WEBVTT - Equities Rise on Economic and Trade Optimism

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<v Speaker 1>Bloomberg Audio Studios, Podcasts, Radio News. Welcome to the Daybreak

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<v Speaker 1>Asia podcast. I'm Doug Chrisner. The US equity market rally today.

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<v Speaker 1>That was after the US and the European Union sped

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<v Speaker 1>up trade talks. The market also got a bit of

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<v Speaker 1>a boost from a sharp rebound in consumer confidence. We

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<v Speaker 1>had the S and P jumping two percent today, but

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<v Speaker 1>to be fair, trading volume in the S ANDP was

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<v Speaker 1>more than ten percent below the ten day average, and

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<v Speaker 1>sometimes light volume can exaggerate some of the price action.

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<v Speaker 1>For a closer look at market action, I'm joined by

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<v Speaker 1>Clark Garnon. He is the chief market strategist at Calba Investments.

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<v Speaker 1>He joins from the Bay Area in California. Clark, thank

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<v Speaker 1>you so much. Give me your sense of what the

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<v Speaker 1>market was telling you today on the equity side.

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<v Speaker 2>Well, we saw that delay, the push off in the

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<v Speaker 2>tariffs on the EU, and like you said, with the

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<v Speaker 2>new numbers coming out on the consumer confidence index, we

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<v Speaker 2>clearly saw some bullish signals. But that being said, you

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<v Speaker 2>know we weren't necessarily surprised. We've seen this headline risk

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<v Speaker 2>go both ways, and like you mentioned, the low volume,

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<v Speaker 2>I think there is some investor fatigue out there.

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<v Speaker 1>It was kind of interesting to look at the bond

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<v Speaker 1>market today because overnight Japanese authorities seem to suggest a

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<v Speaker 1>possible reduction in the amount of debt issuance. The Finance

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<v Speaker 1>Ministry in Japan has been working to stabilize the bond

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<v Speaker 1>market after last week's soft sale in those twenty year jgbs,

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<v Speaker 1>where demand I think was the weakest in more than

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<v Speaker 1>a decade. So maybe we have a little bit of stability,

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<v Speaker 1>But I think overhanging global debt markets right now, there

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<v Speaker 1>is the growing concern about these the large size of

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<v Speaker 1>these government deficits. Is that going to be something that

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<v Speaker 1>you think will persist in of casting a pall over

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<v Speaker 1>global bond markets going forward?

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<v Speaker 2>I think it will, you know. I think looking back

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<v Speaker 2>to twenty twenty two, where we had both equities and

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<v Speaker 2>bonds down double digits for the first time, I think

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<v Speaker 2>we started to get worried about that in April, and

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<v Speaker 2>as we see our deficit continue to grow without a

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<v Speaker 2>solid plan for actually fixing that, that is something that

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<v Speaker 2>we're going to be worried about moving forward.

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<v Speaker 1>So we talked a little bit about the trade story.

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<v Speaker 1>I'm curious to get your take on whether you think,

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<v Speaker 1>first of all, there will be resolution to these various

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<v Speaker 1>trade agreements at least in the near term, and secondly,

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<v Speaker 1>whether you are concerned that even if we get agreements

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<v Speaker 1>with various trading partners, that the net impact will be inflationary.

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<v Speaker 2>So we are concerned about stagflation, So we do think

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<v Speaker 2>that that could be a possibility moving forward. But we

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<v Speaker 2>do think that since we've seen some of these tariff

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<v Speaker 2>delays and there's been a clear response, even the EU

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<v Speaker 2>over the past day has said that they are making

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<v Speaker 2>good progress towards making a deal, and we think that's

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<v Speaker 2>going to be imperative for not only avoiding some stackflation,

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<v Speaker 2>but also a possible recession. At this point, we could

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<v Speaker 2>be in a technical recession, but we also have that

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<v Speaker 2>in twenty twenty where we didn't even realize we were

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<v Speaker 2>in the recession until we were out of it. So

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<v Speaker 2>recession isn't necessarily something that we're concerned about. We could

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<v Speaker 2>have one, but I think moving forward we just need

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<v Speaker 2>to see exactly how many deals are made, because we

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<v Speaker 2>need to see a deal done before the end of summer.

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<v Speaker 1>And a number of FED officials have said repeatedly that

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<v Speaker 1>US trade policy right now has created a fair amount

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<v Speaker 1>of uncertainty for the FED to consider moving rates before September.

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<v Speaker 1>That was what we heard over the weekend from the

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<v Speaker 1>head of the Minneapolis FED, Neil Kashkari, concerned that the

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<v Speaker 1>FED may not have the flexibility that people were hoping

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<v Speaker 1>for to cut rates between now and the end of

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<v Speaker 1>the year.

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<v Speaker 2>I don't know if it's a matter of flexibility. I

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<v Speaker 2>just don't think from their dual mandate, looking at inflation

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<v Speaker 2>and looking at unemployment, that either of those numbers are

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<v Speaker 2>in a place for the FED to cut right now.

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<v Speaker 2>So there's going to have to be some sort of

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<v Speaker 2>change between now in September or the end of the

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<v Speaker 2>year for that matter. And so we're not really anticipating

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<v Speaker 2>any FED cuts at this point, and that could be

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<v Speaker 2>to the chagrin of President Trump, But from their dual mandate,

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<v Speaker 2>looking at the numbers, there doesn't seem to be a

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<v Speaker 2>reason to cut.

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<v Speaker 1>So let's talk a little bit about artificial intelligence. You're

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<v Speaker 1>there near the center of the storm, which I think

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<v Speaker 1>is San Francisco, but you're in the Bay Area, and

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<v Speaker 1>tomorrow we're going to hear from end video. What are

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<v Speaker 1>your expectations.

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<v Speaker 2>While I can't provide expectations for Nvidia earnings, I will

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<v Speaker 2>say that it's always a drastic day in the markets

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<v Speaker 2>the day before earnings and obviously the day of earnings.

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<v Speaker 2>So you know, as we've seen Nvidia push the markets

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<v Speaker 2>higher and higher over the past two years, it definitely

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<v Speaker 2>will be a huge headline tomorrow, and I think just

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<v Speaker 2>adds to the headline risk that we'll be looking at.

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<v Speaker 1>Generally speaking, are you bullish on large cap tech?

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<v Speaker 2>Generally speaking, yes, we are bullish on large cap tech,

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<v Speaker 2>and thankfully, over the past two months, we've had great

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<v Speaker 2>opportunities to enter into some of these names as we

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<v Speaker 2>saw the multiples get reduced so much, it's been a

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<v Speaker 2>great opportunity to buy. So not only are we bullish

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<v Speaker 2>on large cap tech, but we also really like the

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<v Speaker 2>healthcare space as well as financials, and AI plays into

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<v Speaker 2>a lot of that. With healthcare, that's where we're seeing

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<v Speaker 2>a lot of advancements in AI and think that there's

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<v Speaker 2>a lot of room to run.

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<v Speaker 1>Also, today San Francisco based Salesforce announced the acquisition of Informatica.

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<v Speaker 1>This is an eight billion dollar deal. Informatica helps customers

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<v Speaker 1>manage their data in the cloud, So a bit of

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<v Speaker 1>an AI play here for salesforce. While back, people were

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<v Speaker 1>really anticipating a lot more M and A activity that

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<v Speaker 1>really hasn't panned out. Do you think we're going to

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<v Speaker 1>turn the corner soon and see much more in the

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<v Speaker 1>way of deal flow.

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<v Speaker 2>I do, but I think first we need to get

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<v Speaker 2>a few deals done in order to have some more

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<v Speaker 2>clarity and certainty moving forward. I think that also comes

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<v Speaker 2>with the TCGA being passed, and once we have more

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<v Speaker 2>clarity there, then we'll start to see some more deals

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<v Speaker 2>pan out, because we also expected M and A to

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<v Speaker 2>be a large part of this administration's plan moving forward,

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<v Speaker 2>but I think tariffs and getting some deals done with

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<v Speaker 2>countries is first priority. Then we can talk about the

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<v Speaker 2>corporate tax cuts, which are then going to follow into

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<v Speaker 2>the mergers and acquisitions and just sort of the deregulation

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<v Speaker 2>of industries in general.

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<v Speaker 1>So if you're anticipating a pickup in deal flow, I

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<v Speaker 1>would imagine that you look at some of the big banks,

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<v Speaker 1>some of the investment banks as an opportunity.

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<v Speaker 2>Right, absolutely, investment banks and regional banks as well, So

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<v Speaker 2>you know, this is where we're going to see some

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<v Speaker 2>consolidation and most likely not until Q three, Q four

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<v Speaker 2>and even into twenty twenty six, So not necessarily something

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<v Speaker 2>that's going to happen tomorrow, but we know down the

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<v Speaker 2>road once we have more clarity that it will happen.

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<v Speaker 1>Are you still very much squarely focused on putting money

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<v Speaker 1>to work in the United States at the exclusion of

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<v Speaker 1>other developed markets globally?

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<v Speaker 2>So what we like to do is we like to

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<v Speaker 2>keep less than ten percent international, and that's just from

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<v Speaker 2>our investment philosophy. So obviously through this year international's done

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<v Speaker 2>quite well. We didn't want to chase returns, so we

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<v Speaker 2>don't think of ourselves as traders. We are long term

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<v Speaker 2>investors and overall we have a strong bullish view of

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<v Speaker 2>the US markets, and so we'll continue to stick to

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<v Speaker 2>that ten percent.

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<v Speaker 1>All right, Clark, we'll leave it there. Thank you so

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<v Speaker 1>much for joining us. Clark Aaron and he is the

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<v Speaker 1>chief market strategist at Calbay Investments, joining from the Bay

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<v Speaker 1>Area of northern California. Here on the Daybreak Asia podcast.

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<v Speaker 1>Welcome back to the Daybreak Asia podcast. I'm Doug Chrisner.

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<v Speaker 1>So we have talked on this podcast for a while

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<v Speaker 1>about how investors across Asia have been rethinking their strategy

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<v Speaker 1>of investing in US assets. We know the concerns are many.

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<v Speaker 1>There's the US budget deficit along with the impact of

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<v Speaker 1>tariffs and shifting US trade policies, as well as the

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<v Speaker 1>knock on effect of a weaker dollar. For a closer look, now,

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<v Speaker 1>I'm joined by vs N i Are. He is the

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<v Speaker 1>CIO at East Spring Investments. Vs joins us from our

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<v Speaker 1>studios in Hong Kong. Good of you to make time

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<v Speaker 1>to chat with me. I'm curious to get your take

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<v Speaker 1>on the way in which investors in Asia are now

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<v Speaker 1>de risking from the US. What are those fun flows

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<v Speaker 1>look like to you?

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<v Speaker 2>Hi?

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<v Speaker 3>Thanks, Thanks Doug for having me here. So what we

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<v Speaker 3>see is that we've had a number of years now

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<v Speaker 3>where US markets in general, both fixed income and equities,

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<v Speaker 3>have had a very large outshare of interest and of

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<v Speaker 3>drawing capital, so into US equities, into use fixed income,

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<v Speaker 3>et cetera. Now now we've now in a position where

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<v Speaker 3>we're seeing some challenges to growth, be it driven by

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<v Speaker 3>tariff some uncertainty. We've seen weakness in the dollar. Often

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<v Speaker 3>forgotten is that the US markets have recovered, But in

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<v Speaker 3>twenty twenty five, US markets have underperformed some of the

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<v Speaker 3>larger Asian markets. So it's a very interesting cocktail. So

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<v Speaker 3>in the backdrop of a falling dollar, challenges and the

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<v Speaker 3>long end of the US curve, you know, we've seen

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<v Speaker 3>some disappointments there as well in terms of the auctions,

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<v Speaker 3>we see investors really increasingly thinking about diversification. So the

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<v Speaker 3>last few years has been a very clear market where

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<v Speaker 3>concentration has done well. So a few stocks, particularly tech

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<v Speaker 3>stocks in the US, have driven global markets and of

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<v Speaker 3>course the US markets as well. And you're seeing a

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<v Speaker 3>change in that. You're seeing a change in that leadership,

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<v Speaker 3>You're seeing challenges to growth, you're seeing longer long end

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<v Speaker 3>interest rates, we're seeing a falling dollar. So these cocktail

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<v Speaker 3>is a cocktail of changes really, and investors are adapt

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<v Speaker 3>to that. Then they're adapting by being much more focused

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<v Speaker 3>again on diversification, seeking out those pockets of the market

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<v Speaker 3>that might be a little bit more resilient, those pockets

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<v Speaker 3>that potentially could outperform, and then allocating appropriately, which often

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<v Speaker 3>means now a little bit away from the US.

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<v Speaker 1>So to what extent does China represent an alternative right now?

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<v Speaker 1>How would you wait opportunities in China broadly speaking, and

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<v Speaker 1>whether there is really the kind of story, the kind

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<v Speaker 1>of narrative that would compel an investor to put money

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<v Speaker 1>to work on the mainland.

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<v Speaker 3>So what a great questen. So what we see, of course,

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<v Speaker 3>this year, we've seen the Chinese markets have outperformed the US.

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<v Speaker 3>Of course, there's been a lot of volatility around tariffs,

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<v Speaker 3>a lot of uncertainty around tariffs, and that of course

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<v Speaker 3>holds back perhaps invests a little bit from going all

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<v Speaker 3>in in some ways. But the Chinese market, of course,

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<v Speaker 3>as we've moved to a world where despite all the

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<v Speaker 3>tariff on certainty, we see effectively there this effective tariff

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<v Speaker 3>rate of about thirty five percent. You know, there's a

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<v Speaker 3>ten percent flat rate, there's a twenty percent fentanyl rate,

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<v Speaker 3>and there's some sector specific additional rates as well. So

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<v Speaker 3>on average, we think that's about thirty five percent. That

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<v Speaker 3>is potentially a one percent headwind to GDP, but we

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<v Speaker 3>still see China delivering about four point four percent growth

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<v Speaker 3>this year. We've seen two percent fiscal stimulus already, we

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<v Speaker 3>think there could be another one one and a half

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<v Speaker 3>percent coming, and we think they can deliver that four

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<v Speaker 3>percent growth. This is against a backdrop of US growth

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<v Speaker 3>actually deteriorating in the second half of the year. Secondly,

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<v Speaker 3>there is room for interest rates to to come down

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<v Speaker 3>in China, and we've also seen very much sector specific

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<v Speaker 3>lending to help certain sectors. So in no way do

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<v Speaker 3>we think that there is a sort of across the

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<v Speaker 3>board positive stories across all sectors in China. We still

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<v Speaker 3>have concerns around property, et cetera. But certainly things like

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<v Speaker 3>the technology sector in China trade a very cheap valuations.

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<v Speaker 3>You you are you are buying into the market at

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<v Speaker 3>very very attractive valuations, and we think this is a

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<v Speaker 3>good point, and that's why investors have started to become

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<v Speaker 3>much more likely to allocate to some of those agent

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<v Speaker 3>markets in particularly China.

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<v Speaker 1>I'm wondering how you wait the problem of deflation in

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<v Speaker 1>China and whether you are worried that this could become

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<v Speaker 1>a more intractable and deeper problem for officials in China

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<v Speaker 1>to deal with.

0:13:32.280 --> 0:13:34.480
<v Speaker 3>Well, I think the key thing there is that they

0:13:34.559 --> 0:13:37.280
<v Speaker 3>have the tools, so it's it's you know, we're not

0:13:37.320 --> 0:13:40.360
<v Speaker 3>We're not. I think tracking a repeat of what we

0:13:40.400 --> 0:13:43.480
<v Speaker 3>saw with Japan. They have got tools that will allow

0:13:43.559 --> 0:13:48.040
<v Speaker 3>them to to stimulate. We still are seeing growth, So

0:13:48.080 --> 0:13:51.520
<v Speaker 3>it's not a zero growth environment. They they delivered something

0:13:51.640 --> 0:13:53.880
<v Speaker 3>last year. We think they'll deliver four and a half

0:13:53.920 --> 0:13:57.120
<v Speaker 3>this year. But I think what might be the concern

0:13:57.200 --> 0:13:59.240
<v Speaker 3>is that we don't see this as an across the board,

0:13:59.280 --> 0:14:03.560
<v Speaker 3>across all sects. There are domestic champions. There are particular

0:14:03.600 --> 0:14:06.760
<v Speaker 3>sectors that do well. We do strongly advocate. I mean,

0:14:06.800 --> 0:14:09.440
<v Speaker 3>we've just released our midyear outlook and the theme of

0:14:09.480 --> 0:14:13.000
<v Speaker 3>that was think Asia, but think active. We don't think

0:14:13.040 --> 0:14:17.400
<v Speaker 3>this is a broad market recovery or a broad market allocation.

0:14:17.880 --> 0:14:21.440
<v Speaker 3>It's very much about identifying those companies that are much

0:14:21.480 --> 0:14:25.840
<v Speaker 3>more resilient with you know, competitive advantages, strong balance sheets,

0:14:25.880 --> 0:14:29.640
<v Speaker 3>the kind of essentially quality names, and we think those

0:14:29.680 --> 0:14:32.200
<v Speaker 3>are the ones that can outperform because evaluations are so

0:14:32.280 --> 0:14:33.120
<v Speaker 3>much more attractive.

0:14:33.640 --> 0:14:37.000
<v Speaker 1>I want to pivot to supply chain reconfiguration if we can't,

0:14:37.040 --> 0:14:39.480
<v Speaker 1>because it's a part of the tariff story obviously, and

0:14:39.520 --> 0:14:43.120
<v Speaker 1>we know that firms began to diversify away from China

0:14:43.400 --> 0:14:45.880
<v Speaker 1>to a small extent during the first Trump trade war

0:14:45.960 --> 0:14:50.760
<v Speaker 1>with Beijing. Then the pandemic struck, and that clearly highlighted

0:14:50.760 --> 0:14:54.560
<v Speaker 1>the risk of being overly concentrated in China. Now during

0:14:54.600 --> 0:14:58.160
<v Speaker 1>the second Trump trade war, there seems to be even

0:14:58.200 --> 0:15:03.000
<v Speaker 1>greater risk now under the current strategy, the Trump administration

0:15:03.280 --> 0:15:07.240
<v Speaker 1>is trying to counter this reconfiguration story. It's focused on

0:15:07.320 --> 0:15:11.080
<v Speaker 1>places like Vietnam, where reshoring has been underway as we

0:15:11.120 --> 0:15:13.720
<v Speaker 1>know for some time. And I'm curious, viz, how are

0:15:13.760 --> 0:15:14.920
<v Speaker 1>you navigating all of this?

0:15:16.720 --> 0:15:19.880
<v Speaker 3>That question almost identified all of the concerns that we

0:15:20.000 --> 0:15:25.160
<v Speaker 3>have as investors as well. So undoubtedly the first President

0:15:25.240 --> 0:15:28.920
<v Speaker 3>Trump administration was very focused on China, and what we

0:15:28.960 --> 0:15:32.520
<v Speaker 3>saw was this China plus one strategy adopted by many

0:15:32.560 --> 0:15:37.680
<v Speaker 3>Asian manufacturers, essentially relocating to the likes of Vietnam and

0:15:37.800 --> 0:15:42.200
<v Speaker 3>other places in Southeast Asia. I think that the ideological

0:15:43.120 --> 0:15:47.040
<v Speaker 3>and game still seems very much that the US policies

0:15:47.040 --> 0:15:50.920
<v Speaker 3>are very much trying to contain China. I think we

0:15:50.960 --> 0:15:54.120
<v Speaker 3>are in a journey of discovery around trade deals and

0:15:54.720 --> 0:15:59.240
<v Speaker 3>those negotiations. The Chinese have got some concerns, you know,

0:15:59.360 --> 0:16:02.520
<v Speaker 3>very clearly the US is focused on the bigger nations

0:16:02.600 --> 0:16:05.920
<v Speaker 3>they've you know, we're talking about Europe, Japan, China. They're

0:16:05.960 --> 0:16:08.840
<v Speaker 3>putting a lot of energy into that. It's pertinent that

0:16:09.120 --> 0:16:14.560
<v Speaker 3>we haven't easily struck deals so it's not a negotiation

0:16:14.720 --> 0:16:18.840
<v Speaker 3>tactic that has forced a kind of a submission. It's

0:16:18.960 --> 0:16:22.320
<v Speaker 3>very much a negotiation that the likes of Japan and

0:16:23.000 --> 0:16:25.920
<v Speaker 3>China are going through, and the Chinese are very aware

0:16:25.960 --> 0:16:28.480
<v Speaker 3>and they're looking out for deals that in any way

0:16:28.640 --> 0:16:31.960
<v Speaker 3>disadvantage them in the global market. Now, when we think

0:16:32.000 --> 0:16:34.480
<v Speaker 3>of that policy, I think that it's the uncertainty they

0:16:34.520 --> 0:16:38.640
<v Speaker 3>investors are struggling with. So if investors are struggling with it,

0:16:38.840 --> 0:16:42.760
<v Speaker 3>so are you know, business owners and business managers, Because

0:16:43.080 --> 0:16:47.960
<v Speaker 3>how do you relocate production into a third into a

0:16:47.960 --> 0:16:51.800
<v Speaker 3>third nation or a third region without policy certainty. I

0:16:51.840 --> 0:16:55.600
<v Speaker 3>think that is that that is the dimension that really

0:16:55.640 --> 0:16:59.000
<v Speaker 3>has suffered in the last few months, because this uncertainty

0:16:59.040 --> 0:17:03.240
<v Speaker 3>potentially leads to less investment and then that potentially leads

0:17:03.280 --> 0:17:07.120
<v Speaker 3>to lower growth. So as investors, that is the primary focus.

0:17:07.160 --> 0:17:10.399
<v Speaker 3>If we're trying to predict the endgame, I think that

0:17:10.520 --> 0:17:13.639
<v Speaker 3>it's very difficult to do. Other than perhaps a few

0:17:13.920 --> 0:17:16.159
<v Speaker 3>points we know we think there might be something like

0:17:16.200 --> 0:17:21.120
<v Speaker 3>a ten percent tariff ry across the board with many nations.

0:17:21.160 --> 0:17:23.440
<v Speaker 3>I think that even the Chinese have sort of got

0:17:23.480 --> 0:17:27.760
<v Speaker 3>themselves to a roughly relaxed point there. I think that

0:17:28.200 --> 0:17:31.679
<v Speaker 3>there is some strong negotiations around trying to limit the

0:17:31.720 --> 0:17:36.880
<v Speaker 3>impact on inflation from those tariff tax rises, and then

0:17:37.080 --> 0:17:39.879
<v Speaker 3>we are in a void discovery around what that means

0:17:39.880 --> 0:17:45.280
<v Speaker 3>in terms of supply chain adjustment. The first administration moved

0:17:45.280 --> 0:17:50.360
<v Speaker 3>a lot of supply chain manufacturing to Southeast Asia. Clearly,

0:17:50.480 --> 0:17:53.080
<v Speaker 3>now the US President is very clear that they want

0:17:53.119 --> 0:17:56.000
<v Speaker 3>to at least try and limit or pay attention to that.

0:17:56.440 --> 0:17:58.600
<v Speaker 3>They haven't we haven't got to the endpoint where we

0:17:58.720 --> 0:18:02.960
<v Speaker 3>know for certain that's not going to be a good idea. Clearly,

0:18:03.000 --> 0:18:04.560
<v Speaker 3>we've got other parts of the world that they may

0:18:04.600 --> 0:18:06.960
<v Speaker 3>be paying attention to. But I think if there's one

0:18:07.000 --> 0:18:10.600
<v Speaker 3>anchor to everything is they want to at least limit

0:18:11.160 --> 0:18:13.760
<v Speaker 3>their reliance on China as in terms of their own

0:18:13.800 --> 0:18:15.960
<v Speaker 3>supply chain. That's the best we can give.

0:18:16.080 --> 0:18:18.080
<v Speaker 1>We'll leave it there. Vis Thank you so much for

0:18:18.119 --> 0:18:21.119
<v Speaker 1>being with us. Fee Sneier is the CIO at East

0:18:21.160 --> 0:18:24.480
<v Speaker 1>Spring Investments, joining from Hong Kong here on the Daybreak

0:18:24.520 --> 0:18:29.680
<v Speaker 1>Asia podcast. Thanks for listening to today's episode of the

0:18:29.720 --> 0:18:33.879
<v Speaker 1>Bloomberg Daybreak Asia Edition podcast. Each weekday, we look at

0:18:33.880 --> 0:18:38.400
<v Speaker 1>the story shaping markets, finance, and geopolitics in the Asia Pacific.

0:18:38.600 --> 0:18:41.920
<v Speaker 1>You can find us on Apple, Spotify, the Bloomberg Podcast

0:18:41.960 --> 0:18:45.320
<v Speaker 1>YouTube channel, or anywhere else you listen. Join us again

0:18:45.359 --> 0:18:48.600
<v Speaker 1>tomorrow for insight on the market moves from Hong Kong

0:18:48.800 --> 0:18:53.199
<v Speaker 1>to Singapore and Australia. I'm Doug Prisner, and this is

0:18:53.200 --> 0:18:53.760
<v Speaker 1>Bloomberg