December 3, 2025 • 30 mins
It’s time to look ahead and make bold predictions for Asia in 2026. After a standout year, Asian equities are on track to beat the S&P 500 by the widest margin in eight years. Can the rally continue, and which markets will lead? Are investors overlooking US funding stress, potential QE, and the risks behind multi-decade tight credit spreads? And what’s next for Asian currencies and gold?
Asia Centric convenes Bloomberg Intelligence strategists for a forward-looking discussion. Host John Lee is joined by Senior Equity Strategist Marvin Chen, Chief Asia FX Strategist Stephen Chiu and Senior Credit Strategist Timothy Tan as they unpack AI-driven growth, shifting currency dynamics, structural liquidity risks, and the potential repatriation of trillions in global capital back to Asia.
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Episode Transcript
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Speaker 1 (00:00):
Before we begin this week, from the team that produces
the Asia Centric podcast, we extend our deepest condolences to
the individuals and families who lost their loved ones in
the Typo fire tragedy in Hong Kong. Our thoughts are
with you and we stand in solidarity during this time
of grief. Now to the podcast, Asian financial markets have
(00:23):
had a stellar year. The MSCI Asia Pacific Equity Index
is up twenty three percent this year and on track
to beat the S and P five hundred by the
biggest margin in eight years, led by gains in South Korea,
Hong Kong, and Japan. Asian currencies like the Malaysian RINGT
type art and China's women Bee have strengthened versus the
(00:44):
US dollar. Meanwhile, credit spreads in high yield and investment
grade continue to remain extremely tight. Can Asian financial markets
continue their strength going into twenty twenty six? What are
the major themes investors should watch out for and what
are the potential black swan events? You're listening to Asia
Centric from Bloomberg Intelligence. I'm John Lee in Hong Kong,
(01:08):
and as we do every year in December, we invite
our three investment strategists to review what's happened in the
year so far and make their bold predictions for twenty
twenty six. We have FX strategist Steven Chu, equity strategist
Marvin Chen, and credit strategist Timothy Tan. Gentlemen, welcome back
to the show.
Speaker 2 (01:28):
Thank you, Thank you, Thanks Chan.
Speaker 1 (01:30):
Marvin. I want to start with you because I think
twenty twenty five has really been the year of equities now.
AI continues to be the biggest driver, both in the
US and in Asia, in markets like Career, Taiwan, Japan,
and also in Hong Kong. And the biggest debate in
finance right now is whether we're in an AI bubble.
Where do you sit on this issue?
Speaker 3 (01:52):
Well, there's definitely some concerns, you know, given the hundreds
of billions being spent by some of the US tech
companies here in the region. In China, we're talking on
a scale of tens of billions, so the magnitude is
much smaller. Also, the consensus is that China is still
kind of trailing behind the US and AI development and
(02:12):
playing catch up. But what this also means is that
some of this growth potential going forward is still rising
so you know, if we look at the earnings growth
of the China Tech you know, our version of the
Max seven, it is expected to accelerate in twenty twenty six.
And this is unlike the Max seven which has been
slowing since twenty twenty four. Also, in terms of valuations,
(02:34):
China Tech is trading at a twenty five to fifty
percent discount to US Tech. So with forward earnings accelerating
and lower multiples, we think the signs of an AI
bubble are just not there for our region yet.
Speaker 1 (02:47):
Okay, and Asia, the she is set to outperform the
US or the S and P five hundred. Now, it's
very rare that Asia outperforms, especially in the last fifteen
years or so. Can we make these two years in
a row.
Speaker 3 (03:01):
Yeah, we think emerging markets overall does stand a good
chance of outperforming the US next year. If we look
at em earnings, they're at the highest level since the
global financial crisis. This year, some of that was driven
by Latin America and Emerging Europe, which is why we
saw some of the our performances in those regions. But
next year we think we may see some rotation towards Asia.
(03:23):
You know, obviously Korea Taiwan are still going to be
leading given the chip demand. But if we look at
the growth inflections or where the shifts in earnings momentum
are changing the most, we think, you know, some of
this may come from Southeast Asia, India and as well
as China, which are expected to read about.
Speaker 1 (03:42):
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(04:05):
If you like what you're hear, don't forget to subscribe
and share how our investors positioned in Asia because at
the beginning of this year there was a lot of
talk of whether US exceptionalism is over. Have investors shifted
money outside the US to Asia?
Speaker 3 (04:22):
Yeah, you know, US will always be an important part
of the investment consideration, but we have seen some rotation
this year, and a lot of this is driven by
you know, the FED and currency movements, which Steven can
cover later on, but in general for Asia, obviously, positioning
in China is very important. You know, we've seen sentiments
(04:43):
stabilizing both onshore and in terms of foreign investment. You know,
we track the top one hundred BM funds and allocation
to China has been increasing since the second half of
twenty twenty four, but it is still well below historical averages,
so there may be room for f the inflows. You know,
in terms of the tech positioning, we've also seen some
(05:03):
signs of rotation from Taiwan to Korea as the AI
investment thing kind of shifts towards memory demand next year,
which should benefit Korea. For the rest of the region,
you know, positioning in Southeast Asia remains quite light, and
we have seen some outflows from India this year, but overall,
if the FED continues to ease in twenty twenty six,
we think this should translate into more flows for the
(05:25):
Asia region.
Speaker 1 (05:27):
You mentioned quite a few countries there, like which markets
do you think will outperform, Well, it's still be Korea.
In Taiwan, yeah, I.
Speaker 3 (05:37):
Mean, they do have the AI tailwinds, but we think
that next year the story maybe in Southeast Asia and India.
These may present opportunities in twenty twenty six. Even though
some of these markets are not thought of as an
AI play, you know, they can still participate as data
center build out expands in the region. For China, we
think it will not only be about tech but also
(05:59):
the apply side reform or the anti involution, which can
improve profitability of the old economy sectors. We're seeing some
early signs of earning's improvement in the material sector based
on in the recent earning season. But next year we
hope to see that it broadened out to a broader
range of industries and hopefully kind of ease pricing pressures
for areas such as the e commerce platforms.
Speaker 1 (06:22):
Okay, and what about themes going into next year, Like
if you look at twenty twenty five, there were a
lot of hot themes, like you know, humanoid robotics was
very popular. At the beginning of this year, we had
this like China consumption excitement, especially over stocks like Laboubu
and Louful Gold. Defense stocks went up a lot, especially
(06:42):
with the continuation of the Russia Ukraine War. What can
we look out for next year?
Speaker 3 (06:48):
Yeah, I think you know, some of the themes you
mentioned will still be relevant next year, as a lot
of these are still in the early phases of the
investment cycles, you know, things such as robotics, industrial modernization.
These will continue to be teams. But I think the
main issue, particularly for China is the inflation outlook and
(07:08):
whether supply side reform can lift the economy out of deflation,
and this will benefit the broader market. I think the
geopolitical tensions will still be an issue and these investing
in defense may continue to be a theme. And also,
you know, if we do see more fed ric cuts,
the dollar and currencies will be a driver for foreign
(07:31):
inflows as well.
Speaker 1 (07:32):
Okay, well, thanks mav and I wanted to bring us
Stephen into the conversation. Stephen, like a weaker US dollar
has generally been positive for you know, Asian risk assets
like equities and bonds. Does this relationships still hold?
Speaker 4 (07:46):
That has been the case before April the second this
year basically, so what you're talking about, it's kind of
like that dollar's mouth theory because the dollar has been
a funding currency for so many years because of super
low interest rate after the financial crisis. So when you
have if a resk once scenario, you have like a
Rekord dollar.
Speaker 2 (08:02):
Everybody tries to look for yield.
Speaker 4 (08:04):
They buy EM currencies, they buy EM equities like marketing space.
But that was only the case before April the second
So what happened, especially in the second quarter, we saw
a breakdown in correlation. So basically now during risk of
because the sauce is very likely to be the US
I e. Trump's administration, So we had a reciprocal tariff
this year and next year, we don't know what's coming up,
(08:26):
probably some independence of the fat concern something like that.
If that happens, then obviously we get a risk of environment.
But then the dollar can sei yourself off, like is
that going to be constructive for Asian currencies? Is that
going to be constructive for Asian economies and stocks? It
really depends depends on what happens and what's the source
of the risk movement by then.
Speaker 1 (08:48):
Okay, and what do you see as a major sort
of macro risks going forward next year?
Speaker 4 (08:52):
To be very honest, I'm going to look in the
view for dollar Asia. So in general, I think when
we look across the cell cue, at least those that
have put out forecast, everybody is trying to go safe
and call for lower dollar Asia. Especially what happened in
the first half of the year. We have really like
a dollar decline. We have low uders like tawer and
dollar current one yen or strengthening. So despite some recovery
(09:14):
in the dollar in the second half, so I think
it makes sense for most of the street, the consensus
to call for a moderate decline in dollar Asia, but
we're going to be somewhat anti consensus here at least
for the first half of the next year. We think
there's going to be more upside for the US dollar
against Asian currencies. So basically a continuation of what happened
in second half, because now especially with the US and
(09:36):
King trade deals with different partners, South Korea, even with China,
there's a trade trials. So basically the recovery in risk sentiments,
it's helping the dollar. So to our earlier point, now
we have sort of a risk on scenario. In the
third quarter, we have like really strong rally in Taiwanese stocks,
in current stocks, inflows, but the Asian currencies actually fell
against the dollar. So now we're seeing a more thing
(09:58):
a changing relationship and next year, given that it's the
midterm election for the US if Trump just stays rational,
which is well highly unlikely. But if that's the case,
then there might not be a driver for the dollar
to drop if Marke gets focused on the fat, if
market focused on raad differentials, as long as the fat
doesn't cut more than what the market has priced. So
that's like once in December three times next year. If
(10:21):
it's less than that million, that dollar will still have
support against Asian currencies because Asia still has to ease
at the same time.
Speaker 1 (10:27):
Okay, so you're going against the grain and you think
the US dollar will strengthen against major Asian currencies, which
Asian currencies will do relatively better than others.
Speaker 4 (10:38):
Yeah, that's a broad view. Of course, not every currency
is going to drop against the dollar. Just like as
you mentioned this year, despite the dollar recovery, now we
have the yuan and the ring get really strong, and
in the second half especially the ring get.
Speaker 2 (10:49):
Despite a dollar recovery, the.
Speaker 4 (10:50):
Ring is still up by near two percent in the
second half year to day and the entire to day,
the ring get is the strongest currency, up over eight percent.
Last year, the ring get was the strongest. We saw
that there's something behind the dollar story, say for Malaysian
ring it, fundamentals are really good over there, We've got
like good surplus, narrowing surface data sets, FDI inflows, so
all these are supporting the ring get and of course
(11:12):
they've got pretty strict capital control as well, so I
will pick ring it.
Speaker 1 (11:15):
The yuan.
Speaker 4 (11:17):
In fact, a lot of people are saying it's sort
of over value.
Speaker 2 (11:20):
Is should weekend.
Speaker 4 (11:21):
China's been pushing down the van but in fact, if
you look at the fundamentals, the good balance, the trade
ser plus, FDI, similar to Malaysia, all these fundamental drivers
are pointing to a stronger women B and as we
can see in recent weeks, once China signaled, they allow
the currency to rise through the fixing. We so that
un basically just now is dropping towards seven so next year,
(11:42):
regardless of the dollar trend. From a fundamental perspective, we
like Malaysia, we like China, and if you want to
play safe, you don't want to bet on the dollar view,
you can go for safe haven like the Hong Kong
dollar and the Sacond dollar. So I'm going to avoid Korea,
I'm going to avoid Taiwan, which is highly sensitive to dollar.
Speaker 2 (11:58):
Move and equity moves.
Speaker 4 (11:59):
I'm going to avoid all the high users because they
tend to outperform if the dollar is strong. But we
don't know whether like dollar will drop, as we said,
like I don't know what Trump will do, so we're
going to skip all those high beta currencies. And I
was sick with Malaysia, China and also Hong Kong Singapore.
Speaker 1 (12:13):
Okay, and you did mention about the women be Do
you think there are signs that the authorities will allow
the currency to appreciate.
Speaker 2 (12:21):
They have.
Speaker 4 (12:21):
In fact, in recent weeks, we saw that the fixing
is quite clearly that they're guiding the currency lower because
during the first half of the year, and in fact,
like previous years, obviously we had a strong dollar backdrop
and we saw that the UN should be a lot weaker.
But you can see that they're basically guiding the UN
is not moving anywhere. Happen now enter the second.
Speaker 2 (12:39):
Half, we saw that.
Speaker 4 (12:39):
Okay, they allowed the UN to break through seven point
one towards seven, so they are showing a message they're
willing to let the UN appreciate.
Speaker 1 (12:47):
Okay. Now I have to ask you about gold. I
don't know if it's a currency or whether it should
be considered a currency, but it's obviously been a fantastic
outperformer this year. What's it going to look like in
twenty twenty six?
Speaker 4 (13:01):
Yeah, if you ask me, it's got to be considered
as the currency right now. It's usually a currency or
currency like when we are facing like rising geopolitical tension.
Speaker 2 (13:09):
It happens during all the world.
Speaker 4 (13:11):
Wars and during all the big geopolitical conflicts because gold
is the utmost safe haven. It's not the dollar, it's
not the British pound back then, it's the gold. So
therefore I'm not just profit investors.
Speaker 2 (13:21):
Central banks have been buying goals like crazy.
Speaker 4 (13:23):
Well, of course, if you look at the share of
reserve or the central bank reserve, a lot of that
it's because of price change, because like goals up by
about sixty percent you to date. But still central banks
they're not buying gold I think one percent percent. So
that trend is very.
Speaker 2 (13:37):
Likely to continue.
Speaker 4 (13:38):
And I mean traditional wisdom tells us that just don't
go against central bank.
Speaker 1 (13:43):
Okay, so gold is still going to look positive going
into twenty twenty six. And Tim, I've seen you.
Speaker 2 (13:49):
You've been shaking your head.
Speaker 1 (13:50):
I think you disagree with other strategists. But look, let's
get into credit. Look, you know, credit spreads continue to
remain really tired. I feel like we're saying this year
after year. Investors just like fading the risks out there.
Speaker 5 (14:05):
No, I think they're just using fixed income credit bonds
to play the interest right game, so which makes credit
a very dangerous product in twenty twenty six. I disagree
with Stephen with some of the views that he has
because his basic assumption is that markets will continue as normal. Okay,
all right, we don't see that happening. The reason is
(14:27):
because the risk I've been highlighting for the whole year,
in fact the last year, is that funding is going
to be a problem in the dollar bar market. So
when funding have problems the dollar that strengthen, which explains
the strength since September actually in the dollar, because that's
when the funding speed started. So when investors come funding
dollars easily, they go to carry which is why the
(14:50):
end and the Korean one has been the major beneficiary
of this to some extent, whereas the TIWN dollar hasn't
has rallied none, that has weakened, but nowhere near as much.
All right, So one of the issues we see is
that this is a pattern that was repeated in twenty nineteen,
twenty twenty is not new all right. And it also
(15:10):
shows that the funding stress, which is tracked by general
collateral reporates SOFA, the amount of money that's been tapped
at the Standing report facility, all these are indicators that
funding in the US is becoming problematic and the stress
will continue to build because the US government continues to
(15:32):
issue a.
Speaker 1 (15:33):
Lot of that.
Speaker 5 (15:34):
Yes, okay. In November and October, total death increased by
one trillion dollars. Where is that money going to come from?
If it comes from the existing liquidity pool, is going
to draw a liquity our risk assets, which is to
some extent has me expressed in somewhat of a weaker
equity market, and it will come out of barb markets
(15:57):
in credit and specifically. But and it's been reflected in
US credits press. Not in Asia yet. Minu Hia is
somewhat of an anomaly, but at some point it will
start filtering into the Asian dollar bard market. Now, what
can the fact do to alleviate the funding stress. There's
only one outcome. Interest rates will not make liquidity come back.
(16:22):
It actually may have a reverse effect because two and
a half trillion of carry traits estimated as a conservative estimate,
has gone into the US since twenty twenty two. Now,
if the carry dynamic disappears through rake cards, some that
liquid is going to reverse. That already creates the capital
(16:47):
flight issue, which in turns put small stress on the
funding market. Now, in twenty twenty, only one and a
half trillion caused the much dislocation, and the fat had
only one option. It entered straight into QI. Now, if
you're going to revisit the same scenario, which is quite
(17:09):
likely to be honest, this is a structural issue that
cannot be narrated away. Funding will get tighter, funding cost
will con increase, and more and more banks will start
to tap the sending report facility, which in turns creates
questions of where all you liquity? Where do you need
to borrow from the FED? Four investors have thirty five
trillion dollars in the US market now, more than double
(17:31):
off twenty twenty. Can you imagine what happens to day.
It's like, let's take some profit ten percent off the market.
That's three and a half trillion leaving the market. At
one time, the fat has no choice quantitative easy will
be back with a vengeance.
Speaker 1 (17:48):
That's quite a counter consensus view, right, And by the way,
for the benefit of the listeners, we do allow our
analysts to argue and have.
Speaker 4 (17:56):
Their own views.
Speaker 2 (17:57):
Yeah.
Speaker 4 (17:57):
Actually I was gonna say I do agree with Tim,
But mind you, like we were talking about early twenty
twenty six, That's why I had a strong dollar. I mean,
FX market is never a straight line. In the first half,
we had like dollar collapse. But now if you look
at you today, it's a moderate drop instead of a collapse.
So if you ask me, of course, now we talk
about early twenty twenty six, and of course in a
month's time, everybody's going to be changing their view anyway,
(18:18):
So stronger dollar heading into the new year. But if
you ask me eventually, whether it's the second half of
next year, earlier than that, or even twenty twenty seven eventually,
to Tim's point, I do agree that the fat will
have to come back, So curious back and a weekerd
dollar ultimately.
Speaker 1 (18:32):
And Tim, you've mentioned the US federal debt and it
continues to grow and grow each year. When are we
going to get to that tipping point.
Speaker 5 (18:40):
It's really there. That's my point. At the dipping point
comes when you cannot afford to sell bonds without raising yields.
Number one to drawing capital from other set classes, crowding
out evank where there is no one else will lean
to buy a bonds. And the problem room is also
that the US government is facing a death spiral from
(19:03):
the interest costs, so the FAT needs to cut rates.
So because this rather interesting situation where if the FAT
was to try and help the federal government maintain is
debt sustainability, they will need to cut rates. But in
cutting rates they will immediately create a re creaty crisis
because of the CHRRIC trait structure. So you end up
(19:24):
to some extent creating your own problems. And eventually, as
I said, the FAT would have to sacrifice something, correct,
I mean, the last year and a half should be
clear that the FAT has sacrificed inflation. They have been
cutting rates despite inflation being sticky. They use also excuses
to say, oh, inflation may be transitory, it's only because
(19:46):
of terrorist YadA, YadA YadA. By the end of the
day they have admitted that inflation will remain high. We
rather tackle in thea view the economy, but in my view,
federal that sustainability same thing.
Speaker 1 (20:02):
So they're going to be cutting rates in a period
where you see rising inflation.
Speaker 5 (20:07):
Yes, and that's why IRA our rate strategies calls for
much deeper U curve next year. Okay, right, because the
long end rate is not going to react the same
way as in the environment where inflation is coming down.
Speaker 1 (20:20):
And you mentioned that US spreads have already started to
reflect this, but it hasn't been reflected in Asia. Yes,
why is that? It is an ill liquidity issue?
Speaker 5 (20:30):
Partially it's because of in liquidity, partially because we are
funded off the offshore dollar market, the Euro dollar market,
and not the onshore US fat system. Now, at some
point when there is stress in the on shore market
in the US off shore market were called on to tap,
to tap that liquidity, need to help the fund on. Sure,
that's when it happens. But the big issue in Asia
(20:52):
obviously is can you sell if you need to sell?
That's the problem. And one of the issues you have
found over the last year is that any investor who
holds a big position in the bond in an attempt
to sell maybe one third of it will cost the
other twots to get their valuation hammered. Right, so nobody
dares to move. It's one of those rare, unpleasant markets
(21:15):
where if it does hit, the reaction will be very violent.
There's no orderly move coming. It will be extremely disorderly.
Speaker 1 (21:23):
And will this be across the capital structure, both in
ig or investment grade as well as high yield or.
Speaker 5 (21:28):
Well, I think high u is and normally. Now, why
imagine sixty nine percent of your higher bonds has lower
than two hundred and seventy basis points and spread that
is not high yield. Okay, there was investment grade three
years back. Okay, so you could understand the high yield
as a market, all right, No longer really exists in
the from a high perspective, right, it's just wider than
(21:51):
investment grade. But from an absolute risk value, it trades
like a lowly rated investment grade and it is levered
as much. And that's the problem.
Speaker 1 (22:01):
Okay, So it's not reflecting.
Speaker 5 (22:02):
The risks, not reflecting the risks at all, simply, honor.
Speaker 1 (22:05):
You see a lot of investors and you speak a
lot of bloomberg events when you talk about your views.
What's the reaction by the crowd.
Speaker 5 (22:13):
People start nodding their heads. That's the unpleasant part. Normally
I talk when I start speaking about structural funding risk,
doc start talking about financial leverage within the board market. Okay,
those people who are doing reposts, they will do this.
They start nodding really aggressively. Where I start explaining liquidity
in the most simplistic form as a balloon, people immediately
(22:35):
get what's going to be the problem. Now, it's very
unusual for us to experience this because, as Steven mentioned,
US dollar tend to be the funding currency in the
carry trait. This is the first time in known history
that the dollar is the income currency of Kerry Tree,
which means if you believe that to be the case,
(22:56):
then it will behave the same as an emerging market crisis,
because emerging market crisis is often led by the unmind
of cherry trade. Right, So if you view that to
be the case, then liquidity flight is a real concern.
Speaker 1 (23:12):
And that would be Asian investors taking money out of
the US.
Speaker 5 (23:17):
Yes, and obviously it goes right into Marvin's view. Just
now that capital is going to return to Asia. Now
you must remember this thirty five trillion of mostly Asian capital.
Asian and European capital is sitting in the US. That's
a lot of money. Even if a portion comes back,
it's extremely beneficial for local councy markets, for equity markets,
(23:41):
very beneficial.
Speaker 4 (23:42):
Yeah, what's asa just to at a point, and what's
increasingly important is Japanese money a lot in the US
and Europe, especially in US and US credit. And now
we're talking about today the two year GGBOS one percent
longer end of the current record high. It's amounter of
time for Japanese investors like pan livers to bring.
Speaker 2 (24:01):
Their money back.
Speaker 4 (24:02):
And that's an other source to cast a cell off
in the dollar Tim's market, my.
Speaker 5 (24:07):
Market, dollar market.
Speaker 1 (24:08):
Okay, So a big story in the efs as well
as the credit space could be this repatriation of money
back for Uassia.
Speaker 5 (24:15):
That means you're going to see local currency bonds perform,
and you're going to see dollar currency in local currency
terms underperformed dramatically.
Speaker 1 (24:25):
And that would be local government bonds.
Speaker 5 (24:27):
Local bonds, even to some extent they say to Singapore,
even local credit bonds.
Speaker 1 (24:32):
Okay, outside of the US and the FED, what are
some of the potential risks in Asian markets? Like last
week there's a big scare with you know, China property
again came up on everyone's radar. You know, Thanky bonds
sold off, Like, what's your view there.
Speaker 5 (24:48):
I don't think anybody's focused on Banky from a default
risk perspective because they know they're going to default. Not
so much default. I think the key word here is restructuring. Now,
Thanky doesn't really have an leverage problem like the Country Garden,
Shimou or Evergrant. What it does have is a liquidity problem. Now,
the liquidity problem wouldn't exist if the market was normally
(25:11):
funding credit, especially real estate credit, but when the market
refuses to refinance bonds, then immediately that liquiity should becomes
a problem. In the past year, the Center government had
been supporting fun Keys significantly. From that front. There has
been real sales, but the sales are nowhere high enough
to finance all the repayments. It's just not possible that
(25:33):
the industry doesn't work that way. But if continued support
comes from the central government, it is quite likely that
they will be able to extend the maturity to the
existing bonds. It's called a restructuring. Whether they are going
to go called complete non payment is unlikely. They'll probably
go to the whole market. Domestic wise, their offshore amounts
are not very high. It's only about one point tribulant,
(25:55):
which is very small. But mostly the debt is in
the onobine market. If they're able to convince the investors, hey,
in orders of us to really be able to repay,
we need to be able to have a proper maturity
structure instead of everything being lumped up in two years now.
If they can convince investors that hey, we are going
to do this, we will make sure that we'll be
(26:15):
all right based on our sales profile, then yeah, then
it will be resolved very quickly. It doesn't have an
all spill on the other markets. The other readers in companies,
they're already in default, they already restructured. So the question
is about recovery, how fast it can recover, where that
recovery value will be. And that is the focus in
the market, which is why to some extent has what
(26:38):
we call negligible impact on Chinese credits.
Speaker 1 (26:43):
And you mentioned that the investors should focus on local bonds.
It's really particular markets that you wanted to mention.
Speaker 5 (26:51):
Well, I think one of the beneficiaries of STD dollarization
is the offshore and market they're doing. Some market we
have already seen quite a few benchmarks and milestones this year.
More recently is the issuance of Indonesian government bonds into
the Asian market, and we are also seeing big moves
(27:13):
in sovereigns into the pandamond market. So we're already seeing
the diversification of issuance number one. Now, obviously Indonesia is
not going to issue to the afore A market if
there were no demand for them to do so. That
also reflects to some extent what foreign investors are thinking
about in terms of, hey, do I really want to
(27:34):
carry dollar risks and manage the hetch Some of them
might just say just issue in yen, I will buy
it in yen. And we're going to see this grow
dramatically in the next year as China continues to open
up its financial markets, open up the yuen and strengtheningen
is going to play into that. The internationalization. The UN
(27:54):
complain to that, and simply from a cross border transaction perspective,
there will be demand to whole UN reserves for sure.
Whether you go and convert your dollar in to un
or issue in UEN. I don't know what is the
step that the most often take, but so far issuing
in en appears to be the first step and that
it will continue to grow. We already here of Pakistan, Brazil,
(28:20):
the Middle East, UAE issue one in the pandemic market.
Slovenia is planning one as well, so we are seeing
a whole plethora of solvering issuers coming to the market.
Speaker 1 (28:30):
Okay, So if I could just wrap this up, Tim,
you've been talking about local bonds, Marvin, I think you
mentioned some Southeast Asian markets there and Steven, a stronger
US dollar in the first half of next year. Anything
else you wanted to add, gentlemen.
Speaker 5 (28:48):
No, I think the big it's so called gray right now,
I don't need this black song anymore. Is when the
first is going to do q E not if I
think Stephen choose view is probably in the second half
of next year. I somewhat think that would be closer
to the first sulf of this year, so it's a
little bit different.
Speaker 4 (29:03):
Yeah, I think in the space of EFX, because of Carrie,
it's very hard to prepare for that. As team said,
like it's the largest emerging market, and you never really
shot the largest emerging market currency right.
Speaker 2 (29:13):
Carry expensive until it rolls up.
Speaker 4 (29:15):
When it happens like you can all through just like
April and a like, there's always time for it. So
that which is why if nothing happens naturally we have
a stronger dollar. If something happens, just turn around.
Speaker 5 (29:25):
For easy for mat effects, terrible for credit because you
can't get rid of the bonds, which is what we
saw in Taiwan in April May this year. They couldn't
get out of their positions, so they were down ten
percent of all the essys in three days.
Speaker 1 (29:37):
So more volatility ahead for twenty twenty six, definitely.
Speaker 3 (29:42):
I mean it sounds like Tim's view is very should
be positive for Asian equities if I'm hearing it correctly correctly, So.
Speaker 1 (29:52):
Big story for twenty twenty six is repatriation of funds
back into Asia. Well, gentlemen, thank you, it's been a
really fun episode as usual.
Speaker 3 (30:01):
Thank you, Thank you, Thanks Johan.
Speaker 1 (30:02):
Thanks everyone you've been listening to Asiacentric from Bloomberg Intelligence.
I'm John Lee in Hong Kong. You can listen to
all our episodes on Spotify, Apple Podcasts wherever, you listen
and this podcast was produced and edited by Clara Chan.
Thanks for listening.
Before we begin this week, from the team that produces
the Asia Centric podcast, we extend our deepest condolences to
the individuals and families who lost their loved ones in
the Typo fire tragedy in Hong Kong. Our thoughts are
with you and we stand in solidarity during this time
of grief. Now to the podcast, Asian financial markets have
(00:23):
had a stellar year. The MSCI Asia Pacific Equity Index
is up twenty three percent this year and on track
to beat the S and P five hundred by the
biggest margin in eight years, led by gains in South Korea,
Hong Kong, and Japan. Asian currencies like the Malaysian RINGT
type art and China's women Bee have strengthened versus the
(00:44):
US dollar. Meanwhile, credit spreads in high yield and investment
grade continue to remain extremely tight. Can Asian financial markets
continue their strength going into twenty twenty six? What are
the major themes investors should watch out for and what
are the potential black swan events? You're listening to Asia
Centric from Bloomberg Intelligence. I'm John Lee in Hong Kong,
(01:08):
and as we do every year in December, we invite
our three investment strategists to review what's happened in the
year so far and make their bold predictions for twenty
twenty six. We have FX strategist Steven Chu, equity strategist
Marvin Chen, and credit strategist Timothy Tan. Gentlemen, welcome back
to the show.
Speaker 2 (01:28):
Thank you, Thank you, Thanks Chan.
Speaker 1 (01:30):
Marvin. I want to start with you because I think
twenty twenty five has really been the year of equities now.
AI continues to be the biggest driver, both in the
US and in Asia, in markets like Career, Taiwan, Japan,
and also in Hong Kong. And the biggest debate in
finance right now is whether we're in an AI bubble.
Where do you sit on this issue?
Speaker 3 (01:52):
Well, there's definitely some concerns, you know, given the hundreds
of billions being spent by some of the US tech
companies here in the region. In China, we're talking on
a scale of tens of billions, so the magnitude is
much smaller. Also, the consensus is that China is still
kind of trailing behind the US and AI development and
(02:12):
playing catch up. But what this also means is that
some of this growth potential going forward is still rising
so you know, if we look at the earnings growth
of the China Tech you know, our version of the
Max seven, it is expected to accelerate in twenty twenty six.
And this is unlike the Max seven which has been
slowing since twenty twenty four. Also, in terms of valuations,
(02:34):
China Tech is trading at a twenty five to fifty
percent discount to US Tech. So with forward earnings accelerating
and lower multiples, we think the signs of an AI
bubble are just not there for our region yet.
Speaker 1 (02:47):
Okay, and Asia, the she is set to outperform the
US or the S and P five hundred. Now, it's
very rare that Asia outperforms, especially in the last fifteen
years or so. Can we make these two years in
a row.
Speaker 3 (03:01):
Yeah, we think emerging markets overall does stand a good
chance of outperforming the US next year. If we look
at em earnings, they're at the highest level since the
global financial crisis. This year, some of that was driven
by Latin America and Emerging Europe, which is why we
saw some of the our performances in those regions. But
next year we think we may see some rotation towards Asia.
(03:23):
You know, obviously Korea Taiwan are still going to be
leading given the chip demand. But if we look at
the growth inflections or where the shifts in earnings momentum
are changing the most, we think, you know, some of
this may come from Southeast Asia, India and as well
as China, which are expected to read about.
Speaker 1 (03:42):
Asia Centric is produced by Bloomberg Intelligence. We're more than
five hundred experienced analysts and strategists work around the clock
to bring you timely, world class research. Our coverage spans
two hundred market industries, currencies, commodities, and industries, as well
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(04:05):
If you like what you're hear, don't forget to subscribe
and share how our investors positioned in Asia because at
the beginning of this year there was a lot of
talk of whether US exceptionalism is over. Have investors shifted
money outside the US to Asia?
Speaker 3 (04:22):
Yeah, you know, US will always be an important part
of the investment consideration, but we have seen some rotation
this year, and a lot of this is driven by
you know, the FED and currency movements, which Steven can
cover later on, but in general for Asia, obviously, positioning
in China is very important. You know, we've seen sentiments
(04:43):
stabilizing both onshore and in terms of foreign investment. You know,
we track the top one hundred BM funds and allocation
to China has been increasing since the second half of
twenty twenty four, but it is still well below historical averages,
so there may be room for f the inflows. You know,
in terms of the tech positioning, we've also seen some
(05:03):
signs of rotation from Taiwan to Korea as the AI
investment thing kind of shifts towards memory demand next year,
which should benefit Korea. For the rest of the region,
you know, positioning in Southeast Asia remains quite light, and
we have seen some outflows from India this year, but overall,
if the FED continues to ease in twenty twenty six,
we think this should translate into more flows for the
(05:25):
Asia region.
Speaker 1 (05:27):
You mentioned quite a few countries there, like which markets
do you think will outperform, Well, it's still be Korea.
In Taiwan, yeah, I.
Speaker 3 (05:37):
Mean, they do have the AI tailwinds, but we think
that next year the story maybe in Southeast Asia and India.
These may present opportunities in twenty twenty six. Even though
some of these markets are not thought of as an
AI play, you know, they can still participate as data
center build out expands in the region. For China, we
think it will not only be about tech but also
(05:59):
the apply side reform or the anti involution, which can
improve profitability of the old economy sectors. We're seeing some
early signs of earning's improvement in the material sector based
on in the recent earning season. But next year we
hope to see that it broadened out to a broader
range of industries and hopefully kind of ease pricing pressures
for areas such as the e commerce platforms.
Speaker 1 (06:22):
Okay, and what about themes going into next year, Like
if you look at twenty twenty five, there were a
lot of hot themes, like you know, humanoid robotics was
very popular. At the beginning of this year, we had
this like China consumption excitement, especially over stocks like Laboubu
and Louful Gold. Defense stocks went up a lot, especially
(06:42):
with the continuation of the Russia Ukraine War. What can
we look out for next year?
Speaker 3 (06:48):
Yeah, I think you know, some of the themes you
mentioned will still be relevant next year, as a lot
of these are still in the early phases of the
investment cycles, you know, things such as robotics, industrial modernization.
These will continue to be teams. But I think the
main issue, particularly for China is the inflation outlook and
(07:08):
whether supply side reform can lift the economy out of deflation,
and this will benefit the broader market. I think the
geopolitical tensions will still be an issue and these investing
in defense may continue to be a theme. And also,
you know, if we do see more fed ric cuts,
the dollar and currencies will be a driver for foreign
(07:31):
inflows as well.
Speaker 1 (07:32):
Okay, well, thanks mav and I wanted to bring us
Stephen into the conversation. Stephen, like a weaker US dollar
has generally been positive for you know, Asian risk assets
like equities and bonds. Does this relationships still hold?
Speaker 4 (07:46):
That has been the case before April the second this
year basically, so what you're talking about, it's kind of
like that dollar's mouth theory because the dollar has been
a funding currency for so many years because of super
low interest rate after the financial crisis. So when you
have if a resk once scenario, you have like a
Rekord dollar.
Speaker 2 (08:02):
Everybody tries to look for yield.
Speaker 4 (08:04):
They buy EM currencies, they buy EM equities like marketing space.
But that was only the case before April the second
So what happened, especially in the second quarter, we saw
a breakdown in correlation. So basically now during risk of
because the sauce is very likely to be the US
I e. Trump's administration, So we had a reciprocal tariff
this year and next year, we don't know what's coming up,
(08:26):
probably some independence of the fat concern something like that.
If that happens, then obviously we get a risk of environment.
But then the dollar can sei yourself off, like is
that going to be constructive for Asian currencies? Is that
going to be constructive for Asian economies and stocks? It
really depends depends on what happens and what's the source
of the risk movement by then.
Speaker 1 (08:48):
Okay, and what do you see as a major sort
of macro risks going forward next year?
Speaker 4 (08:52):
To be very honest, I'm going to look in the
view for dollar Asia. So in general, I think when
we look across the cell cue, at least those that
have put out forecast, everybody is trying to go safe
and call for lower dollar Asia. Especially what happened in
the first half of the year. We have really like
a dollar decline. We have low uders like tawer and
dollar current one yen or strengthening. So despite some recovery
(09:14):
in the dollar in the second half, so I think
it makes sense for most of the street, the consensus
to call for a moderate decline in dollar Asia, but
we're going to be somewhat anti consensus here at least
for the first half of the next year. We think
there's going to be more upside for the US dollar
against Asian currencies. So basically a continuation of what happened
in second half, because now especially with the US and
(09:36):
King trade deals with different partners, South Korea, even with China,
there's a trade trials. So basically the recovery in risk sentiments,
it's helping the dollar. So to our earlier point, now
we have sort of a risk on scenario. In the
third quarter, we have like really strong rally in Taiwanese stocks,
in current stocks, inflows, but the Asian currencies actually fell
against the dollar. So now we're seeing a more thing
(09:58):
a changing relationship and next year, given that it's the
midterm election for the US if Trump just stays rational,
which is well highly unlikely. But if that's the case,
then there might not be a driver for the dollar
to drop if Marke gets focused on the fat, if
market focused on raad differentials, as long as the fat
doesn't cut more than what the market has priced. So
that's like once in December three times next year. If
(10:21):
it's less than that million, that dollar will still have
support against Asian currencies because Asia still has to ease
at the same time.
Speaker 1 (10:27):
Okay, so you're going against the grain and you think
the US dollar will strengthen against major Asian currencies, which
Asian currencies will do relatively better than others.
Speaker 4 (10:38):
Yeah, that's a broad view. Of course, not every currency
is going to drop against the dollar. Just like as
you mentioned this year, despite the dollar recovery, now we
have the yuan and the ring get really strong, and
in the second half especially the ring get.
Speaker 2 (10:49):
Despite a dollar recovery, the.
Speaker 4 (10:50):
Ring is still up by near two percent in the
second half year to day and the entire to day,
the ring get is the strongest currency, up over eight percent.
Last year, the ring get was the strongest. We saw
that there's something behind the dollar story, say for Malaysian
ring it, fundamentals are really good over there, We've got
like good surplus, narrowing surface data sets, FDI inflows, so
all these are supporting the ring get and of course
(11:12):
they've got pretty strict capital control as well, so I
will pick ring it.
Speaker 1 (11:15):
The yuan.
Speaker 4 (11:17):
In fact, a lot of people are saying it's sort
of over value.
Speaker 2 (11:20):
Is should weekend.
Speaker 4 (11:21):
China's been pushing down the van but in fact, if
you look at the fundamentals, the good balance, the trade
ser plus, FDI, similar to Malaysia, all these fundamental drivers
are pointing to a stronger women B and as we
can see in recent weeks, once China signaled, they allow
the currency to rise through the fixing. We so that
un basically just now is dropping towards seven so next year,
(11:42):
regardless of the dollar trend. From a fundamental perspective, we
like Malaysia, we like China, and if you want to
play safe, you don't want to bet on the dollar view,
you can go for safe haven like the Hong Kong
dollar and the Sacond dollar. So I'm going to avoid Korea,
I'm going to avoid Taiwan, which is highly sensitive to dollar.
Speaker 2 (11:58):
Move and equity moves.
Speaker 4 (11:59):
I'm going to avoid all the high users because they
tend to outperform if the dollar is strong. But we
don't know whether like dollar will drop, as we said,
like I don't know what Trump will do, so we're
going to skip all those high beta currencies. And I
was sick with Malaysia, China and also Hong Kong Singapore.
Speaker 1 (12:13):
Okay, and you did mention about the women be Do
you think there are signs that the authorities will allow
the currency to appreciate.
Speaker 2 (12:21):
They have.
Speaker 4 (12:21):
In fact, in recent weeks, we saw that the fixing
is quite clearly that they're guiding the currency lower because
during the first half of the year, and in fact,
like previous years, obviously we had a strong dollar backdrop
and we saw that the UN should be a lot weaker.
But you can see that they're basically guiding the UN
is not moving anywhere. Happen now enter the second.
Speaker 2 (12:39):
Half, we saw that.
Speaker 4 (12:39):
Okay, they allowed the UN to break through seven point
one towards seven, so they are showing a message they're
willing to let the UN appreciate.
Speaker 1 (12:47):
Okay. Now I have to ask you about gold. I
don't know if it's a currency or whether it should
be considered a currency, but it's obviously been a fantastic
outperformer this year. What's it going to look like in
twenty twenty six?
Speaker 4 (13:01):
Yeah, if you ask me, it's got to be considered
as the currency right now. It's usually a currency or
currency like when we are facing like rising geopolitical tension.
Speaker 2 (13:09):
It happens during all the world.
Speaker 4 (13:11):
Wars and during all the big geopolitical conflicts because gold
is the utmost safe haven. It's not the dollar, it's
not the British pound back then, it's the gold. So
therefore I'm not just profit investors.
Speaker 2 (13:21):
Central banks have been buying goals like crazy.
Speaker 4 (13:23):
Well, of course, if you look at the share of
reserve or the central bank reserve, a lot of that
it's because of price change, because like goals up by
about sixty percent you to date. But still central banks
they're not buying gold I think one percent percent. So
that trend is very.
Speaker 2 (13:37):
Likely to continue.
Speaker 4 (13:38):
And I mean traditional wisdom tells us that just don't
go against central bank.
Speaker 1 (13:43):
Okay, so gold is still going to look positive going
into twenty twenty six. And Tim, I've seen you.
Speaker 2 (13:49):
You've been shaking your head.
Speaker 1 (13:50):
I think you disagree with other strategists. But look, let's
get into credit. Look, you know, credit spreads continue to
remain really tired. I feel like we're saying this year
after year. Investors just like fading the risks out there.
Speaker 5 (14:05):
No, I think they're just using fixed income credit bonds
to play the interest right game, so which makes credit
a very dangerous product in twenty twenty six. I disagree
with Stephen with some of the views that he has
because his basic assumption is that markets will continue as normal. Okay,
all right, we don't see that happening. The reason is
(14:27):
because the risk I've been highlighting for the whole year,
in fact the last year, is that funding is going
to be a problem in the dollar bar market. So
when funding have problems the dollar that strengthen, which explains
the strength since September actually in the dollar, because that's
when the funding speed started. So when investors come funding
dollars easily, they go to carry which is why the
(14:50):
end and the Korean one has been the major beneficiary
of this to some extent, whereas the TIWN dollar hasn't
has rallied none, that has weakened, but nowhere near as much.
All right, So one of the issues we see is
that this is a pattern that was repeated in twenty nineteen,
twenty twenty is not new all right. And it also
(15:10):
shows that the funding stress, which is tracked by general
collateral reporates SOFA, the amount of money that's been tapped
at the Standing report facility, all these are indicators that
funding in the US is becoming problematic and the stress
will continue to build because the US government continues to
(15:32):
issue a.
Speaker 1 (15:33):
Lot of that.
Speaker 5 (15:34):
Yes, okay. In November and October, total death increased by
one trillion dollars. Where is that money going to come from?
If it comes from the existing liquidity pool, is going
to draw a liquity our risk assets, which is to
some extent has me expressed in somewhat of a weaker
equity market, and it will come out of barb markets
(15:57):
in credit and specifically. But and it's been reflected in
US credits press. Not in Asia yet. Minu Hia is
somewhat of an anomaly, but at some point it will
start filtering into the Asian dollar bard market. Now, what
can the fact do to alleviate the funding stress. There's
only one outcome. Interest rates will not make liquidity come back.
(16:22):
It actually may have a reverse effect because two and
a half trillion of carry traits estimated as a conservative estimate,
has gone into the US since twenty twenty two. Now,
if the carry dynamic disappears through rake cards, some that
liquid is going to reverse. That already creates the capital
(16:47):
flight issue, which in turns put small stress on the
funding market. Now, in twenty twenty, only one and a
half trillion caused the much dislocation, and the fat had
only one option. It entered straight into QI. Now, if
you're going to revisit the same scenario, which is quite
(17:09):
likely to be honest, this is a structural issue that
cannot be narrated away. Funding will get tighter, funding cost
will con increase, and more and more banks will start
to tap the sending report facility, which in turns creates
questions of where all you liquity? Where do you need
to borrow from the FED? Four investors have thirty five
trillion dollars in the US market now, more than double
(17:31):
off twenty twenty. Can you imagine what happens to day.
It's like, let's take some profit ten percent off the market.
That's three and a half trillion leaving the market. At
one time, the fat has no choice quantitative easy will
be back with a vengeance.
Speaker 1 (17:48):
That's quite a counter consensus view, right, And by the way,
for the benefit of the listeners, we do allow our
analysts to argue and have.
Speaker 4 (17:56):
Their own views.
Speaker 2 (17:57):
Yeah.
Speaker 4 (17:57):
Actually I was gonna say I do agree with Tim,
But mind you, like we were talking about early twenty
twenty six, That's why I had a strong dollar. I mean,
FX market is never a straight line. In the first half,
we had like dollar collapse. But now if you look
at you today, it's a moderate drop instead of a collapse.
So if you ask me, of course, now we talk
about early twenty twenty six, and of course in a
month's time, everybody's going to be changing their view anyway,
(18:18):
So stronger dollar heading into the new year. But if
you ask me eventually, whether it's the second half of
next year, earlier than that, or even twenty twenty seven eventually,
to Tim's point, I do agree that the fat will
have to come back, So curious back and a weekerd
dollar ultimately.
Speaker 1 (18:32):
And Tim, you've mentioned the US federal debt and it
continues to grow and grow each year. When are we
going to get to that tipping point.
Speaker 5 (18:40):
It's really there. That's my point. At the dipping point
comes when you cannot afford to sell bonds without raising yields.
Number one to drawing capital from other set classes, crowding
out evank where there is no one else will lean
to buy a bonds. And the problem room is also
that the US government is facing a death spiral from
(19:03):
the interest costs, so the FAT needs to cut rates.
So because this rather interesting situation where if the FAT
was to try and help the federal government maintain is
debt sustainability, they will need to cut rates. But in
cutting rates they will immediately create a re creaty crisis
because of the CHRRIC trait structure. So you end up
(19:24):
to some extent creating your own problems. And eventually, as
I said, the FAT would have to sacrifice something, correct,
I mean, the last year and a half should be
clear that the FAT has sacrificed inflation. They have been
cutting rates despite inflation being sticky. They use also excuses
to say, oh, inflation may be transitory, it's only because
(19:46):
of terrorist YadA, YadA YadA. By the end of the
day they have admitted that inflation will remain high. We
rather tackle in thea view the economy, but in my view,
federal that sustainability same thing.
Speaker 1 (20:02):
So they're going to be cutting rates in a period
where you see rising inflation.
Speaker 5 (20:07):
Yes, and that's why IRA our rate strategies calls for
much deeper U curve next year. Okay, right, because the
long end rate is not going to react the same
way as in the environment where inflation is coming down.
Speaker 1 (20:20):
And you mentioned that US spreads have already started to
reflect this, but it hasn't been reflected in Asia. Yes,
why is that? It is an ill liquidity issue?
Speaker 5 (20:30):
Partially it's because of in liquidity, partially because we are
funded off the offshore dollar market, the Euro dollar market,
and not the onshore US fat system. Now, at some
point when there is stress in the on shore market
in the US off shore market were called on to tap,
to tap that liquidity, need to help the fund on. Sure,
that's when it happens. But the big issue in Asia
(20:52):
obviously is can you sell if you need to sell?
That's the problem. And one of the issues you have
found over the last year is that any investor who
holds a big position in the bond in an attempt
to sell maybe one third of it will cost the
other twots to get their valuation hammered. Right, so nobody
dares to move. It's one of those rare, unpleasant markets
(21:15):
where if it does hit, the reaction will be very violent.
There's no orderly move coming. It will be extremely disorderly.
Speaker 1 (21:23):
And will this be across the capital structure, both in
ig or investment grade as well as high yield or.
Speaker 5 (21:28):
Well, I think high u is and normally. Now, why
imagine sixty nine percent of your higher bonds has lower
than two hundred and seventy basis points and spread that
is not high yield. Okay, there was investment grade three
years back. Okay, so you could understand the high yield
as a market, all right, No longer really exists in
the from a high perspective, right, it's just wider than
(21:51):
investment grade. But from an absolute risk value, it trades
like a lowly rated investment grade and it is levered
as much. And that's the problem.
Speaker 1 (22:01):
Okay, So it's not reflecting.
Speaker 5 (22:02):
The risks, not reflecting the risks at all, simply, honor.
Speaker 1 (22:05):
You see a lot of investors and you speak a
lot of bloomberg events when you talk about your views.
What's the reaction by the crowd.
Speaker 5 (22:13):
People start nodding their heads. That's the unpleasant part. Normally
I talk when I start speaking about structural funding risk,
doc start talking about financial leverage within the board market. Okay,
those people who are doing reposts, they will do this.
They start nodding really aggressively. Where I start explaining liquidity
in the most simplistic form as a balloon, people immediately
(22:35):
get what's going to be the problem. Now, it's very
unusual for us to experience this because, as Steven mentioned,
US dollar tend to be the funding currency in the
carry trait. This is the first time in known history
that the dollar is the income currency of Kerry Tree,
which means if you believe that to be the case,
(22:56):
then it will behave the same as an emerging market crisis,
because emerging market crisis is often led by the unmind
of cherry trade. Right, So if you view that to
be the case, then liquidity flight is a real concern.
Speaker 1 (23:12):
And that would be Asian investors taking money out of
the US.
Speaker 5 (23:17):
Yes, and obviously it goes right into Marvin's view. Just
now that capital is going to return to Asia. Now
you must remember this thirty five trillion of mostly Asian capital.
Asian and European capital is sitting in the US. That's
a lot of money. Even if a portion comes back,
it's extremely beneficial for local councy markets, for equity markets,
(23:41):
very beneficial.
Speaker 4 (23:42):
Yeah, what's asa just to at a point, and what's
increasingly important is Japanese money a lot in the US
and Europe, especially in US and US credit. And now
we're talking about today the two year GGBOS one percent
longer end of the current record high. It's amounter of
time for Japanese investors like pan livers to bring.
Speaker 2 (24:01):
Their money back.
Speaker 4 (24:02):
And that's an other source to cast a cell off
in the dollar Tim's market, my.
Speaker 5 (24:07):
Market, dollar market.
Speaker 1 (24:08):
Okay, So a big story in the efs as well
as the credit space could be this repatriation of money
back for Uassia.
Speaker 5 (24:15):
That means you're going to see local currency bonds perform,
and you're going to see dollar currency in local currency
terms underperformed dramatically.
Speaker 1 (24:25):
And that would be local government bonds.
Speaker 5 (24:27):
Local bonds, even to some extent they say to Singapore,
even local credit bonds.
Speaker 1 (24:32):
Okay, outside of the US and the FED, what are
some of the potential risks in Asian markets? Like last
week there's a big scare with you know, China property
again came up on everyone's radar. You know, Thanky bonds
sold off, Like, what's your view there.
Speaker 5 (24:48):
I don't think anybody's focused on Banky from a default
risk perspective because they know they're going to default. Not
so much default. I think the key word here is restructuring. Now,
Thanky doesn't really have an leverage problem like the Country Garden,
Shimou or Evergrant. What it does have is a liquidity problem. Now,
the liquidity problem wouldn't exist if the market was normally
(25:11):
funding credit, especially real estate credit, but when the market
refuses to refinance bonds, then immediately that liquiity should becomes
a problem. In the past year, the Center government had
been supporting fun Keys significantly. From that front. There has
been real sales, but the sales are nowhere high enough
to finance all the repayments. It's just not possible that
(25:33):
the industry doesn't work that way. But if continued support
comes from the central government, it is quite likely that
they will be able to extend the maturity to the
existing bonds. It's called a restructuring. Whether they are going
to go called complete non payment is unlikely. They'll probably
go to the whole market. Domestic wise, their offshore amounts
are not very high. It's only about one point tribulant,
(25:55):
which is very small. But mostly the debt is in
the onobine market. If they're able to convince the investors, hey,
in orders of us to really be able to repay,
we need to be able to have a proper maturity
structure instead of everything being lumped up in two years now.
If they can convince investors that hey, we are going
to do this, we will make sure that we'll be
(26:15):
all right based on our sales profile, then yeah, then
it will be resolved very quickly. It doesn't have an
all spill on the other markets. The other readers in companies,
they're already in default, they already restructured. So the question
is about recovery, how fast it can recover, where that
recovery value will be. And that is the focus in
the market, which is why to some extent has what
(26:38):
we call negligible impact on Chinese credits.
Speaker 1 (26:43):
And you mentioned that the investors should focus on local bonds.
It's really particular markets that you wanted to mention.
Speaker 5 (26:51):
Well, I think one of the beneficiaries of STD dollarization
is the offshore and market they're doing. Some market we
have already seen quite a few benchmarks and milestones this year.
More recently is the issuance of Indonesian government bonds into
the Asian market, and we are also seeing big moves
(27:13):
in sovereigns into the pandamond market. So we're already seeing
the diversification of issuance number one. Now, obviously Indonesia is
not going to issue to the afore A market if
there were no demand for them to do so. That
also reflects to some extent what foreign investors are thinking
about in terms of, hey, do I really want to
(27:34):
carry dollar risks and manage the hetch Some of them
might just say just issue in yen, I will buy
it in yen. And we're going to see this grow
dramatically in the next year as China continues to open
up its financial markets, open up the yuen and strengtheningen
is going to play into that. The internationalization. The UN
(27:54):
complain to that, and simply from a cross border transaction perspective,
there will be demand to whole UN reserves for sure.
Whether you go and convert your dollar in to un
or issue in UEN. I don't know what is the
step that the most often take, but so far issuing
in en appears to be the first step and that
it will continue to grow. We already here of Pakistan, Brazil,
(28:20):
the Middle East, UAE issue one in the pandemic market.
Slovenia is planning one as well, so we are seeing
a whole plethora of solvering issuers coming to the market.
Speaker 1 (28:30):
Okay, So if I could just wrap this up, Tim,
you've been talking about local bonds, Marvin, I think you
mentioned some Southeast Asian markets there and Steven, a stronger
US dollar in the first half of next year. Anything
else you wanted to add, gentlemen.
Speaker 5 (28:48):
No, I think the big it's so called gray right now,
I don't need this black song anymore. Is when the
first is going to do q E not if I
think Stephen choose view is probably in the second half
of next year. I somewhat think that would be closer
to the first sulf of this year, so it's a
little bit different.
Speaker 4 (29:03):
Yeah, I think in the space of EFX, because of Carrie,
it's very hard to prepare for that. As team said,
like it's the largest emerging market, and you never really
shot the largest emerging market currency right.
Speaker 2 (29:13):
Carry expensive until it rolls up.
Speaker 4 (29:15):
When it happens like you can all through just like
April and a like, there's always time for it. So
that which is why if nothing happens naturally we have
a stronger dollar. If something happens, just turn around.
Speaker 5 (29:25):
For easy for mat effects, terrible for credit because you
can't get rid of the bonds, which is what we
saw in Taiwan in April May this year. They couldn't
get out of their positions, so they were down ten
percent of all the essys in three days.
Speaker 1 (29:37):
So more volatility ahead for twenty twenty six, definitely.
Speaker 3 (29:42):
I mean it sounds like Tim's view is very should
be positive for Asian equities if I'm hearing it correctly correctly, So.
Speaker 1 (29:52):
Big story for twenty twenty six is repatriation of funds
back into Asia. Well, gentlemen, thank you, it's been a
really fun episode as usual.
Speaker 3 (30:01):
Thank you, Thank you, Thanks Johan.
Speaker 1 (30:02):
Thanks everyone you've been listening to Asiacentric from Bloomberg Intelligence.
I'm John Lee in Hong Kong. You can listen to
all our episodes on Spotify, Apple Podcasts wherever, you listen
and this podcast was produced and edited by Clara Chan.
Thanks for listening.
Hosts And Creators
John Lee
Tom Corbett
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