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

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Speaker 2: Welcome to the Bloomberg day Break Asia Podcast. I'm Doug Chrisner.

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Speaker 2: So markets in Asia are looking to mimic Monday's performance

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Speaker 2: in the US, where the bulls drove equities to all

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Speaker 2: time highs. Also today the question of whether fierce competition

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Speaker 2: in China's AI industry is muddying the long term outlook

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Speaker 2: for the sector. In a moment or two, we'll be

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Speaker 2: joined by Bloomberg Opinion columnist Catherine Thorbeck. But we begin

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Speaker 2: this morning with markets. As I mentioned, equities in the

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Speaker 2: States at all time highs on the final day of

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Speaker 2: the second quarter. So now the S and P five

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Speaker 2: hundred is up roughly twenty five percent from its April lows,

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Speaker 2: its best quarter since December twenty twenty three. Today we

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Speaker 2: broke above sixty two hundred for the first time, tech

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Speaker 2: shares leading the charge. And for a closer look at

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Speaker 2: the price section, I'm joined now by Burns McKinney. He

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Speaker 2: is managing to arect doctor also senior portfolio manager at

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Speaker 2: NFJ Investment Group. Burns, thank you so much for making

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Speaker 2: time to chat with me. What's your view on the

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Speaker 2: rally that we saw in Q two.

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Speaker 3: It's it's it's just amazing.

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Speaker 4: How you know, if an investor went to sleep at

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Speaker 4: the end of the first quarter and then woke up

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Speaker 4: at the end of the second quarter, they think, hey,

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Speaker 4: this has been a pretty quiet quarter.

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Speaker 3: And not a lot has happened.

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Speaker 4: But you know, we've been on a pretty wild round trip,

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Speaker 4: and you know, really it's it's at least pretty simple

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Speaker 4: to explain. I mean, the market's you know, really got

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Speaker 4: pummeled after the April second announcement of the tariffs, the

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Speaker 4: Liberation Day or obliteration Day, if you will, And you know,

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Speaker 4: as the markets have kind of gained more and more

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Speaker 4: confidence that okay, you know what, the president really does

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Speaker 4: care what the markets think, and a lot of these

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Speaker 4: tariffs won't be as bad as feared, they rebounded really

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Speaker 4: just back where they were. That said, you know, the

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Speaker 4: risk awards, you know, may be a little bit worse

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Speaker 4: than it was at the beginning of the period, simply

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Speaker 4: because you know, despite the fact that the tariffs may

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Speaker 4: not be as bad as once feared, you're still looking

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Speaker 4: at levels that will probably be three to four times

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Speaker 4: anything that we've seen in our lifetime.

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Speaker 2: Last Friday strategist over at Bank of America, we're warning

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Speaker 2: that there is an increasing risk of a speculative bubble inequities.

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Speaker 2: Is that something you share.

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Speaker 3: Yeah, Bubble is a word that I think.

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Speaker 4: It gets clicks, It gets people excited. You know, it's

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Speaker 4: hard to say there's a bubble. But that said, you know,

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Speaker 4: equity markets do look a bit richly valued. You're looking

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Speaker 4: at you know, the US markets trading at about twenty

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Speaker 4: three times earnings. That's about a third above their long

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Speaker 4: term average valuation. And it's really only been more expensive

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Speaker 4: than this about twenty percent of the time over the

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Speaker 4: last twenty five years. And so stocks are rich. You know,

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Speaker 4: looking forward, it's hard to see multiple expansion from here

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Speaker 4: for an investor in the broader market. So you're just

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Speaker 4: going to have to rely on good old fashion earnings growth,

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Speaker 4: and even that's at risk given the fact that you know,

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Speaker 4: tariffs could squeeze margins. And so, you know, looking looking backward,

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Speaker 4: you in the last couple of years, you know, I say,

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Speaker 4: last year, we're sort of like throwing the football down

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Speaker 4: the field forty yard bomb. Year before that, forty yard

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Speaker 4: hail Mary. You know, going forward, investors probably kind of

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Speaker 4: looking at the good old fashioned, you know, three yards

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Speaker 4: in a cloud of dust, But there are opportunities to

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Speaker 4: be had beneath the surface.

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Speaker 2: So you mentioned margins. Are margins really the biggest test

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Speaker 2: in the upcoming earning season.

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Speaker 4: It's definitely what investors are going to be keeping an

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Speaker 4: eye on, and that's what they're going to be listening

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Speaker 4: for in all the earnings calls.

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Speaker 3: I mean in general, you know, you know, in.

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Speaker 4: A capitalistic society, margins are one of the most mean

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Speaker 4: reverting stats out there. And you know, even prior to

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Speaker 4: the current policy environment, corporate profit margins were really near

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Speaker 4: all time highs. And now when you factor in the

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Speaker 4: fact that we've seen tariffs start to go into place,

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Speaker 4: we haven't necessarily seen a lot of those increases in

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Speaker 4: costs be passed on to consumers, and so there's really

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Speaker 4: nowhere for that to go.

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Speaker 3: But basically squeeze.

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Speaker 4: Profit margins a little bit on the corporate environment, and

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Speaker 4: that's certainly what investors are going to be focused on.

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Speaker 2: Maybe we can talk a little bit about the dollar.

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Speaker 2: For the month of June, I think the Bloomberg Dollar

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Speaker 2: Spot index was down about two percent, and I think

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Speaker 2: right now we're at about the lowest level since March

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Speaker 2: twenty twenty two. I'm wondering whether you think this is

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Speaker 2: an illustration of diminished appeal of US assets globally. And

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Speaker 2: if that's the case, why is.

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Speaker 4: That there's definitely been more and more discussion about a

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Speaker 4: sort of an end to the period of US or

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Speaker 4: American exceptionalism. You know, we've been in an environment whereby

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Speaker 4: you know, US stocks ab outperformed global global global markets

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Speaker 4: outside the United States by over the last decade by

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Speaker 4: you know, one hundred percentage points. And you know a

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Speaker 4: lot of that's had to do with the innovation and

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Speaker 4: environment embracing in the United States. But you know, as

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Speaker 4: investors have seen certain threats to that again, you know,

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Speaker 4: trade wars. You know, we we say trade war is

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Speaker 4: easy to win. You know, there's really aren't. There might

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Speaker 4: be relative winners in a trade war, but you know,

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Speaker 4: basically on absolute basis, everyone loses. And so you know,

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Speaker 4: between that between you know, geopolitical risk and you know,

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Speaker 4: whether it's just smaller risks like threats to fit into independence. Uh,

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Speaker 4: and investors are starting to look elsewhere and you know,

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Speaker 4: you've seen lower evaluations overseas for a long time, but

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Speaker 4: you haven't necessarily had the catalysts to get investors to

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Speaker 4: jump into those valuations. So it definitely makes a case

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Speaker 4: for uh, you know, maybe investors diversifying their portfolios. Maybe

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Speaker 4: you know, again not necessarily selling the US, but you know,

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Speaker 4: maybe you know, diversifying away from your winners and maybe

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Speaker 4: you know, adding to some of your losers.

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Speaker 2: So the equity market seems to be telling us we

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Speaker 2: will avoid a recession here in the US. The bond

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Speaker 2: market seems to be suggesting that inflation is not an issue.

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Speaker 2: Right now, does the bond market have it right?

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Speaker 3: Yeah?

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Speaker 4: Well, first, yeah, I hate to admit this as an

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Speaker 4: equity investor, but the bond market usually gets a little

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Speaker 4: bit more correct than equity managers such as ourselves. But

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Speaker 4: you know, inflation, you know, you really have seen you know,

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Speaker 4: I think that the FED was fairly successful in you know,

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Speaker 4: threading that needle and navigating you know, cutting job openings

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Speaker 4: without cutting jobs, and taming inflation and just keeping you know,

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Speaker 4: the most important thing they had to do was keep

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Speaker 4: investor expectations of inflation down because that's the type of

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Speaker 4: thinking that can just spiral out of control. And you know,

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Speaker 4: we're in a world now where you know, the Fed's

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Speaker 4: preferred measure, the you know, the core PCEE for inflation

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Speaker 4: is now running roughly you know, two and a half percent,

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Speaker 4: and if in fact, if you look at the last

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Speaker 4: three months and annualize those, it's really right at the

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Speaker 4: FEDS two percent target.

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Speaker 3: And so inflation has been coming down.

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Speaker 4: You know. One of the big fears has been that

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Speaker 4: tariffs might you know, cause resurgence in inflation. We haven't

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Speaker 4: seen that yet, and so it does seem that you know,

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Speaker 4: you know, pricing increases are probably a bit behind us,

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Speaker 4: notwithstanding whether we have a geopolitical shock that might actually

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Speaker 4: drive up energy prices in the their term.

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Speaker 2: So I think we can agree that a lot of

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Speaker 2: the gains that we have seen in stocks have been

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Speaker 2: built on hope that the FED is going to resume

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Speaker 2: rate cuts at some point. Do you have a sense

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Speaker 2: of when that may happen? Is it September? Perhaps a

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Speaker 2: little sooner, maybe July?

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Speaker 4: Yeah, yeah, I think what the markets are pricing in

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Speaker 4: is something along the lines of September or October.

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Speaker 3: You know.

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Speaker 4: The great thing about this, and this is the reason

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Speaker 4: the markets have rallied, is that there's you know, there's

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Speaker 4: there's two reasons the Fed would cut rates. One is,

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Speaker 4: you know, in case of emergency, you see, you know

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Speaker 4: something has been broken, you know you're you're heading towards

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Speaker 4: a recession. And the other reason is simply when they

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Speaker 4: determine that the FED rate adjusted for inflation has just

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Speaker 4: gotten restricted because of the fact that they've been winning

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Speaker 4: that warworth inflation. So if you see a continuation of

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Speaker 4: that Fed cutting cycle, this is actually for the good reason,

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Speaker 4: the good news reason for the latter, as far as

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Speaker 4: you know, when they cut them, whether it's July, September, October,

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Speaker 4: you know, really what investors should focus on is not

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Speaker 4: necessarily what the Fed does next, but what they do last,

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Speaker 4: insofar as where they ultimates ultimately settle.

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Speaker 3: And this is.

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Speaker 4: Probably you know, if you're looking for a contrarian view,

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Speaker 4: it would be that given the fact that inflation's coming down,

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Speaker 4: but just due to deglobalization, it might not go back

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Speaker 4: to the you know, entirely to the levels that it's

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Speaker 4: been over the last ten fifteen years. And as such,

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Speaker 4: you know, when you know, the FED resumes cutting, they

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Speaker 4: might not be able to get rates down to that

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Speaker 4: year zero level that we've been at which you know,

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Speaker 4: if rates are just a little bit higher for longer,

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Speaker 4: that really makes a case for investors. Well, how do

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Speaker 4: I respond to this? It means go short duration with inequities,

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Speaker 4: go for value stocks, and specifically companies that are paying

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Speaker 4: and raising dividends.

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Speaker 2: Are those the key tenants of your strategy at this point?

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Speaker 4: You know, we're we're looking for relative valuation regardless of markets.

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Speaker 4: We don't like to try to time markets. We you know,

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Speaker 4: we like to stay fully invested at all times within

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Speaker 4: the framework diversification. But you know, we've always made the

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Speaker 4: case that you know, the some of the best strategies

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Speaker 4: through time have been those that have focused on companies

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Speaker 4: that are returning capital to shareholder, that are shareholder friendly,

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Speaker 4: and that means companies that are either buying back shares

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Speaker 4: or paying dividends.

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Speaker 2: What about opportunities offshore? Given everything that you're describing, I'm

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Speaker 2: wondering whether you find the same thing to be true

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Speaker 2: let's say in Asia or in Europe.

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Speaker 4: You know, I mean absolutely, I think at this point

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Speaker 4: in time, you've you know, I noted ago that you know,

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Speaker 4: whereas the S and P five hundreds trade and at

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Speaker 4: twenty three times earnings, the stocks in Europe are trading

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Speaker 4: at like fourteen times earnings. That valuation gap is as

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Speaker 4: wide as it's been in the last you know, ten

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Speaker 4: or fifteen years. And you know, again, investors have been

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Speaker 4: looking for a catalyst, and you know, that catalyst may

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Speaker 4: be the fact that you have overseas and place is

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Speaker 4: like Europe, a delayed response to interest rate cuts there

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Speaker 4: they have, you know, because inflation has really pulled back

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Speaker 4: there and they have been able to resume cutting interest rates.

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Speaker 4: You have that, but the policy environment is also looking

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Speaker 4: a little bit more favorable on the fiscal side. You're

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Speaker 4: starting to see signs of life there, whereas places like

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Speaker 4: Germany have basically been removing some of their debt caps

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Speaker 4: and starting to focus on infrastructure and defense spending. The

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Speaker 4: same goes for France and other countries, and so that

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Speaker 4: could be maybe that catalyst to you know, sort of

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Speaker 4: kickstart a reversion of the mean in places like Europe.

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Speaker 4: And you know, one other place to you know, investors

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Speaker 4: to look or at least for diversification purposes, is the

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Speaker 4: fact that you noted a few minutes ago the weakening

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Speaker 4: of the dollar. Historically speaking, when the dollar weakens, that

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Speaker 4: bodes well for emerging markets equities, so it makes a

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Speaker 4: great case for getting a little bit of exposure there too.

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

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Speaker 2: Burns McKinney is managing director also senior portfolio manager at

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Speaker 2: NFJ Investment Group. Joining us here on the Daybreak Asia podcast.

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

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Speaker 2: China's crowded AI landscape is not only fueling rapid innovation,

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Speaker 2: but fierce competition as well, and it's that competition that

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Speaker 2: seems to be dragging down profits. Let's check in with

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Speaker 2: Bloomberg opinion columnist Katherine Thorbek. She covers all things tech

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Speaker 2: in Asia, and she joins us from our bureau in Tokyo. Catherine,

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Speaker 2: thank you for making time to chat with me about this.

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Speaker 2: Give me a sense of perspective on this. How recent

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Speaker 2: has this kind of tension between innovation and competition been

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Speaker 2: developing in AI in China?

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Speaker 1: This is really a story we've seen play out many

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Speaker 1: times in the history of China's tech sector. You know,

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Speaker 1: competition is notoriously fierce in the world's second largest economy,

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Speaker 1: So whenever a new craze emerges there's always just so

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Speaker 1: many rivals that sort of come out of the woodwork

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Speaker 1: ready to pounce, And for example, we saw this in

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Speaker 1: the food delivery market. There's some food delivery wars that

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Speaker 1: were going on, and it really became a race to

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Speaker 1: the bottom when it comes to pricing. You know, we

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Speaker 1: saw bubble t being sold for less than twenty five

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Speaker 1: cents last month, and we also SAWT in the electric

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Speaker 1: vehicle market, which is sort of left behind a trail

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Speaker 1: of zombie cars. And now these sort of same forces

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Speaker 1: are really in full swing in the booming artificial intelligence industry,

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Speaker 1: and these AI firms have really been focused on this

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Speaker 1: sort of classic playbook, which is scaling up their user

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Speaker 1: bases and racing for market share, and the result has

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Speaker 1: sort of been this rat race. You know, they're at

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Speaker 1: each other's throats when it comes to pricing, and it's

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Speaker 1: really become a race to the bottom. But I think

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Speaker 1: a key difference here is that nobody has actually figured

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Speaker 1: out has really cracked the key to getting consumers to

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Speaker 1: pay for these services. So it makes the issue of

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Speaker 1: monetization or a path to profitability seem a really long

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Speaker 1: way off. And this is really unique to China's tech sector.

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Speaker 1: You know, in the States, in Silicon Valley, there's sort

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Speaker 1: of a smaller number of large players that really dominate

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Speaker 1: the market and they really have control over pricing, whereas

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Speaker 1: in China, you know, there's just so many smaller players

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Speaker 1: and as well as the big tech companies, So competition

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Speaker 1: has been really really fierce, and I'm just not sure

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Speaker 1: how sustainable it is.

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Speaker 2: I'm just wondering. When you talk about big tech companies,

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Speaker 2: I think of Ali Baba, and you would expect maybe

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Speaker 2: that company or companies like Baba to have some sort

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Speaker 2: of advantage.

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Speaker 1: That's right. So Ali Baba and Byteedance and Tencent, these

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Speaker 1: sort of big tech players, I think they really can

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Speaker 1: play the long game and they can sort of sort

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Speaker 1: of weather this storm a little bit better than these

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Speaker 1: so called little dragons, which are these sort of startups

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Speaker 1: that are really driving innovation in China's tech ecosystem. And

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Speaker 1: so I think the big tech players are definitely in

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Speaker 1: a better position. But I also think that's a little

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Speaker 1: bit unfortunate because we really see sort of the biggest

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Speaker 1: breakthroughs in AI come from these smaller startups, which I

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Speaker 1: think are at higher risk.

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Speaker 2: Here does the government have a view on what's happening,

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Speaker 2: do you think so.

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Speaker 1: I think post deep Seek, there's just been a lot

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Speaker 1: of exuberance. There's been a lot of top down support

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Speaker 1: for the AI sector, and so it's sort of driving

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Speaker 1: the and in some ways it's a double edged sword,

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Speaker 1: you know, because there's so much excitement for AI and

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Speaker 1: so much top down support, it has really been driving

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Speaker 1: widespread adoption of AI services and AI tools throughout China,

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Speaker 1: which the government wants. But I think it definitely puts

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Speaker 1: these companies in a crunch when it comes to sort

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Speaker 1: of figuring out how to make money.

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Speaker 2: So when you talk about adoption, is it primarily on

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Speaker 2: the part of consumers using more AI related devices or

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Speaker 2: is it in industry as well?

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Speaker 1: That's right, So I think consumers definitely demand for AI

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Speaker 1: services and tools is red hot. You know, we see

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Speaker 1: so many chatbots, so many people using deep seak across

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Speaker 1: you know, local governments and across even hospitals. So I

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Speaker 1: think the adoption has been widespread. And the way I

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Speaker 1: kind of look at it when we talk about the

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Speaker 1: sort of top down support was you know, I'm not

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Speaker 1: going to remember which US president it was, but there

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Speaker 1: was a President that put electricity in the White House

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Speaker 1: to sort of signal that you know, this technology is

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Speaker 1: safe and we can, you know, rapidly adopt it. And

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Speaker 1: I think there have been a lot of top down

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Speaker 1: signals coming from Beijing and coming from Hijinping about how

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Speaker 1: AI is, you know, the future, and we shouldn't be

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Speaker 1: afraid of it. And I think we've really seen that

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Speaker 1: play out when it comes to consumers really sort of

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Speaker 1: embracing this technology and not being afraid of it and

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Speaker 1: sort of rushing to adopt it.

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Speaker 2: One of the big questions in the States as it

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Speaker 2: relates to the investments being made in artificial intelligence, is

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Speaker 2: the ROI the return on those investments. Do we have

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Speaker 2: any visibility into whether or not this is having kind

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Speaker 2: of a similar conundrum in China right now.

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Speaker 1: Right so, I really think that's sort of the biggest

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Speaker 1: existential threat hanging over sort of the entire AI ecosystem

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Speaker 1: in China is that there really is not a clear

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Speaker 1: path to profitability, and there's not even a clear path

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Speaker 1: to sort of monetization and making money off of consumers.

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Speaker 1: You know, so many of these chatbots are being offered

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Speaker 1: for free, and because you know, competitors are offering them

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Speaker 1: for free. Basically peer pressures all of the companies to

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Speaker 1: do the same. And I think there's one statistic that

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Speaker 1: our Bloomberg Intelligence colleagues wrote, which was that I think

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Speaker 1: all of the top ten AI chat bomds at China

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Speaker 1: generated just one million dollars in revenue from Apple's iOS

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Speaker 1: app store in twelve months, And during that same time period,

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Speaker 1: Open AI's chat ebt garnered six hundred and sixty nine

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Speaker 1: million dollars in iOS revenue. So that's quite a big difference.

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Speaker 1: And that's just one chatbot compared to ten of China's.

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Speaker 2: So what do we know about the rate of failure here?

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Speaker 2: I mean, do we have enough data to begin to

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Speaker 2: kind of quantify that?

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Speaker 1: So I think it's too soon to tell. Like I said,

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Speaker 1: there's you know, this top down support, and there's just

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Speaker 1: this insatiable hype, especially in the wake of Deep Seek,

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Speaker 1: and I think for now that's been a really strong

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Speaker 1: propellant of the AI sector. You know, A former government

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Speaker 1: official in China last week said that the nation is

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Speaker 1: on the cusp of generating more than one hundred Deep

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Speaker 1: Seek like breakthroughs. But I think you know, if you

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Speaker 1: look at more than one hundred deep seeks, you know,

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Speaker 1: what does that actually mean? That means such fierce competition,

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Speaker 1: And so I think in the long run we may

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Speaker 1: see at least one hundred you know, zombie AI tools

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Speaker 1: or zombie AI agents. But I think, you know, that's

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Speaker 1: still a long way off. And for now, you know,

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Speaker 1: this hype is really driving a lot of exuberance. But

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Speaker 1: we'll have to see how it plays out.

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Speaker 2: And I'm wondering about the workers that are involved in

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Speaker 2: these companies, the programmers, the software engineers. I would imagine

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Speaker 2: that it's a very good sign for them. The question

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Speaker 2: is whether it continues.

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Speaker 1: Yes, we will definitely have to see. You know, I

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Speaker 1: think the AI exuberance has just been especially after Deep Seak,

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Speaker 1: has just been absolute pandemonium in China, and so we'll

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Speaker 1: have to see how it eventually plays out. But yes,

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Speaker 1: a lot of excitement.

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Speaker 2: What is the next thing that you're going to be

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Speaker 2: watching for in trying to understand this story more deeply?

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Speaker 1: So I think eventually it's inevitable that there's going to

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Speaker 1: be some kind of cooling down, whether that's sort of

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Speaker 1: a consolidation on the horizon. But like I said, I

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Speaker 1: don't think that's coming anytime soon, because, you know, because

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Speaker 1: of all this excitement, because of all this top down support,

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Speaker 1: I think that this frenzy still has a little bit

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Speaker 1: of room to run. But I think the big question is, really,

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Speaker 1: how can any of these companies find a way to

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Speaker 1: monetize if nobody's actually willing to pay for these services?

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Speaker 1: You know, Chinese consumers historically have just not liked paying

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Speaker 1: for software services they're sort of intangible, and they've also

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Speaker 1: refused subscription models, which are sort of the two sort

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Speaker 1: of revenue streams that have taken hold in the US.

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Speaker 1: So without those, we'll have to see how how any

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Speaker 1: of them, whether they could come up with a killer

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Speaker 1: app that people are willing to pay for, or whether

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Speaker 1: you know, enterprises decide it's worth you know, shelling out

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Speaker 1: for AI services. But for now, it's the market is

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Speaker 1: pretty much dominated by free to use services, so I

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Speaker 1: question how sustainable that is.

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Speaker 2: We know the tension that exists, particularly in the realm

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Speaker 2: of technology between the US and China, and the limitations

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Speaker 2: that are inherently a part of that story, but I'm

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Speaker 2: wondering about the adoption of AI related products created by China.

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Speaker 2: Maybe being employed by or in other jurisdictions across parts.

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Speaker 1: Of Asia, right, So I think that there was hope that,

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Speaker 1: you know, if Chinese consumers aren't willing to pay, and

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Speaker 1: if the market at home is so hyper competitive, of

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Speaker 1: maybe these firms can start looking abroad for growth. But

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Speaker 1: I think that's really an uphill battle. You know, we've

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Speaker 1: already seen jurisdictions around the world, whether that's Italy Taiwan,

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Speaker 1: start to crack down on deep seek and restrict use

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Speaker 1: just because of all those sort of geopolitical tensions. So

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Speaker 1: I think going abroad would definitely be there's definitely hope

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Speaker 1: that that's like a market overseas markets or where some

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Speaker 1: of the growth is. But I think it's going to

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Speaker 1: be very, very difficult for these Chinese AI firms to

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Speaker 1: sort of distance themselves from Beijing.

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Speaker 2: We'll leave it there. Catherine, always a pleasure. Thank you

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Speaker 2: so very much, Bloomberg Opinion columnist Katherine Thorbeck. She covers

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Speaker 2: all things Asia tech from our bureau in Tokyo, talking

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Speaker 2: here on the Daybreak Asia podcast. Thanks for listening to

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Speaker 2: today's episode of the Bloomberg Daybreak Asia Edition podcast. Each weekday,

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Speaker 2: we look at the story shaping markets, finance, and geopolitics

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Speaker 2: in the Asia Pacific. You can find us on Apple, Spotify,

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Speaker 2: the Bloomberg Podcast, Fast YouTube channel, or anywhere else you listen.

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Speaker 2: Join us again tomorrow for insight on the market moves

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Speaker 2: from Hong Kong to Singapore and Australia. I'm Doug Prisoner

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Speaker 2: and this is Bloomberg