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

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Speaker 2: This is the Bloomberg Daybreak Asia podcast. I'm Brian Curtis

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Speaker 2: along with Doug Krisner. Join us each day for the

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Speaker 2: stories making news and moving markets in the Asia Pacific.

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Speaker 2: You can subscribe to the show anywhere you get your

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Speaker 2: podcasts and always on Bloomberg Radio, the Bloomberg Terminal, and

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Speaker 2: the Bloomberg Business App. Joining us now in our studios

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Speaker 2: here in Hong Kong for further discussion about one of

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Speaker 2: our top stories. Is Vlad Savov, Bloomberg Tech editor, looking

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Speaker 2: more closely at these possible curbs coming Vlad, how likely

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Speaker 2: is this?

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Speaker 3: Well, that's a kind of an open question.

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Speaker 4: As you can say from my own reporting these behind

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Speaker 4: the scenes discussions, then they're going to be things that

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Speaker 4: are just going to be fleshed as a headline and publicize.

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Speaker 4: Really everyone wants to do some sort of negotiation, and

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Speaker 4: there's a lot of players, like we discussed in the

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Speaker 4: early reporting. There's the US companies, there's the Tokyo Electron

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Speaker 4: in Japan, there's ASMO in the Netherlands, and then there

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Speaker 4: are the governments themselves, and they're all kind of playing

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Speaker 4: each other's they're all playing a role in this. I mean,

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Speaker 4: when you look at it from the other government's perspective,

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Speaker 4: they don't want to make any rash moves ahead of

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Speaker 4: the US election. Everyone's kind of trying to wait it

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Speaker 4: out so they know exactly what kind of an administration

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Speaker 4: they're dealing with. While the companies themselves, whatever nationality they are,

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Speaker 4: they still want to do business with China. It's a

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Speaker 4: huge market in China itself. Its priorities to get as

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Speaker 4: many chips as it can.

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Speaker 2: It seems like the semiconductor equipment makers have been the

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Speaker 2: hardest hit. We had Tokyo Electron down another ten percent

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Speaker 2: today after seven and a half percent lower. We talked

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Speaker 2: about ASML, why more of the equipment makers, then, let's

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Speaker 2: say the other ship providers.

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Speaker 4: They're the ones who are most in line to be

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Speaker 4: effective by any of these elevations and sanctions.

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Speaker 3: You have to bear in mind.

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Speaker 4: We also had an interview with the Nikon president this

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Speaker 4: week and he said that this remarkable demand coming out

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Speaker 4: of China. Tokyo Electron, there's a very significant proportion of

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Speaker 4: its sales is now going into China. ASML Likewise, its

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Speaker 4: biggest export market is China. So these companies their equipment.

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Speaker 4: We're not talking about the cutting edge stuff because that

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Speaker 4: has already been taken up by existing US sanctions on

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Speaker 4: trade with China. We're talking about their more mature technologies

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Speaker 4: nicon This is kind of an amusing element. They're new

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Speaker 4: in a system that they designed more than twenty five

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Speaker 4: years ago, just because that sort of mature established tech

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Speaker 4: and chips is really high demand in China. And it's

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Speaker 4: things like power regulation controllers for evs, which obviously are

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Speaker 4: a huge industry in China.

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Speaker 3: They're just huge demand coming out of it.

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Speaker 2: And we saw from ASML that nearly half of its

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Speaker 2: business in the second quarter sales were in China. So,

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Speaker 2: you know, it starts to get to the point where

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Speaker 2: companies might move away from some of these restrictions from

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Speaker 2: the United States. In other words, as we said in

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Speaker 2: our stories earlier, they might scrub American products so that

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Speaker 2: they don't have to pay heed to these restrictions. Is

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Speaker 2: that a danger that the US is fully aware of

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Speaker 2: and considering.

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Speaker 4: Right, Well, that's the US's point of leverage. When you

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Speaker 4: think about the entire supply chain, so much of the

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Speaker 4: software and the design and engineering that goes into building

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Speaker 4: the chip making gear machinery comes from designers in the US.

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Speaker 4: A lot of that intellectual property and software is the

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Speaker 4: US strength and the thing the leverage. I'm not sure

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Speaker 4: that it's as simple as ASML saying, oh, you know what,

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Speaker 4: life is much easier without US software and technology. I

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Speaker 4: would imagine if that was the case, they would have

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Speaker 4: done in house long ago. So that strength for the

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Speaker 4: US tech industry is still going to be there, and

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Speaker 4: it is still going to be a level that the

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Speaker 4: US government can pull.

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Speaker 2: So who's the biggest winner in this versus the biggest loser.

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Speaker 4: I'm not sure that there is a massive winner, to

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Speaker 4: be honest. When you impose trade sanctions of the sort,

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Speaker 4: you are cutting into business. One thing that is probably

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Speaker 4: worth mentioning here as well is that some of these selloffs,

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Speaker 4: I mean, like you said, Tokay Electro more than ten

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Speaker 4: percent down today after taking a big job yesterday, is

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Speaker 4: largely down to many of these chip making chip making

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Speaker 4: gear providers have had their share prices surging by ten

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Speaker 4: twenty fifty percent, TSMC and Vidia likewise, they're all driving

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Speaker 4: this uprise related to AI, and the reaction may be

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Speaker 4: a bit of an overreaction just because there's price of reason.

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Speaker 3: As much as they have.

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Speaker 2: Yeah, it's interesting because we even state in our story

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Speaker 2: that prior moves by the US didn't really affect the

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Speaker 2: sales the business, for instance ASML in China.

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Speaker 4: Why more now, I would say, again, it's a matter

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Speaker 4: of just addressing the competitive dynamics if anything. I mean,

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Speaker 4: you have to you also have to bear in mind

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Speaker 4: that Tokyo Electron and asmo's competitors in the US are

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Speaker 4: putting pressure on the government. Now in this case, they

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Speaker 4: probably don't want this measure, Like we mentioned, it might

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Speaker 4: be a bit too far, But the US government is

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Speaker 4: also trying to position its own national companies better, and

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Speaker 4: there are various approaches, and honestly, again these are kind

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Speaker 4: of behind the scenes negotiations, and I would imagine if anything,

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Speaker 4: this is positive as like a doomsday scenario so to speak,

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Speaker 4: to get Japan and the Netherlands to play ball on

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Speaker 4: a lesser restriction.

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Speaker 2: On the one hand, it seems like a negative for

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Speaker 2: AI in a sense that the geopolitics is entering into it.

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Speaker 2: But the mere fact that the US and China are

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Speaker 2: squabbling over this to this level shows you how important

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Speaker 2: that industry is, So what are you hearing from investors?

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Speaker 2: Do they want to stay with it or are they

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Speaker 2: looking to, you know, sort of run for the hills here.

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Speaker 4: Well, like I say, I do feel like there's a

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Speaker 4: great degree of sensitivity with these companies for when demand

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Speaker 4: and production for AI products is going to subside.

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Speaker 3: Everyone is watching it really closely.

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Speaker 4: TSMC in our region has become by far and away

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Speaker 4: the most closely watched company, And I don't think that

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Speaker 4: you would do that with a company that is just

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Speaker 4: winning and there's no.

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Speaker 3: Worries about it.

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Speaker 4: You watch it closely when you're watching out for science

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Speaker 4: that there's going to be any sort of slip up

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Speaker 4: in demand.

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Speaker 2: Are we getting close to companies downstream monetizing AI.

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Speaker 3: Ah, that's a good question, Brian.

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Speaker 4: I have no idea how anybody's going to monetize AI.

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Speaker 4: One of the ways that they go about it, it's

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Speaker 4: an emergent trend this year is everyone's trying to sell

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Speaker 4: AI as a hardware product. So Microsoft Copilot, new laptops, Google, Apple,

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Speaker 4: and Samsung they're all trying to sell us AI smartphones.

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Speaker 4: So that's kind of using the old ways of monetizing

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Speaker 4: technology with the new technology of AI. But in terms

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Speaker 4: of just can I create an AS service that would

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Speaker 4: turn into the equivalent of a Netflix subscription, I haven't

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Speaker 4: seen that happening yet.

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Speaker 2: I guess a lot of the benefits will be indirect

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Speaker 2: in nature, and it might not be easy to actually

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Speaker 2: put a number on trying to monetize what AI means

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Speaker 2: to revenues for various companies. Lad, thank you very much

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Speaker 2: for joining us. Flat Salvov, Bloomberg Tech editor with us. Well,

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Speaker 2: joining us now on the program for some discussion of

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Speaker 2: markets is Brian Krowez, president of Sharp Investment. On the markets. Well,

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Speaker 2: one of the things that happened today was that we

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Speaker 2: had a little bit of spreading of the selling and

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Speaker 2: some of these chip makers it wasn't just confined to

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Speaker 2: that industry. Do you think that this could be the

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Speaker 2: trigger for maybe a broader sell off in the overall market.

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Speaker 5: Yeah, thanks for having me. It certainly could be. I mean,

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Speaker 5: one of the things that the first half was all

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Speaker 5: about was tech. I mean, you had the S and

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Speaker 5: P up in the second quarter about four and a

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Speaker 5: half percent, but if you look at value stocks, small

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Speaker 5: cap stocks, equal weight, SMP equal weight, those were all

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Speaker 5: actually down last quarter. So it's been a very tech

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Speaker 5: driven market. And now suddenly, as you guys were just reporting,

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Speaker 5: you've got talk of you know, both Trump and Biden

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Speaker 5: are talking about putting potential restrictions. You've got Trump talking

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Speaker 5: about tariffs, and so that could be the kind of

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Speaker 5: catalyst that that causes a rotation into you know, lots

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Speaker 5: of other stocks, which which frankly are much cheaper.

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Speaker 2: There's a lot of ways to look at this. I mean,

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Speaker 2: some investors might just say, okay, let me take a

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Speaker 2: look here. How much of this company's product line is

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Speaker 2: is really prominent in China, and I'll discount a little

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Speaker 2: bit and trim just to kind of make, you know,

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Speaker 2: take account of that. Others might say, look, you know,

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Speaker 2: I've been looking to lighten up anyway and take some profits,

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Speaker 2: so now's a good opportunity. And others might see this

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Speaker 2: as a buying opportunity. Of the three, which of those

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Speaker 2: positions resonates most with you?

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Speaker 5: Well, for us, we actually think there's just a lot

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Speaker 5: of opportunities outside of the big tech markets. Right now,

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Speaker 5: S and P is about forty five percent of what

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Speaker 5: we're calling tech and tech, like the S and P

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Speaker 5: is about twenty two to twenty three times earnings, whereas

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Speaker 5: the average stock within the S and P or the

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Speaker 5: SNP equal weight is more like sixteen seventeen times earnings.

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Speaker 5: And actually for twenty twenty five, they both have the

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Speaker 5: same growth, same thing with the RUSSO one thousand value index.

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Speaker 5: So there's just a lot better opportunities in our view.

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Speaker 5: And by the way, if you look at the returns

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Speaker 5: this year, sixty eight percent of the SMP came from

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Speaker 5: just the ten largest stocks. The last time we had

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Speaker 5: a real concentrated market like that was in nineteen ninety nine,

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Speaker 5: with thirty eight percent of the S and p's return

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Speaker 5: was from the ten larger stocks.

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Speaker 2: Yeah, but the difference is the earnings now from those

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Speaker 2: big companies is much greater than I suppose what they

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Speaker 2: were back in nineteen ninety nine two thousand. Do you

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Speaker 2: think that some of those broader type companies, companies that

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Speaker 2: are more like cyclical value in nature, will they produce

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Speaker 2: the earnings that justify gains.

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Speaker 5: So that's a real good point, and I've had plenty

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Speaker 5: of people say that to me before as well as like, well,

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Speaker 5: the companies now are more real than back then. But

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Speaker 5: think about cell phones one of the top ten stocks

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Speaker 5: in ninet nine nine was actually Nokia, which was a

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Speaker 5: cell phone leader at the time. So if at the

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Speaker 5: time you had thought, or if someone had come to

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Speaker 5: the time machine and told you how dominant cell phones

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Speaker 5: would be today versus nineteen ninety nine, he probably would

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Speaker 5: have thought you'd be pretty good in the top ten stocks,

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Speaker 5: including Nokia and Cisco, which were sort of the Internet leaders.

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Speaker 5: But actually those top ten stocks over the next ten

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Speaker 5: years were down twenty seven percent, whereas you know, the

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Speaker 5: eco weight SMP was up sixty. So I think the

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Speaker 5: moral of the story is AI is going to be

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Speaker 5: really big, but it's really hard to know the winners.

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Speaker 5: There's been about two hundred billion spent on AI so far,

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Speaker 5: and estimates are there's been about three billion dollars or

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Speaker 5: so in revenue, So there's been a lot of data

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Speaker 5: coming out in terms of questioning you know when we'll

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Speaker 5: see a return on AI, and we probably will, but

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Speaker 5: knowing who the leaders are going to be and who

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Speaker 5: the winners are going to be is going to be

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Speaker 5: harder than people think, and so a lot of times

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Speaker 5: investors just overpay for what they think is certainty, and

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Speaker 5: it turns out that someone else is the winner.

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Speaker 3: In the end.

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Speaker 2: Yeah, So when you look at companies that are outside

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Speaker 2: sort of the top ten or so, I mean, whether

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Speaker 2: you want to focus on the magnificent seven or maybe

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Speaker 2: the top fifteen or twenty, when you look elsewhere in

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Speaker 2: the marketplace, what stands out is the most attractive.

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Speaker 5: I mean there's a lot of areas. As I said,

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Speaker 5: you know, if you just look at the average stock

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Speaker 5: and the S and P five hundred, it's training at

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Speaker 5: a very big discount to the index itself. So you

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Speaker 5: have a very concerted market where people are really just

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Speaker 5: incredibly focused on the NVIDIAs and apples of the world.

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Speaker 5: And yet there's plenty of smaller companies out there. You know,

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Speaker 5: just to name one, a company like Gentex, which is

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Speaker 5: very dominant in autodimming mirrors. They have some really interesting

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Speaker 5: technology coming out where they're going to be able to

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Speaker 5: have full sun roofs that darken. They're already on the

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Speaker 5: Dreamliner where instead of having a shade you pull down

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Speaker 5: to block the side of the window, you can push

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Speaker 5: the button and it darkens. I mean, this is a

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Speaker 5: company that it's grown double digits, it's trading well blow,

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Speaker 5: it's historical averages and so you can buy it well

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Speaker 5: blow where the S and B is trading. And yet

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Speaker 5: it is sort of a got a tech aspect to

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Speaker 5: it and should be able to continue to grow as

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Speaker 5: we move into autonomous vehicles and things like that. It

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Speaker 5: also incidentally fits very much into if the Trump administration

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Speaker 5: comes in and they're looking for manufacturers in US domestic

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Speaker 5: type companies, and so if it's that profile as well.

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Speaker 5: It's just that it's a smaller company that people aren't

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Speaker 5: really thinking of, so it's sort of been just sort

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Speaker 5: of forgotten.

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Speaker 2: In addition to gentechs, you you also mentioned Samsung in

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Speaker 2: your notes. While that is a way to play AI,

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Speaker 2: it has a lot of other prongs to its business.

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Speaker 2: What do you like about Samsung?

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Speaker 5: I mean, there's a lot to like about Samsung. You know,

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Speaker 5: there are some problems with it, but it's it's very cheap.

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Speaker 5: It's historically been a very good tech company, one of

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Speaker 5: the largest by revenue, dominant in a lot of areas.

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Speaker 5: Like you said, it's kind of interesting about them. Even

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Speaker 5: just listening to what President Trump said in his Bloomberg interview,

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Speaker 5: you know, talking about you know, wanting to Taiwan to

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Speaker 5: play for defense and stuff. So if if there's a

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Speaker 5: growing desire to get more chip alliance outside of Taiwan,

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Speaker 5: which seems to be what what Trump is indicating, you know,

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Speaker 5: potentially a player like Samsung could could benefit. And then

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Speaker 5: you know, longer term, you've got demand for AI regardless

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Speaker 5: of you know, how big it ends up being, and

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Speaker 5: they're going to benefit as you said from.

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Speaker 3: That as well.

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Speaker 5: Yeah, so there's a lot to like about Samsung.

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Speaker 2: Brian, Thank you. Brian crowez that our president of Sharf Investment,

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Speaker 2: President Shi Jinping, will unveil his long term vision for

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Speaker 2: Chinese economy. She will be wrapping up the Third Plenum

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Speaker 2: in Beijing, a meeting on reform that happens just twice

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Speaker 2: a decade. Joining us now in our studios here in

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Speaker 2: Hong Kong is Way Yao, head of Research and Chief

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Speaker 2: Economists for the Asia Pacific at Associate General. Well, yeah,

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Speaker 2: thanks very much for coming into the studios. So we

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Speaker 2: have been really thinking that we'll hear more about a

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Speaker 2: continuation of President She's policies, things like high quality growth

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Speaker 2: and Chinese style modernization. Yet it it seems like there's

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Speaker 2: pressing need for stimulus. So how do you expect, you know,

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Speaker 2: the sort of core of the speech to.

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Speaker 1: Be well morning. Indeed, you know, we don't expect much

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Speaker 1: change in terms of the long term direction that She

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Speaker 1: Jinping has made very very clear and has been implementing

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Speaker 1: for several years now, which is, you know, a double

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Speaker 1: down on China's tech upgrade supply chain security rather than

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Speaker 1: domesity amounts. So we don't we think it's better to

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Speaker 1: keep the expectation low for stimulus.

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Speaker 2: Right, and how much stimulus is needed to sort of

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Speaker 2: set the Chinese economy on a more upward pace.

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Speaker 1: Well, actually, you know, strictly speaking, it's not even a

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Speaker 1: question of stimulus at the moment. It's really that the

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Speaker 1: policy setting is very deflationary. Monitor policy doesn't favor lower

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Speaker 1: interest rate, doesn't want to weaken the currency, and the

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Speaker 1: fiscal policy essentially is more about the leveraging than supporting economy.

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Speaker 1: So the first task is actually to reduce the amount

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Speaker 1: of austerity in the economy, so any increase in the

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Speaker 1: fiscal impulse will be helpful.

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Speaker 2: So it's not even reform, really, it's not even well,

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Speaker 2: it is reform, but it's not so much extra stimulus needed,

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Speaker 2: but just to pull down the curbs. What are chief

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Speaker 2: among the curbs.

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Speaker 1: Well, so, you know, one thing I think it's a

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Speaker 1: bit less notice is you know the fiscal side, local

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Speaker 1: governments actually seems to have the priority of lowering the

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Speaker 1: shadow debt. They have cumulated, right, but given you know,

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Speaker 1: they're missing a huge chunk of the lens cells now,

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Speaker 1: so essentially you know they're running fiscal austerity.

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Speaker 2: And we have actually looming quite a lot on the

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Speaker 2: geopolitical front, which perhaps is a little outside the basic

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Speaker 2: thrust of the Third planum, but it's looming. You have

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Speaker 2: not only the these tariffs coming from Europe on electric vehicles,

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Speaker 2: but also the former president Donald Trump pledging a sixty

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Speaker 2: percent tax on goods from China. I know that's down

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Speaker 2: the road, but both President Biden and former President Trump

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Speaker 2: want to maintain this toughness on China.

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Speaker 1: Well, you can say this is even related to the strategy, right.

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Speaker 1: So when as now, the China's policy is very much

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Speaker 1: about supply rather than demand, it just exacerbates the imbalance,

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Speaker 1: which leads to the situation that China is running a

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Speaker 1: manufacturing trade supplus of ten percent of GDP or one

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Speaker 1: point five trillion US dollar. So everyone's pushing back. So

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Speaker 1: this policy is creating a problem for the world essentially, and.

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Speaker 2: The real estate downturn is a big part of what's

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Speaker 2: holding back the consumer. Might we expect that to organically

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Speaker 2: fix itself or do you think there really are some

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Speaker 2: strong policies needed.

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Speaker 1: Well, if organically it would take much longer or much worse. First,

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Speaker 1: on that front, we see a tiny bit of cost

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Speaker 1: correction this year. You know, it seems that they will

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Speaker 1: to put a botton to the housing is stronger, but

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Speaker 1: the policy still takes time and takes more effort. So

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Speaker 1: it's a bit early to say, how you know and

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Speaker 1: when this housing can stabilize.

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Speaker 2: What might be a comprehensive reform that is really needed if.

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Speaker 1: We're talking about the how to support a domestic demand. Yes, indeed,

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Speaker 1: they need to first sort out the problem that the

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Speaker 1: local government's just running out of fiscal resource, so some

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Speaker 1: tax reform is necessary, which seems to be on the agenda.

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Speaker 1: But more importantly, it's just that the central government really

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Speaker 1: needs to step up borrowing by itself to to cushion

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Speaker 1: the system during this transition.

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Speaker 2: Something briefly mentioned earlier, the Houkoh system is that still

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Speaker 2: serving as a major constraint for people in.

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Speaker 1: China, it's not. It's actually far less than before. You know,

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Speaker 1: outside of you know, several major large city, very big cities,

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Speaker 1: there is not much restrain restriction on people moving around anymore.

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Speaker 1: Even for Houko system right to take it to the

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Speaker 1: next stage to help the domestic demand. It's a question

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Speaker 1: about local government fiscal results because you need a social

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Speaker 1: security spending to support that.

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Speaker 2: And do you see very positive prospects for some of

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Speaker 2: these new technologies that are very much at the center

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Speaker 2: of the geopolitical debate, for instance, chips for AI.

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Speaker 1: In a way, I guess, you know, the fact that

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Speaker 1: the leadership is not overly concerned has a lot to

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Speaker 1: do with, you know, the fact that from their perspective,

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Speaker 1: you know, things are actually going fine on the supply side.

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Speaker 1: So there is a lot of progress. But the problem

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Speaker 1: is that relying on manufacturing a loan doesn't generate enough

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Speaker 1: jobs and demand in the economy as big as China.

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Speaker 1: It just doesn't.

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Speaker 2: All right, thanks so much for joining us here. Unfortunately

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Speaker 2: out of time where Yao is head of Research and

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Speaker 2: chief Economists for the Asia Pacific at Associate A General.

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Speaker 2: This is the bloomberg Daybreak Asia podcast, bringing to the

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Speaker 2: stories making news and moving markets in the Asia Pacific.

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Speaker 2: Visit the Bloomberg Podcast channel on YouTube to get more

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Speaker 2: episodes of this and other shows from Bloomberg. Subscribe to

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Speaker 2: the podcast on Apple, Spotify, or anywhere else you listen

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Speaker 2: and always on Bloomberg Radio, the Bloomberg Terminal, and the

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