May 9, 2024 • 21 mins
Featuring:
Kunjan Sobhani, Bloomberg Intelligence Senior Semiconductor Analyst, on Arm's earnings.
Eric Zhu, Bloomberg Economist covering China and Hong Kong, with a look ahead at China's April trade data.
Julia Wang, Executive Director and Global Market Strategist at JPMorgan Private Bank, shares her market outlook.
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Episode Transcript
Available transcripts are automatically generated. Complete accuracy is not guaranteed.
Speaker 1 (00:02):
Bloomberg Audio Studios, Podcasts, radio news. This is the Bloomberg
Daybreak Asia podcast. I'm Doug Krisner. You can join Brian
Curtis and myself for the stories, making news and moving
markets in the APAC region. You can subscribe to the
show anywhere you get your podcast and always on Bloomberg Radio,
(00:23):
the Bloomberg Terminal and the Bloomberg Business App.
Speaker 2 (00:27):
Armholding shares stumbled around eight percent after the chip designer
gave what was termed a lukewarm revenue forecast. And what
we say in our story is that this could raise
concerns that AI spending is slowing. And we're joined here
by Kunjohn Sabani, Bloomberg Intelligence Senior Semiconductor analyst on the earning.
(00:48):
So we got a couple of things going there, the
broader market and then ARM itself. First of all, did
you read the forecast as somewhat lukewarm?
Speaker 3 (00:59):
I did. And the thing is, though we don't think
the AI story for ARM had significant impact here, the
likely drivers of sort of the myths versus what the
street had. We're coming from networking and industrial IoT, which
are not the AI markets, and this weakness has been
(01:23):
very publicly has been visible across all other semiconductor companies
coming into this earning. So this is something you know,
market driven, not AI specific to ARM.
Speaker 1 (01:37):
So when you look at their exposure to the soft
the smartphone industry, I mean, how does that look to you,
coin John, Again, the long.
Speaker 3 (01:46):
Term story remains intact. Their percentage share of their V
nine architecture, which have doubled. The royalty versus the prior
gen continues to go up each quarter, growing five percent.
The total person is the royalties every quarter, which we
think they'll continue, and the biggest beneficiary that penetration coming
(02:07):
from actually the smartphone markets. So most of the premium
in fact, almost one hundred percent of the premium smartphones
run on our architecture, and that is the segment that
is seeing relatively robust strength over the rest of the
smartphone market. So they're really benefiting that the unit growth
is slowing, yes, but they are getting corresponding esp increases
(02:30):
again due to higher royalties there.
Speaker 2 (02:33):
So the reason I asked you whether or not the
revenue forecast was luke warm was that it was beyond
the midpoint. It just wasn't over the high end of
the range that they gave so you know, I think
some people would say, well, it was sort of within
the range, but we have to say that the stock
maybe is not the best way to read really the
(02:55):
health of the company, because stock was already up forty
one percent this year following eight or nine percent. You know,
is not the end of the world.
Speaker 3 (03:03):
Is it. I know you exactly got it right. Look,
it was not that bad of a miss. What you
have going is a combination of two things. Like you said,
you know what we've seen this earning season, these high
flying AI stocks who have benefited and from rich multiples
because of their AI story, have just been priced for perfection,
(03:26):
where every quarter investors are setting up high expectations of
significant beats and rays and when that meets reality that look,
which was again not AI driven, This is what you
are seeing in terms of stock reaction, bringing them slightly
back to earth and back close to reality.
Speaker 1 (03:45):
So we know that ARM is roughly ninety percent owned
by soft Bank, and we had news tonight that soft
Bank is in talks now to acquire this a British
chip startup called Graphcore. Do you know anything about graph Core?
And then kind of give me a sense, give us
a sense of what's going on with soft Bank as
it relates to semiconductors.
Speaker 3 (04:07):
I don't cover graph course I might not be the
most modest person to talk about it. I can just
quickly allude to it is one of you know it,
Graphcore is an AI sort of chip or a massive
chip manufacturing company, and it would make sense, right. Software
always is looking to invest in the next sort of
gen AI, whether it's some semi conductors or a hardware companies,
(04:31):
So that align with that strategy. That makes sense.
Speaker 2 (04:36):
ARM has something of an unusual role in the semiconductor
industry in that it licenses instructions that software uses to
communicate with chips. Walk us through a little bit about
what makes ARM unique.
Speaker 3 (04:51):
Yeah, what makes this unique is it has this unique
position within the industry where almost every player needs ARM,
and it has a friendly relationship, which is not what
you see across the board. Give you an example, most
of the semiconductor companies use ARMS IP, so they are
(05:12):
their customers and they prefer ARM. You know, that's good
for ARM. Most of these semiconductor companies customers and customers,
which are your cloud guys, your hyperscalers, also are ARMS customers.
Speaker 2 (05:25):
So it.
Speaker 3 (05:27):
Enjoys this really friendly sort of neutral position within the
ecosystem which no other company has, and to be honest,
in a lot of market there is no other option,
like for example, smartphones, they have one hundred percent share.
When you think about anything not X eighty six architecture,
whether it's in PCs, whether it's in server CPO, there's
(05:49):
only one name almost which is ARMED. So it just
has this really good unique positioning across the ecosystem.
Speaker 1 (05:56):
Do you think that there is still a little bit
I want to say market access but maybe a little
too much enthusiasm when it comes to semiconductors visa VI
artificial intelligence, or do you think the market has it
about right?
Speaker 3 (06:10):
I think from a fundamental perspective, most of the estimates
the market has it right. I can't speak to allusion
because here Bloomberg Intelligence, we don't give price target, so
I leave that up to it if the market has
it right when it comes to the richness of the
multiples that the some of these names are trading.
Speaker 2 (06:29):
Atkonjohn, thanks so much for joining us, Kunjohn Sabani, Bloomberg Intelligence,
Senior Semiconductor analyst. Taking a closer look at ARM earnings,
well China's trade data for April are likely to show
exports and imports swinging back to year on year increases
(06:53):
after being negative in the last print. Joining us now
is Eric Ju, Bloomberg economist on China and Hong Kong. Eric,
why why do we swing back to positive?
Speaker 4 (07:04):
I think so far this year we have seen some
improving size on export and the March was actually, you know,
probably a one off blip because we had a very
strong growth lust and the much last year, so that's
a very challenging basis fat. So we saw drop in
the exports last months, but I think now the basil
(07:25):
fat would be more favorable for April, and usually on
seasonal you know factors, April would typically you know pick
up slightly from March. So both factors will support a
better headline in April, and we would expect to see
a small increase young year. So in this year's albunctionmen.
Speaker 1 (07:46):
So when you look at exports, Eric, there are two components.
In my mind, one is kind of the overall global
economy and the extent to which they're a strong external demand.
And in the case of China right now, as though
it's been struggling with a weak currency. When you're dealing
with an export part of the economy a week currency
is going to be a big benefit.
Speaker 4 (08:04):
Right, It's some benefit, but I won't say it's a
big benefit because I think even from policy makers view,
I think that the fundamental think driving export was still
the external demand. It's not really the currency issue unless
you have very you know, a big depression in UM.
But I think it's marginally it's going to help, but
(08:26):
I think it's not a fundamental driver.
Speaker 2 (08:28):
We saw a big jump in South Korea's exports, right,
is that sort of presage what's happening here?
Speaker 4 (08:35):
Yeah, but you have to remember South Korea, it's kind
of different in terms structure of the exports. You know,
for health career, it's more on the chips, I think
their strands this year it's it's more driven by a
big rebound in the chips shouldment. But I think China
is a more broad, you know, a goods basket, so
I think it's more depending on the overall you know,
(08:58):
a stabiliation of the manufacturing in demand.
Speaker 1 (09:00):
So when we look at Chinese imports, how is domestic
demand right now?
Speaker 4 (09:06):
I think if you look at iports so far this year,
it's it's still so so so we haven't seen a
very clear sign that domes demanded picking up. So we
still expect a small year on year creamy imports in April.
But overall we'll say we haven't seen a very good
(09:27):
sign of some coming point in the domestic demand. I
think that's still something is confusing departy makers. They have
to do more, you know, to try to estimulate domestic demand.
Speaker 2 (09:38):
We've heard a lot from the United States and from
Europe about overcapacity in various industries in China. I'm interested
in your take on that and the impact that it
has on, say, the domestic economy.
Speaker 4 (09:53):
Yeah, and I think for this question, I think there
are two sides both arguments, I think, But from a
e commics view, I think sometimes it's it's it's not
really about overcapacity because right, it's it's just a free
trade that's a two hundred years of theory. Right, It's
not like every country producing based on your domest demand. Right,
(10:15):
we have a free trade word. So if there's a
demand outside of countries, so that doesn't mean you cannot produce,
You still can produce.
Speaker 1 (10:23):
Well, I hear what you're saying, although we just were
talking about this new move from the government in China,
new rules drafted it slowing the expansion of the domestic
battery industry. So, I mean, I hear what you're saying
in terms of free trade, but are there perhaps segments
of the manufacturing economy in China that that have a
(10:44):
strong issue here when it comes to overtire past.
Speaker 4 (10:47):
I think it's it's sometimes it's also you know, even
within China there could be some over compathitive problem, you know,
UV or batteries, because I heard from industry that the
domest demand for electrick vehicle is really you know, it's
close to four So every producer that are trying to
go outside because there's no much more demand new demand
(11:11):
left in China. So I think in terms of that,
you can say, yeah, we are producing more than what
domestic consumers can buy, but there's still a big, huge
overseas market. But the thing is now they face more
and more trade proper frictions on that front.
Speaker 2 (11:29):
Yeah, the reason I asked you just briefly is that
I wonder whether or not it kind of adds to
deflationary considerations when you overproduce at home.
Speaker 4 (11:38):
Yeah, it's uh, but I think the disflationary story. I
think we did look at the inflation data well decompos
into supply or demand factors. I think since the second
half of this year, the weak inflation was still mostly
driven by the weak demand side. It's not supply side.
So I think it's still for China, it's the main
(12:00):
reason is to people are not willing to spend. The
consumption is too two week.
Speaker 2 (12:06):
Thanks very much for joining us here in our studios,
Eric Juwe Bloomberg economists covering China and Hong Kong. Joining
us now on the program is Julia Wong, executive director
and global market strategists at JP Morgan Private Bank. Julia,
(12:26):
thanks very much for coming into our studios. So when
in a bull market, it would take a brave person
I suppose to say, well it's over now we're going
the other direction. But I put this question to you,
are are traders at the moment are we seeing from
the caution in markets? Are they driven more by FOMO
than they are about having confidence in the fundamentals?
Speaker 5 (12:49):
Well, I think that if you think about the incredible
gains for the aquity market in the US and also
you know some parts of the world, since basically late
last year is you know, many markets were up ten
twenty percent over the last three four months, so I
think that it was it was it was natural, almost expected,
(13:09):
a healthy adjustment as we had, you know, into April
to have to see a pullback in resentiment. We saw
some rebalancing our flows. We saw some investors adjusting their
positions here and they're just to make sure they're not
overly uh, you know, attached to one one sector or
one theme. But we do think that the fundamental thesis
for equities have not really changed and they're still quite positive.
(13:30):
You know, you talked about the fat. The fat is
you know, maybe they're not going to cut so soon,
but they're not hiking. The direction of monetropolo still unchanged,
so that factor is still there. And then you have
the structural changes in the global economy artificial intelligence. I mean,
you can debate the speed and who's going to Wigan
and who's going to lose, but the structural change is there.
So we still think that. And of course the economy globally,
(13:52):
particularly in the US, continue to hold up and the
rest of the world is a little bit softer, but
it's not quite recessionary. So we do think that the
overall map backdrop it's still there, and that's why we
do think that the risk asset equity market in particular
will probably recover from this consolidation phase.
Speaker 1 (14:07):
Julia, can we talk a little bit about what's happening
to the Chinese equity markets. I mean, this has been
a pretty remarkable recovery so far. This here, how are
you reading this? What do you understand it's about?
Speaker 5 (14:19):
So we think it's a tactical recovery from an oversold position.
So if you think about coming into the year, Chinese
market were down. You know, Homesong market was down to
nearly below fifteen thousand in late January, when the rest
of the world was powering ahead, and of course then
the investor were after three months of very strong gains
(14:40):
in the US and the rest of the world, investors
wanted to take some position away to diversify, and China
meantime did not fall further because the economy seems like
it was holding up, even though we debate the the
sustainability of that. So I think that led to a
return of flows to this part of the world, which
is the reason, alongside and demanding valuation that drove over
(15:03):
recovery in markets. So we do agree that, you know,
the recovery probably was overdue. It was an oversold market
in January. But we do think that fundamentally the economy
still does face challenges. There are still uncertainty you had,
So we do think that it's probably the rally. Probably
most of that probably already happened, and that's where we are.
Speaker 2 (15:24):
So it's not on your conviction call list. You're talking
about buying on the dip in Japanese equities and US
equities as well. And then as you already talked about
some of the secular themes like artificial intelligence and semiconductors,
let's pivot quickly to Japan, although I do actually let
me ask you about Hong Kong first, and then perhaps
you can pivot if Doug is willing. There was an
(15:47):
interesting story that we looked at today that's tied to
a conference that is actually today that Hong Kong is organizing,
Hong Kong Exchanges and Clearing is organizing with the Saudidol
group and they're looking for, you know, some extra support
for the Hong Kong market. Do you see Hong Kong
as having the ability perhaps to move ahead if China doesn't.
Speaker 5 (16:11):
I think from an economic cycle perspective, is increasingly tied
to China's economic cycle, so I think that. But I
do think from a market structure perspective, there are all
these longer term adjustments that you know, the regulators here
can make that will make that will you know, further
make the market more resilient. I do think that these are, however,
quite long term, and they're probably not the factor that
(16:34):
really explained why the market rebounded the way it did.
I do think that to see a more sustain the
recovery in the market from in this part of the world,
you do need to see a turnaround in China's growth
outlook or a clarity or turnaround in China's policy direction,
and neither of these two things have really changed at
this point.
Speaker 1 (16:53):
Before we get to Japan, and we'll get there in
a moment, I want to talk about the earnings that
were likely to get next week Big Now Games out
of China tencent Ali Baba JD dot com by do
what what is your sense of what we're likely to
get next week?
Speaker 3 (17:09):
So I'm not.
Speaker 5 (17:10):
Equity expert by far, but I think that you know
from what we can what we can see from a
broad perspective, I do think that investors sentiment towards big
tech in China has already warmed quite a bit or
particularly you know, you mentioned Tens and all these big names.
There are things that we know, like gaming, for example,
the regulatory process worked a little better. So all of
(17:30):
that gradually has you know, dripped through to market and
probably are enterprice at this point. So we do think
that earnings, of course are important, but you know, we
do need to see a sustained turnaround in their guidance
over the next few years of the market to do
even better from where it is today.
Speaker 2 (17:49):
Okay, to Japan, we we do have a little bit
of a mix in the market. I've heard recently a
few commentators saying that they don't really buy into, you know,
the structural reform and the whole bull market story on
Japan that you know, they've made all these improvements and such.
Others are sticking with that and see a lot of
(18:09):
potential for the Japanese market going forward.
Speaker 5 (18:11):
Your thoughts there, Yeah, so I think that there are
two big structural changes. One is actually what's happened in
the global economy, the global supply chain shifts the rival
of AI, and as I said earlier, we can debate
the pace of it, but it probably is a secular
change that will be with us for next five, ten,
type or even a decade. So that's one thing that
japan industry is just in a position to benefit from.
(18:34):
They didn't create this, but you know, they're on the
supply chain, they're monopolies, they can benefit from it. The
second thing is we do think the reflation story is
taking hold. There is a rise in household and business
expectations for prices and wage growth for the first time
in thirty years. You can see that in the range
of data. So I think that this will take time
to play play out. It's not a one night or
(18:55):
you know, even one year story. But they move away
from reflation since seems surreal. So for those two reasons,
both of which are very structural and are not so
tied with the day to day moving the effects market
or resentiment, we do think that Japan is an investable
market again for thirty years, and that's a very different
position from where it was in the last decade. So
globally invested in so underweight this market, but suddenly it's investible,
(19:19):
So we think that this is this is a real
shift that's happening.
Speaker 1 (19:22):
Julia, how do you understand the reliance that Japan has
on a strong Chinese economy? Is that still the case
right now?
Speaker 5 (19:30):
So if you look at bilateral trade, you know, China
is to the biggest trade partner for Japan. Japan is
maybe third or fifth biggest trade partner for China. So
bilateral trade is strong, and China imports a lot of
robotics in high end equipment from Japan. And while China
has this long term goal to be self sufficient and
(19:50):
move up the value chain, in the process through which
they get there, they rely a lot on Japanese technologies
and businesses. So I think that the ties will stay
and that is actually a small positive for Japan as well,
because that's you know, an area of demand that they
will see for the next couple of years.
Speaker 2 (20:07):
So if you really boil it down with what's happening
in China, is it's safe to say that we've seen
a cyclical upturn, but we still have secular headwinds.
Speaker 5 (20:17):
That's one way to one way to put it. I
think cyclical stability is another way to put it. In
a sense. The stability allows investor to take the tail
risk off the table or at least reduce the probability
of that happening. Together with what's happening globally with the
diversification of flows, is what I think drove the market recovery.
But we think that the concerns, you know, next six
(20:39):
to twelve months are you know, housing market is still
declining by sharp right every month, and there is a
constraint of what policymakers can do on a stimulus front.
All of these are still concerns.
Speaker 2 (20:49):
All right, Julia, thanks very much for joining us. Julia Wong,
Executive director of Global Market Strategist at JP Morgan Private Bank.
Speaker 1 (20:57):
This has been the Bloomberg Daybreak Asia podcast, bringing you
the stories, making news and moving markets in the Asia Pacific.
Visit the Bloomberg Podcast channel on YouTube to get more
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(21:18):
Bloomberg Business.
Speaker 3 (21:19):
Apple
Bloomberg Audio Studios, Podcasts, radio news. This is the Bloomberg
Daybreak Asia podcast. I'm Doug Krisner. You can join Brian
Curtis and myself for the stories, making news and moving
markets in the APAC region. You can subscribe to the
show anywhere you get your podcast and always on Bloomberg Radio,
(00:23):
the Bloomberg Terminal and the Bloomberg Business App.
Speaker 2 (00:27):
Armholding shares stumbled around eight percent after the chip designer
gave what was termed a lukewarm revenue forecast. And what
we say in our story is that this could raise
concerns that AI spending is slowing. And we're joined here
by Kunjohn Sabani, Bloomberg Intelligence Senior Semiconductor analyst on the earning.
(00:48):
So we got a couple of things going there, the
broader market and then ARM itself. First of all, did
you read the forecast as somewhat lukewarm?
Speaker 3 (00:59):
I did. And the thing is, though we don't think
the AI story for ARM had significant impact here, the
likely drivers of sort of the myths versus what the
street had. We're coming from networking and industrial IoT, which
are not the AI markets, and this weakness has been
(01:23):
very publicly has been visible across all other semiconductor companies
coming into this earning. So this is something you know,
market driven, not AI specific to ARM.
Speaker 1 (01:37):
So when you look at their exposure to the soft
the smartphone industry, I mean, how does that look to you,
coin John, Again, the long.
Speaker 3 (01:46):
Term story remains intact. Their percentage share of their V
nine architecture, which have doubled. The royalty versus the prior
gen continues to go up each quarter, growing five percent.
The total person is the royalties every quarter, which we
think they'll continue, and the biggest beneficiary that penetration coming
(02:07):
from actually the smartphone markets. So most of the premium
in fact, almost one hundred percent of the premium smartphones
run on our architecture, and that is the segment that
is seeing relatively robust strength over the rest of the
smartphone market. So they're really benefiting that the unit growth
is slowing, yes, but they are getting corresponding esp increases
(02:30):
again due to higher royalties there.
Speaker 2 (02:33):
So the reason I asked you whether or not the
revenue forecast was luke warm was that it was beyond
the midpoint. It just wasn't over the high end of
the range that they gave so you know, I think
some people would say, well, it was sort of within
the range, but we have to say that the stock
maybe is not the best way to read really the
(02:55):
health of the company, because stock was already up forty
one percent this year following eight or nine percent. You know,
is not the end of the world.
Speaker 3 (03:03):
Is it. I know you exactly got it right. Look,
it was not that bad of a miss. What you
have going is a combination of two things. Like you said,
you know what we've seen this earning season, these high
flying AI stocks who have benefited and from rich multiples
because of their AI story, have just been priced for perfection,
(03:26):
where every quarter investors are setting up high expectations of
significant beats and rays and when that meets reality that look,
which was again not AI driven, This is what you
are seeing in terms of stock reaction, bringing them slightly
back to earth and back close to reality.
Speaker 1 (03:45):
So we know that ARM is roughly ninety percent owned
by soft Bank, and we had news tonight that soft
Bank is in talks now to acquire this a British
chip startup called Graphcore. Do you know anything about graph Core?
And then kind of give me a sense, give us
a sense of what's going on with soft Bank as
it relates to semiconductors.
Speaker 3 (04:07):
I don't cover graph course I might not be the
most modest person to talk about it. I can just
quickly allude to it is one of you know it,
Graphcore is an AI sort of chip or a massive
chip manufacturing company, and it would make sense, right. Software
always is looking to invest in the next sort of
gen AI, whether it's some semi conductors or a hardware companies,
(04:31):
So that align with that strategy. That makes sense.
Speaker 2 (04:36):
ARM has something of an unusual role in the semiconductor
industry in that it licenses instructions that software uses to
communicate with chips. Walk us through a little bit about
what makes ARM unique.
Speaker 3 (04:51):
Yeah, what makes this unique is it has this unique
position within the industry where almost every player needs ARM,
and it has a friendly relationship, which is not what
you see across the board. Give you an example, most
of the semiconductor companies use ARMS IP, so they are
(05:12):
their customers and they prefer ARM. You know, that's good
for ARM. Most of these semiconductor companies customers and customers,
which are your cloud guys, your hyperscalers, also are ARMS customers.
Speaker 2 (05:25):
So it.
Speaker 3 (05:27):
Enjoys this really friendly sort of neutral position within the
ecosystem which no other company has, and to be honest,
in a lot of market there is no other option,
like for example, smartphones, they have one hundred percent share.
When you think about anything not X eighty six architecture,
whether it's in PCs, whether it's in server CPO, there's
(05:49):
only one name almost which is ARMED. So it just
has this really good unique positioning across the ecosystem.
Speaker 1 (05:56):
Do you think that there is still a little bit
I want to say market access but maybe a little
too much enthusiasm when it comes to semiconductors visa VI
artificial intelligence, or do you think the market has it
about right?
Speaker 3 (06:10):
I think from a fundamental perspective, most of the estimates
the market has it right. I can't speak to allusion
because here Bloomberg Intelligence, we don't give price target, so
I leave that up to it if the market has
it right when it comes to the richness of the
multiples that the some of these names are trading.
Speaker 2 (06:29):
Atkonjohn, thanks so much for joining us, Kunjohn Sabani, Bloomberg Intelligence,
Senior Semiconductor analyst. Taking a closer look at ARM earnings,
well China's trade data for April are likely to show
exports and imports swinging back to year on year increases
(06:53):
after being negative in the last print. Joining us now
is Eric Ju, Bloomberg economist on China and Hong Kong. Eric,
why why do we swing back to positive?
Speaker 4 (07:04):
I think so far this year we have seen some
improving size on export and the March was actually, you know,
probably a one off blip because we had a very
strong growth lust and the much last year, so that's
a very challenging basis fat. So we saw drop in
the exports last months, but I think now the basil
(07:25):
fat would be more favorable for April, and usually on
seasonal you know factors, April would typically you know pick
up slightly from March. So both factors will support a
better headline in April, and we would expect to see
a small increase young year. So in this year's albunctionmen.
Speaker 1 (07:46):
So when you look at exports, Eric, there are two components.
In my mind, one is kind of the overall global
economy and the extent to which they're a strong external demand.
And in the case of China right now, as though
it's been struggling with a weak currency. When you're dealing
with an export part of the economy a week currency
is going to be a big benefit.
Speaker 4 (08:04):
Right, It's some benefit, but I won't say it's a
big benefit because I think even from policy makers view,
I think that the fundamental think driving export was still
the external demand. It's not really the currency issue unless
you have very you know, a big depression in UM.
But I think it's marginally it's going to help, but
(08:26):
I think it's not a fundamental driver.
Speaker 2 (08:28):
We saw a big jump in South Korea's exports, right,
is that sort of presage what's happening here?
Speaker 4 (08:35):
Yeah, but you have to remember South Korea, it's kind
of different in terms structure of the exports. You know,
for health career, it's more on the chips, I think
their strands this year it's it's more driven by a
big rebound in the chips shouldment. But I think China
is a more broad, you know, a goods basket, so
I think it's more depending on the overall you know,
(08:58):
a stabiliation of the manufacturing in demand.
Speaker 1 (09:00):
So when we look at Chinese imports, how is domestic
demand right now?
Speaker 4 (09:06):
I think if you look at iports so far this year,
it's it's still so so so we haven't seen a
very clear sign that domes demanded picking up. So we
still expect a small year on year creamy imports in April.
But overall we'll say we haven't seen a very good
(09:27):
sign of some coming point in the domestic demand. I
think that's still something is confusing departy makers. They have
to do more, you know, to try to estimulate domestic demand.
Speaker 2 (09:38):
We've heard a lot from the United States and from
Europe about overcapacity in various industries in China. I'm interested
in your take on that and the impact that it
has on, say, the domestic economy.
Speaker 4 (09:53):
Yeah, and I think for this question, I think there
are two sides both arguments, I think, But from a
e commics view, I think sometimes it's it's it's not
really about overcapacity because right, it's it's just a free
trade that's a two hundred years of theory. Right, It's
not like every country producing based on your domest demand. Right,
(10:15):
we have a free trade word. So if there's a
demand outside of countries, so that doesn't mean you cannot produce,
You still can produce.
Speaker 1 (10:23):
Well, I hear what you're saying, although we just were
talking about this new move from the government in China,
new rules drafted it slowing the expansion of the domestic
battery industry. So, I mean, I hear what you're saying
in terms of free trade, but are there perhaps segments
of the manufacturing economy in China that that have a
(10:44):
strong issue here when it comes to overtire past.
Speaker 4 (10:47):
I think it's it's sometimes it's also you know, even
within China there could be some over compathitive problem, you know,
UV or batteries, because I heard from industry that the
domest demand for electrick vehicle is really you know, it's
close to four So every producer that are trying to
go outside because there's no much more demand new demand
(11:11):
left in China. So I think in terms of that,
you can say, yeah, we are producing more than what
domestic consumers can buy, but there's still a big, huge
overseas market. But the thing is now they face more
and more trade proper frictions on that front.
Speaker 2 (11:29):
Yeah, the reason I asked you just briefly is that
I wonder whether or not it kind of adds to
deflationary considerations when you overproduce at home.
Speaker 4 (11:38):
Yeah, it's uh, but I think the disflationary story. I
think we did look at the inflation data well decompos
into supply or demand factors. I think since the second
half of this year, the weak inflation was still mostly
driven by the weak demand side. It's not supply side.
So I think it's still for China, it's the main
(12:00):
reason is to people are not willing to spend. The
consumption is too two week.
Speaker 2 (12:06):
Thanks very much for joining us here in our studios,
Eric Juwe Bloomberg economists covering China and Hong Kong. Joining
us now on the program is Julia Wong, executive director
and global market strategists at JP Morgan Private Bank. Julia,
(12:26):
thanks very much for coming into our studios. So when
in a bull market, it would take a brave person
I suppose to say, well it's over now we're going
the other direction. But I put this question to you,
are are traders at the moment are we seeing from
the caution in markets? Are they driven more by FOMO
than they are about having confidence in the fundamentals?
Speaker 5 (12:49):
Well, I think that if you think about the incredible
gains for the aquity market in the US and also
you know some parts of the world, since basically late
last year is you know, many markets were up ten
twenty percent over the last three four months, so I
think that it was it was it was natural, almost expected,
(13:09):
a healthy adjustment as we had, you know, into April
to have to see a pullback in resentiment. We saw
some rebalancing our flows. We saw some investors adjusting their
positions here and they're just to make sure they're not
overly uh, you know, attached to one one sector or
one theme. But we do think that the fundamental thesis
for equities have not really changed and they're still quite positive.
(13:30):
You know, you talked about the fat. The fat is
you know, maybe they're not going to cut so soon,
but they're not hiking. The direction of monetropolo still unchanged,
so that factor is still there. And then you have
the structural changes in the global economy artificial intelligence. I mean,
you can debate the speed and who's going to Wigan
and who's going to lose, but the structural change is there.
So we still think that. And of course the economy globally,
(13:52):
particularly in the US, continue to hold up and the
rest of the world is a little bit softer, but
it's not quite recessionary. So we do think that the
overall map backdrop it's still there, and that's why we
do think that the risk asset equity market in particular
will probably recover from this consolidation phase.
Speaker 1 (14:07):
Julia, can we talk a little bit about what's happening
to the Chinese equity markets. I mean, this has been
a pretty remarkable recovery so far. This here, how are
you reading this? What do you understand it's about?
Speaker 5 (14:19):
So we think it's a tactical recovery from an oversold position.
So if you think about coming into the year, Chinese
market were down. You know, Homesong market was down to
nearly below fifteen thousand in late January, when the rest
of the world was powering ahead, and of course then
the investor were after three months of very strong gains
(14:40):
in the US and the rest of the world, investors
wanted to take some position away to diversify, and China
meantime did not fall further because the economy seems like
it was holding up, even though we debate the the
sustainability of that. So I think that led to a
return of flows to this part of the world, which
is the reason, alongside and demanding valuation that drove over
(15:03):
recovery in markets. So we do agree that, you know,
the recovery probably was overdue. It was an oversold market
in January. But we do think that fundamentally the economy
still does face challenges. There are still uncertainty you had,
So we do think that it's probably the rally. Probably
most of that probably already happened, and that's where we are.
Speaker 2 (15:24):
So it's not on your conviction call list. You're talking
about buying on the dip in Japanese equities and US
equities as well. And then as you already talked about
some of the secular themes like artificial intelligence and semiconductors,
let's pivot quickly to Japan, although I do actually let
me ask you about Hong Kong first, and then perhaps
you can pivot if Doug is willing. There was an
(15:47):
interesting story that we looked at today that's tied to
a conference that is actually today that Hong Kong is organizing,
Hong Kong Exchanges and Clearing is organizing with the Saudidol
group and they're looking for, you know, some extra support
for the Hong Kong market. Do you see Hong Kong
as having the ability perhaps to move ahead if China doesn't.
Speaker 5 (16:11):
I think from an economic cycle perspective, is increasingly tied
to China's economic cycle, so I think that. But I
do think from a market structure perspective, there are all
these longer term adjustments that you know, the regulators here
can make that will make that will you know, further
make the market more resilient. I do think that these are, however,
quite long term, and they're probably not the factor that
(16:34):
really explained why the market rebounded the way it did.
I do think that to see a more sustain the
recovery in the market from in this part of the world,
you do need to see a turnaround in China's growth
outlook or a clarity or turnaround in China's policy direction,
and neither of these two things have really changed at
this point.
Speaker 1 (16:53):
Before we get to Japan, and we'll get there in
a moment, I want to talk about the earnings that
were likely to get next week Big Now Games out
of China tencent Ali Baba JD dot com by do
what what is your sense of what we're likely to
get next week?
Speaker 3 (17:09):
So I'm not.
Speaker 5 (17:10):
Equity expert by far, but I think that you know
from what we can what we can see from a
broad perspective, I do think that investors sentiment towards big
tech in China has already warmed quite a bit or
particularly you know, you mentioned Tens and all these big names.
There are things that we know, like gaming, for example,
the regulatory process worked a little better. So all of
(17:30):
that gradually has you know, dripped through to market and
probably are enterprice at this point. So we do think
that earnings, of course are important, but you know, we
do need to see a sustained turnaround in their guidance
over the next few years of the market to do
even better from where it is today.
Speaker 2 (17:49):
Okay, to Japan, we we do have a little bit
of a mix in the market. I've heard recently a
few commentators saying that they don't really buy into, you know,
the structural reform and the whole bull market story on
Japan that you know, they've made all these improvements and such.
Others are sticking with that and see a lot of
(18:09):
potential for the Japanese market going forward.
Speaker 5 (18:11):
Your thoughts there, Yeah, so I think that there are
two big structural changes. One is actually what's happened in
the global economy, the global supply chain shifts the rival
of AI, and as I said earlier, we can debate
the pace of it, but it probably is a secular
change that will be with us for next five, ten,
type or even a decade. So that's one thing that
japan industry is just in a position to benefit from.
(18:34):
They didn't create this, but you know, they're on the
supply chain, they're monopolies, they can benefit from it. The
second thing is we do think the reflation story is
taking hold. There is a rise in household and business
expectations for prices and wage growth for the first time
in thirty years. You can see that in the range
of data. So I think that this will take time
to play play out. It's not a one night or
(18:55):
you know, even one year story. But they move away
from reflation since seems surreal. So for those two reasons,
both of which are very structural and are not so
tied with the day to day moving the effects market
or resentiment, we do think that Japan is an investable
market again for thirty years, and that's a very different
position from where it was in the last decade. So
globally invested in so underweight this market, but suddenly it's investible,
(19:19):
So we think that this is this is a real
shift that's happening.
Speaker 1 (19:22):
Julia, how do you understand the reliance that Japan has
on a strong Chinese economy? Is that still the case
right now?
Speaker 5 (19:30):
So if you look at bilateral trade, you know, China
is to the biggest trade partner for Japan. Japan is
maybe third or fifth biggest trade partner for China. So
bilateral trade is strong, and China imports a lot of
robotics in high end equipment from Japan. And while China
has this long term goal to be self sufficient and
(19:50):
move up the value chain, in the process through which
they get there, they rely a lot on Japanese technologies
and businesses. So I think that the ties will stay
and that is actually a small positive for Japan as well,
because that's you know, an area of demand that they
will see for the next couple of years.
Speaker 2 (20:07):
So if you really boil it down with what's happening
in China, is it's safe to say that we've seen
a cyclical upturn, but we still have secular headwinds.
Speaker 5 (20:17):
That's one way to one way to put it. I
think cyclical stability is another way to put it. In
a sense. The stability allows investor to take the tail
risk off the table or at least reduce the probability
of that happening. Together with what's happening globally with the
diversification of flows, is what I think drove the market recovery.
But we think that the concerns, you know, next six
(20:39):
to twelve months are you know, housing market is still
declining by sharp right every month, and there is a
constraint of what policymakers can do on a stimulus front.
All of these are still concerns.
Speaker 2 (20:49):
All right, Julia, thanks very much for joining us. Julia Wong,
Executive director of Global Market Strategist at JP Morgan Private Bank.
Speaker 1 (20:57):
This has been the Bloomberg Daybreak Asia podcast, bringing you
the stories, making news and moving markets in the Asia Pacific.
Visit the Bloomberg Podcast channel on YouTube to get more
episodes of this and other shows from Bloomberg. Subscribe to
the podcast on Apple, Spotify, or anywhere else you listen
and always on Bloomberg Radio, the Bloomberg Terminal, and The
(21:18):
Bloomberg Business.
Speaker 3 (21:19):
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