Speaker 1: Bloomberg Audio Studios, podcasts, radio news.
Speaker 2: Welcome to the Daybreak Asia podcast. I'm Doug Chrisner. We
Speaker 2: begin today with a warning from the Bank of International
Speaker 2: Settlements the global economy remains caught in the cross currents
Speaker 2: of progress and peril. In its annual report published today,
Speaker 2: the BIS said an artificial intelligence bust, along with inflation
Speaker 2: and fiscal stress, are among the most alarming threats to
Speaker 2: global prosperity at the present now. This report also highlights
Speaker 2: the risk linked to circular financing deals. For a closer
Speaker 2: look at the risks confronting markets and economies globally, let's
Speaker 2: bring in Oliver Shale. Oliver is investment specialist at the
Speaker 2: Rougher Investment Company, joining from here in New York City.
Speaker 2: Thank you, sir for being with us. How do you
Speaker 2: evaluate the risk right now in the current environment, And
Speaker 2: I'd be curious to get your take on how these
Speaker 2: risks are being weighted right now.
Speaker 3: Yeah, High Dige, it's great to be with you. I
Speaker 3: think what we've got at the moment is a market
Speaker 3: which is baking in a lot of good news and
Speaker 3: hope and has coalesced around a very narrow selection of
Speaker 3: stocks and themes meeting a real world and fundamentals that
Speaker 3: are increasingly volatile and bifurcated. And I think specifically on
Speaker 3: the market front, you're seeing the perceptions around some of
Speaker 3: the AI leadership AI build out shifting fast. Not least
Speaker 3: in that BIS report that you mentioned, the investors have
Speaker 3: becoming more skeptical about the adoption of AI, the genuine
Speaker 3: results that it might be bringing, as you say that
Speaker 3: as an increased understanding awareness of the circularity of earnings
Speaker 3: around the whole ecosystem, while companies are encouraging engineers to
Speaker 3: be more cost aware, moving to more token efficiency. So
Speaker 3: a lot is resting on this revolution. A lot is
Speaker 3: resting on the shoulders of a handful of companies, and
Speaker 3: there is not a huge margin of safety in valuations,
Speaker 3: especially for those names, and that's something that we're always
Speaker 3: looking for ways to preserve capital and trying to avoid
Speaker 3: meaningful drawdowns in markets. So that's something that keeps us cautious.
Speaker 2: We had an interesting story on the Bloomberg terminal today,
Speaker 2: in fact, talking about the surge that we have seen
Speaker 2: in market leverage. It seems like demand to borrow money
Speaker 2: has driven an unusual mid year spike and financing cost.
Speaker 2: I think they are now at about the highest level
Speaker 2: that we have seen since December twenty twenty four. To
Speaker 2: what extent is leverage kind of a defining theme for
Speaker 2: the market right now? And if it is, are you
Speaker 2: concerned maybe about elevated levels?
Speaker 3: Yeah, I think that's so important. And you're seeing equity
Speaker 3: funding rates increase. That's driven by the huge amount of supply.
Speaker 3: The large IPOs that are coming to market is driven
Speaker 3: by a demand for those equities and for leverage, and
Speaker 3: it creates a setup which is avalanche prone. The growth
Speaker 3: of or the use of leverage across trading activity, the
Speaker 3: growth of things like leathered ETFs again, which are focused
Speaker 3: on a narrow selection of stocks, can exacerbate moves in
Speaker 3: the market in both directions, and it really makes for
Speaker 3: a market which can be jumpy, avalanche prone, and vulnerable
Speaker 3: to outside or exogynists shots.
Speaker 2: One of the big stories near the end of the
Speaker 2: last week was the fact that both Apple and Microsoft
Speaker 2: are having to raise the cost of their devices to
Speaker 2: compensate from higher cost of memory chips and storage. And
Speaker 2: today we are getting indications that South Korea is going
Speaker 2: to unveil a sweeping strategy aimed at driving the great
Speaker 2: leap forward. We've got names like Samsung SK Group involved
Speaker 2: with that, which sounds to me like it's a semiconductor story.
Speaker 2: Where are we right now in this cycle and is
Speaker 2: there the risk that a name like Samsung or sk
Speaker 2: Heinez or SK Group were to add to its capex
Speaker 2: right now to try to build up even greater capacity
Speaker 2: at this particular moment where we may be at an
Speaker 2: inflection point if names like Apple and Microsoft are passing
Speaker 2: on higher cost of their components due to the fundamental
Speaker 2: problem with a shortage of men memory and how prices
Speaker 2: on that front have been pushing higher, is there the
Speaker 2: risk that we could see some level of demand destruction
Speaker 2: and that that could ripple back and impact some of
Speaker 2: the memory manufacturers.
Speaker 3: It's very interesting because it's sort of bringing into focus
Speaker 3: the question of who ultimately absorbs the cost of this
Speaker 3: AI build out and where do the benefits even accrue to.
Speaker 3: I think some of the headlines you mentioned bring in
Speaker 3: to focus a bit of a paradox where the revenue
Speaker 3: for these semiconductor and memory companies is ultimately a cost
Speaker 3: and a rapidly growing one for basically the rest of
Speaker 3: the market and certainly to the hyperscale companies that prop
Speaker 3: up the market. So it's underscoring the kind of intensifying
Speaker 3: margin pressures that come with this booming demand for compute
Speaker 3: and in order to fund this capex cycle, we know
Speaker 3: that these companies are increasingly looking towards investors to finance
Speaker 3: their AI ambitions. They're tapping credit markets, they're coming to
Speaker 3: equity markets. The investors will increasingly ask to see returns
Speaker 3: on those investments. And if at some point they begin
Speaker 3: to go worry, then and either the cost of capital
Speaker 3: starts to rise or the financing is simply withdrawn or
Speaker 3: not there, and the capex that build out has to slow.
Speaker 2: So I'm curious about rougher strategy in the current environment.
Speaker 2: If you have to be exposed to that space somehow,
Speaker 2: anything that's related to artificial intelligence, whether it's the hyperscalers,
Speaker 2: whether it's the semiconductor manufacturers, is that necessarily true? And
Speaker 2: if it is, how do you protect yourself against downside?
Speaker 3: Yeah, it's a great question. What we really look for
Speaker 3: and are obsessed with is asymmetry in asset prices. We
Speaker 3: like things that are not crowded, that have a large
Speaker 3: margin of safety and can produce strong COMICX returns when
Speaker 3: they work. Now we're completely in agreement that AI is
Speaker 3: a thing and we want to take the technology seriously.
Speaker 3: An area where we can get cheaper and more asymmetric
Speaker 3: exposure to that is through the Chinese technology sectors the
Speaker 3: US economy. It's clearly extremely innovative that the models are superior,
Speaker 3: but the capability gap is closing, and there is a
Speaker 3: place in the world for cheaper, kind of good enough models,
Speaker 3: and there are signs that some consumers and businesses are
Speaker 3: even favoring these. So if those models begin to see adoption,
Speaker 3: and they may soon call into question the premium charge
Speaker 3: by some of the more sophisticated US labs. But it goes,
Speaker 3: it goes broader than this. These Chinese companies have very
Speaker 3: strong business models. They train a much cheap evaluations at
Speaker 3: nine times earnings, with strong revenue growth and captive customer bases.
Speaker 3: So that's an area that we seek to get exposure
Speaker 3: to this narrative and theme without taking on so much
Speaker 3: of the valuation risk and the crowding risk.
Speaker 2: In the US, it seems like you can't be discussing
Speaker 2: artificial intelligence without addressing the power issue. Is that a
Speaker 2: space that you're playing in right now? Do you have
Speaker 2: a view on that.
Speaker 3: We don't play directly in that at the moment, but
Speaker 3: it's it perhaps highlights that we are we're moving to
Speaker 3: this world where countries companies need to shift from a
Speaker 3: just in time optimized model to one of resilience. You know,
Speaker 3: you can't guarantee that you have access to these commodities, power,
Speaker 3: the chips that you need at the prices you might
Speaker 3: have expect did and all of that is underpinning these shifts,
Speaker 3: something which we think is really important to a world
Speaker 3: of higher and more volatile inflation. We're seeing this in
Speaker 3: trends like supply chain, on shoring, commodity stockpiling, a remilitarization,
Speaker 3: and I think that's a really important trend for markets
Speaker 3: in the coming cycle, that inflation is here to stay
Speaker 3: and we should expect more inflation volatility.
Speaker 2: So what does that mean in terms of the house
Speaker 2: outlook for interest rates? Can you give me a forecast?
Speaker 3: We are part of the thesis and the reason for
Speaker 3: fearing inflation volatility is that if you look at inflation
Speaker 3: episodes through time, they very rarely occur in just a
Speaker 3: single wave. They typically come in waves, and that's usually
Speaker 3: because the rus and the policies that are needed to
Speaker 3: quash inflation are not in place and not palatable after
Speaker 3: the first wave. And so that tells you a little
Speaker 3: bit about how we think about where interest rates heading.
Speaker 3: That we think it will be difficult to meaningfully raise
Speaker 3: interest rates on a structural basis, and that allows the
Speaker 3: inflation impulse to come through. That said, it seems like
Speaker 3: the US Central Bank and Kevin Walsh have enacted a miniatry,
Speaker 3: mini monetary policy regime change and are leaning more hawkishly
Speaker 3: and markets are having to digest that. And it's very
Speaker 3: possible that we see tightening attempts and that could equally
Speaker 3: undermine the valuation basis of particularly US assets.
Speaker 2: Oliver will leave it there, thank you so very much.
Speaker 2: Oliver Shale is investment specialist at the Rougher Investment Company.
Speaker 2: Joining from here in New York City on the Daybreak
Speaker 2: Asia podcast. Welcome back to the Daybreak Asia Podcast. I'm
Speaker 2: Doug Chrisner. South Korea will unveil a sweeping industrial policy
Speaker 2: later today. It's expected to focus on sectors including semiconductors, AI,
Speaker 2: data centers and physical AI and as a part of
Speaker 2: this plan, Samsung and sk Group are expected to announce
Speaker 2: major investment plans. Korea Economic Daily says the value is
Speaker 2: expected to be one point three trillion dollars over the
Speaker 2: next ten years. And that's where we begin our conversation
Speaker 2: with Sean Cochrane. Shawn is head of research at Sidik CLSA.
Speaker 2: He spoke with Bloomberg TV host Paul Allen and Cherry on.
Speaker 1: We talked about this rotation trade in the markets, right
Speaker 1: that sell off from tech South Korea very reflective of
Speaker 1: the jitters around AI spending. What will the announcements today
Speaker 1: have more investments to come in this sector do for
Speaker 1: the market in the long term.
Speaker 4: Well, that's exactly the question the market is trying to
Speaker 4: resolve and why we're seeing the volatility, which is that
Speaker 4: it's very clear there's a very strong demand for memory
Speaker 4: and that's coming from this AI revolution that we're all
Speaker 4: witnessing unfold. What the market is trying to decide is
Speaker 4: two things. First of all, how much supply will come
Speaker 4: and then how will that be consumed. The real challenge
Speaker 4: that's actually driving the end volatility is the market's trying
Speaker 4: to decide what's the true profitability of this memory that's
Speaker 4: been purchased for the purposes of AI, which will then
Speaker 4: tell us what's the sustainable nature of that spending.
Speaker 1: And really, while we're trying to understand if this will
Speaker 1: pay off or not, we have seen this US exceptionalism narrative,
Speaker 1: continuous strength in the dollar as well, combined with what
Speaker 1: the effect could potentially do in a more hawkish narrative
Speaker 1: now on unfolding at the moment, what are the implications
Speaker 1: for Asia and economies that of course are also suffering
Speaker 1: from pressuring their currencies.
Speaker 4: It's really interesting in that there's the growth element to
Speaker 4: it which is pulled around North Asia in that for
Speaker 4: those economies that are geared towards the AI capex boom
Speaker 4: and they're participating in what we might call this K
Speaker 4: shaped economic structure where economies are seeing strong capex which
Speaker 4: is holding up the economic growth overall. At the same time,
Speaker 4: the general population is not necessarily participating in so far
Speaker 4: as we're not getting pervasive jobs, it's not moving out
Speaker 4: into consumption. At the same time, we have a new
Speaker 4: FED environment and the signal is relatively clear, which is
Speaker 4: this new FED is saying we will not provide strong
Speaker 4: guidance to the market. The market is actually a core
Speaker 4: source of intelligence for them, and then are more of
Speaker 4: a fact driven scenario. Is what the FED is signaling
Speaker 4: to us now, so the markets are trying to balance
Speaker 4: these mixed signals overall, This is a meaning that yields
Speaker 4: are pushed up into this change in the FED. Overall, However,
Speaker 4: the long term meals are already quite elevated, and it's
Speaker 4: unlikely that the market can sustained very high levels of
Speaker 4: yields increases, especially at the long end.
Speaker 3: Of the curve.
Speaker 5: Yeah, in one of your recent reports, you say the
Speaker 5: end's looking attractive. This is even though it was hovering
Speaker 5: around forty years lows. So maybe a buying opportunity here.
Speaker 5: But what's your outlook for the currency for the US dollar?
Speaker 5: And is it intervention that's going to finally break the
Speaker 5: down trend for the yen or is it something else? Ideally, well,
Speaker 5: probably Bank of Japan tightening.
Speaker 4: Right, So two very important questions. Let's unpack them separately.
Speaker 4: So if we look at the US dollar, we've been
Speaker 4: contrarian bullish on the dollar. It's been quite fashionable to
Speaker 4: be bearish on the dollar, and some time ago there
Speaker 4: was the view that there was going to be an
Speaker 4: engineered decline in the dollar in that certainly it's performed
Speaker 4: well and it's not cheap relative to global currencies. That said,
Speaker 4: the challenge has become the global economy has been very
Speaker 4: much dependent on credit provision to continue this growth. We're
Speaker 4: even seeing this in the tech sector. Overall. This means
Speaker 4: that as credit conditions get worse, as the debt loads
Speaker 4: become higher relative to the sustainable cash flows, this increases
Speaker 4: demand for high quality collateral and over time creates demand
Speaker 4: for the dollar. The next phase for this is a
Speaker 4: deterioration in the credit cycle and more demand for the dollar.
Speaker 4: So tactically I would say we're bullish on the dollar.
Speaker 4: Certainly I'm personally bullish on the dollar. The end is
Speaker 4: very interesting in that the END is a net creditor,
Speaker 4: a very strong economy in terms of the amount of
Speaker 4: capital letter has to deploy, often deployed offshore, and so
Speaker 4: in an environment of tightening credit conditions, you'd normally see
Speaker 4: en capital repatriated home, which should put upward pressure on
Speaker 4: the END. What's fascinating is that the END has been
Speaker 4: weakening for some time, whereby historically its monetary conditions were
Speaker 4: too loose relative to global conditions. They've been seeking to
Speaker 4: tighten and the market is yet to respond. And obviously
Speaker 4: there's inflationary pressures that have built in Japan that is
Speaker 4: unusual in the historical contexts. Base case would be that
Speaker 4: the end can find a flaw here and can rally
Speaker 4: in tightening credit conditions. If that doesn't happen, that would
Speaker 4: be a major change in the way that the market
Speaker 4: is looking at the end.
Speaker 1: There were some ideas that the weakness of the Japanese
Speaker 1: yen and the extra pressure that we're getting on the
Speaker 1: currency was because also Japanese starts were rallying at the
Speaker 1: same time. So when you have foreigners hedging the gains
Speaker 1: in the NIKE, you have to rebalance and that will
Speaker 1: actually lead to huge en selling. How does the pressure
Speaker 1: on the en affect the equity space net net because
Speaker 1: you have some of those big exporters. But at the
Speaker 1: same time, when you have a weekending economy, won't that
Speaker 1: dampen demand?
Speaker 2: Right?
Speaker 4: So certainly, from a cause of perspective, the most likely
Speaker 4: thing I could see investors having conviction is the idea
Speaker 4: that as long as the the end is weakening, it
Speaker 4: creates an environment where equities as a real esset provide
Speaker 4: a natural inflation heads and as a result, a weakening
Speaker 4: of the end creates an increased risk of future inflation,
Speaker 4: and investors will therefore be more inclined to be interested
Speaker 4: in equities because that provides the natural hedge. Combined with
Speaker 4: the fact that Japan as an economy has been performing
Speaker 4: reasonably well, and there's clearly the value up theme that
Speaker 4: has increased the investor's conviction that equity can deliver value
Speaker 4: given that Japanese equities are not expensive in a global context,
Speaker 4: albeit equities as an asset class and not cheap right
Speaker 4: now in a long term perspective.
Speaker 5: Sean, I just want to get back to this AI
Speaker 5: story because we had a very interesting report over the
Speaker 5: weekend from the Bank of International Settlements warning of a
Speaker 5: potential AI bust and the short term but in the
Speaker 5: longer term the utter hollowing art of the middle class,
Speaker 5: and they point out that this is not like other
Speaker 5: tech revolutions. AI can pretty much handle any new job
Speaker 5: up or down the value chain near term, medium term,
Speaker 5: long term. Do you lose any sleep over these kinds
Speaker 5: of themes and how do you play them?
Speaker 4: Certainly I've done markets a long time, and the one
Speaker 4: thing that you learn with enough time in markets is
Speaker 4: we don't know anything for sure, and so we need
Speaker 4: to be extremely open minded. That said, the long arc
Speaker 4: of history suggests that usually technologies create more jobs than
Speaker 4: they destroy, and that would be my base case until
Speaker 4: there's very strong evidence to the contrary. Now, what we're
Speaker 4: witnessing right now is a peak concern around job destruction
Speaker 4: or the replacement of humans via machine solutions, simply because
Speaker 4: it's a slightly naive application of how these models should
Speaker 4: be applied. What do I mean by that? If you
Speaker 4: think of how models are being applied right now, some
Speaker 4: of the most advanced front team models give us a
Speaker 4: PhD level capability in certain context, think of us as
Speaker 4: having our own children from the Big Bang available to
Speaker 4: us at call. The challenge becomes that rather than asking
Speaker 4: this individual to help us solve string theory, where sometimes
Speaker 4: asking this individual to solve simple problems. The market's slowly
Speaker 4: going to figure out that we need to apply the
Speaker 4: right technology in the right context, and that will give
Speaker 4: us a better solution in terms of the cost involved
Speaker 4: and how this will be evolved in terms of how
Speaker 4: companies actually apply it.
Speaker 1: In the meantime, while we get to that equilibrium, will
Speaker 1: we see more of that key shaped recovery that we
Speaker 1: talk about within economies? Among economies we have seen this
Speaker 1: inequality leading to protests in South Korea, for example, between
Speaker 1: chip workers and non chip workers. And what does that
Speaker 1: mean for investors that are trying to really bet on
Speaker 1: the next big sector?
Speaker 3: Right?
Speaker 4: So, certainly, as long as the market remains focused on
Speaker 4: capex driven growth, which is it oriented than this case,
Speaker 4: shape phenomena will continue, and you will have this bifurcation
Speaker 4: between those that participate in that and those that don't,
Speaker 4: which will create political tension if we think about what's
Speaker 4: driving that. The core dynamic for now is the market
Speaker 4: is looking forward to the potential of AI. We don't
Speaker 4: know exactly how companies will make money from my AI,
Speaker 4: that is the core question. As a result, capital markets
Speaker 4: are playing a crucial role. What we're witnessing is a
Speaker 4: lot of private companies that are a large part of
Speaker 4: the purchasing where this capex is coming from. The money
Speaker 4: that's funding that is typically through equity and to a
Speaker 4: lesser extent for the private sector debt raisers and certainly
Speaker 4: for the public sector for debt raisers. As we come
Speaker 4: into the process of some of these companies listing, that
Speaker 4: should reduce the ability for consistent aggressive equity capital raisings,
Speaker 4: which should slow the capics. When that happens, it should
Speaker 4: then slow the orientation on AI and the market's focus
Speaker 4: will move to other sectors which can either broaden or
Speaker 4: slow the economy.
Speaker 2: That with Sean Cochran, head of research at Sidik CLSA,
Speaker 2: speaking with Bloomberg TV host Sherryon and Paul Allen, bringing
Speaker 2: you their conversation here on the Daybreak Aasia Podcast. Thanks
Speaker 2: for listening to today's episode of the Bloomberg Daybreak Asia
Speaker 2: Edition podcast. Each weekday, we look at the story shaping markets, finance,
Speaker 2: and geopolitics in the Asia Pacific. You can find us
Speaker 2: on Apple, Spotify, the Bloomberg Podcast YouTube channel, or anywhere
Speaker 2: else you listen. Join us again tomorrow for insight on
Speaker 2: the market moves from Hong Kong to Singapore and Australia.
Speaker 2: I'm Doug Prisner, and this is Bloomberg