1 00:00:02,520 --> 00:00:08,480 Speaker 1: Bloomberg Audio Studios, Podcasts, radio News. 2 00:00:11,080 --> 00:00:14,400 Speaker 2: Welcome to the Bloomberg day Break Asia podcast. I'm Doug Christner. 3 00:00:14,720 --> 00:00:17,919 Speaker 2: The City China Conference is underway in Shanghai, and in 4 00:00:17,960 --> 00:00:20,400 Speaker 2: a moment we'll go there for a conversation with City 5 00:00:20,480 --> 00:00:23,960 Speaker 2: CEO Jane Fraser. Now this will happen against a backdrop 6 00:00:24,040 --> 00:00:28,160 Speaker 2: of equity market weakness today across the Asia Pacific following 7 00:00:28,160 --> 00:00:31,680 Speaker 2: a selloff in the States. Today's FED speak was hawkish, 8 00:00:31,800 --> 00:00:35,440 Speaker 2: and valuations do remain a major concern, especially in big 9 00:00:35,479 --> 00:00:38,839 Speaker 2: cap tech. We got some perspective from the APEC with 10 00:00:39,040 --> 00:00:42,559 Speaker 2: Billy Leung. He is investment strategist at Global X. 11 00:00:42,640 --> 00:00:44,720 Speaker 3: If you look at the AI names or even the 12 00:00:44,760 --> 00:00:47,920 Speaker 3: tech names, it's actually quite solid compared to, for example, 13 00:00:48,040 --> 00:00:50,200 Speaker 3: twenty twenty five years ago. And I think a really 14 00:00:50,200 --> 00:00:53,840 Speaker 3: really good sort of view is that if you look 15 00:00:53,840 --> 00:00:56,000 Speaker 3: at twenty es ago, looking at the NAZAC, you know 16 00:00:56,040 --> 00:00:58,440 Speaker 3: over seventy percent of those companies at that time was 17 00:00:58,480 --> 00:01:02,000 Speaker 3: probably a negative free cash they were probably unprofitable, their 18 00:01:02,040 --> 00:01:04,200 Speaker 3: had net debts. But if you look at right now 19 00:01:04,200 --> 00:01:06,679 Speaker 3: in terms of the NAZAC companies, that's sort of opposite. 20 00:01:06,760 --> 00:01:08,679 Speaker 3: Right now we've flipped it over US. Seventy percent of 21 00:01:08,760 --> 00:01:10,920 Speaker 3: the tech companies in the US right now are actually 22 00:01:10,959 --> 00:01:13,760 Speaker 3: profitable and having positive free cash flow, So we are 23 00:01:13,840 --> 00:01:17,480 Speaker 3: in a much more solid fundamentals and quality. So I 24 00:01:17,520 --> 00:01:19,520 Speaker 3: always see that as more of a justification of why 25 00:01:19,560 --> 00:01:21,440 Speaker 3: I guess valuations are much higher right now. 26 00:01:21,520 --> 00:01:25,400 Speaker 2: That was Billy Leung investment strategistic global X. We also 27 00:01:25,480 --> 00:01:29,200 Speaker 2: learned today the China's economic activity cooled more than expected 28 00:01:29,240 --> 00:01:32,600 Speaker 2: in October. There was a slump in investment and slower 29 00:01:32,640 --> 00:01:36,600 Speaker 2: growth in industrial output. Now, retail sales did top estimates 30 00:01:36,600 --> 00:01:39,839 Speaker 2: with annual growth of two point nine percent. However, month 31 00:01:39,920 --> 00:01:43,680 Speaker 2: on month, retail sales slowed for a fifth straight month. 32 00:01:44,240 --> 00:01:46,840 Speaker 2: Let's go next to the City China conference. Here is 33 00:01:46,840 --> 00:01:51,240 Speaker 2: Bloomberg Steven Engel for a conversation with City CEO Jane Fraser. 34 00:01:51,360 --> 00:01:52,920 Speaker 4: So what do you hope to get out of this? 35 00:01:53,000 --> 00:01:55,440 Speaker 5: And we're talking to all your guests and your clients 36 00:01:55,840 --> 00:01:59,320 Speaker 5: and to understand a little bit more about the China market, 37 00:01:59,320 --> 00:02:00,640 Speaker 5: which you know very well. 38 00:02:00,800 --> 00:02:02,800 Speaker 4: But we're coming out of a bruising trade war. 39 00:02:03,200 --> 00:02:05,200 Speaker 5: We're not even out of it yet right Some say 40 00:02:05,320 --> 00:02:08,720 Speaker 5: it's a truce, not necessarily a lasting piece. 41 00:02:08,760 --> 00:02:10,160 Speaker 4: What has been your takeaway so far. 42 00:02:11,360 --> 00:02:14,960 Speaker 6: I think what's interesting this time at this conference is 43 00:02:15,000 --> 00:02:18,480 Speaker 6: that it's moved away from a China for China story 44 00:02:19,040 --> 00:02:22,320 Speaker 6: and instead we have had huge interests and a large 45 00:02:22,440 --> 00:02:27,160 Speaker 6: number of investors and companies coming to China to understand 46 00:02:27,160 --> 00:02:30,720 Speaker 6: what is happening here as well as the Chinese companies 47 00:02:30,760 --> 00:02:34,920 Speaker 6: and investors that are looking much more externally now. So 48 00:02:35,040 --> 00:02:38,360 Speaker 6: that really feels like a sea change here. That's pretty exciting. 49 00:02:38,639 --> 00:02:41,760 Speaker 5: How do you serve your clients against the backdrop of 50 00:02:41,800 --> 00:02:45,040 Speaker 5: two governments that are trying to de risk, if not decouple. 51 00:02:45,520 --> 00:02:50,919 Speaker 6: No, I think the recent truth has brought some much 52 00:02:51,240 --> 00:02:55,239 Speaker 6: needed and welcome stability here. 53 00:02:54,800 --> 00:02:56,520 Speaker 1: I think we're in a position. 54 00:02:56,160 --> 00:02:59,240 Speaker 6: Now for both sides that wanted to have a period 55 00:02:59,360 --> 00:03:02,440 Speaker 6: now where we can just we can move ahead and 56 00:03:02,560 --> 00:03:08,400 Speaker 6: have a more stable relationship between both of them. It's transactional, 57 00:03:09,280 --> 00:03:14,200 Speaker 6: but it's in both both sides interests. We see offline 58 00:03:14,240 --> 00:03:16,560 Speaker 6: base navigating this well. 59 00:03:16,960 --> 00:03:21,400 Speaker 5: Yeah, what's your vision for the China as the China 60 00:03:21,440 --> 00:03:24,760 Speaker 5: market as it folds into your overall restructuring plan as well? 61 00:03:24,880 --> 00:03:28,520 Speaker 5: You're now chair and CEO, first time that those two 62 00:03:28,600 --> 00:03:31,120 Speaker 5: rules have been joined in a couple of decades. Clear 63 00:03:31,200 --> 00:03:33,920 Speaker 5: mandate to carry out your vision going forward. 64 00:03:34,080 --> 00:03:34,960 Speaker 4: What does that look like. 65 00:03:35,080 --> 00:03:39,000 Speaker 5: When you did exit your consumer banking business here like 66 00:03:39,000 --> 00:03:41,120 Speaker 5: you did in mini markets around the world, you also 67 00:03:41,200 --> 00:03:45,160 Speaker 5: sold your retail wealth management portfolio to HSBC. You got 68 00:03:45,160 --> 00:03:49,600 Speaker 5: out of an investment bank JV with Orient Securities, I believe, 69 00:03:49,680 --> 00:03:53,360 Speaker 5: and you have an outstanding license application for your wholly 70 00:03:53,400 --> 00:03:55,640 Speaker 5: owned JV Insecurities. 71 00:03:56,160 --> 00:03:59,800 Speaker 6: So City has been in China for one hundred and 72 00:03:59,800 --> 00:04:05,480 Speaker 6: twenty four years. We have a landmark building here in Shanghai. 73 00:04:05,920 --> 00:04:09,320 Speaker 6: And what we have done is focus our strategy and grow. 74 00:04:10,680 --> 00:04:15,160 Speaker 6: We are following our international clients around the world. We're 75 00:04:15,200 --> 00:04:18,960 Speaker 6: seeing them with renewed interest and focus in China as 76 00:04:18,960 --> 00:04:22,080 Speaker 6: we talked about, and then we're seeing the Chinese companies 77 00:04:22,480 --> 00:04:27,719 Speaker 6: innovating at pace on that and also looking at expanding internationally. 78 00:04:28,200 --> 00:04:28,920 Speaker 1: So we've been. 79 00:04:28,800 --> 00:04:33,200 Speaker 6: Growing rapidly here with a more focused strategy, and it 80 00:04:33,360 --> 00:04:37,920 Speaker 6: is the power of clarity and renewed purpose in the firm. 81 00:04:38,160 --> 00:04:41,159 Speaker 5: Now, before this interview started, you really countered what I 82 00:04:41,279 --> 00:04:43,520 Speaker 5: said is you're pulling back a little bit from China. 83 00:04:43,560 --> 00:04:44,360 Speaker 4: That's not at all. 84 00:04:44,520 --> 00:04:48,279 Speaker 5: You're adding headcount. How what are your headcount numbers? When 85 00:04:48,320 --> 00:04:51,800 Speaker 5: we get headlines that your IT department maybe thirty five 86 00:04:51,839 --> 00:04:54,240 Speaker 5: hundred jobs are going to be moving elsewhere, and this 87 00:04:54,320 --> 00:04:56,080 Speaker 5: and that you pulled back from retail three or four 88 00:04:56,160 --> 00:04:56,600 Speaker 5: years ago. 89 00:04:56,760 --> 00:04:58,760 Speaker 1: Yeah, I think you're getting the story wrong. 90 00:04:59,320 --> 00:05:01,280 Speaker 4: Good good, That's why I receive it. 91 00:05:01,640 --> 00:05:03,919 Speaker 6: City is on the city is on the front foot. 92 00:05:04,760 --> 00:05:09,680 Speaker 6: We are innovating, we are growing, We're helping support our clients. 93 00:05:10,080 --> 00:05:13,880 Speaker 6: Our clients are both building resiliency and they are reinventing 94 00:05:13,920 --> 00:05:17,760 Speaker 6: themselves with all the technological changes. That is no different 95 00:05:17,880 --> 00:05:20,640 Speaker 6: in China than it is in other parts of the world. 96 00:05:21,120 --> 00:05:25,960 Speaker 6: So note this is a firm with clarity of purpose, 97 00:05:26,240 --> 00:05:27,440 Speaker 6: with clarity of direction. 98 00:05:27,960 --> 00:05:28,919 Speaker 1: We know where we're. 99 00:05:28,720 --> 00:05:33,520 Speaker 6: Headed and we're really delivering strong progress. So I'm excited 100 00:05:33,640 --> 00:05:36,400 Speaker 6: by the upside that we have. I'm excited about the 101 00:05:36,440 --> 00:05:39,240 Speaker 6: progress we're making, and I see it here on the 102 00:05:39,279 --> 00:05:42,559 Speaker 6: ground in China. If we think we move away from 103 00:05:42,600 --> 00:05:45,560 Speaker 6: some of the just headwinds that we all know about 104 00:05:45,600 --> 00:05:49,360 Speaker 6: on consumer spending and on the property market, you look 105 00:05:49,440 --> 00:05:54,680 Speaker 6: behind that here in China. It's a manufacturing powerhouse. What 106 00:05:54,800 --> 00:05:58,440 Speaker 6: are we seeing. Fifty percent of all robotic companies in 107 00:05:58,480 --> 00:06:02,520 Speaker 6: the world are here in China. China is writing the 108 00:06:02,560 --> 00:06:07,720 Speaker 6: next chapter of its economy around advanced manufacturing, around innovation, 109 00:06:08,279 --> 00:06:12,000 Speaker 6: as well as all Chinese companies expanding internationally. 110 00:06:12,920 --> 00:06:15,159 Speaker 1: And we're both serving. 111 00:06:15,240 --> 00:06:18,480 Speaker 6: Seventy percent of a fortune five hundred that are here 112 00:06:18,560 --> 00:06:22,280 Speaker 6: in China as well as serving the Chinese companies locally 113 00:06:23,120 --> 00:06:24,440 Speaker 6: tap into global marketing. 114 00:06:24,480 --> 00:06:26,760 Speaker 4: So how does that equate to what the deal flow? 115 00:06:26,839 --> 00:06:27,440 Speaker 4: You see this? 116 00:06:27,680 --> 00:06:29,919 Speaker 5: Who's the head of Global Banking who we talked to 117 00:06:30,040 --> 00:06:32,719 Speaker 5: a couple of hours ago, extremely bullish on the amount 118 00:06:32,760 --> 00:06:35,040 Speaker 5: of deal flows going into twenty twenty six. What kind 119 00:06:35,080 --> 00:06:36,640 Speaker 5: of cross bordered with China do you see? 120 00:06:37,200 --> 00:06:40,800 Speaker 6: Look, I think we're seeing new corridors opening up, and 121 00:06:40,880 --> 00:06:43,640 Speaker 6: the scale of ambitions not just in China but in 122 00:06:43,720 --> 00:06:47,280 Speaker 6: Asia are higher than we see really in many. 123 00:06:47,040 --> 00:06:48,480 Speaker 1: Other parts of the world. 124 00:06:48,640 --> 00:06:50,960 Speaker 6: So in these new corridors, we're seeing the Middle East 125 00:06:51,000 --> 00:06:55,200 Speaker 6: connecting with Asia. For the GCC, you know, they were 126 00:06:55,240 --> 00:07:00,360 Speaker 6: expecting Asia to be its largest trading partner by next year. 127 00:07:01,000 --> 00:07:03,480 Speaker 6: That's an entirely new set of flows. In the last 128 00:07:03,560 --> 00:07:07,960 Speaker 6: five years, Brazil's connection into Asia and into China again 129 00:07:08,600 --> 00:07:11,480 Speaker 6: very robust their major partners. 130 00:07:11,880 --> 00:07:14,080 Speaker 1: So you know, the world is changing. 131 00:07:13,800 --> 00:07:17,800 Speaker 6: Rapidly, it's adding new corridors, it's adding new flows. It's 132 00:07:17,880 --> 00:07:21,640 Speaker 6: adding new wealth and scale is the. 133 00:07:21,640 --> 00:07:22,360 Speaker 1: Name of the game. 134 00:07:22,440 --> 00:07:24,560 Speaker 4: What will be your strategy with wealth management? 135 00:07:24,680 --> 00:07:27,560 Speaker 5: You got out as I said, the retail portion of 136 00:07:27,600 --> 00:07:31,160 Speaker 5: your wealth management was sold to HSBC, But you're going 137 00:07:31,200 --> 00:07:33,080 Speaker 5: to be on shore here, but you're going to do 138 00:07:33,120 --> 00:07:35,080 Speaker 5: a lot of it from Hong Kong and Singapore right now. 139 00:07:35,120 --> 00:07:40,640 Speaker 6: So City is focused internationally, not on not on retail banking. 140 00:07:40,720 --> 00:07:44,280 Speaker 6: We are focused on serving clients who have cross border needs. 141 00:07:44,720 --> 00:07:50,240 Speaker 6: That is a very vibrant but segment of clients. Think 142 00:07:50,280 --> 00:07:55,040 Speaker 6: of individuals that are driving the mid market companies are 143 00:07:55,040 --> 00:07:59,400 Speaker 6: growing internationally. We think of the world's billionaires and wealthy 144 00:08:00,080 --> 00:08:03,239 Speaker 6: that need access to global markets, and then we obviously 145 00:08:03,280 --> 00:08:07,640 Speaker 6: think of investors and corporations we're doing so there's a 146 00:08:07,680 --> 00:08:08,160 Speaker 6: lot of. 147 00:08:08,080 --> 00:08:11,200 Speaker 1: Engine of growth. It's going to be. 148 00:08:11,120 --> 00:08:14,560 Speaker 6: Fifty percent of all of the new high network households 149 00:08:14,640 --> 00:08:17,200 Speaker 6: created in the next three years will be created here 150 00:08:17,240 --> 00:08:20,760 Speaker 6: in Asia. So our focus is on what is the 151 00:08:20,800 --> 00:08:24,640 Speaker 6: wealth proposition for those as well as supporting the companies 152 00:08:24,680 --> 00:08:27,160 Speaker 6: and the engines of growth behind them. 153 00:08:27,560 --> 00:08:29,640 Speaker 5: So what kind of hiring is going to be needed 154 00:08:29,640 --> 00:08:31,640 Speaker 5: in this part of the world, Not necessarily China, but 155 00:08:31,680 --> 00:08:34,200 Speaker 5: the rest of Asia at a time when we're also 156 00:08:34,240 --> 00:08:38,160 Speaker 5: seeing Corporate America as they invest heavily into AI, they've 157 00:08:38,200 --> 00:08:41,520 Speaker 5: had to pull back on hiring and jobs have been cut. 158 00:08:41,960 --> 00:08:43,480 Speaker 1: It's a great question. 159 00:08:43,800 --> 00:08:46,520 Speaker 6: I think AI is certainly changing a lot of what 160 00:08:46,559 --> 00:08:49,440 Speaker 6: we're expecting we're going to need in the world going forward. 161 00:08:49,840 --> 00:08:53,320 Speaker 6: So from City's point of view, for example, we see 162 00:08:53,360 --> 00:08:56,320 Speaker 6: this as an opportunity to really train our talent. 163 00:08:56,800 --> 00:08:58,800 Speaker 1: How do we empower our talent to. 164 00:08:58,840 --> 00:09:01,880 Speaker 6: Use the AI tool so they can be smarter in 165 00:09:01,920 --> 00:09:06,040 Speaker 6: front of clients. They can spend more time serving clients 166 00:09:06,720 --> 00:09:09,160 Speaker 6: and coming up with solutions as opposed to the more 167 00:09:09,920 --> 00:09:14,439 Speaker 6: chure elements of being a banker. We don't know how 168 00:09:14,520 --> 00:09:18,120 Speaker 6: quickly it's going to change, Steve, So there'll be certainly 169 00:09:18,440 --> 00:09:20,920 Speaker 6: a lot of shift in coding jobs. 170 00:09:21,000 --> 00:09:24,240 Speaker 1: We've seen that already. Our productivity is up. 171 00:09:24,200 --> 00:09:28,160 Speaker 6: Nine percent year over year for our coding teams. But 172 00:09:28,200 --> 00:09:31,920 Speaker 6: there's going to be new jobs created too. None of 173 00:09:32,000 --> 00:09:35,240 Speaker 6: us quite know yet exactly how the timing will play out, 174 00:09:35,600 --> 00:09:37,640 Speaker 6: and we know there's a lot of change ahead of that, 175 00:09:38,240 --> 00:09:41,600 Speaker 6: but our approaches, we're going to invest in our talent. 176 00:09:42,000 --> 00:09:44,560 Speaker 6: Our firm is growing and that should be able to 177 00:09:44,600 --> 00:09:45,199 Speaker 6: support the. 178 00:09:45,200 --> 00:09:46,240 Speaker 1: Needs going forward. 179 00:09:46,640 --> 00:09:47,600 Speaker 4: You mentioned the Middle East. 180 00:09:47,640 --> 00:09:50,400 Speaker 5: I think you just came back from Riard your cultair 181 00:09:50,480 --> 00:09:55,000 Speaker 5: of the US Saudi Business Council. I believe this also 182 00:09:55,200 --> 00:09:58,679 Speaker 5: vary bullet on India. Magnificent opportunity there. 183 00:09:58,679 --> 00:09:59,360 Speaker 1: He's highest. 184 00:10:00,200 --> 00:10:04,320 Speaker 5: Might be a little bit biased, maybe, but again, what 185 00:10:04,360 --> 00:10:07,800 Speaker 5: do you hope to get from those markets as it 186 00:10:07,840 --> 00:10:11,040 Speaker 5: fits into your restructurement and the vision that you just talked. 187 00:10:10,800 --> 00:10:14,720 Speaker 1: About the growth plans that we have going forward. 188 00:10:14,760 --> 00:10:18,120 Speaker 6: Because we are on the front foot, I cannot stress 189 00:10:18,200 --> 00:10:18,839 Speaker 6: that enough. 190 00:10:19,240 --> 00:10:20,600 Speaker 1: You can see it in our results. 191 00:10:20,960 --> 00:10:24,559 Speaker 6: So all of our businesses we're taking share, We're growing 192 00:10:25,000 --> 00:10:30,440 Speaker 6: very quickly, and our returns are improving. So as we're 193 00:10:30,440 --> 00:10:34,680 Speaker 6: looking forward its growth. Let's take India. City is larger 194 00:10:34,679 --> 00:10:35,720 Speaker 6: in India today. 195 00:10:35,800 --> 00:10:36,280 Speaker 1: We are the. 196 00:10:36,320 --> 00:10:41,040 Speaker 6: Largest foreign firm by revenues in India. When I look 197 00:10:41,040 --> 00:10:44,400 Speaker 6: at Korea, we are were It was just that that's 198 00:10:44,440 --> 00:10:47,040 Speaker 6: another market where we were the first foreign bank to 199 00:10:47,120 --> 00:10:51,080 Speaker 6: open the doors in Korea, and we have a very 200 00:10:51,120 --> 00:10:54,720 Speaker 6: strong position there supporting multinationals and clients. 201 00:10:55,120 --> 00:10:58,600 Speaker 1: So as I look around the world, it's becoming. 202 00:10:59,000 --> 00:11:03,679 Speaker 6: More focused on versification. There is also a focus on reinvention. 203 00:11:04,280 --> 00:11:07,880 Speaker 6: What we are doing is helping provide the strategic advice. 204 00:11:08,240 --> 00:11:11,760 Speaker 6: We're helping provide the financing and structuring and arranging that. 205 00:11:12,360 --> 00:11:16,160 Speaker 6: And we're also helping manage the supply chain reconfiguration. 206 00:11:16,440 --> 00:11:20,160 Speaker 1: We're helping with the hedging and foreign exchange interest rates. 207 00:11:20,000 --> 00:11:22,520 Speaker 6: Because volatility is a feature, it's not a bug of 208 00:11:22,600 --> 00:11:23,199 Speaker 6: this system. 209 00:11:23,360 --> 00:11:25,680 Speaker 5: Through your restructuring, you had to get rid of the 210 00:11:25,679 --> 00:11:28,280 Speaker 5: retail side, and there's are there other areas that you 211 00:11:28,320 --> 00:11:29,800 Speaker 5: would like to divest. 212 00:11:30,240 --> 00:11:32,680 Speaker 1: I know you have the wrong story. 213 00:11:33,120 --> 00:11:37,040 Speaker 6: City is about growing. We're very clear foot forward, very 214 00:11:37,040 --> 00:11:37,480 Speaker 6: clear on. 215 00:11:37,440 --> 00:11:39,559 Speaker 1: Our strategy and we're moving onwards. 216 00:11:39,720 --> 00:11:42,839 Speaker 5: I only ask because again, the Russia situation is a 217 00:11:42,880 --> 00:11:45,199 Speaker 5: little bit different, probably than your overall strategy. 218 00:11:45,640 --> 00:11:48,359 Speaker 4: We just got a word that Vladimir Putin. 219 00:11:48,080 --> 00:11:51,560 Speaker 5: Approved the sale to Renaissance Capital of your bank in Russia, 220 00:11:51,640 --> 00:11:53,440 Speaker 5: probably something that you've been wanting to do for a 221 00:11:53,440 --> 00:11:54,720 Speaker 5: while but was held back. 222 00:11:55,559 --> 00:11:59,640 Speaker 6: We have been winding down many many companies have been 223 00:11:59,720 --> 00:12:03,200 Speaker 6: the franchise in Russia. We were waiting for the final 224 00:12:03,280 --> 00:12:05,880 Speaker 6: approval to be able to sell. We've got a couple 225 00:12:05,960 --> 00:12:09,800 Speaker 6: more to go to Renaissance, but it's a tiny it's 226 00:12:09,840 --> 00:12:13,240 Speaker 6: a tiny business, so it's in the Grand scheme of 227 00:12:13,640 --> 00:12:16,400 Speaker 6: where city is, where we're investing, on what we're doing. 228 00:12:17,240 --> 00:12:21,840 Speaker 6: It would be good to get that done, but it's 229 00:12:21,920 --> 00:12:24,720 Speaker 6: not critical to the firm strategy going forward. 230 00:12:24,840 --> 00:12:27,160 Speaker 5: Let's talk about the outlook in the United States right 231 00:12:27,200 --> 00:12:29,040 Speaker 5: now as we head into twenty twenty six. 232 00:12:29,240 --> 00:12:30,800 Speaker 4: We saw the market reaction overnight. 233 00:12:30,920 --> 00:12:34,720 Speaker 5: Simply we're seeing that the FEDS equation the bets for 234 00:12:35,000 --> 00:12:37,760 Speaker 5: possible easing coming up and now fifty to fifty hoor 235 00:12:37,840 --> 00:12:40,600 Speaker 5: is till below that because of the aspector of inflation. 236 00:12:40,840 --> 00:12:42,320 Speaker 4: What is your outlook. 237 00:12:41,920 --> 00:12:44,640 Speaker 5: For FED action going into the new year and the 238 00:12:44,640 --> 00:12:46,000 Speaker 5: specter of inflation rising. 239 00:12:47,200 --> 00:12:49,680 Speaker 6: Look, I don't think we're out of the woods yet, 240 00:12:49,720 --> 00:12:52,480 Speaker 6: and there's a sensor that maybe another shoe to drop. 241 00:12:52,520 --> 00:12:55,320 Speaker 1: It could be in tariffs or in the labor market, it. 242 00:12:55,200 --> 00:12:57,520 Speaker 6: Could be in the asset prices that are quite high 243 00:12:57,600 --> 00:13:01,280 Speaker 6: in the States. But all of that said, we're quite 244 00:13:01,320 --> 00:13:05,840 Speaker 6: optimistic about twenty six. The challenge for the freed right 245 00:13:05,920 --> 00:13:08,760 Speaker 6: now is with the government shutdown. You know, we all 246 00:13:08,800 --> 00:13:11,040 Speaker 6: have a death of up to date data which we 247 00:13:11,080 --> 00:13:13,680 Speaker 6: could do with it's hard to make these calls of 248 00:13:13,760 --> 00:13:15,000 Speaker 6: exactly what's going on. 249 00:13:15,440 --> 00:13:17,199 Speaker 1: Whilst we're waiting for the information. 250 00:13:18,200 --> 00:13:21,880 Speaker 6: But as we look further out into next year, I 251 00:13:21,880 --> 00:13:25,200 Speaker 6: think the resiliency of the corporate balance sheets, the strength 252 00:13:25,600 --> 00:13:28,360 Speaker 6: companies leaning in. 253 00:13:27,800 --> 00:13:30,120 Speaker 1: To innovation, investing in AI. 254 00:13:30,720 --> 00:13:33,800 Speaker 6: You know, there is some I think the doomsdays will 255 00:13:33,800 --> 00:13:34,679 Speaker 6: be proven wrong. 256 00:13:35,920 --> 00:13:38,240 Speaker 5: We're a couple months out now from when we had 257 00:13:38,520 --> 00:13:41,559 Speaker 5: concerns rise about I think there was one tricolor of 258 00:13:42,200 --> 00:13:46,320 Speaker 5: the auto subprime model lender. There were failures. There was 259 00:13:46,360 --> 00:13:50,200 Speaker 5: concerns about non performing loans. What does your balance sheet 260 00:13:50,280 --> 00:13:53,079 Speaker 5: look like as far as that and where is your 261 00:13:53,080 --> 00:13:53,760 Speaker 5: worries live? 262 00:13:54,000 --> 00:13:57,840 Speaker 6: You know, our balance sheet is pristine, But I think 263 00:13:57,920 --> 00:14:02,439 Speaker 6: part of that is because it's very heavily our investment 264 00:14:02,480 --> 00:14:06,160 Speaker 6: grade on the corporate side, we're over eighty percent investment 265 00:14:06,200 --> 00:14:09,840 Speaker 6: grade globally, and when we look at the consumer side, 266 00:14:10,160 --> 00:14:14,240 Speaker 6: it's about eighty six percent prime. So you tend to 267 00:14:14,400 --> 00:14:17,359 Speaker 6: you know, we tend to see the most resilient, healthiest 268 00:14:17,400 --> 00:14:20,480 Speaker 6: parts of the economy on the balance sheet. All of 269 00:14:20,480 --> 00:14:24,600 Speaker 6: that said, we haven't seen a thing that is concerning us. 270 00:14:24,920 --> 00:14:29,920 Speaker 6: The consumer in the States is being fiscally responsible. Companies 271 00:14:29,960 --> 00:14:33,440 Speaker 6: have been building up some more cash, either for a 272 00:14:33,560 --> 00:14:36,040 Speaker 6: rainy day if it proves necessary, but most of them 273 00:14:36,080 --> 00:14:40,920 Speaker 6: for investment, and you know they're acting from a position 274 00:14:40,960 --> 00:14:44,520 Speaker 6: of strength. We'll keep an eye on the labor market, 275 00:14:45,000 --> 00:14:47,840 Speaker 6: We'll keep an eye on some of the areas of 276 00:14:47,920 --> 00:14:51,440 Speaker 6: mid tier players in private credit and the like. But 277 00:14:51,800 --> 00:14:54,360 Speaker 6: as far as we're concerned that second third. 278 00:14:54,320 --> 00:14:55,600 Speaker 1: Order effects. 279 00:14:57,040 --> 00:15:00,640 Speaker 6: The banks, the Bank's not seeing anything that we're worried about. 280 00:15:00,800 --> 00:15:04,040 Speaker 5: Are you concerned by what some say maybe bubble forming 281 00:15:04,080 --> 00:15:06,600 Speaker 5: an AI. We talked about the advantages of AI, but 282 00:15:07,360 --> 00:15:08,960 Speaker 5: how much of a bubble are overheating? 283 00:15:09,560 --> 00:15:12,280 Speaker 6: I'm not sure if we're just in with a lot 284 00:15:12,320 --> 00:15:15,080 Speaker 6: of our tech clients and the West Coast, I don't 285 00:15:15,120 --> 00:15:17,120 Speaker 6: think anyone was ready to say that it's a full 286 00:15:17,160 --> 00:15:20,360 Speaker 6: on a high bubble. But no one is saying that 287 00:15:20,400 --> 00:15:23,840 Speaker 6: there aren't some real pockets of let's call it the 288 00:15:23,880 --> 00:15:26,600 Speaker 6: British understatement frothiness. 289 00:15:25,840 --> 00:15:29,080 Speaker 1: In the market. It's more around the edges. 290 00:15:30,320 --> 00:15:33,480 Speaker 6: What I found interesting is we can see a lot 291 00:15:33,520 --> 00:15:37,040 Speaker 6: of the demand for the infrastructure build that's going in 292 00:15:37,200 --> 00:15:40,200 Speaker 6: AI and the energy for the next couple of years. 293 00:15:40,840 --> 00:15:44,320 Speaker 6: You know where you saw some opinions diverge was in 294 00:15:44,360 --> 00:15:47,400 Speaker 6: the three to five year period, probably be in danger 295 00:15:47,400 --> 00:15:50,600 Speaker 6: of overbuilding, But no one's feeling that for the big 296 00:15:50,600 --> 00:15:53,040 Speaker 6: investments that are going on at the moment for the 297 00:15:53,080 --> 00:15:55,720 Speaker 6: next couple of years. So I think on that one, 298 00:15:57,280 --> 00:16:01,280 Speaker 6: certainly some pockets of frothiness there on the valuations, but 299 00:16:01,440 --> 00:16:09,000 Speaker 6: the core infrastructure investments are important, and as we're seeing 300 00:16:09,000 --> 00:16:11,480 Speaker 6: in our own bank and I think many companies, we'll 301 00:16:11,480 --> 00:16:15,040 Speaker 6: start getting some of the productivity benefits coming through. But 302 00:16:15,200 --> 00:16:20,360 Speaker 6: the scale, the scale and the pace of investment is unprecedented, 303 00:16:20,440 --> 00:16:21,280 Speaker 6: that is for sure. 304 00:16:21,360 --> 00:16:24,480 Speaker 2: That was Jane Fraser, CEO of City, speaking with Bloomberg. 305 00:16:24,520 --> 00:16:27,880 Speaker 2: Stephen Engel coming up a chat with Michael Green, chief 306 00:16:27,960 --> 00:16:32,520 Speaker 2: strategist and portfolio manager at Simplify Asset Management, here on 307 00:16:32,560 --> 00:16:44,000 Speaker 2: the Daybreak Asia podcast. Welcome back to the Daybreak Asia Podcast. 308 00:16:44,000 --> 00:16:48,080 Speaker 2: I'm Doug Chrisner. US equities sold off on Thursday after 309 00:16:48,160 --> 00:16:50,720 Speaker 2: some hawkish FED speak and a lot more in the 310 00:16:50,760 --> 00:16:54,480 Speaker 2: way of worry over valuations, especially among AI related tech. 311 00:16:54,920 --> 00:16:57,200 Speaker 2: For a closer look, I'm joined by Michael Green. He 312 00:16:57,320 --> 00:17:02,240 Speaker 2: is chief strategist and portfolio manager for Simple Asset Management. Michael, 313 00:17:02,280 --> 00:17:05,119 Speaker 2: thank you for being here. It's kind of curious because, 314 00:17:05,400 --> 00:17:07,159 Speaker 2: at least to me, didn't seem as though we had 315 00:17:07,160 --> 00:17:10,040 Speaker 2: a strong catalyst for today's retreat in stocks. 316 00:17:11,240 --> 00:17:13,320 Speaker 7: I don't have a really strong sense. I mean, the 317 00:17:13,359 --> 00:17:16,399 Speaker 7: biggest thing that I think we've seen is just a 318 00:17:16,480 --> 00:17:20,879 Speaker 7: general uncertainty and unease with the narrative that AI was 319 00:17:21,119 --> 00:17:25,600 Speaker 7: going to turn out to be everything. You know, there's 320 00:17:25,680 --> 00:17:28,119 Speaker 7: some evidence that that has broken a little bit. At 321 00:17:28,200 --> 00:17:31,119 Speaker 7: least we've broken the back of that move. At the 322 00:17:31,119 --> 00:17:34,399 Speaker 7: same time, I'm not yet seeing evidence that we have 323 00:17:34,560 --> 00:17:40,520 Speaker 7: got any form of meaningful retail redemptions or reductions in 324 00:17:40,600 --> 00:17:43,919 Speaker 7: terms of flow. The most interesting story I heard today 325 00:17:44,040 --> 00:17:47,720 Speaker 7: is that firms like Schwab started to place some limitations 326 00:17:47,920 --> 00:17:51,199 Speaker 7: around margin and the ability to access margin on a 327 00:17:51,280 --> 00:17:55,840 Speaker 7: daily basis, and so that that may have played a role. 328 00:17:56,480 --> 00:17:59,080 Speaker 2: So would you agree with the statement that the pullback 329 00:17:59,119 --> 00:18:02,560 Speaker 2: that we saw today is especially in tech, makes next 330 00:18:02,600 --> 00:18:05,160 Speaker 2: week's earnings from Nvidio more important than ever. 331 00:18:07,280 --> 00:18:10,160 Speaker 7: I think that's right, although I will be very frank 332 00:18:10,240 --> 00:18:13,040 Speaker 7: with you that I think ultimately in Video's earnings, while 333 00:18:13,040 --> 00:18:16,960 Speaker 7: they may engender and immediate response, are going to play 334 00:18:17,000 --> 00:18:22,639 Speaker 7: a less important role in this than whether Americans continue 335 00:18:22,680 --> 00:18:28,080 Speaker 7: to have jobs and the economy doesn't slow significantly. I'm 336 00:18:28,160 --> 00:18:31,560 Speaker 7: much more about the flows of investment and the largest 337 00:18:31,560 --> 00:18:35,920 Speaker 7: flows continue to be simply coming from retail with contributions 338 00:18:35,920 --> 00:18:37,119 Speaker 7: into passive vehicles. 339 00:18:37,400 --> 00:18:40,159 Speaker 2: So what about the rotation that we have seen away 340 00:18:40,200 --> 00:18:44,440 Speaker 2: from tech and into defensive names like healthcare and consumer staples. 341 00:18:44,480 --> 00:18:48,360 Speaker 2: And we know that valuations are a major concern. Are 342 00:18:48,400 --> 00:18:51,720 Speaker 2: you seeing an acceleration in repositioning right now? Is that 343 00:18:51,800 --> 00:18:53,440 Speaker 2: really what the dynamic is all about? 344 00:18:55,200 --> 00:18:56,760 Speaker 7: I think much less so. So that's part of what 345 00:18:56,800 --> 00:18:58,880 Speaker 7: I was highlighting in terms of it being a broad day. 346 00:18:59,040 --> 00:19:02,679 Speaker 7: Right So we're down thirty five basis points strong balance 347 00:19:02,680 --> 00:19:06,879 Speaker 7: sheets were down sixty six basis points. Value even if 348 00:19:06,920 --> 00:19:09,399 Speaker 7: I just isolate for the long component of it was 349 00:19:09,480 --> 00:19:12,760 Speaker 7: down about eighty three basis points. There really was no 350 00:19:13,000 --> 00:19:17,160 Speaker 7: segment of the market that was untouched. We clearly saw 351 00:19:17,200 --> 00:19:22,800 Speaker 7: a break in areas like unprofitable technology and relatively recent momentum, 352 00:19:22,960 --> 00:19:26,640 Speaker 7: which have been leading the market for the past several months. 353 00:19:28,880 --> 00:19:32,000 Speaker 7: Those clearly we saw sold. It's less clear that we 354 00:19:32,040 --> 00:19:34,720 Speaker 7: saw significant buying in the defensive areas. 355 00:19:34,880 --> 00:19:38,680 Speaker 2: To what extent was hawkish FED speak at culprit because 356 00:19:38,720 --> 00:19:42,000 Speaker 2: if you look at what some of the major FED players, 357 00:19:42,040 --> 00:19:45,240 Speaker 2: and I'm thinking of Kashkari in Minneapolis, maybe to a 358 00:19:45,320 --> 00:19:48,639 Speaker 2: lesser extent, Musalom from Saint Louis. They are still very 359 00:19:48,720 --> 00:19:52,840 Speaker 2: much concerned about the impact of higher inflation. And I 360 00:19:52,840 --> 00:19:54,880 Speaker 2: don't know whether or not you feel the same way 361 00:19:54,920 --> 00:19:58,400 Speaker 2: as they may feel, but clearly the market right now 362 00:19:58,440 --> 00:20:00,520 Speaker 2: is pricing less than a fifty percent chance of a 363 00:20:00,600 --> 00:20:03,840 Speaker 2: RAID cut in December. To what extent is the FED 364 00:20:04,240 --> 00:20:06,240 Speaker 2: a component here and what we're talking about. 365 00:20:07,320 --> 00:20:09,840 Speaker 7: I think that's actually a far more critical component. The 366 00:20:09,840 --> 00:20:12,760 Speaker 7: pressure that we're seeing on the fixed income space with 367 00:20:12,920 --> 00:20:17,159 Speaker 7: retreating from the expectations and nearly one hundred percent expectations 368 00:20:17,200 --> 00:20:20,160 Speaker 7: that the FED would cut in December are not all 369 00:20:20,160 --> 00:20:22,000 Speaker 7: that different than what we saw at the tail end 370 00:20:22,040 --> 00:20:24,399 Speaker 7: of last year. And this is something that I've actually 371 00:20:24,440 --> 00:20:28,760 Speaker 7: written about in advance. I've highlighted it repeatedly. We have 372 00:20:28,840 --> 00:20:34,000 Speaker 7: a problem with our seasonal inflation adjustments. The COVID dynamics 373 00:20:34,080 --> 00:20:38,760 Speaker 7: and the Russian invasion of Ukraine through traditional seasonality and 374 00:20:38,880 --> 00:20:43,960 Speaker 7: CPI off that's actually causing many of the indicators, and 375 00:20:43,960 --> 00:20:46,760 Speaker 7: I'm sure the FED is tracking these privately as well. 376 00:20:47,359 --> 00:20:50,720 Speaker 7: It's caused many of the indicators of inflation to actually 377 00:20:50,800 --> 00:20:55,040 Speaker 7: become atypical seasonally. When you attempt to seasonally adjust them, 378 00:20:55,080 --> 00:20:59,320 Speaker 7: it shows Q four and Q one inflation as higher. 379 00:21:00,400 --> 00:21:03,320 Speaker 7: My hunch is that this is just wrong right, that 380 00:21:03,480 --> 00:21:06,600 Speaker 7: ultimately what we're seeing is a slowing in the housing market, 381 00:21:06,760 --> 00:21:09,879 Speaker 7: that the pressure from tariffs is now translating to lower 382 00:21:09,960 --> 00:21:14,159 Speaker 7: aggregate demand, and that in turn means that inflation is 383 00:21:14,400 --> 00:21:18,000 Speaker 7: likely to be quite low next year. As we come 384 00:21:18,040 --> 00:21:21,520 Speaker 7: into you know, April, May June, we'll see the same 385 00:21:21,640 --> 00:21:25,000 Speaker 7: narrative shift. Oh my gosh, inflation's nowhere near as bad 386 00:21:25,040 --> 00:21:28,040 Speaker 7: as we thought it was, and the FED will again return. 387 00:21:28,160 --> 00:21:31,080 Speaker 7: But this was exactly the risk that the FED was 388 00:21:31,119 --> 00:21:35,560 Speaker 7: going to become overly conservative and slow in response to 389 00:21:35,680 --> 00:21:37,680 Speaker 7: atypical seasonality and pricing. 390 00:21:37,720 --> 00:21:41,520 Speaker 2: Information on the goods inflation side, away from food and 391 00:21:41,680 --> 00:21:44,719 Speaker 2: energy for a moment, can we assume that the story 392 00:21:44,760 --> 00:21:48,760 Speaker 2: in China, the deflation story in China, means that China 393 00:21:48,800 --> 00:21:51,640 Speaker 2: will continue to export deflation. 394 00:21:53,520 --> 00:21:55,960 Speaker 7: I think that's a good assumption. I think the key 395 00:21:56,119 --> 00:21:59,040 Speaker 7: issue that we need to remember with China is that 396 00:21:59,160 --> 00:22:03,679 Speaker 7: China is increasingly automating much of its production. That means 397 00:22:03,760 --> 00:22:06,720 Speaker 7: that their productivity continues to move a pace in the 398 00:22:06,760 --> 00:22:12,160 Speaker 7: production of goods. Because China's population is now shrinking, their 399 00:22:12,240 --> 00:22:16,000 Speaker 7: aggregate demand, It's very difficult to grow that domestically, so 400 00:22:16,080 --> 00:22:21,080 Speaker 7: you simultaneously have expanding domestic production and flat to down 401 00:22:21,240 --> 00:22:24,920 Speaker 7: domestic aggregate demand, which we see very clearly in China's 402 00:22:24,960 --> 00:22:30,000 Speaker 7: import data. As a result, China is forced to export 403 00:22:30,240 --> 00:22:34,720 Speaker 7: deflation and goods and to a lesser extent, technological services 404 00:22:35,240 --> 00:22:38,120 Speaker 7: around the globe in the hopes of finding somebody else 405 00:22:38,160 --> 00:22:40,920 Speaker 7: to buy what they want. That's particularly acute in an 406 00:22:41,000 --> 00:22:44,159 Speaker 7: environment in which the Americans are saying, you know no Moss. 407 00:22:44,600 --> 00:22:47,480 Speaker 2: Michael, talk to me about some of the strategies that 408 00:22:47,560 --> 00:22:51,359 Speaker 2: you're putting in place to protect against downside in the 409 00:22:51,359 --> 00:22:52,119 Speaker 2: equity market. 410 00:22:53,600 --> 00:22:57,200 Speaker 7: Well, fortunately, I have less direct involvement in the equity 411 00:22:57,200 --> 00:22:59,320 Speaker 7: markets than I do in the fixed income markets and 412 00:22:59,359 --> 00:23:02,680 Speaker 7: the fixed in income markets. There's two sources of protection. 413 00:23:03,480 --> 00:23:07,199 Speaker 7: One is rates themselves. Right now, that's working against you 414 00:23:07,320 --> 00:23:09,080 Speaker 7: because the concerns that the FED is going to back 415 00:23:09,119 --> 00:23:14,040 Speaker 7: away from cutting rates cutting yields. But ultimately that is 416 00:23:14,080 --> 00:23:17,879 Speaker 7: a source of protection. Those indogenous cash flows will continue 417 00:23:17,880 --> 00:23:20,639 Speaker 7: to flow in the form of coupons, etc. Two, investors 418 00:23:20,680 --> 00:23:25,040 Speaker 7: protecting their portfolios relative to assets like equities that have 419 00:23:25,280 --> 00:23:29,080 Speaker 7: very little indogenous cash flow to them. The second thing 420 00:23:29,119 --> 00:23:33,119 Speaker 7: that we use is a series of proprietary hedging techniques, 421 00:23:33,240 --> 00:23:37,760 Speaker 7: most of which involve identifying an equity overlay in which 422 00:23:37,760 --> 00:23:41,280 Speaker 7: we are long companies that never need to tap capital markets, 423 00:23:41,320 --> 00:23:44,480 Speaker 7: and we are short companies that do need to continually 424 00:23:44,520 --> 00:23:49,000 Speaker 7: tap capital markets. When you enter into concerning periods and 425 00:23:49,040 --> 00:23:54,080 Speaker 7: financial distress, that ability to refinance comes into question. That 426 00:23:54,200 --> 00:23:57,680 Speaker 7: causes the relative performance of those two series to shift 427 00:23:57,720 --> 00:24:01,000 Speaker 7: in a way that's very similar to credit spread, and 428 00:24:01,040 --> 00:24:04,400 Speaker 7: it ultimately offers protection to my portfolio that's worked extraordinarily 429 00:24:04,440 --> 00:24:08,159 Speaker 7: well over the past couple of years. That's really the 430 00:24:08,200 --> 00:24:12,240 Speaker 7: primary focus is making sure that our investors are protected 431 00:24:12,280 --> 00:24:15,400 Speaker 7: against rising credit spreads. And again, today was an interesting one. 432 00:24:15,440 --> 00:24:17,879 Speaker 7: We just didn't see that much response in the credit market. 433 00:24:18,960 --> 00:24:21,160 Speaker 2: So we know that the shutdown has meant a lack 434 00:24:21,240 --> 00:24:23,640 Speaker 2: of key economic data. And I'm curious to get your 435 00:24:23,720 --> 00:24:28,080 Speaker 2: take on the time that will be required for visibility, 436 00:24:28,200 --> 00:24:33,080 Speaker 2: adequate visibility to return to help understand not only FED policy, 437 00:24:33,160 --> 00:24:35,159 Speaker 2: but what's going on in the broader economy. 438 00:24:36,440 --> 00:24:38,440 Speaker 7: Well, I think this is one of the great ironies, right, 439 00:24:38,480 --> 00:24:41,040 Speaker 7: You never shut down your system if you actually don't 440 00:24:41,040 --> 00:24:45,760 Speaker 7: have a meaningful competitive advantage in the private sector. Firms 441 00:24:45,760 --> 00:24:51,800 Speaker 7: like Rovolo and True Inflation to a certain extent, ADP, 442 00:24:52,560 --> 00:24:57,520 Speaker 7: the NFIB, etc. Those are all providing private sector data 443 00:24:57,600 --> 00:24:59,320 Speaker 7: that I think many of us are actually looking at 444 00:24:59,320 --> 00:25:02,800 Speaker 7: and saying, other than the fence fixation on the official data, 445 00:25:03,440 --> 00:25:05,280 Speaker 7: we feel like we have a pretty good grasp on this. 446 00:25:06,560 --> 00:25:09,119 Speaker 7: So it's the data that we're getting. In some ways, 447 00:25:09,720 --> 00:25:13,440 Speaker 7: removing the noise of the official releases has caused more 448 00:25:13,480 --> 00:25:17,000 Speaker 7: and more people to seek out private sector alternatives. My 449 00:25:17,119 --> 00:25:19,720 Speaker 7: hunches is that those will remain part of the arsenal. 450 00:25:19,960 --> 00:25:23,399 Speaker 2: When you speak of private sector alternatives, I'm curious to 451 00:25:23,400 --> 00:25:26,199 Speaker 2: get your take on what we've been seeing lately in 452 00:25:26,240 --> 00:25:29,080 Speaker 2: the private credit space. Is that a cause of concern 453 00:25:29,160 --> 00:25:31,000 Speaker 2: for you well? 454 00:25:31,000 --> 00:25:33,520 Speaker 7: As a credit investor. That's very, very much a cause 455 00:25:33,560 --> 00:25:38,960 Speaker 7: of concern on two fronts. One, the absolutely insane growth 456 00:25:39,000 --> 00:25:41,520 Speaker 7: in terms of capital that was committed to private credit 457 00:25:42,240 --> 00:25:45,000 Speaker 7: has helped to underpin the very tight credit spreads that 458 00:25:45,000 --> 00:25:48,920 Speaker 7: we've seen in areas like high yield companies that we're 459 00:25:49,000 --> 00:25:52,760 Speaker 7: facing risks of refinancing were often able to turn to 460 00:25:52,840 --> 00:25:57,080 Speaker 7: private credit firms in order to obtain sources of funds 461 00:25:57,160 --> 00:25:59,359 Speaker 7: that they might not have been able to otherwise obtain 462 00:25:59,440 --> 00:26:03,760 Speaker 7: in places like high yield. The second component of it 463 00:26:03,800 --> 00:26:06,520 Speaker 7: is is that we've seen an extraordinary divergence start to 464 00:26:06,520 --> 00:26:09,399 Speaker 7: play out over the last six months, where areas like 465 00:26:09,480 --> 00:26:13,400 Speaker 7: high yield have experienced very tight credit spreads even as 466 00:26:13,480 --> 00:26:18,240 Speaker 7: proxies for private credit have seen their equivalent spreads widen dramatically. 467 00:26:18,280 --> 00:26:21,560 Speaker 7: There's a divergence that we've really never seen to this 468 00:26:21,680 --> 00:26:25,760 Speaker 7: degree before in the markets. It suggests that the public 469 00:26:25,880 --> 00:26:30,159 Speaker 7: sector measures of private credit, things like BDC's trading at 470 00:26:30,200 --> 00:26:34,320 Speaker 7: a discount, business development companies trading at a discount to 471 00:26:34,359 --> 00:26:38,480 Speaker 7: their nav or price to book, are actually somewhat of 472 00:26:38,480 --> 00:26:40,760 Speaker 7: a value in the credit space. Because people have been 473 00:26:40,840 --> 00:26:44,240 Speaker 7: seeking ways to hedge private credit, they've been using publicly 474 00:26:44,240 --> 00:26:47,960 Speaker 7: traded BDCs to do so. My hunch is this is 475 00:26:47,960 --> 00:26:49,679 Speaker 7: going to be a little bit of a buy the rumor, 476 00:26:49,760 --> 00:26:53,280 Speaker 7: sell the news type event. Lots of concerns around hedging 477 00:26:53,320 --> 00:26:57,919 Speaker 7: have pushed down BDC prices. Private credit itself remains untouched. 478 00:26:58,200 --> 00:27:03,760 Speaker 7: High yield spreads remain very very tight, certainly relative to history. 479 00:27:03,840 --> 00:27:06,959 Speaker 7: There's an interesting scenario in which is the information begins 480 00:27:07,000 --> 00:27:09,959 Speaker 7: to flow out, we actually see how yield begin to 481 00:27:09,960 --> 00:27:13,280 Speaker 7: suffer relative to where we've publicly marked things like business 482 00:27:13,359 --> 00:27:14,199 Speaker 7: development corps. 483 00:27:14,480 --> 00:27:17,160 Speaker 2: What about the use of debt to finance a lot 484 00:27:17,200 --> 00:27:21,040 Speaker 2: of the buildout that we have seen lately in AI infrastructure. 485 00:27:21,520 --> 00:27:23,040 Speaker 2: Is that a cause of concern for you? 486 00:27:24,280 --> 00:27:26,040 Speaker 7: Well, that I think is actually a really big cause 487 00:27:26,040 --> 00:27:30,400 Speaker 7: of concern, because ultimately this has become extraordinarily incestuous. Remember 488 00:27:30,480 --> 00:27:33,560 Speaker 7: that a firm like Microsoft didn't actually make a cash 489 00:27:33,640 --> 00:27:38,439 Speaker 7: investment in open Ai. They largely made a contribution of 490 00:27:38,520 --> 00:27:43,000 Speaker 7: a zure operating use, which meant that open ai had 491 00:27:43,560 --> 00:27:47,000 Speaker 7: cash equivalents that they could use for purchasing access to 492 00:27:47,200 --> 00:27:54,080 Speaker 7: data centers and GPUs. If open Ai can't actually finance 493 00:27:54,119 --> 00:27:59,240 Speaker 7: its buildout, or if Meta or Oracle or others cannot 494 00:27:59,320 --> 00:28:03,040 Speaker 7: core you, for example, cannot finance their build out, that 495 00:28:03,080 --> 00:28:05,960 Speaker 7: calls into question open ais growth. That calls into question 496 00:28:06,160 --> 00:28:09,240 Speaker 7: their ability to effectively utilize those as your credits, which 497 00:28:09,280 --> 00:28:12,760 Speaker 7: then means that Microsoft could place could face pressure on 498 00:28:12,800 --> 00:28:16,399 Speaker 7: the revenue side. So these are all very very tightly linked. 499 00:28:16,400 --> 00:28:20,000 Speaker 7: At this point. A sizeable fraction of US GDP growth 500 00:28:20,600 --> 00:28:23,040 Speaker 7: is tied into this area, and I think people are 501 00:28:23,280 --> 00:28:25,720 Speaker 7: appropriately starting to say, hey, wait, a second. Does this 502 00:28:25,840 --> 00:28:26,760 Speaker 7: make that much sense? 503 00:28:27,040 --> 00:28:29,040 Speaker 2: Will leave it there, Michael, Thank you so very much. 504 00:28:29,080 --> 00:28:32,440 Speaker 2: Michael Green there. He is the chief strategist also portfolio 505 00:28:32,480 --> 00:28:36,000 Speaker 2: manager at Simplify Asset Management. Joining us here on the 506 00:28:36,040 --> 00:28:41,480 Speaker 2: Daybreak Asia Podcast. Thanks for listening to today's episode of 507 00:28:41,520 --> 00:28:45,600 Speaker 2: the Bloomberg Daybreak Asia Edition podcast. Each weekday, we look 508 00:28:45,640 --> 00:28:49,440 Speaker 2: at the story shaping markets, finance, and geopolitics in the 509 00:28:49,480 --> 00:28:52,720 Speaker 2: Asia Pacific. You can find us on Apple, Spotify, the 510 00:28:52,760 --> 00:28:56,760 Speaker 2: Bloomberg Podcast YouTube channel, or anywhere else you listen. Join 511 00:28:56,880 --> 00:28:59,760 Speaker 2: us again tomorrow for insight on the market moves from 512 00:28:59,840 --> 00:29:04,320 Speaker 2: Hong Kong to Singapore and Australia. I'm Doug Prisoner and 513 00:29:04,480 --> 00:29:05,640 Speaker 2: this is Bloomberg