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

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Speaker 2: Welcome to the Daybreak Asia podcast. I'm Doug Krisner. We

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Speaker 2: begin in Japan, where the inflation rate ticked up in

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Speaker 2: the month of October. Consumer prices excluding fresh food rose

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Speaker 2: at a rate of three percent compared to last year.

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Speaker 2: Now that may keep the Bank of Japan on track

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Speaker 2: for an interest rate hike in the coming months. And

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Speaker 2: at the same time, this inflation print comes as newly

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Speaker 2: installed Prime Minister take Ichi is planning to unveil her

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Speaker 2: first economic package later today. Now she's already vowed to

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Speaker 2: address the frustration over persistent increases in the cost of

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Speaker 2: living for a closer look. Now, I'm joined by Masa Takeda.

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Speaker 2: He is portfolio manager at the Hennessy Japan Fund. Masa,

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

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Speaker 1: I'd like to.

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Speaker 2: Begin with the inflation story Visa VI take Ichi and

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Speaker 2: whether anything that she rolls out today has the potential

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Speaker 2: to change the inflation story in Japan.

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Speaker 3: Does it in terms of impacting inflation? I think it

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Speaker 3: still remains to be seen. I think Takoiti is largely

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Speaker 3: known for thus far more proactive fiscal policy and dubvish

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Speaker 3: stance on monetor policy. So if anything might be inflationary

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Speaker 3: side effects, but you know, it'll take time whether that

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Speaker 3: is going that is going to be the case or not.

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Speaker 3: Short term, I think I think it's more similar stimilative

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Speaker 3: to the economy, and I think that's what that has

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Speaker 3: been to be focused on the market.

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Speaker 2: One of the culprits in the inflation story in Japan

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Speaker 2: has been the weakness of the currency. Right now, the

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Speaker 2: end is trading against the dollar with a one fifty

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Speaker 2: seven handle. Yeah, a portion of that weakness could be

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Speaker 2: addressed through a rate hike from the Bank of Japan.

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Speaker 2: There's also the possibility here masa of intervention from the

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Speaker 2: Ministry of Finance direct.

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Speaker 3: I mean, the end is has been weak, you know,

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Speaker 3: for good reason, which is the real interest rate of

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Speaker 3: Japan is deeply negative, and I think the yen is

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Speaker 3: pretty much the only currency among major economies with real

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Speaker 3: negative real interest rate that inevitably it pushes up in

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Speaker 3: poor prices. Now, whether the central back is going to

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Speaker 3: hike rates or not, the timing is uncertain. However, I

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Speaker 3: think it's still on a path towards gradual rate hikes.

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Speaker 3: I say gradual is because the Bank of Japan has

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Speaker 3: made some mistakes in the past two thousand and two

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Speaker 3: thousand and six when they prematurely lifted, you know, the

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Speaker 3: zero rate policy, and you know, each time the economy

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Speaker 3: fell into recessions. So I think they're going to, you know,

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Speaker 3: rather gradually hike rates going forward.

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Speaker 2: I'm curious to get your take on this recent spike

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Speaker 2: intention between Tokyo and Beijing, given the recent comments from

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Speaker 2: Prime Minister Takei Ichi on the issue of Taiwan, this

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Speaker 2: is clearly deepening the rift between Japan and China, and

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Speaker 2: I would think that it carries with it a lot

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Speaker 2: of severe economic implications, many of which could be substantial.

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Speaker 3: Well so, of course at the top level there there

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Speaker 3: there are tensions right now, but it's not the first time,

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Speaker 3: and I think, you know, the Japan and China always

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Speaker 3: managed to work out those frictions. And on a more

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Speaker 3: micro level, you know, we do see the Chinese consumers

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Speaker 3: always wanting to buy Japanese products and you know, the

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Speaker 3: high quality products and the services, not to mention the

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Speaker 3: inbound tourism. Currently some restrictions that may result in slow down,

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Speaker 3: but I think eventually, you know, the Chinese consumers will

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Speaker 3: behave according to you know, what they want, so I'm

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Speaker 3: not too worried about this short term events.

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Speaker 2: It's been a pretty amazing year for the Japanese equity market. Yes,

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Speaker 2: the NK is down from record highs. Nonetheless, I think

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Speaker 2: in dollar terms the NK is up by more than

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Speaker 2: twenty percent. Are you constructive on the Japanese equity market?

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Speaker 3: So short term, you know, as you said, the market

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Speaker 3: has been up quite steadily since the beginning of this year,

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Speaker 3: and that's that's basically a function of rerating over the

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Speaker 3: evaluation multiples, and therefore short term, you know, the return

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Speaker 3: expectations might be more limited for the foreseeable future. However,

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Speaker 3: I am still very positive on the mid to long

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Speaker 3: term outlook of Japan, and that's because not just the

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Speaker 3: improving economic fundamentals, you know, the rising inflation and normalization

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Speaker 3: interest rates, but I think the most important driving force

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Speaker 3: is the corporate governance reforms, and it's been going on

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Speaker 3: for about ten years now, and you know, finally corporate

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Speaker 3: Japan is embracing the basic principles of Western capitalism. So

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Speaker 3: the capital efficiency has been improving, and now the last

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Speaker 3: few years, the main focus was on companies whose share

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Speaker 3: prices were trading less than one times book, so the

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Speaker 3: corporate underperformance. But now going forward, the market regulators and

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Speaker 3: the government are now reviewing the current existing corporate governance

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Speaker 3: code to deliver stronger message to those that are trading

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Speaker 3: above one times book because the capital allocation is not

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Speaker 3: always optimal at those companies as well. So that's the

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Speaker 3: one key catalyst to watch out for.

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Speaker 2: And how are you feeling about the trade relationship between

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Speaker 2: the US and Japan right now? With higher tariffs and

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Speaker 2: the impact they represented Japanese exporters.

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Speaker 3: Japan had trade deficit with the rest of the world,

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Speaker 3: but with the US had trades plus, and that was

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Speaker 3: mainly with carmakers and auto parts suppliers. These companies are

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Speaker 3: now through internal rationalization, absorb most, if not all, of

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Speaker 3: the impact from the tariffs. Meanwhile, I think there's also

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Speaker 3: kind of positive development in terms of foreign direct investment

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Speaker 3: by Japan into the US. You know, five hundred and

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Speaker 3: fifty billion dollars you know worth of foreign direct investments

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Speaker 3: promised by the Japanese government that should take place over

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Speaker 3: the next I guess four years before Trump leaves the office.

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Speaker 3: And so there's increasing economic cooperation between the two countries,

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Speaker 3: and that should benefit some of the Japanese exporters, whether

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Speaker 3: it's semiconductor, AI or you know others. There are mixed signals,

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Speaker 3: but I think I'm leaning towards more positive outlook for

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Speaker 3: these exporters.

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Speaker 2: Okay, Massa. Before I let you go, I have to

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Speaker 2: ask about what your expectations are for the Bank of

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Speaker 2: Japan when it comes to the December meeting and whether

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Speaker 2: or not you think the BOJ will hike interest rates.

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Speaker 3: Well, so short term, look, my prediction is just as

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Speaker 3: good as anyone's on the street. But as I said,

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Speaker 3: I think that Japan is on a on a pathwards

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Speaker 3: gradual rate highs, and what that means is that the

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Speaker 3: nominal rates will rise while the real rates will will

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Speaker 3: like to remain negative or very low at most. That

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Speaker 3: means the monetary policy overall framework will like or remain accommodative,

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Speaker 3: and that should favor asset classes like equities. So higher

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Speaker 3: nominal rates should definitely further improve the fundamentals of financials, banks,

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Speaker 3: financial services companies, insurance and so on, and in the

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Speaker 3: broader accommodation and monetored policy should should benefit you know,

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Speaker 3: the broader market. Also, I think the current economy, current

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Speaker 3: environment is very favorable.

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

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Speaker 2: Massa de Keta. He is a portfoli olio manager at

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Speaker 2: the Hennessey Japan Fund. Joining us here on the Daybreak

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Speaker 2: Asia podcast. Welcome back to the Daybreak Asia Podcast. I'm

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Speaker 2: Doug Chrisner. We had a dramatic reversal today in the

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Speaker 2: US equity market. The session began on a big upnote

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Speaker 2: after those surprisingly strong results from Nvidia and at the

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Speaker 2: New York Open. Nvidia pop five percent and that led

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Speaker 2: the S and P to a gain almost immediately of

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Speaker 2: about one point nine percent. But by midday those gains

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Speaker 2: began to steadily evaporate, and at the end of the

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Speaker 2: session the S and P was down by more than

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Speaker 2: one and a half percent. For a closer look at

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Speaker 2: the price action, I'm joined by Adam Koons. He is

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Speaker 2: the co CIO at Winthrop Capital Management. Adam, thank you

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Speaker 2: for making the time. Let's begin with getting your view

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Speaker 2: on today's trading, especially that reversal.

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Speaker 4: Well, obviously it's a little bit shocking to see almost

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Speaker 4: a four percent total move and something like that.

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Speaker 1: NASDAC for the day.

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Speaker 4: And this is really kind of that that exhaustion that

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Speaker 4: you're feeling in the market, especially heading into year end,

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Speaker 4: where you cannot forget the fact that the market, like

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Speaker 4: the S and P five hundred, has been up, you know,

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Speaker 4: twenty percent for the last three years in a row.

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Speaker 4: And this is coming off of you know, quite a

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Speaker 4: volatile springtime when the SMP was down you know, over

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Speaker 4: ten percent, recovered it really quickly, and then we're off.

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Speaker 1: To the races again.

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Speaker 4: It seems like everyone just kind of forgets tear OFFFS, inflation,

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Speaker 4: everything else that's kind of been in the headlines, and

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Speaker 4: it's worked, but I'm not really surprised that, you know,

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Speaker 4: you're continuing to see markets start to ask more questions.

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Speaker 4: And that's really what's happening is, you know, the markets

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Speaker 4: are starting to think through the AI story, some of

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Speaker 4: the private credit issues that we're seeing in different pockets

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Speaker 4: here in the US, and it's just giving investors a

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Speaker 4: little bit of a you know, more cautious attitude anytime

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Speaker 4: you see a rally, and that's probably what we're going

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Speaker 4: to see for the rest of the year, is that

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Speaker 4: when we see big rallies, we might see just kind

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Speaker 4: of sell the news type mentality for the rest of

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Speaker 4: the year.

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Speaker 2: Did you hear anything from Nvidia after the bell on

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Speaker 2: Wednesday that may have justified this type of skittishness on

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Speaker 2: the AI trade. I thought it was very interesting. We

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Speaker 2: heard from analyst Kim forrest Over at Boca Capital Partners,

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Speaker 2: and she was saying the market may have been spooked

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Speaker 2: a bit by Nvidia's rising net accounts receivables. To quote Kim,

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Speaker 2: if your chips are flying off the shelves, why aren't

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Speaker 2: you getting paid for it? Do you think that's a

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Speaker 2: part of the narrative here when it comes to Nvidia,

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Speaker 2: that we must take a closer look on what's really

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Speaker 2: driving revenue and profits for this company.

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Speaker 4: Yeah, I mean, I think we've entered that phase of

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Speaker 4: the market where investors are actually going to start taking

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Speaker 4: a look and not just taking your word for it.

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Speaker 4: Like you said, you're seeing account receivable pickup, inventories are

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Speaker 4: picking up at the same time when management is saying

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Speaker 4: you're sold out of chips. You know, that raises a

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Speaker 4: lot of red flags that have already kind of started

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Speaker 4: to percolate with investors that are trying to understand this

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Speaker 4: circular nature of kind of the AI stories selling leasing,

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Speaker 4: and kind of what is really driving revenue?

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Speaker 1: Is it just companies selling to themselves? And so yeah,

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Speaker 1: that is a big That is a big.

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Speaker 4: Part of what we saw today, just that you know,

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Speaker 4: further digestion of how is this really working, who's really

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Speaker 4: making the money, and who's really going to pay the

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Speaker 4: price down the road.

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Speaker 2: I'm also wondering about the degree to which the FED

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Speaker 2: is a part of this story. We had some pretty

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Speaker 2: hawkish FED speak today, we heard from Governor Barr as

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Speaker 2: well as fedbank presidents schools be and Hammock. And in aggregate,

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Speaker 2: there seems to be a lot of concern about inflation

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Speaker 2: in spite of the fact that the labor market continues

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Speaker 2: to struggle. And I'm wondering Adam is putting greater emphasis

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Speaker 2: on the inflation story justified.

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Speaker 1: In the short term probably, but in the long term no.

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Speaker 4: And I think you saw the bomb market eventually come

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Speaker 4: to grips with that, because by the end of the

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Speaker 4: US session you had rates start to come down pretty

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Speaker 4: much across the entire curve. But yes, there was a

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Speaker 4: period there where some of the FED you know, minutes

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Speaker 4: were coming out and the thought around that that was

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Speaker 4: pushing rates up.

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Speaker 1: But like I said, by the end.

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Speaker 4: Of the day, I think most most investors started to

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Speaker 4: think through the job's number, the fact that the jobs

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Speaker 4: market is still I don't want to say weak, but

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Speaker 4: is fragile, and at the same time just the overall

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Speaker 4: economy coming into question. So you know, it's going to

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Speaker 4: be difficult as we start to get numbers that are

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Speaker 4: a little bit discombobulated with the timing because of.

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Speaker 1: The US shutdown.

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Speaker 4: What we really saw by the end of the day

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Speaker 4: was just a pure risk off and less worry about

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Speaker 4: inflation and more worry about the US economy.

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Speaker 2: Speaking of fragility, let's talk a little bit about the

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Speaker 2: crypto space. The selloff in bitcoin continued. I think we've

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Speaker 2: been in reach now for more than a month. Today

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Speaker 2: bitcoin fell below eighty seven thousand for the first time

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Speaker 2: since April. A number of analysts we're saying crypto is

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Speaker 2: no longer the canary in the coal mine. It's the

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Speaker 2: coal mine itself, and it's collapsing under the weight of

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Speaker 2: its own leverage. I was struck by the fact that,

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Speaker 2: according to coin Glass, the forced liquidations over the past

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Speaker 2: twenty four hours totaled eight hundred and forty seven million dollars. Adam,

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Speaker 2: I'm curious to know how you understand Bitcoin is a

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Speaker 2: part of this risk off move.

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Speaker 4: I see it as a symptom of the cold I

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Speaker 4: think you've got just a general, like I said, risk

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Speaker 4: off mentality, and it's being exaggerated because Bitcoin, any crypto

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Speaker 4: for that matter, is already volatile. You match that with,

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Speaker 4: like you said, the increased volatility that comes from a

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Speaker 4: time period where you start to get margin calls, and

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Speaker 4: so I think that's largely what's you know, kind of

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Speaker 4: driven the acceleration of the decline, And so as any

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Speaker 4: investor in the crypto space, I think you've got to

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Speaker 4: be really careful right now. We need basically see all

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Speaker 4: of these just all the leverage in this in this space,

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Speaker 4: at least I want to call it, you know, kind

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Speaker 4: of the weak leverage. Those that just are are way

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Speaker 4: over their skis got to let that kind of work

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Speaker 4: its way out of the market. I don't think this

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Speaker 4: is the end of the crypto trade by any means.

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Speaker 4: We're just kind of entering that just higher volatility period

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Speaker 4: that people.

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Speaker 1: Tend to forget when times are good.

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Speaker 2: So, given everything that we're talking about I'm curious as

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Speaker 2: to how you play the market right now. Are you

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Speaker 2: a little risk averse, are you storing away a little

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Speaker 2: bit of dry powder? Are you waiting for a further

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Speaker 2: pullback in risk assets? I mean, what's your strategy right now?

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Speaker 1: Obviously where you're coming from matters a lot.

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Speaker 4: So in probably the last half of the year, we've

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Speaker 4: been more defensive generally speaking. So for us, that gives us,

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Speaker 4: you know, it's difficult when markets are going up and

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Speaker 4: you're defensive, but we look for times like this because

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Speaker 4: this has actually been our opportunity to shift more towards neutral.

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Speaker 4: And that's not a very exciting thing to say, but

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Speaker 4: when you're coming off of being maybe underweight some certain sectors,

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Speaker 4: some growth sectors, that sort of thing for us, when

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Speaker 4: you do have dry powder, when you start to see

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Speaker 4: these market dislocations, that's actually the time to put money

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Speaker 4: to work, to put money, you know, to risk a

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Speaker 4: little bit. Now we're doing it very, very marginally, because

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Speaker 4: I think there's still probably the higher risk is to

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Speaker 4: the downside, I'll say that, but we are starting to

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Speaker 4: kind of rebalance and reallocate towards neutral, which is actually

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Speaker 4: increasing our allocation to risk right now.

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Speaker 1: And I'm happy to do that.

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Speaker 4: I'm kind of happy to sit neutral going into year

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Speaker 4: end because I don't have a high conviction in any

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Speaker 4: particular large sector heading into your end.

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Speaker 2: Okay, Adam, we'll leave it there. Thank you so very much.

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Speaker 2: Adam Koons is co cio at Win from Capital Management,

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Speaker 2: joining us here on the Daybreak as your podcast. Thanks

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

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Speaker 2: Edition podcast. Each weekday, we look at the story shaping markets, finance,

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Speaker 2: and geopolitics in the Asia Pacific. You can find us

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Speaker 2: on Apple, Spotify, the Bloomberg Podcast YouTube channel, or anywhere

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Speaker 2: else you listen. Join us again tomorrow for insight on

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Speaker 2: the market moves from Hong Kong to Singapore and Australia.

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Speaker 2: I'm Doug Prisoner and this is Bloomberg