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

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Speaker 2: Welcome to the Daybreak Asia podcast. I'm Doug Risner. In

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Speaker 2: the US, there were no official government data given the shutdown,

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Speaker 2: so that left private economic surveys to kind of set

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Speaker 2: the tone for trading. Today's reading showed a fragile but

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Speaker 2: stable labor market, so we had equities overcoming early losses

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Speaker 2: and finishing at record highs. Meantime, global markets are now

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Speaker 2: looking ahead to this weekend's leadership vote in Japan's parliament.

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Speaker 2: The race between reformists in jiro Koizumi and right leading

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Speaker 2: Sunai Takeichi is too close to call in a moment.

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Speaker 2: We'll go to Tokyo for more, but we begin here

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Speaker 2: in the States. Joining me now is Jeff Grills. He

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Speaker 2: has head of EM debt at Agon Asset Management. Jeff,

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

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Speaker 2: If you don't mind, I'd like to get your view

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Speaker 2: initially on the US interest rate environment. Since we know

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Speaker 2: that US rates drive so much of the story when

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Speaker 2: it comes to EM debt.

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Speaker 3: Well, we currently think that rates are slightly undervalued. Our

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Speaker 3: view has been that all the tariff concerns that have

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Speaker 3: been going on for twenty twenty five, and what inflationary

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Speaker 3: impact that will have have been overstated. Tariffs are a

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Speaker 3: one time adjustment to prices other than just future changes,

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Speaker 3: and therefore we don't expect them to be inflationary. So

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Speaker 3: our view is that the Fed will have room to

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Speaker 3: cut rates. The ten year rate will have an ability

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Speaker 3: to continue to go down lower, not dramatically, but three

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Speaker 3: seventy five to three fifteen we're already seeing a decline

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Speaker 3: in ten year yields. The thirty year might have a

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Speaker 3: little bit more pressure, So we do think there'll be

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Speaker 3: a steeper curve just because of fiscal concerns, But overall,

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Speaker 3: the trend should be to rates being here to slightly

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Speaker 3: lower over the next twelve to eighteen months.

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Speaker 2: So if that comes to pass, where what jurisdictions are

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Speaker 2: you looking at an EM right now that you think

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Speaker 2: would be the biggest beneficiaries.

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Speaker 3: Well, the big challenge for emerging markets across which is

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Speaker 3: the same for credit markets in general, is that spreads

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Speaker 3: are at multi almost multi decade tights. I mean, we

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Speaker 3: really haven't been to these types of tights now since

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Speaker 3: two thousand and six, two thousand and seven, which everybody

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Speaker 3: we will call was led into a more difficult period,

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Speaker 3: which I'm not saying we're there, but so you know,

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Speaker 3: we continue to think that you're supposed to have a

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Speaker 3: combination of the stable credits that have that offers some value.

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Speaker 3: So in Latin America we still have a couple of

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Speaker 3: favorites that we have Columbia, which we'll get through their

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Speaker 3: elections next year, but spreads are wider as a result

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Speaker 3: of that, but we think they'll get through those elections.

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Speaker 3: So Colombia is one of our top overweights. Costa Rica

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Speaker 3: bounces that it's a much more stable, It's got growth

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Speaker 3: in the three and a half to four percent range,

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Speaker 3: so it will do well. Now within Latin America, Argentina

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Speaker 3: has been one that for the for those that are braver,

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Speaker 3: we've seen a big correct and prices in Argentina, with

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Speaker 3: Argentine bonds going down about twenty points. You've seen there's

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Speaker 3: been the headlines about the support from the US investment.

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Speaker 3: We think that Malay will survive the election, but that

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Speaker 3: is the big risk and we think that they'll be

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Speaker 3: upside into Argentina. So for the riskier segments or portfolios

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Speaker 3: that we manage, Argentina's where we're looking at least in

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Speaker 3: Latin America.

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Speaker 2: So in the US today, the equity market closed it

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Speaker 2: record highs. There's a lot of debate in terms of

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Speaker 2: where we are in this cycle and whether or not

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Speaker 2: there's the potential here for a meaningful pullback in US

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Speaker 2: stocks given the concerns about valuation and the fact that

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Speaker 2: maybe the economy is slowing to an extent where you

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Speaker 2: have to kind of re evaluate the corporate darning story.

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Speaker 2: If we do see the market wobble and there is

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Speaker 2: a repatriation of foreign money out of the United States

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Speaker 2: and into other parts of the global market structure, does

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Speaker 2: EM necessarily come out on top. Are there opportunities that

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Speaker 2: you think foreign investors would take advantage of if they

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Speaker 2: removed money from the US.

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Speaker 3: No, EM probably would not be the first place that

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Speaker 3: people would do in that type of scenario. I think

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Speaker 3: that people would probably go back to develop markets, looking

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Speaker 3: to Europe or other economies, at least the more stable

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Speaker 3: countries within Asia. I do think that it won't be

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Speaker 3: terrible for emerging markets. I mean, in past times of

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Speaker 3: that type of scenario that you just outlined, EM spreads

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Speaker 3: could widen one hundred and two hundred basis points. I

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Speaker 3: don't think that's the type of scenario that we're setting

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Speaker 3: up for. But also because I mean currently I don't

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Speaker 3: know that we're going to face major volatility, I mean

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Speaker 3: at least major downturn, because spending on AI is still

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Speaker 3: very strong. The PE ratios for some companies are very high,

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Speaker 3: but for the main main ones are you know, at

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Speaker 3: the upper end of the ranges, but they're not the

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Speaker 3: dot com type levels that we had. So I still

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Speaker 3: think EM probably does find but there would it would

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Speaker 3: definitely underperform and not be the first place to go.

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Speaker 3: Local markets have done very well, so I think if

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Speaker 3: you've got to pull back there, that would be the

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Speaker 3: first place where people would start to go back in

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Speaker 3: since the since the local market trade still is one

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Speaker 3: that most investors faive.

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Speaker 2: So talk to me a little bit about how the

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Speaker 2: dollar figures into this. If we're talking about lower interest

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Speaker 2: rates in the United States and we're talking essentially about

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Speaker 2: a week er dollar, how does that correlate with your

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Speaker 2: EM trade.

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Speaker 3: Well, I think we've set off a path of a

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Speaker 3: weeker dollar. Ever since the tariffs were first initiated back

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Speaker 3: in April of this year, we saw a big ten

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Speaker 3: percent correction. Now we've stabilized around that. But our view

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Speaker 3: is that the US dollar will likely weaken over the

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Speaker 3: next two to three years, but not on more than

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Speaker 3: a magnitude of two to five percent. So it's not

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Speaker 3: that this is going to be a massive flight from

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Speaker 3: the US dollar. The asset allocators, they just don't move

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Speaker 3: their money that fast. They do it and want to

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Speaker 3: two percent movements, they don't do it in ten percent movements.

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Speaker 3: So but if we do have that depreciation of the dollar,

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Speaker 3: I do, But as long as we have the low

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Speaker 3: rates that go along with that, I think for em

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Speaker 3: countries and issuers, including the corporate sector, they're going to

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Speaker 3: still be able to access capital markets at rates that

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Speaker 3: are still very attractive to them, with growth rates that

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Speaker 3: are higher than developed markets. So I think US dollar

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Speaker 3: assets will do fine. I do think again that you'll

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Speaker 3: see local markets they're more volatile, but local markets will

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Speaker 3: probably still benefit from that. So countries like Brazil and

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Speaker 3: Colombia and Peru should do fine. The Asian currencies probably

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Speaker 3: more balanced, but we should expect both US dollar assets

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Speaker 3: and local market assets to do somewhat favorably, at least

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Speaker 3: in a weaker dollar scenario.

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Speaker 2: So I'd like to get your take on the China story.

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Speaker 2: We're in the Golden Week holiday right now. There's a

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Speaker 2: lot of pressure I think that the government is putting

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Speaker 2: on the consumer in China to really help ignite a

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Speaker 2: little bit more domestic demand. How do you see the

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Speaker 2: China story.

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Speaker 4: China story is to us a two prong stories.

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Speaker 3: So you have the old economy with the consumer property

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Speaker 3: sector and everything that has been going unfortunately wrong with that,

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Speaker 3: and we don't see the property sector necessiarily spurring on

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Speaker 3: growth too dramatically, and I think the consumer will be

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Speaker 3: directly impacted by that, and that's the frustration in what

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Speaker 3: you're seeing with President z. I do think that people

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Speaker 3: should not underestimate how much support the government has been

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Speaker 3: putting into the technology sector and into the things that

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Speaker 3: they want to exceed at. They are excelling in the

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Speaker 3: money that's been put into technology, They are excelling at

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Speaker 3: evs and other types of renewable energies, and so I

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Speaker 3: know there's been criticism in the past, but they are

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Speaker 3: definitely looking to grow and the numbers have shown that

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Speaker 3: they've had pretty substantial growth there, and so I think

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Speaker 3: that's helping them to offset their growth story at least

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Speaker 3: the weakness. It just needs to filter down to the

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Speaker 3: consumer so that the consumer can get confidence. There's just

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Speaker 3: really no place for them to go other than property sector,

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Speaker 3: which is keeping them somewhat less vigorous with their spending.

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Speaker 2: So when we get to the trade story, a lot

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Speaker 2: of the focus tends to be on US China from

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Speaker 2: the US side, With a lot of the changes that

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Speaker 2: we have seen in economic policy from the administration, do

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Speaker 2: you have a concern of some type of diminishment in

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Speaker 2: the influence of the United States going forward, that other countries,

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Speaker 2: whether it's China, maybe even India to some extent, will

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Speaker 2: begin to kind of develop ways of conducting business that

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Speaker 2: are less reliant on the US.

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Speaker 3: Well, I think they've already been doing that. I mean,

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Speaker 3: I think the actions of the US have clearly been

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Speaker 3: more protectionist and centrist. But this is something that's been

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Speaker 3: going on for a long time. I am not in

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Speaker 3: the camp of that. I think that the US is

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Speaker 3: in big trouble today. I think we are still a

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Speaker 3: great source of innovation, capitalism, the other things that will

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Speaker 3: go with it. But you've seen central banks start to

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Speaker 3: diversify out their reserves. You've seen people try to figure

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Speaker 3: out ways to diversify their reliance on the Take Latin

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Speaker 3: America for example, they were wholly reliant on the US

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Speaker 3: twenty to thirty years ago. Today they're now much more balanced,

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Speaker 3: about a third to third, a third to the US,

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Speaker 3: Europe and to Asia China. So I think that trend

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Speaker 3: will continue. The question will be who wins the technology race,

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Speaker 3: And it's gonna be an interesting one because China, as

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Speaker 3: I said, is putting a lot of investment into that.

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Speaker 3: The US has been great capital spirits and innovation, So

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Speaker 3: I think you will see that competition going there.

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Speaker 4: The good news is they both are reliant on each other.

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Speaker 3: So as much as we want to have this protectionist approach,

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Speaker 3: at least in terms of America, first we are reliant

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Speaker 3: on trade and we are reliant on investment, and so

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Speaker 3: I think that relationship is not going to go away.

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Speaker 3: And best And said today there might be some news

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Speaker 3: that can be positive out of China on that front.

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Speaker 2: So what's the one thing that you are most concerned about?

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Speaker 3: So the big thing that I get concerned about, well,

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Speaker 3: two things. One, we are having exceptional growth. Everybody has

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Speaker 3: been very cautious. Everybody's been very nervous about what will

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Speaker 3: growth look like. The market keeps surprising, at least the

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Speaker 3: GDP numbers keep surprising. So if we were to have

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Speaker 3: some sort of more prolonged slow down, if the labor

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Speaker 3: force was weaker, that would be something that would make

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Speaker 3: me nervous about risk valuations across most markets, including emerging

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Speaker 3: market debt. That's not our central view. The other one

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Speaker 3: that does worry me, and I'm a pretty positive on

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Speaker 3: AI and what we're going to do in terms of

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Speaker 3: the investment and the productivity boost that can have. But

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Speaker 3: while PE ratios, as I mentioned before, are not necessarily

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Speaker 3: my concern, the E is sometimes because if innovation, as

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Speaker 3: it normally does, figures out the way to produce things

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Speaker 3: at a lower cost, then that E can go down.

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Speaker 4: Right, So the big Mega, the mag.

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Speaker 3: Sevens, the invidious of the world, which have a great

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Speaker 3: monopoly and a great ability to do this, If somebody

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Speaker 3: eventually does the true deep seek offset to that, you

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Speaker 3: could start to see some concerns about, Okay, what does

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Speaker 3: that mean for earnings and what is that? I think

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Speaker 3: that's just a correction. I think the long term trend

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Speaker 3: is still to stay in, but that could be a

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Speaker 3: correction that could cause volatility for markets.

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

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Speaker 2: Jeff Grills is head of em Debt at Aigon Asset Management.

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Speaker 2: Joining us here on the Daybreak Asia podcast. Welcome back

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Speaker 2: to the Daybreak Asia Podcast. I'm Doug Prisner. Japan is

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Speaker 2: set to elect its second prime minister in over a

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Speaker 2: year this weekend, when the ruling Liberal Democratic Party holds

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Speaker 2: a leadership vote.

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Speaker 5: Now.

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Speaker 2: Recent opinion polls show Agriculture Minister Sinjiro Koizumi and former

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Speaker 2: Economic Security Minister Sanae taka Ichi are neck and neck.

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Speaker 2: The new leader will replace outgoing Prime Minister Shaghiro Ishiba,

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Speaker 2: he was forced to resign after an historic Upper House

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Speaker 2: election loss in July. For more, we heard from David Bowling.

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Speaker 2: He is the Eurasia Group Director for Japan and Asia Trade.

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Speaker 2: Bowling spoke to Bloomberg TV host Cherry On and Avril

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Speaker 2: Hong on the Asia.

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Speaker 1: Trade David, great to have you with us. How different

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Speaker 1: could Japan be depending on who wins this leadership election tomorrow?

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Speaker 5: Thank you for having me well. I think it's clear

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Speaker 5: that Koizumi is the leader here among the five and

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Speaker 5: he's emphasized the importance of dealing with inflation. And I

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Speaker 5: think that's the big lesson that we learned from the

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Speaker 5: Upper House elections and why the LDP lost the Upper

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Speaker 5: House is that the Japanese public is very irritated with inflation.

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Speaker 5: So I think that all of the candidates, whether it's

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Speaker 5: Koizumi or Takaichi or Hayashi, and those are really the

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Speaker 5: three who are in contention at this point, are going

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Speaker 5: to spend a lot of time focusing on inflation. The

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Speaker 5: only piece playbook so far though, has been that it

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Speaker 5: is relied on cash handouts to households who are suffering

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Speaker 5: from inflation, and I think the Japanese public is tired

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Speaker 5: of that. What they would probably really like to see

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Speaker 5: is a cut in the consumption tax, but the LDP

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Speaker 5: is opposing that. The opposition party support that. But the

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Speaker 5: LDP is in somewhat of a difficult position because it

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Speaker 5: doesn't want to cut the consumption tax, which is what

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Speaker 5: the public wants, but at the same time, it does

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Speaker 5: want to address inflation because it's a real incumbent killer

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Speaker 5: and they know that.

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Speaker 1: I mean, you mentioned Kavnat, secretary of Hayashi who would

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Speaker 1: be a continuity candidate from prime minister issue, but who

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Speaker 1: himself surprising the election last year which led to the

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Speaker 1: nik tanking the next day. Could we see a surprise

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Speaker 1: and would that mean a change, a significant change in

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Speaker 1: terms of policy or perhaps continuity as well.

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Speaker 5: I mean, let's remember this is an LDP presidential election,

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Speaker 5: and so the candidates are largely in agreement. I think

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Speaker 5: when it comes to economic policy and the direction for

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Speaker 5: the country, Takaichi is somewhat a different one because she's

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Speaker 5: been a long time supporter of avenamics, which is, you know,

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Speaker 5: loose fiscal policy uh and loose monetary policy. So she's

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Speaker 5: certainly won to watch and I think that if she

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Speaker 5: did prevail on Saturday, that you could see, you know,

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Speaker 5: some reaction from the markets because of her her winning

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Speaker 5: and her her different her different views. I don't really

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Speaker 5: think that abnomics is the right prescription for Japan right now.

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Speaker 5: It has inflation. Abynomics was was there to deal with deflation,

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Speaker 5: and I think that Takaichi even recognizes that some if

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Speaker 5: if you saw that some of the debate forms that

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Speaker 5: they had, even she moderated somewhat on her positions about

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Speaker 5: spending and sounded a bit more moderate. I think she

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Speaker 5: has to appeal to the moderates and the LDP to

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Speaker 5: win because the Conservatives, the ave faction that she relied

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Speaker 5: on last year, has splintered and has smaller numbers.

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Speaker 6: Not just appeal to lawmakers, but also potentially for forming

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Speaker 6: the coalition later on with working along with opposition. Who

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Speaker 6: do you think has a better sense of engaging with

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Speaker 6: those parties well, I.

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Speaker 5: Think all of the candidates in the debate forums have

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Speaker 5: recognized that the LDP and Comeato have to expand their coalition. Right.

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Speaker 5: They do not have a majority in the lower House,

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Speaker 5: which is stronger of the two houses. They do not

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Speaker 5: have a majority and the upper House, so they are

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Speaker 5: going to have to move forward, and all of the

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Speaker 5: candidates have spoken about the importance of moving forward to

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Speaker 5: build the coalition. I think Takaichi has talked in terms

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Speaker 5: of moving a bit more quickly than the other candidates,

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Speaker 5: But I would see that any of the cans who

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Speaker 5: prevail will move pretty quickly to establish negotiations. I think

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Speaker 5: there's negotiations going on right now. I think the party

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Speaker 5: that is most likely to become a coalition member would

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Speaker 5: be the Innovation Party. The Osaka based party. They are

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Speaker 5: aligned with the LDP, particular on defense and national security issues,

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Speaker 5: and you know, I think they're at a point now

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Speaker 5: where they recognize they are not probably going to achieve

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Speaker 5: national strength, that they will remain a regional party, and

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Speaker 5: this probably makes them more willing to join the coalition

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Speaker 5: in order to have some influence, whereas the Democratic Party

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Speaker 5: for the People, I think is the other opposition parties,

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Speaker 5: is still on the rise and probably less interested in

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Speaker 5: joining the coalition.

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Speaker 6: David wondering, also, when you look at the debt poths,

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Speaker 6: how do things look in terms of progress? You outline

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Speaker 6: some of the potential cash handouts that voters are perhaps

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Speaker 6: frustrated with. Take that along with how a consumption tax

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Speaker 6: cut doesn't seem likely. What are you seeing in terms

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Speaker 6: of perhaps what the progress might look like. I think

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Speaker 6: it's tough.

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Speaker 5: I mean, I'll be honest, I think it's a very

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Speaker 5: tough environment. We all know that Japan's debt to GDP

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Speaker 5: ratio is two hundred and fifty percent, and this limits

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Speaker 5: its ability to do a whole lot. It also is

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Speaker 5: having to spend more money on defense. It is on

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Speaker 5: the path, you know, to reaching two percent of GDP

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Speaker 5: by twenty twenty seven. I think the LDP intends to

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Speaker 5: keep pushing for that. I think the Japanese public supports

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Speaker 5: increased spending on defense, but when you ask the Japanese

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Speaker 5: public whether they want their taxes raised to do that,

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Speaker 5: they're less less enthusiastic about that. So the LDP isn't

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Speaker 5: in a difficult position when you think about the current

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Speaker 5: fiscal constraints that it it's dealing with. I mean, these

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Speaker 5: are built up over the years, largely because the LDP

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Speaker 5: has been quite willing to spend more money through supplementary budgets,

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Speaker 5: which seem to become almost you know, an annual annual thing.

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Speaker 5: And the LDP is talking about that now for the

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Speaker 5: for the for the October legislative session as well.

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Speaker 1: Yeah, and of course complicating the picture of normalization by

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Speaker 1: the Bank of Japan. David Bowling, Good to have you

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Speaker 1: with us, Director of Japan and the Asian Trade of

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Speaker 1: the Eurasia Group.

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

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Speaker 2: Asia Edition podcast. Each weekday, we look at the story

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Speaker 2: shaping markets, finance, and geopolitics in the Asia Pacific. You

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Speaker 2: can find us on Apple Spotify, the Bloomberg Podcast YouTube channel,

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Speaker 2: or anywhere else you listen. Join us again tomorrow for

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Speaker 2: insight on the market moves from Hong Kong to Singapore

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