December 17, 2025 • 35 mins
Geopolitical risk is often seen as a market threat, yet the rivalry between Washington and Beijing is driving a wave of investment opportunities. The US push for re-industrialization is boosting demand for Asian exports in sectors such as shipbuilding, power generation and semiconductors while China’s investment in "new productive forces" accelerates its high-end manufacturing upgrade.
Timothy Moe, chief Asia-Pacific equity strategist at Goldman Sachs, joins John Lee on the Asia Centric podcast. Moe explains why technology will remain a dominant theme in 2026 and why the firm is overweight Asia ex-Japan, forecasting the region will outperform the US and Europe. He also details why South Korea remains his top pick, citing 35% projected earnings growth and reasonable valuations, and outlines the rationale for his recent upgrade of India.
This will also be our last episode for 2025 and we will re-commence on January 8 with a new line up of exciting speakers.
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Episode Transcript
Available transcripts are automatically generated. Complete accuracy is not guaranteed.
Speaker 1 (00:01):
Geopolitical risk is often seen as a threat to market,
but for savvy investors it can be a source of opportunity.
Strategic competition between the two great powers is accelerating US
reindustrialization while driving China's push for self sufficiency. This shift
is creating ripple effects across supply chains and opening doors
(00:23):
in North Asia, where economies like Korea, Taiwan, Japan and
China have already capitalized on the AI wave. Will this
momentum carry into twenty twenty six and where does the
rest of Asia, particularly India fit into this picture. You're
listening to Asia Centric from Bloomberg Intelligence. I'm John Lee
(00:44):
in Hong Kong. Today we have Timothy Moe, partner and
chief Asia Pacific equity strategist at Goldman Sachs, dialing in
from Singapore. Tim Welcome to the.
Speaker 2 (00:54):
Show, John, Thank you very much for having me on.
Speaker 1 (00:58):
We've had a great year for global equities and in
particular Asian equities. Can these continue going into twenty twenty six?
Speaker 2 (01:06):
Short answer is we think yes, and we're wrapping our
views around five key themes, some of which you touched
on in your introduction. The simple logic we're espousing is
that we have a equity supportive macro backdrop which really
divides into or is driven by three key factors. One
that economic growth is good and that is going to
(01:28):
filter into earnings growth. Number Two, we think that rates
will continue to come down policy rates. The FED is
cutting we think shortly, and we'll cut twice more in
early twenty twenty six, and that will, in our view,
lead to some further weakening of the dollar. So if
we have an environment of supportive growth, lower rates, and
(01:49):
stronger Asian currencies aka wikre dollar, that typically is a
macro backdrop that is supported for Asian equities. And that's
complemented by the fact that positioning in markets by foreign
investors still is on the light side. So when you
have that sort of configuration, along with valuations that have
risen this year but are still less expensive than global comparables,
(02:09):
we think that together is a potent cocktail for Asian
markets making further gains into twenty twenty six.
Speaker 1 (02:16):
And where does Asia fit into the Goldman Sachs strategy view?
Will this outperform the US or other markets like Ama
next year?
Speaker 2 (02:26):
We think it's likely that that is the case. So
to be clear, we're overweight equities as an asset class
in our global asset allocation, where OVID equities, as I mentioned,
underweight credit and then market weight on the other key
asset classes of fixed income cash commodities. Now within equities,
we're overweight Asia ex Japan, and we're market weight on
(02:50):
the US, and we're underweight in Europe. So that does
indicate a tilt towards Asia away from Europe in this case,
But to be clear, we're constructive on the asset class
globally as.
Speaker 1 (03:02):
A whole and tim At the beginning of the intro,
I reference one of your reports where you discuss how
investors can turn geopolitical risks into opportunities, and in particular,
how competition between the US and China is creating opportunities
for Asian companies. Can you go into detail.
Speaker 2 (03:22):
Yeah, thanks John. This is actually one of the five
themes that I mentioned. It's the fourth of five, and
it's one that we're particularly excited about because I think
it's a creative twist on what is typically viewed as
a problem. So the simple construct here is that geopolitics
has typically been viewed through the lens of being a risk,
and in fact there's a geopolitical risk index which is
(03:44):
publicly available, which shows if you look at a twenty
year history, that we're in a higher what you might
call a trading range, higher level of risk that has
been the case for the past twenty years. Of course,
there's a lot of spikes to that, and we've also
shown in our work that elevated periods of geopolitical risk
tend to be associated with market selling off and it
(04:05):
then takes them a quarter or to recover after that
particular shock. Now, there's many types of geopolitical risks, but
one of the largest ones that investors are focusing on,
of course, is the strategic tension between the United States
and China. So our observation is that that is the
world that we're in. It's unlikely to change. Whether or
not investors would like that, that's kind of irrelevant. They have
(04:26):
to do with the world that we're in. And if
you look at recent documents, including the just issued US
National Security Strategy and others, as well as pronouncements on
the China side, it's very clear that the US and
China are strategic competitors. Now, the observation we're having here
is that that can create some opportunities for investors on
the US side. The term we're using and which is
(04:49):
now more broadly used, is reindustrialization. So the idea that
the US needs to regain some domestic manufacturing capability, some
manufacturing process know how in order to to develop greater
supply chain security. Obviously rare earths are a key issue
and focus, but not just that, and that this therefore
(05:09):
creates some opportunities for Asian providers of some of the
necessary goods and materials and know how into that US reindustrialization.
Now we're grouping that under categories which would include production.
Semiconductors would be a good one. You can reference for
example TSMC's plant in Arizona which is now just turning
(05:29):
out Blackwell chips. You can talk about what we call projection,
which would be naval capability globally, which US needs help
on from a shipbuilding perspective. And then also power generation.
The US has a need to invest significantly in developing
its power generation capacity and expanding that and there are
a number vasion companies that can help in that supply chain.
So short story is that we have identified companies in Korea, Japan, Taiwan,
(05:54):
and Australia in the industries of industrials, technology and materials
and identified a number of companies that can play into
that supply chain, and we think that's an interesting investment
theme for investors to focus on. And then briefly, the
other angle would be the China side, where China is
leaning into so called new Productive Forces, which really is
an embracing term for advanced manufacturing technology upgrade and focus
(06:19):
on exports. And we've identified a number of companies here,
for example, that have been implicitly cited in the fifteenth
five Year Plan which is just announced a few weeks ago,
and we think that's also an exciting investment opportunity for investors.
So both sides of these, the usre industrialization and China
leaning into its ongoing industrialization and manufacturing upgrade, we think
is really an exciting place for investors to focus And.
Speaker 1 (06:42):
Tim is this a multi theme that could play up I.
Speaker 2 (06:46):
Think absolutely yes. I think there are a number of
themes that are you can credibly say they're five to
ten year themes, and I think this is one of them.
I find it hard to see how there's going to
be really any deviation on either side from this strategic
focus given the competitive nature of things and the idea
that economic security is now a part of national security,
(07:09):
and this.
Speaker 1 (07:09):
Is quite an interesting view. Was if we roll back
the clock, say, twelve months ago, a lot of economists
and strategists, Now I'm not saying gold and Sachs, but
maybe some of your competitors, maybe some you know, chief
investment officers were saying that we're entering into like a
tariff war, and that was suggesting that, you know, you
should play it safe and maybe invest more into Southeast
(07:32):
Asia India that are less exposed to global trade. But
in reality your views are quite different.
Speaker 2 (07:40):
Well, yes, I mean there's a number of different themes here, John,
that are at play embedded in your question, So, yes,
I think from the lens purely of greater tariffs that
focusing on economies and stock markets that are more domestically
focused and insulated from tariffs makes sense. We made that
(08:00):
same point in much of our tire for work. But
there are other themes at play too in markets, and
of course this year one of the dominant ones has
been the importance of artificial intelligence and how that's impacted
the technology sector. Now we've done some work which shows
at a very granular level that the exposure of the
(08:22):
North Asian markets Taiwan, Korea, Japan, and China to the
AI theme is significant, and this involves going stock by
stock in the index and mapping which stocks have direct
measurable AI related revenues, not some sort of conceptual thing,
but actually getting dollars from AI related sales. And one
(08:42):
example would be HIND excelling HBM three chips to Nvidia
or TSMC manufacturing in vidious chips. So if you go
through that mapping process, you'll see that about eighty percent
of Taiwan's market cap as some AI related revenues, and
somewhere between forty to sixty percent of the market cap
of China, Japan and Korea also have AI related revenues.
And then if you say, well, what percent of the
(09:03):
very strong gains in North Asia this year come from
that AI related cohort in each respective market, ninety percent
of Taiwan's gains are coming from AI related stocks, and
between forty to fifty percent of the gains in China,
Korea and Japan have similarly come from AI related stocks.
So you know, the AI theme has been really dominant
(09:24):
and as the tariff concerns moderated somewhat from the sort
of the extreme levels of concern in early April. I
think that explains very well why April was the low
this year, and from that bottom which was on April eighth,
I believe the broader MASAI Asia Pacific EXPAN Index rallied
over forty three percent to the recent high in early November.
Speaker 1 (09:45):
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(10:08):
If you like what you hear, don't forget to subscribe
and share. Jim, you must get this question all the time,
but I have to ask, are we in a AI
tech bubble?
Speaker 2 (10:19):
So it's a great question, and you're right. I've had
lots of conversations in this I've just been let you
around the world talking to investors in the US and
Europe and Middle Eastern parts of Asia and this topic
of isaiah bubble has come up a lot. Look, the
short story is that we don't think it's a bubble
dot dot dot, at least not yet. Okay, so we're
(10:41):
not oblivious to the concerns that there are worries that
the hyperscalers are going from an asset light to a
more asset heavy model, that they're going from very strong
balance sheets with lots of cash on them, the cash
flow to given the amount of capics are spending to
funding that now with some debt. There's a lot of
concerns about circular financing in different deals and lots of
(11:04):
analogs with the late nineteen nineties in the United States
when it was Internet bubble, you know, kind of one
point zero. So we're very well aware of that and
my various colleagues in the macro area Goldmessacs have written
papers on this, including our chief global strategies beater Oropenheimer
is written a paper on this and the title was
ISAI bubble not yet? We've written about how AI capics
(11:26):
in the US compares to previous bubbles, and the punchline
is that it's about one percent of GDP, but that
compares for example to the railroad build in the late
in eighteen hundreds and eighteen sixties when it was about
five percent of GDP. And we've also talked about how
much AIS stocks have gone up relative to the present
value of the opportunity for me AI and we think
that it's not outlandish, but that the AI stocks have
(11:48):
gone up and discounted a lot of the potential gain.
So you know, we're well aware of all this. So
we're not going to say that equivocally there's no bubble
at all, but we're saying that we're probably still not
in the later stages of one for variight of reasons.
But look, the pragmatic punchline for US in Asia and
for me wearing my asient strategy hat is that as
(12:08):
long as the US hyperscalar investment continues and grows to
the extent that we think it will in twenty twenty
six and twenty twenty seven. And just to put some
numbers on that, this year twenty twenty five, there's been
about four hundred billion of capex by the hyperscalers in
the US. We think round numbers that goes to about
five hundred and fifty billion next year and then about
(12:29):
six hundred and forty and twenty twenty seven. If that happens,
and I think there are very good reasons for thinking
that it will, then it's very very positive for the
upstream providers into that capex, which would be significantly the
semiconductor providers in Asia. And the reason is that there
is a significant supply demand shortfall which will be exacerbated
(12:51):
into twenty twenty six and will continue into twenty twenty seven.
And given the very high operating leverage of the semiconductor
industry because of the large amount of you've got to
spend to build incremental fabs when you have pricing power,
that falls to the bottom line in terms of profits
in a very magnified manner. So we think, for example,
that Korea's earnings will grow thirty five percent next year
for the aggregate market and more obviously for the semiconductive
(13:14):
socks themselves. So we think that still constitutes a very
constructive backdrop for Korea for example, which we're still very
bullish on.
Speaker 1 (13:21):
Okay, so you mentioned Korea, How does these you know,
markets rank like Korea, Taiwan, Japan, China, Like, give us
your ranking.
Speaker 2 (13:31):
So we're overweight Korea, China, and Japan. We're market weight
on Taiwan, just a signal that we like both Korea Taiwan,
but we are favoring Korea, which so far this year
is worked because Korea is up eighty plus percent in
dollars and Taiwan's up are very credible, but is up
thirty thirty five percent depending upon sort of you know
which day, which week you're looking at. So happy with
(13:51):
that designation, and then we recently upgraded interview on India,
having kind of sidestepped that for the last year. Now,
if you press me today, okay, like all of them,
but you know, how would you rank order them? I
would say Korea would be our top simply because the
correction that we've seen has been about a ten percent
correction in the market and then it's bounced back a bit.
(14:12):
Is entirely expectable and a normal phenomenon in markets after
you've had literally a ninety percent gain off the lows
in April. But if you do a post check right now,
there are four key reasons why we think that Korea
can continue to advance and make further strides into twenty
twenty six. Number one, as I mentioned, is the earnings
growth that we're expecting thirty five percent plus next year
(14:34):
and then a further mid teens gained into twenty twenty seven.
And number two, the valuation of the market as of
just recent close is about ten and a half times
forward earnings, which is not high in absolute terms and
is banging in the middle of the ten year trading range.
So you can't say that Korea is overly valued or
that it's discounted all the strong profit growth that I
(14:57):
that just made mention of Number three. Foreigners have rebought
the market, but there's still only at the midpoint fiftieth
percentile of their ten year range, so it's not as
though foreign investors are overexposed. And actually retail investors in
Korea have continued to prefer Nasdaq and have taken the
money out of Korea which is part of the reason
why the WAND has been weak, and put it into Nasdaq.
(15:17):
And our sense is that when they look at the
scorecard for this year where the US and NASZAC has
done very well, SMB's up sixteen percent, NAZECX up twenty
but Korea is up nearly eighty, they're probably going to say, hmm,
maybe there's some opportunity back home. Why I put on
my money elsewhere, so we think there's some potential flow
coming back there. And then the last one is that
(15:39):
the potential for Korea to rerate and to narrow the
long standing so called Korean discount, we think is very
strong because there are credible the illegal changes that have
been made by the government to advance better corporate governance,
including just this last week there were changes the dividend
taxation law which encourage companies to pay more devast and
(16:00):
investors to have a lower tax rate and therefore receiving dividends.
So if one aspect of a well functioning market is
returning of cash to shareholders, there's more of that which
is going on and will continue to go on in Korea.
So that is several other things we think argue for
some structural narrowing of the long standing career discount from
levels that are currently very very modest in absolute terms.
(16:23):
So you put all those together and we think that
the story for Korea remains pretty compelling.
Speaker 1 (16:28):
And Tim, you and I chatted previously, but you also
mentioned that the new government it's left leaning, but it's
actually more you know, I would say business friendly than
originally anticipated.
Speaker 2 (16:41):
No, that's absolutely right. We were somewhat concerned when we're
looking at the presidential election in May that the current
president from the Democratic Party e j MUN would come
in with a very leftist program or populist program may
be better term, and that might not be great for
the market, given maybe not as much of a pro
(17:03):
economic orientation, and might also have some negative connotations from
your political standpoint. And as it's turned out that the
new president is acting in a much more centrist manner
than perhaps people had thought or had feared. And that's
very clear in terms of the focus on leaning into
areas of strength for Korea industries like semiconductors, AI related aspects, shipbuilding, defense, biotechnology,
(17:32):
and so on. And it's also evident in terms of
the very clear focus on encouraging the market to improve.
And the signature tagline for the government now is cost
me five thousand, and we're just broke in the four
thousand mark, so cost me five thousand doesn't look that
far away, and in fact they might need to revise that,
(17:53):
but a higher costly number on things.
Speaker 1 (17:56):
Okay, look, I know you upgraded career early this year,
so it sounds like it's been a great call. Another
recommendation that you had is that you downgraded India last
year in October, and that also seems like it was
a great call. Was India's really underperformed, but recently upgraded
India again to overweight. Can you go through your reasoning there.
Speaker 2 (18:18):
Yes, and you said we're fortunate that I think we've
got the timing and that reasonably well. So the background
here is that we've been long standing fans of India
and the key argument, which is I think well known
and well appreciated, that India has structurally one of the
best longer term growth potentials or trended growth potentials of
any major economy, not just in Asia but inn em
(18:40):
So India is now the fourth largest economy globally, it's
the largest by population, and we think that trend economic
growth could be comfortably mid six percent level in real terms,
and that would suggest, given call a three four percent
inflation rate, that you can have nominal GDP growth of
ten ish percent. And Indian corporates have a very history
of being able to monetize a strong nominal GDP growth
(19:05):
environment and deliver good corporate profits. So the view is
that if you've got a big market that can deliver
call it thirteen fourteen, fifteen percent trend earnings growth, that
that's something that's worth liking, worth paying for it. So
we've been overweighted India for a while now. As we
got into the louder part of last year, that was
all great, but the market had done very, very well,
(19:25):
and so well that, in fact, the multiple evaluation for
the market had increased to twenty five times earnings. So
we had a view that, look, it's great, but there's
a lot of good news that's in the price. That
was reason number one, and then reason number two was
we were expecting what we called a mid cycle economic
correction or moderation, just a sort of a modestcyclical downturn.
(19:45):
Nothing hugely problematic, but we thought that would result in
some earnings downgrades. And as I'm sure you're well aware,
when you have highly valued stocks meeting earnings downgrades, that's
typically not a good recipe for near term performance. So
we thought it was better to dial back our view
in India and downgrade it, which we did in early October,
and that turned out to be shortly after the peak,
(20:06):
which was late September. For the market, so we resisted
upgrading for some time, and as you said, India's turned
out to have had a pretty lack luster year this year.
It's only sort of small or mid single digits in
US dollar terms, and therefore dramatic underperformed the twenty five
or their percent gains for the MSI Asia Pacific ex
(20:28):
Japan index, and then the thirty plus gains for China
and Taiwan and close to thirty for Japan, and as
we mentioned, eighty plus for Korea. So we sort of
feel happy we sidestep that. So why do we come back,
really because we feel that as you look forward, the
market has digested some of that valuation, it's still as expensive.
(20:48):
But we did a deep dive in evaluation and the
punchlines we think that around twenty to twenty two times
earnings is fair or justifiable, not super cheap, but certainly
justifiable kind of where we are right now. So going forward,
the question therefore is what's going to drive India, and
of course that's going to be earning delivery. And the
key point here is that we think we're through a
(21:09):
significant downgrade cycle and that we're starting to see earning's upgrades,
and so we have confidence that earnings delivery can be
around thirteen fourteen percent for the next few years, and
we think that's good enough to justify, as we call it,
kind of putting your toes back into the water and
starting to take a more constructive view on the market.
Speaker 1 (21:29):
Do you think India is a winner in the AI space?
And the reason why I'm asking is I'm getting conflicting views. Obviously,
Indie's got a lot of talented engineers. A lot of
the US tech companies are led by people from Indian origin.
But on the other hand, it exports a lot of
its IT services. Some people think that this could be
(21:49):
exposed to efficiency gains from AI and potential cuts in
terms of you know, manpower. What's your view there, So.
Speaker 2 (21:58):
John, it's a terrific question. And I was just in
India three weeks ago and this is very much a
topic of discussion. So I think you've hit on a
lot of key points there. One is I think there's
a lot of surprise on the investors that, given India's
characterization as being having high level of you know, stam
and computer talent, why has it been absent from the
(22:20):
AI discussion when it's all been about North Asia, as
we've been mentioning previously in our conversation now, and I
think the one of the points that has not yet surfaced,
and this is a I think the benefit of having
just been in Indian spoken to a number of different
companies is that there is a fair amount of focus
at the corporate level on AI. But companies are just
(22:42):
figuring out what their AI strategy is and haven't yet
broadcast it. So I guess my point number one is
that there's a lot of kind of AI focus bubbling
under the surface that is not yet maybe fully manifested.
The second point I'd make is that there's a strong
primary issuance activity in India now, a lot of IPOs
companies coming public, and our understanding is that there are
(23:04):
a number of AI startups which will be listed over
the next few quarters. So the forward looking point here
is that maybe a little bit more AI in the
public light coming up, or AI related companies in the
public light, which which may start to somewhat shift that narrative,
which will be I think interesting into India's benefit. The
third thing, as you correctly mentioned, is that the IT
(23:27):
services companies clearly have a threat to their business models
because of the displacement effect of greater of AI and
the fact that it makes coding easier and therefore there
may be less of a need to outsource computer problems
or or challenges to the Indie IT services companies. So
this is clearly a challenge to them and one of
(23:48):
the reasons why they've underperformed, and we've been underweight that
part of the market as well. By the way, what
I'd say on a forward looking basis is that I
would be loath to write those companies off, quote unquote,
because if you look at the last say thirty years
of these companies' history, and I've been investing in India
(24:09):
previous incarnation, I was running hedge funt money and we
had actually quite a large book in India at that time.
And if you look at the business model in the
late nineteen nineties and then its subsequent periods, these companies
have obviously changed because the technology has changed. So I
think when you've got smart people who are adaptive and
understand that technology is never changing game that I think,
(24:30):
if you give some credit, that they'll be able to
figure things out and pivot. But I think there is
a challenge to the business model, and I think that's
what the market has been penalizing. These companies share prices
for at least relative to how the broader index is done.
And then look, the last part of the AI discussion,
or another important point which and I've had these conversations
with investors in India, is the question whether AI could
(24:53):
sort of short circuit the demographic dividend that India is
enjoying or it's likely to continue to enjoy if that
starts to take away jobs for lower skilled workers who
are just getting onto the economic ladder and driving the
whole emerging market story of you know, higher capit incomes
mean that you change consuming patterns, and that's what drives
demand for housing and for automobiles and refrigerators and you know,
(25:18):
construction are goods and services. And here I think that
that is a credible issue to be concerned about, but
I think it's a long way from saying it's going
to disrupt India's growth potential. I mean, if you just
think about the amount of infrastructure that India is doing
and needs to do, which is a very powerful part
of the investment thesis, AI is not going to build
the bridges, the roads, the tunnels, the ports, et cetera.
(25:40):
So I think there still is a very strong growth
story for India, which is again where we're leaning into
it after being on the sidelines for a year.
Speaker 1 (25:49):
Okay, and if we could zoom out and talk about
the rest ofvation. Now we've talked about like AI and
how that's really been a tail wind for North Asian economies.
India's got that domestic excit in growth story, But what
about the rest of you know, like Southeast Asia, Australia,
it doesn't really have either of those two factors.
Speaker 2 (26:10):
Yeah, sadly that's true, and we have to be underweighted
something heref we're positive on various parts of the region.
So we have been underweight and are underweight in Australia
and parts of Osion. And the way we characterize it,
it's not that we're outright bearish or there's terrible things
going on there. It's just that they don't have quite
(26:30):
as forceful the drivers that we've identified and quickly discussed
in this conversation. Now, in Australia's case, the story of
the short way we would characterize our view is that
the market is expensive relative to its own history, and
earnings growth is still we think going to be fairly pedestrian,
(26:53):
sort of mid single digit earnings growth. So when you
have originally priced market in absolute terms and relative to
history with a fairly lackluster earning growth profile, it just
seems that there are better areas to deploy capital in
the region. When you've got thirty plus percent growth in
Korea for example, as I mentioned, it just sort of
seems that's not a hard decision to make as or
(27:13):
as which market you would favor. And then if you
drill down into it just one level, more fifty percent
of the market capital Australia is in the banks and
the material sector, and the banks are expensive. They probably
stay that way because superannuation flows, but they are expensive
without as much growth, So we just don't feel as
inspired there, especially in the environment where RACHEL coming down,
(27:35):
which it tends to put pressure on bank margins. And
then on the material side, there's bits of materials that
we like whevery bulls are on copper, for example, and gold,
but we're not so keen in iron ore and aluminum
or as as you say, aluminium, and those are significant
parts of the revenue stream for the large materials companies.
So when you put all that together, it's just kind
(27:56):
of hard from a bottom up industry by industry construction
to arrive at a positive view. And then for osion,
obviously there's different markets with different characteristics. Look a lot
of parts of ausion look really cheap. I mean, the
Philippines is trading at less than ten times earnings and
Indonesia is trading at eleven. So these markets are not expensive,
and there're definitely is value for more focused investors. But
(28:18):
one unfortunate aspect is just that, especially in the case
of the Philippines, that liquidity is just so small that
when you think about from a standpoint of a global investor,
the amount of work you have to do in order
to commit say fifteen million dollars of capital in a
place like Philippines or Indonesia. You've got to get to
know the country, You've got to look at the companies.
(28:39):
You can only put you know, maybe a million dollars
or some smaller amount at each stock you want to buy.
You take liquidity risk, et cetera, et cetera. It's just
a lot of mental effort to deploy that amount of capital,
whereas if you just made one decision. I mean, you
could buy you know, twenty times that amount in like
TSMC or you know, any other larger, more liquid companies.
So from the standpoint of allocation mental bandwidth for a
(29:01):
global investor, it's very hard to get anyone's attention under
the small rising market. So sadly, that liquidity constraint means
that you've got to have much much more upside potential
to compensate for the liquidity risk you're taking. And most investors,
including US, don't see that trade off being so favorable
that you can really warrant a more constructive view on
the markets.
Speaker 1 (29:21):
And tim you meet investors all the time around the world,
what's their positioning like in Asia? And you know, when
you tell this bullish case for Asian equities, what's the response.
Speaker 2 (29:34):
So from a positioning standpoint, foreigners are still conservatively positioned
relative to they have been in the past. We track
all this fairly carefully, and I'll just give you one
headline number not to clog this conversation up with too
many details, and that is that from the middle of
last year, and this is exchange level information for the
(29:58):
emerging Asia markets that give them this kind of detail,
which would be Korea, Taiwan, India, and the four Osan markets.
So for that collection of what we call emerging Asia markets,
foreigners have nets sold round numbers one hundred billion dollars
from the peak in twenty twenty four to the lows
this year that then rebought about forty or so, but
(30:19):
then have subsequently sold about twenty of that, so net
net there's still way down on where they were in
the middle of twenty twenty four, and that also is
lower than where they were sort of, you know, four
or five years before that. So overall, foreigners have definitely
decumulated as the US has been really the center of
attention and Asia has had problems, particularly China, which went
(30:41):
through kind of a four year bear market from twenty
twenty one to the low's late twenty four to twenty five.
So I think it's going to take a little bit
of time for people to recover their risk appetite, and
we think the key to that really will be the
US market just not making money. So the US, of
course the largest capital market globally, and it's what's been
attracting lots of fun flows and positioning what we've observed,
(31:05):
and it's very clear in the numbers that when the
US goes down, it tends to take everyone down with
It's either greater or lesser degrees. But it's very hard
to make money in absolute terms. If the US market correct,
say ten percent or more, that's totally there in the data. Correspondingly,
if the US is going up a lot, then hey,
you're making money in the biggest capital market. Life is great.
(31:25):
Why take risk elsewhere? So the sweet spot from a
fun flow perspective to for example, Asia or emerging markets
more broadly, is if the US is just bouncing around
sort of zero plus five minus five, you know, just
sort of not making money. I think in that environment,
people might be impelled to take risk elsewhere in order
to find other areas of gain. And that, indeed is
(31:46):
what we expect. I mean, we think that the US
will still do decently well next year, but we think
that other markets might have some higher potential returns. And
if we're right about that sort of broader context, then
that should also result in some incremental flows going into
Asia and supporting the markets in the region.
Speaker 1 (32:07):
Tim sounds like a pretty positive story for Asian equities.
Speaker 2 (32:10):
What could go wrong?
Speaker 1 (32:11):
What's the risk factor here?
Speaker 2 (32:13):
So how fertile is your imagination something which can go
wrong If you've been around Asia for a long time,
which indeed I have, you have to always be prepared
for surprises. So you know, it's just really as the
list is, as long as your imagination is fertile. To
be a bit more specific, so you could take fertile
fundamental growth. So if there's any kind of growth downturn
(32:37):
or shocks in terms of the macroeconomic environment, then that's
obviously going to be more of a challenge because that
ultimately will start to impair earnings growth. Then I think
it's very very clear that earnings are the fundamental longer
term driver of equities. Similarly, equities globally have reflated, as
I mentioned earlier in our conversation, So if there is
(33:00):
any kind of a shock, either in terms of the
rate environment, or the currency backdrop, or the growth backdrop,
or indeed in the geopolitical backdrop, then markets are vulnerable
to some sort of a correction. Now we actually have
an indicator we've developed. We call it RADAR, which stands
for Regional Asia draut On Risk Model, and it's a
logistic probabilistic regression which estimates the probability of varying degrees
(33:25):
of pullbacks, and what that model is saying now is
that the risk of a ten percent correction is fairly elevated.
We think the risk of a greater so called twenty
percent correction is actually quite low, the reason being that
the greater drawdown is driven by a variety of more
fundamental macro inputs, which still seem to be perfect okay,
But the more moderate correction drawdown risk is driven by
(33:48):
things of how much markets have gone up or valuations
are reflated to and we're credable mentum indicators and a
few other things have gotten to. So really with that
saying is that there is a risk of some sort
of a moderate pullback, which could be bit scary for investors.
And if you want to think ahead, typically you get
good seasonality in markets in December and in January, but
(34:09):
then you kind of run into a bit of a
softer patch typically in late February and March. So one
thing that investors might want to keep their eye on
is the risk of some sort of of an air
pocket in markets as we get later into the first
quarter of next year, so that at least be some
level of triggers which could catalyze some bit of an
airpocket in markets. It's never a straight line, John, as
(34:32):
you know, so you prepare some for some things.
Speaker 1 (34:35):
And tim for the benefit of the listener. I know
you've been in Asia for many years. Has it been
over twenty five or thirty years we've been in Asian
equity markets.
Speaker 2 (34:43):
Actually a bit longer than that to confess, it's been
closer to forty. Okay, scars on the back.
Speaker 1 (34:51):
Dam, It's great having you on.
Speaker 2 (34:54):
Thanks for joining well, thank you so much for having me.
Speaker 1 (34:56):
It's been a pleasure you've been listening to Asia Centric
from Blue Omberger Intelligence. I'm John Lee in Hong Kong.
You can listen to all our episodes on Apple Podcasts,
Spotify or revery you listen. This was our last podcast
for this year, and we'll resume on the eighth of
January twenty twenty six. Happy holidays, look forward to more
exciting guests next year. This podcast was produced and edited
(35:20):
by Clara Chan. Thanks for listening.
Geopolitical risk is often seen as a threat to market,
but for savvy investors it can be a source of opportunity.
Strategic competition between the two great powers is accelerating US
reindustrialization while driving China's push for self sufficiency. This shift
is creating ripple effects across supply chains and opening doors
(00:23):
in North Asia, where economies like Korea, Taiwan, Japan and
China have already capitalized on the AI wave. Will this
momentum carry into twenty twenty six and where does the
rest of Asia, particularly India fit into this picture. You're
listening to Asia Centric from Bloomberg Intelligence. I'm John Lee
(00:44):
in Hong Kong. Today we have Timothy Moe, partner and
chief Asia Pacific equity strategist at Goldman Sachs, dialing in
from Singapore. Tim Welcome to the.
Speaker 2 (00:54):
Show, John, Thank you very much for having me on.
Speaker 1 (00:58):
We've had a great year for global equities and in
particular Asian equities. Can these continue going into twenty twenty six?
Speaker 2 (01:06):
Short answer is we think yes, and we're wrapping our
views around five key themes, some of which you touched
on in your introduction. The simple logic we're espousing is
that we have a equity supportive macro backdrop which really
divides into or is driven by three key factors. One
that economic growth is good and that is going to
(01:28):
filter into earnings growth. Number Two, we think that rates
will continue to come down policy rates. The FED is
cutting we think shortly, and we'll cut twice more in
early twenty twenty six, and that will, in our view,
lead to some further weakening of the dollar. So if
we have an environment of supportive growth, lower rates, and
(01:49):
stronger Asian currencies aka wikre dollar, that typically is a
macro backdrop that is supported for Asian equities. And that's
complemented by the fact that positioning in markets by foreign
investors still is on the light side. So when you
have that sort of configuration, along with valuations that have
risen this year but are still less expensive than global comparables,
(02:09):
we think that together is a potent cocktail for Asian
markets making further gains into twenty twenty six.
Speaker 1 (02:16):
And where does Asia fit into the Goldman Sachs strategy view?
Will this outperform the US or other markets like Ama
next year?
Speaker 2 (02:26):
We think it's likely that that is the case. So
to be clear, we're overweight equities as an asset class
in our global asset allocation, where OVID equities, as I mentioned,
underweight credit and then market weight on the other key
asset classes of fixed income cash commodities. Now within equities,
we're overweight Asia ex Japan, and we're market weight on
(02:50):
the US, and we're underweight in Europe. So that does
indicate a tilt towards Asia away from Europe in this case,
But to be clear, we're constructive on the asset class
globally as.
Speaker 1 (03:02):
A whole and tim At the beginning of the intro,
I reference one of your reports where you discuss how
investors can turn geopolitical risks into opportunities, and in particular,
how competition between the US and China is creating opportunities
for Asian companies. Can you go into detail.
Speaker 2 (03:22):
Yeah, thanks John. This is actually one of the five
themes that I mentioned. It's the fourth of five, and
it's one that we're particularly excited about because I think
it's a creative twist on what is typically viewed as
a problem. So the simple construct here is that geopolitics
has typically been viewed through the lens of being a risk,
and in fact there's a geopolitical risk index which is
(03:44):
publicly available, which shows if you look at a twenty
year history, that we're in a higher what you might
call a trading range, higher level of risk that has
been the case for the past twenty years. Of course,
there's a lot of spikes to that, and we've also
shown in our work that elevated periods of geopolitical risk
tend to be associated with market selling off and it
(04:05):
then takes them a quarter or to recover after that
particular shock. Now, there's many types of geopolitical risks, but
one of the largest ones that investors are focusing on,
of course, is the strategic tension between the United States
and China. So our observation is that that is the
world that we're in. It's unlikely to change. Whether or
not investors would like that, that's kind of irrelevant. They have
(04:26):
to do with the world that we're in. And if
you look at recent documents, including the just issued US
National Security Strategy and others, as well as pronouncements on
the China side, it's very clear that the US and
China are strategic competitors. Now, the observation we're having here
is that that can create some opportunities for investors on
the US side. The term we're using and which is
(04:49):
now more broadly used, is reindustrialization. So the idea that
the US needs to regain some domestic manufacturing capability, some
manufacturing process know how in order to to develop greater
supply chain security. Obviously rare earths are a key issue
and focus, but not just that, and that this therefore
(05:09):
creates some opportunities for Asian providers of some of the
necessary goods and materials and know how into that US reindustrialization.
Now we're grouping that under categories which would include production.
Semiconductors would be a good one. You can reference for
example TSMC's plant in Arizona which is now just turning
(05:29):
out Blackwell chips. You can talk about what we call projection,
which would be naval capability globally, which US needs help
on from a shipbuilding perspective. And then also power generation.
The US has a need to invest significantly in developing
its power generation capacity and expanding that and there are
a number vasion companies that can help in that supply chain.
So short story is that we have identified companies in Korea, Japan, Taiwan,
(05:54):
and Australia in the industries of industrials, technology and materials
and identified a number of companies that can play into
that supply chain, and we think that's an interesting investment
theme for investors to focus on. And then briefly, the
other angle would be the China side, where China is
leaning into so called new Productive Forces, which really is
an embracing term for advanced manufacturing technology upgrade and focus
(06:19):
on exports. And we've identified a number of companies here,
for example, that have been implicitly cited in the fifteenth
five Year Plan which is just announced a few weeks ago,
and we think that's also an exciting investment opportunity for investors.
So both sides of these, the usre industrialization and China
leaning into its ongoing industrialization and manufacturing upgrade, we think
is really an exciting place for investors to focus And.
Speaker 1 (06:42):
Tim is this a multi theme that could play up I.
Speaker 2 (06:46):
Think absolutely yes. I think there are a number of
themes that are you can credibly say they're five to
ten year themes, and I think this is one of them.
I find it hard to see how there's going to
be really any deviation on either side from this strategic
focus given the competitive nature of things and the idea
that economic security is now a part of national security,
(07:09):
and this.
Speaker 1 (07:09):
Is quite an interesting view. Was if we roll back
the clock, say, twelve months ago, a lot of economists
and strategists, Now I'm not saying gold and Sachs, but
maybe some of your competitors, maybe some you know, chief
investment officers were saying that we're entering into like a
tariff war, and that was suggesting that, you know, you
should play it safe and maybe invest more into Southeast
(07:32):
Asia India that are less exposed to global trade. But
in reality your views are quite different.
Speaker 2 (07:40):
Well, yes, I mean there's a number of different themes here, John,
that are at play embedded in your question, So, yes,
I think from the lens purely of greater tariffs that
focusing on economies and stock markets that are more domestically
focused and insulated from tariffs makes sense. We made that
(08:00):
same point in much of our tire for work. But
there are other themes at play too in markets, and
of course this year one of the dominant ones has
been the importance of artificial intelligence and how that's impacted
the technology sector. Now we've done some work which shows
at a very granular level that the exposure of the
(08:22):
North Asian markets Taiwan, Korea, Japan, and China to the
AI theme is significant, and this involves going stock by
stock in the index and mapping which stocks have direct
measurable AI related revenues, not some sort of conceptual thing,
but actually getting dollars from AI related sales. And one
(08:42):
example would be HIND excelling HBM three chips to Nvidia
or TSMC manufacturing in vidious chips. So if you go
through that mapping process, you'll see that about eighty percent
of Taiwan's market cap as some AI related revenues, and
somewhere between forty to sixty percent of the market cap
of China, Japan and Korea also have AI related revenues.
And then if you say, well, what percent of the
(09:03):
very strong gains in North Asia this year come from
that AI related cohort in each respective market, ninety percent
of Taiwan's gains are coming from AI related stocks, and
between forty to fifty percent of the gains in China,
Korea and Japan have similarly come from AI related stocks.
So you know, the AI theme has been really dominant
(09:24):
and as the tariff concerns moderated somewhat from the sort
of the extreme levels of concern in early April. I
think that explains very well why April was the low
this year, and from that bottom which was on April eighth,
I believe the broader MASAI Asia Pacific EXPAN Index rallied
over forty three percent to the recent high in early November.
Speaker 1 (09:45):
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(10:08):
If you like what you hear, don't forget to subscribe
and share. Jim, you must get this question all the time,
but I have to ask, are we in a AI
tech bubble?
Speaker 2 (10:19):
So it's a great question, and you're right. I've had
lots of conversations in this I've just been let you
around the world talking to investors in the US and
Europe and Middle Eastern parts of Asia and this topic
of isaiah bubble has come up a lot. Look, the
short story is that we don't think it's a bubble
dot dot dot, at least not yet. Okay, so we're
(10:41):
not oblivious to the concerns that there are worries that
the hyperscalers are going from an asset light to a
more asset heavy model, that they're going from very strong
balance sheets with lots of cash on them, the cash
flow to given the amount of capics are spending to
funding that now with some debt. There's a lot of
concerns about circular financing in different deals and lots of
(11:04):
analogs with the late nineteen nineties in the United States
when it was Internet bubble, you know, kind of one
point zero. So we're very well aware of that and
my various colleagues in the macro area Goldmessacs have written
papers on this, including our chief global strategies beater Oropenheimer
is written a paper on this and the title was
ISAI bubble not yet? We've written about how AI capics
(11:26):
in the US compares to previous bubbles, and the punchline
is that it's about one percent of GDP, but that
compares for example to the railroad build in the late
in eighteen hundreds and eighteen sixties when it was about
five percent of GDP. And we've also talked about how
much AIS stocks have gone up relative to the present
value of the opportunity for me AI and we think
that it's not outlandish, but that the AI stocks have
(11:48):
gone up and discounted a lot of the potential gain.
So you know, we're well aware of all this. So
we're not going to say that equivocally there's no bubble
at all, but we're saying that we're probably still not
in the later stages of one for variight of reasons.
But look, the pragmatic punchline for US in Asia and
for me wearing my asient strategy hat is that as
(12:08):
long as the US hyperscalar investment continues and grows to
the extent that we think it will in twenty twenty
six and twenty twenty seven. And just to put some
numbers on that, this year twenty twenty five, there's been
about four hundred billion of capex by the hyperscalers in
the US. We think round numbers that goes to about
five hundred and fifty billion next year and then about
(12:29):
six hundred and forty and twenty twenty seven. If that happens,
and I think there are very good reasons for thinking
that it will, then it's very very positive for the
upstream providers into that capex, which would be significantly the
semiconductor providers in Asia. And the reason is that there
is a significant supply demand shortfall which will be exacerbated
(12:51):
into twenty twenty six and will continue into twenty twenty seven.
And given the very high operating leverage of the semiconductor
industry because of the large amount of you've got to
spend to build incremental fabs when you have pricing power,
that falls to the bottom line in terms of profits
in a very magnified manner. So we think, for example,
that Korea's earnings will grow thirty five percent next year
for the aggregate market and more obviously for the semiconductive
(13:14):
socks themselves. So we think that still constitutes a very
constructive backdrop for Korea for example, which we're still very
bullish on.
Speaker 1 (13:21):
Okay, so you mentioned Korea, How does these you know,
markets rank like Korea, Taiwan, Japan, China, Like, give us
your ranking.
Speaker 2 (13:31):
So we're overweight Korea, China, and Japan. We're market weight
on Taiwan, just a signal that we like both Korea Taiwan,
but we are favoring Korea, which so far this year
is worked because Korea is up eighty plus percent in
dollars and Taiwan's up are very credible, but is up
thirty thirty five percent depending upon sort of you know
which day, which week you're looking at. So happy with
(13:51):
that designation, and then we recently upgraded interview on India,
having kind of sidestepped that for the last year. Now,
if you press me today, okay, like all of them,
but you know, how would you rank order them? I
would say Korea would be our top simply because the
correction that we've seen has been about a ten percent
correction in the market and then it's bounced back a bit.
(14:12):
Is entirely expectable and a normal phenomenon in markets after
you've had literally a ninety percent gain off the lows
in April. But if you do a post check right now,
there are four key reasons why we think that Korea
can continue to advance and make further strides into twenty
twenty six. Number one, as I mentioned, is the earnings
growth that we're expecting thirty five percent plus next year
(14:34):
and then a further mid teens gained into twenty twenty seven.
And number two, the valuation of the market as of
just recent close is about ten and a half times
forward earnings, which is not high in absolute terms and
is banging in the middle of the ten year trading range.
So you can't say that Korea is overly valued or
that it's discounted all the strong profit growth that I
(14:57):
that just made mention of Number three. Foreigners have rebought
the market, but there's still only at the midpoint fiftieth
percentile of their ten year range, so it's not as
though foreign investors are overexposed. And actually retail investors in
Korea have continued to prefer Nasdaq and have taken the
money out of Korea which is part of the reason
why the WAND has been weak, and put it into Nasdaq.
(15:17):
And our sense is that when they look at the
scorecard for this year where the US and NASZAC has
done very well, SMB's up sixteen percent, NAZECX up twenty
but Korea is up nearly eighty, they're probably going to say, hmm,
maybe there's some opportunity back home. Why I put on
my money elsewhere, so we think there's some potential flow
coming back there. And then the last one is that
(15:39):
the potential for Korea to rerate and to narrow the
long standing so called Korean discount, we think is very
strong because there are credible the illegal changes that have
been made by the government to advance better corporate governance,
including just this last week there were changes the dividend
taxation law which encourage companies to pay more devast and
(16:00):
investors to have a lower tax rate and therefore receiving dividends.
So if one aspect of a well functioning market is
returning of cash to shareholders, there's more of that which
is going on and will continue to go on in Korea.
So that is several other things we think argue for
some structural narrowing of the long standing career discount from
levels that are currently very very modest in absolute terms.
(16:23):
So you put all those together and we think that
the story for Korea remains pretty compelling.
Speaker 1 (16:28):
And Tim, you and I chatted previously, but you also
mentioned that the new government it's left leaning, but it's
actually more you know, I would say business friendly than
originally anticipated.
Speaker 2 (16:41):
No, that's absolutely right. We were somewhat concerned when we're
looking at the presidential election in May that the current
president from the Democratic Party e j MUN would come
in with a very leftist program or populist program may
be better term, and that might not be great for
the market, given maybe not as much of a pro
(17:03):
economic orientation, and might also have some negative connotations from
your political standpoint. And as it's turned out that the
new president is acting in a much more centrist manner
than perhaps people had thought or had feared. And that's
very clear in terms of the focus on leaning into
areas of strength for Korea industries like semiconductors, AI related aspects, shipbuilding, defense, biotechnology,
(17:32):
and so on. And it's also evident in terms of
the very clear focus on encouraging the market to improve.
And the signature tagline for the government now is cost
me five thousand, and we're just broke in the four
thousand mark, so cost me five thousand doesn't look that
far away, and in fact they might need to revise that,
(17:53):
but a higher costly number on things.
Speaker 1 (17:56):
Okay, look, I know you upgraded career early this year,
so it sounds like it's been a great call. Another
recommendation that you had is that you downgraded India last
year in October, and that also seems like it was
a great call. Was India's really underperformed, but recently upgraded
India again to overweight. Can you go through your reasoning there.
Speaker 2 (18:18):
Yes, and you said we're fortunate that I think we've
got the timing and that reasonably well. So the background
here is that we've been long standing fans of India
and the key argument, which is I think well known
and well appreciated, that India has structurally one of the
best longer term growth potentials or trended growth potentials of
any major economy, not just in Asia but inn em
(18:40):
So India is now the fourth largest economy globally, it's
the largest by population, and we think that trend economic
growth could be comfortably mid six percent level in real terms,
and that would suggest, given call a three four percent
inflation rate, that you can have nominal GDP growth of
ten ish percent. And Indian corporates have a very history
of being able to monetize a strong nominal GDP growth
(19:05):
environment and deliver good corporate profits. So the view is
that if you've got a big market that can deliver
call it thirteen fourteen, fifteen percent trend earnings growth, that
that's something that's worth liking, worth paying for it. So
we've been overweighted India for a while now. As we
got into the louder part of last year, that was
all great, but the market had done very, very well,
(19:25):
and so well that, in fact, the multiple evaluation for
the market had increased to twenty five times earnings. So
we had a view that, look, it's great, but there's
a lot of good news that's in the price. That
was reason number one, and then reason number two was
we were expecting what we called a mid cycle economic
correction or moderation, just a sort of a modestcyclical downturn.
(19:45):
Nothing hugely problematic, but we thought that would result in
some earnings downgrades. And as I'm sure you're well aware,
when you have highly valued stocks meeting earnings downgrades, that's
typically not a good recipe for near term performance. So
we thought it was better to dial back our view
in India and downgrade it, which we did in early October,
and that turned out to be shortly after the peak,
(20:06):
which was late September. For the market, so we resisted
upgrading for some time, and as you said, India's turned
out to have had a pretty lack luster year this year.
It's only sort of small or mid single digits in
US dollar terms, and therefore dramatic underperformed the twenty five
or their percent gains for the MSI Asia Pacific ex
(20:28):
Japan index, and then the thirty plus gains for China
and Taiwan and close to thirty for Japan, and as
we mentioned, eighty plus for Korea. So we sort of
feel happy we sidestep that. So why do we come back,
really because we feel that as you look forward, the
market has digested some of that valuation, it's still as expensive.
(20:48):
But we did a deep dive in evaluation and the
punchlines we think that around twenty to twenty two times
earnings is fair or justifiable, not super cheap, but certainly
justifiable kind of where we are right now. So going forward,
the question therefore is what's going to drive India, and
of course that's going to be earning delivery. And the
key point here is that we think we're through a
(21:09):
significant downgrade cycle and that we're starting to see earning's upgrades,
and so we have confidence that earnings delivery can be
around thirteen fourteen percent for the next few years, and
we think that's good enough to justify, as we call it,
kind of putting your toes back into the water and
starting to take a more constructive view on the market.
Speaker 1 (21:29):
Do you think India is a winner in the AI space?
And the reason why I'm asking is I'm getting conflicting views. Obviously,
Indie's got a lot of talented engineers. A lot of
the US tech companies are led by people from Indian origin.
But on the other hand, it exports a lot of
its IT services. Some people think that this could be
(21:49):
exposed to efficiency gains from AI and potential cuts in
terms of you know, manpower. What's your view there, So.
Speaker 2 (21:58):
John, it's a terrific question. And I was just in
India three weeks ago and this is very much a
topic of discussion. So I think you've hit on a
lot of key points there. One is I think there's
a lot of surprise on the investors that, given India's
characterization as being having high level of you know, stam
and computer talent, why has it been absent from the
(22:20):
AI discussion when it's all been about North Asia, as
we've been mentioning previously in our conversation now, and I
think the one of the points that has not yet surfaced,
and this is a I think the benefit of having
just been in Indian spoken to a number of different
companies is that there is a fair amount of focus
at the corporate level on AI. But companies are just
(22:42):
figuring out what their AI strategy is and haven't yet
broadcast it. So I guess my point number one is
that there's a lot of kind of AI focus bubbling
under the surface that is not yet maybe fully manifested.
The second point I'd make is that there's a strong
primary issuance activity in India now, a lot of IPOs
companies coming public, and our understanding is that there are
(23:04):
a number of AI startups which will be listed over
the next few quarters. So the forward looking point here
is that maybe a little bit more AI in the
public light coming up, or AI related companies in the
public light, which which may start to somewhat shift that narrative,
which will be I think interesting into India's benefit. The
third thing, as you correctly mentioned, is that the IT
(23:27):
services companies clearly have a threat to their business models
because of the displacement effect of greater of AI and
the fact that it makes coding easier and therefore there
may be less of a need to outsource computer problems
or or challenges to the Indie IT services companies. So
this is clearly a challenge to them and one of
(23:48):
the reasons why they've underperformed, and we've been underweight that
part of the market as well. By the way, what
I'd say on a forward looking basis is that I
would be loath to write those companies off, quote unquote,
because if you look at the last say thirty years
of these companies' history, and I've been investing in India
(24:09):
previous incarnation, I was running hedge funt money and we
had actually quite a large book in India at that time.
And if you look at the business model in the
late nineteen nineties and then its subsequent periods, these companies
have obviously changed because the technology has changed. So I
think when you've got smart people who are adaptive and
understand that technology is never changing game that I think,
(24:30):
if you give some credit, that they'll be able to
figure things out and pivot. But I think there is
a challenge to the business model, and I think that's
what the market has been penalizing. These companies share prices
for at least relative to how the broader index is done.
And then look, the last part of the AI discussion,
or another important point which and I've had these conversations
with investors in India, is the question whether AI could
(24:53):
sort of short circuit the demographic dividend that India is
enjoying or it's likely to continue to enjoy if that
starts to take away jobs for lower skilled workers who
are just getting onto the economic ladder and driving the
whole emerging market story of you know, higher capit incomes
mean that you change consuming patterns, and that's what drives
demand for housing and for automobiles and refrigerators and you know,
(25:18):
construction are goods and services. And here I think that
that is a credible issue to be concerned about, but
I think it's a long way from saying it's going
to disrupt India's growth potential. I mean, if you just
think about the amount of infrastructure that India is doing
and needs to do, which is a very powerful part
of the investment thesis, AI is not going to build
the bridges, the roads, the tunnels, the ports, et cetera.
(25:40):
So I think there still is a very strong growth
story for India, which is again where we're leaning into
it after being on the sidelines for a year.
Speaker 1 (25:49):
Okay, and if we could zoom out and talk about
the rest ofvation. Now we've talked about like AI and
how that's really been a tail wind for North Asian economies.
India's got that domestic excit in growth story, But what
about the rest of you know, like Southeast Asia, Australia,
it doesn't really have either of those two factors.
Speaker 2 (26:10):
Yeah, sadly that's true, and we have to be underweighted
something heref we're positive on various parts of the region.
So we have been underweight and are underweight in Australia
and parts of Osion. And the way we characterize it,
it's not that we're outright bearish or there's terrible things
going on there. It's just that they don't have quite
(26:30):
as forceful the drivers that we've identified and quickly discussed
in this conversation. Now, in Australia's case, the story of
the short way we would characterize our view is that
the market is expensive relative to its own history, and
earnings growth is still we think going to be fairly pedestrian,
(26:53):
sort of mid single digit earnings growth. So when you
have originally priced market in absolute terms and relative to
history with a fairly lackluster earning growth profile, it just
seems that there are better areas to deploy capital in
the region. When you've got thirty plus percent growth in
Korea for example, as I mentioned, it just sort of
seems that's not a hard decision to make as or
(27:13):
as which market you would favor. And then if you
drill down into it just one level, more fifty percent
of the market capital Australia is in the banks and
the material sector, and the banks are expensive. They probably
stay that way because superannuation flows, but they are expensive
without as much growth, So we just don't feel as
inspired there, especially in the environment where RACHEL coming down,
(27:35):
which it tends to put pressure on bank margins. And
then on the material side, there's bits of materials that
we like whevery bulls are on copper, for example, and gold,
but we're not so keen in iron ore and aluminum
or as as you say, aluminium, and those are significant
parts of the revenue stream for the large materials companies.
So when you put all that together, it's just kind
(27:56):
of hard from a bottom up industry by industry construction
to arrive at a positive view. And then for osion,
obviously there's different markets with different characteristics. Look a lot
of parts of ausion look really cheap. I mean, the
Philippines is trading at less than ten times earnings and
Indonesia is trading at eleven. So these markets are not expensive,
and there're definitely is value for more focused investors. But
(28:18):
one unfortunate aspect is just that, especially in the case
of the Philippines, that liquidity is just so small that
when you think about from a standpoint of a global investor,
the amount of work you have to do in order
to commit say fifteen million dollars of capital in a
place like Philippines or Indonesia. You've got to get to
know the country, You've got to look at the companies.
(28:39):
You can only put you know, maybe a million dollars
or some smaller amount at each stock you want to buy.
You take liquidity risk, et cetera, et cetera. It's just
a lot of mental effort to deploy that amount of capital,
whereas if you just made one decision. I mean, you
could buy you know, twenty times that amount in like
TSMC or you know, any other larger, more liquid companies.
So from the standpoint of allocation mental bandwidth for a
(29:01):
global investor, it's very hard to get anyone's attention under
the small rising market. So sadly, that liquidity constraint means
that you've got to have much much more upside potential
to compensate for the liquidity risk you're taking. And most investors,
including US, don't see that trade off being so favorable
that you can really warrant a more constructive view on
the markets.
Speaker 1 (29:21):
And tim you meet investors all the time around the world,
what's their positioning like in Asia? And you know, when
you tell this bullish case for Asian equities, what's the response.
Speaker 2 (29:34):
So from a positioning standpoint, foreigners are still conservatively positioned
relative to they have been in the past. We track
all this fairly carefully, and I'll just give you one
headline number not to clog this conversation up with too
many details, and that is that from the middle of
last year, and this is exchange level information for the
(29:58):
emerging Asia markets that give them this kind of detail,
which would be Korea, Taiwan, India, and the four Osan markets.
So for that collection of what we call emerging Asia markets,
foreigners have nets sold round numbers one hundred billion dollars
from the peak in twenty twenty four to the lows
this year that then rebought about forty or so, but
(30:19):
then have subsequently sold about twenty of that, so net
net there's still way down on where they were in
the middle of twenty twenty four, and that also is
lower than where they were sort of, you know, four
or five years before that. So overall, foreigners have definitely
decumulated as the US has been really the center of
attention and Asia has had problems, particularly China, which went
(30:41):
through kind of a four year bear market from twenty
twenty one to the low's late twenty four to twenty five.
So I think it's going to take a little bit
of time for people to recover their risk appetite, and
we think the key to that really will be the
US market just not making money. So the US, of
course the largest capital market globally, and it's what's been
attracting lots of fun flows and positioning what we've observed,
(31:05):
and it's very clear in the numbers that when the
US goes down, it tends to take everyone down with
It's either greater or lesser degrees. But it's very hard
to make money in absolute terms. If the US market correct,
say ten percent or more, that's totally there in the data. Correspondingly,
if the US is going up a lot, then hey,
you're making money in the biggest capital market. Life is great.
(31:25):
Why take risk elsewhere? So the sweet spot from a
fun flow perspective to for example, Asia or emerging markets
more broadly, is if the US is just bouncing around
sort of zero plus five minus five, you know, just
sort of not making money. I think in that environment,
people might be impelled to take risk elsewhere in order
to find other areas of gain. And that, indeed is
(31:46):
what we expect. I mean, we think that the US
will still do decently well next year, but we think
that other markets might have some higher potential returns. And
if we're right about that sort of broader context, then
that should also result in some incremental flows going into
Asia and supporting the markets in the region.
Speaker 1 (32:07):
Tim sounds like a pretty positive story for Asian equities.
Speaker 2 (32:10):
What could go wrong?
Speaker 1 (32:11):
What's the risk factor here?
Speaker 2 (32:13):
So how fertile is your imagination something which can go
wrong If you've been around Asia for a long time,
which indeed I have, you have to always be prepared
for surprises. So you know, it's just really as the
list is, as long as your imagination is fertile. To
be a bit more specific, so you could take fertile
fundamental growth. So if there's any kind of growth downturn
(32:37):
or shocks in terms of the macroeconomic environment, then that's
obviously going to be more of a challenge because that
ultimately will start to impair earnings growth. Then I think
it's very very clear that earnings are the fundamental longer
term driver of equities. Similarly, equities globally have reflated, as
I mentioned earlier in our conversation, So if there is
(33:00):
any kind of a shock, either in terms of the
rate environment, or the currency backdrop, or the growth backdrop,
or indeed in the geopolitical backdrop, then markets are vulnerable
to some sort of a correction. Now we actually have
an indicator we've developed. We call it RADAR, which stands
for Regional Asia draut On Risk Model, and it's a
logistic probabilistic regression which estimates the probability of varying degrees
(33:25):
of pullbacks, and what that model is saying now is
that the risk of a ten percent correction is fairly elevated.
We think the risk of a greater so called twenty
percent correction is actually quite low, the reason being that
the greater drawdown is driven by a variety of more
fundamental macro inputs, which still seem to be perfect okay,
But the more moderate correction drawdown risk is driven by
(33:48):
things of how much markets have gone up or valuations
are reflated to and we're credable mentum indicators and a
few other things have gotten to. So really with that
saying is that there is a risk of some sort
of a moderate pullback, which could be bit scary for investors.
And if you want to think ahead, typically you get
good seasonality in markets in December and in January, but
(34:09):
then you kind of run into a bit of a
softer patch typically in late February and March. So one
thing that investors might want to keep their eye on
is the risk of some sort of of an air
pocket in markets as we get later into the first
quarter of next year, so that at least be some
level of triggers which could catalyze some bit of an
airpocket in markets. It's never a straight line, John, as
(34:32):
you know, so you prepare some for some things.
Speaker 1 (34:35):
And tim for the benefit of the listener. I know
you've been in Asia for many years. Has it been
over twenty five or thirty years we've been in Asian
equity markets.
Speaker 2 (34:43):
Actually a bit longer than that to confess, it's been
closer to forty. Okay, scars on the back.
Speaker 1 (34:51):
Dam, It's great having you on.
Speaker 2 (34:54):
Thanks for joining well, thank you so much for having me.
Speaker 1 (34:56):
It's been a pleasure you've been listening to Asia Centric
from Blue Omberger Intelligence. I'm John Lee in Hong Kong.
You can listen to all our episodes on Apple Podcasts,
Spotify or revery you listen. This was our last podcast
for this year, and we'll resume on the eighth of
January twenty twenty six. Happy holidays, look forward to more
exciting guests next year. This podcast was produced and edited
(35:20):
by Clara Chan. Thanks for listening.
Hosts And Creators
John Lee
Tom Corbett
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