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Speaker 1: Bloomberg Audio Studios, podcasts, radio news. Welcome to the Daybreak

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Speaker 1: Asia podcast. I'm Doug Prisner. Markets across the Asia Pacific

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Speaker 1: are reacting today to the FED cutting its policy rate

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Speaker 1: by twenty five basis points now. To be fair, that

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Speaker 1: move was widely expected. At the same time, FED officials

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Speaker 1: maintain their outlook for just one rate cut in the

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Speaker 1: new year. Here's Fed Shair J. Powell with today's decision.

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Speaker 2: We have lowered our policy rate three quarters of a

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Speaker 2: percentage point over our last three meetings. This further normalization

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Speaker 2: of our policy stance should help stabilize the labor market

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Speaker 2: while allowing inflation to resume its downward trend toward two

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Speaker 2: percent once the effects of tariffs have passed through.

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Speaker 1: The Fed also subtly altered the wording of its statement

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Speaker 1: to suggest greater uncertainty about when it may cut rates again.

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Speaker 1: For a closer look, now, I'm joined by Jeff Grills,

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Speaker 1: his head of US cross Markets and Merging Markets Debt

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Speaker 1: at Agon Asset Management. Jeff, thank you so much for

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Speaker 1: making time to chat. Let's begin with a FED decision.

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Speaker 1: Not a big surprise here, but what's curious is that

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Speaker 1: the FED seems to be maybe moving more toward a

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Speaker 1: neutral place. How do you read what we had from

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Speaker 1: policymakers today, Well.

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Speaker 3: I think you had both the two official descents, where

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Speaker 3: you had two governors putting no cuts as we read it,

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Speaker 3: and then you have Mirin who wanted a fifty basis

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Speaker 3: point cut.

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Speaker 4: But then you had what was considered these silent descents.

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Speaker 3: Right, So six of the forecast said that the FED

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Speaker 3: funds rate would stay somewhere between three seventy five, three

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Speaker 3: point seventy five and four percent.

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Speaker 4: So I think what you've really set up for is.

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Speaker 3: A more difficult environment in twenty twenty six, especially when

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Speaker 3: pal is no longer on the committee. You're going to

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Speaker 3: have a candidate that likely is announced sometime in the

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Speaker 3: new year by Trump, who is going to be wanting cuts.

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Speaker 3: But he's got to manage a committee that scenes right

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Speaker 3: now like they are nervous about too many cuts, and

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Speaker 3: as they don't really think the GDP growth numbers are

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Speaker 3: all that week, the labor markets could be the ultimate

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Speaker 3: determiner in this right, So what those will be the

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Speaker 3: key statistics to watch for the next couple of weeks

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Speaker 3: and months.

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Speaker 1: Well, if there is a question, it seems to be

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Speaker 1: around the persistence of inflation, how stubborn it is.

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Speaker 3: What's your view, Well, I mean, I think that the

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Speaker 3: inflation that we've had has been somewhat tariff driven, you know.

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Speaker 3: I think I think I've said this before, we had

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Speaker 3: we talked about before. I mean, tariffs to me are

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Speaker 3: a one off inflationary impact, right, the tariff goes on,

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Speaker 3: it creates a move up, and then you know it's

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Speaker 3: not compounding, or it doesn't.

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Speaker 4: It doesn't do that in the future.

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Speaker 3: So we are of the view that inflation should stay

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Speaker 3: low enough for the FED to continue cutting. Our official

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Speaker 3: call is that they'll cut two times in twenty twenty six,

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Speaker 3: or even the official house call is for another cut

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Speaker 3: in January. Although I think the next three labor market

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Speaker 3: data points right. We're going to get the December and

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Speaker 3: November or sorry, October and November payrolls here soon, and

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Speaker 3: then the December payrolls in January. But I think that

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Speaker 3: what we're setting up for is if labor continues to

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Speaker 3: be weak and inflation stays in sort of that two

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Speaker 3: and a half to three percent.

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Speaker 4: I think their official forecasted rate is two and a half.

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Speaker 3: I don't see why we wouldn't have some more easing

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Speaker 3: into twenty twenty six.

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Speaker 1: So the Fed, if it did deliver a surprise, it

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Speaker 1: was on the resumption of purchases of treasury bills. The

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Speaker 1: aim ostensibly is to support liquidity in the overnight funding markets.

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Speaker 1: From your point of view, I mean, you're looking at

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Speaker 1: bond market liquidity all the time. Was this warranted?

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Speaker 3: Well, there was a lot of illiquidity in the markets

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Speaker 3: back in September and early October, and part of that

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Speaker 3: was a function of the government shut down and just

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Speaker 3: people wanting to be cautious.

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Speaker 4: I think the FED had.

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Speaker 3: Forecasted that they were going to do something on the

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Speaker 3: ease of either stopping purchases or doing something to aid liquidity.

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Speaker 4: So a little surprising, but not really surprising.

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Speaker 3: But I think the market took it positively right, having

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Speaker 3: forty billion, having liquidity in the markets is good. That's

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Speaker 3: why you had the stocks stocks up anywhere from a

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Speaker 3: half to a percent, depending on which indicator you're looking at,

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Speaker 3: And I think the FED is always there to make

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Speaker 3: sure that liquidity is functioning right. So that's the only

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Speaker 3: part that surprises me a little bit is I don't

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Speaker 3: feel like it had gotten. It had gotten better since September,

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Speaker 3: so I'm surprised they announced it as a more official program.

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Speaker 3: But at the end of the day that you know,

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Speaker 3: there's plenty of liquidity in the markets, you just want

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Speaker 3: to make sure that the grease is there to keep

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Speaker 3: the wheels moving in the interim.

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Speaker 1: So, not surprisingly, we had yields down across the curve today,

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Speaker 1: more so at the short end, and right now in

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Speaker 1: the Tokyo session, I think the two years down another

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Speaker 1: basis point or so. We're trading around three point fifty two.

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Speaker 1: With those lower yields, it's not a surprise to see

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Speaker 1: some dollar weakness. I think in New York trading. The

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Speaker 1: Bloomberg Dollar Spot Index fell to the lowest level in October.

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Speaker 1: So if you've got this dollar weakness, which seems to

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Speaker 1: be kind of the base case going forward here, what

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Speaker 1: does it do to your foothilosophy on em debt.

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Speaker 3: Well, first of all, I think that you know our

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Speaker 3: view has been that EM local will continue to be

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Speaker 3: reasonably well positioned.

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Speaker 4: It's done very well in twenty twenty five. The dollar.

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Speaker 3: The dollar strength story I think officially turned back earlier

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Speaker 3: this summer, and you have the FED as the last

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Speaker 3: central bank really easing rates. Everybody else is either on

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Speaker 3: hold or has done all their cuts, or in some

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Speaker 3: cases are hiking rates, as we're seeing in other major

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Speaker 3: central banks. So it's not surprising to see that the

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Speaker 3: dollar is weakening somewhat.

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Speaker 4: I mean as it relates to emerging markets. I mean,

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Speaker 4: stronger local currencies tend to be better for them.

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Speaker 3: It helps reduce their indebtedness, at least if they have

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Speaker 3: offshore indebtedness. But the grand scheme, it's going to be

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Speaker 3: really about where rates are, and as long as rates

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Speaker 3: on the ten year stay four percent or lower. Right

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Speaker 3: we're at four thirteen. I think right now that's going

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Speaker 3: to be the key for these countries. They need to

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Speaker 3: issue at rates that are attractive to them, and then

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Speaker 3: they need to have growth. So I think it's going

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Speaker 3: to be less about the currency and more about just

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Speaker 3: where is their access to financing.

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Speaker 1: We've got the BOJ meeting next two week. It seems

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Speaker 1: right now that the market is pricing in something greater

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Speaker 1: than a ninety percent probability of a twenty five basis

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Speaker 1: point rate hike, which would take this policy rate to

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Speaker 1: around seventy five basis points. I think that would be

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Speaker 1: the highest for Japan in around thirty years. How do

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Speaker 1: you view the situation with the BOJ and the implications

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Speaker 1: for the broader global bond market story.

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Speaker 4: Yeah, I mean I think it's very interesting, right, I

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Speaker 4: mean your point.

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Speaker 3: I mean, we haven't seen positive rates, much less rates

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Speaker 3: where where they are here in quite some time in Japan.

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Speaker 3: But it's a good thing, right, I mean, I think

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Speaker 3: as long as Japan doesn't choke off inflation in their

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Speaker 3: economy and they can continue to get some sort of

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Speaker 3: inflationary I mean, the biggest problem they had for the

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Speaker 3: last thirty years really has been disinflation. But I mean, overall,

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Speaker 3: I think what's going on in Pan is sort of

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Speaker 3: unique to Japan. I think in general, you're going to

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Speaker 3: continue to see currency appreciation in Asian currencies, right remember,

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Speaker 3: probably will continue to appreciate some of the other regional

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Speaker 3: currencies Malaysia, Korea, things of that nature. But it's all

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Speaker 3: a reflection of just a longer term trend in the

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Speaker 3: US dollar. I think that the markets, you know, US

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Speaker 3: was the primary spot for people to invest, and I

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Speaker 3: think people will make allocations that move away from the dollar,

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Speaker 3: and that's part of that pressure you're seeing. So I

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Speaker 3: think that the boj action is going to be a

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Speaker 3: little independent, but it adds to that fuel, right, it

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Speaker 3: adds to dollar weakness and going into other currencies.

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Speaker 1: So when you look at the e M debt space broadly,

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Speaker 1: are you tempted to avoid the sovereign space maybe and

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Speaker 1: take a flyer on corporate debt in e M?

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Speaker 4: Yeah, well I wouldn't. I wouldn't say we take flyers.

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Speaker 1: So we've liked We've liked.

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Speaker 4: Corporates for for quite some time.

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Speaker 3: I mean, corporates were the big thematic allocation coming out

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Speaker 3: of COVID. The big problem you have for all of

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Speaker 3: it is that in credit markets in general are that

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Speaker 3: credit spreads are at multi decade low. So when you

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Speaker 3: look at sovereign spreads, investment grade sovereign spreads are right

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Speaker 3: around ninety five to one hundred basis points over investment

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Speaker 3: grade corporate spreads in EM are as well, about one

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Speaker 3: hundred basis points over. So you have to be very

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Speaker 3: selective with what you like. We do still like some sovereigns.

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Speaker 3: We think things on the gold side. We do think

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Speaker 3: there are exporters like Ghana and Ivory Coast which will

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Speaker 3: continue to benefit from gold exports as along with South Africa.

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Speaker 3: We do think the local markets look look attractive, so

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Speaker 3: our favorite is Mexican ten year rates. And on the

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Speaker 3: corporate side, again, I would probably go more towards the

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Speaker 3: metal and mining as ones that will likely benefit.

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Speaker 4: But there are a number of select corporates.

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Speaker 3: The corporate market is huge now, which is nice, so

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Speaker 3: there are a lot of corporates that you can pick from.

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Speaker 4: But it's going to be an interesting year.

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Speaker 3: Just because spreads are tight in EM and in credit

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Speaker 3: markets in general.

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Speaker 1: One of the things that we've seen recently in terms

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Speaker 1: of the corporate bond market in the US companies many

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Speaker 1: hyperscalers involved with the AI theme have come to market

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Speaker 1: in search of new issuance. Is that something that's playing

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Speaker 1: out in EM at all as it relates to AI.

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Speaker 4: Very little?

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Speaker 3: I mean, I believe there's only been one issuer out

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Speaker 3: of China that was a direct data center issuer, and

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Speaker 3: then you get the Ali Baba's and Tencent and who

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Speaker 3: are sort of more in the AI space. But it's

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Speaker 3: not really much much activity going on in terms of

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Speaker 3: the hyper scalers and data centers. I mean, it was

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Speaker 3: interesting there was a there was a headline I think

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Speaker 3: back in October that said that open Ai, which has

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Speaker 3: been funding everything that it can get its hands on,

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Speaker 3: it seems, and I'm not sure where the cash is

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Speaker 3: going to come from, but was going to do a

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Speaker 3: twenty five billion dollar investment in a data center in Argentina.

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Speaker 4: So I'll believe it when I see it.

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Speaker 3: So I don't think we're going to get much of

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Speaker 3: that going on in EM, and I don't think we

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Speaker 3: need to. Most of these data centers are going to

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Speaker 3: be in developed markets in the US and in China,

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Speaker 3: and so I don't anticipate much action from that perspective

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Speaker 3: even in twenty six for EM.

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Speaker 1: So just to focus on duration for a moment, where

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Speaker 1: are you finding the best opportunity if you look across

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Speaker 1: the curve.

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Speaker 4: Yeah, we used to be in front end, but given.

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Speaker 3: How flat the curves are, we've sort of looked at

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Speaker 3: the belly of the curve. So five and ten year

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Speaker 3: parts of most curves, I mean curves have really flattened

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Speaker 3: in quite a bit. There's only about a ten or

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Speaker 3: twenty basis point pickup if you go from ten year

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Speaker 3: to thirty year, and most EM curves now that's more

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Speaker 3: investment grade triple B some double B, at least on

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Speaker 3: the sovereign side, So we.

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Speaker 4: Favor five to ten year parts of the curve.

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Speaker 3: After that, when you get down to lower rated credit,

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Speaker 3: you have to be on a case by case basis.

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Speaker 3: So there's not many in the single B range that

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Speaker 3: we're very bullish on today. I mean, Ecuador we think

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Speaker 3: looks interesting. We still think Equador continue to have fundamental improvements.

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Speaker 3: Argentina was an interesting one for the last three months,

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Speaker 3: but it's fine ten percent, but I don't think you're

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Speaker 3: gonna get any kind of tightening, So as long as

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Speaker 3: you're willing to take kerry in Argentina, which sometimes can

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Speaker 3: be a little daunting, but otherwise when it comes to

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Speaker 3: other curves, we prefer not being in the thirty year

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Speaker 3: and being more in the ten year.

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Speaker 1: So within em as you look out to the year ahead,

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Speaker 1: i'd like your take very quickly on the macro and

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Speaker 1: the extent to which you may see some sort of

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Speaker 1: pickup in default risk. Is that something you're concerned about?

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Speaker 4: There?

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Speaker 3: No, not, at least not from a sovereign perspective. Mean,

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Speaker 3: it's pretty interesting. We actually have had no defaults last

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Speaker 3: year in this year in sovereigns right, so we had

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Speaker 3: some restructurings that came out of the whole Russia Ukraine

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Speaker 3: crisis that saw a number of credits needing to reprofile.

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Speaker 3: You may get one.

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Speaker 4: Senegal is definitely on the radar for overstructuring. They're saying

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Speaker 4: they're committed.

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Speaker 3: The IMF is a little bit of a differential, so

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Speaker 3: you might get that one, but it's not a huge

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Speaker 3: market exposure. On the corporate side, you had some pickups

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Speaker 3: and a couple of very isolated predominantly in Brazil, but

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Speaker 3: overall the backdrop remains reasonably positive. I mean, it's a

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Speaker 3: little boring just to say that, oh, we're going to

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Speaker 3: get three and a half to four percent growth, but

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Speaker 3: that's probably what we're going to get. I think the

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Speaker 3: biggest risk to watch that could lead to higher defaults

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Speaker 3: is if you'd get some sort of a sudden stop

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Speaker 3: in all this AI and other types of funding, or

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Speaker 3: just some sort of a pullback and activity. That would

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Speaker 3: be a concern for me. But otherwise the backdrop is

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Speaker 3: reasonably constructive. I mean, we're going to have growth that's

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Speaker 3: picking up in the US. We have Frankly, you saw

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Speaker 3: that in the fed's projections. They raise their growth outlook

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Speaker 3: for twenty twenty six. Part of that's the delayed government shutdown,

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Speaker 3: but most economies should be picking up in develop markets.

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Speaker 3: That translates well to EM so we don't really have

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Speaker 3: a major concern for defaults other than just idiosyncratics where

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Speaker 3: you have to do your homework.

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Speaker 1: Okay, Jeff will leave it there, Thanks so much. Jeff

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Speaker 1: Grills is head of US cross Markets and Emerging Market

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Speaker 1: stat at Agon Asset Management. Joining us here on the

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Speaker 1: Daybreakas podcast. Welcome back to the Daybreak Asia podcast. I'm

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Speaker 1: Doug Chrisner. Equity markets in the APAC region are rising

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Speaker 1: in sympathy with US stocks. That's after the FED cut

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Speaker 1: its policy rate as expected, and FED Shair J. Powell

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Speaker 1: seemed to voice a bit of optimism about stronger growth,

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Speaker 1: while at the same time suggesting the inflationary impacts from

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Speaker 1: tariffs will fade away. That's where we begin our conversation

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Speaker 1: with Christina Woon, portfolio manager at east Spring Investments. She

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Speaker 1: spoke with Bloomberg TV host Annabel Droolers and David Nglase.

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Speaker 5: We can start with the FED and your reaction to

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Speaker 5: the decision.

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Speaker 6: Yeah, I think the FED cut rates has expected, and

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Speaker 6: that was a fairly consensus view as well. I would

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Speaker 6: say that what that reiterates for me is that we

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Speaker 6: will see into twenty twenty six traditional opportunities or avenues

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Speaker 6: for income tail off a little, and then when we

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Speaker 6: think about how the market's actually done so well this

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Speaker 6: year as well, perhaps a narrowing of the opportunity set

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Speaker 6: for alpha as well. So I do think that going

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Speaker 6: into next year where we are right now, we probably

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Speaker 6: will have to be even more selective in trying to

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Speaker 6: drive both income as alpha for equity investors.

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Speaker 7: Okay, well, I was going to ask you then what

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Speaker 7: this means for you know, A trade has been very,

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Speaker 7: very popular Christina David here, by the way, we talked

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Speaker 7: that length about this.

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Speaker 4: Already with you too.

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Speaker 7: You know, the AI trade and the megacap play in

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Speaker 7: the US, and we've seen an internal rotation within some

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Speaker 7: of those big names in the US of late. How

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Speaker 7: has that affected how you look at your portfolio or

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Speaker 7: has it affected you at all? Yeah?

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Speaker 6: Definitely. I mean I would say that just given how

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Speaker 6: everything has shaped up over the year, or actually over

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Speaker 6: the past few months within the AI trade, that strong

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Speaker 6: rally means that it is definitely a key risk that

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Speaker 6: we have to watch, even out here in Asia. You know,

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Speaker 6: we've got diversified supply chains here, but it doesn't mean

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Speaker 6: that it's something that we we should be complacent about.

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Speaker 6: So I do think it's something that you know, I've

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Speaker 6: been taking a bit of profit into the valley. But

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Speaker 6: having said that, I do remain constructive on the trade.

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Speaker 6: You know, I was in Soul just last week speaking

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Speaker 6: to some of the big memory makers, and the consistent

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Speaker 6: message that we've been getting is that supply into next

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Speaker 6: year remains very tight. So that does have positive support

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Speaker 6: for demand and supply within certain spaces. So I can

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Speaker 6: find some comfort by focusing on where the bottlenecks are

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Speaker 6: within this trade.

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Speaker 5: And so how did those continue to perform? I think

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Speaker 5: obviously the big theme of watching is Oracle, for instance,

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Speaker 5: and in their latest numbers we see quite a significant

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Speaker 5: cape spend, a lot more than Wall Street had been expecting.

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Speaker 5: But still that ROI isn't there quite yet either or

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Speaker 5: at the level that's been anticipated. How long is this

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Speaker 5: sort of going to also sustain? Of course, they've got

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Speaker 5: the demand for for memory from the likes of a

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Speaker 5: Samsung or SK heinex. But when does that also start

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Speaker 5: to reach a tipping point, do you think?

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Speaker 6: Yeah? I think the worry that we have when we

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Speaker 6: see all these big CAPEX numbers, and I think we've

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Speaker 6: seen that express in the market as well, is on

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Speaker 6: the funding side. But again, if we look at cash

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Speaker 6: flows and if we do see or we do have

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Speaker 6: the expectation that cash flows should pick up a little

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Speaker 6: alongside or keep pace versus where they are right now,

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Speaker 6: then there should there should be some support for their

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Speaker 6: overall rhetoric. I would say, though, going back to my

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Speaker 6: point earlier, and that's where we really do have to

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Speaker 6: focus on where the bottlenecks are, because that's where that

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Speaker 6: gives you more visibility and comfort in in playing this trade.

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Speaker 6: The worry, of course that people have in mind is

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Speaker 6: with all of these big numbers that we're seeing, is

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Speaker 6: there the risk of double booking anywhere? I think we

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Speaker 6: have to be cognizant of the fact that that that

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Speaker 6: risk will always be there. So again to solve that,

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Speaker 6: you have to focus on where the bottlenecks are.

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Speaker 7: And risking asking the obvious where are those bottlenecks? And

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Speaker 7: you know, you just thing you've recently come from a

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Speaker 7: from a trip to career, is it in that market,

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Speaker 7: because that market's also done exceptionally well, and I wonder

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Speaker 7: how you pair that with the price right now.

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Speaker 6: No, I think that's that's absolutely right. So career has

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Speaker 6: been such a strong market this year, and it's driven

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Speaker 6: so much by tech. I would say though, that the

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Speaker 6: memory players are just given what I've heard from them

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Speaker 6: about the complete lack of clean room facilities into next year.

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Speaker 6: And you know, capacity doesn't just come in overnight. You

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Speaker 6: can't snap your fingers and magic up capacity. So we're

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Speaker 6: still looking at that situation remaining tight at least into

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Speaker 6: into next year as well. So I do think that

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Speaker 6: within the tech trait, the memory players do stand out

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Speaker 6: quite well. That the difficulty with that, though, is just

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Speaker 6: given how how we balance that out with where sentiment is,

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Speaker 6: which is why I do think that for prudent's sake,

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Speaker 6: taking some profit into the rally still remains my stance

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Speaker 6: at this point. And then elsewhere in Korea, I wouldn't

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Speaker 6: forget that there are the themes that are playing there

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Speaker 6: as well. I'm still finding out ideas. So for example,

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Speaker 6: just last week or earlier this week, we saw the

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Speaker 6: dividend tax reform come around as well, So that does

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Speaker 6: have implications for how companies will be thinking about their

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Speaker 6: Shhelder return policies in the coming months. So that could

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Speaker 6: be a potential opportunity for income funds too.

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Speaker 5: We're talking with a few analysts that are saying that

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Speaker 5: in light of these concerns around the AI bubble essentially

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Speaker 5: that they're thinking maybe India could present a good diversification

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Speaker 5: opportunity for twenty twenty six. You are you in that

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Speaker 5: camp as well?

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Speaker 6: I am, I mean I would be in agreement with that.

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Speaker 6: And you know, India has quite a number of things

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Speaker 6: going for them at this point. You know, domestically they

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Speaker 6: do have they had their RBI cut last week. Inflation

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Speaker 6: does remain benign at this point, which does benefit household

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Speaker 6: spending going into next year. If we do see a

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Speaker 6: finalization of any trade deal with the US, so that

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Speaker 6: could also be positive for sentiment. So a number of

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Speaker 6: things that are lining up simply into next year. And then,

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Speaker 6: as you mentioned as well, just given how many of

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Speaker 6: the companies or listed companies in in India aren't as

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Speaker 6: driven by the AI trade as you would see in

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Speaker 6: the rest of the in the rest of the world.

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Speaker 6: It does present as a pretty good AI hedge in

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Speaker 6: the current times from a portfolio perspective, so I do

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Speaker 6: think for diversification reasons, India is actually a good allocation

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Speaker 6: to have at this time.

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Speaker 1: That was Christina Woun from East Spring Investments speaking to

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Speaker 1: Bloomberg TV host Annabel Droolers and David nglace Here on

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Speaker 1: the Daybreak Asia Podcast. Thanks for listening to today's episode

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Speaker 1: of the Bloomberg Daybreak Asia Edition podcast. Each weekday, we

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Speaker 1: look at the story shaping markets, finance, and geopolitics in

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Speaker 1: the Asia Pacific. You can find us on Apple, Spotify,

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Speaker 1: the Bloomberg Podcast YouTube channel, or anywhere else you listen.

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Speaker 1: Join us again tomorrow for insight on the market moves

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Speaker 1: from Hong Kong to Singapore and Australia. I'm Doug Prisoner

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Speaker 1: and this is Bloomberg