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Speaker 2: these are two sectors that are really sort of a

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Speaker 2: lot less sensitive to what happens in the end. So

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Speaker 2: our focus has been a lot more on these two

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Speaker 2: sort of trades rather than of the large cups at

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Speaker 2: this stage.

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Speaker 1: So, George, I hear you're reasonably constructive on certain pockets

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Speaker 1: of the equity market in Japan. I'm wondering whether you're

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Speaker 1: feeling the same way about Chinese markets, including Hong Kong.

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Speaker 2: So yeah, we've been constructive on China throughout the To

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Speaker 2: be honest, at the very beginning of the year, I

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Speaker 2: remember kind of being a bloomag and sort of noting

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Speaker 2: that this is a rally, kind of for the first time,

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Speaker 2: this is a rally that we're not selling because this

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Speaker 2: rally is more embedded, has has a lot more fundamental

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Speaker 2: sort of supporting this. Previously, you know, in the past

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Speaker 2: twenty twenty three, twenty twenty four, Japan, China, sorry, China

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Speaker 2: has been more of a sort of a trading opportunity

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Speaker 2: where it's been sort of a by the rumors, sell

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Speaker 2: the fact, Whereas at the start of this year, we

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Speaker 2: think that there's a lot more fundamental supporting sort of

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Speaker 2: the story. We think that China is slowly starting to

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Speaker 2: embrace a pivot more towards domestic consumption. It's a slow pivot,

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Speaker 2: and it's understandably slow pivot because you know, if we

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Speaker 2: think of China, it has two key growth engines, two

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Speaker 2: sort of growth pillars. The one is the export exports,

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Speaker 2: and the other one is the domestic consumption story. One

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Speaker 2: has been going overdrive, the other one has been sort

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Speaker 2: of punching below its weight and exports to the probably

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Speaker 2: the surprise of most sports even now, the latest expert

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Speaker 2: which has been quite quite strong in China, and as

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Speaker 2: a result, the need the urgency for Chinese policy makers

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Speaker 2: to pivot more towards domestic policies sort of stimulus has

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Speaker 2: been you know, the urgency is not there, but we

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Speaker 2: don't expect the export component to be as strong as

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Speaker 2: it has been given sort of a global trade disruption,

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Speaker 2: given the kind of the geopolitics, and we expect to

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Speaker 2: see more of a pivot towards domestic consumption. We think

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Speaker 2: this makes sense. You know, China for a while now

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Speaker 2: has been fighting thiss inflation forces. We think a pivot

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Speaker 2: towards domestic stimulus and you know, supporting the domestic consumption

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Speaker 2: story households. We think this is the most sustainable way

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Speaker 2: to fight sort of disinflation and deflation. We've already been

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Speaker 2: seeing kind of elements of targeted subsidies a year ago

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Speaker 2: pretty much Q four of last week Q four of

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Speaker 2: twenty twenty four, we saw all those targeted subsidies across

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Speaker 2: certain sectors. You know, it hasn't been broad based, it

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Speaker 2: has been targeted. But you know, for us, one of

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Speaker 2: the important things has been a year ago when these

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Speaker 2: targeted subjecties were announced, there was a big, you know,

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Speaker 2: a big part of the market that thought, you know what,

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Speaker 2: even if China does that, it might not really work.

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Speaker 2: And you know, a few sort of months or quarters on,

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Speaker 2: we did see that wherever China did those targeted subsidies,

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Speaker 2: they really did work, and the consumption in those areas

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Speaker 2: really did pick up. And that I think sends a

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Speaker 2: very important message both to policy makers and to market

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Speaker 2: participants that you know, if China decided to do more

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Speaker 2: of that stimulus, it will work. We expect to see

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Speaker 2: more stimulus coming through again. As I said, I think

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Speaker 2: this is the most sustainable way for China to find

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Speaker 2: sort of this inflation story. Since then, we've also seen

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Speaker 2: the involution where China is trying to target excess supply.

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Speaker 2: And you know, yesterday we had yesterday, or the day

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Speaker 2: before we had industrial profitability, a big jump multi year

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Speaker 2: sort of big jumps, so you know, it's not helping

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Speaker 2: them entire sort of all sectors of the economy. What

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Speaker 2: we are seeing China sort of essentially trying to address

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Speaker 2: the very well known issues. At the same time. We

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Speaker 2: know we've we've seen Chinese policymakers embraced the new productive forces,

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Speaker 2: embraced the private sector, where China now is delivering innovation

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Speaker 2: and on the equity titles of delivering innovation and diversification.

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Speaker 2: And you know, there's been a kind of the question

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Speaker 2: in investors' minds for the past many years has been

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Speaker 2: is China investable? You know, that's when we meet with times.

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Speaker 2: That's been a keep question we've been asked, and our

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Speaker 2: response has always been the same. China is investable so

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Speaker 2: long as it's delivering earnings. And for the past many years,

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Speaker 2: China has not really been delivering earnings at a time

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Speaker 2: when other parts of global equity markets has been delivering

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Speaker 2: earnings US and beyond this time around, China's delivering earnings.

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Speaker 2: China's delivering beats. And that's why we have seen the

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Speaker 2: market starting to to sort of pivot back towards China

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Speaker 2: to some extent and this, you know, auninvestable narrative is

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Speaker 2: starting sort of to change. So we do like China.

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Speaker 2: We do like Chinese equity markets, whether it's sort of

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Speaker 2: the tech sector, kind of the offshore and tech sector,

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Speaker 2: but also we do like CSI five hundreds, So it's

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Speaker 2: kind of the more domestically focused part of the economy,

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Speaker 2: which should be the most direct beneficiary should we end

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Speaker 2: up seeing sort of more stimulus coming through, and it's

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Speaker 2: not a part of the market that's particularly expensive.

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

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Speaker 1: George f. Sthopoulos. He manages a multi asset growth and

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Speaker 1: income fund for Fidelity. George is based in Singapore. Joining

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Speaker 1: us here on the Daybreak Asia podcast. Welcome back to

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Speaker 1: the Daybreak Asia Podcast. I'm Doug Krisner. Optimism over a

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Speaker 1: trade deal between the US and China was able to

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Speaker 1: lift the equity market to all time highs over the weekend.

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Speaker 1: The two sides met in Malaysia and the US and

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Speaker 1: China said, hey, we've reached a trade framework. At the

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Speaker 1: same time, markets are preparing for another FED rate cut

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Speaker 1: this week, with further cuts expected on the way, and

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Speaker 1: needless to say, it's a critical week for quarterly results.

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Speaker 1: We'll hear from Microsoft, Alphabet Meta Platforms, Amazon as well

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Speaker 1: as Apple. Joining me now is Amed Riesco. He is

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Speaker 1: the cio ed Insignio Ameda, joining from Miami, Florida. Thank

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Speaker 1: you so much, sir for making time to chat with

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Speaker 1: me as I mentioned fresh records for the equity market

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Speaker 1: at a time when, as I'm sure you're well aware,

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Speaker 1: there has been a lot of chatter about a bubble

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Speaker 1: in AI stocks. Are you feeling a little nervous right now?

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Speaker 3: Look, that to me is the key to this week

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Speaker 3: and for how the market will probably behave for the

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Speaker 3: rest of the year. I mean, I know a lot

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Speaker 3: of the attention has been on the trade deals, there's

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Speaker 3: some talk around government shutdowns, but it really has been

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Speaker 3: in earning story that is putting such a strong floor

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Speaker 3: on the market here, and that it is really behind

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Speaker 3: the resiliency of the financial markets. Because the economy is

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Speaker 3: doing okay, It's not great, and obviously the sort of

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Speaker 3: fog that we're in right now with no economic data

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Speaker 3: is not a good place to be. But with earnings

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Speaker 3: being as robust as they have been so far, we

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Speaker 3: really like that, and like you mentioned, this is a

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Speaker 3: critical week, a good portion of the MAC seven's are reporting.

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Speaker 3: If this rally is going to continue higher, these names

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Speaker 3: are going to have to deliver. And remember it's not

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Speaker 3: just deliver expectations, They're going to have to beat and

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Speaker 3: be substantially.

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Speaker 1: When you look at what some of these names in

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Speaker 1: the AI space are doing in terms of circular financing,

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Speaker 1: I'm wondering on ed whether that causes you just a

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Speaker 1: little concern. Perhaps it's a symptom of late cycle behavior.

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Speaker 3: Is it? It typically is. The problem is that we

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Speaker 3: don't have the other aspects that are also typical of

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Speaker 3: the late cycle, one of them being that financing is increased. Right,

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Speaker 3: the cost of finance is increasing. That's not the case now,

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Speaker 3: the cost of financing is actually heading lower. With the

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Speaker 3: FED really beginning, what is another easing cycle. I still

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Speaker 3: expect another at least another seventy five to one hundred

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Speaker 3: basis points of breake cuts after the one this week,

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Speaker 3: So pretty difficult to get. I think a crisis like

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Speaker 3: situation when financing costs are heading lower. Plus, these companies

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Speaker 3: are a lot different than the last time we had

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Speaker 3: a bubble like this, Right, everyone points to the two

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Speaker 3: thousand and one bubble, totally different companies, different financial profiles,

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Speaker 3: different balance sheets, different income statements. So again, it's nice

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Speaker 3: to talk about because we've had such a strong run,

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Speaker 3: and we definitely always need to be aware and we

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Speaker 3: should be cautious, and we should and we should be

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Speaker 3: suspicious of any move up or down. But again it's

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Speaker 3: still we're still far away, I think, from an equity

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Speaker 3: bubble in the AI space. Now in the private markets,

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Speaker 3: that's another story. There are there is a a lot

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Speaker 3: more frothiness in private markets. I'm looking at names like

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Speaker 3: open AI Andthropic those are a bit harder to justify.

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Speaker 3: But in the public market it's not really seeing it

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Speaker 3: so much.

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Speaker 1: What about private credit, There's been a lot of concern

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Speaker 1: about the exposure there, particularly maybe where some of the

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Speaker 1: big banks are connected. Is that a concern to.

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Speaker 3: You, No, I think the big banks are in really

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Speaker 3: good shape. And what we're seeing is that some of

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Speaker 3: the issues we had last week, you really look at

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Speaker 3: it be sort of you lift the hood and you

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Speaker 3: look underneath. Really it's idiosyncratic problems with a few banks.

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Speaker 3: You know, lending standards got a little loose. In fact,

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Speaker 3: there seems to have been some fraud there, so I

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Speaker 3: really do think that this is an idiosyncratic thing that

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Speaker 3: happened among a few names. I don't think this is

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Speaker 3: going to morph into something more systemic. Again, also very

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Speaker 3: difficult to have a funding crisis or a financial crisis

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Speaker 3: when rates are headed lower. It's usually when those rates

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Speaker 3: start heading higher that's when we would start to be concerned.

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Speaker 3: So at that point, whenever the fat does begin a

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Speaker 3: hiking cycle once again, and that's when we're going to

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Speaker 3: probably take a closer look and be more concerned about

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Speaker 3: that space.

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Speaker 1: So you mentioned the issue of trade a moment ago.

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Speaker 1: I'm wondering how you're feeling about the resolution in this

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Speaker 1: friction between the US and China, and whether or not,

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Speaker 1: if we do get a positive outcome at the or

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Speaker 1: on the sidelines of the APEX summit in South Korea,

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Speaker 1: whether that will have a materially positive impact on the

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Speaker 1: equity market.

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Speaker 3: I think it'll remove a worry of concerns, sort of

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Speaker 3: an eight hundred pounds thrill in the room, however you

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Speaker 3: want to call it. I doubt we're going to get

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Speaker 3: anything material or substantive or gain changing from these discussions.

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Speaker 3: The bottom line is that the imbalance between the Chinese

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Speaker 3: and US economy specifically, is way is too far off

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Speaker 3: for anything for any painless trade deal to fix it.

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Speaker 3: And what I mean by that is that the funt

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Speaker 3: what's at the problem here. The root of the problem

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Speaker 3: between the US and China is that saves too much,

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Speaker 3: spends too little, and the US is the mere opposite

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Speaker 3: of that. We spend too much, we save too little.

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Speaker 3: Until that imbalance is not fixed, nothing permanent is going

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Speaker 3: to really come about between the two countries. By the way,

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Speaker 3: with Canada and Mexico, we also don't think anything substantive

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Speaker 3: will really come out into the USMCA renegotiations next year.

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Speaker 3: I think a lot of this is just sort of

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Speaker 3: stuff made for TV consumption. I don't think anything substantive

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Speaker 3: will come out of this.

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Speaker 1: So in terms of US China, we've known for a

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Speaker 1: while that Beijing has been working pretty aggressively on reducing

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Speaker 1: its dependence on the American economy a lot more in

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Speaker 1: the way of trade with Southeast Asia North Asia, even

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Speaker 1: to what extent is decoupling still a risk and maybe

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Speaker 1: at a level that we have underappreciated.

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Speaker 3: Yeah, I think both countries would like to decouple from

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Speaker 3: each other. The problem is that they can't, and the

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Speaker 3: reason they can't is because there is no substitute for

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Speaker 3: the other economy in their world, the Chinese. There is

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Speaker 3: no substitute for the US consumer out there in the

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Speaker 3: global markets. At the same time, from the US perspective,

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Speaker 3: there is no substitute for the manufacturing capacity that is

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Speaker 3: in China. So again, yes, they would like to decouple

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Speaker 3: for strategic reasons. However, the reality comes that they is

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Speaker 3: that they cannot. At least they cannot in a painless way.

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Speaker 3: Right The coupling would have to be so painful that

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Speaker 3: I don't think either country right now is willing to

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Speaker 3: tolerate the pain that that would require to actually decouple

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Speaker 3: the two countries.

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Speaker 1: Speaking of pain, let's talk a little bit about the

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Speaker 1: American labor market. We had some interesting news today Bloomberg

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Speaker 1: and reuter Is both reporting that Amazon is on the

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Speaker 1: verge of job cuts well into the thousands, maybe as

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Speaker 1: many as thirty thousand workers. Now, AI is obviously a

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Speaker 1: part of the story, but I'm curious, what's your sense

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Speaker 1: of the American labor market right now.

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Speaker 3: So I definitely think the labor market is weakening. It's

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Speaker 3: one of the reasons why I've been I've been saying

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Speaker 3: on record that the FED should have probably started cutting

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Speaker 3: rates back in June. I've been concerned with the trajectory

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Speaker 3: of labor demands. What's helping us out here, so to speak,

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Speaker 3: is that we're seeing is that the US economy has

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Speaker 3: had a productivity boom. And the reason why I can

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Speaker 3: say that with high confidence is because we really have

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Speaker 3: not been hiring many people, and yet our GDP numbers

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Speaker 3: have been, you know, quite spectacular. That goes to tell

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Speaker 3: me that a lot of this, a lot of GDP

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Speaker 3: is being now done, is being automated away. I think

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Speaker 3: that is going to create a structurally lower demand for

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Speaker 3: for workers, and so I think the break even rate

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Speaker 3: for the US economy is probably much lower than what

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Speaker 3: we thought. So somewhere around you know, fifteen to twenty

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Speaker 3: thousand jobs are what probably need to be added to

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Speaker 3: keep the labor market in balance. So as long as

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Speaker 3: we stay above that and we don't go negative, I

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Speaker 3: think will be okay. I think if the FED continues

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Speaker 3: cutting rates, I think we'll be able to skirt that issue.

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Speaker 3: But it definitely hangs on a precarious balance.

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Speaker 1: Do you feel that the equity market overall continues, Well,

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Speaker 1: maybe it needs to broaden out a little bit more

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Speaker 1: in order for this move higher to be durable.

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Speaker 3: I do, I do, and and that would bring me

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Speaker 3: a lot of comfort. I think it would bring a

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Speaker 3: lot of other acid allocators comfort. So far, we haven't

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Speaker 3: seen that. We'll see this is this is you know,

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Speaker 3: this is the chance that companies get to show us

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Speaker 3: their earnings and their guidance. So we'll see if that

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Speaker 3: broadens out. We've had a couple of false starts in

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Speaker 3: the small cap space, I think precisely because they're so cheap.

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Speaker 3: But you know, in order to get a sustainable long

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Speaker 3: term rally here, I think we are going to have

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Speaker 3: to see a broadening out of that space. Now listen,

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Speaker 3: let let's be let's be let's be on point here.

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Speaker 3: Small caps have outperformed the S and P five hundred

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Speaker 3: over the last six months, so I also don't want

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Speaker 3: to make it seem like it's been a completely false breakout,

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Speaker 3: but we really need to start seeing some of this

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Speaker 3: turn into actual earnings on the small cap side here

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Speaker 3: going forward.

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Speaker 1: All right, I'm ed believe it. They are always a pleasure,

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Speaker 1: Thank you so very much, I'm ed Riesco. He is

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Speaker 1: the CIO at Insignio, joining from Miami, Florida here on

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Speaker 1: the Daybreak Asia Podcast. Thanks for listening to today's episode

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

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

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Speaker 1: 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: Join us again tomorrow for insight on the market moves

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Speaker 1: from Hong Kong to Singapore and Australia. I'm Doug Chrisner,

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Speaker 1: and this is Bloomberg